<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
QUADRAMED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 52-1992861
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
80 E. SIR FRANCIS DRAKE BLVD., SUITE 2A
LARKSPUR, CALIFORNIA 94939
(415) 461-7725
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KEITH M. ROBERTS, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
QUADRAMED CORPORATION
80 E. SIR FRANCIS DRAKE BLVD., SUITE 2A
LARKSPUR, CALIFORNIA 94939
(415) 461-7725
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
SCOTT D. LESTER, ESQ. J. CRAIG WALKER, ESQ.
BROBECK, PHLEGER & HARRISON LLP BELL, BOYD & LLOYD
ONE MARKET THREE FIRST NATIONAL PLAZA
SPEAR STREET TOWER 70 WEST MADISON STREET, SUITE 3300
SAN FRANCISCO, CALIFORNIA 94105 CHICAGO, ILLINOIS 60602
(415) 442-0900 (312) 372-1121
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: AT THE
EFFECTIVE TIME OF THE MERGER OF A WHOLLY OWNED SUBSIDIARY OF THE REGISTRANT WITH
AND INTO MEDICUS SYSTEMS CORPORATION, WHICH SHALL OCCUR AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AND THE SATISFACTION OF
ALL CONDITIONS TO CLOSING OF SUCH MERGER.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
======================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share.............. 1,186,788 $6.938 $22,573,324 $6,659
======================================================================================================
</TABLE>
(1) The actual number of shares of QuadraMed Common Stock to be issued will
vary depending on the number of shares of common stock issuable in the
Merger to stockholders of Medicus Systems Corporation who elect to receive
common stock in the Merger.
(2) Estimated solely for the purpose of computing the amount of the registration
fee, based on the average of the high and low prices for the Common Stock of
Medicus Systems Corporation as reported on the Nasdaq National Market on
January 21, 1998 in accordance with Rule 457 under the Securities Act of
1933. ------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
MEDICUS SYSTEMS CORPORATION
ONE ROTARY CENTER, SUITE 1111
EVANSTON, ILLINOIS 60201
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
------------------------
To the Stockholders of Medicus Systems Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Medicus Systems Corporation, a Delaware corporation ("Medicus"),
will be held on , 1998 at a.m., local time, at Medicus'
executive offices, third floor auditorium, One Rotary Center, Evanston,
Illinois, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Reorganization, dated as of November 9, 1997 (the
"Merger Agreement"), by and among QuadraMed Corporation, a Delaware
corporation ("QuadraMed"), and Medicus, pursuant to which a wholly owned
subsidiary of QuadraMed ("Merger Sub") will be merged with and into
Medicus, upon the terms and subject to the conditions of the Merger
Agreement (the "Merger"), and each share of common stock, par value $.01
per share, of Medicus (the "Medicus Common Stock") issued and outstanding
at the effective time of the Merger will be converted into the right to
receive any of (i) a cash payment of $7.50 per share of Medicus Common
Stock, (ii) 0.3125 shares of common stock, par value $.01 per share, of
QuadraMed (the "QuadraMed Common Stock") 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; and
2. To vote upon such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only stockholders of record at the close of business on , 1998
are entitled to receive notice of and vote at the Special Meeting or any
adjournments or postponements thereof. Holders of Medicus Common Stock are
entitled to one vote on each matter considered and voted on at the Special
Meeting for each share of Medicus Common Stock held of record at the close of
business on such date. Approval of the Merger Agreement requires the affirmative
vote of a majority of the outstanding shares of Medicus Common Stock. If the
Merger is consummated, holders of Medicus Common Stock who properly demand
appraisal of the fair value of their Medicus Common Stock prior to the
stockholder vote, do not vote in favor of the approval of the Merger Agreement,
and otherwise comply with the requirements of Section 262 of the Delaware
General Corporation Law (the "DGCL") (all as more fully described in the
accompanying Proxy Statement/ Prospectus) will be entitled to statutory
appraisal rights. A copy of Section 262 of the DGCL is attached as Annex C to
the accompanying Proxy Statement/Prospectus.
DETAILED INFORMATION CONCERNING THE MERGER AGREEMENT AND THE MERGER IS
CONTAINED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS, AND THE ANNEXES
THERETO, WHICH ACCOMPANY THIS NOTICE. YOU ARE URGED TO AND SHOULD READ THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND RELATED MATERIALS, WHICH ARE
INCORPORATED HEREIN BY REFERENCE AND FORM A PART OF THIS NOTICE.
THE BOARD OF DIRECTORS OF MEDICUS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL
OF THE MERGER AGREEMENT.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. A STOCKHOLDER WHO EXECUTES A PROXY
<PAGE> 3
MAY REVOKE IT AT ANY TIME BEFORE IT IS EXERCISED BY GIVING WRITTEN NOTICE OF
REVOCATION TO MEDICUS, BY SUBSEQUENTLY FILING ANOTHER PROXY OR BY ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON.
For the Board of Directors,
PATRICK C. SOMMERS
Chairman of the Board of Directors
Dated: , 1998
<PAGE> 4
MEDICUS SYSTEMS CORPORATION
ONE ROTARY CENTER, SUITE 1111
EVANSTON, ILLINOIS 60201
[LOGO]
, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
("Special Meeting") of Medicus Systems Corporation, a Delaware corporation
("Medicus"), to be held at a.m., on , 1998 at Medicus'
executive offices, third floor auditorium, One Rotary Center, Evanston,
Illinois.
At the Special Meeting, you will be asked to vote upon the approval and
adoption of the Agreement and Plan of Reorganization, dated as of November 9,
1997 (the "Merger Agreement"), by and among QuadraMed Corporation, a Delaware
corporation ("QuadraMed") and Medicus. Pursuant to the terms of the Merger
Agreement, a wholly owned subsidiary of QuadraMed will be merged with and into
Medicus (the "Merger"). The consummation of the Merger will result in, among
other things, the cancellation, extinguishment and conversion of the outstanding
shares of the common stock, par value $.01 per share, of Medicus (the "Medicus
Common Stock") into the right to receive any of (i) a cash payment of $7.50 per
share of Medicus Common Stock, (ii) 0.3125 shares of common stock, par value
$.01 per share, of QuadraMed (the "QuadraMed Common Stock") 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 (collectively, the "Merger Consideration"). As a result of the Merger,
each share of Medicus Common Stock (other than shares owned by Medicus or
QuadraMed) will be canceled and extinguished and be converted automatically into
the right to receive the Merger Consideration, and Medicus will become a wholly
owned subsidiary of QuadraMed. The proposed Merger is described in the
accompanying Proxy Statement/ Prospectus, the forepart of which includes a
summary of the terms of the Merger and certain other information relating to the
proposed transaction.
The approval and adoption of the Merger Agreement requires the affirmative
vote of holders of at least a majority of the outstanding shares of Medicus
Common Stock. QuadraMed, which acquired 56.7% of the outstanding shares of
Medicus Common Stock pursuant to stock purchase agreements dated November 9,
1997 with certain Medicus stockholders, is required by the Merger Agreement to
vote or cause to be voted its shares of Medicus Common Stock in favor of
approval and adoption of the Merger Agreement. QuadraMed will vote its shares
for the Merger. No provision has been made in the Merger Agreement which
requires the approval of the Merger by a majority of the shares not owned by
QuadraMed. As a result, QuadraMed owns a sufficient number of shares of Medicus
Common Stock to approve the Merger Agreement and the Merger.
AFTER CAREFUL CONSIDERATION, THE MEDICUS BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE MEDICUS
STOCKHOLDERS. ACCORDINGLY, THE MEDICUS BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF MEDICUS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Stockholders are urged to review carefully the information contained in the
Proxy Statement/Prospectus prior to deciding how to vote their shares at the
Special Meeting.
YOUR VOTE IS IMPORTANT. Whether or not you expect to attend the Special
Meeting in person, please complete, sign and promptly return the enclosed proxy
card in the enclosed postage-prepaid envelope to assure representation of your
shares. You may revoke your proxy at any time before it has been voted, and if
<PAGE> 5
you attend the Special Meeting you may vote in person, even if you previously
returned your proxy card. Your prompt cooperation will be greatly appreciated.
WHETHER OR NOT YOU PLAN TO VOTE IN FAVOR OF THE APPROVAL OF THE MERGER
AGREEMENT, YOU SHOULD COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED FORM OF
ELECTION TO THE EXCHANGE AGENT IN THE ENCLOSED PRE-ADDRESSED POSTAGE-PREPAID
ENVELOPE. FAILURE TO RETURN A PROPERLY COMPLETED AND EXECUTED FORM OF ELECTION
TO THE EXCHANGE AGENT BY THE ELECTION DEADLINE (AS DEFINED IN THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS) WILL BE TREATED AS A NON-ELECTION (AS DEFINED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS) AND RESULT IN YOUR RECEIVING, SUBJECT
TO CERTAIN ALLOCATION PROCEDURES, SHARES OF QUADRAMED COMMON STOCK IN RESPECT OF
YOUR SHARES OF MEDICUS COMMON STOCK. AN ELECTION TO RECEIVE CASH OR QUADRAMED
COMMON STOCK IN RESPECT OF ALL OR PART OF YOUR SHARES OF COMPANY COMMON STOCK
WILL NOT CONSTITUTE A VOTE IN FAVOR OF THE APPROVAL OF THE MERGER AGREEMENT.
The Board of Directors and management of Medicus appreciate your continued
support. If you need assistance in completing your proxy card or form of
election and letter of transmittal, or if you have any questions about the Proxy
Statement/Prospectus, please feel free to contact the undersigned at (847)
570-7500.
Sincerely,
Patrick C. Sommers
President and Chief Executive Officer
<PAGE> 6
MEDICUS SYSTEMS CORPORATION
PROXY STATEMENT
------------------------
QUADRAMED CORPORATION
PROSPECTUS
------------------------
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, par value $.01 per share (the "Medicus Common Stock"), of Medicus Systems
Corporation ("Medicus"), in connection with the solicitation of proxies by the
Board of Directors of Medicus (the "Medicus Board") for use at the special
meeting of stockholders of Medicus to be held on , 1998 at
a.m., local time, at Medicus' executive offices, third floor
auditorium, One Rotary Center, Evanston, Illinois, including any adjournments or
postponements thereof (the "Special Meeting").
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") into Medicus of a wholly owned subsidiary ("Merger Sub") of QuadraMed
Corporation ("QuadraMed") pursuant to the Agreement and Plan of Reorganization,
dated as of November 9, 1997 (the "Merger Agreement"), by and among QuadraMed
and Medicus. This Proxy Statement/Prospectus also constitutes the prospectus of
QuadraMed under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the shares of QuadraMed Common Stock issuable in connection with the
Merger.
Upon the consummation of the Merger, Medicus will become a wholly owned
subsidiary of QuadraMed and each share of Medicus Common Stock issued and
outstanding at the effective time of the Merger will be converted into the
right to receive any of (i) a cash payment of $7.50 per share of Medicus Common
Stock (the "Per Share Cash Amount"), (ii) 0.3125 shares (the "Exchange Ratio")
of common stock, par value $.01 per share (the "QuadraMed 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. If the QuadraMed Stock Value (as defined in
"THE MERGER -- General") is less than $20.40, then QuadraMed may, at its sole
discretion, elect to have all or any portion of the shares of Medicus Common
Stock converted into cash. QuadraMed is obligated to issue no more than
1,800,000 shares of QuadraMed Common Stock pursuant to the Merger and pursuant
to the exercise of warrants held by certain former stockholders of Medicus,
which shares are subject to pro rata allocation in the event stock elections by
Medicus stockholders and warrant exercises exceed the share limitation.
Consummation of the Merger is subject to various conditions, including the
affirmative vote of holders of a majority of the outstanding shares of Medicus
Common Stock entitled to vote at the Special Meeting. See "SUMMARY," "THE STOCK
PURCHASE AGREEMENTS AND WARRANTS," "THE MERGER AGREEMENT" and ANNEX A to this
Proxy Statement/Prospectus.
A Form of Election with which Medicus stockholders can elect to receive the
Per Share Cash Amount or QuadraMed Common Stock (or a combination thereof) for
their shares of Medicus Common Stock accompanies this Proxy Statement/
Prospectus. Each holder of Medicus Common Stock must submit a Form of Election
to First National Bank of Boston (the "Exchange Agent") by no later than 5:00
p.m. New York City time on the last business day prior to the Effective Time
(the "Election Deadline"). Medicus stockholders who wish to obtain information
regarding possible adjustments to the Exchange Ratio prior to making their
elections should call the Exchange Agent at (781) 575-2338 after ,
1998 (two days prior to the date of the Special Meeting). The Form of Election
accompanying this Proxy Statement/ Prospectus contains important information
concerning the timing and procedures for making an election. Please read such
materials carefully.
THE MEDICUS BOARD HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE MEDICUS STOCKHOLDERS. ACCORDINGLY,
<PAGE> 7
THE MEDICUS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF MEDICUS VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. See "THE MERGER -- Recommendation of the Board of
Directors of Medicus; Reasons for the Merger" and "THE MERGER -- Interests of
Certain Persons in the Merger."
Proxies for the Special Meeting may be revoked, subject to the procedures
described herein, at any time up to and including the date of the Special
Meeting. See "THE SPECIAL MEETING -- Record Date; Voting Rights; Proxies."
THE ABOVE MATTERS ARE DESCRIBED IN DETAIL IN THE PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE
STRONGLY URGED TO AND SHOULD READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS DESCRIBED UNDER THE
HEADINGS "RISK FACTORS" AND "SPECIAL FACTORS" BEGINNING ON PAGES 15 AND 24,
RESPECTIVELY.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Medicus on or about , 1998.
NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED IN THE MERGER HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998.
<PAGE> 8
NO PERSON HAS BEEN AUTHORIZED BY QUADRAMED OR MEDICUS TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY QUADRAMED OR
MEDICUS. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
QuadraMed and Medicus are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). QuadraMed has filed
with the Commission a Rule 13e-3 Transaction Statement on Schedule 13E-3 with
respect to the transactions described in this Proxy Statement/Prospectus (the
"Schedule 13E-3"). As permitted by the rules and regulations of the Commission,
this Proxy Statement/Prospectus omits certain exhibits contained in the Schedule
13E-3. Copies of the Schedule 13E-3 and the exhibits thereto, as well as such
reports, proxy statements and other information, can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of these materials can also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site that contains reports, proxy and information statements and other materials
that are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"). This Web site can be accessed at http://www.sec.gov.
In addition, material filed by QuadraMed and material filed by Medicus can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement on Form S-4 and exhibits relating thereto,
including any amendments (the "Registration Statement"), of which this Proxy
Statement/Prospectus is a part, and which QuadraMed has filed with the
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Reference is made to such Registration Statement for further information with
respect to QuadraMed and Medicus and the securities of QuadraMed offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission or attached as an annex hereto.
<PAGE> 9
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by QuadraMed with the Commission under
Sections 13(d), 14 and 15(d) of the Exchange Act are hereby incorporated by
reference in this Proxy Statement/Prospectus:
1. Proxy Statement on Schedule 14A filed January 16, 1998;
2. Proxy Statement on Schedule 14A filed April 28, 1997;
3. Annual Report on Form 10-KSB, and amendment thereto, for the fiscal
year ended December 31, 1996;
4. Quarterly Report on Form 10-Q for the quarter ended March 31, 1997;
5. Quarterly Report on Form 10-Q, and amendment thereto, for the quarter
ended June 30, 1997;
6. Quarterly Report on Form 10-Q, and amendment thereto, for the quarter
ended September 30, 1997;
7. Current Report on Form 8-K filed January 9, 1997;
8. Current Report on Form 8-K filed May 9, 1997 and amendment thereto
filed July 8, 1997;
9. Current Report on Form 8-K filed October 14, 1997;
10. Current Report on Form 8-K filed November 21, 1997 and amendment
thereto filed December 24, 1997;
11. Current Report on Form 8-K filed January 13, 1998; and
12. The description of QuadraMed Common Stock set forth in QuadraMed's
Registration Statement on Form S-3 (Registration No. 333-36189) filed
pursuant to Section 12 of the Exchange Act and any amendment or report
filed for the purpose of updating such description.
The following documents filed by Medicus with the Commission under Sections
13(d) and 15(d) of the Exchange Act are hereby incorporated by reference in this
Proxy Statement/Prospectus:
1. Annual Report on Form 10-K, and amendment thereto, for the fiscal year
ended May 31, 1997 (the "Medicus Annual Report");
2. Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,
1997;
3. Quarterly Report on Form 10-Q for the fiscal quarter ended November 30,
1997 (the "Medicus Second Quarter 10-Q"); and
4. Current Report on Form 8-K dated November 9, 1997.
In accordance with the rules and regulations of the Commission, the Medicus
Annual Report and the Medicus Second Quarter 10-Q are being delivered together
with this Proxy Statement/Prospectus and are attached hereto as Annex D and
Annex E, respectively.
All reports and definitive proxy or information statements filed by
QuadraMed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Proxy Statement/Prospectus and prior to the date
of the Special Meeting shall be deemed to be incorporated by reference into this
Proxy Statement/Prospectus from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED WITHOUT
CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF MEDICUS COMMON STOCK,
TO WHOM A PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST
OF ANY SUCH PERSON, A COPY OF ANY OR ALL
<PAGE> 10
DOCUMENTS INCORPORATED BY REFERENCE HEREIN (EXCLUDING EXHIBITS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN). WITH RESPECT TO
QUADRAMED'S DOCUMENTS, REQUESTS SHOULD BE DIRECTED TO KEITH M. ROBERTS,
QUADRAMED CORPORATION, 80 E. SIR FRANCIS DRAKE BLVD., SUITE 2A, LARKSPUR,
CALIFORNIA, 94939 (TEL. 415/461-7725). WITH RESPECT TO MEDICUS' DOCUMENTS,
REQUESTS SHOULD BE DIRECTED TO PATRICK SOMMERS, MEDICUS SYSTEMS CORPORATION, ONE
ROTARY CENTER, SUITE 1111, EVANSTON, ILLINOIS 60201 (TEL. 847/570-7500). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE SPECIAL
MEETING TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST
SHOULD BE MADE BY , 1998.
All information contained in this Proxy Statement/Prospectus relating to
QuadraMed has been supplied by QuadraMed, and all information relating to
Medicus has been supplied by Medicus.
<PAGE> 11
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Proxy Statement/Prospectus and
in documents incorporated herein by reference may be considered forward-looking
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including, without limitation, (i) the statements in
"SUMMARY -- Comparative Historical and Combined Per Share Data," "-- Unaudited
Pro Forma Combined Selected Financial Data for QuadraMed and Medicus" and "PRO
FORMA FINANCIAL DATA," (ii) the statements in "SPECIAL FACTORS -- Certain
Effects of the Merger; Plans for the Company after the Merger," (iii) the
statements in "SPECIAL FACTORS -- Recommendation of the Board of Directors of
Medicus; Reasons for the Merger," "-- Opinion of Medicus' Financial Advisor" and
"-- Analysis of QuadraMed's Financial Advisor" concerning, among other things,
prospective considerations that the respective boards of directors took into
account in arriving at their respective recommendations in favor of the Merger
and (iv) variations of the foregoing statements whenever they appear in this
Proxy Statement/Prospectus and the documents incorporated herein by reference.
Forward-looking statements are made based upon either QuadraMed's or Medicus'
current expectations and beliefs concerning future developments and their
potential effects upon QuadraMed and Medicus, respectively. There can be no
assurance that future developments affecting either QuadraMed or Medicus will be
those anticipated by their respective managements. Actual results may differ
materially from those included in the forward-looking statements. These
forward-looking statements involve risks and uncertainties including those
discussed in "RISK FACTORS."
While Medicus and QuadraMed each reassess material trends and uncertainties
affecting each company's financial condition and results of operations, in
connection with its preparation of management's discussion and analysis of
financial condition and results of operations contained in each company's
quarterly and annual reports, neither Medicus nor QuadraMed intends to review or
revise any particular forward-looking statement made in this Proxy Statement/
Prospectus or incorporated herein by reference.
The information referred to above should be considered by Medicus
stockholders when reviewing any forwardlooking statements contained in this
Proxy Statement/Prospectus, in any documents incorporated herein by reference,
in any of QuadraMed's or Medicus' public filings or press releases or in any
oral statements made by either Medicus or QuadraMed or any of their respective
officers or other persons acting on their behalf. By means of this cautionary
note, each of Medicus and QuadraMed intends to avail itself of the safe harbor
from liability with respect to forward-looking statements that is provided by
Section 27A of the Securities Act and Section 21E of the Exchange Act referred
to above.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
SUMMARY............................................................................... 1
Parties to the Merger............................................................... 1
The Merger.......................................................................... 1
Special Factors..................................................................... 4
The Special Meeting................................................................. 7
Recommendation of the Medicus Board of Directors.................................... 7
Risk Factors........................................................................ 8
The QuadraMed Common Stock.......................................................... 8
Comparative Per Share Prices........................................................ 8
Comparative Historical and Combined Per Share Data.................................. 10
QuadraMed Selected Financial Data................................................... 11
Medicus Selected Financial Data..................................................... 12
Unaudited Pro Forma Combined Selected Financial Data for QuadraMed and Medicus...... 13
Comparative Rights of Stockholders.................................................. 14
Recent Developments................................................................. 14
RISK FACTORS.......................................................................... 15
History of Operating Losses; Uncertain Profitability................................ 15
Potential Variability in Quarterly Operating Results................................ 15
Integration of Medicus and RHP Into QuadraMed....................................... 16
Dependence on Acquisitions For Growth............................................... 16
Risks Associated with Acquisitions; Need to Manage Changing Operations.............. 16
Need to Expand Sales and Technical Support Capabilities............................. 17
Dependence on Key Personnel......................................................... 17
Expanded Product and Service Offerings; Reliance on Cross-Selling Products and
Services to Customers............................................................ 17
The Effect of QuadraMed Stock Price Fluctuations on the Consideration to Be Received
by the Holders of Medicus Common Stock in the Merger............................. 18
Risks Related to Hospital and Managed Care Markets.................................. 18
Highly Competitive Market........................................................... 19
New Product Development and System Enhancement...................................... 19
Limited Proprietary Rights; Risk of Infringement.................................... 20
Risk of Product Defects; Failure to Meet Performance Criteria....................... 20
Risk of Interruption of Data Processing............................................. 20
Risks Related to Outsourcing Business............................................... 20
Government Regulation............................................................... 21
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Uncertainty in the Health Care Industry............................................. 21
Risk of Product-Related Claims...................................................... 21
Risks Associated with Certain Investments........................................... 22
Potential Effect of Anti-Takeover Provisions........................................ 22
Shares Eligible for Future Sale; Possible Volatility of Stock Price; Low Trading
Volume........................................................................... 22
Risks Related to Medicus Litigation................................................. 23
SPECIAL FACTORS....................................................................... 24
Background of the Merger............................................................ 24
Purpose and Structure of the Merger................................................. 26
Source and Amount of Funds.......................................................... 26
Certain Effects of the Merger; Plans for the Company After the Merger............... 26
Recommendation of the Board of Directors of Medicus; Reasons for the Merger......... 26
Opinion of Medicus' Financial Advisor............................................... 28
Interests of Certain Persons in the Merger.......................................... 33
Approval of the Board of Directors of QuadraMed; Reasons for the Merger............. 34
Analysis of QuadraMed's Financial Advisor........................................... 36
Federal Income Tax Consequences..................................................... 37
Accounting Treatment................................................................ 37
Certain Legal Matters............................................................... 38
Federal Securities Law Consequences................................................. 38
Listing............................................................................. 38
Appraisal Rights.................................................................... 38
THE STOCK PURCHASE AGREEMENTS AND WARRANTS............................................ 41
THE SPECIAL MEETING................................................................... 43
Purpose of the Special Meeting...................................................... 43
Record Date; Voting Rights; Proxies................................................. 43
Solicitation of Proxies............................................................. 43
Quorum.............................................................................. 43
Required Vote....................................................................... 44
THE MERGER............................................................................ 44
General............................................................................. 44
Effective Time...................................................................... 45
Election Procedures; Procedures for Exchange of Certificates........................ 45
Treatment of Stock Options and Outstanding Warrants................................. 46
THE MERGER AGREEMENT.................................................................. 47
The Merger.......................................................................... 47
Terms of the Merger................................................................. 47
Fractional Shares................................................................... 47
Limitation on Shares Issuable....................................................... 48
Election for Shares or Cash......................................................... 48
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Surrender and Payment............................................................... 49
Conditions to Consummation of the Merger............................................ 50
Representations and Warranties...................................................... 51
Conduct of Business Pending the Merger.............................................. 51
Covenants........................................................................... 53
Effect on Employee Benefit Plans.................................................... 53
No Solicitation..................................................................... 53
Indemnification..................................................................... 54
Termination; Expenses; Amendment; Waiver............................................ 55
PRO FORMA FINANCIAL DATA.............................................................. 57
CERTAIN INFORMATION CONCERNING QUADRAMED.............................................. 60
CERTAIN INFORMATION CONCERNING MEDICUS................................................ 61
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 62
CERTAIN TRANSACTIONS.................................................................. 63
DIVIDEND INFORMATION.................................................................. 63
LEGAL MATTERS......................................................................... 63
EXPERTS............................................................................... 63
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ANNEXES:
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Annex A -- Agreement and Plan of Reorganization, dated November 9, 1997, by and between
QuadraMed and Medicus.
Annex B -- Opinion of Volpe Brown Whelan & Company, LLC.
Annex C -- Section 262 of the Delaware General Corporation Law.
Annex D -- Medicus' Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
Annex E -- Medicus' Quarterly Report on Form 10-Q for the fiscal quarter ended November 30,
1997.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. This summary is not intended to be a complete
description of the matters covered in this Proxy Statement/Prospectus and is
subject to and qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, including
the Annexes hereto, and in the documents incorporated by reference in this Proxy
Statement/Prospectus. The Merger Agreement is set forth in Annex A to this Proxy
Statement/Prospectus and reference is made thereto for a complete description of
the terms of the Merger. Medicus stockholders are urged to read carefully the
entire Proxy Statement/Prospectus, including the Annexes. As used in this Proxy
Statement/Prospectus, the terms "QuadraMed" and "Medicus" refer to such
corporations, respectively, and where the context requires, such corporations
and their respective subsidiaries.
This Proxy Statement/Prospectus contains forward-looking statements about
future results which are subject to risks and uncertainties. See "Information
Concerning Forward-Looking Statements." Medicus stockholders should consider
carefully the information set forth herein under the headings "Risk Factors" and
"Special Factors" in addition to the other information presented herein.
PARTIES TO THE MERGER
QUADRAMED
QuadraMed Corporation, a Delaware corporation ("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's suite of products is an integrated offering of electronic data
interchange ("EDI"), financial management and decision support solutions for
both providers and payors. In addition, QuadraMed provides business office
outsourcing and cash flow management services.
QuadraMed's executive offices are located at 80 East Sir Francis Drake
Blvd., Suite 2A, Larkspur, California 94939 and its telephone number is (415)
461-7725. See "CERTAIN INFORMATION CONCERNING QUADRAMED."
MEDICUS
Medicus Systems Corporation, a Delaware corporation ("Medicus"), develops,
markets, and supports a family of specialized integrated software products
utilized by healthcare financial administrators, physicians and nursing
executives, as well as health information and other administrative departments
to capture, structure and analyze clinical, operational and financial
information. Medicus' specialized software applications and services allow these
professionals to measure, monitor and manage organizational performance and
optimize outcomes. Medicus also provides product-related maintenance and support
services. Clients include hospitals, academic medical centers, managed care
organizations, community care networks, integrated health systems, primary care
and multi-specialty physician groups, government agencies, and other
organizations.
Medicus' executive offices are located at One Rotary Center, Suite 1111,
Evanston, Illinois, 60201 and its telephone number is (847) 570-7500. See
"CERTAIN INFORMATION CONCERNING MEDICUS."
THE MERGER
QuadraMed and Medicus have entered into an Agreement and Plan of
Reorganization, dated as of November 9, 1997 (the "Merger Agreement"), a copy of
which is attached hereto as Annex A, whereby a wholly owned subsidiary of
QuadraMed ("Merger Sub") will be merged with and into Medicus (the "Merger"). As
a result of the Merger, Medicus will become a wholly owned subsidiary of
QuadraMed. See "THE MERGER."
<PAGE> 16
MERGER CONSIDERATION
At the Effective Time, each share of Medicus Common Stock issued and
outstanding (other than any shares of Medicus Common Stock owned by Medicus as
treasury stock or owned by QuadraMed) will be canceled and extinguished and be
converted automatically into the right to receive (i) $7.50 in cash, without
interest (the "Per Share Cash Amount"); or (ii) 0.3125 shares of QuadraMed
Common Stock (the "Exchange Ratio"), subject to adjustment and limitations as
described below; or (iii) a combination of shares of QuadraMed Common Stock and
cash. The Exchange Ratio is subject to the following adjustments: (1) if the
QuadraMed Stock Value (as defined below) exceeds $27.60, then the Exchange Ratio
shall be the quotient obtained by dividing (A) $8.625 by (B) the QuadraMed Stock
Value, and (2) if the QuadraMed Stock Value is less than $24.00, then the
Exchange Ratio shall be the quotient obtained by dividing (A) $7.50 by (B) the
QuadraMed Stock Value. Additionally, if the QuadraMed Stock Value is less than
$20.40, then QuadraMed may, at its sole discretion, elect to have all or any
portion of the shares of Medicus Common Stock converted into the Per Share Cash
Amount (the "QuadraMed Cash Election"). In the event of a QuadraMed Cash
Election in which less than all of the outstanding shares of Medicus Common
Stock will be converted into cash, the shares of Medicus Common Stock to be
converted into cash as a result of the QuadraMed Cash Election will be selected
pro rata according to the number of shares with respect to which a Stock
Election (as defined in "THE MERGER -- General") has been made. The amounts paid
in the Merger in exchange for shares of Medicus Common Stock shall be referred
to herein as the "Merger Consideration." For purposes hereof, the "QuadraMed
Stock Value" shall be equal to the average of the closing prices of QuadraMed
Common Stock during the fifteen (15) days prior to the second day prior to the
date of the Special Meeting. See "THE MERGER AGREEMENT -- Terms of the Merger."
PRIOR PURCHASE OF MEDICUS COMMON STOCK BY QUADRAMED
On November 9, 1997, QuadraMed and certain stockholders of Medicus,
including certain members of the Medicus Board of Directors (the "Selling
Stockholders") entered into Stock Purchase Agreements pursuant to which
QuadraMed acquired 56.7% of the outstanding Medicus Common Stock. In
consideration for the sale of the Medicus Common Stock to QuadraMed, QuadraMed
agreed to pay to the Selling Stockholders $7.50 per share, in cash, without
interest, together with a warrant (the "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 $24.00 per share (the closing price
of the QuadraMed Common Stock on the last trading day prior to the execution of
the Stock Purchase Agreements), subject to adjustments and certain limitations.
The aggregate purchase price paid by QuadraMed to the Selling Stockholders was
approximately $23.3 million in cash plus Warrants to purchase an aggregate of
972,220 shares of QuadraMed Common Stock. See "THE STOCK PURCHASE AGREEMENTS
AND WARRANTS."
LIMITATION ON SHARES ISSUABLE
In no event shall the aggregate number of shares of QuadraMed Common Stock
which QuadraMed is obligated to issue (i) upon the exercise of Warrants and (ii)
in exchange for outstanding shares of Medicus Common Stock exceed a total of
1,800,000 shares. In the event that the aggregate number of shares of QuadraMed
Common Stock that holders of Warrants and holders of Medicus Common Stock have
elected to receive as described in clauses (i) and (ii) in the immediately
preceding sentence exceeds 1,800,000 shares, QuadraMed shall only be required to
issue 1,800,000 shares of QuadraMed Common Stock and such holders shall be
entitled to receive shares of QuadraMed Common Stock equal to each holder's pro
rata portion of the total amount of shares issued by QuadraMed as described in
clauses (i) and (ii), based on the total number of shares each holder elected to
receive and in the case of clause (ii), such holders shall receive the remaining
Merger Consideration to which they are entitled in cash. See "THE MERGER
AGREEMENT -- Limitation on Shares Issuable."
TREATMENT OF STOCK OPTIONS AND OUTSTANDING WARRANTS
At the Effective Time, the obligations under the Medicus Stock Option Plans
(as defined in "THE MERGER AGREEMENT -- Terms of the Merger") and the Stock
Subscription Warrant dated March 1,
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<PAGE> 17
1996 issued by Medicus to TriHealth, Inc. (the "TriHealth Warrant") will be
assumed by QuadraMed. Each option so assumed by QuadraMed shall continue to
have, and be subject to, the same terms and conditions set forth in the Medicus
Stock Option Plans and the TriHealth Warrant shall continue to have, and be
subject to, the same terms and conditions set forth therein, immediately prior
to the Effective Time, except that (i) each of the assumed options and warrants
will be exercisable for that number of whole shares of QuadraMed Common Stock
equal to the product of the number of shares of Medicus Common Stock that were
issuable upon exercise of such option or warrant immediately prior to the
Effective Time multiplied by 0.3565, rounded down to the nearest whole number
of shares of QuadraMed Common Stock, (ii) an aggregate of 728,000 options
granted under the Medicus 1994 Directors' Stock Option Plan, the Medicus 1996
C.E.O. Stock Option Plan, the Medicus 1996 C.E.O. Replacement Stock Option Plan
and the Medicus 1996 C.E.O. Special Stock Option Plan (the "Director Options")
shall be fully vested and shall remain exercisable for a period of three years
after (a) termination of employment,in the case of options held by Mr. Sommers
and (b) the Effective Time in the case of Director Options and (iii) the per
share exercise price for the shares of QuadraMed Common Stock issuable upon
exercise of such assumed option or warrant will be equal to the quotient
determined by dividing the exercise price per share of Medicus Common Stock at
which such option or warrant was exercisable immediately prior to the Effective
Time by 0.3565, rounded up to the nearest whole cent. See "THE MERGER --
Treatment of Stock Options and Outstanding Warrants" and "THE MERGER AGREEMENT
- -- Terms of the Merger."
At the Effective Time, certain warrants issued by Medicus to Richard C.
Jelinek, a director of Medicus, and a trust for his benefit (the "Jelinek
Warrants") shall be purchased and cancelled by QuadraMed in exchange for
QuadraMed Common Stock. See "SPECIAL FACTORS -- Interests of Certain Persons in
the Merger."
ELECTION FOR SHARES OR CASH
Each record holder of Medicus Common Stock may elect to receive cash,
shares of QuadraMed Common Stock or a combination of both by submitting a Form
of Election to the Exchange Agent no later than the Election Deadline. Record
holders who indicate no preference on the Form of Election or who do not submit
a Form of Election prior to the Election Deadline will automatically have their
shares of Medicus Common Stock converted into the right to receive shares of
QuadraMed Common Stock at the Effective Time. See "THE MERGER -- Election
Procedures; Procedures for Exchange of Certificates" and "THE MERGER
AGREEMENT -- Election for Shares or Cash."
SURRENDER OF STOCK CERTIFICATES
At the Effective Time, QuadraMed will instruct First National Bank of
Boston, as the Exchange Agent, to mail to each holder of record of certificates
which formerly represented Medicus Common Stock a letter of transmittal as soon
as practicable. The letter of transmittal will contain instructions with respect
to the surrender of certificates formerly representing Medicus Common Stock to
be exchanged for QuadraMed Common Stock and/or cash. See "THE MERGER -- Election
Procedures; Procedures for Exchange of Certificates."
CONDITIONS TO THE MERGER; TERMINATION
Consummation of the Merger is subject to various conditions, including but
not limited to: (i) obtaining requisite stockholder approval; (ii) the continued
effectiveness of the Registration Statement; (iii) the absence of any
preliminary or permanent injunction or other order by any federal or state court
which prevents the consummation of the Merger; (iv) obtaining requisite
governmental approvals; (v) approval for listing on the Nasdaq National Market,
subject to official notice of issuance, of the QuadraMed Common Stock to be
issued in connection with the Merger; (vi) the accuracy of each party's
representations; and (vii) each party's performance of its covenants. See "THE
MERGER AGREEMENT -- Conditions to Consummation of the Merger."
At any time prior to the Effective Time, whether before or after approval
of the matters presented in connection with the Merger by the stockholders of
Medicus, the Merger Agreement may be terminated: (i) by mutual consent of
QuadraMed and Medicus; (ii) by either QuadraMed or Medicus, if, without fault of
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<PAGE> 18
the terminating party, the closing of the Merger shall not have occurred on or
before May 1, 1998 (or such later date as may be agreed upon in writing by the
parties); (iii) by QuadraMed, if (a) Medicus shall breach any of its
representations, warranties or obligations and such breach shall not have been
cured within ten business days of receipt by Medicus of written notice of such
breach, or (b) the Board of Directors of Medicus shall have withdrawn or
modified its recommendation of the Merger Agreement or the Merger in a manner
adverse to QuadraMed or shall have resolved to do any of the foregoing; (iv) by
Medicus, if QuadraMed shall breach any of its representations, warranties or
obligations and such breach shall not have been cured within ten days following
receipt by QuadraMed of written notice of such breach; or (v) by either
QuadraMed or Medicus if (a) any permanent injunction or other order of a court
or other competent authority preventing the consummation of the Merger shall
have become final and nonappealable or (b) if any required approval of the
stockholders of Medicus shall not have been obtained by reason of the failure to
obtain the required vote upon a vote held at a duly held meeting of stockholders
or at any adjournment thereof.
SPECIAL FACTORS
Holders of Medicus Common Stock, in voting on the Merger, should consider
special factors associated with the Merger. See "SPECIAL FACTORS."
BACKGROUND OF THE MERGER
For a description of events leading to the adoption and approval of the
Merger Agreement by the Boards of Directors of QuadraMed and Medicus, see
"SPECIAL FACTORS -- Background of the Merger."
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is for QuadraMed to acquire the entire equity
interest in Medicus. Because holders of Medicus Common Stock have the right to
elect to receive QuadraMed Common Stock, they will have the opportunity to
maintain an indirect equity interest in Medicus.
SOURCE AND AMOUNT OF FUNDS
If all Medicus stockholders elect to receive cash in the Merger and
assuming no current Medicus option holders exercise options to purchase Medicus
Common Stock, approximately $18.1 million will be required to pay such
consideration. In addition, QuadraMed will pay fees and expenses of
approximately $ in connection with the Merger. The cash required in
connection with the Merger will be provided by current cash resources of
QuadraMed.
In connection with its purchase of 56.7% of the outstanding shares of the
Medicus Common Stock, QuadraMed paid cash to the Selling Stockholders of
approximately $23.3 million, which amount was funded by QuadraMed's existing
cash resources.
CERTAIN EFFECTS OF THE MERGER; PLANS FOR THE COMPANY AFTER THE MERGER
Following the Merger, QuadraMed will own 100% of the outstanding capital
stock of the Surviving Corporation (as defined in "THE MERGER AGREEMENT -- The
Merger"). As such, QuadraMed will be the direct beneficiary of any future
earnings and growth of the Surviving Corporation, and will have the ability to
benefit from any divestitures, strategic acquisitions or other corporate
opportunities that may be pursued by the Surviving Corporation in the future.
Upon the consummation of the Merger, each share of Medicus Common Stock issued
and outstanding immediately prior to the Effective Time (other than any shares
of Medicus Common Stock owned by Medicus or QuadraMed) will be cancelled and
extinguished and be converted into the right to receive the Merger Consideration
and the stockholders of Medicus will cease to have any direct ownership interest
in Medicus.
As a result of the Merger, (i) the Surviving Corporation will be privately
held; (ii) there will be no market for the Medicus Common Stock; (iii) the
Medicus Common Stock will cease to be listed on the Nasdaq National Market; and
(iv) the registration of the Medicus Common Stock under the Exchange Act will be
terminated and Medicus will no longer be required to file periodic reports with
the Commission.
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See "SPECIAL FACTORS -- Certain Effects of the Merger; Plans for the
Company After the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Medicus with
respect to the Merger, holders of Medicus Common Stock should be aware that
certain members of Medicus' management and members of the Medicus Board of
Directors have certain interests in the Merger, in addition to those of Medicus'
stockholders generally. The Board of Directors of Medicus was aware of these
interests when it considered and approved the Merger and the Merger Agreement.
Upon consummation of the Merger, QuadraMed has agreed to enter into an
employment agreement with Patrick C. Sommers, President and Chief Executive
Officer of Medicus. In addition, Mr. Sommers has received a bonus payment of
$750,000 from Medicus in connection with QuadraMed's acquisition of Medicus. See
"SPECIAL FACTORS -- Interests of Certain Persons in the Merger" for a
description of such bonus and employment agreement.
Pursuant to the Merger Agreement, the obligations under the Medicus Stock
Option Plans and the TriHealth Warrant will be assumed by QuadraMed. Each option
so assumed by QuadraMed shall continue to have, and be subject to, the same
terms and conditions set forth in the Medicus Stock Option Plans and the
TriHealth Warrant, shall continue to have, and be subject to, the same terms and
conditions set forth therein, immediately prior to the Effective Time, except
that (i) each of the assumed options and warrants will be exercisable for that
number of whole shares of QuadraMed Common Stock equal to the product of the
number of shares of Medicus Common Stock that were issuable upon exercise of
such option or warrant immediately prior to the Effective Time multiplied by
0.3565, rounded down to the nearest whole number of shares of QuadraMed Common
Stock, (ii) Director Options shall be fully vested and shall remain exercisable
for a period of three years after (a) termination of employment, in the case of
options held by Mr. Sommers and (b) the Effective Time in the case of other
Director Options and (iii) the per share exercise price for the shares of
QuadraMed Common Stock issuable upon exercise of such assumed option or warrant
will be equal to the quotient determined by dividing the exercise price per
share of Medicus Common Stock at which such option or warrant was exercisable
immediately prior to the Effective Time by 0.3565, rounded up to the nearest
whole cent.
At the Effective Time of the Merger, QuadraMed will purchase and cancel the
Jelinek Warrants in exchange for shares of QuadraMed Common Stock with an
aggregate value of $1.12 million. The number of shares of QuadraMed Common Stock
issuable in exchange for the Jelinek Warrants will be determined by dividing
$1.12 million by the QuadraMed Stock Value as defined in the Merger Agreement.
If at the Effective Time of the Merger, the QuadraMed Stock Value exceeds
$27.60, then the number of shares of QuadraMed Common Stock issuable upon
cancellation of the Jelinek Warrants shall be equal to $1.12 million divided by
$27.60. If at the Effective Time of the Merger, the QuadraMed Stock Value is
less than $20.40, then the number of shares of QuadraMed Common Stock issuable
upon cancellation of the Jelinek Warrants shall be equal to $1.12 million
divided by $20.40.
Concurrent with the execution of the Merger Agreement, certain stockholders
of Medicus (including Richard C. Jelinek, William G. Brown, Jon E.M. Jacoby,
Gail L. Warden and Dorsey R. Gardner, all of whom are members of the Medicus
Board of Directors) sold their shares of Medicus Common Stock to QuadraMed
pursuant to stock purchase agreements, each dated as of November 9, 1997. The
consideration paid by QuadraMed for such shares was $7.50 per share in cash plus
a warrant to purchase 0.3125 shares of QuadraMed Common Stock for each share of
Medicus Common Stock sold. The warrants are exercisable only at the Effective
Time of the Merger at a price of $24.00 per share (the closing price of the
QuadraMed Common Stock on the last trading day prior to the execution of the
stock purchase agreements), subject to
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certain adjustments and limitations. See "SPECIAL FACTORS -- Interests of
Certain Persons in the Merger" and "THE STOCK PURCHASE AGREEMENTS AND WARRANTS."
FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Merger Consideration for shares of Medicus Common Stock
will be a taxable transaction for U.S. federal income tax purposes and may be a
taxable transaction for foreign, state and local income tax purposes as well. A
Medicus stockholder will generally recognize gain or loss equal to the
difference between (i) the amount of cash, and, in the case of Medicus
stockholders receiving QuadraMed Common Stock, the fair market value of
QuadraMed Common Stock that the stockholder receives as a result of the Merger
and (ii) the stockholder's adjusted tax basis in the shares of Medicus Common
Stock that the stockholder exchanges in the Merger. Medicus will not recognize
any gain or loss as a result of the Merger for U.S. federal income tax purposes.
See "SPECIAL FACTORS -- Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial reporting
purposes in accordance with generally accepted accounting principles ("GAAP").
This method will require the allocation of the purchase price to the various
assets acquired and liabilities assumed based on the fair market values of those
assets and liabilities.
QuadraMed received an appraisal of certain intangible assets which will be
acquired in the Merger which indicated that approximately $35,000,000 of the
intangible assets to be acquired consist of in-process research and development.
In the opinion of management, the acquired in-process research and development
had not yet reached technological feasibility and had no alternative future use.
Accordingly, QuadraMed expects to record a non-recurring charge of approximately
$35,000,000 in its fourth quarter ended December 31, 1997. The remaining
intangible assets are expected to be amortized over a seven-year period.
CERTAIN LEGAL MATTERS
No federal or state regulatory requirements or approvals (other than those
which arose in connection with the registration of QuadraMed Common Stock to be
issued in the Merger and certain notice filings after the Effective Time) must
be complied with or obtained in connection with the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All QuadraMed Common Stock issued in connection with the Merger will be
freely transferable, except that any QuadraMed Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Medicus or QuadraMed prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act with respect to affiliates of Medicus, or Rule 144 under the Securities Act
with respect to persons who are or become affiliates of QuadraMed, or as
otherwise permitted under the Securities Act. See "SPECIAL FACTORS -- Federal
Securities Law Consequences."
LISTING
It is a condition to the obligations of QuadraMed and Medicus to consummate
the Merger that application shall have been made to the Nasdaq National Market
to list the shares of QuadraMed Common Stock to be issued in connection with the
Merger.
APPRAISAL RIGHTS
Record holders of Medicus Common Stock are entitled to appraisal rights
under Section 262 ("Section 262") of the Delaware General Corporation Law (the
"DGCL"), which is reprinted in its entirety as Annex C to this Proxy
Statement/Prospectus. A person having a beneficial interest in shares of Medicus
Common Stock held of record in the name of another person, such as a broker or
nominee, must act promptly
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to cause the record holder to follow the steps summarized below properly and in
a timely manner to perfect the appraisal rights provided under Section 262.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, not less than 20
days prior to the meeting, a constituent corporation must notify each of the
holders of its stock (who was a stockholder on the record date for such meeting)
for which appraisal rights are available that such appraisal rights are
available and include in each such notice a copy of Section 262. THIS PROXY
STATEMENT/ PROSPECTUS SHALL CONSTITUTE SUCH NOTICE TO THE RECORD HOLDERS OF
MEDICUS COMMON STOCK THAT APPRAISAL RIGHTS ARE AVAILABLE. ANY SUCH STOCKHOLDER
WHO WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING
DISCUSSION AND ANNEX -- C CAREFULLY, BECAUSE FAILURE TO TIMELY AND STRICTLY
COMPLY WITH THE PROCEDURES SPECIFIED MAY RESULT IN THE LOSS OF APPRAISAL RIGHTS
UNDER THE DGCL. See "SPECIAL FACTORS -- Appraisal Rights" and ANNEX C.
THE SPECIAL MEETING
TIME, PLACE AND DATE
A special meeting of the stockholders of Medicus will be held at Medicus'
executive offices, third floor auditorium, One Rotary Center, Evanston,
Illinois, on , 1998, at a.m., local time (including any
and all adjournments or postponements thereof, the "Special Meeting").
PURPOSE OF THE MEETING
At the Special Meeting, holders of Medicus Common Stock will consider and
vote upon a proposal to approve and adopt the Merger Agreement and approve the
Merger. As a result of the Merger, Medicus will become a wholly owned subsidiary
of QuadraMed. Stockholders of Medicus will also consider and vote upon any other
matter that may properly come before the Special Meeting. See "THE SPECIAL
MEETING."
VOTE REQUIRED; RECORD DATE
Approval of the Merger Agreement and the consummation of the Merger will
require the affirmative vote of the holders of a majority of the outstanding
shares of Medicus Common Stock entitled to vote at the Special Meeting. Holders
of Medicus Common Stock are entitled to one vote per share. Only holders of
Medicus Common Stock at the close of business on , 1998 (the
"Medicus Record Date") will be entitled to notice of and to vote at the Special
Meeting. On , 1998, there were shares of Medicus Common
Stock outstanding and entitled to vote. See "THE SPECIAL MEETING."
QuadraMed, which acquired 56.7% of the outstanding shares of Medicus Common
Stock on November 9, 1997 pursuant to stock purchase agreements with certain
stockholders of Medicus, will vote its shares of Medicus Common Stock in favor
of approval and adoption of the Merger Agreement and the transactions
contemplated thereby. As a result, QuadraMed's affirmative vote for approval and
adoption of the Merger Agreement is sufficient to approve the Merger. No
provision has been made in the Merger Agreement which requires that the Merger
be approved by a majority of the unaffiliated Medicus stockholders. See "THE
STOCK PURCHASE AGREEMENTS AND WARRANTS," "THE SPECIAL MEETING" and "THE MERGER."
RECOMMENDATION OF THE MEDICUS BOARD OF DIRECTORS
THE MEDICUS BOARD OF DIRECTORS (I) UNANIMOUSLY BELIEVES THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT AND THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE MEDICUS STOCKHOLDERS, (II) HAS UNANIMOUSLY APPROVED THE TERMS
OF THE MERGER AGREEMENT AND THE MERGER AND (III) UNANIMOUSLY RECOMMENDS THAT THE
MEDICUS STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT AND
CONSUMMATION OF THE MERGER. THE PRIMARY FACTORS CONSIDERED AND RELIED UPON BY
THE MEDICUS BOARD OF
7
<PAGE> 22
DIRECTORS IN REACHING ITS RECOMMENDATION ARE REFERRED TO IN "SPECIAL
FACTORS -- BACKGROUND OF THE MERGER," "-- RECOMMENDATION OF THE BOARD OF
DIRECTORS OF MEDICUS; REASONS FOR THE MERGER" AND "-- INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
RISK FACTORS
Holders of Medicus Common Stock should consider risks associated with the
Merger and with holding QuadraMed Common Stock before voting to approve and
adopt the Merger Agreement and the Merger. A copy of the Merger Agreement is
attached as Annex A to this Proxy Statement/Prospectus. See "RISK FACTORS."
THE QUADRAMED COMMON STOCK
At December 31, 1997, the authorized capital stock of QuadraMed consisted
of: (i) 20,000,000 shares of common stock, par value $.01 per share, of which
11,916,097 shares were issued and outstanding and 2,425,129 shares were issuable
with respect to options, warrants, convertible debt and similar rights to
acquire shares of QuadraMed Common Stock; and (ii) 5,000,000 shares of preferred
stock, par value $.01 per share, of which no shares were issued and outstanding.
It is anticipated that at the Effective Time, assuming issuance of 1,800,000
shares of QuadraMed Common Stock pursuant to the Merger Agreement and the
exercise of the Warrants, approximately 1,800,000 shares of QuadraMed Common
Stock will be issued to the holders of Medicus Common Stock and the Warrants,
and an additional 570,827 shares of QuadraMed Common Stock will be issuable upon
the exercise of options which were previously granted under the Medicus Stock
Option Plans and the TriHealth Warrant. In addition, up to 54,902 shares of
QuadraMed Common Stock will be issued upon the purchase and cancellation of the
Jelinek Warrants. The 2,425,729 shares of QuadraMed Common Stock issuable in
connection with these transactions would represent approximately 14.5% of
QuadraMed's outstanding Common Stock (on a fully-diluted basis) following the
Merger based on QuadraMed's outstanding Common Stock and other rights to aquire
QuadraMed Common Stock outstanding as of December 31, 1997. QuadraMed Common
Stock trades on the Nasdaq National Market under the symbol "QMDC."
COMPARATIVE PER SHARE PRICES
QUADRAMED MARKET PRICE DATA
QuadraMed'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 QuadraMed 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 Ending December 31, 1998
First Quarter (through ).................
</TABLE>
As of January 7, 1998, there were approximately 81 holders of record of
QuadraMed's Common Stock. QuadraMed believes that the number of beneficial
holders of QuadraMed Common Stock substantially exceeds this number.
8
<PAGE> 23
MEDICUS MARKET PRICE DATA
Medicus' Common Stock has been quoted on the Nasdaq National Market since
March 1, 1996 under the symbol "MECS." The following table sets forth the range
of high and low closing sales prices reported on the Nasdaq National Market for
Medicus Common Stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended May 31, 1996
Fourth Quarter............................................... $8 $5 1/4
Year Ended May 31, 1997
First Quarter................................................ 6 1/2 4 3/4
Second Quarter............................................... 65/16 4 1/2
Third Quarter................................................ 7 1/2 4 3/8
Fourth Quarter............................................... 6 1/2 5 1/4
Year Ending May 31, 1998
First Quarter................................................ 5 7/8 4
Second Quarter............................................... 7 3/8 4 9/16
Third Quarter (through )................................
</TABLE>
There were 185 holders of record and approximately 2,160 beneficial
holders of Medicus' Common Stock as of August 21, 1997.
RECENT CLOSING PRICES
The following table sets forth the closing prices per share of QuadraMed
Common Stock and Medicus Common Stock on the Nasdaq National Market on November
7, 1997, the last trading day before announcement of the proposed Merger, and on
[ ], the latest practicable trading day before the printing of
this Proxy Statement/Prospectus, and the equivalent per share prices for Medicus
Common Stock based on the QuadraMed Common Stock prices:
<TABLE>
<CAPTION>
MEDICUS
QUADRAMED STOCK MEDICUS STOCK EQUIVALENT(1)
--------------- ------------- -------------
<S> <C> <C> <C>
November 7, 1997......... $ 24.00 $ 5.50 $ 7.50
[ , 1998]..... $ [ ] $ [ ] $ [ ]
</TABLE>
- ---------------
(1) Represents the equivalent of one share of Medicus Common Stock calculated by
multiplying the price per share of QuadraMed Common Stock by the Exchange
Ratio.
9
<PAGE> 24
COMPARATIVE HISTORICAL AND COMBINED PER SHARE DATA
The following historical earnings (loss) per share and stockholders' equity
per share of QuadraMed and Medicus, and pro forma loss per share and
stockholders' equity per share give effect to the Merger as though it occurred
at the beginning of each period for earnings (loss) per share purposes and as of
the indicated balance sheet date for purposes of stockholders' equity per share
information. The equivalent pro forma loss per share and stockholders' equity
per share is based upon an assumed share exchange ratio of 0.3125 provided by
the Merger Agreement as discussed in the footnotes below. The comparative
historical and combined per share data are not necessarily indicative of the
results that actually would have occurred if the Merger had been completed at
the beginning of the periods presented or which may be expected in the future.
The combined financial information should be read in conjunction with the
historical consolidated financial statements of QuadraMed and Medicus
incorporated by reference herein and in conjunction with the Unaudited Pro Forma
Combined Condensed Financial Statements of QuadraMed and Medicus included
elsewhere herein. See "PRO FORMA FINANCIAL DATA."
Medicus' fiscal year ends May 31. The historical Consolidated Financial
Statements of Medicus have been recast and reclassified to conform with
QuadraMed's historical financial statement presentation.
Estimated direct costs of the Merger and other costs of consolidation have
not been determined and are not included in pro forma combined loss per share
for the periods indicated. Such amounts are not expected to be significant to
the combined operations of the companies.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Historical earnings (loss) per share:
Quadramed........................................ $ 0.03 $ 0.37
Medicus.......................................... $(0.57) $ (0.87)
Pro forma combined loss per QMC share.............. $(0.90) $ (0.47)
Pro forma combined loss per equivalent Medicus
share (1)........................................ $(0.28) $ (0.15)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Historical stockholders' equity per share:
QuadraMed (2).................................... $ 4.14 $4.84
Medicus (2)...................................... $ 2.90 $1.39
Pro forma combined stockholders' equity per QMC
share (3)..................................... $ 6.82 $6.17
Pro forma combined stockholders' equity per
Medicus share (1)............................. $ 2.13 $1.93
</TABLE>
- ---------------
(1) The Medicus equivalent pro forma combined loss per share and equivalent pro
forma stockholders' equity per share represents the pro forma combined loss
per share and pro forma combined stockholders' equity per share,
respectively, multiplied by an assumed share exchange ratio of 0.3125 shares
of QuadraMed common stock for each share of Medicus common stock.
(2) The historical stockholders' equity per share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding at
the end of the period.
(3) The pro forma combined stockholders' equity per share is computed by
dividing the pro forma stockholders' equity by the pro forma number of
shares of common stock outstanding at the end of each period.
10
<PAGE> 25
QUADRAMED SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of QuadraMed for
each fiscal year in the five-year period ended December 31, 1996 and for the
nine months ended September 30, 1997. Such data for the annual periods have been
derived from, and should be read in conjunction with, QuadraMed's audited
consolidated financial statements contained in QuadraMed's Annual Report on Form
10-KSB, and amendment thereto, for the fiscal year ended December 31, 1996 and
incorporated herein by reference. Such data for the nine months ended September
30, 1997 have been derived from, and should be read in conjunction with,
QuadraMed's unaudited consolidated financial statements contained in QuadraMed's
Form 10-Q for the period then ended and incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
Interim unaudited data reflect, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
information set forth therein.
Results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of results of operations for the entire year or
predictive of future periods. QuadraMed's development and expansion activities,
including acquisitions, during the periods shown below materially affect the
comparability of this data from one period to another.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------------------ -----------------
1992 1993 1994 1995 1996 1996 1997
---- ----- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $175 $ 517 $ 6,102 $ 7,603 $19,088 $11,798 $22,149
Income (loss) from operations..... (77) (793) (4,780) (9,337) 497 (47) 2,551
Net income (loss)................. (80) (804) (4,865) (9,434) 153 (520) 2,780
Pro forma net income (loss) per
share(1)....................... -- -- -- (2.13) -- -- --
Net income (loss) per share(1).... $ -- $ -- $ -- $ -- $ 0.03 $ (0.11) $ 0.37
==== ===== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
---- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (deficit)... $ 46 $(1,866) $(1,494) $(6,372) $18,357 $13,640
Total assets................ 130 2,123 2,801 9,533 29,569 39,105
Stockholders' equity
(deficit)................ 72 (667) (1,457) (5,817) 24,893 32,200
</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.
11
<PAGE> 26
MEDICUS SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of Medicus for
each fiscal year in the five-year period ended May 31, 1997 and for the six
months ended November 30, 1997. Such data for the annual fiscal periods have
been derived from, and should be read in conjunction with, Medicus' audited
consolidated financial statements contained in Medicus' Annual Report on Form
10-K for the period then ended which is attached hereto as Annex D and
incorporated herein by reference. Such data for the six months ended November
30, 1997 have been derived from, and should be read in conjunction with,
Medicus' unaudited financial statements contained in Medicus' Form 10-Q for the
period then ended which is attached hereto as Annex E and incorporated herein by
reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION." Interim unaudited data reflect, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth therein.
Results of operations for the six months ended November 30, 1997 are not
necessarily indicative of results of operations for the entire year or
predictive of future periods.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MAY 31, NOVEMBER 30
----------------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues........................ $18,140 $21,337 $22,507 $19,794 $18,270 $9,360 $8,388
Operating income (loss)......... 3,226 4,379 3,540 (7,445) (7,356) 391 (2,263)
Net income (loss)............... 2,117 3,225 3,025 (3,726) (4,220) 504 (1,392)
Net income (loss) per common
share(1)........................ -- -- -- -- $ (0.70) $ 0.08 $(0.25)
Pro forma earnings (loss) per
common share(1)................. $ 0.39 $ 0.51 $ 0.45 $ (0.57) -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF
----------------------------------------------- NOVEMBER 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Working capital..................... $ 9,411 $21,984 $17,150 $12,627 $ 2,090 $ 859
Total assets........................ 17,805 35,510 30,882 27,689 22,849 24,140
Stockholders' equity................ 11,461 25,575 22,304 18,201 9,502 8,357
</TABLE>
- ---------------
(1) Loss per common share and pro forma earnings (loss) per common share are
based upon the actual capital structure of Medicus since March 1, 1996, and
the capital structure of Medicus' predecessor prior to March 1, 1996.
12
<PAGE> 27
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
FOR QUADRAMED AND MEDICUS
The following unaudited pro forma combined selected financial data for
QuadraMed and Medicus give effect to the Merger as though it occurred at the
earliest period presented for statement of operations purposes and as of
September 30, 1997 for balance sheet data purposes. The unaudited pro forma
combined selected financial data is not necessarily indicative of the results
that actually would have occurred if the Merger had been completed on the dates
indicated or which may be expected in the future. Such unaudited pro forma
combined selected financial data should be read in conjunction with the audited
historical consolidated financial statements and notes thereto of QuadraMed and
Medicus incorporated by reference herein and in conjunction with the Unaudited
Pro Forma Combined Condensed Financial Statements of QuadraMed and Medicus
included in "PRO FORMA FINANCIAL DATA."
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1996 NOVEMBER 30, 1996
------------------------ -------------------
HISTORICAL PRIOR HISTORICAL PRO FORMA PRO FORMA
QUADRAMED ACQUISITIONS MEDICUS ADJUSTMENTS COMBINED(1)
--------- ------------ ------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $19,088 $ 12,431 $18,435 $ 49,954
Operating Expenses................ 18,591 14,373 25,586 $ 2,143 60,693
Income/(Loss) from Operations..... 497 (1,942) (7,151) (2,143) (10,739)
------- ------- ------- ------- -------
Net Income/(Loss)................. $ 153 $ (2,218) $(3,750) $(2,143) $ (7,958)
======= ======= ======= ======= =======
Net Income (Loss) Per Share....... $ 0.03 $ (0.41) $ (0.90)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 AUGUST 31, 1997
------------------------ -----------------
HISTORICAL PRIOR HISTORICAL PRO FORMA PRO FORMA
QUADRAMED ACQUISITIONS MEDICUS ADJUSTMENTS COMBINED(1)
--------- ------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues........................... $22,149 $ 4,328 $13,530 $40,007
Operating Expenses................. 19,598 5,484 22,206 $ 1,607 48,895
Income/(Loss) from Operations...... 2,551 (1,156) (8,676) (1,607) (8,888)
------- ------- ------- ------- -------
Net Income/(Loss).................. $ 2,780 $ (1,204) $(5,230) $(1,607) $(5,261)
======= ======= ======= ======= =======
Net Income (Loss) Per Share........ $ 0.37 $ (0.15) $ (0.47)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, AUGUST 31,
1997 1997
------------- ----------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
QUADRAMED MEDICUS ADJUSTMENTS COMBINED
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Current Assets..................................... $19,069 $ 11,619 $ 8,000 $38,688
Total Assets....................................... $39,105 $ 20,000 $23,000 $82,105
======= ======= ======= =======
</TABLE>
- ----------
(1) Excludes the effect of non-recurring charge of approximately $35.0 million
to in-process technology resulting from the acquisition of Medicus.
13
<PAGE> 28
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of Medicus stockholders currently are governed by Delaware law,
Medicus' Amended and Restated Certificate of Incorporation, and Medicus' Bylaws.
Upon consummation of the Merger, stockholders of Medicus may become stockholders
of QuadraMed, which is also a Delaware corporation, and their rights as
stockholders of QuadraMed would be governed by Delaware law, QuadraMed's Second
Amended and Restated Certificate of Incorporation ("Certificate of
Incorporation") and QuadraMed's Bylaws. For a comparison of the rights of
Medicus stockholders and the rights of QuadraMed stockholders, see "COMPARISON
OF STOCKHOLDER RIGHTS."
RECENT DEVELOPMENTS
On December 29, 1997, QuadraMed acquired Rothenberg Health Systems Inc.
("Rothenberg"), a provider of health care information systems, and Healthcare
Research Affiliates ("HRA"), a consulting company that specializes in HEDIS
reporting, from Resource Health Partners, L.P. ("RHP") in two related merger
transactions (referred to herein as the "RHP Mergers"). In the RHP Mergers,
QuadraMed issued an aggregate of 1,588,701 shares of QuadraMed Common Stock,
valued at approximately $37.0 million. The transaction will be treated as a
pooling of interests for accounting purposes. QuadraMed has agreed to register
such shares for resale under the Securities Act. See "RISK FACTORS -- Shares
Eligible for Future Sale; Possible Volatility of Stock Price; Low Trading
Volume."
Rothenberg is a provider of health care information systems designed to
enable health care providers to efficiently manage the risks associated with
managed care contracts. Rothenberg has a client base of more than 300 IPAs,
medical groups, hospitals, MSOs, PHOs and integrated delivery systems that
employ or contract with an estimated 40,000 providers of care, who, in turn,
serve over 8,000,000 enrollees in 35 states. Rothenberg's primary product is
EZ-CAP(R), a software product that is designed to validate enrollee eligibility,
adjudicate claims based on specific benefit structures and ensure the accurate
processing and payment of claims. See "RISK FACTORS -- Integration of Acquired
Companies Into QuadraMed" and "-- Risks Associated with Acquisitions; Need to
Manage Changing Operations."
14
<PAGE> 29
RISK FACTORS
Holders of Medicus Common Stock should consider carefully all of the
information contained in this Proxy Statement/Prospectus, including the
following risk factors in evaluating the Merger:
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY
QuadraMed incurred net losses of $4.9 million and $9.4 million for the
years ended December 31, 1994 and 1995, respectively, and as of September 30,
1997 had an accumulated deficit of $12.3 million. Medicus incurred net losses of
$3.7 million and $4.2 million for the years ended May 31, 1996 and 1997,
respectively, and for the six months ended November 30, 1997, had a net loss of
$1.4 million and an accumulated deficit of $9.3 million. Although QuadraMed
recorded net income of $153,000 and $2.8 million for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively, these results
do not include the effect of the Medicus and RHP acquisitions. In connection
with the Merger and other acquisitions, QuadraMed 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 QuadraMed will be able to achieve or sustain revenue growth or
profitability on a quarterly or annual basis. See "SUMMARY -- QuadraMed Selected
Financial Data," "-- Medicus Selected Financial Data" and "PRO FORMA FINANCIAL
DATA."
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
QuadraMed'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 in demand for QuadraMed's products and
services; the number, timing and significance of announcements and releases of
product enhancements and new products by QuadraMed and its competitors; the
timing and significance of announcements concerning QuadraMed's present or
prospective strategic alliances; the termination of, or a reduction in,
offerings of QuadraMed'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 QuadraMed in
marketing, sales, research and development, and administrative personnel
necessary to support QuadraMed's anticipated operations; marketing and sales
promotional activities; software defects and other quality factors; and general
economic conditions.
In May 1997, QuadraMed acquired, in exchange for $2.5 million, a 10.2%
equity stake in EDI USA, Inc. ("EDI USA"), an organization owned and established
by thirteen independent Blue Cross and Blue Shield Plans to build and operate an
EDI transaction network to facilitate submission of claims, receipt of
remittances, eligibility verification and other health care transactions. In
addition, QuadraMed entered into an agreement with EDI USA for QuadraMed to
provide EDI processing services. QuadraMed recorded non-recurring charges of
$334,000, $360,000 and $346,000 for each of the first three quarters of 1997,
respectively, related to start-up costs incurred in connection with its
arrangement to provide EDI processing and management services for EDI USA's
transactions. QuadraMed and EDI USA have terminated their business relationship,
and EDI USA repurchased QuadraMed's equity stake in EDI USA for $2.5 million
during the fourth quarter of 1997. As a result of the termination of the
relationship, QuadraMed expects to record a non-recurring charge in the fourth
quarter of 1997 that substantially exceeds the charges reported in the first
three quarters.
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, QuadraMed typically experiences, and Medicus and RHP have
experienced, sales cycles that extend over several quarters for new customers.
QuadraMed expects that these factors will result in variations in quarterly
revenues and operating results. Moreover, QuadraMed's operating expense levels,
which will increase with the addition of the businesses of Medicus and RHP, are
relatively fixed. If revenues are below expectations, net income is likely to be
15
<PAGE> 30
disproportionately affected. Further, it is likely that in some future quarter
QuadraMed's revenues or operating results will be below the expectations of
securities analysts and investors. In such event, the trading price of
QuadraMed's Common Stock would likely be materially adversely affected.
INTEGRATION OF ACQUIRED COMPANIES INTO QUADRAMED
QuadraMed has entered into the Merger Agreement with Medicus and completed
the RHP Mergers with the expectation that the Merger and the RHP Mergers will
result in certain benefits to QuadraMed as the combined company. Realizing the
benefits of the Merger and the RHP Mergers will depend in part upon the
successful integration of the businesses, products and employees of QuadraMed,
RHP 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. QuadraMed will incur a
significant amortization expense in future periods as a result of the Medicus
acquisition. Any difficulties encountered in the integration process could have
a material adverse effect on the revenues and operating results of the combined
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 combined company. Even if these companies are
successfully integrated into QuadraMed, the acquired operations may not achieve
sales, productivity and profitability commensurate with QuadraMed's historical
operating results or with projected results of QuadraMed and financial analysts
and investors. Failure to achieve such projected results would have a material
adverse effect on QuadraMed's financial performance, and in turn, on the market
value of the QuadraMed Common Stock. There can be no assurance that the combined
company will realize any of the anticipated benefits of the Merger and the RHP
Mergers or that such acquisitions will enhance QuadraMed's business or financial
performance.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
QuadraMed intends to continue to expand in substantial part through
acquisitions of products, technologies and businesses. QuadraMed'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
QuadraMed's industry, which may intensify due to increasing consolidation in the
health care industry, increasing the costs of capitalizing on acquisition
opportunities. QuadraMed competes for acquisition opportunities with other
companies that have significantly greater financial and management resources
than QuadraMed. 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 QuadraMed's business, financial condition and results
of operations. In addition, acquisitions may divert management's attention from
other business concerns, expose QuadraMed 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 QuadraMed or the acquired company. Moreover, acquisitions
(including the Merger and the RHP Mergers) by QuadraMed 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 its
business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS; NEED TO MANAGE CHANGING OPERATIONS
Acquisitions, including the Medicus Merger and RHP Mergers 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
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assumption of unknown liabilities, potential disputes with the sellers of one or
more acquired entities, all of which could have a material adverse effect on
QuadraMed'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 QuadraMed's reputation and its
sales and marketing initiatives. With the addition of the Medicus and RHP
businesses, QuadraMed's anticipated future operations may place a strain on its
management systems and resources. QuadraMed 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 QuadraMed 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.
NEED TO EXPAND SALES AND TECHNICAL SUPPORT CAPABILITIES
A substantial percentage of QuadraMed's sales force is currently
inexperienced in selling QuadraMed's products and will remain so for some time.
With the addition of the Medicus and RHP businesses, QuadraMed will need to
commit significant resources to further recruit, train, motivate, manage and
retain sales personnel to support its expanded product and service offerings.
While QuadraMed intends to commit funds to expand its sales organization, there
can be no assurance that QuadraMed will be able to recruit, train, motivate,
manage and retain additional sales personnel or that their activities will
result in additional revenues to QuadraMed. In addition, QuadraMed recognizes
that as its level of sales increases, it will need to expand its technical
support capabilities to service its expanding customer base. Competition for
qualified sales and technical support personnel in the software industry is
intense. Failure by QuadraMed to effectively expand its sales and technical
support capabilities could have a material adverse effect on QuadraMed's
business, financial condition and results of operations.
In addition, QuadraMed intends to develop a 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 QuadraMed's broader range of product and service offerings.
There can be no assurance that QuadraMed will be successful 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.
DEPENDENCE ON KEY PERSONNEL
QuadraMed'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, including such key personnel associated
with Medicus and RHP who must be successfully integrated into QuadraMed's
management team. The loss of the services of any of its executive officers or
the failure to hire or retain other key employees could have a material adverse
effect on QuadraMed'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 QuadraMed's business, financial
condition and results of operations.
EXPANDED PRODUCT AND SERVICE OFFERINGS; RELIANCE ON CROSS-SELLING PRODUCTS AND
SERVICES TO CUSTOMERS
With the acquisition of the Medicus and RHP businesses, QuadraMed will
further expand the complexity of its product and service offerings and broaden
its customer base to include physicians and other non-hospital health care
providers. Prior to the RHP Mergers, QuadraMed's customers were typically
hospitals and other health care providers, and substantially all of QuadraMed's
revenues were derived from the sale of software products and services to
hospitals. With the addition of the Medicus and RHP businesses, QuadraMed
intends to direct its sales and marketing efforts to a broader customer base
than it has previously addressed, including cross-selling its expanded product
and service offerings to existing customers of QuadraMed, Medicus and RHP.
Additionally, QuadraMed intends to continue to expand its product and service
offerings in the future. The addition by QuadraMed to its product and service
offerings presents certain risks and uncertainties involving QuadraMed's
relative unfamiliarity with these new products and services and the market for
such new products and services. There can be no assurance that QuadraMed will be
successful in its cross-selling
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efforts or in developing or integrating new products and services, or that its
existing customers will accept such new products and services. Additionally,
there can be no assurance that QuadraMed will retain its existing customers or
the existing customers of Medicus and RHP. In particular, Medicus and RHP have
each released Windows(TM)-based versions of their products and may choose not to
continue to provide technical support for old versions of their product. If the
combined company chooses not to provide this technical support, existing Medicus
and RHP customers may be lost. Any failure by QuadraMed to successfully cross-
sell its products, to develop or integrate new products and services or to
retain existing customers of the combined company could have a material adverse
effect on its business, financial condition and results of operations.
THE EFFECT OF QUADRAMED STOCK PRICE FLUCTUATIONS ON THE CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF MEDICUS COMMON STOCK IN THE MERGER
The price of the QuadraMed Common Stock at the Effective Time may vary
significantly from the price as of the date of execution of the Merger Agreement
or the date hereof or the date of the Special Meeting. These variances may be
due to changes in the business, operations and prospects of QuadraMed or
Medicus, market assessments of the likelihood that the Merger will be
consummated and the timing thereof, the effect of any conditions or restrictions
imposed on or proposed with respect to the combined companies by regulatory
agencies in connection with or following consummation of the Merger, general
market and economic conditions, and other factors. For example, between January
1, 1997 and December 31, 1997, the sales price of the QuadraMed Common Stock
ranged from a high of $27.50 to a low of $6.75. The Exchange Ratio will be
adjusted based on certain changes in the stock price of the QuadraMed Common
Stock: (1) if the QuadraMed Stock Value exceeds $27.60, the Exchange Ratio shall
be the quotient obtained by dividing (A) $8.625 by (B) the QuadraMed Stock
Value, and (2) if the QuadraMed Stock Value is less than $24.00, the Exchange
Ratio shall be the quotient obtained by dividing (A) $7.50 by (B) the QuadraMed
Stock Value. Additionally, if the QuadraMed Stock Value is less than $20.40,
QuadraMed may elect, at its sole discretion, to cause all or any portion of the
Medicus Common Stock to be converted into the Per Share Cash Amount. The
"QuadraMed Stock Value" is equal to the average of the closing prices of
QuadraMed Common Stock during the 15 days prior to the second day prior to the
Special Meeting. Pursuant to the terms of the Merger Agreement, the dollar value
of the QuadraMed Common Stock to be received by the holders of Medicus Common
Stock will not be determined until the Effective Time, and may be substantially
more or less than the value of the QuadraMed Common Stock as of the date of
execution of the Merger Agreement, the date hereof or the date of the Special
Meeting.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS
A substantial portion of QuadraMed's revenues have been and are expected to
be derived from the sale of software products and services to hospitals.
QuadraMed's financial performance is dependent on continued demand for its
products. 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 QuadraMed's products and services or the loss of one or
more of QuadraMed's significant customers, including existing customers of
Medicus and RHP, insofar as customers may be acquired by another company that
uses products or services provided by a competitor of QuadraMed, Medicus or RHP.
Any of these occurrences could have a material adverse effect on QuadraMed's
business, financial condition and results of operations. In addition, the
decision to purchase QuadraMed's products often involves the approval of several
members of management of a hospital or health care provider. Consequently, it is
difficult for QuadraMed 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. QuadraMed 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 QuadraMed's customers are providing services under capitated
service agreements, and a reduction in the use of capitation arrangements as a
result of regulatory or
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market changes could have a material adverse effect on QuadraMed'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 QuadraMed's clients in ways that cannot be predicted.
Health care organizations may react to these proposals by curtailing or
deferring investments, including those for QuadraMed's products and services.
HIGHLY COMPETITIVE MARKET
Competition in the market for QuadraMed's products and services (including
products and services acquired from Medicus and RHP by QuadraMed) 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 QuadraMed's business, financial condition and results of
operations. While no one firm competes directly in all niches in which Medicus
and Rothenberg offers products, Medicus and Rothenberg each compete with several
firms of varying size and geographic coverage in each of their market niches.
QuadraMed'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 Corp.
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 QuadraMed'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 QuadraMed may
enter QuadraMed's markets. In addition, many of QuadraMed's competitors and
potential competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than
QuadraMed. Many of QuadraMed'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, QuadraMed's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than QuadraMed. There can be no assurance that QuadraMed will be able
to compete successfully against current and future competitors or that
competitive pressures faced by QuadraMed will not materially adversely affect
its business, financial condition and results of operations.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
QuadraMed's performance will depend in large part upon QuadraMed'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. QuadraMed 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 QuadraMed 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 QuadraMed will meet the requirements of hospitals or other health care
providers and payors and achieve or sustain market acceptance.
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LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
QuadraMed relies on a combination of trade secrets, copyright and trademark
laws, nondisclosure and other contractual provisions to protect its proprietary
rights. QuadraMed has not filed any patent applications covering its technology.
There can be no assurance that measures taken by QuadraMed to protect its
intellectual property will be adequate or that QuadraMed's competitors will not
independently develop products and services that are substantially equivalent or
superior to those of QuadraMed.
Substantial litigation regarding intellectual property rights exists in the
software industry, and QuadraMed expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in QuadraMed's industry segment grows and the functionality of
products overlaps. Although QuadraMed 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 QuadraMed 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 QuadraMed to incur substantial litigation expenses or subject
QuadraMed to significant liabilities and could have a material adverse effect on
QuadraMed's business, financial condition and results of operations. QuadraMed
has recently received notice of a claim filed with the United States Trademark
Appeal Board for the cancellation of its registered QuanTIM(R) trademark, and
also has recently received a letter from a separate third party challenging this
trademark. There can be no assurance that QuadraMed 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 combined company frequently contain
errors or failures, especially when initially introduced or when new versions
are released. Although each company conducts extensive testing, software errors
have been discovered in certain enhancements and products after their
introduction. QuadraMed and Medicus are currently developing various new
applications and each has recently introduced versions of certain of its
existing applications designed to function with the Microsoft Windows(TM) NT
operating system. There can be no assurance that, despite testing by QuadraMed
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 QuadraMed'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.
RISK OF INTERRUPTION OF DATA PROCESSING
QuadraMed currently processes substantially all its customer data at its
facilities in Larkspur, California and Neptune, New Jersey. While QuadraMed 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 QuadraMed's business, financial
condition and results of operations.
RISKS RELATED TO OUTSOURCING BUSINESS
QuadraMed provides business office outsourcing and cash flow management
services, including the billing and collection of receivables. The
infrastructure for QuadraMed's outsourcing business was acquired by QuadraMed.
In addition, QuadraMed often uses its software products to provide outsourcing
services. As a result, QuadraMed has not been required to make significant
capital expenditures in order to service existing outsourcing contracts.
However, if QuadraMed 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.
QuadraMed's failure to estimate
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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, QuadraMed's failure to meet a client's expectations in the performance
of its services could damage QuadraMed's reputation and adversely affect its
ability to attract new business. Finally, QuadraMed 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 QuadraMed's products make
them clinical decision tools subject to FDA regulation. Compliance with these
regulations could be burdensome, time consuming and expensive. QuadraMed 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 QuadraMed in other respects not presently foreseeable. QuadraMed 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 QuadraMed'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 QuadraMed. 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 QuadraMed's products.
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care organizations. Changes in current health care financing and
reimbursement systems could result in the need for unplanned product
enhancements, in delays or cancellations of product orders or shipments or in
the revocation of endorsement of QuadraMed's products by hospital associations
or other customers. Any of these occurrences could have a material adverse
effect on QuadraMed'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 QuadraMed's products. The failure of QuadraMed to maintain
adequate price levels would have a material adverse effect on QuadraMed's
business, financial condition and results of operations. Other market-driven
reforms could also have unpredictable effects on QuadraMed's business, financial
condition and results of operations.
RISK OF PRODUCT-RELATED CLAIMS
Certain of the combined 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 QuadraMed
or by QuadraMed's products to accurately assess, process or collect such claims
could result in claims against QuadraMed by its customers. QuadraMed has been
and currently is involved in claims or administrates such contracts for money
damages related to services provided by its accounts receivable
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management business. QuadraMed 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
QuadraMed. A successful claim brought against QuadraMed 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 QuadraMed's expenditure of funds in litigation and
management time and resources. There can be no assurance that QuadraMed will not
be subject to material claims in the future, that such claims will not result in
liability in excess of its insurance coverage, that QuadraMed's insurance will
cover such claims or that appropriate insurance will continue to be available to
QuadraMed in the future at commercially reasonable rates. In addition, if
liability of QuadraMed 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
QuadraMed 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. QuadraMed 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 QuadraMed will
ever realize a return on its investments. To the extent any of these companies
are unprofitable, QuadraMed may be required to recognize a loss on its
investment during a reporting period. Any loss in connection with these
investments could have a material adverse effect on QuadraMed's business,
financial condition or results of operations during a particular reporting
period. In addition, to the extent any of such companies fail or become bankrupt
or insolvent, QuadraMed 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 QuadraMed could have the
effect of delaying, deterring or preventing a change in control of QuadraMed,
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,
QuadraMed'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. QuadraMed's Board of Directors
is classified into three classes of directors serving staggered, three-year
terms and has the authority without action by QuadraMed'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. QuadraMed's Certificate of
Incorporation provides that directors may be removed only by the affirmative
vote of the holders of two-thirds of the shares of capital stock of the
corporation entitled to vote. Any vacancy on the Board of Directors may be
filled only by vote of the majority of directors then in office. Further,
QuadraMed's Certificate of Incorporation provides that any "Business
Combination" (as therein defined) requires the affirmative vote of two-thirds of
the shares entitled to vote, voting together as a single class. These
provisions, and certain other provisions of the Certificate of Incorporation
which may have the effect of delaying proposed stockholder actions until the
next annual meeting of stockholders, could have the effect of delaying or
preventing a tender offer for QuadraMed's Common Stock or other changes of
control or management of QuadraMed, which could adversely affect the market
price of the QuadraMed Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE VOLATILITY OF STOCK PRICE; LOW TRADING
VOLUME
After the Merger and assuming the issuance of 1,800,000 shares of QuadraMed
Common Stock pursuant to the Merger Agreement and the Warrants, approximately
[ ] shares of QuadraMed Common Stock issued to holders of Medicus
Common Stock and the Warrants will be freely tradeable, and an additional
[ ] shares of QuadraMed Common Stock will be tradeable under Rule 145
under the Securities Act. Additionally,
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QuadraMed has issued 1,588,701 shares of QuadraMed Common Stock in connection
with the RHP Mergers, all of which are being registered under the Securities Act
on a Form S-3 filed concurrently with the registration statement on Form S-4
filed in connection with this Proxy Statement/Prospectus. As a result,
substantial sales of QuadraMed Common Stock could occur immediately after the
Merger. Sales of a substantial number of the aforementioned shares of QuadraMed
Common Stock could adversely affect or cause substantial fluctuations in the
market price of QuadraMed Common Stock and impair QuadraMed's ability to raise
additional capital through the sale of its equity securities.
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
QuadraMed'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 QuadraMed or its competitors, governmental
regulatory action, other developments or disputes with respect to proprietary
rights, general trends in the industry and overall market conditions, and other
factors. The market price may also be affected by movements in prices of equity
securities in general. In addition, the average daily trading volume of
QuadraMed's Common Stock since public trading of the Common Stock commenced has
been low. To the extent this trading pattern continues, the price of the Common
Stock may fluctuate significantly as a result of relatively minor changes in
demand for such shares and sales of stock by stockholders.
RISKS RELATED TO MEDICUS LITIGATION
On July 11, 1997, St. Joseph Hospital filed a lawsuit, St. Joseph Hospital
v. Medicus Systems Corporation, File No. 97-36574, in the District Court of
Harris County, Texas. The complaint alleges primarily breach of a contract to
provide case management software, and seeks unspecified damages, including
attorney's fees. Medicus vigorously denies any liability, and has filed an
answer denying the plaintiff's claims. In addition, Medicus has filed
counterclaims asserting breach of contract and fraudulent inducement. Medicus
believes that it has meritorious defenses to the plaintiff's claims, and it
intends to defend the litigation vigorously. However, due to the nature of the
litigation, the combined company cannot determine the total expense or possible
loss, if any, that may ultimately be incurred either in the context of a trial,
or as a result of a negotiated settlement. Regardless of the ultimate outcome
of the litigation, it could result in significant diversion of time by the
combined company's personnel. While management believes that the resolution of
these matters will not have a material adverse effect on the combined company's
business, financial condition and results of operation, the results of these
proceedings, including any potential settlement are uncertain and there can be
no assurance to that effect.
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SPECIAL FACTORS
BACKGROUND OF THE MERGER
From time to time, QuadraMed has evaluated strategic alliances, including
business combinations with other companies that could complement and strengthen
QuadraMed's product offerings and revenues. Similarly, from time to time,
Medicus has considered various opportunities for expanding its base of products
and distribution. QuadraMed and Medicus believe that the product lines of the
two companies are complementary, and that the Merger will strengthen the
resources, product offerings and distribution channels for each company.
During 1996, management of Medicus, and in particular, Richard C. Jelinek,
who served as Chairman of the Board of Medicus and had voting control of Medicus
until March 19, 1997, explored the possibility of some form of business
combination with another company. Mr. Jelinek had, for some time, expressed his
concern that Medicus was too small to take advantage of the marketplace. He
believed that not only did Medicus lack the profitability and positive cash flow
to finance appropriate research and development, but also that the stand-alone
products being developed by Medicus would be best developed, marketed and sold
as part of a family of similar related products. Management had serious
discussions with two companies expressing preliminary interests in acquiring
Medicus during this period, but by October, 1996, both companies had informed
Medicus that they were not interested in pursuing discussions at that time.
Mr. Jelinek continued to be interested in selling Medicus or his shares of
Medicus. Other Medicus directors did not believe that continuing discussions
with potential buyers at that time were in the best interest of Medicus. These
directors believed that Medicus would benefit from a period of uninterrupted
focus on its operations. In December 1996, representatives of Medicus reached an
agreement in principle with Mr. Jelinek whereby Medicus would acquire 1,000,000
shares of Medicus Common Stock and all of the controlling Medicus Voting
Preferred Stock from Mr. Jelinek. This transaction was completed on March 19,
1997.
Following the March 19, 1997 repurchase of part of Mr. Jelinek's common
stock and all of his controlling Voting Preferred Stock, Medicus' financial
performance failed to meet the expectations of management or the Medicus Board.
Cash flow was less than anticipated and projected future research and
development costs exceeded previously projected levels. As a result, at a
meeting on July 10-11th, 1997, the Medicus Board expressed the view for the
first time that Mr. Jelinek's analysis might be correct and directed management,
among other things, to initiate discussions with selected investment bankers,
potential strategic partners and venture capital firms, concerning a possible
investment, refinancing or business combination involving Medicus.
Following this July Board meeting, Patrick Sommers, Chief Executive Officer
of Medicus, and Dan DiCaro, Chief Financial Officer of Medicus, held discussions
with representatives of several investment banks, venture capital firms, and
companies in the health care software business. None of these discussions other
than the discussions with representatives of QuadraMed described below appeared
likely to result in a transaction that would be favorable to Medicus or its
stockholders.
On August 12, 1997, Mr. Sommers and Lon Gruen, Senior Vice President,
Marketing, of Medicus, met with James D. Durham, Chairman and Chief Executive
Officer of QuadraMed, at QuadraMed's offices in Larkspur, California, presented
the Medicus business plan and discussed a possible acquisition of Medicus by
QuadraMed. QuadraMed expressed interest in receiving more information concerning
Medicus.
On September 2, 1997 Mr. Sommers, Mr. Gruen and Mr. DiCaro met with Mr.
Durham and other members of QuadraMed management, as well as representatives of
Jefferies & Co., in Larkspur, and discussed the Medicus business model.
QuadraMed and Medicus signed a confidentiality agreement at this meeting.
Mr. Sommers received a call on October 1, 1997 from Mr. Durham, during
which Mr. Durham indicated that QuadraMed continued to be interested in learning
more about Medicus but that QuadraMed was in the process of a public offering
and any further discussions could not take place until that offering was
completed.
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At a Medicus Board meeting on October 1 and October 2, Mr. Sommers
described his discussions to date with QuadraMed. The Board directed Mr. Sommers
to continue with such discussions.
On October 23, 1997, Medicus received a letter from QuadraMed formally
proposing a merger transaction for a cash consideration of $6.00 per share,
subject to certain approvals and contingencies including negotiation of a
definitive acquisition agreement. On October 28, 1997, the Medicus Board met via
teleconference to discuss the proposal. Neither Mr. Sommers nor Mr. Jelinek
participated in this meeting. The Medicus Board felt that the purchase price
reflected in the offer was too low. However, the Medicus Board established a
special committee consisting of Dorsey Gardner, chair; Jon Jacoby and Patrick
Sommers (the "Special Committee") to negotiate with QuadraMed and attempt to
obtain a higher price.
The Special Committee met after the Board meeting on October 28, and Mr.
Sommers was directed to prepare a proposal to present to QuadraMed justifying a
higher price. The Special Committee met again on October 30 to review this
proposal.
Later on October 30, 1997, Mr. Sommers and Mr. DiCaro met with Mr. Durham
and John Cracchiolo, Chief Financial Officer of QuadraMed, at the Medicus
offices in Evanston, Illinois, gave further detailed information about Medicus
to the QuadraMed representatives, and discussed the QuadraMed offer. During
these discussions, Mr. Sommers and Mr. DiCaro explained why they believed
Medicus was worth more than $6.00 per share to QuadraMed. They also suggested
that Medicus stockholders would benefit by being offered the option of receiving
either cash or QuadraMed stock. At the conclusion of the meeting QuadraMed
representatives verbally raised QuadraMed's offer to $7.00 per share payable in
either cash, shares of QuadraMed Common Stock or a combination thereof, subject
to certain approvals and contingencies including negotiation of a definitive
acquisition agreement.
The Special Committee, with William Brown (a director and Secretary of
Medicus) participating, met by teleconference on November 2, 1997 and determined
that, while the Special Committee would not make a recommendation, QuadraMed's
latest offer should be presented to the entire Medicus Board. The Medicus Board
met on November 3, 1997 via teleconference to discuss the revised proposal and
instructed Mr. Sommers to continue to negotiate to obtain a higher price.
Mr. Sommers met with Mr. Durham and Mr. Cracchiolo in QuadraMed's offices
on November 4, 1997 and discussed the offer and the need for a higher purchase
price to secure unanimous approval of the Medicus Board. At this meeting,
subject to further consultation with directors, QuadraMed tentatively agreed to
raise the purchase price to $7.50 per share payable in either cash, shares of
QuadraMed Common Stock or a combination thereof. On November 5, 1997 Medicus
received a formal offer from QuadraMed at a purchase price of $7.50 per share,
payable in cash, QuadraMed Common Stock or a combination thereof, subject to
certain approvals and contingencies including negotiation of a definitive
acquisition agreement.
On November 6, 1997 the Medicus Board met via teleconference to discuss the
revised proposal. The Board unanimously approved the basic terms of the offer,
subject to negotiation of an acceptable definitive agreement, and instructed Mr.
Sommers to enter into such negotiations.
Mr. Sommers and Medicus management and their representatives met with
members of QuadraMed management and their representatives in Evanston beginning
November 7, and from November 7 through November 9, such representatives
negotiated and drafted the definitive Merger Agreement.
At a meeting of the QuadraMed Board held by teleconference on November 9,
the QuadraMed Board unanimously approved the Stock Purchase Agreements, the
Warrants, the Merger and the Merger Agreement. One director of QuadraMed, Mr.
Kenneth E. Jones, did not participate in the November 9 meeting. Mr. Thomas F.
McNulty, a director of QuadraMed, abstained from voting because he holds options
to purchase Medicus Common Stock.
At a meeting of the entire Medicus Board held by teleconference on November
9, the Medicus Board unanimously approved the Merger and the Merger Agreement.
The companies executed the Merger Agreement on Sunday afternoon, November
9, 1997, and the agreement to merge was publicly announced early Monday morning,
November 10, 1997 by the issuance of a
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joint press release. QuadraMed also executed the Stock Purchase Agreements with
certain stockholders of Medicus on November 9, 1997 and completed the purchase
of 56.7% of the outstanding shares of Medicus Common Stock during the week of
November 10, 1997.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is for QuadraMed to acquire the entire equity
interest in Medicus. Because holders of Medicus Common Stock have the right to
elect to receive QuadraMed Common Stock, they will have the opportunity to
maintain an indirect equity interest in Medicus through an Election Procedure.
SOURCE AND AMOUNT OF FUNDS
If all Medicus stockholders elect to receive cash in the Merger and
assuming no current Medicus option holders exercise options to purchase Medicus
Common Stock, approximately $18.1 million will be required to pay such
consideration. In addition, QuadraMed will pay fees and expenses of
approximately $ in connection with the Merger. The cash required in
connection with the Merger will be provided by current cash resources of
QuadraMed.
In connection with its purchase of 56.7% of the outstanding shares of the
Medicus Common Stock, QuadraMed paid cash to the Selling Stockholders of
approximately $23.3 million, which amount was funded by QuadraMed's existing
cash resources.
CERTAIN EFFECTS OF THE MERGER; PLANS FOR THE COMPANY AFTER THE MERGER
Following the Merger, QuadraMed will own 100% of the outstanding capital
stock of the Surviving Corporation (as defined in "THE MERGER AGREEMENT -- The
Merger"). As such, QuadraMed will be the direct beneficiary of any future
earnings and growth of the Surviving Corporation, and will have the ability to
benefit from any divestitures, strategic acquisitions or other corporate
opportunities that may be pursued by the Surviving Corporation in the future.
Upon the consummation of the Merger, each share of Medicus Common Stock issued
and outstanding immediately prior to the Effective Time (other than any shares
of Medicus Common Stock owned by Medicus or QuadraMed) will be cancelled and
extinguished and be converted into the right to receive the Merger Consideration
and the stockholders of Medicus will cease to have any direct ownership interest
in Medicus.
As a result of the Merger, the Surviving Corporation will be privately held
and there will be no market for the Medicus Common Stock. Upon consummation of
the Merger, the Medicus Common Stock will cease to be listed on the Nasdaq
National Market and the registration of the Medicus Common Stock under the
Exchange Act will be terminated. Accordingly, Medicus will no longer be required
to file periodic reports with the Commission.
It is expected that following the Merger, the business and operations of
Medicus will be continued under the QuadraMed name, substantially as they are
being conducted presently. However, QuadraMed and management of Medicus will
continue to evaluate Medicus' business and operations after the consummation of
the Merger and make such changes as are deemed appropriate. Specifically,
employees in Medicus' decision support operations will report to the manager of
QuadraMed's value added services division, and employees in QuadraMed's
existing medical records product lines will report to the manager of the
Medicus medical records division. Except as otherwise indicated in this Proxy
Statement/ Prospectus, QuadraMed does not have any plans or proposals
subsequent to the Merger that relate to or would result in any extraordinary
corporate transaction, such as a merger, reorganization or liquidation,
involving Medicus, or a sale or transfer of a material amount of the assets of
Medicus. QuadraMed has begun combining certain redundant operations of Medicus
and eliminating certain corporate operations previously conducted at Medicus,
including certain human resource and finance functions.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF MEDICUS; REASONS FOR THE MERGER
At its November 9, 1997 meeting, the Medicus Board of Directors unanimously
determined that the Merger, upon the terms and conditions set forth in the
Merger Agreement, is fair to, and in the best interests
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of, the holders of Medicus Common Stock. Accordingly, the Medicus Board of
Directors has unanimously adopted the Merger Agreement and unanimously
recommends that Medicus stockholders vote for approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the
Merger, at the Special Meeting. See "-- Background of the Merger." In reaching
this determination, the Medicus Board of Directors considered a number of
factors, including those set forth below.
At the time the Medicus Board approved the Merger Agreement, the members
unanimously believed that not only did Medicus lack the profitability and
positive cash flow to finance appropriate research and development, but also
that the stand-alone products being developed by Medicus would be best
developed, marketed and sold as part of a family of similar related products.
Based on management's discussions with investment banks, venture capital firms
and other companies described above, which discussions continued during the
period of the negotiations with QuadraMed, the QuadraMed proposal represented
both the most concrete and most favorable opportunity for Medicus and its
stockholders.
The Medicus Board believes that the $7.50 consideration to be received in
the Merger represents a fair price to stockholders in light of both recent and
historical market prices of Medicus Common Stock and the future prospects for
Medicus' business. The Medicus Board also believes that the ability to continue
to participate in the growth of the Medicus business through the ownership of
QuadraMed Common Stock by those stockholders who elect to receive QuadraMed
Common Stock represents a favorable opportunity for such stockholders. In
addition, the Medicus Board believes that the Merger represents an excellent
opportunity to grow and improve the business of Medicus. While certain
administrative savings will result from the combination of the two companies,
their businesses also complement each other very well. In particular, the
combination of the decision support business of the two companies will enable
them to offer a more complete solution to customers; in addition, QuadraMed's
DRG Check product provides increased functionality for Medicus' Clinical Data
Systems customers. Finally, QuadraMed possesses the capital resources necessary
to effectively operate and expand Medicus' businesses. These resources, together
with the synergies and savings referred to above, led the Medicus Board to
conclude that QuadraMed's proposal was an attractive opportunity to improve
Medicus' business. The amount and form of the Merger Consideration are, in the
Medicus Board's opinion, fair and in the best interests of Medicus'
stockholders.
In reaching its determination, the Medicus Board consulted with management,
as well as its legal counsel, and considered a number of factors, including the
following material factors, both positive and negative:
(i) the Board's knowledge of the business, operations, properties,
assets, financial condition and operating results of Medicus;
(ii) the Board's knowledge of, and confidence in, James D. Durham,
QuadraMed's Chief Executive Officer, resulting from certain Board members'
shared experiences with him as co-employees, co-directors and co-investors
in several predecessor corporations of Medicus, Knowledge Data Systems
Corporation and several other companies with which Mr. Durham was involved
prior to his founding QuadraMed, and his performance as founder and chief
executive officer of QuadraMed;
(iii) the reports and opinions of Medicus' management, its legal
counsel and its independent auditors, including the result of their due
diligence investigations concerning the business, operations and financial
condition of QuadraMed;
(iv) the effect on stockholder value of Medicus continuing as an
independent entity compared to the effect of a combination with QuadraMed,
in light of the financial condition and prospects of Medicus and the
current economic and industry environment, including, but not limited to,
(A) other possible strategic alternatives for Medicus which the Medicus
Board of Directors had examined, including continuing to execute its
business plan on a stand-alone basis, and (B) the potential for increased
value in the combined QuadraMed/Medicus enterprise;
(v) recent and current market prices of the QuadraMed Common Stock;
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(vi) the terms and conditions of the Merger Agreement and the related
documents, which were the product of extensive arms-length negotiations;
(vii) the premium represented by the Exchange Ratio of (a)
approximately 36% over the Medicus Common Stock closing sales price on
November 7, 1997, the last trading day prior to the meeting of the Medicus
Board of Directors at which the Merger Agreement was approved, (b)
approximately 37% over the price one week before November 7, 1997, and (c)
approximately 13% over the price four weeks before November 7, 1997;
(viii) the compatibility of the respective business philosophies of
QuadraMed and Medicus;
(ix) the opportunity for Medicus stockholders to participate, as
holders of QuadraMed Common Stock, in a larger, more diversified company;
(x) the risk that Medicus will not achieve the synergies and cost
savings anticipated to be achieved in the Merger, including a reduction in
expenses resulting from the combined purchasing power of the two companies;
(xi) the risk that the operations of the two companies would not be
successfully integrated;
(xii) the risk that key technical and management personnel might be
lost prior to or after consummation of the Merger and the potential to
mitigate this risk by negotiating the conversion of Medicus options into
QuadraMed options;
(xiii) Medicus' future prospects for executing its business strategy
and the likelihood that such prospects would be enhanced upon consummation
of the Merger in light of the enhanced competition from software suppliers
to the health care industry;
(xiv) the adverse effects on Medicus' business, operations and
financial condition should it not be possible to consummate the Merger
following public announcement that the Merger Agreement had been entered
into; and
(xv) other risks associated with QuadraMed and Medicus' businesses,
including those described above under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
Medicus Board of Directors is not intended to be exhaustive but includes all
material factors considered by the Medicus Board of Directors. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the Medicus Board of Directors did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Medicus
Board of Directors may have given different weights to different factors. In the
course of its deliberations, the Medicus Board of Directors did not establish a
range of value for Medicus; however, based on the factors outlined above, the
Medicus Board of Directors determined that the Merger is advisable and fair and
in the best interests of Medicus and its stockholders.
THE MEDICUS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
MEDICUS COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF MEDICUS' FINANCIAL ADVISOR
Medicus retained Volpe Brown Whelan & Company, LLC ("VBW&Co.") to render an
opinion to the Medicus Board of Directors as to the fairness, from a financial
point of view, to the stockholders of Medicus, other than QuadraMed, of the
consideration to be received by such stockholders in the Merger. On December 30,
1997, VBW&Co. rendered its opinion to Medicus' Board of Directors to the effect
that, as of such date and based on and subject to the matters stated in the
opinion, the Merger Consideration is fair, from a financial point of view, to
the stockholders of Medicus, other than QuadraMed.
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THE FULL TEXT OF VBW&CO.'s WRITTEN OPINION DATED DECEMBER 30, 1997 WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B AND
IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. HOLDERS OF MEDICUS COMMON STOCK
ARE URGED TO, AND SHOULD, READ THIS OPINION CAREFULLY IN ITS ENTIRETY. THE
ENGAGEMENT OF VBW&CO. AND ITS OPINION ARE FOR THE BENEFIT OF THE MEDICUS BOARD.
VBW&CO.'S OPINION ADDRESSES ONLY THE FAIRNESS OF THE MERGER CONSIDERATION FROM A
FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF MEDICUS, OTHER THAN QUADRAMED,
AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF MEDICUS COMMON STOCK AS TO HOW TO VOTE WITH
RESPECT TO THE MERGER.
In arriving at its opinion, VBW&Co.: (i) reviewed the Merger Agreement;
(ii) discussed the proposed terms of QuadraMed's prospective acquisition of
Resource Health Partners, L.P. ("RHP") with QuadraMed management; (iii)
interviewed management of Medicus and QuadraMed concerning the business
prospects, financial outlook and operating plans of each company individually
and combined; (iv) reviewed certain historical Medicus and QuadraMed, and
certain projected Medicus and QuadraMed (including RHP) financial statements and
other relevant financial and operating data of Medicus and QuadraMed prepared by
the respective company management teams; (v) reviewed the historical stock
trading patterns of both QuadraMed and Medicus and analyzed implied historical
exchange ratios as well as the premium of the Merger Consideration in relation
to historical Medicus stock trading ranges; (vi) reviewed the valuation of
selected publicly-traded companies VBW&Co. deemed comparable and relevant to the
Merger; (vii) reviewed, to the extent publicly-available, the financial terms of
selected merger and acquisition transactions VBW&Co. deemed comparable and
relevant to the Merger; (viii) reviewed the relative contribution each of
Medicus and QuadraMed would make to the combined company in terms of financial
results and compared the implied values resulting from this analysis with the
Merger Consideration; (ix) performed a discounted cash flow analysis of Medicus
as a stand-alone entity based upon financial projections of Medicus management;
(x) performed a pro forma financial impact analysis of the combined entity,
based upon financial projections provided by Medicus and QuadraMed; and (xi)
performed other such studies, analyses and inquiries and considered other such
information as we deemed relevant.
In rendering its opinion, VBW&Co. relied without independent verification
upon the accuracy and completeness of all of the financial, accounting, legal,
tax, operating and other information provided to VBW&Co. by Medicus and
QuadraMed and relied upon the assurances of Medicus and QuadraMed that all such
information provided by them, respectively, was complete and accurate in all
material respects and that there was no additional material information known to
any of them that would make any of the information made available to VBW&Co.
either incomplete or misleading. Medicus also retained outside legal, accounting
and tax advisors to advise on matters relating to the Merger. Accordingly,
VBW&Co. relied on their advice and expresses no opinion on such matters. With
respect to the projected financial data of Medicus and QuadraMed (including
RHP), all of which was provided by the management of Medicus or QuadraMed, as
well as the combined business plan, VBW&Co. has relied upon assurances of each
company that such data was prepared in good faith on a reasonable basis
reflecting the best currently available estimates and judgments of Medicus and
QuadraMed managements as to the future financial performance of each company
separately and as a combined company. VBW&Co. has not made any independent
appraisals or valuations of any assets of Medicus or QuadraMed, nor has VBW&Co.
been furnished with any such appraisals or valuations. In addition, VBW&Co.
assumed that the Merger would be accounted for as a purchase for financial
reporting purposes and the Merger Consideration would be taxable to Medicus
stockholders when received. VBW&Co.'s opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to VBW&Co. as of, the date it rendered its opinion.
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The following is a brief summary of the material analyses performed by
VBW&Co. in rendering its opinion to the Board of Directors of Medicus. The pro
forma financial impact analysis and contribution analysis include the expected
results of RHP, based on information provided by QuadraMed.
Stock Trading and Exchange Ratio Analysis. VBW&Co. analyzed the stock
trading patterns of both Medicus and QuadraMed over various periods of time and
compared them historically to one another. From January 1, 1996 to November 7,
1997 (the last trading day prior to the announcement of the Merger), Medicus
stock ranged from $10.19 per share on February 16, 1996 (prior to the spin-off
on March 1, 1996 of Managed Care Solutions, Inc.) to $4.00 per share on August
7, 1997, August 8, 1997 and October 28, 1997 with a mean daily closing price of
$6.00 per share. The last time the stock price exceeded the level of Merger
Consideration was during the week of March 8, 1996. On a volume basis, 82.5% of
Medicus' trades from January 1, 1996 to November 7, 1997 were below $7.50 per
share and 99.8% of trades from January 1, 1997 to November 7, 1997 were below
$7.50 per share. The exchange ratio implied from dividing historical Medicus
stock prices by QuadraMed stock prices generally was in excess of the Exchange
Ratio prior to August 1, 1997 and was below the Exchange Ratio thereafter. The
implied exchange ratio ranged from 0.1984 - 0.8704 with a mean of 0.4868 since
QuadraMed's IPO. VBW&Co. noted that the implied exchange ratio was 0.2292 and
0.2659 one day and one month, respectively, prior to the date of announcement.
VBW&Co. placed greater weight on the more recent implied exchange ratios one day
and one month prior to the date of announcement.
Premium Analysis. VBW&Co. analyzed the premiums paid in eight Healthcare
Information Services ("HCIS") transactions ("HCIS Premium Panel") deemed
comparable by VBW&Co. and in merger and acquisition transactions generally and
compared them to the premium represented by the Merger Consideration. The Merger
Consideration represents a premium of 36.4% and 30.4% compared to Medicus' stock
price one day and one month prior to the date of announcement, respectively.
For the HCIS Premium Panel, one day premiums ranged from 5.5% to 53.3% with
a median of 17.1% and one month premiums ranged from 10.5% to 110.0% with a
median of 36.8%. These values would imply stock prices based on one day premiums
ranging from $5.80 to $8.43 with a median of $6.44 and stock prices based on one
month premiums ranging from $6.35 to $12.08 with a median of $7.87. For M&A
transactions announced from January 1, 1997 through December 5, 1997 involving
less than $200 million in consideration and with premiums ranging from 0.0% to
131.0%, one day premiums ranged from 0.5% to 108.7% with a median of 22.3% and
one month premiums ranged from 0.9% to 130.9% with a median of 31.2%. These
values would imply stock prices based on one day premiums ranging from $5.53 to
$11.48 with a median of $6.73 and stock prices based on one month premiums
ranging from $5.80 to $13.28 with a median of $7.54.
Comparable Publicly-Traded Company Analysis. VBW&Co. compared certain
financial information of Medicus with that of two groups of publicly-traded
companies selected by VBW&Co. The first group (the "HCIS Panel") were selected
by VBW&Co. based on whether or not each company generated most of its revenues
and earnings from HCIS related businesses. A subset of the first group was also
selected by VBW&Co. composed of those companies that, in the view of VBW&Co.,
are most directly comparable to Medicus (the "Most Comparable Panel"). These
companies include APACHE Medical Systems, Inc., HCIA Inc., MECON, Inc.,
Medirisk, Inc., QuadraMed Corporation, Summit Medical Systems, Inc. and
Transition Systems, Inc. VBW&Co. selected these companies based on similarity of
product lines and on general similarity in size in terms of revenues and
earnings as compared to Medicus.
The HCIS Panel financial information reviewed included stock price in
relation to forecasted calendar year ("FCY") 1998 earnings per share ("EPS") and
book value of stockholders' equity as well as enterprise value (defined as
market capitalization plus funded debt less cash) in relation to last 12 months
("L12M") revenue. FCY 1997 EPS and FCY 1998 EPS for the HCIS Panel were based on
published estimates by research organizations, including those of VBW&Co. Due to
Medicus' losses in the L12M period and FCY 1997, multiples of L12M EBITDA, EBIT,
and net income as well as FCY 1997 net income were not meaningful. VBW&Co. noted
that, based on closing stock prices and earnings estimates as of December 26,
1997, the HCIS Panel traded in a range of 10.7 to 48.3 times FCY 1998 earnings
(with a median of 25.8 times) and 0.4 to 11.3 times book value (with a median of
2.8 times). The enterprise value of the HCIS Panel implied from the stock prices
provided a range of 0.2 to 11.8 times L12M revenues (with a median of 2.5
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times). The implied range of stock prices for Medicus based on the HCIS Panel's
stock prices in relation to FCY 1998 EPS was $1.94 to $8.76 (with a median of
$4.67) and $0.74 to $18.58 (with a median of $4.56) in relation to book value.
The implied range of stock prices for Medicus based on the enterprise value of
the HCIS Panel implied from the stock prices was $0.21 to $39.73 (with a median
of $8.34) in relation to L12M revenues.
The Most Comparable Panel financial information reviewed included stock
price in relation to FCY 1998 EPS and book value of stockholders' equity as well
as enterprise value in relation to L12M revenue. VBW&Co. noted that, based on
closing stock prices and earnings estimates as of December 26, 1997, the Most
Comparable Panel traded in a range of 14.4 to 34.6 times FCY 1998 earnings (with
a median of 28.0 times) and 0.4 to 5.7 times book value (with a median of 2.8
times). The enterprise value of the Most Comparable Panel implied from the stock
prices provided a range of 0.2 to 7.4 times L12M revenues (with a median of 2.3
times). The implied range of stock prices for Medicus based on the Most
Comparable Panel's stock prices in relation to FCY 1998 EPS was $2.60 to $6.28
(with a median of $5.08) and $0.74 to $9.33 (with a median of $4.54) in relation
to book value. The implied range of stock prices for Medicus based on the
enterprise value of the Most Comparable Panel implied from the stock prices was
$0.21 to $25.03 (with a median of $7.48) in relation to L12M revenues. VBW&Co.
placed more weight on valuation results based on FCY 1998 earnings than those
based on revenue and book value since it was the only available valuation
statistic based on profitability.
Comparable Merger and Acquisition Transactions. VBW&Co. has prepared a
valuation of Medicus based upon 15 merger and acquisition transactions of target
companies participating in the HCIS industry ("HCIS Transaction Panel"). In
selecting the HCIS Transaction Panel, VBW&Co. considered whether or not the
target company generated most of its revenues and earnings from HCIS-related
businesses. VBW&Co. also prepared a valuation of Medicus based upon four merger
and acquisition transactions of target companies that, in the view of VBW&Co.,
are most directly comparable to Medicus ("Most Comparable HCIS Transaction
Panel"). The Most Comparable HCIS Transaction Panel includes HBO & Company's
acquisition of GMIS Inc., HBO & Company's acquisition of HPR Inc., Cardinal
Health, Inc.'s acquisition of MediQual Systems, Inc., and National Data
Corporation's pending acquisition of Source Informatics Inc. VBW&Co. selected
these companies based on the similarity of their product lines and on the
similarity in size in terms of revenues and earnings as compared to Medicus.
VBW&Co. reviewed the HCIS Transaction Panel's financial terms, to the
extent publicly available. The enterprise value of these transactions ranged
from 2.0 to 10.6 times L12M revenue (with a median of 4.2 times) and 1.1 to 6.8
times next 12 months forecasted ("N12M") revenue (with a median of 3.0 times).
The transaction value of these transactions ranged from 2.5 to 9.5 times book
value (with a median of 5.2 times), and 11.0 to 41.5 times N12M net income (with
a median of 33.7 times). Due to Medicus' operating losses in L12M EBITDA, EBIT,
and net income, multiples of L12M EBITDA, EBIT, and net income were not
meaningful. The implied range of stock prices for Medicus based on HCIS
Transaction Panel's enterprise value in relation to L12M revenue was $6.52 to
$35.91 (with a median of $13.85) and $4.71 to $29.51 (with a median of $13.14)
in relation to N12M revenue. The implied range of stock prices for Medicus based
on HCIS Transaction Panel's transaction value in relation to book value was
$4.13 to $15.60 (with a median of $8.55) and $1.99 to $7.52 (with a median of
$6.11) in relation to N12M net income.
VBW&Co. also reviewed the Most Comparable HCIS Transaction Panel's
financial terms, to the extent publicly available. The enterprise value of these
transactions ranged from 2.4 to 8.6 times L12M revenue (with a median of 6.0
times) and 1.1 to 6.8 times N12M revenue (with a median of 3.4 times). The
transaction value of these transactions ranged from 4.0 to 9.5 times book value
(with a median of 6.7 times), and 11.0 to 41.5 times N12M net income (with a
median of 34.1 times). The implied range of stock prices for Medicus based on
the Most Comparable HCIS Transaction Panel's enterprise value in relation to
L12M revenue was $8.03 to $29.16 (with a median of $20.30) and $4.71 to $29.51
(with a median of $14.86) in relation to N12M revenue. The implied range of
stock prices for Medicus based on the Most Comparable HCIS Transaction Panel's
transaction value in relation to book value was $6.54 to $15.60 (with a median
of $11.07) and $1.99 to $7.52 (with a median of $6.18) in relation to N12M net
income. VBW&Co. placed more weight on valuation
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results based on N12M net income than those based on revenue and book value
since it was the only available valuation statistic based on profitability.
Contribution Analysis. VBW&Co. reviewed certain historical and forecasted
financial information (including revenue, gross profit, EBITDA, EBIT, net income
and book value) for Medicus and QuadraMed (including RHP) and the pro forma
combined entity resulting from the Merger. VBW&Co. adjusted the relative
contributions of revenue, gross profit, EBITDA and EBIT to reflect the
differences in capital structures of the two companies. VBW&Co. analyzed the
relative contributions of Medicus and QuadraMed (including RHP) based on
historical financial performance for L12M and forecasted financial performance
for 1997 through 2000 provided by the management teams of Medicus and QuadraMed
(including RHP). Based on the foregoing analysis, VBW&Co. concluded that Medicus
would be contributing the following percentages of revenue (26.3% in L12M, 23.2%
in FCY 1997 and 21.0% in FCY 1998), gross profit (28.6% in L12M, 25.5% in FCY
1997 and 24.5% in FCY 1998), EBITDA (-0.7% in L12M, -0.7% in FCY 1997 and 13.5%
in FCY 1998), EBIT (-0.7% in L12M, -0.7% in FCY 1997 and 9.3% in FCY 1998), net
income (0% in L12M, 0% in FCY 1997 and 9.8% in FCY 1998) and book value (8.4% in
L12M, 8.3% in FCY 1997 and 8.4% in FCY 1998). VBW&Co. determined that the
preceding ratios implied the following stock prices for Medicus: L12M revenue:
$16.09; FCY 1997 revenue: $13.61; FCY 1998 revenue: $12.01; L12M gross profit:
$18.07; FCY 1997 gross profit: $15.46; FCY 1998 gross profit: $14.63; L12M
EBITDA: not meaningful; FCY 1997 EBITDA: not meaningful; FCY 1998 EBITDA: $7.02;
L12M EBIT: not meaningful; FCY 1997 EBIT: not meaningful; FCY 1998 EBIT: $4.63;
L12M net income: not meaningful; FCY 1997 net income: not meaningful; FCY 1998
net income: $4.88; L12M book value: $4.14; FCY 1997 book value: $4.07; FCY 1998
book value: $4.14.
Discounted Cash Flow Analysis. VBW&Co. performed a discounted cash flow
analysis of Medicus based on certain financial projections provided by the
management team of Medicus for the periods 1997 through 2002. Unlevered free
cash flows were calculated as net income available to common stockholders plus
the sum of depreciation, amortization and other non-cash charges minus capital
expenditures and plus or minus changes in working capital and minus tax adjusted
interest expense. VBW&Co. calculated terminal values by applying exit multiples
on 2002 net income; and the cash flow streams and terminal values were then
discounted to the present using a range of discount rates deemed appropriate by
VBW&Co. Based on this analysis, VBW&Co. calculated stock prices of Medicus
ranging from $9.92 to $21.94.
Pro Forma Financial Impact Analysis. VBW&Co. analyzed the pro forma impact
of the Merger on QuadraMed's earnings per share for the calendar years 1998
through 2002. The analysis was performed utilizing stand-alone operating
estimates and estimates of transaction-related costs and projected cost savings
resulting from the Merger provided by the management teams of QuadraMed and
Medicus. VBW&Co. expresses no opinion as to whether these projections and
estimates would actually be obtained. VBW&Co. noted that based on management
projections, the Merger would be accretive to QuadraMed's 1998 earnings and
significantly accretive to QuadraMed's 1999 and beyond earnings. The analysis
assumed that the RHP acquisition was completed prior to the Merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, VBW&Co. considered the results of all of its analyses
as a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of the analysis, without
considering all of the analyses, would create an incomplete view of the process
underlying its opinion. In addition, VBW&Co. may have given various analyses and
factors more or less weight than other analyses and factors, and may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to be VBW&Co.'s view of the actual value of Medicus.
The analyses performed by VBW&Co. are not necessarily indicative of actual
value, which may be significantly more or less favorable than the value
suggested by such analyses. Such analyses were prepared solely as part of
VBW&Co.'s analysis of the fairness of the Merger Consideration from a financial
point of view to the stockholders of Medicus other than QuadraMed. The analyses
do not purport to be appraisals or to reflect the prices at which Medicus might
actually be sold. Because such estimates are inherently subject to
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uncertainty, none of Medicus, QuadraMed, VBW&Co. nor any other person assumes
responsibility for their accuracy. Consequently, the VBW&Co. analyses described
herein should not be viewed as determinative of the opinion of the Medicus Board
of Directors with respect to the value of Medicus or of whether the QuadraMed
Board of Directors or the Medicus Board of Directors would have been willing to
agree to a different level of consideration.
VBW&Co. is a nationally recognized investment banking firm and was selected
by Medicus based on VBW&Co.'s experience and expertise. VBW&Co., as a customary
part of its investment banking business, engages in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate and other purposes. In the ordinary course of its
business, VBW&Co. and its affiliates may actively trade the equity securities of
QuadraMed or Medicus for its and their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
VBW&Co. has been engaged by QuadraMed to provide investment banking and
financial advisory services to QuadraMed unrelated to the Medicus transaction.
To date no fees have been paid to VBW&Co. by QuadraMed. VBW&Co. has also been
retained by RHP to provide financial advice and a fairness opinion to RHP with
respect to the acquisition of RHP by QuadraMed and will receive a fee for
rendering such opinion to RHP.
VBW&Co. will receive a fee for rendering its opinion to Medicus, no portion
of which is conditioned upon the opinion being favorable. In addition, Medicus
has agreed to reimburse VBW&Co. for its out-of-pocket costs and expenses and to
indemnify VBW&Co. and its affiliates against certain liabilities and expenses.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Medicus with
respect to the Merger, holders of Medicus Common Stock should be aware that
certain members of Medicus' management, some of whom are members of the Medicus
Board of Directors, and the members of the Medicus Board of Directors have
certain interests in the Merger, in addition to those of Medicus' stockholders
generally. The Board of Directors of Medicus was aware of these interests when
it considered and approved the Merger and the Merger Agreement.
Upon consummation of the Merger, QuadraMed has agreed to enter into an
employment agreement with Patrick C. Sommers, President and Chief Executive
Officer of Medicus. Pursuant to such employment agreement, Mr. Sommers was paid
a signing bonus of $75,000, a pro rata portion of which is subject to repayment
by Mr. Sommers in the event his employment with QuadraMed terminates (other than
without cause) prior to November 9, 1998. Additionally, the employment agreement
provides that Mr. Sommers be paid an annual salary of $175,000, subject to
upward adjustment after an annual review, and an annual bonus. In fiscal year
1998, Mr. Sommers will receive a bonus of no less than $75,000. In the event Mr.
Sommers is terminated by QuadraMed without cause, he will receive a lump sum
payment equal to 150% of his then current salary and benefits for 12 months and
his vested options will remain exercisable for a period of three years following
the date of his termination. In the event Mr. Sommers' termination without
cause results from a change in control of Quadramed, all of his unvested
options will automatically accelerate and become immediately exercisable and
will remain exercisable for a period of three years following such termination.
Mr. Sommers' employment agreement also contains a non-compete provision in which
Mr. Sommers agrees not to compete with QuadraMed in the United States for a
period of 18 months following termination of his employment with QuadraMed. In
addition, at the November 9, 1997 meeting at which the Merger was approved, the
Medicus Board also approved the payment to Mr. Sommers of a bonus in the amount
of $750,000 in satisfaction of Medicus' obligation under Mr. Sommers' employment
agreement to make certain payments in the event of a change in control of
Medicus. The immediate vesting of all stock options held by Mr. Sommers was
approved as well, with such options to be exercisable for a period of three
years after termination of Mr. Sommers' employment.
Concurrent with the execution of the Merger Agreement, certain stockholders
of Medicus, including Richard C. Jelinek, William G. Brown, Jon E.M. Jacoby,
Gail L. Warden and Dorsey R. Gardner, each of whom are directors of Medicus,
sold their shares of Medicus Common Stock to QuadraMed pursuant to stock
purchase agreements dated November 9, 1997. The consideration paid by QuadraMed
for such shares was $7.50 per share in cash plus a warrant to purchase 0.3125
shares of QuadraMed Common Stock for each share
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of Medicus Common Stock sold at a price of $24.00 per share (the closing price
of the QuadraMed Common Stock on the last trading day prior to the execution of
the stock purchase agreements), subject to certain adjustments. The Warrants are
exercisable only at the Effective Time of the Merger. See "THE STOCK PURCHASE
AGREEMENTS AND WARRANTS."
Pursuant to the Merger Agreement, the obligations under the Medicus Stock
Option Plans and the TriHealth Warrant will be assumed by QuadraMed. Each option
so assumed by QuadraMed shall continue to have, and be subject to, the same
terms and conditions set forth in the Medicus Stock Option Plans and the
TriHealth Warrant shall continue to have, and be subject to, the same terms and
conditions set forth therein, immediately prior to the Effective Time, except
that (i) each of the assumed options and warrants will be exercisable for that
number of whole shares of QuadraMed Common Stock equal to the product of the
number of shares of Medicus Common Stock that were issuable upon exercise of
such option or warrant immediately prior to the Effective Time multiplied by
0.3565 and rounded down to the nearest whole number of shares of QuadraMed
Common Stock, (ii) the Director Options will be fully vested (with respect to
each of the Medicus Directors in the following amounts: Patrick C. Sommers --
428,000, William G. Brown -- 20,000, Jon E.M. Jacoby -- 125,000, John P. Kunz
- -- 35,000, Richard C. Jelinek -- 20,000, Risa Lavizzo-Mourey -- 50,000, Gail L.
Warden -- 20,000, Dorsey R. Gardner -- 30,000) and shall remain exercisable for
a period of three years following the Effective Time, and (iii) the per share
exercise price for the shares of QuadraMed Common Stock issuable upon exercise
of such assumed option or warrant will be equal to the quotient determined by
dividing the exercise price per share of Medicus Common Stock at which such
option or warrant was exercisable immediately prior to the Effective Time by
0.3565, rounded up to the nearest whole cent. See "THE MERGER AGREEMENT --
Effect on Employee Benefit Plans" and "THE MERGER -- Treatment of Stock Options
and Outstanding Warrants."
Thomas F. McNulty, a director of QuadraMed, holds options to purchase
_______ shares of Medicus Common Stock which will be assumed by QuadraMed in the
Merger. These options will be converted into options to purchase shares of
Quadramed Common Stock on the same terms as other outstanding Medicus options.
At the Effective Time of the Merger, QuadraMed will purchase and cancel the
Jelinek Warrants in exchange for shares of QuadraMed Common Stock with an
aggregate value of $1.12 million. The number of shares of QuadraMed Common Stock
issuable in exchange for the Jelinek Warrants will be determined by dividing
$1.12 million by the QuadraMed Stock Value as defined in the Merger Agreement.
If at the Effective Time of the Merger, the QuadraMed Stock Value exceeds
$27.60, then the number of shares of QuadraMed Common Stock issuable upon
cancellation of the Jelinek Warrants shall be equal to $1.12 million divided by
$27.60. If at the Effective Time of the Merger, the QuadraMed Stock Value is
less than $20.40, then the number of shares of QuadraMed Common Stock issuable
upon cancellation of the Jelinek Warrants shall be equal to $1.12 million
divided by $20.40.
After the Effective Time, QuadraMed will indemnify and hold harmless the
present and former officers, directors, employees and agents of Medicus in
respect of acts or omissions occurring on or prior to the Effective Time to the
extent permitted by law and to the extent provided under Medicus' Amended and
Restated Certificate of Incorporation and Bylaws or any indemnification
agreement with Medicus' officers and directors to which Medicus is a party. For
two years after the Effective Time, QuadraMed will use its best efforts to
provide officers' and directors' liability insurance in respect of acts or
omissions occurring on or prior to the Effective Time covering each such person
currently covered by Medicus' officers' and directors' liability insurance
policy on terms substantially similar to those of such policy in effect on the
date of the Merger Agreement. QuadraMed shall not be obligated to pay premiums
in excess of 150% of the amount per annum Medicus paid in its last full fiscal
year, and if the insurance required by the Merger Agreement cannot be obtained,
QuadraMed shall obtain as much comparable insurance as possible for an annual
premium equal to such maximum amount. See "THE MERGER
AGREEMENT -- Indemnification."
APPROVAL OF THE BOARD OF DIRECTORS OF QUADRAMED; REASONS FOR THE MERGER
At its November 9, 1997 meeting, the QuadraMed Board of Directors
determined that the Merger, upon the terms and conditions set forth in the
Merger Agreement, is fair to the holders of Medicus Common Stock and QuadraMed
Common Stock. Mr. Kenneth E. Jones did not participate in the meeting and Mr.
Thomas F. McNulty abstained from voting because he holds options to purchase
Medicus Common Stock. See "-- Interests of Certain Persons in the Merger." The
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remaining QuadraMed directors have unanimously adopted the Merger Agreement and
the transactions contemplated thereby, including the Merger. See "-- Background
of the Merger."
QuadraMed has identified what it believes are strategic and financial
benefits that the Merger would provide to each company and the stockholders,
employees and customers of each company. QuadraMed believes there exists a high
level of technical and functional compatibility between the products and
services offered by the companies, particularly in the areas of decision support
and clinical data systems. Medicus' products are PC-based and most are compliant
with the Windows(TM) operating environment, as are the systems offered by
QuadraMed. In addition, QuadraMed believes that the data captured by Medicus'
systems, when combined with that collected by QuadraMed's systems, is of
potential value and will enable QuadraMed to enhance the quality of data-based
products currently marketed by the two companies. Furthermore, access to an
increased number of customers who own only one or two of the products offered in
the combined companies' suite of products and services, represents a
cross-selling opportunity. QuadraMed also perceives the reputation of Medicus in
the marketplace as being widely known and well-regarded which may further
enhance QuadraMed's own reputation. QuadraMed generally believes the management
and employees of Medicus to be experienced and skilled in health care
information systems and, when combined with the management and resources of
QuadraMed, may result in a management team that is better able to create
stockholder value. Additionally, the management of the two companies believe
certain economies of scale, cost savings and operational leverage may be
achieved by reducing certain duplicative administrative functions.
In reaching its determination, the QuadraMed Board consulted with
management, as well as its legal counsel, and considered a number of factors,
including the following material factors, both positive and negative:
(i) the Board's knowledge of the business, operations, properties,
assets, financial condition and operating results of QuadraMed;
(ii) the reports and opinions of QuadraMed's management, its legal
counsel and its independent auditors, including the result of their due
diligence investigations concerning the business, operations and financial
condition of Medicus;
(iii) the effect on stockholder value of Medicus and QuadraMed
continuing as independent entities compared to the effect of combining the
two companies, in light of the financial condition and prospects of Medicus
and the current economic and industry environment, including, but not
limited to, the potential for increased value in the combined
QuadraMed/Medicus enterprise;
(iv) recent and current market prices of the QuadraMed Common Stock
and the Medicus Common Stock;
(v) the terms and conditions of the Merger Agreement and the related
documents, which were the product of extensive arms-length negotiations;
(vi) the premium represented by the Exchange Ratio over the price of
the Medicus Common Stock;
(vii) the compatibility of the respective business philosophies of
QuadraMed and Medicus;
(viii) the opportunity for Medicus stockholders to participate, as
holders of QuadraMed Common Stock, in a larger, more diversified company;
(ix) the risks that QuadraMed will not achieve the synergies and cost
savings anticipated to be achieved in the Merger, including a reduction in
expenses resulting from the combined purchasing power of the two companies;
(x) the risk that the operations of the two companies would not be
successfully integrated;
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(xi) the risk that key technical and management personnel might be
lost prior to or after consummation of the Merger and the potential to
mitigate this risk by negotiating the conversion of Medicus options into
QuadraMed options;
(xii) QuadraMed's future prospects for executing its business strategy
and the likelihood that such prospects would be enhanced as a result of the
Merger in light of the enhanced competition in the health care information
systems industry;
(xiii) the adverse effects on QuadraMed's and Medicus' businesses,
operations and financial condition should it not be possible to consummate
the Merger following public announcement that the Merger Agreement had been
entered into; and
(xiv) other risks associated with QuadraMed and Medicus' businesses,
including those described above under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
QuadraMed Board of Directors is not intended to be exhaustive but includes all
material factors considered by the QuadraMed Board of Directors. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the QuadraMed Board of Directors did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the QuadraMed
Board of Directors may have given different weights to different factors. In the
course of its deliberations, the QuadraMed Board of Directors did not establish
a range of value for Medicus; however, based on the factors outlined above, the
QuadraMed Board of Directors determined that the Merger is advisable and fair
and in the best interests of QuadraMed, Medicus and their respective
stockholders.
ANALYSIS OF QUADRAMED'S FINANCIAL ADVISOR
In evaluating the proposed merger with Medicus, the QuadraMed Board of
Directors considered certain materials and analyses presented by Jefferies &
Company, Inc. ("Jefferies"), which acted as QuadraMed's financial advisor in
connection with the transaction. Jefferies was not instructed to, nor did it,
render an opinion as to the fairness of the transaction from a financial point
of view to the Board of Directors or stockholders of QuadraMed, and was not
engaged as an advisor to Medicus or its stockholders, which retained a separate
advisor. See "-- Opinion of Medicus' Financial Advisor." The analysis prepared
by Jefferies was limited to an accretion/dilution analysis at various possible
purchase prices and was based upon publicly-available information and
information provided by QuadraMed and Medicus. Had Jefferies been instructed to
deliver a fairness opinion or to advise Medicus or its stockholders, it might
have reviewed additional information and analyses which might have resulted in
materials and analyses that differed from that which was presented to
QuadraMed's Board of Directors. Furthermore, the materials and analyses
presented relied upon certain information which was provided to Jefferies by
QuadraMed and Medicus or was otherwise publicly available. Jefferies was not
asked to, and did not, independently verify the accuracy, completeness or fair
presentation of any financial or other information (including financial
projections, pro forma financial information and estimates), and assumed that
the information provided to it by QuadraMed and Medicus had been prepared on the
basis reasonably reflecting management's best currently available estimate and
good faith judgments as to the future performance of the respective companies
for all the periods specified therein. Jefferies was not asked to, and did not,
make an independent evaluation or appraisal or conduct a physical inspection of
any of the assets of QuadraMed or Medicus, nor was any such appraisal or
valuation made available to Jefferies.
Jefferies, as part of its investment banking business, is regularly engaged
in the evaluation of capital structures, the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, financial restructurings and other financial
services. Jefferies has provided investment banking services to QuadraMed in the
past for which it has received or expects to receive customary investment
banking fees and commissions, including acting as managing underwriter in
connection with QuadraMed's initial public offering in October 1996 and
follow-on equity offering in October 1997 and acting as financial advisor in
connection with QuadraMed's acquisition of Healthcare Recovery, Inc. (d.b.a.
Synergy HMC) in
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April 1997, the RHP Mergers in December 1997 and for this Merger. QuadraMed
retained Jefferies as its advisor in connection with the Medicus transaction
due, in part, to Jefferies' experience in investment banking and general
familiarity with the health care information systems industry and certain of its
participants, including QuadraMed and Medicus. In the ordinary course of its
business, Jefferies and its affiliates may actively trade the securities of
QuadraMed or Medicus for their own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
The materials and analysis provided to QuadraMed's Board of Directors
contained (i) a summary description of Medicus, which among other things
described certain product and technology information, marketing agreements,
historical corporate transactions (including the March 1996 distribution of
Medicus' managed care business, Medicus' share repurchase from Mr. Richard
Jelinek and Medicus' reorganizations which took place in each of the fiscal
years ended May 31, 1996 and 1997), summary operating data, certain share and
option ownership, price and trading volume characteristics of Medicus' common
stock, monthly trading volume of the leading market makers in Medicus' common
stock and biographies of certain officers and directors; (ii) an overview of the
consideration to be paid to Medicus shareholders and the anticipated accretive
or dilutive effects of the transaction relative to the projected stand alone
results of QuadraMed as estimated by the research department of Jefferies; (iii)
a transaction analysis which depicted the pro forma effects of the Merger on the
projected combined results of operations of the two companies; (iv) certain
publicly available disclosure documents, including Medicus' most recent proxy,
10-K and 10-Q; and (v) an analysis of recent mergers and acquisitions in the
health care information systems industry which included, among other items,
certain ratios of the consideration paid relative to various operating results
of the acquired companies.
Jefferies' advisory services and the materials and analysis presented to
QuadraMed's Board of Directors were provided for the information and assistance
of QuadraMed's Board of Directors in connection with its consideration of the
Merger and do not constitute a recommendation as to whether any holder of
Medicus Common Stock should vote for or against approval and adoption of the
Merger Agreement.
FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Merger Consideration for shares of Medicus Common Stock
will be a taxable transaction for U.S. federal income tax purposes and may be a
taxable transaction for foreign, state and local income tax purposes as well. A
Medicus stockholder will generally recognize gain or loss equal to the
difference between (i) the amount of cash, and, in the case of Medicus
stockholders receiving QuadraMed Common Stock, the fair market value of
QuadraMed Common Stock that the stockholder receives as a result of the Merger
and (ii) the stockholder's adjusted tax basis in the shares of Medicus Common
Stock that the stockholder exchanges in the Merger. Medicus will not recognize
any gain or loss as a result of the Merger for U.S. federal income tax purposes.
THE FOREGOING IS NOT INTENDED TO BE A COMPREHENSIVE DISCUSSION OF ALL
POSSIBLE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.
FURTHERMORE, THE PROXY STATEMENT/PROSPECTUS DOES NOT PROVIDE INFORMATION
REGARDING THE TAX CONSEQUENCES OF THE MERGER UNDER THE TAX LAWS OF ANY STATE OR
OF ANY LOCAL OR FOREIGN JURISDICTION. MEDICUS STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO SPECIFIC TAX CONSEQUENCES OF THE MERGER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial reporting
purposes in accordance with GAAP. This method will require the allocation of the
purchase price to the various assets acquired and liabilities assumed based on
the fair market values of those assets and liabilities.
QuadraMed received an appraisal of certain intangible assets which will be
acquired in the Merger which indicated that approximately $35,000,000 of the
intangible assets to be acquired consist of in-process research and development.
In the opinion of management, the acquired in-process research and development
had not
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yet reached technological feasibility and had no alternative future use.
Accordingly, QuadraMed expects to record a non-recurring charge of approximately
$35,000,000 in its fourth quarter ended December 31, 1997. The remaining
intangible assets are expected to be amortized over a seven-year period.
CERTAIN LEGAL MATTERS
No federal or state regulatory requirements or approvals (other than those
which arose in connection with the registration of QuadraMed Common Stock to be
issued in the Merger and the effectiveness of this Proxy Statement/Prospectus
and certain notice filings after the Effective Time) must be complied with or
obtained in connection with the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All QuadraMed Common Stock issued in connection with the Merger will be
freely transferable, except that any QuadraMed Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Medicus or QuadraMed prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act with respect to affiliates of Medicus, or Rule 144 under the Securities Act
with respect to persons who are or become affiliates of QuadraMed, or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Medicus or QuadraMed generally include individuals or entities
that control, are controlled by, or are under common control with, such party
and may include certain officers and directors of such party as well as
principal stockholders of such party.
Affiliates of Medicus may not sell their shares of QuadraMed Common Stock
acquired in connection with the Merger, except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 (or Rule 144 under the Securities Act in the case of
persons who become affiliates of QuadraMed) or another applicable exemption from
the registration requirements of the Securities Act. In general, under Rule 145,
for one year following the Effective Time an affiliate (together with certain
related persons) would be entitled to sell shares of QuadraMed Common Stock
acquired in connection with the Merger only through unsolicited "brokers'
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by an
affiliate (together with certain related persons and certain persons acting in
concert with an affiliate) within any three-month period for purposes of Rule
145 may not exceed the greater of 1% of the outstanding shares of QuadraMed
Common Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would only remain available,
however, to such former Medicus affiliates if QuadraMed remained current with
its informational filings with the Commission under the Exchange Act. One year
after the Effective Time, a former affiliate of Medicus would be able to sell
such QuadraMed Common Stock without such manner of sale or volume limitations
provided that QuadraMed was current with its Exchange Act informational filings
and such affiliate was not then an affiliate of QuadraMed. Two years after the
Effective Time, a former affiliate of Medicus would be able to sell such shares
of QuadraMed Common Stock without any restrictions so long as such affiliate had
not been an affiliate of QuadraMed for at least three months prior thereto.
LISTING
It is a condition to the obligations of QuadraMed and Medicus to consummate
the Merger that application shall have been made to the Nasdaq National Market
to list the shares of QuadraMed Common Stock to be issued in connection with the
Merger.
APPRAISAL RIGHTS
Record holders of Medicus Common Stock are entitled to appraisal rights
under Section 262 ("Section 262") of the Delaware General Corporation Law (the
"DGCL"). The following discussion represents a summary of the material
provisions of Section 262, and is qualified in its entirety by reference to the
full text of Section 262, which is reprinted in its entirety as Annex C to this
Proxy Statement/Prospectus. A person
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having a beneficial interest in shares of Medicus Common Stock held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect the appraisal rights provided under Section 262.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, not less than 20
days prior to the meeting, a constituent corporation must notify each of the
holders of its stock (who was a stockholder on the record date for such meeting)
for which appraisal rights are available that such appraisal rights are
available and include in each such notice a copy of Section 262. THIS PROXY
STATEMENT/PROSPECTUS SHALL CONSTITUTE SUCH NOTICE TO THE RECORD HOLDERS OF
MEDICUS COMMON STOCK THAT APPRAISAL RIGHTS ARE AVAILABLE. ANY SUCH STOCKHOLDER
WHO WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING
DISCUSSION AND ANNEX C CAREFULLY, BECAUSE FAILURE TO TIMELY AND STRICTLY COMPLY
WITH THE PROCEDURES SPECIFIED MAY RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER
THE DGCL.
Under the DGCL, a record holder of shares of Medicus Common Stock who makes
the demand described below with respect to such shares, who continuously is the
record holder of such shares through the Effective Time, who otherwise complies
with the statutory requirements set forth in Section 262 and who neither votes
in favor of approval of the Merger Agreement and the Merger nor consents thereto
in writing will be entitled to have his or her shares of Medicus Common Stock
appraised by the Delaware Court of Chancery and to receive payment of the "fair
value" of such shares as described below. Such holders are, in such
circumstances, entitled to appraisal rights because they hold stock of a
constituent corporation to the Merger and may be required by the Merger
Agreement to accept cash as a portion or all of the Merger Consideration. Since
holders of shares of Medicus Common Stock wishing to exercise appraisal rights
must not vote in favor of approval of the Merger Agreement and the Merger, such
holders should not deliver unmarked proxies (i.e., proxies without instructions)
to Medicus as such proxies will be voted FOR such approval. See "THE SPECIAL
MEETING -- Record Date; Voting Rights; Proxies."
A holder of shares of Medicus Common Stock wishing to exercise his or her
appraisal rights must deliver to the Secretary of Medicus, before the vote on
the Merger Agreement at the Special Meeting, a written demand for appraisal of
his or her shares of Medicus Common Stock. Merely voting or delivering a proxy
directing a vote against approval of the Merger Agreement and the Merger will
not constitute a demand for appraisal. A written demand is essential. Such
written demand must reasonably inform Medicus of the identity of the holder and
that such holder intends thereby to demand appraisal of the holder's shares. All
written demands for appraisal of Medicus Common Stock should be sent or
delivered to Medicus, One Rotary Center, Suite 1111, Evanston, Illinois 60201,
Attn: Secretary. In addition, a holder of shares of Medicus Common Stock wishing
to exercise his or her appraisal rights must hold such shares of record on the
date the written demand for appraisal is made and must hold such shares
continuously through the Effective Time. Stockholders who hold their shares of
Medicus Common Stock in brokerage accounts or other nominee forms and who wish
to exercise appraisal rights must take all necessary steps in order that a
demand for appraisal is made by the record holder of such shares and are urged
to consult with their brokers to determine the appropriate procedures for the
making of a demand for appraisal by the record holder.
Within 10 days after the Effective Time, the Surviving Corporation (as
defined in "The Merger Agreement -- The Merger") must send a notice as to the
effectiveness of the Merger to each holder of shares of Medicus Common Stock who
has satisfied the appropriate provisions of Section 262 and who is entitled to
appraisal rights under Section 262. Within 120 days after the Effective Time,
any holder of record of shares of Medicus Common Stock who has complied with the
requirements for exercise of appraisal rights will be entitled, upon written
request, to receive from the Surviving Corporation a statement setting forth (i)
the aggregate number of shares of Medicus Common Stock not voted in favor of the
Merger Agreement and with respect to which demands for appraisal have been
received and (ii) the aggregate number of holders of such shares. Any such
statement must be mailed within 10 days after a written request therefor has
been received by the Surviving Corporation.
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Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any holder of shares of Medicus Common Stock who has complied
with the foregoing procedures and who is entitled to appraisal rights under
Section 262 may file a petition in the Delaware Court of Chancery demanding a
determination of the "fair value" of such shares. The Surviving Corporation is
not under any obligation to file a petition with respect to the appraisal of the
"fair value" of the shares of Medicus Common Stock and neither QuadraMed nor
Medicus presently expects that the Surviving Corporation will file such a
petition. Accordingly, it is the obligation of the holders of Medicus Common
Stock to initiate all necessary action to perfect their appraisal rights within
the time prescribed in Section 262. A holder of shares of Medicus Common Stock
will fail to perfect, or effectively lose, his or her right to appraisal if no
petition for appraisal of shares of Medicus Common Stock is filed within 120
days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of shares of
Medicus Common Stock entitled to appraisal rights and will appraise the "fair
value" of the shares of Medicus Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the Merger. Holders
considering seeking appraisal should be aware that the "fair value" of their
shares of Medicus Common Stock as determined under Section 262 could be more
than, the same as, or less than the value of the Merger Consideration they would
receive if they did not seek appraisal. The Delaware Supreme Court has stated
that "proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenter's exclusive remedy.
The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose shares of
Medicus Common Stock have been appraised. The costs of the action may be
determined by such court and taxed upon the parties as the court deems
equitable. The Delaware Court of Chancery may also order that all or a portion
of the expenses incurred by any holder of shares of Medicus Common Stock in
connection with an appraisal, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all of the shares of
Medicus Common Stock entitled to appraisal.
If any holder of shares of Medicus Common Stock who demands appraisal of
his or her shares under Section 262 fails to perfect, or effectively withdraws
or loses, his or her right to appraisal, as provided in the DGCL, such
stockholder will receive the Merger Consideration in accordance with the Merger
Agreement. A holder may withdraw his or her demand for appraisal by delivering
to the Surviving Corporation a written withdrawal of his or her demand for
appraisal and acceptance of the Merger, except that any such attempt to withdraw
made more than 60 days after the Effective Time will require the written
approval of the Surviving Corporation. Failure to follow the steps required by
Section 262 for perfecting appraisal rights may result in the loss of such
rights.
Any holder of shares of Medicus Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote the shares of Medicus Common Stock subject to such demand for
any purpose or be entitled to the payment of dividends or other distributions on
those shares (except dividends or other distributions payable to holders of
record of shares of Medicus Common Stock as of a date prior to the Effective
Time).
Shares of Medicus Common Stock held by any holder who shall have failed to
perfect or who effectively shall have withdrawn or lost his or her rights to
appraisal of such shares of Medicus Common Stock under Section 262 shall be
deemed to have been converted into and to have become exchangeable, as of the
Effective Time, for the right to receive, without any interest thereon, shares
of QuadraMed Common Stock based on the Exchange Ratio, as if such shares were
covered by Non-Elections, upon surrender of the certificate or certificates that
formerly evidenced such shares of Medicus Common Stock. See "THE MERGER
AGREEMENT -- Election for Shares or Cash."
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THE STOCK PURCHASE AGREEMENTS AND WARRANTS
On November 9, 1997, QuadraMed and certain stockholders of Medicus (the
"Selling Stockholders") entered into Stock Purchase Agreements pursuant to which
QuadraMed acquired 56.7% of the outstanding shares of Medicus Common Stock. In
consideration for the sale of the Medicus Common Stock to QuadraMed, QuadraMed
agreed to pay to the Selling Stockholders $7.50 per share, in cash, without
interest, together with a warrant (the "Warrant") entitling the Selling
Stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of Medicus Common Stock sold. The aggregate purchase price paid by QuadraMed to
the Selling Stockholders was approximately $23.3 million in cash plus Warrants
to purchase an aggregate of 972,220 shares of QuadraMed Common Stock as
described in the following paragraphs. The Selling Stockholders included Richard
C. Jelinek, William G. Brown, Jon E.M. Jacoby, Gail L. Warden and Dorsey R.
Gardner, all of whom are directors of Medicus.
The Warrants entitle the Selling Stockholders to purchase QuadraMed Common
Stock at a price of $24.00 per share (the closing price on the last trading day
prior to execution of the Stock Purchase Agreements), which would provide them
with additional value in the event the market price of QuadraMed Common Stock
were to increase above $24.00 per share. If at the Effective Time of the Merger,
the QuadraMed Stock Value (as defined below) exceeds $27.60, then the number of
shares of QuadraMed Common Stock issuable upon exercise of the Warrants shall be
adjusted downward such that the number of shares of QuadraMed Common Stock
issuable upon exercise of a Warrant shall be X, where X is equal to the Warrant
Value (as defined below) divided by the difference of (i) the QuadraMed Stock
Value minus (ii) $24.00. For purposes of the Warrants, the term "QuadraMed Stock
Value" means the price per share equal to the average of the closing prices of
QuadraMed Common Stock during the fifteen (15) days prior to the second day
prior to the date of the Special Meeting and the term "Warrant Value" means the
product obtained by multiplying $3.60 by the initial number of shares of
QuadraMed Stock issuable under the Warrants.
The Warrants were intended to provide to the Selling Stockholders the
opportunity to benefit from any increase in the price of the QuadraMed Common
Stock to the same extent as other holders of Medicus Common Stock who may elect
to receive the Merger Consideration in the form of QuadraMed Common Stock. To
the extent that a Warrant is not exercised at the Effective Time or the number
of shares issuable upon exercise of a Warrant is limited as set forth in the
following paragraph, the portion of a Warrant that is unexercised or subject to
the limitations set forth in the following paragraph shall terminate and shall
be void and of no further force or effect. The shares of QuadraMed Common Stock
issuable upon exercise of Warrants will be registered pursuant to a registration
statement on Form S-3 to be filed by QuadraMed.
In no event shall the aggregate number of shares of QuadraMed Common Stock
which QuadraMed is obligated to issue (1) upon conversion of the Warrants and
(2) in exchange for outstanding shares of Medicus Common Stock pursuant to the
Merger Agreement, exceed 1,800,000 shares of QuadraMed Common Stock. In the
event that the total number of shares of QuadraMed Common Stock which holders of
Warrants and holders of Medicus Common Stock have elected to receive as
described in clauses (1) and (2) in the immediately preceding sentence exceeds
1,800,000, QuadraMed shall only be required to issue 1,800,000 shares of
QuadraMed Common Stock and such holders shall be entitled to receive shares of
QuadraMed Common Stock equal to each holder's pro rata portion of the total
amount of shares issued by QuadraMed as described in clauses (1) and (2), based
on the total number of shares each holder elected to receive. See "THE MERGER
AGREEMENT -- Limitation on Shares Issuable."
In lieu of the cash payment described above, QuadraMed delivered to William
G. Brown, a Selling Stockholder and director of Medicus, a promissory note in
the amount of $1,620,075 (which note was paid on January 5, 1998) in exchange
for Mr. Brown's transfer to QuadraMed of 216,010 shares of Medicus Common Stock.
In connection with the Merger, Patrick Sommers and Richard C. Jelinek,
option holders of Medicus, granted irrevocable proxies to QuadraMed with respect
to all shares of Medicus Common Stock which are issuable upon exercise of
outstanding options or warrants to purchase Medicus Common Stock owned by them
(the "Option Shares"). Pursuant to the proxies, QuadraMed is empowered to
exercise all voting and other
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rights with respect to the Option Shares as it deems proper in respect of any
matter at a meeting of stockholders, or any written consent in lieu of a meeting
of stockholders.
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THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, holders of record of Medicus Common Stock entitled
to vote as of the Medicus Record Date (as defined below) will consider and vote
upon a proposal to approve and adopt the Merger Agreement and such other matters
as may properly be brought before the Special Meeting.
THE BOARD OF DIRECTORS OF MEDICUS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
The Medicus Board has established a Record Date Committee (consisting of
Messrs. Brown and Sommers) which has fixed the close of business on
, 1998 as the record date (the "Medicus Record Date") for determining holders
of Medicus Common Stock entitled to notice of and to vote at the Special
Meeting.
As of the Medicus Record Date, there were [ ] shares of Medicus
Common Stock issued and outstanding, each of which entitles the holder thereof
to one vote. All shares of Medicus Common Stock represented by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH SHARES OF MEDICUS COMMON STOCK WILL BE VOTED FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
Votes cast by proxy or in person at the Special Meeting will be tabulated
by the election inspectors appointed for the meeting who will determine whether
or not a quorum is present. Where, as to any matter submitted to the
stockholders for a vote, proxies are marked as abstentions (or stockholders
appear in person but abstain from voting), such abstentions will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the stockholders for a vote. If a broker indicates on
the proxy that it does not have discretionary authority as to certain shares to
vote on a particular matter, those shares will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but will not be considered as present and entitled to vote with respect
to that matter.
SOLICITATION OF PROXIES
Medicus will bear its own cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by the directors and officers of
Medicus by personal interview, telephone, telegram or E-mail. Such directors and
officers will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements may also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares of Medicus Common Stock held of record by such persons, in
which case Medicus will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Medicus Common Stock entitled
to vote as of the Medicus Record Date is necessary to constitute a quorum at the
Special Meeting. Under applicable Delaware Law, abstentions and "broker
non-votes" (that is, proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owner or other person
entitled to vote shares as to a matter with respect to which the brokers or
nominees do not have discretionary power to vote) will be treated as present for
purposes of determining the presence of a quorum at the Special Meeting.
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REQUIRED VOTE
The approval of the Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Medicus Common Stock. QuadraMed, which
acquired 56.7% of the outstanding shares of Medicus Common Stock pursuant to
Stock Purchase Agreements with certain stockholders of Medicus, will vote its
shares of Medicus Common Stock in favor of approval and adoption of the Merger
Agreement and the transactions contemplated thereby. In addition, in connection
with the Merger, Patrick Sommers and Richard C. Jelinek, option holders of
Medicus, granted irrevocable proxies to QuadraMed with respect to all shares of
Medicus Common Stock which are issuable upon exercise of outstanding options or
warrants to purchase Medicus Common Stock owned by them (the "Option Shares").
Pursuant to the proxies, QuadraMed is empowered to exercise all voting and other
rights with respect to the Option Shares as it deems proper in respect of any
matter at a meeting of stockholders, or any written consent in lieu of a meeting
of stockholders. As a result, QuadraMed's affirmative vote for approval and
adoption of the Merger Agreement is sufficient to approve the Merger. No
provision has been made in the Merger Agreement which requires that the Merger
be approved by a majority of the unaffiliated Medicus stockholders.
A proposal to adjourn the Special Meeting to solicit additional proxies
requires the affirmative vote of the holders of a majority of Medicus Common
Stock present in person or by proxy at the Special Meeting. As of the Medicus
Record Date, there were [ ] shares of Medicus Common Stock outstanding
and entitled to vote held by approximately [ ] stockholders of record.
As of the Medicus Record Date, QuadraMed and directors and officers of Medicus
and their affiliates as a group beneficially owned [ ] shares of
Medicus Common Stock, or approximately [ ]% of those shares of Medicus
Common Stock outstanding as of such date.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF MEDICUS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
THE MERGER
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approval of the Medicus stockholders required therefor is obtained and all other
conditions to the Merger are satisfied or waived. Pursuant to the Merger
Agreement, QuadraMed, which owns 56.7% of the Medicus Common Stock, has agreed
and intends to vote all of its shares of Medicus Common Stock in favor of the
Merger. As a result, QuadraMed's affirmative vote for approval and adoption of
the Merger Agreement is sufficient to approve the Merger. See "THE MERGER
AGREEMENT -- Conditions to Consummation of the Merger."
Upon consummation of the Merger, Merger Sub, a wholly owned subsidiary of
QuadraMed, will be merged with and into Medicus, and Medicus will become a
wholly owned subsidiary of QuadraMed. Upon consummation of the Merger, each
outstanding share of Medicus Common Stock (other than shares owned by Medicus as
treasury stock or by its subsidiaries or shares owned by QuadraMed or any direct
or indirect wholly owned subsidiary of QuadraMed, all of which will be canceled)
will be automatically converted into the right to receive any of (i) $7.50 in
cash, without interest (the "Per Share Cash Amount"); or (ii) 0.3125 shares of
QuadraMed Common Stock (the "Exchange Ratio"), subject to adjustment and certain
limitations as described in the Merger Agreement; or (iii) a combination of
shares of QuadraMed Common Stock and cash (collectively, the "Merger
Consideration"). The Exchange Ratio is subject to the following adjustments: if
(1) the QuadraMed Stock Value exceeds $27.60, then the Exchange Ratio shall be
the quotient obtained by dividing (A) $8.625 by (B) the QuadraMed Stock Value,
and (2) the QuadraMed Stock Value is less than $24.00, then the Exchange Ratio
shall be the quotient obtained by dividing (A) $7.50 by (B) the QuadraMed Stock
Value. Additionally, if the QuadraMed Stock Value is less than $20.40, then
QuadraMed may elect, at
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its sole discretion, to cause all or any portion of the shares of Medicus Common
Stock to be converted into the Per Share Cash Amount (the "QuadraMed Cash
Election"). In the event of a QuadraMed Cash Election in which less than all of
the outstanding shares of Medicus Common Stock will be converted into cash, the
shares of Medicus Common Stock to be converted into cash as a result of the
QuadraMed Cash Election will be selected pro rata according to the number of
shares with respect to which a Stock Election has been made. The "QuadraMed
Stock Value" is equal to the average of the closing prices of QuadraMed Common
Stock during the fifteen (15) days prior to the second day prior to the date of
the Special Meeting.
Each record holder of Medicus Common Stock may elect to receive the Per
Share Cash Amount (a "Cash Election"), shares of QuadraMed Common Stock (a
"Stock Election") or a combination of both. Shares of Medicus Common Stock for
which no election is received or for which a stockholder has indicated no
preference for cash or shares (a "Non-Election") will automatically be
converted into the right to receive QuadraMed Common Stock. The maximum number
of shares of QuadraMed Common Stock which QuadraMed is obligated to issue in the
Merger and upon exercise of the Warrants is 1,800,000 shares. If the aggregate
number of shares of QuadraMed Common Stock issuable pursuant to Stock Elections
and issuable upon exercise of the Warrants exceeds 1,800,000, the shares
issuable upon consummation of the Merger and exercise of the Warrants will be
allocated on a pro rata basis. See "THE MERGER AGREEMENT -- Limitation on
Shares Issuable."
Based upon the capitalization of Medicus and QuadraMed (as adjusted for and
assuming the issuance of 1,800,000 shares of QuadraMed Common Stock and assuming
no adjustment of the Exchange Ratio) as of the Medicus Record Date, the
stockholders of Medicus will own approximately [ ]% of the outstanding
QuadraMed Common Stock following consummation of the Merger. Such percentage
could change depending on the number of shares of QuadraMed Common Stock and
Medicus Common Stock issued upon exercise of outstanding Medicus and QuadraMed
stock options and warrants or otherwise issued prior to the Effective Time.
EFFECTIVE TIME
The Effective Time of the Merger will occur upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Certificate of Merger"). The filing of the Certificate of Merger will occur on
the date of closing of the transactions contemplated in the Merger Agreement
(the "Closing Date"). QuadraMed and Medicus currently expect that the closing
will occur promptly after the Special Meeting. The Merger Agreement may be
terminated by either party if the Merger has not been consummated on or before
May 1, 1998 and under certain other conditions. See "THE MERGER
AGREEMENT -- Conditions to Consummation of the Merger," "-- Termination;
Expenses; Amendment; Waiver."
ELECTION PROCEDURES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Each record holder of Medicus Common Stock may elect to receive the Per
Share Cash Amount, shares of QuadraMed Common Stock or a combination of both by
submitting a Form of Election to the Exchange Agent no later than the Election
Deadline. Record holders who indicate no preference on the Form of Election or
who do not submit a Form of Election prior to the Election Deadline will
automatically have their shares of Medicus Common Stock converted into the right
to receive shares of QuadraMed Common Stock at the Effective Time (subject to
QuadraMed's right to make the QuadraMed Cash Election and QuadraMed's obligation
to issue no more than 1,800,000 shares of QuadraMed Common Stock in the Merger).
Promptly after the Effective Time, QuadraMed will instruct the Exchange
Agent to mail to each holder of record of certificates which formerly
represented Medicus Common Stock (the "Certificates") as soon as practicable a
letter of transmittal and instructions for use in effecting the surrender of
Certificates. Upon receipt of such Certificates, the Exchange Agent will
deliver, as the case may be, (i) the Per Share Cash Amount and/or (ii) whole
shares of QuadraMed Common Stock to such stockholder and cash in lieu of
fractional shares to which such holder would otherwise be entitled pursuant to
the terms of the Merger Agreement and in accordance with the letter of
transmittal, together with any dividends or other distributions to which such
stockholder is entitled, without interest. See "THE MERGER AGREEMENT -- Election
for Shares or Cash."
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After the Effective Time, there will be no further transfers of Medicus
Common Stock on the stock transfer books of Medicus. If a Certificate
representing Medicus Common Stock is presented for transfer, it will be canceled
and exchanged as provided in the Merger Agreement. See "THE MERGER
AGREEMENT -- Surrender and Payment."
After the Effective Time and until surrendered, Certificates which formerly
represented shares of Medicus Common Stock will be deemed for all corporate
purposes, other than the payment of dividends and distributions, to evidence
ownership of the number of full shares of QuadraMed Common Stock or the Per
Share Cash Amount, as the case may be, into which such shares of Medicus Common
Stock were converted at the Effective Time. After the Effective Time, no
dividends or other distributions, if any, payable to holders of QuadraMed Common
Stock will be paid to the holders of any Certificates until such Certificates
are surrendered. Upon surrender of such Certificates, all such declared
dividends and distributions with a record date after the Effective Time will be
paid to the holder of record of certificates representing the full shares of
QuadraMed Common Stock represented by the certificate issued in exchange
therefor, without interest. See "THE MERGER AGREEMENT -- Surrender and Payment."
It should be noted that QuadraMed has never declared any cash dividends on the
QuadraMed Common Stock. QuadraMed currently intends to retain future earnings,
if any, to fund the development and growth of its business and does not
anticipate paying any cash dividends on the QuadraMed Common Stock in the
foreseeable future. In addition, QuadraMed's credit agreement contains
provisions that restrict the payment of dividends.
TREATMENT OF STOCK OPTIONS AND OUTSTANDING WARRANTS
At the Effective Time, the obligations under the Medicus Stock Option Plans
and the TriHealth Warrant will be assumed by QuadraMed. Each option so assumed
by QuadraMed shall continue to have, and be subject to, the same terms and
conditions set forth in the Medicus Stock Option Plans and the TriHealth
Warrant shall continue to have, and be subject to, the same terms and
conditions set forth therein, immediately prior to the Effective Time, except
that (i) each of the assumed options and warrants will be exercisable for that
number of whole shares of QuadraMed Common Stock equal to the product of the
number of shares of Medicus Common Stock that were issuable upon exercise of
such option or warrant immediately prior to the Effective Time multiplied by
0.3565, rounded down to the nearest whole number of shares of QuadraMed Common
Stock, (ii) the Director Options will be fully vested and shall remain
exercisable for a period of three years after the Effective Time (or three
years after termination of employment in the case of Mr. Sommers) and (iii) the
per share exercise price for the shares of QuadraMed Common Stock issuable upon
exercise of such assumed option or warrant will be equal to the quotient
determined by dividing the exercise price per share of Medicus Common Stock at
which such option or warrant was exercisable immediately prior to the Effective
Time by 0.3565, rounded up to the nearest whole cent.
At the Effective Time, the Jelinek Warrants shall be purchased and
cancelled by QuadraMed in exchange for QuadraMed Common Stock. See "SPECIAL
FACTORS -- Interests of Certain Persons in the Merger."
HOLDERS OF MEDICUS COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF
MEDICUS COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
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THE MERGER AGREEMENT
The following description of the Merger Agreement is necessarily a summary
thereof and is therefore qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Annex A and incorporated herein by reference. Stockholders of Medicus are urged
to read the Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
by the stockholders of Medicus and the satisfaction or waiver of the other
conditions to the Merger, a newly formed subsidiary of QuadraMed ("Merger Sub")
will be merged with and into Medicus in accordance with Delaware law, whereupon
the separate existence of Merger Sub will cease and Medicus will be the
surviving corporation of the Merger (the "Surviving Corporation"). Merger Sub
was formed solely to complete the Merger. At the Effective Time, the conversion
of Medicus Common Stock and the conversion of shares of the common stock of
Merger Sub pursuant thereto will be effected as described below. The Certificate
of Incorporation and Bylaws of Merger Sub will become the Certificate of
Incorporation and Bylaws of the Surviving Corporation and may thereafter be
amended and/or restated as provided therein and by Delaware law. The directors
and officers of Merger Sub shall become the directors and officers of the
Surviving Corporation.
TERMS OF THE MERGER
At the Effective Time, each share of Medicus Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares owned by
Medicus as treasury stock or by its subsidiaries or shares owned by QuadraMed or
any direct or indirect wholly owned subsidiary of QuadraMed, all of which will
be cancelled) will be canceled and extinguished and be converted automatically
into the right to receive any of (i) the Per Share Cash Amount; or (ii) the
Exchange Ratio; or (iii) a combination of shares of QuadraMed Common Stock and
the Per Share Cash Amount. The Exchange Ratio is subject to the following
adjustments: (i) if the QuadraMed Stock Value exceeds $27.60, then the Exchange
Ratio shall be the quotient obtained by dividing (A) $8.625 by (B) the QuadraMed
Stock Value, and (ii) if the QuadraMed Stock Value is less than $24.00, then the
Exchange Ratio shall be the quotient obtained by dividing (A) $7.50 by (B) the
QuadraMed Stock Value; provided further, however, that if the QuadraMed Stock
Value is less than $20.40, then QuadraMed may, at its sole discretion, elect to
have all or any portion of the shares of Medicus Common Stock converted into the
Per Share Cash Amount (the "QuadraMed Cash Election"). In the event of the
QuadraMed Cash Election in which less than all of the outstanding shares of
Medicus Common Stock will be converted into cash, the shares of Medicus Common
Stock to be converted into cash as a result of the QuadraMed Cash Election will
be selected pro rata according to the number of shares with respect to which a
Stock Election (as defined in "-- Election for Shares or Cash") has been made.
The amounts paid in the Merger in exchange for shares of Medicus Common Stock
shall be referred to herein as the "Merger Consideration."
At the Effective Time, the Medicus 1989 Stock Option Plan, the Medicus 1991
Stock Option Plan, the Medicus 1993 Stock Option Plan, the Medicus 1993
Performance Stock Option Plan, the Medicus 1994 Stock Option Plan, the Medicus
1994 Directors' Stock Option Plan, the Medicus 1995 RCM Stock Option Plan, the
Medicus 1996 C.E.O. Stock Option Plan, the Medicus 1996 C.E.O. Replacement Stock
Option Plan, the Medicus 1996 C.E.O. Special Stock Option Plan, the Medicus 1997
Employee Stock Option and Restricted Stock Plan, and the Medicus 1997 Directors'
Stock Option Plan (collectively, the "Medicus Stock Option Plans"), the
TriHealth Warrant and all options or rights to purchase Medicus Common Stock
then outstanding under the Medicus Stock Option Plans, and the TriHealth
Warrant, shall be assumed by QuadraMed.
FRACTIONAL SHARES
No fraction of a share of QuadraMed Common Stock will be issued in the
Merger. In lieu of any fractional shares that would otherwise be issuable in the
Merger in exchange for shares of Medicus Common
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Stock, QuadraMed shall pay the proportionate amount of the Per Share Cash Amount
that would be payable in respect of such fractional share.
LIMITATION ON SHARES ISSUABLE
In no event shall the aggregate number of shares of QuadraMed Common Stock
which QuadraMed is obligated to issue in the aggregate (i) upon the exercise of
the Warrants and (ii) in exchange for outstanding shares of Medicus Common Stock
pursuant to the Merger Agreement exceed a total of 1,800,000 shares. In the
event that the aggregate number of shares of QuadraMed Common Stock that holders
of Warrants and holders of Medicus Common Stock have elected to receive as
described in clauses (i) and (ii) in the immediately preceding sentence exceeds
1,800,000, QuadraMed shall only be required to issue 1,800,000 shares of
QuadraMed Common Stock and such holders shall be entitled to receive shares of
QuadraMed Common Stock equal to each holder's pro rata portion of the total
amount of shares issued by QuadraMed as described in clauses (i) and (ii), based
on the total number of shares each holder elected to receive. See "THE STOCK
PURCHASE AGREEMENTS AND WARRANTS."
ELECTION FOR SHARES OR CASH
Immediately prior to the Effective Time, each record holder of shares of
Medicus Common Stock will be entitled (i) to elect to receive cash for none,
some or all of such shares (a "Cash Election"), (ii) to elect to receive
QuadraMed Common Stock for none, some or all of such shares (a "Stock
Election"), or (iii) to indicate that such record holder has no preference as to
the receipt of cash or QuadraMed Common Stock for such shares (a
"Non-Election"). All such elections shall be made on a form designed for that
purpose (a "Form of Election"). Holders of record of shares of Medicus Common
Stock who hold such shares as nominees, trustees or in other representative
capacities (a "Representative") may submit multiple Forms of Election, provided
that such Representative certifies that each such Form of Election covers all
the shares of Medicus Common Stock held by each Representative for a particular
beneficial owner. All shares of Medicus Common Stock covered by Stock Elections
(the "Stock Election Shares") and all shares of Medicus Common Stock covered by
Non-Elections (the "Non-Election Shares") shall be converted into the right to
receive QuadraMed Common Stock (subject to QuadraMed's right to make the
QuadraMed Cash Election and QuadraMed's obligation to issue no more than
1,800,000 shares of QuadraMed Common Stock in the Merger), and the Cash Election
Shares shall be converted into the right to receive cash, without interest.
Elections shall be made by holders of Medicus Common Stock by mailing or
otherwise delivering to the Exchange Agent a Form of Election. To be effective,
a Form of Election must be properly completed, signed and submitted to the
Exchange Agent. QuadraMed will have the discretion, which it may delegate in
whole or in part to the Exchange Agent, to determine whether Forms of Election
have been properly completed, signed and submitted or revoked and to disregard
immaterial defects in Forms of Election. The decision of QuadraMed (or the
Exchange Agent) in such matters shall be conclusive and binding. Neither
QuadraMed nor the Exchange Agent will be under any obligation to notify any
person of any defect in a Form of Election submitted to the Exchange Agent. The
Exchange Agent shall also make all computations contemplated by the Merger
Agreement and all such computations shall be conclusive and binding on the
holders of Medicus Common Stock. A holder of Medicus Common Stock who does not
submit a Form of Election which is received by the Exchange Agent prior to the
Election Deadline shall be deemed to have made a Non-Election. If QuadraMed or
the Exchange Agent shall determine that any purported Cash Election or Stock
Election was not properly made, such purported Cash Election or Stock Election
shall be deemed to be of no force and effect and the stockholder making such
purported Cash Election or Stock Election shall be deemed to have made a
Non-Election. QuadraMed and Medicus shall each use its reasonable best efforts
to mail the Form of Election to all persons who become holders of Medicus Common
Stock during the period between the Medicus Record Date and 10:00 a.m.
California time, on the date seven calendar days prior to the anticipated
Effective Time and to make the Form of Election available to all persons who
become holders of Medicus Common Stock subsequent to such day and no later than
the close of business on the business day prior to the Effective Time. A Form of
Election must be received by the Exchange Agent prior to the Election Deadline
in order to be effective. All elections may be revoked until the Election
Deadline.
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SURRENDER AND PAYMENT
The First National Bank of Boston shall act as the Exchange Agent in the
Merger.
Promptly after the Effective Time, QuadraMed shall make available to the
Exchange Agent (i) the shares of QuadraMed Common Stock issuable in exchange for
Stock Election Shares and Non-Election Shares and (ii) cash in an amount
sufficient to make payment with respect to Cash Election Shares and permit
payment of cash in lieu of fractional shares.
Promptly after the Effective Time, the Surviving Corporation shall cause to
be mailed to each holder of record of the Certificate(s) which immediately prior
to the Effective Time represented outstanding shares of Medicus Common Stock,
whose shares were converted into the right to receive shares of QuadraMed Common
Stock (and cash in lieu of fractional shares) or the Per Share Cash Amount (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as QuadraMed may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of QuadraMed Common Stock (and cash in lieu of fractional
shares) or the Per Share Cash Amount. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by QuadraMed, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holder of
such Certificate shall be entitled to receive in exchange therefor (i) a
certificate representing the number of whole shares of QuadraMed Common Stock
and payment in lieu of fractional shares which such holder has the right to
receive or (ii) the Per Share Cash Amount, as the case may be, and the
Certificate so surrendered shall be canceled. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented shares of
Medicus Common Stock will be deemed for all corporate purposes, other than the
payment of dividends, to evidence the ownership of the number of full shares of
QuadraMed Common Stock or the Per Share Cash Amount, as the case may be, into
which such shares of Medicus Common Stock shall have been so converted and the
right to receive an amount in cash in lieu of the issuance of any fractional
shares.
No dividends or other distributions with respect to QuadraMed Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of QuadraMed Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of QuadraMed Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of any such dividends or other distributions with a record date after the
Effective Time payable with respect to such shares of QuadraMed Common Stock.
QuadraMed has never declared any cash dividends on the QuadraMed Common Stock.
QuadraMed currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not anticipate paying any cash
dividends on the QuadraMed Common Stock in the foreseeable future. In addition,
QuadraMed's credit agreement contains provisions that restrict the payment of
dividends.
If any certificate for shares of QuadraMed Common Stock is to be issued in
a name other than that in which the Certificate surrendered in exchange therefor
is registered, it will be a condition of the issuance thereof that the
Certificate so surrendered will be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange will have paid to
QuadraMed or any agent designated by it any transfer or other taxes required by
reason of the issuance of a certificate for shares of QuadraMed Common Stock in
any name other than that of the registered holder of the Certificate
surrendered, or established to the satisfaction of QuadraMed or any agent of
QuadraMed that such tax has been paid or is not payable.
In the event any Certificates shall have been lost, stolen or destroyed,
the Exchange Agent shall issue QuadraMed Common Stock (and cash in lieu of
fractional shares) in exchange for such lost, stolen or destroyed Certificates,
upon the making of an affidavit of that fact by the holder thereof. QuadraMed
may, in its discretion and as a condition precedent to the issuance of shares of
QuadraMed Common Stock, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably
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direct as indemnity against any claim that may be made against QuadraMed, the
Surviving Corporation or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
DETAILED INSTRUCTIONS, INCLUDING A LETTER OF TRANSMITTAL, WILL BE MAILED TO
HOLDERS OF RECORD OF MEDICUS COMMON STOCK AS SOON AS PRACTICABLE FOLLOWING THE
EFFECTIVE TIME AS TO THE METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING
SHARES OF MEDICUS COMMON STOCK FOR CASH OR CERTIFICATES REPRESENTING SHARES OF
QUADRAMED COMMON STOCK. SEE "THE MERGER -- GENERAL" AND "-- ELECTION PROCEDURES;
PROCEDURES FOR EXCHANGE OF CERTIFICATES." STOCKHOLDERS OF MEDICUS SHOULD NOT
SEND CERTIFICATES REPRESENTING THEIR SHARES TO MEDICUS OR TO THE EXCHANGE AGENT
PRIOR TO RECEIPT OF THE LETTER OF TRANSMITTAL.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of QuadraMed and Medicus to consummate the Merger are
subject to the satisfaction of certain conditions, including: (i) the approval
of the Merger Agreement and the transactions contemplated thereby by the holders
of a majority of the shares of Medicus Common Stock as of the Medicus Record
Date, (ii) the Registration Statement shall have been declared effective by the
Commission and no stop orders with respect thereto shall have been issued by the
Commission and remain in effect; (iii) the absence of any temporary restraining
order, preliminary or permanent injunction or other order issued by any federal
or state court in the United States which prevents the consummation of the
Merger (each party agreeing to use its reasonable diligent efforts to have any
such injunction lifted); (iv) all necessary government approvals, waivers and
consents shall have been obtained, including such approvals, waivers and
consents required under the provisions of the Securities Act and approvals under
any applicable state securities law; and (v) application shall have been made
with the Nasdaq National Market to list the shares of QuadraMed Common Stock
issuable to Medicus stockholders pursuant to the Merger Agreement.
The obligation of Medicus to consummate the Merger is also subject to the
satisfaction of the following further conditions (unless waived in writing by
Medicus): (i) the representations and warranties of QuadraMed and Merger Sub in
the Merger Agreement shall be true and correct in all material respects (except
for such representations and warranties that are qualified by their terms by a
reference to materiality which representations and warranties as so qualified
shall be true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time; (ii) QuadraMed
and Merger Sub shall have performed and complied in all material respects with
all covenants, obligations and conditions of the Merger Agreement required to be
performed and complied with by them as of the Effective Time; (iii) Medicus
shall have been provided with a certificate executed on behalf of QuadraMed by
its President and its Chief Financial Officer to the effect that, as of the
Effective Time, all representations and warranties made by QuadraMed and Merger
Sub under the Merger Agreement are true and complete in all material respects
and all covenants, obligations and conditions of the Merger Agreement to be
performed by QuadraMed and Merger Sub on or before such date have been so
performed in all material respects; (iv) there shall not have occurred any
material adverse change in the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations, results
of operations or prospects of QuadraMed and its subsidiaries, taken as a whole;
(v) Medicus shall have been furnished with evidence satisfactory to it of the
consent or approval of those persons whose consent or approval shall be required
in connection with the Merger under any material contract of QuadraMed or any of
its subsidiaries or otherwise; and (vi) no temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint provision limiting
or restricting QuadraMed's business following the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental entity, domestic or foreign, seeking the foregoing be pending.
The obligations of QuadraMed and Merger Sub to consummate the Merger are
also subject to the satisfaction of the following further conditions (unless
waived in writing by QuadraMed): (i) the representations and warranties of
Medicus in the Merger Agreement shall be true and correct in all material
respects
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(except for such representations and warranties that are qualified by their
terms by a reference to materiality, which representations and warranties as so
qualified shall be true in all respects) on and as of the Effective Time as
though such representations and warranties were made on and as of such time;
(ii) Medicus shall have performed and complied in all material respects with all
covenants, obligations and conditions of the Merger Agreement required to be
performed and complied with by it as of the Effective Time; (iii) QuadraMed
shall have been provided with a certificate executed on behalf of Medicus by its
President and its Chief Financial Officer to the effect that, as of the
Effective Time, all representations and warranties made by Medicus under the
Merger Agreement are true and complete in all material respects and all
covenants, obligations and conditions of the Merger Agreement to be performed by
Medicus on or before such date have been so performed in all material respects;
(iv) QuadraMed shall have been furnished with evidence satisfactory to it of the
consent or approval of those persons whose consent or approval shall be required
in connection with the Merger under any material contract of Medicus or any of
its subsidiaries or otherwise; (v) no temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint provision limiting or
restricting QuadraMed's conduct or operation of the business of Medicus and its
subsidiaries following the Merger shall be in effect, nor shall any proceeding
brought by an administrative agency or commission or other governmental entity,
domestic or foreign, seeking the foregoing be pending; (vi) there shall not have
occurred any material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Medicus and its subsidiaries,
taken as a whole; and (vii) QuadraMed shall have received from each of the
affiliates of Medicus an executed Affiliate Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
QuadraMed and Merger Sub and Medicus relating to, among other things, the
following matters (which representations and warranties are subject, in certain
cases, to specified exceptions): (i) the due organization, power and standing
of, and similar corporate matters with respect to, each of Medicus and QuadraMed
and Merger Sub; (ii) the capitalization of each of Medicus and QuadraMed and
Merger Sub; (iii) performance and enforceability of the Merger Agreement by each
such party and of the transactions contemplated thereby; (iv) the absence of any
conflict with each of Medicus' and QuadraMed's Certificate of Incorporation,
Bylaws and material agreements and instruments and compliance with applicable
laws; (v) reports and other documents filed with the Commission and other
regulatory authorities and the accuracy of the information contained therein;
(vi) the absence of certain changes or events having a material adverse effect
on the financial condition, business or results of operations of Medicus and
QuadraMed; (vii) the absence of any undisclosed liabilities, litigation or
restrictions on business activities of Medicus and QuadraMed; and (viii)
compliance with applicable laws.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement and continuing
until the earlier of the termination of the Merger Agreement or the Effective
Time, each of Medicus and QuadraMed have agreed (except to the extent expressly
contemplated by the Merger Agreement or as consented to in writing by the
other), to carry on its and its subsidiaries' business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, to pay
and to cause its subsidiaries to pay debts and taxes when due subject to good
faith disputes over such debts or taxes, to pay or perform other obligations
when due, and to use all reasonable efforts consistent with past practice and
policies to preserve intact its and its subsidiaries' present business
organizations, use its best efforts consistent with past practice to keep
available the services of its and its subsidiaries' present officers and key
employees and use its best efforts consistent with past practice to preserve its
and its subsidiaries' relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it or its
subsidiaries, to the end that its and its subsidiaries' goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Each of Medicus and
QuadraMed have agreed to promptly notify the other of any event or occurrence
not in the ordinary course of its or its subsidiaries' business, and of any
event which could have a material adverse effect on the financial condition,
business or results of operations of such entity ("Material Adverse Effect").
QuadraMed may negotiate and consummate acquisitions of businesses or assets
without providing notice to or obtaining the consent of Medicus.
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Except as contemplated by the Merger Agreement, neither Medicus nor
QuadraMed shall do, cause or permit any of the following, or allow, cause or
permit any of its subsidiaries to do, cause or permit any of the following,
without the prior written consent of the other: (i) amend its Certificate of
Incorporation or Bylaws; (ii) declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or repurchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with any termination of
service to it or its subsidiaries; or (iii) take, or agree in writing or
otherwise to take, any of the foregoing actions.
During the period from the date of the Merger Agreement and continuing
until the earlier of the termination of the Merger Agreement or the Effective
Time, except as expressly contemplated by the Merger Agreement, Medicus shall
not do, cause or permit any of the following, or allow, cause or permit any of
its subsidiaries to do, cause or permit any of the following, without the prior
written consent of QuadraMed, which consent shall not be unreasonably withheld:
(i) enter into any contract or commitment, or violate, amend or otherwise modify
or waive any of the terms of any of its contracts, other than in the ordinary
course of business consistent with past practice and in no event shall such
contract, commitment, amendment, modification or waiver be in excess of
$250,000; (ii) issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than the issuance of shares of Medicus Common Stock pursuant to the exercise of
stock options, warrants or other rights therefor outstanding as of the date of
the Merger Agreement, except pursuant to the Medicus 1997 Directors' Stock
Option Plan as currently in effect; (iii) accelerate, amend or change the period
of exercisability or vesting of options or other rights granted under its
employee stock plans or director stock plans or authorize cash payments in
exchange for any options or other rights granted under any of such plans; (iv)
transfer to any person or entity any rights to its intellectual property other
than in the ordinary course of business consistent with past practice; (v) enter
into or amend any agreements pursuant to which any other party is granted
exclusive marketing or other exclusive rights of any type or scope with respect
to any of its products or technology; (vi) sell, lease, license or otherwise
dispose of or encumber any of its properties or assets which are material,
individually or in the aggregate, to its and its subsidiaries' business, taken
as a whole, except in the ordinary course of business consistent with past
practice; (vii) incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others; (viii) enter into any operating lease in excess of an
aggregate of $10,000; (ix) pay, discharge or satisfy in an amount in excess of
$10,000 in any one case or $100,000 in the aggregate, any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise)
arising other than in the ordinary course of business, other than the payment,
discharge or satisfaction of liabilities reflected or reserved against in its
financial statements; (x) make any capital expenditures, capital additions or
capital improvements except in the ordinary course of business and consistent
with past practice; (xi) materially reduce the amount of any material insurance
coverage provided by existing insurance policies; (xii) adopt or amend any
employee benefit or stock purchase or option plan, or hire any new director
level or officer level employee (except that it may hire a replacement for any
current director level or officer level employee if it first provides QuadraMed
advance notice regarding such hiring decision), pay any special bonus or special
remuneration to any employee or director, or increase the salaries or wage rates
of its employees; (xiii) grant any severance or termination pay to any director
or officer or to any other employee except payments made pursuant to standard
written agreements outstanding on the date of the Merger Agreement or grants
which are made in the ordinary course of business in accordance with its
standard past practice; (xiv) commence a lawsuit other than for the routine
collection of bills, in such cases where it in good faith determines that
failure to commence suit would result in the material impairment of a valuable
aspect of its business, provided that it consults with QuadraMed prior to the
filing of such a suit, or for a breach of the Merger Agreement; (xv) acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
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division thereof, or otherwise acquire or agree to acquire any assets which are
material, individually or in the aggregate, to its and its subsidiaries'
business, taken as a whole, or acquire or agree to acquire any equity securities
of any corporation, partnership, association or business organization; (xvi)
other than in the ordinary course of business, make or change any material
election in respect of taxes, adopt or change any accounting method in respect
of taxes, file any material tax return or any amendment to a material tax
return, enter into any closing agreement, settle any claim or assessment in
respect of taxes, or consent to any extension or waiver of the limitation period
applicable to any claim or assessment in respect of taxes; (xvii) fail to give
all notices and other information required to be given to the employees of
Medicus, any collective bargaining unit representing any group of employees of
Medicus, and any applicable government authority under the WARN Act, the
National Labor Relations Act, the Internal Revenue Code, the Consolidated
Omnibus Budget Reconciliation Act, and other applicable law in connection with
the transactions provided for in the Merger Agreement; (xviii) revalue any of
its assets, including without limitation writing down the value of inventory or
writing off notes or accounts receivable other than in the ordinary course of
business; or (xix) take or agree in writing or otherwise to take, any of the
foregoing actions.
COVENANTS
Each of QuadraMed and Medicus will give the other access throughout the
period prior to the Effective Time, with regard to such party and its respective
subsidiaries, to its properties, books, contracts, commitments, records and
personnel. QuadraMed and Medicus have further agreed to prepare and file with
the Commission the Registration Statement of which this Proxy
Statement/Prospectus is a part, with respect to the QuadraMed Common Stock to be
issued in connection with the Merger and to make all necessary filings with
respect to the transactions contemplated by the Merger under applicable state
securities laws.
QuadraMed has agreed to vote or cause to be voted all shares of Medicus
Common Stock owned by QuadraMed in favor of the Merger, which shares constitute
approximately 56.7% of the outstanding capital stock of Medicus.
Medicus shall use its best efforts to deliver or cause to be delivered to
QuadraMed from those persons who may be deemed "Affiliates" of Medicus within
the meaning of Rule 144 promulgated under the Securities Act an executed
Affiliate Agreement.
Each of QuadraMed and Medicus has agreed to use its reasonable best efforts
to effectuate the transactions contemplated by the Merger Agreement and to
fulfill and cause to be fulfilled the conditions to closing under the Merger
Agreement.
EFFECT ON EMPLOYEE BENEFIT PLANS
For purposes of QuadraMed employee benefit plans, Medicus employees will
receive full credit for years of service with Medicus.
NO SOLICITATION
Medicus and its subsidiaries and the officers, directors, employees or
other agents of Medicus and its subsidiaries will not, directly or indirectly,
(i) take any action to solicit, initiate or encourage any Takeover Proposal (as
defined below) or (ii) subject to the terms of the immediately following
sentence, engage in negotiations with, or disclose any nonpublic information
relating to Medicus or any of its subsidiaries to, or afford access to the
properties, books or records of Medicus or any of its subsidiaries to, any
person that has advised Medicus that it may be considering making, or that has
made, a Takeover Proposal; provided, however, that nothing shall prohibit
Medicus' Board of Directors from taking and disclosing to Medicus' stockholders
a position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act. Notwithstanding the immediately preceding
sentence, if an unsolicited Takeover Proposal, or an unsolicited written
expression of interest that can reasonably be expected to lead to a Takeover
Proposal, shall be received by the Board of Directors of Medicus, then, to the
extent the Board of Directors of Medicus believes in good faith (after
consultation with its financial advisor) that such Takeover Proposal would, if
consummated, result in a transaction more favorable to Medicus' stockholders
from a financial point of view
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than the Merger (any such more favorable Takeover Proposal being referred to as
a "Superior Proposal") and the Board of Directors of Medicus determines in good
faith after consultation with outside legal counsel that it is necessary for the
Board of Directors of Medicus to comply with its fiduciary duties to
stockholders under applicable law, Medicus and its officers, directors,
employees, investment bankers, financial advisors, attorneys, accountants and
other representatives retained by it may furnish in connection therewith
information and take such other actions as are consistent with the fiduciary
obligations of Medicus' Board of Directors, and such actions shall not be
considered a breach of the Merger Agreement, provided that in each such event
Medicus notifies QuadraMed of such determination by the Medicus Board of
Directors and provides QuadraMed with a true and complete copy of the Superior
Proposal received from such third party, if the Superior Proposal is in writing,
or a complete written summary thereof, if it is not in writing, and provides
QuadraMed with all documents containing or referring to non-public information
of Medicus that are supplied to such third party; provided further, that (A) the
Board of Directors of Medicus has determined, with the advice of Medicus'
investment bankers, that such third party is capable of making a Superior
Proposal upon satisfactory completion of such third party's review of the
information supplied by Medicus, (B) the third party has stated that it intends
to make a Superior Proposal, (C) Medicus may not provide any non-public
information to any such third party if it has not prior to the date thereof
provided such information to QuadraMed or QuadraMed's representatives, (D)
Medicus notifies QuadraMed in advance of any disclosure of non-public
information to any such third party, with a description of the information
proposed to be disclosed, and (E) Medicus provides such non-public information
pursuant to a non-disclosure agreement at least as restrictive as the existing
confidentiality agreement between QuadraMed and Medicus. Medicus will promptly
notify QuadraMed after receipt of any Takeover Proposal or any notice that any
person is considering making a Takeover Proposal or any request for non-public
information relating to Medicus or any of its subsidiaries or for access to the
properties, books or records of Medicus or any of its subsidiaries by any person
that has advised Medicus that it may be considering making, or that has made, a
Takeover Proposal and will keep QuadraMed fully informed of the status and
details of any such Takeover Proposal, notice, request, or any correspondence or
communications related thereto and shall provide QuadraMed with a true and
complete copy of such Takeover Proposal, notice, or request or correspondence or
communications related thereto, if it is in writing, or a complete written
summary thereof, if it is not in writing. A "Takeover Proposal" means any offer
or proposal for, or any indication of interest in, a merger or other business
combination involving Medicus or any of its subsidiaries or the acquisition of
any significant equity interest in, or a significant portion of the assets of,
Medicus or any of its subsidiaries, other than the transactions contemplated by
the Merger Agreement.
INDEMNIFICATION
After the Effective Time, QuadraMed will, and will cause the Surviving
Corporation to, indemnify and hold harmless the present and former officers,
directors, employees and agents of Medicus (the "Indemnified Parties") in
respect of acts or omissions occurring on or prior to the Effective Time to the
extent permitted by law and to the extent provided under Medicus' Amended and
Restated Certificate of Incorporation and Bylaws or any indemnification
agreement with Medicus' officers and directors to which Medicus is a party, in
each case in effect on the date of the Merger Agreement. Such indemnification
shall be subject to any limitation imposed from time to time under applicable
law. Without limitation of the foregoing, in the event any such Indemnified
Party is or becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter relating to the Merger Agreement or
the transactions contemplated thereby occurring on or prior to the Effective
Time, QuadraMed shall, or shall cause the Surviving Corporation to, pay as
incurred such Indemnified Party's reasonable legal and other expenses (including
the cost of any investigation and preparation) incurred in connection therewith
to the extent permitted by law and to the extent provided under Medicus' Amended
and Restated Certificate of Incorporation and Bylaws or the indemnification
agreement with such Indemnified Party.
For two years after the Effective Time, QuadraMed will, or will cause the
Surviving Corporation to, use its best efforts to provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
prior to the Effective Time covering each such person currently covered by
Medicus' officers' and directors' liability insurance policy on terms
substantially similar to those of such policy in effect on the date hereof.
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<PAGE> 69
QuadraMed shall not be obligated to, or to cause the Surviving Corporation to,
pay premiums in excess of 150% of the amount per annum Medicus paid in its last
full fiscal year, and if the Surviving Corporation is unable to obtain the
required insurance, it shall obtain as much comparable insurance as possible for
an annual premium equal to such maximum amount.
To the extent there is any claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time) against an Indemnified
Party that arises out of or pertains to any action or omission in his or her
capacity as a director, officer, employee, fiduciary or agent of Medicus
occurring prior to the Effective Time, or arises out of or pertains to the
transactions contemplated by the Merger Agreement for a period of two years
after the Effective Time (whether arising before or after the Effective Time),
such Indemnified Party shall be entitled to be represented by counsel and
following the Effective Time (i) any counsel retained by the Indemnified Parties
shall be reasonably satisfactory to the Surviving Corporation and QuadraMed,
(ii) the Surviving Corporation and QuadraMed shall pay the reasonable fees and
expenses of such counsel, promptly after statements therefor are received and
(iii) the Surviving Corporation and QuadraMed will cooperate in the defense of
any such matter. However, neither the Surviving Corporation nor QuadraMed shall
be liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and in the event that any claim or claims
for indemnification are asserted or made within such two-year period, all rights
to indemnification in respect of any such claim or claims shall continue until
the disposition of any and all such claims. The Indemnified Parties as a group
may retain only one law firm to represent them with respect to any single action
unless a conflict on any significant issue exists between the positions of any
two or more Indemnified Parties.
TERMINATION; EXPENSES; AMENDMENT; WAIVER
At any time prior to the Effective Time, whether before or after approval
of the matters presented in connection with the Merger by the stockholders of
Medicus, the Merger Agreement may be terminated: (i) by mutual consent of
QuadraMed and Medicus; (ii) by either QuadraMed or Medicus, if, without fault of
the terminating party, the closing of the Merger shall not have occurred on or
before May 1, 1998 (or such later date as may be agreed upon in writing by the
parties); (iii) by QuadraMed, if Medicus shall breach any of its
representations, warranties or obligations under the Merger Agreement and such
breach shall not have been cured within ten business days of receipt by Medicus
of written notice of such breach or the Board of Directors of Medicus shall have
withdrawn or modified its recommendation of the Merger Agreement or the Merger
in a manner adverse to QuadraMed or shall have resolved to do any of the
foregoing; (iv) by Medicus, if QuadraMed shall breach any of its
representations, warranties or obligations under the Merger Agreement and such
breach shall not have been cured within ten days following receipt by QuadraMed
of written notice of such breach; or (v) by either QuadraMed or Medicus if any
permanent injunction or other order of a court or other competent authority
preventing the consummation of the Merger shall have become final and
nonappealable or if any required approval of the stockholders of Medicus shall
not have been obtained by reason of the failure to obtain the required vote upon
a vote held at a duly held meeting of stockholders or at any adjournment
thereof.
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel) shall be paid by the party incurring such
expenses, except that expenses incurred in connection with printing this Proxy
Statement/Prospectus and the Registration Statement, registration and filing
fees incurred in connection with this Proxy Statement/Prospectus and the
Registration Statement, the listing of additional shares with the Nasdaq
National Market, and fees, costs and expenses associated with compliance with
applicable state securities laws in connection with the Merger shall be paid by
QuadraMed.
In the event that QuadraMed shall terminate the Merger Agreement because
(i) Medicus has breached any representation, warranty or obligation under the
Merger Agreement and such breach is not cured as described above, (ii) the
Medicus Board of Directors has withdrawn or modified its recommendation of the
Merger Agreement or the Merger in a manner adverse to QuadraMed or (iii) the
Medicus stockholders do not approve the Merger (but only if all of the Medicus
Common Stock owned by QuadraMed is voted in favor
55
<PAGE> 70
of the Merger), Medicus shall promptly reimburse QuadraMed for all of the
out-of-pocket costs and expenses incurred by QuadraMed in connection with the
Merger Agreement and the transactions contemplated thereby (including, without
limitation, the fees and expenses of its advisors, accountants and legal
counsel).
The boards of directors of QuadraMed and Medicus may cause the Merger
Agreement to be amended at any time by execution of an instrument in writing
signed on behalf of each of QuadraMed and Medicus; provided that an amendment
made subsequent to adoption of the Merger Agreement by the stockholders of
Medicus or Merger Sub shall not (i) alter or change the amount or kind of
consideration to be received on conversion of the Medicus Common Stock, (ii)
alter or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of the Merger Agreement if such alteration or change would
adversely affect the holders of Medicus Common Stock or Merger Sub common stock.
At any time prior to the Effective Time any party to the Merger Agreement
may, to the extent legally allowed, (i) extend the time for the performance of
any of the obligations or other acts of the other parties thereto, (ii) waive
any inaccuracies in the representations and warranties made to such party
contained therein or in any document delivered pursuant thereto and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained therein. Any agreement on the part of a party to the Merger
Agreement to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
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<PAGE> 71
PRO FORMA FINANCIAL DATA
QUADRAMED CORPORATION
AND MEDICUS SYSTEMS CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
SEPTEMBER 30, 1997
1997 ---------------
------------- HISTORICAL
HISTORICAL MEDICUS SYSTEMS PRO FORMA PRO FORMA
QUADRAMED CORPORATION(S) ADJUSTMENTS COMBINED
------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 6,928 $ 372 8,000(f) $15,300
Restricted cash............................... 33 -- 33
Accounts receivable, net...................... 11,418 8,615 20,033
Prepaid and deferred income taxes............. -- 2,025 2,025
Prepaid and other............................. 690 607 1,297
------- ------- ------- -------
Total current assets....................... 19,069 11,619 8,000 38,688
EQUIPMENT, at cost:
Equipment..................................... 5,589 7,473 13,062
Accumulated depreciation...................... (2,346) (5,331) -- (7,677)
------- ------- ------- -------
Equipment, net............................. 3,243 2,142 -- 5,385
Long-term investment............................ 3,700 -- 3,700
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net..... 1,253 2,938 4,191
ACQUIRED SOFTWARE, net.......................... 1,374 -- 1,374
GOODWILL, net................................... 10,234 -- 15,000(g) 25,234
INSTALLMENT ACCOUNTS RECEIVABLE................. -- 537 537
DEFERRED INCOME TAXES........................... -- 2,764 2,764
OTHER........................................... 232 -- 232
------- ------- ------- -------
$39,105 $20,000 $23,000 $82,105
======= ======= ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable................................... $ 300 $ 1,000 $ 1,300
Current maturities of capital lease
obligations................................... 175 -- 175
Accounts payable................................ 1,029 485 1,514
Accrued liabilities............................. 2,584 1,755 4,339
Accrued restructuring charge.................... -- 1,876 1,876
Deferred revenue................................ 1,341 4,857 6,198
------- ------- ------- -------
Total current liabilities.................. 5,429 9,973 15,402
CAPITAL LEASE OBLIGATIONS,
less current portion.......................... 320 -- 320
Notes payable, less current portion............. 1,156 1,000 2,156
------- ------- ------- -------
Total Liabilities.......................... 6,905 10,973 17,878
STOCKHOLDERS' EQUITY
Preferred stock................................. -- 500 (500)(h) --
Common stock.................................... 61 65 (30)(h) 96
Deferred compensation........................... (54) -- -- (54)
Additional paid-in capital...................... 44,485 23,039 43,953(h) 111,477
Less treasury stock............................. -- (6,187) 6,187(h) --
Accumulated deficit............................. (12,292) (8,390) (26,610)(h) (47,292)
------- ------- ------- -------
Total Stockholders' Equity (Deficit)....... 32,200 9,027 23,000 64,227
------- ------- ------- -------
$39,105 $20,000 $23,000 $82,105
======= ======= ======= =======
</TABLE>
57
<PAGE> 72
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NINE MONTHS ENDED AUGUST 31, 1997
SEPTEMBER 30, 1997 -----------------
------------------------------ HISTORICAL
HISTORICAL PRIOR MEDICUS SYSTEMS PRO FORMA PRO FORMA
QUADRAMED ACQUISITIONS(B)(J) CORPORATION(C) ADJUSTMENTS COMBINED
--------- ------------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses......................... $14,849 (4) $13,530 28,375
Services......................... 7,300 4,332 -- 11,632
------- ------- ------- ------- -------
Total revenue.................. 22,149 4,328 13,530 40,007
------- ------- ------- ------- -------
Operating Expenses
Cost of licenses................. 5,618 -- 6,379 11,997
Cost of services................. 4,220 4,269 -- 8,489
General and administration....... 2,947 699 3,970 7,616
Sales and marketing.............. 2,887 281 4,524 7,692
Research and development......... 2,227 -- 2,843 5,070
Amortization of intangible
assets......................... 659 235 -- 1,607(i) 2,501
Stock repurchase................. -- -- 1,690 1,690
Non-recurring start-up
charges/restructuring
charges........................ 1,040 -- 2,800 3,840
------- ------- ------- ------- -------
Total operating expenses....... 19,598 5,484 22,206 1,607 48,895
------- ------- ------- ------- -------
Income (loss) from operations...... 2,551 (1,156) (8,676) (1,607) (8,888)
------- ------- ------- ------- -------
Interest expense/(income).......... (505) 48 (95) (1,607) (552)
Other expense/(income), net........ 11 -- (167) (156)
Provision for income taxes
(benefit)........................ 265 -- (3,184) (2,919)
------- ------- ------- ------- -------
Net income/(loss).................. $ 2,780 $ (1,204) $(5,230) $(1,607) $(5,261)
======= ======= ======= ======= =======
Net income (loss) per share........ $ 0.37 $ (0.15) $ (0.47)
======= ======= =======
Weighted average common and common
equivalent shares................ 7,532 7,827 11,294
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
NOVEMBER 30, 1996
-----------------
TWELVE MONTHS ENDED
DECEMBER 31, 1996 (UNAUDITED)
------------------------------ HISTORICAL
HISTORICAL PRIOR MEDICUS SYSTEMS PRO FORMA PRO FORMA
QUADRAMED ACQUISITIONS(B)(J) CORPORATION(C) ADJUSTMENTS COMBINED
--------- ------------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses......................... $16,223 (16) $18,435 34,642
Services......................... 2,865 12,447 -- 15,312
------- ------- ------- ------- -------
Total revenue.................. 19,088 12,431 18,435 49,954
------- ------- ------- ------- -------
Operating Expenses:
Cost of licenses................. 7,294 -- 7,782 15,076
Cost of services................. 2,683 9,706 -- 12,389
General and administration....... 3,221 2,343 5,390 10,954
Sales and marketing.............. 2,434 1,414 5,625 9,473
Research and development......... 2,499 -- 2,127 4,626
Amortization of intangible
assets......................... 460 807 -- 2,143(i) 3,410
Non-recurring
expenses/restructuring
charges........................ -- 103 4,662 4,765
------- ------- ------- ------- -------
Total operating expenses....... 18,591 14,373 25,586 2,143 60,693
------- ------- ------- ------- -------
Income (loss) from operations...... 497 (1,942) (7,151) (2,143) (10,739)
------- ------- ------- ------- -------
Interest expense/(income).......... 329 -- (703)
Other expense/(income), net........ 15 317 -- 332
Provision for income taxes
(benefit)........................ -- (41) (2,698) (2,739)
------- ------- ------- ------- -------
Net income/(loss).................. $ 153 $ (2,218) $(3,750) $(2,143) $(7,958)
======= ======= ======= ======= =======
Net income (loss) per share........ $ 0.03 $ (0.41) $ (0.90)
======= ======= =======
Weighted average common and common
equivalent shares................ 5,089 5,384 8,851
======= ======= =======
</TABLE>
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<PAGE> 73
QUADRAMED CORPORATION AND MEDICUS SYSTEMS CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED
BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED)
NOTE 1. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined balance sheet and statement of operations as described below:
(a) Represents the historical combined balance sheet of Medicus as of
August 31, 1997, because Medicus' fiscal year ends May 31.
(b) Includes results of operations of Healthcare Revenue Management,
Inc. ("HRM") for the eight months ended August 31, 1997, and the Synergy
Companies ("Synergy") for the three months ended March 31, 1997, and
related pro forma adjustments. Subsequent to August 31, 1997 and March 31,
1997, the results of operations of HRM and Synergy, respectively, are
included in the "Historical QuadraMed" column.
(c) Represents historical results of operations for the nine months
ended August 31, 1997.
(d) Includes HRM and Synergy results of operations for the twelve
months ended December 31, 1996 and the related pro forma adjustments.
(e) Represents historical results of operations for the twelve months
ended November 30, 1996.
(f) Reflects the expected cash to be paid of approximately $50,000,000
for the acquisition of Medicus, net of the proceeds of $58,000,000 from
QuadraMed's public offering to sell common stock which closed on October
10, 1997. Purchase accounting adjustments reflect 100 percent ownership of
Medicus.
(g) Reflects the recording of goodwill acquired from the acquisition
of Medicus of approximately $15,000,000.
(h) Reflects the elimination of Medicus' stockholders' equity and the
issuance of common stock from QuadraMed's public offering which closed on
October 10, 1997 and an adjustment to retained earnings related to the
write-off of in-process technology of approximately $35,000,000 from the
acquisition of Medicus and the valuation of QuadraMed options issued in
exchange for outstanding Medicus options at the acquisition date.
(i) Reflects the amortization of goodwill acquired of $15,000,000 for
Medicus which will be amortized on a straight line basis over the estimated
life of seven years.
(j) The weighted average shares have been adjusted for (1) 3,467,000
shares of common stock issued as part of the public offering which closed
on October 10, 1997, (2) approximately 182,000 shares of common stock
issued in conjunction with the Synergy acquisition and (3) approximately
113,000 shares issued in conjunction with the HRM acquisition.
59
<PAGE> 74
CERTAIN INFORMATION CONCERNING QUADRAMED
QuadraMed Corporation, a Delaware corporation ("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's suite of products is an integrated offering of electronic data
interchange ("EDI"), financial management and decision support solutions for
both providers and payors. In addition, QuadraMed provides business office
outsourcing and cash flow management services.
Electronic Data Interchange. These products enable the editing and
formatting of all claims submitted to payors to help ensure accuracy and
completeness, which results in more efficient reimbursement of third party
claims. QuadraMed collects and utilizes detailed clinical and financial
information from customers who license its EDI products. This data, which is
supplemented with similar, publicly-available information, forms the basis of
QuadraMed's proprietary databases for its decision support products.
Financial Management Products. These products utilize the enhanced data
stream created by QuadraMed's EDI products to allow providers to track payor
contract terms and review medical billing information to ensure that bills are
properly coded and include all services rendered. These capabilities facilitate
a provider's ability to obtain timely and accurate reimbursement and to
administer and measure the profitability of managed care contracts. Further,
QuadraMed offers a product that is designed to improve the ability of health
care providers to prevent Medicare and Medicaid fraud and abuse by identifying
potentially fraudulent coding in their medical bills. In addition, QuadraMed's
electronic document imaging products allow its customers to improve work flow
and move toward a paperless office environment.
Decision Support Products. These products include database analysis
software and national and regional benchmark data that enable customers to
perform clinical, financial and marketing analyses. These products utilize the
enhanced data stream created by QuadraMed's EDI and financial management
products to build proprietary databases that enable providers to measure more
accurately the resources consumed in the provision of care and to compare
clinical outcomes against the associated costs.
Business Office Outsourcing and Cash Flow Management Services. These
services are offered to health care providers, many of which are recognizing the
value of outsourcing their business office operations to reduce costs, increase
cash flow and improve operating efficiencies. QuadraMed believes that it
possesses a significant advantage in the provision of outsourcing services due
to its ability to use its own QuanTIM(R) suite of software products and its
centralized cash flow management operations.
QuadraMed's executive offices are located at 80 East Sir Francis Drake
Blvd., Suite 2A, Larkspur, California 94939 and its telephone number is (415)
461-7725.
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<PAGE> 75
CERTAIN INFORMATION CONCERNING MEDICUS
Medicus develops, markets, and supports a family of specialized integrated
software products utilized by health care financial administrators, physicians
and nursing executives, health information and other administrative departments
to capture, structure and analyze clinical, operational and financial
information. Medicus' specialized software applications and services allow these
professionals to measure, monitor and manage organizational performance and
optimize outcomes. Medicus also provides product-related maintenance and support
services. Clients of Medicus include hospitals, academic medical centers,
managed care organizations, community care networks, integrated health systems,
primary care and multi-specialty physician groups, government agencies, and
other organizations.
Medicus offers products and services in the following categories:
Clinical Data Systems (CDS). DS is an integrated encoding system and data
repository that enables the health care provider to classify, capture, validate,
and analyze clinical data. This expert encoding system aids in optimizing
prospective payment reimbursement for both inpatient and ambulatory care
services. It captures and validates clinical indicators, severity and risk
factors as well as patient demographics data, diagnoses and procedures. By
validating data at the point of capture and linking it to a Diagnosis Related
Group, the CDS creates an accurate and complete data repository that provides
the information required to manage costs and improve clinical effectiveness and
service efficiency.
Decision Support Systems. This division offers two lines of products,
Enterprise Analyst and Resource Case Management. Enterprise Analyst is a fully
integrated, enterprise wide decision support system application designed to
allow Medicus' customers to maximize the principal components of value: quality,
outcomes and cost containment. Resource Case Management provides case managers
and other personnel the ability to evaluate and manage patient care resources on
a daily basis.
Patient Focused System. This division's main product is InterAct 2000,
which is a modular system of software tools and methodologies designed to manage
patient care resource utilization through workload measurement, staffing against
budget, cost and productivity reporting and employer scheduling. InterAct 2000
includes two integrated modules, the Workload/Productivity module which uses an
organization's own financial and quality of care objectives to generate
assessments of workload and staffing needs against the department's resource
utilization budget, and the Personnel/Scheduler module which creates balanced
staff schedules based on a specific scheduling algorithm and a set of user
defined rules.
Maintenance and Support Services. Medicus provides training and support
services during client implementation and thereafter, as required. Maintenance
and support services include software updates, enhancements and services which
are purchased by substantially all of Medicus' clients under renewable annual
contracts. Medicus maintains logging, notification, and follow-up procedures to
track client problems encountered in implementing and operating its products.
Medicus also conducts client conferences to exchange ideas regarding product
usage and product extensions. Management believes that these conferences are
valuable in gathering ideas for future products as well as enhancements to
Medicus' current product line.
Medicus' executive offices are located at One Rotary Center, Suite 1111,
Evanston, Illinois, 60201 and its telephone number is (847) 570-7500.
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<PAGE> 76
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
holders of QuadraMed Common Stock and the rights of holders of Medicus Common
Stock.
Each of QuadraMed and Medicus is organized under the laws of the State of
Delaware. Any material differences in the rights of their respective
stockholders would arise from various provisions of the Certificate of
Incorporation and Bylaws of each of QuadraMed and Medicus. Among the differences
between the rights of the holders of QuadraMed and Medicus are the following:
Capital Stock. The total number of authorized shares of capital stock of
QuadraMed is 25,000,000 shares, consisting of 20,000,000 shares of Common Stock
with a par value of $.01 per share and 5,000,000 shares of Preferred Stock with
a par value of $.01 per share, while the total number of authorized shares of
capital stock of Medicus is 11,000,500 shares, consisting of 10,000,000 shares
of Common Stock with a par value of $.01 per share, 1,000,000 shares of
Preferred Stock with a par value of $.01 per share and 500 shares of Voting
Preferred Stock with a par value of $1,000 per share.
Special Meetings of Stockholders. The Bylaws of QuadraMed provide that a
special meeting of the stockholders may be called only (i) by the Chairman of
the Board of Directors, (ii) by the Chairman or the Secretary at the written
request of a majority of the total number of Directors which the Corporation
would have if there were no vacancies, or (iii) by the holders of shares
entitled to cast not less than 10 percent of the votes at such special meeting,
while the Bylaws of Medicus provide that a Special Meeting may be called by the
President and shall be called by the President or Secretary at the request in
writing of a majority of the whole board of directors, or at the request in
writing of stockholders owning a majority of the capital stock of the
corporation outstanding and entitled to vote.
Annual Meetings of Stockholders. The Bylaws of QuadraMed provide that to
propose business to be transacted at an annual meeting, a stockholder's notice
must be received by QuadraMed not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than 30 days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received no earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or,
in the event public announcement of the date of such annual meeting is first
made by QuadraMed fewer than 70 days prior to the date of such annual meeting,
the close of business on the 10th day following the day on which public
announcement of the date of such meeting is first mailed by QuadraMed. The
Bylaws of Medicus contain no such provision.
Classification of Directors. QuadraMed's Certificate provides for the
classification of the QuadraMed Board of Directors into three classes as nearly
equal in number as possible, with one class being elected at each annual meeting
to a three year term. Neither the Medicus Certificate nor the Medicus Bylaws
provides for such classification of directors.
Removal of Directors. QuadraMed's Certificate provides that directors may
be removed by the affirmative vote of the holders of at least 66 2/3% of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class. The
Bylaws of Medicus contain no such provision.
Voting Rights. QuadraMed's Certificate provides that any Business
Combination (as defined therein) involving QuadraMed and an Interested
Stockholder (as defined therein) must be approved by the affirmative vote of at
least 66 2/3% of the combined voting power of all shares of QuadraMed entitled
to vote generally in the election of directors, voting together as a single
class. Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that some lesser percentage may be specified, by law or
in any agreement with any national securities exchange or otherwise. As defined
in QuadraMed's Certificate, a "Business Combination" includes, among other
things: (i) any merger or consolidation of QuadraMed or any QuadraMed subsidiary
with any Interested Stockholder or affiliate or associate thereof; (ii) the
sale, lease,
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<PAGE> 77
exchange, mortgage, pledge, transfer or other disposition to, or with, any
Interested Stockholder or affiliate or associate thereof, of any assets of
QuadraMed or any QuadraMed subsidiary constituting not less than five percent of
the total assets of QuadraMed, as reported in the consolidated balance sheet of
QuadraMed as of the end of the most recent quarter with respect to which such
balance sheet has been prepared; (iii) the issuance or transfer by QuadraMed or
any QuadraMed subsidiary of any securities of QuadraMed or any QuadraMed
subsidiary to any Interested Stockholder or affiliate or associate thereof in
exchange for cash, securities or property together constituting not less than
five percent of the total assets of QuadraMed, as reported in the consolidated
balance sheet of QuadraMed as of the end of the most recent quarter with respect
to which such balance sheet has been prepared; (iv) the adoption of any plan or
proposal for the liquidation or dissolution of QuadraMed or any QuadraMed
subsidiary with any Interested Stockholder or affiliate or associate thereof;
and (v) any reclassification of securities or recapitalization of QuadraMed, or
any merger or consolidation of QuadraMed with any of its subsidiaries or any
similar transaction which has the effect, directly or indirectly, of increasing
the percentage of the outstanding shares of (a) any class of equity securities
of QuadraMed or any QuadraMed subsidiary or (b) any class of securities of
QuadraMed or any QuadraMed subsidiary convertible into equity securities of
QuadraMed or any QuadraMed subsidiary, represented by securities of such class
which are directly or indirectly owned by any Interested Stockholder or any
affiliate or associate thereof and "Interested Stockholder" means any person
(other than QuadraMed or any QuadraMed subsidiary) who or which, as of the
record date for the determination of stockholders entitled to notice of and to
vote on such Business Combination, or immediately prior to the consummation of
any such transaction (i) is or was, at any time within two years prior thereto,
the beneficial owner, directly or indirectly, of 15% or more of the then
outstanding Voting Shares, or (ii) is an "Affiliate" or "Associate" of QuadraMed
and at any time within two years prior thereto was the beneficial owner,
directly or indirectly, of 15% or more of the then outstanding "Voting Shares,"
or (iii) is an assignee of or has otherwise succeeded to any shares of capital
stock of QuadraMed which were at any time within two years prior thereto
beneficially owned by an Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction, or series of
transactions, not involving a public offering within the meaning of the
Securities Act of 1933, as amended.
Neither the Medicus Certificate nor the Bylaws of Medicus contain any
similar provision or provisions.
CERTAIN TRANSACTIONS
John H. Austin, M.D., a director of QuadraMed, is the chief executive
officer of a limited partner of RHP. In connection with the approval of the RHP
Mergers by the QuadraMed board of directors, Dr. Austin disclosed this interest
and abstained from voting. See "Summary -- Recent Developments."
DIVIDEND INFORMATION
QuadraMed has never declared any cash dividends on the QuadraMed Common
Stock. QuadraMed currently intends to retain future earnings, if any, to fund
the development and growth of its business and does not anticipate paying any
cash dividends on the QuadraMed Common Stock in the foreseeable future. In
addition, QuadraMed's credit agreement contains provisions that restrict the
payment of dividends.
Medicus' predecessor, Managed Care Solutions, Inc. (prior to March 1, 1996)
and Medicus (beginning March 1, 1996) declared quarterly dividends of $0.03 per
share in each of the quarters in fiscal years 1995 and 1996. Medicus has not
declared any dividends since the end of its 1996 fiscal year, and the Board of
Directors of Medicus has determined not to pay dividends on the Medicus Common
Stock for the foreseeable future. In addition, Medicus' credit agreement
prohibits the declaration or payment of dividends on the Medicus Common Stock.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for QuadraMed by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The audited consolidated financial statements and schedules of QuadraMed
included and incorporated by reference in this Proxy Statement/Prospectus and
elsewhere in the Registration Statement have been audited
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by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited consolidated financial statements of Medicus included and
incorporated by reference in this Proxy Statement/Prospectus and elsewhere in
the Registration Statement have been so included and incorporated in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 9, 1997, by and among QuadraMed Corporation, a
Delaware corporation ("QuadraMed"), and Medicus Systems Corporation, a Delaware
corporation ("Medicus").
RECITALS
A. The Boards of Directors of Medicus and QuadraMed believe it is in the
best interests of their respective companies and the stockholders of their
respective companies that Medicus and a wholly owned subsidiary of QuadraMed to
be formed for the purposes hereof ("Merger Sub") combine into a single company
through the statutory merger of Merger Sub with and into Medicus (the "Merger")
and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Medicus Common Stock, $.01 par value ("Medicus Common Stock"), shall be
converted into shares of QuadraMed Common Stock, $.01 par value ("QuadraMed
Common Stock"), or cash, or a combination thereof, on the terms set forth
herein.
C. Medicus and QuadraMed desire to make certain representations and
warranties and other agreements in connection with the Merger.
D. Concurrent with the execution of this Agreement and as an inducement to
QuadraMed to enter into this Agreement, certain of the stockholders of Medicus
who in the aggregate beneficially own in excess of 50% of the outstanding Common
Stock of Medicus have on the date hereof entered into stock purchase agreements
(the "Stock Purchase Agreements") to sell the shares of Medicus' Common Stock
owned by such person in exchange for a cash payment and a warrant to purchase
QuadraMed Common Stock (the "Warrants").
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, a Certificate of
Merger to be filed in respect of the Merger (the "Certificate of Merger") and
the applicable provisions of the Delaware General Corporation Law ("DGCL"),
Merger Sub shall be merged with and into Medicus, the separate corporate
existence of Merger Sub shall cease and Medicus shall continue as the surviving
corporation. Medicus as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
Closing shall take place at the offices of Brobeck, Phleger & Harrison LLP, One
Market, Spear Street Tower, San Francisco, California 94105, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger with the Secretary of State of the State of Delaware and
with the Recorder of the County in which the registered office of each of
Medicus and Merger Sub is located, in accordance with the relevant provisions of
the DGCL (the time of such filing being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the DGCL. Without limiting the
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generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of Medicus and Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of Medicus and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by the DGCL and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the directors and
officers of Merger Sub shall become the directors and officers of the Surviving
Corporation, until their respective successors are duly elected or appointed and
qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of Merger Sub, Medicus or the holders of any of the following
securities, subject to the provisions of this Section 1.6:
(a) Conversion of Medicus Common Stock. At the Effective Time, each
share of Medicus Common Stock issued and outstanding immediately prior to
the Effective Time (other than any shares of Medicus Common Stock to be
canceled pursuant to Section 1.6(b)) will be canceled and extinguished and
be converted automatically into (i) the right to receive $7.50 in cash,
without interest (the "Per Share Cash Amount"); or (ii) the right to
receive 0.3125 shares of QuadraMed Common Stock (the "Exchange Ratio");
provided, however, that (1) if the QuadraMed Stock Value (as defined below)
exceeds $27.60, then the Exchange Ratio shall be the quotient obtained by
dividing (A) $8.625 by (B) the QuadraMed Stock Value, and (2) if the
QuadraMed Stock Value is less than $24.00, then the Exchange Ratio shall be
the quotient obtained by dividing (A) $7.50 by (B) the QuadraMed Stock
Value; provided further, however, that if the QuadraMed Stock Value is less
than $20.40, then QuadraMed may, at its sole discretion, elect to have all
or any portion of the shares of Medicus Common Stock converted into the Per
Share Cash Amount (the "QuadraMed Cash Election"); or (iii) the right to
receive a combination of shares of QuadraMed Common Stock and cash, all in
accordance with the provisions of this Section 1.6. In the event of the
QuadraMed Cash Election in which less than all of the outstanding shares of
Medicus Common Stock will be converted into cash, the shares of Medicus
Common Stock to be converted into cash as a result of the QuadraMed Cash
Election will be selected pro rata according to the number of shares with
respect to which a Stock Election (as defined below) has been made. The
amounts paid in the Merger in exchange for shares of Medicus Common Stock
shall be referred to herein as the "Merger Consideration." For purposes
hereof, the "QuadraMed Stock Value" shall be equal to the average of the
closing prices of QuadraMed Common Stock during the fifteen (15) days prior
to the second day prior to the date of the Medicus Stockholders Meeting (as
defined in Section 2.23).
(b) Cancellation of Medicus Common Stock Owned by QuadraMed or
Medicus. At the Effective Time, all shares of Medicus Common Stock that are
owned by Medicus as treasury stock and each share of Medicus Common Stock
owned by QuadraMed or any direct or indirect wholly owned subsidiary of
QuadraMed or of Medicus immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof.
(c) Medicus Stock Option Plans. At the Effective Time, the Medicus
1989 Stock Option Plan, the Medicus 1991 Stock Option Plan, the Medicus
1993 Stock Option Plan, the Medicus 1993 Performance Stock Option Plan, the
Medicus 1994 Stock Option Plan, the Medicus 1994 Directors' Stock Option
Plan, the Medicus 1995 RCM Stock Option Plan, the Medicus 1996 C.E.O. Stock
Option Plan, the Medicus 1996 C.E.O. Replacement Stock Option Plan, the
Medicus 1996 C.E.O. Special Stock Option Plan, the Medicus 1997 Employee
Stock Option and Restricted Stock Plan, the Medicus 1997 Directors' Stock
Option Plan (collectively, the "Medicus Stock Option Plans"), the Stock
Exchange and Subscription warrants dated March 19, 1997 issued by Medicus
to Richard C. Jelinek and a trust for his
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benefit (the "Jelinek Warrants") and the Stock Subscription Warrant dated
March 1, 1996 issued by Medicus to TriHealth, Inc. (the "TriHealth
Warrant") and all options or rights to purchase Medicus Common Stock then
outstanding under the Medicus Stock Option Plans, the Jelinek Warrants and
the TriHealth Warrant shall be assumed by QuadraMed in accordance with
Section 5.11.
(d) Capital Stock of Merger Sub. At the Effective Time, each share of
Common Stock, $.01 par value, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, $.01 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of
capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio and Per Share Cash Amount. The
Exchange Ratio and the Per Share Cash Amount shall be adjusted to reflect
fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into
QuadraMed Common Stock or Medicus Common Stock), reorganization,
recapitalization or other like change with respect to QuadraMed Common
Stock or Medicus Common Stock occurring after the date hereof and prior to
the Effective Time.
(f) Fractional Shares. No fraction of a share of QuadraMed Common
Stock will be issued in the Merger. In lieu of any fractional shares that
would otherwise be issuable in the Merger in exchange for shares of Medicus
Common Stock, QuadraMed shall pay the proportionate amount of the Per Share
Cash Amount that would be payable in respect of such fractional share.
(g) Limitation on Shares Issuable. In no event shall the aggregate
number of shares of QuadraMed Common Stock which QuadraMed is obligated to
issue (1) upon the exercise of Warrants and (2) in exchange for outstanding
shares of Medicus Common Stock pursuant to this Agreement exceed a total of
1,800,000 shares. In the event that the aggregate number of shares of
Common Stock that holders of Warrants and holders of Medicus Common Stock
have elected to receive as described in clauses (1) and (2) in the
immediately preceding sentence exceeds 1,800,000 shares, QuadraMed shall
only be required to issue 1,800,000 shares of QuadraMed Common Stock and
such holders shall be entitled to receive shares of QuadraMed Common Stock
equal to each holder's pro rata portion of the total amount of shares
issued by QuadraMed as described in clauses (1) and (2), based on the total
number of shares each holder and each elected to receive.
(h) Election for Shares or Cash. Each record holder immediately prior
to the Effective Time of shares of Medicus Common Stock will be entitled
(i) to elect to receive cash for none, some or all of such shares (a "Cash
Election"), (ii) to elect to receive QuadraMed Common Stock for none, some
or all of such shares (a "Stock Election"), or (iii) to indicate that such
record holder has no preference as to the receipt of cash or QuadraMed
Common Stock for such shares (a "Non-Election"). All such elections shall
be made on a form designed for that purpose (a "Form of Election"). Holders
of record of shares of Medicus Common Stock who hold such shares as
nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the
shares of Medicus Common Stock held by each Representative for a particular
beneficial owner. All shares of Medicus Common Stock covered by Stock
Elections (the "Stock Election Shares") and all shares of Medicus Common
Stock covered by Non-Elections (the "Non-Election Shares") shall be
converted into the right to receive QuadraMed Common Stock, and the Cash
Election Shares shall be converted into the right to receive cash, without
interest.
(i) Election Procedures. Elections shall be made by holders of Medicus
Common Stock by mailing or otherwise delivering to the Exchange Agent (as
defined in Section 1.7) a Form of Election. To be effective, a Form of
Election must be properly completed, signed and submitted to the Exchange
Agent and accompanied by the certificates representing the shares of
Medicus Common Stock as to which the election is being made (or by an
appropriate trust company in the United States or a member of a registered
national securities exchange or the National Association of Securities
Dealers, Inc. (the
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"NASD")). QuadraMed will have the discretion which it may delegate in whole
or in part to the Exchange Agent, to determine whether Forms of Election
have been properly completed, signed and submitted or revoked and to
disregard immaterial defects in Forms of Election. The decision of
QuadraMed (or the Exchange Agent) in such matters shall be conclusive and
binding. Neither QuadraMed nor the Exchange Agent will be under any
obligation to notify any person of any defect in a Form of Election
submitted to the Exchange Agent. The Exchange Agent shall also make all
computations contemplated by this Section 1.6 and all such computations
shall be conclusive and binding on the holders of Medicus Common Stock. For
the purposes hereof, a holder of Medicus Common Stock who does not submit a
Form of Election which is received by the Exchange Agent prior to the
Election Deadline (as hereinafter defined) shall be deemed to have made a
Non-Election. If QuadraMed or the Exchange Agent shall determine that any
purported Cash Election or Stock Election was not properly made, such
purported Cash Election or Stock Election shall be deemed to be of no force
and effect and the stockholder making such purported Cash Election or Stock
Election shall for purposes hereof, be deemed to have made a Non-Election.
QuadraMed and Medicus shall each use its reasonable best efforts to mail
the Form of Election to all persons who become holders of Medicus Common
Stock during the period between the record date for the Medicus
Stockholders Meeting (as defined in Section 2.23) and 10:00 a.m. California
time, on the date seven calendar days prior to the anticipated Effective
Time and to make the Form of Election available to all persons who become
holders of Medicus Common Stock subsequent to such day and no later than
the close of business on the business day prior to the Effective Time. A
Form of Election must be received by the Exchange Agent by the close of
business on the last business day prior to the Effective Time (the
"Election Deadline") in order to be effective. All elections may be revoked
until the Election Deadline.
1.7 Surrender of Certificates.
(a) Exchange Agent. The First National Bank of Boston shall act as exchange
agent (the "Exchange Agent") in the Merger.
(b) QuadraMed to Provide Common Stock and Cash. Promptly after the
Effective Time, QuadraMed shall make available to the Exchange Agent for
exchange in accordance with this Article I, through such reasonable procedures
as QuadraMed may adopt, (i) the shares of QuadraMed Common Stock issuable in
exchange for Stock Election Shares and Non-Election Shares and (ii) cash in an
amount sufficient to purchase Cash Election Shares and permit payment of cash in
lieu of fractional shares pursuant to Section 1.6(f).
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Medicus Common Stock, whose shares were
converted into the right to receive shares of QuadraMed Common Stock (and cash
in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as QuadraMed may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of QuadraMed Common Stock (and cash in lieu of fractional
shares) or cash. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
QuadraMed, together with such letter of transmittal, duly completed and validly
executed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor (i) a certificate
representing the number of whole shares of QuadraMed Common Stock and payment in
lieu of fractional shares which such holder has the right to receive pursuant to
Section 1.6 or (ii) cash, as the case may be, and the Certificate so surrendered
shall forthwith be canceled. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Medicus Common Stock
will be deemed for all corporate purposes, other than the payment of dividends,
to evidence the ownership of the number of full shares of QuadraMed Common Stock
or cash, as the case may be, into which such shares of Medicus Common Stock
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.6.
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(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to QuadraMed Common Stock with a record date after
the Effective Time will be paid to the holder of any unsurrendered Certificate
with respect to the shares of QuadraMed Common Stock represented thereby until
the holder of record of such Certificate shall surrender such Certificate.
Subject to applicable law, following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of QuadraMed Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of any such dividends or other distributions
with a record date after the Effective Time theretofore payable (but for the
provisions of this Section 1.7(d)) with respect to such shares of QuadraMed
Common Stock.
(e) Transfers of Ownership. If any certificate for shares of QuadraMed
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to QuadraMed or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
QuadraMed Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the satisfaction of QuadraMed or
any agent of QuadraMed. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Medicus Common Stock. All shares of
QuadraMed Common Stock issued upon the surrender for exchange of shares of
Medicus Common Stock in accordance with the terms hereof (including any cash
paid in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Medicus Common Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Medicus Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue
QuadraMed Common Stock in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, such shares of QuadraMed Common Stock (and cash in lieu of fractional
shares) as may be required pursuant to Section 1.6; provided, however, that
QuadraMed may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against QuadraMed, the Surviving Corporation or the
Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.10 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Medicus and Merger Sub, the officers and directors of Medicus
and Merger Sub are fully authorized in the name of their respective corporations
or otherwise to take, and will take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
1.11 Dissenting Shares. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Medicus QuadraMed Common Stock that are
outstanding immediately prior to the Effective Time and which are held by
stockholders who shall have demanded properly in writing appraisal for such
shares in accordance with Section 262 of the DGCL (collectively, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration. Such stockholders shall be entitled to receive payment of
the appraised value of such shares of Medicus Common Stock held by them in
accordance with the provisions of Section 262, except that all Dissenting Shares
held by stockholders who shall have failed to perfect or who effectively shall
have withdrawn or lost their rights to appraisal of such shares of Medicus
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Common Stock under such Section 262 shall thereupon be deemed to have been
converted into and to have become exchangeable, as of the Effective Time, for
the right to receive, without any interest thereon, shares of QuadraMed Common
Stock based on the Exchange Ratio determined in accordance with Section 1.1
hereof, as if such shares were covered by Non-Elections, upon surrender, in the
manner provided in this Article I, of the certificate or certificates that
formerly evidenced such shares of Medicus Common Stock.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF MEDICUS
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations or results of operations of such entity or group of
entities. In this Agreement, any reference to a "Material Adverse Effect" with
respect to any entity or group of entities means any event, change or effect
that is materially adverse to the condition (financial or otherwise),
properties, assets, liabilities, business, operations or results of operations
of such entity and its subsidiaries, taken as a whole.
Except as disclosed in a document of even date herewith and delivered by
Medicus to QuadraMed prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Medicus
Disclosure Schedule"), Medicus represents and warrants to QuadraMed and Merger
Sub as follows:
2.1 Organization, Standing and Power. Each of Medicus and its subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of Medicus and its subsidiaries
has the corporate power to own its properties and to carry on its business as
now being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on
Medicus. Medicus has delivered a true and correct copy of the Amended and
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and Bylaws, as amended, or other charter documents, as
applicable, of Medicus and each of its subsidiaries, each as amended to date, to
QuadraMed. Neither Medicus nor any of its subsidiaries is in violation of any of
the provisions of its Certificate of Incorporation or Bylaws or equivalent
organizational documents. Medicus is the owner of all outstanding shares of
capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock of each such subsidiary are owned by Medicus free and
clear of all liens, charges, claims or encumbrances or rights of others. There
are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other securities
of any such subsidiary, or otherwise obligating Medicus or any such subsidiary
to issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Except as disclosed in the Medicus SEC Documents (as defined in
Section 2.4), Medicus does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
2.2 Capital Structure. The authorized capital stock of Medicus consists of
10,000,000 shares of Common Stock, $.01 par value, 1,000,000 shares of Preferred
Stock, $.01 par value, and 500 shares of Voting Preferred Stock, $1,000 par
value, of which there were issued and outstanding as of the close of business on
November 7, 1997, 5,487,971 shares of Common Stock and no shares of Preferred
Stock or Voting Preferred Stock. There are no other outstanding shares of
capital stock or voting securities and no outstanding commitments to issue any
shares of capital stock or voting securities other than pursuant to the exercise
of options outstanding as of such date under the Medicus Stock Option Plans and
the obligation to issue 34,800 restricted shares previously granted under the
Medicus Stock Option Plans. All outstanding shares of Medicus Common Stock are
duly authorized, validly issued, fully paid and non-assessable and are free of
any liens or encumbrances created by, or resulting from the actions of, Medicus,
and are not subject to preemptive rights or rights of first refusal created by
statute, the Certificate of Incorporation or Bylaws of Medicus or any
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agreement to which Medicus is a party or by which it is bound. As of the close
of business on November 7, 1997, Medicus has 1,501,350 shares subject to
outstanding, unexercised options. Since November 7, 1997, Medicus has not issued
or granted additional options under the Medicus Stock Option Plans. Except for
(i) the rights created pursuant to this Agreement or the Medicus Stock Option
Plans and (ii) Medicus' right to repurchase any unvested shares under the
Medicus Stock Option Plans, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which Medicus is a party or by
which it is bound obligating Medicus to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Medicus or obligating Medicus to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. There are no
contracts, commitments or agreements relating to voting, purchase or sale of
Medicus' capital stock (i) between or among Medicus and any of its stockholders
and (ii) to the best of Medicus' knowledge, between or among any of Medicus'
stockholders. The terms of the Medicus Stock Option Plans permit the assumption
or substitution of options to purchase QuadraMed Common Stock as provided in
this Agreement, without the consent or approval of the holders of such
securities, the Medicus stockholders, or otherwise and without any acceleration
of the exercise schedule or vesting provisions in effect for those options. True
and complete copies of all forms of agreements and instruments relating to or
issued under the Medicus Stock Option Plans have been made available to
QuadraMed and such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments in any case from the form made available to QuadraMed.
2.3 Authority. Medicus has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Medicus, subject only to the approval of the
Merger by Medicus' stockholders as contemplated by Section 6.1(a). This
Agreement has been duly executed and delivered by Medicus and constitutes the
valid and binding obligation of Medicus enforceable against Medicus in
accordance with its terms. The execution and delivery of this Agreement by
Medicus does not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (i) any provision of the Certificate of Incorporation or Bylaws of
Medicus or any of its subsidiaries, as amended, or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Medicus or any of its subsidiaries or any of their
properties or assets, except where such conflict, violation, default,
termination, cancellation or acceleration with respect to the foregoing
provisions of (ii) would not have had and would not reasonably be expected to
have a Material Adverse Effect on Medicus. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity") is required by or with respect to
Medicus or any of its subsidiaries in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby
and thereby, except for (i) the filing of the Certificate of Merger as provided
in Section 1.2, (ii) the filing with the Securities and Exchange Commission (the
"SEC") and the NASD of the Proxy Statement (as defined in Section 2.23) relating
to the Medicus Stockholders Meeting (as defined in Section 2.23), (iii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and the
securities laws of any foreign country; and (iv) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not have a Material Adverse Effect on Medicus and would not prevent,
or materially alter or delay any of the transactions contemplated by this
Agreement.
2.4 SEC Documents; Financial Statements. Medicus has furnished to
QuadraMed a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act of 1933, as amended (the "Securities Act")), definitive proxy
statement and other filing filed with the SEC by Medicus since March 1, 1996,
and, prior to the Effective Time, Medicus will have furnished QuadraMed with
true and complete copies of any additional documents filed with the SEC
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by Medicus prior to the Effective Time (collectively, the "Medicus SEC
Documents"). In addition, Medicus has made available to QuadraMed all exhibits
to the Medicus SEC Documents filed prior to the date hereof, and will promptly
make available to QuadraMed all exhibits to any additional Medicus SEC Documents
filed prior to the Effective Time. All documents required to be filed as
exhibits to the Medicus SEC Documents have been so filed, and all material
contracts so filed as exhibits are in full force and effect, except those which
have expired in accordance with their terms, and neither Medicus nor any of its
subsidiaries is in default thereunder. As of their respective filing dates, the
Medicus SEC Documents complied in all material respects with the requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Securities Act, and none of the Medicus SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed Medicus SEC Document. The financial statements
of Medicus, including the notes thereto, included in the Medicus SEC Documents
(the "Medicus Financial Statements") were complete and correct in all material
respects as of their respective dates, complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements included in Quarterly Reports on Form 10-Q,
as permitted by Form 10-Q of the SEC). The Medicus Financial Statements fairly
present the consolidated financial condition and operating results of Medicus
and its subsidiaries at the dates and during the periods indicated therein
(subject, in the case of unaudited statements, to normal, recurring year-end
adjustments). There has been no change in Medicus accounting policies except as
described in the notes to the Medicus Financial Statements.
2.5 Absence of Certain Changes. Since August 31, 1997 (the "Medicus
Balance Sheet Date"), Medicus has conducted its business in the ordinary course
consistent with past practice and, except as disclosed in the Medicus SEC
Documents, there has not occurred: (i) any change, event or condition (whether
or not covered by insurance) that has resulted in, or might reasonably be
expected to result in, a Material Adverse Effect to Medicus; (ii) any
acquisition, sale or transfer of any material asset of Medicus or any of its
subsidiaries other than in the ordinary course of business and consistent with
past practice; (iii) any change in accounting methods or practices (including
any change in depreciation or amortization policies or rates) by Medicus or any
revaluation by Medicus of any of its or any of its subsidiaries' assets; (iv)
any declaration, setting aside, or payment of a dividend or other distribution
with respect to the shares of Medicus, or any direct or indirect redemption,
purchase or other acquisition by Medicus of any of its shares of capital stock;
(v) any material contract entered into by Medicus or any of its subsidiaries,
other than in the ordinary course of business and as provided to QuadraMed, or
any material amendment or termination of, or default under, any material
contract to which Medicus or any of its subsidiaries is a party or by which it
is bound; or (vi) any negotiation or agreement by Medicus or any of its
subsidiaries to do any of the things described in the preceding clauses (i)
through (v) (other than negotiations with QuadraMed and its representatives
regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. Medicus has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in Medicus' Quarterly Report on Form 10-Q for the period
ended August 31, 1997 (the "Medicus Balance Sheet"), (ii) those incurred in the
ordinary course of business and not required to be set forth in the Medicus
Balance Sheet under generally accepted accounting principles, (iii) those
incurred in the ordinary course of business since the Medicus Balance Sheet Date
and consistent with past practice; and (iv) those incurred in connection with
the execution of this Agreement.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Medicus or any of its
subsidiaries, threatened against Medicus or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Medicus.
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There is no judgment, decree or order against Medicus or any of its
subsidiaries, or, to the knowledge of Medicus and its subsidiaries, any of their
respective directors or officers (in their capacities as such), that could
prevent, enjoin, alter or materially delay any of the transactions contemplated
by this Agreement, or that could reasonably be expected to have a Material
Adverse Effect on Medicus.
2.8 Restrictions on Business Activities. There is no material agreement,
judgment, injunction, order or decree binding upon Medicus or any of its
subsidiaries which has or reasonably could be expected to have the effect of
prohibiting or materially impairing any current or future business practice of
Medicus or any of its subsidiaries, any acquisition of property by Medicus or
any of its subsidiaries or the conduct of business by Medicus or any of its
subsidiaries as currently conducted or as proposed to be conducted by Medicus or
any of its subsidiaries.
2.9 Governmental Authorization. Medicus and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Medicus or any of its subsidiaries currently operates or holds
any interest in any of its properties or (ii) that is required for the operation
of Medicus' or any of its subsidiaries' business or the holding of any such
interest ((i) and (ii) herein collectively called "Medicus Authorizations"), and
all of such Medicus Authorizations are in full force and effect, except where
the failure to obtain or have any of such Medicus Authorizations could not
reasonably be expected to have a Material Adverse Effect on Medicus.
2.10 Title to Property. Medicus and its subsidiaries have good and valid
title to all of their respective properties, interests in properties and assets,
real and personal, reflected in the Medicus Balance Sheet or acquired after the
Medicus Balance Sheet Date (except properties, interests in properties and
assets sold or otherwise disposed of since the Medicus Balance Sheet Date in the
ordinary course of business), or in the case of leased properties and assets,
valid leasehold interests therein, free and clear of all mortgages, liens,
pledges, charges or encumbrances of any kind or character, except (i) the lien
of current taxes not yet due and payable, (ii) such imperfections of title,
liens and easements as do not and will not materially detract from or interfere
with the use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties and (iii) liens
securing debt which is reflected on the Medicus Balance Sheet. The plants,
property and equipment of Medicus and its subsidiaries that are used in the
operations of their businesses are in good operating condition and repair. All
properties used in the operations of Medicus and its subsidiaries are reflected
in the Medicus Balance Sheet to the extent generally accepted accounting
principles require the same to be reflected. Schedule 2.10 identifies each
parcel of real property owned or leased by Medicus or any of its subsidiaries.
2.11 Intellectual Property.
(a) Medicus and its subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use all patents, trademarks, trade names, service
marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas, algorithms,
processes, computer software programs or applications (in both source code and
object code form), and tangible or intangible proprietary information or
material ("Intellectual Property") that are used in the business of Medicus and
its subsidiaries as currently conducted or as proposed to be conducted by
Medicus and its subsidiaries, except to the extent that the failure to have such
rights have not had and would not reasonably be expected to have a Material
Adverse Effect on Medicus.
(b) Medicus has provided to QuadraMed (i) all patents and patent
applications and all registered and unregistered trademarks, trade names and
service marks, registered and unregistered copyrights, and maskworks, which
Medicus considers to be material to its business and included in the
Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
licenses, sublicenses and other agreements as to which Medicus is a party and
pursuant to which any person is authorized to use any Intellectual Property, and
(iii) all licenses, sublicenses and other agreements as to which Medicus is a
party and pursuant to which Medicus is authorized to use any third party
patents, trademarks or copyrights,
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including software ("Third Party Intellectual Property Rights") which are
incorporated in, are, or form a part of any Medicus product that is material to
its business.
(c) To Medicus' knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Medicus
or any of its subsidiaries, any trade secret material to Medicus or any of its
subsidiaries, or any Intellectual Property right of any third party to the
extent licensed by or through Medicus or any of its subsidiaries, by any third
party, including any employee of its subsidiaries has entered into any agreement
to indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(d) Medicus is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights, the
breach of which would have a Material Adverse Effect on Medicus.
(e) All patents, registered trademarks, service marks and copyrights held
by Medicus are valid and subsisting. Medicus (i) has not been sued in any suit,
action or proceeding which involves a claim of infringement of any patents,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party and (ii) has not brought any action, suit
or proceeding for infringement of Intellectual Property or breach of any license
or agreement involving Intellectual Property against any third party. The
manufacture, marketing, licensing or sale of Medicus' products does not infringe
any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party, except where such infringement would not
have a Material Adverse Effect on Medicus.
(f) Medicus has secured valid written assignments from all consultants and
employees who contributed to the creation or development of Intellectual
Property of the rights to such contributions that Medicus does not already own
by operation of law.
(g) Medicus has taken all reasonable and appropriate steps to protect and
preserve the confidentiality of all Intellectual Property not otherwise
protected by patents, or patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential Information
owned by Medicus by or to a third party has been pursuant to the terms of a
written agreement between Medicus and such third party. All use, disclosure or
appropriation of Confidential Information not owned by Medicus has been pursuant
to the terms of a written agreement between Medicus and the owner of such
Confidential Information, or is otherwise lawful.
2.12 Environmental Matters
(a) The following terms shall be defined as follows:
(i) "Environmental and Safety Laws" shall mean any federal, state or
local laws, ordinances, codes, regulations, rules, policies and orders that
are intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to,
or list or define air, water, groundwater, solid waste, hazardous or toxic
substances, materials, wastes, pollutants or contaminants, or which are
intended to assure the safety of employees, workers or other persons,
including the public.
(ii) "Hazardous Materials" shall mean any toxic or hazardous
substance, material or waste or any pollutant or contaminant, or infectious
or radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental and Safety Laws.
(iii) "Property" shall mean all real property leased or owned by
Medicus or its subsidiaries either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on the
Property of Medicus or its subsidiaries.
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(b) Medicus represents and warrants as follows: (i) to Medicus' knowledge,
no methylene chloride or asbestos is contained in or has been used at or
released from the Facilities; (ii) all Hazardous Materials and wastes disposed
of by Medicus have been disposed of in accordance with all Environmental and
Safety Laws; (iii) Medicus and its subsidiaries have received no notice (verbal
or written) of any noncompliance of the Facilities or its past or present
operations with Environmental and Safety Laws; (iv) no notices, administrative
actions or suits are pending or, to Medicus' knowledge, threatened relating to a
violation of any Environmental and Safety Laws; (v) neither Medicus nor its
subsidiaries have been notified that they are a potentially responsible party
under the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), or state analog statute, arising out of events occurring
prior to the Closing Date; (vi) to Medicus' knowledge, there have not been in
the past, and are not now, any Hazardous Materials on, under or migrating to or
from the Facilities or Property; (vii) to Medicus' knowledge, there have not
been in the past, and are not now, any underground tanks or underground
improvements at, on or under the Property including without limitation,
treatment or storage tanks, pumps, or water, gas or oil wells; (viii) to
Medicus' knowledge, there are no polychlorinated biphenyls (PCBs) deposited,
stored, disposed of or located on the Property or Facilities or any equipment on
the Property containing PCBs at levels in excess of 50 parts per million; (ix)
to Medicus' knowledge, there is no formaldehyde on the Property or in the
Facilities, nor any insulating material containing urea formaldehyde in the
Facilities; (x) Medicus' and its subsidiaries' uses of and activities within the
Facilities have at all times complied with all Environmental and Safety Laws;
and (xi) Medicus and its subsidiaries have all the permits and licenses required
to be issued and are in full compliance with the terms and conditions of those
permits, except where the failure to have or comply with such permits would not,
individually or in the aggregate, have a Material Adverse Effect of Medicus.
2.13 Taxes. Medicus and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Medicus or any of
its subsidiaries is or has been a member have timely filed all Tax Returns
required to be filed by it, have paid all Taxes shown thereon to be due and has
provided adequate accruals in accordance with generally accepted accounting
principles in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax returns. Except as disclosed in the
SEC Documents, (i) no material claim for Taxes has become a lien against the
property of Medicus or any of its subsidiaries or is being asserted against
Medicus or any of its subsidiaries other than liens for Taxes not yet due and
payable, (ii) no audit of any Tax Return of Medicus or any of its subsidiaries
is being conducted by a Tax authority, (iii) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Medicus or any of
its subsidiaries and is currently in effect, and (iv) there is no agreement,
contract or arrangement to which Medicus or any of its subsidiaries is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G, 162 or 404 of the Code. Medicus has not been and will
not be required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger. Neither
Medicus nor any of its subsidiaries is a party to any tax sharing or tax
allocation agreement nor does Medicus or any of its subsidiaries owe any amount
under any such agreement. For purposes of this Agreement, the following terms
have the following meanings: "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or any penalty, addition to tax or additional amount
imposed by any Governmental Entity (a "Tax Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) any liability for the
payment of any amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group for any Taxable
period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person. As used herein, "Tax Return" shall mean any return,
statement, report or form (including, without limitation,) estimated Tax returns
and reports, withholding Tax returns and reports and information reports and
returns required to be filed with respect to Taxes. Medicus and each of its
subsidiaries are in full compliance with all terms and conditions of any Tax
exemptions or other Tax-sharing agreement or order of a foreign government
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and the consummation of the Merger shall not have any adverse effect on the
continued validity and effectiveness of any such Tax exemptions or other
Tax-sharing agreement or order.
2.14 Employee Benefit Plans.
(a) Schedule 2.14 lists, with respect to Medicus, any subsidiary of Medicus
and any trade or business (whether or not incorporated) which is treated as a
single employer with Medicus (an "ERISA Affiliate") within the meaning of
Section 414(b), (c), (m) or (o) of the Code, (i) all material employee benefit
plans (as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), (ii) each loan to a non-officer employee in
excess of $50,000, loans to officers and directors and any stock option, stock
purchase, phantom stock, stock appreciation right, supplemental retirement,
severance, sabbatical, medical, dental, vision care, disability, employee
relocation, cafeteria benefit (Code section 125) or dependent care (Code Section
129), life insurance or accident insurance plans, programs or arrangements,
(iii) all bonus, pension, profit sharing, savings, deferred compensation or
incentive plans, programs or arrangements, (iv) other fringe or employee benefit
plans, programs or arrangements that apply to senior management of Medicus and
that do not generally apply to all employees, and (v) any current or former
employment or executive compensation or severance agreements, written or
otherwise, as to which unsatisfied obligations of Medicus of greater than
$50,000 remain for the benefit of, or relating to, any present or former
employee, consultant or director of Medicus (together, the "Medicus Employee
Plans").
(b) Medicus has furnished to QuadraMed a copy of each of the Medicus
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and, to the extent still in its possession, any material
employee communications relating thereto) and has, with respect to each Medicus
Employee Plan which is subject to ERISA reporting requirements, provided copies
of the Form 5500 reports filed for the last three plan years. Any Medicus
Employee Plan intended to be qualified under Section 401(a) of the Code has
either obtained from the Internal Revenue Service a favorable determination
letter as to its qualified status under the Code, including all amendments to
the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or
has applied to the Internal Revenue Service for such a determination letter
prior to the expiration of the requisite period under applicable Treasury
Regulations or Internal Revenue Service pronouncements in which to apply for
such determination letter and to make any amendments necessary to obtain a
favorable determination. Medicus has also furnished QuadraMed with the most
recent Internal Revenue Service determination letter issued with respect to each
such Medicus Employee Plan, and nothing has occurred since the issuance of each
such letter which could reasonably be expected to cause the loss of the
tax-qualified status of any Medicus Employee Plan subject to Code Section
401(a).
(c) (i) Except as disclosed on Schedule 2.14, none of the Medicus Employee
Plans promises or provides retiree medical or other retiree welfare benefits to
any person; (ii) there has been no "prohibited transaction," as such term is
defined in Section 406 of ERISA and Section 4975 of the Code, with respect to
any Medicus Employee Plan, which could reasonably be expected to have, in the
aggregate, a Material Adverse Effect; (iii) each Medicus Employee Plan has been
administered substantially in accordance with its terms and in compliance with
the requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not have, in the aggregate, a
Material Adverse Effect, and Medicus and each subsidiary or ERISA Affiliate have
performed all obligations required to be performed by them under, are not in any
respect in default under or violation of, and have no knowledge of any default
or violation by any other party to, any of the Medicus Employee Plans, which
default or violation could reasonably be expected to have a Material Adverse
Effect on Medicus; (iv) neither Medicus nor any subsidiary or ERISA Affiliate is
subject to any liability or penalty under Sections 4976 through 4980 of the Code
or Title I of ERISA with respect to any of the Medicus Employee Plans, other
than obligations for the payment of benefits in the normal operation of the
Plan, and obligations which would not in the aggregate have a Material Adverse
Effect on Medicus; (v) all material contributions required to be made by Medicus
or any subsidiary or ERISA Affiliate to any Medicus Employee Plan have been made
on or before their due dates and any accruals required by general accepted
accounting principles ("GAAP") for contributions to each Medicus Employee Plan
for the current plan years are reflected on the financial statements of Medicus;
(vi) with respect to each Medicus Employee Plan, no "reportable event" within
the meaning of Section 4043 of ERISA (excluding any such event for
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which the thirty (30) day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 or ERISA has occurred; and (vii) neither Medicus nor any subsidiary
or ERISA Affiliate has incurred or expects to incur any liability under Title IV
of ERISA or Section 412 of the Code. With respect to each Medicus Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1) of ERISA, Medicus has prepared in good faith and timely filed all
requisite governmental reports (which were true and correct as of the date
filed) and has properly and timely filed and distributed or posted all notices
and reports to employees required to be filed, distributed or posted with
respect to each such Medicus Employee Plan, except for failures which would not
have a Material Adverse Effect on Medicus. No suit, administrative proceeding,
action or other litigation has been brought, or to the best knowledge of Medicus
is threatened, against or with respect to any such Medicus Employee Plan,
including any audit or inquiry by the IRS or United States Department of Labor.
Neither Medicus nor any Medicus subsidiary or other ERISA Affiliate is a party
to, or has made any contribution to or otherwise incurred any obligation under,
any "multiemployer plan" as defined in Section 3(37) of ERISA.
(d) With respect to each Medicus Employee Plan, Medicus and each of its
United States subsidiaries have complied with (i) the applicable health care
continuation and notice provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") and the proposed regulations thereunder and
(ii) the applicable requirements of the Family Leave Act of 1993 and the
regulations thereunder, except to the extent that such failure to comply would
not, in the aggregate, have a Material Adverse Effect.
(e) The consummation of the transactions contemplated by this Agreement
will not entitle any current or former employee or other service provider of
Medicus, any Medicus subsidiary or any other ERISA Affiliate to severance
benefits or any other payment, except as vesting, or increase the amount of
compensation due any such employee or service provider.
(f) Except as disclosed on Schedule 2.14, there has been no amendment to,
written interpretation or announcement (whether or not written) by Medicus, any
Medicus subsidiary or other ERISA Affiliate relating to, or change in
participation or coverage under, any Medicus Employee Plan which would
materially increase the expense of maintaining such Plan above the level of
expense incurred with respect to that Plan for the most recent fiscal year
included in Medicus' financial statements.
2.15 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Medicus or any of its subsidiaries, (ii) materially
increase any benefits otherwise payable by Medicus or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
2.16 Employee Matters. Medicus and each of its subsidiaries are in
compliance in all respects with all currently applicable laws and regulations
respecting employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice, except where the
failure to be in compliance or the engagement in such unfair labor practices
would not have a Material Adverse Effect on Medicus. There are no pending claims
against Medicus or any of its subsidiaries under any workers compensation plan
or policy or for long term disability. Neither Medicus nor any of its
subsidiaries has any obligations under COBRA with respect to any former
employees or qualifying beneficiaries thereunder, except for obligations that
would not have a Material Adverse Effect on Medicus. There are no controversies
pending or, to the knowledge of Medicus or any of its subsidiaries, threatened,
between Medicus or any of its subsidiaries and any of their respective
employees, which controversies have or could reasonably be expected to have a
Material Adverse Effect on Medicus. Neither Medicus nor any of its subsidiaries
is a party to any collective bargaining agreement or other labor union contract
nor does Medicus nor any of its subsidiaries know of any activities or
proceedings of any labor union to organize any such employees.
2.17 Interested Party Transactions. Except as disclosed in the Medicus SEC
Documents, neither Medicus nor any of its subsidiaries is indebted to any
director, officer, employee or agent of Medicus or any of
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its subsidiaries (except for amounts due as normal salaries and bonuses and in
reimbursement of ordinary expenses), and no such person is indebted to Medicus
or any of its subsidiaries, and there have been no other transactions of the
type required to be disclosed pursuant to Items 402 and 404 of Regulation S-K
under the Securities Act and the Exchange Act since March 1, 1996.
2.18 Insurance. Medicus and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Medicus and its
subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Medicus and its subsidiaries are
otherwise in compliance in all material respects with the terms of such policies
and bonds. Medicus has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
2.19 Compliance With Laws. Each of Medicus and its subsidiaries has
complied with, are not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Medicus.
2.20 Minute Books. The minute books of Medicus and its subsidiaries made
available to QuadraMed contain a complete and accurate summary of all meetings
of directors and stockholders or actions by written consent since the time of
incorporation of Medicus and the respective subsidiaries through the date of
this Agreement, and reflect all transactions referred to in such minutes
accurately in all material respects.
2.21 [Intentionally Omitted].
2.22 Brokers' and Finders' Fees. Medicus has not incurred, nor will it
incur without QuadraMed's prior written consent, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or investment
bankers' fees or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
2.23 Registration Statement; Proxy Statement/Prospectus. The information
supplied by Medicus for inclusion in the registration statement on Form S-4 (or
such other or successor form as shall be appropriate) pursuant to which the
shares of QuadraMed Common Stock to be issued in the Merger will be registered
with the SEC (the "Registration Statement") shall not at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by Medicus for
inclusion in the proxy statement/prospectus to be sent to the stockholders of
Medicus in connection with the meeting of Medicus' stockholders to consider the
Merger (the "Medicus Stockholders Meeting") (such proxy statement/prospectus as
amended or supplemented is referred to herein as the "Proxy Statement") shall
not, on the date the Proxy Statement is first mailed to Medicus' stockholders,
at the time of the Medicus Stockholders Meeting and at the Effective Time,
contain any statement which, at such time, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the Medicus Stockholders Meeting which has become
false or misleading. If at any time prior to the Effective Time any event or
information should be discovered by Medicus which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
Medicus shall promptly inform QuadraMed and Merger Sub. Notwithstanding the
foregoing, Medicus makes no representation, warranty or covenant with respect to
any information supplied by QuadraMed or Merger Sub which is contained in any
documents.
2.24 [Intentionally Omitted].
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2.25 Vote Required. The affirmative vote of the holders of a majority of
the shares of Medicus Common Stock outstanding on the record date set for the
Medicus Stockholders Meeting is the only vote of the holders of any of Medicus'
capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
2.26 Board Approval. The Board of Directors of Medicus has (i) unanimously
approved this Agreement and the Merger and all transactions contemplated hereby,
including the purchase of shares of Medicus Common Stock pursuant to the Stock
Purchase Agreements, (ii) determined that the Merger is in the best interests of
the stockholders of Medicus and is on terms that are fair to such stockholders
and (iii) recommended that the stockholders of Medicus approve this Agreement
and consummation of the Merger.
2.27 Section 203 of the DGCL Not Applicable. The Board of Directors of
Medicus has taken all actions so that the restrictions contained in Section 203
of the DGCL applicable to a "business combination" (as defined in Section 203)
will not apply to the execution, delivery or performance of this Agreement or
the consummation of the Merger or the other transactions contemplated by this
Agreement.
2.28 Customers and Suppliers. As of the date hereof, no customer which
individually accounted for more than 1% of Medicus' gross revenues during the 12
month period preceding the date hereof has indicated to Medicus that it will
stop, or decrease the rate of, buying services or products of Medicus, or has at
any time on or after May 31, 1997 decreased materially its usage of the services
or products of Medicus. As of the date hereof, no material supplier of Medicus
has indicated to Medicus that it will stop, or decrease the rate of, supplying
materials, products or services to Medicus. Medicus has not knowingly breached,
so as to provide a benefit to Medicus that was not intended by the parties, any
agreement with, or engaged in any fraudulent conduct with respect to, any
customer or supplier of Medicus.
2.29 Employee Nondisclosure Agreements. Each employee of Medicus has
executed and delivered to Medicus the Standard Key Employee Nondisclosure
Agreement in the form previously delivered to QuadraMed.
2.30 Representations Complete. None of the representations or warranties
made by Medicus herein or in any Schedule hereto, including Medicus Disclosure
Schedule, or certificate furnished by Medicus pursuant to this Agreement, or the
Medicus SEC Documents, when all such documents are read together in their
entirety, contains or will contain at the Effective Time any untrue statement of
a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF QUADRAMED AND MERGER SUB
Except as disclosed in a document of even date herewith and delivered by
QuadraMed to Medicus prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the
"QuadraMed Disclosure Schedule"), QuadraMed and Merger Sub represent and warrant
to Medicus as follows. All representations and warranties of Merger Sub set
forth below are made solely as of the Closing Date.
3.1 Organization, Standing and Power. Each of QuadraMed and its
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of QuadraMed and its subsidiaries has the corporate power to
own its properties and to carry on its business as now being conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the failure to be so qualified and in good standing would have a Material
Adverse Effect on QuadraMed. QuadraMed has made available a true and correct
copy of the Certificate of Incorporation and Bylaws or other charter documents,
as applicable, of QuadraMed to Medicus. Neither QuadraMed nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent organizational documents. QuadraMed is the
owner of all outstanding shares of capital
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stock of each of its subsidiaries and all such shares are duly authorized,
validly issued, fully paid and nonassessable. All of the outstanding shares of
capital stock of each such subsidiary are owned by QuadraMed free and clear of
all liens, charges, claims or encumbrances or rights of others. There are no
outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable
or convertible securities or other commitments or agreements of any character
relating to the issued or unissued capital stock or other securities of any such
subsidiary, or otherwise obligating QuadraMed or any such subsidiary to issue,
transfer, sell, purchase, redeem or otherwise acquire any such securities.
Except as disclosed in the QuadraMed SEC Documents (as defined in Section 3.4),
QuadraMed does not directly or indirectly own any equity or similar interest in,
or any interest convertible or exchangeable or exercisable for, any equity or
similar interest in, any corporation, partnership, joint venture or other
business association or entity.
3.2 Capital Structure. Except as described in this Section 3.2, the
authorized and outstanding capital stock of QuadraMed is as set forth in the
section entitled "Description of Capital Stock" in QuadraMed's Prospectus dated
October 21, 1997 as filed with the Securities and Exchange Commission and as
previously delivered to Medicus. There are no other outstanding shares of
capital stock or voting securities of QuadraMed other than shares of QuadraMed
Common Stock issued after October 21, 1997 upon the exercise of options or
warrants. The authorized capital stock of Merger Sub consists of 1,000 shares of
Common Stock, $.01 par value, all of which are issued and outstanding and are
held by QuadraMed. All outstanding shares of QuadraMed and Merger Sub have been
duly authorized, validly issued, fully paid and are nonassessable and free of
any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof. Other than pursuant to this Agreement, and
options or warrants that were outstanding as of October 21, 1997, there are no
other options, warrants, calls, rights, commitments or agreements of any
character to which QuadraMed or Merger Sub is a party or by which either of them
is bound obligating QuadraMed or Merger Sub to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of QuadraMed or Merger Sub or obligating QuadraMed
or Merger Sub to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. The shares of QuadraMed Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid, and non-assessable.
3.3 Authority. QuadraMed and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of QuadraMed and Merger Sub. This
Agreement has been duly executed and delivered by QuadraMed and Merger Sub and
constitutes the valid and binding obligations of QuadraMed and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Certificate
of Incorporation or Bylaws of QuadraMed or any of its subsidiaries, as amended,
or (ii) any material mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to QuadraMed or any of
its subsidiaries or their properties or assets, except where such conflict,
violation, default, termination, cancellation or acceleration with respect to
the foregoing provisions of (ii) would not have had and would not reasonably be
expected to have a Material Adverse Effect on QuadraMed. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Entity, is required by or with respect to QuadraMed or any of its
subsidiaries in connection with the execution and delivery of this Agreement by
QuadraMed and Merger Sub or the consummation by QuadraMed and Merger Sub of the
transactions contemplated hereby, except for (i) the filing of the Certificate
of Merger as provided in Section 1.2, (ii) the filing with the SEC of the
Registration Statement, (iii) the filing of a Form 8-K with the SEC within 15
days after the Closing Date, (iv) any filings as may be required under
applicable state securities laws and the securities laws of any foreign country,
(v) the filing with the Nasdaq National Market of a Notification Form for
Listing of Additional Shares with respect to the shares of QuadraMed Common
Stock issuable upon conversion of the Medicus Common Stock in the Merger and
upon exercise of the options under the Medicus Stock Option Plans assumed by
QuadraMed, and (vi) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made,
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would not have a Material Adverse Effect on QuadraMed and would not prevent or
materially alter or delay any of the transactions contemplated by this
Agreement.
3.4 SEC Documents; Financial Statements. QuadraMed has made available to
Medicus a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filing filed with the SEC
by QuadraMed since March 31, 1997, and, prior to the Effective Time, QuadraMed
will have furnished Medicus with true and complete copies of any additional
documents filed with the SEC by QuadraMed prior to the Effective Time
(collectively, the "QuadraMed SEC Documents"). All documents required to be
filed as exhibits to the Medicus SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect, except
those which have expired in accordance with their terms, and neither QuadraMed
nor any of its subsidiaries is in default thereunder. As of their respective
filing dates, the QuadraMed SEC Documents complied in all material respects with
the requirements of the Exchange Act and the Securities Act, and none of the
QuadraMed SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed QuadraMed SEC Document. The financial statements of QuadraMed, including
the notes thereto, included in the QuadraMed SEC Documents (the "QuadraMed
Financial Statements") were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the case of
unaudited statements included in Quarterly Reports on Form 10-Q, as permitted by
Form 10-Q of the SEC). The QuadraMed Financial Statements fairly present the
consolidated financial condition and operating results of QuadraMed and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no material change in QuadraMed accounting policies except as
described in the notes to the QuadraMed Financial Statements.
3.5 Absence of Certain Changes. Since June 30, 1997 (the "QuadraMed
Balance Sheet Date"), QuadraMed has conducted its business in the ordinary
course consistent with past practice and there has not occurred: (i) any change,
event or condition (whether or not covered by insurance) that has resulted in,
or might reasonably be expected to result in, a Material Adverse Effect to
QuadraMed; (ii) any acquisition, sale or transfer of any material asset of
QuadraMed or any of its subsidiaries other than in the ordinary course of
business and consistent with past practice; (iii) any material change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by QuadraMed or any revaluation by QuadraMed of
any of its assets; (iv) any declaration, setting aside, or payment of a dividend
or other distribution with respect to the shares of QuadraMed, or any direct or
indirect redemption, purchase or other acquisition by QuadraMed of any of its
shares of capital stock; or (v) any negotiation or agreement by QuadraMed or any
of its subsidiaries to do any of the things described in the preceding clauses
(i) through (iv) (other than negotiations with Medicus and its representatives
regarding the transactions contemplated by this Agreement).
3.6 Absence of Undisclosed Liabilities. QuadraMed has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in QuadraMed's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (the "QuadraMed Balance Sheet"), (ii) those incurred
in the ordinary course of business and not required to be set forth in the
QuadraMed Balance Sheet under generally accepted accounting principles, and
(iii) those incurred in the ordinary course of business since the QuadraMed
Balance Sheet Date and consistent with past practice.
3.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of QuadraMed or any of
its subsidiaries, threatened against QuadraMed or any of its subsidiaries or any
of their respective properties or any of their respective officers or directors
(in their capacities as such) that,
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individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on QuadraMed. There is no judgment, decree or order
against QuadraMed or any of its subsidiaries or, to the knowledge of QuadraMed
or any of its subsidiaries, any of their respective directors or officers (in
their capacities as such) that could prevent, enjoin, alter or materially delay
any of the transactions contemplated by this Agreement, or that could reasonably
be expected to have a Material Adverse Effect on QuadraMed.
3.8 Restrictions on Business Activities. There is no material agreement,
judgment, injunction, order or decree binding upon QuadraMed or any of its
subsidiaries which has or reasonably could be expected to have the effect of
prohibiting or materially impairing any current or future business practice of
QuadraMed or any of its subsidiaries, any acquisition of property by QuadraMed
or any of its subsidiaries or the conduct of business by QuadraMed or any of its
subsidiaries as currently conducted or as proposed to be conducted by QuadraMed
or any of its subsidiaries.
3.9 Governmental Authorization. QuadraMed and each of its subsidiaries
have obtained each federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
(i) pursuant to which QuadraMed or any of its subsidiaries currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of QuadraMed's or any of its subsidiaries' business or the holding of
any such interest ((i) and (ii) herein collectively called "QuadraMed
Authorizations"), and all of such QuadraMed Authorizations are in full force and
effect, except where the failure to obtain or have any of such QuadraMed
Authorizations could not reasonably be expected to have a Material Adverse
Effect on QuadraMed.
3.10 Compliance With Laws. Each of QuadraMed and its subsidiaries has
complied with, are not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on QuadraMed.
3.11 [Intentionally Omitted].
3.12 Broker's and Finders' Fees. QuadraMed has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby, other
than with respect to its arrangements with Jefferies & Company, Inc.
3.13 Registration Statement; Proxy Statement/Prospectus. The information
supplied by QuadraMed and Merger Sub for inclusion in the Registration Statement
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by QuadraMed for
inclusion in the Proxy Statement shall not, on the date the Proxy Statement is
first mailed to Medicus' stockholders, at the time of the Medicus Stockholders
Meeting and at the Effective Time, contain any statement which, at such time, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which it is made, not false or misleading; or omit to state
any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Medicus
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by QuadraMed
or Merger Sub which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, QuadraMed or Merger Sub will
promptly inform Medicus. Notwithstanding the foregoing, QuadraMed and Merger Sub
make no representation, warranty or covenant with respect to any information
supplied by Medicus which is contained in any of the foregoing documents.
3.14 Board Approval. The Board of Directors of QuadraMed has unanimously
(i) approved this Agreement and the Merger and (ii) determined that the Merger
is in the best interests of its stockholders and is on terms that are fair to
such stockholders.
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3.15 Representations Complete. None of the representations or warranties
made by QuadraMed or Merger Sub herein or in any Schedule hereto, including the
QuadraMed Disclosure Schedule, or certificate furnished by QuadraMed or Merger
Sub pursuant to this Agreement, or the QuadraMed SEC Documents, when all such
documents are read together in their entirety, contains or will contain at the
Effective Time any untrue statement of a material fact, or omits or will omit at
the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Medicus and QuadraMed. During the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the Effective Time, each of Medicus and QuadraMed agrees
(except to the extent expressly contemplated by this Agreement or as consented
to in writing by the other), to carry on its and its subsidiaries' business in
the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay and to cause its subsidiaries to pay debts and
Taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform other obligations when due, and to use all reasonable efforts
consistent with past practice and policies to preserve intact its and its
subsidiaries' present business organizations, use its best efforts consistent
with past practice to keep available the services of its and its subsidiaries'
present officers and key employees and use its best efforts consistent with past
practice to preserve its and its subsidiaries' relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it or its subsidiaries, to the end that its and its subsidiaries'
goodwill and ongoing businesses shall be unimpaired at the Effective Time. Each
of Medicus and QuadraMed agrees to promptly notify the other of any event or
occurrence not in the ordinary course of its or its subsidiaries' business, and
of any event which could have a Material Adverse Effect. Notwithstanding
anything in this Section 4.1 to the contrary, QuadraMed may negotiate and
consummate acquisitions of businesses or assets without providing notice to or
obtaining the consent of Medicus. Without limiting the foregoing, except as
expressly contemplated by this Agreement, neither Medicus nor QuadraMed shall
do, cause or permit any of the following, or allow, cause or permit any of its
subsidiaries to do, cause or permit any of the following, without the prior
written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries; or
(c) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) and (b) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.2 Conduct of Business of Medicus. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement, Medicus shall not do, cause or permit any of the following, or allow,
cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of QuadraMed, which consent shall
not be unreasonably withheld:
(a) Material Contracts. Enter into any contract or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of its
contracts, other than in the ordinary course of business
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consistent with past practice and in no event shall such contract,
commitment, amendment, modification or waiver be in excess of $250,000;
(b) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than the issuance of shares
of its Common Stock pursuant to the exercise of stock options, warrants or
other rights therefor outstanding as of the date of this Agreement, except
pursuant to the Medicus 1997 Directors' Stock Option Plan as currently in
effect;
(c) Stock Option Plans, Etc. Accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its
employee stock plans or director stock plans or authorize cash payments in
exchange for any options or other rights granted under any of such plans;
(d) Intellectual Property. Transfer to any person or entity any rights
to its Intellectual Property other than in the ordinary course of business
consistent with past practice;
(e) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or
technology;
(f) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(g) Indebtedness. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
(h) Leases. Enter into any operating lease in excess of an aggregate
of $10,000;
(i) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $10,000 in any one case or $100,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Medicus Financial Statements;
(j) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
and consistent with past practice;
(k) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(l) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend
any employee benefit or stock purchase or option plan, or hire any new
director level or officer level employee (except that it may hire a
replacement for any current director level or officer level employee if it
first provides QuadraMed advance notice regarding such hiring decision),
pay any special bonus or special remuneration to any employee or director,
or increase the salaries or wage rates of its employees;
(m) Severance Arrangements. Grant any severance or termination pay (i)
to any director or officer or (ii) to any other employee except (A)
payments made pursuant to standard written agreements outstanding on the
date hereof or (B) grants which are made in the ordinary course of business
in accordance with its standard past practice;
(n) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with QuadraMed
prior to the filing of such a suit, or (iii) for a breach of this
Agreement;
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(o) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its subsidiaries' business,
taken as a whole, or acquire or agree to acquire any equity securities of
any corporation, partnership, association or business organization;
(p) Taxes. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Notices. Fail to give all notices and other information required
to be given to the employees of Medicus, any collective bargaining unit
representing any group of employees of Medicus, and any applicable
government authority under the WARN Act, the National Labor Relations Act,
the Internal Revenue Code, the Consolidated Omnibus Budget Reconciliation
Act, and other applicable law in connection with the transactions provided
for in this Agreement;
(r) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(s) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (r) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing.
4.3 No Solicitation. Medicus and its subsidiaries and the officers,
directors, employees or other agents of Medicus and its subsidiaries will not,
directly or indirectly, (i) take any action to solicit, initiate or encourage
any Takeover Proposal (defined below) or (ii) subject to the terms of the
immediately following sentence, engage in negotiations with, or disclose any
nonpublic information relating to Medicus or any of it subsidiaries to, or
afford access to the properties, books or records of Medicus or any of its
subsidiaries to, any person that has advised Medicus that it may be considering
making, or that has made, a Takeover Proposal; provided, however, that nothing
herein shall prohibit Medicus' Board of Directors from taking and disclosing to
Medicus' stockholders a position with respect to a tender offer pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange Act. Notwithstanding the
immediately preceding sentence, if an unsolicited Takeover Proposal, or an
unsolicited written expression of interest that can reasonably be expected to
lead to a Takeover Proposal, shall be received by the Board of Directors of
Medicus, then, to the extent the Board of Directors of Medicus believes in good
faith (after consultation with its financial advisor) that such Takeover
Proposal would, if consummated, result in a transaction more favorable to
Medicus' stockholders from a financial point of view than the transaction
contemplated by the Agreement (any such more favorable Takeover Proposal being
referred to in this Agreement as a "Superior Proposal") and the Board of
Directors of Medicus determines in good faith after consultation with outside
legal counsel that it is necessary for the Board of Directors of Medicus to
comply with its fiduciary duties to stockholders under applicable law, Medicus
and its officers, directors, employees, investment bankers, financial advisors,
attorneys, accountants and other representatives retained by it may furnish in
connection therewith information and take such other actions as are consistent
with the fiduciary obligations of Medicus' Board of Directors, and such actions
shall not be considered a breach of this Section 4.3 or any other provisions of
this Agreement, provided that in each such event Medicus notifies QuadraMed of
such determination by the Medicus Board of Directors and provides QuadraMed with
a true and complete copy of the Superior Proposal received from such third
party, if the Superior Proposal is in writing, or a complete written summary
thereof, if it is not in writing, and provides QuadraMed with all documents
containing or referring to non-public information of Medicus that are supplied
to such third party; provided further, that (A) the Board of Directors of
Medicus has determined, with the advice of Medicus' investment bankers, that
such third party is capable of making a Superior Proposal upon satisfactory
completion of such third party's review of the information supplied by Medicus,
(B) the third party has stated that it intends to make a Superior Proposal, (C)
Medicus may not provide any non-public
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information to any such third party if it has not prior to the date thereof
provided such information to QuadraMed or QuadraMed's representatives, (D)
Medicus notifies QuadraMed in advance of any disclosure of non-public
information to any such third party, with a description of the information
proposed to be disclosed, and (E) Medicus provides such non-public information
pursuant to a non-disclosure agreement at least as restrictive as the
Confidentiality Agreement (as defined in Section 5.4). Medicus will promptly
notify QuadraMed after receipt of any Takeover Proposal or any notice that any
person is considering making a Takeover Proposal or any request for non-public
information relating to Medicus or any of its subsidiaries or for access to the
properties, books or records of Medicus or any of its subsidiaries by any person
that has advised Medicus that it may be considering making, or that has made, a
Takeover Proposal and will keep QuadraMed fully informed of the status and
details of any such Takeover Proposal notice, request or any correspondence or
communications related thereto and shall provide QuadraMed with a true and
complete copy of such Takeover Proposal notice or request or correspondence or
communications related thereto, if it is in writing, or a complete written
summary thereof, if it is not in writing. For purposes of this Agreement,
"Takeover Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving Medicus or any of
its subsidiaries or the acquisition of any significant equity interest in, or a
significant portion of the assets of, Medicus or any of its subsidiaries, other
than the transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, Medicus and QuadraMed shall
prepare, and Medicus shall file with the SEC, preliminary proxy materials
relating to the approval of the Merger and the transactions contemplated hereby
by the stockholders of Medicus and, as promptly as practicable following receipt
of SEC comments thereon, QuadraMed shall file with the SEC a Registration
Statement on Form S-4 (or such other or successor form as shall be appropriate),
which complies in form with applicable SEC requirements and shall use all
reasonable efforts to cause the Registration Statement to become effective as
soon thereafter as practicable. Subject to the provisions of Section 4.3, the
Proxy Statement shall include the recommendation of the Board of Directors of
Medicus in favor of the Merger; provided that such recommendation may not be
included or may be withdrawn if previously included if Medicus' Board of
Directors believes in good faith that a Superior Proposal has been made and,
upon written advice of its outside legal counsel, shall determine that to
include such recommendation or not withdraw such recommendation if previously
included would constitute a breach of the Board's fiduciary duty under
applicable law.
5.2 Meeting of Stockholders.
(a) Medicus shall promptly after the date hereof take all action necessary
in accordance with the DGCL and its Certificate of Incorporation and Bylaws to
convene the Medicus Stockholders Meeting within 45 days of the Registration
Statement being declared effective by the SEC. Medicus shall consult with
QuadraMed regarding the date of the Medicus Stockholders Meeting and use all
reasonable efforts and shall not postpone or adjourn (other than for the absence
of a quorum) the Medicus Stockholders Meeting without the consent of QuadraMed.
Subject to Section 5.1, Medicus shall use its best efforts to solicit from
stockholders of Medicus proxies in favor of the Merger and shall take all other
action necessary or advisable to secure the vote or consent of stockholders
required to effect the Merger.
(b) QuadraMed shall vote or cause to be voted all shares of Medicus Common
Stock owned by QuadraMed in favor of the Merger.
5.3 Access to Information.
(a) Medicus shall afford QuadraMed and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Medicus' and its subsidiaries'
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of Medicus and its
subsidiaries as QuadraMed may reasonably request.
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Medicus agrees to provide to QuadraMed and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
QuadraMed shall afford Medicus and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of QuadraMed's and its
subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of
QuadraMed and its subsidiaries as Medicus may reasonably request. QuadraMed
agrees to provide to Medicus and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of QuadraMed and Medicus shall confer on a regular and
frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.4 Confidentiality. The parties acknowledge that each of QuadraMed and
Medicus has previously executed a non-disclosure agreement (the "Confidentiality
Agreement"), which Confidentiality Agreement shall continue in full force and
effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement,
QuadraMed and Medicus shall consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASD.
5.6 Consents; Cooperation. Each of QuadraMed and Medicus shall use its
best efforts to obtain all necessary consents, waivers and approvals under any
of its material contracts in connection with the Merger for the assignment
thereof or otherwise.
5.7 Affiliate Agreements. Schedule 5.7 sets forth those persons who may be
deemed "Affiliates" of Medicus within the meaning of Rule 145 promulgated under
the Securities Act ("Rule 145"). Medicus shall provide QuadraMed such
information and documents as QuadraMed shall reasonably request for purposes of
reviewing such list. Medicus shall use its best efforts to deliver or cause to
be delivered to QuadraMed, concurrently with the execution of this Agreement
(and in each case prior to the Effective Time) from each of the Affiliates of
Medicus, an executed Affiliate Agreement in the form attached hereto as Exhibit
A. QuadraMed and Merger Sub shall be entitled to place appropriate legends on
the certificates evidencing any QuadraMed Common Stock to be received by such
Affiliates of Medicus pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for QuadraMed
Common Stock, consistent with the terms of such Affiliates Agreements.
5.8 [Intentionally Omitted].
5.9 Legal Requirements. Each of QuadraMed, Merger Sub and Medicus will,
and will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
them with respect to the consummation of the transactions contemplated by this
Agreement and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed upon such
other party in connection with the consummation of the transactions contemplated
by this Agreement and will take all reasonable actions necessary to obtain (and
will cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity or other person, required to be obtained or made
in connection with the taking of any action contemplated by this Agreement.
5.10 Blue Sky Laws. QuadraMed shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the QuadraMed
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Common Stock in connection with the Merger. Medicus shall use its best efforts
to assist QuadraMed as may be necessary to comply with the securities and blue
sky laws of all jurisdictions which are applicable in connection with the
issuance of QuadraMed Common Stock in connection with the Merger.
5.11 Treatment of Employee Benefit Plans and Outstanding Warrants.
(a) At the Effective Time, the Medicus Stock Option Plans and each
outstanding option to purchase shares of Medicus Common Stock under the Medicus
Stock Option Plans, whether vested or unvested, the Jelinek Warrants and the
TriHealth Warrant will be assumed by QuadraMed. Schedule 5.11 hereto sets forth
a true and complete list as of the date hereof of all holders of outstanding
options under the Medicus Stock Option Plans, including the number of shares of
Medicus capital stock subject to each such option, the exercise or vesting
schedule, the exercise price per share and the term of each such option. On the
Closing Date, Medicus shall deliver to QuadraMed an updated Schedule 5.11 hereto
current as of such date.
(b) Each such option so assumed by QuadraMed under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Medicus Stock Option Plans, and each of the Jelinek Warrants and the
TriHealth Warrant shall continue to have, and be subject to, the same terms and
conditions set forth therein, immediately prior to the Effective Time, except
that (i) each such option and each such warrant will be exercisable for that
number of whole shares of QuadraMed Common Stock equal to the product of the
number of shares of Medicus Common Stock that were issuable upon exercise of
such option or warrant immediately prior to the Effective Time multiplied by
0.3565 and rounded down to the nearest whole number of shares of QuadraMed
Common Stock, and (ii) the per share exercise price for the shares of QuadraMed
Common Stock issuable upon exercise of such assumed option or warrant will be
equal to the quotient determined by dividing the exercise price per share of
Medicus Common Stock at which such option or warrant was exercisable immediately
prior to the Effective Time by 0.3565, rounded up to the nearest whole cent.
(c) Consistent with the terms of the Medicus Stock Option Plans and the
documents governing the outstanding options under those Plans, the Merger will
not terminate any of the outstanding options under such Plans or accelerate the
exercisability or vesting of such options or the shares of QuadraMed Common
Stock which will be subject to those options upon the QuadraMed's assumption of
the options in the Merger. Within 10 business days after the Effective Time,
QuadraMed will issue to each person who, immediately prior to the Effective Time
was a holder of an outstanding option under the Medicus Stock Option Plans a
document in form and substance satisfactory to Medicus evidencing the foregoing
assumption of such option by QuadraMed.
(d) For purposes of QuadraMed employee benefit plans, Medicus employees
will receive full credit for years of service with Medicus.
5.12 Letter of QuadraMed's and Medicus' Accountants.
(a) QuadraMed shall use all reasonable efforts to cause to be delivered to
Medicus a Procedures Letter of QuadraMed's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to Medicus, in form reasonably satisfactory
to Medicus and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
(b) Medicus shall use all reasonable efforts to cause to be delivered to
QuadraMed a Procedures Letter of Medicus' independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to QuadraMed, in form reasonably
satisfactory to QuadraMed and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
5.13 Form S-8. QuadraMed agrees to file, no later than thirty (30) days
after the Closing, a registration statement on Form S-8 covering the shares of
QuadraMed Common Stock issuable pursuant to outstanding options under the
Medicus Stock Option Plans assumed by QuadraMed and the shares of
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QuadraMed Common Stock issuable pursuant to the Jelinek Warrants. Medicus shall
cooperate with and assist QuadraMed in the preparation of such registration
statement.
5.14 Listing of Additional Shares. Prior to the Effective Time, QuadraMed
shall file with the Nasdaq National Market a Notification Form for Listing of
Additional Shares with respect to the shares referred to in Section 6.1(e).
5.15 Nasdaq Quotation. Medicus and QuadraMed agree to continue the
quotation of Medicus Common Stock and QuadraMed Common Stock, respectively, on
the Nasdaq National Market during the term of the Agreement.
5.16 Indemnification.
(a) After the Effective Time, QuadraMed will, and will cause the Surviving
Corporation to, indemnify and hold harmless the present and former officers,
directors, employees and agents of Medicus (the "Indemnified Parties") in
respect of acts or omissions occurring on or prior to the Effective Time to the
extent permitted by law and to the extent provided under Medicus' Certificate of
Incorporation and Bylaws or any indemnification agreement with Medicus' officers
and directors to which Medicus is a party, in each case in effect on the date
hereof; provided, however, that such indemnification shall be subject to any
limitation imposed from time to time under applicable law. Without limitation of
the foregoing, in the event any such Indemnified Party is or becomes involved in
any capacity in any action, proceeding or investigation in connection with any
matter relating to this Agreement or the transactions contemplated hereby
occurring on or prior to the Effective Time, QuadraMed shall, or shall cause the
Surviving Corporation to, pay as incurred such Indemnified Party's reasonable
legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith to the extent permitted by law and
to the extent provided under Medicus' Certificate of Incorporation and Bylaws or
the indemnification agreement with such Indemnified Party.
(b) For two years after the Effective Time, QuadraMed will, or will cause
the Surviving Corporation to, use its best efforts to provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
prior to the Effective Time covering each such person currently covered by
Medicus' officers' and directors' liability insurance policy on terms
substantially similar to those of such policy in effect on the date hereof ;
provided, however, that in satisfying its obligation under this Section 5.16,
QuadraMed shall not be obligated to, or to cause the Surviving Corporation to,
pay premiums in excess of 150% of the amount per annum Medicus paid in its last
full fiscal year, which amount has been disclosed to QuadraMed, and if the
Surviving Corporation is unable to obtain the insurance required by this Section
5.16, it shall obtain as much comparable insurance as possible for an annual
premium equal to such maximum amount.
(c) To the extent there is any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time) against an
Indemnified Party that arises out of or pertains to any action or omission in
his or her capacity as a director, officer, employee, fiduciary or agent of
Medicus occurring prior to the Effective Time, or arises out of or pertains to
the transactions contemplated by this Agreement for a period of two years after
the Effective Time (whether arising before or after the Effective Time), such
Indemnified Party shall be entitled to be represented by counsel and following
the Effective Time (i) any counsel retained by the Indemnified Parties shall be
reasonably satisfactory to the Surviving Corporation and QuadraMed, (ii) the
Surviving Corporation and QuadraMed shall pay the reasonable fees and expenses
of such counsel, promptly after statements therefor are received and (iii) the
Surviving Corporation and QuadraMed will cooperate in the defense of any such
matter; provided, however, that neither the Surviving Corporation nor QuadraMed
shall be liable for any settlement effected without its written consent (which
consent shall not be unreasonably withheld); and provided, further, however,
that in the event that any claim or claim for indemnification are asserted or
made within such two-year period, all rights to indemnification in respect of
any such claim or claims shall continue until the disposition of any and all
such claims. The Indemnified Parties as a group may retain only one law firm (in
addition to local counsel) to represent them with respect to any single action
unless there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any tow or more Indemnified
Parties.
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(d) The provisions of this Section 5.16 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
5.17 Reasonable Best Efforts and Further Assurances. Each of the parties
to this Agreement shall use its reasonable best efforts to effectuate the
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement. Each party hereto, at the reasonable
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the holders of a majority of the shares of
Medicus Common Stock outstanding as of the record date set for the Medicus
Stockholders Meeting.
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
by the SEC; and all requests for additional information on the part of the
SEC shall have been complied with to the reasonable satisfaction of the
parties hereto.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal. In the event an injunction or other order shall have been
issued, each party agrees to use its reasonable diligent efforts to have
such injunction or other order lifted.
(d) Governmental Approval. QuadraMed, Medicus and Merger Sub and their
respective subsidiaries shall have timely obtained from each Governmental
Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the several
transactions contemplated hereby, including such approvals, waivers and
consents as may be required under the Securities Act and under state Blue
Sky laws.
(e) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of QuadraMed Common Stock issuable upon conversion of the
Medicus Common Stock in the Merger and upon exercise of the options under
the Medicus Stock Option Plans assumed by QuadraMed shall have been made.
6.2 Additional Conditions to Obligations of Medicus. The obligations of
Medicus to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by Medicus:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of QuadraMed and Merger Sub in this Agreement shall be true
and correct in all material respects (except
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for such representations and warranties that are qualified by their terms
by a reference to materiality which representations and warranties as so
qualified shall be true in all respects) on and as of the Effective Time as
though such representations and warranties were made on and as of such time
and (ii) QuadraMed and Merger Sub shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by them as of the
Effective Time.
(b) Certificate of QuadraMed. Medicus shall have been provided with a
certificate executed on behalf of QuadraMed by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by QuadraMed and Merger
Sub under this Agreement are true and complete in all material respects;
and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by QuadraMed and Merger Sub on or before such date have
been so performed in all material respects.
(c) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of QuadraMed and its
subsidiaries, taken as a whole.
(d) Third Party Consents. Medicus shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of QuadraMed or any of its subsidiaries or
otherwise.
(e) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting QuadraMed's business following
the Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
6.3 Additional Conditions to the Obligations of QuadraMed and Merger
Sub. The obligations of QuadraMed and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by QuadraMed:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of Medicus in this Agreement shall be true and correct in
all material respects (except for such representations and warranties that
are qualified by their terms by a reference to materiality, which
representations and warranties as so qualified shall be true in all
respects) on and as of the Effective Time as though such representations
and warranties were made on and as of such time and (ii) Medicus shall have
performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of Medicus. QuadraMed shall have been provided with a
certificate executed on behalf of Medicus by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Medicus under this
Agreement are true and complete in all material respects; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Medicus on or before such date have been so performed in
all material respects.
(c) Third Party Consents. QuadraMed shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of Medicus or any of its subsidiaries or
otherwise.
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(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting QuadraMed's conduct or
operation of the business of Medicus and its subsidiaries, following the
Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
(e) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Medicus and its
subsidiaries, taken as a whole.
(f) Affiliate Agreements. QuadraMed shall have received from each of
the Affiliates of Medicus an executed Affiliate Agreement in substantially
the form attached hereto as Exhibit A.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Medicus, this Agreement may be terminated:
(a) by mutual consent of QuadraMed and Medicus;
(b) by either QuadraMed or Medicus, if, without fault of the
terminating party, the Closing shall not have occurred on or before May 1,
1998 (or such later date as may be agreed upon in writing by the parties
hereto);
(c) by QuadraMed, if (i) Medicus shall breach any of its
representations, warranties or obligations hereunder and such breach shall
not have been cured within ten business days of receipt by Medicus of
written notice of such breach or (ii) the Board of Directors of Medicus
shall have withdrawn or modified its recommendation of this Agreement or
the Merger in a manner adverse to QuadraMed or shall have resolved to do
any of the foregoing;
(d) by Medicus, if QuadraMed shall breach any of its representations,
warranties or obligations hereunder and such breach shall not have been
cured within ten days following receipt by QuadraMed of written notice of
such breach;
(e) by either QuadraMed or Medicus if (i) any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and nonappealable or
(ii) if any required approval of the stockholders of Medicus shall not have
been obtained by reason of the failure to obtain the required vote upon a
vote held at a duly held meeting of stockholders or at any adjournment
thereof.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of QuadraMed, Merger Sub or
Medicus or their respective officers, directors, stockholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of Section 5.4 (Confidentiality),
Section 7.3 (Expenses) and this Section 7.2 shall remain in full force and
effect and survive any termination of this Agreement.
7.3 Expenses.
(a) Subject to subsection (b) of this Section 7.3, whether or not the
Merger is consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisers, accountants and legal
counsel) shall be paid by the party incurring such expense, except that expenses
incurred in connection with printing the Proxy
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Materials and the Registration Statement, registration and filing fees incurred
in connection with the Registration Statement, the Proxy Materials and the
listing of additional shares pursuant to Section 6.1(e) and fees, costs and
expenses associated with compliance with applicable state securities laws in
connection with the Merger shall be paid by QuadraMed.
(b) In the event that (i) QuadraMed shall terminate this Agreement pursuant
to Section 7.1(c) or (ii) QuadraMed shall terminate this Agreement pursuant to
Section 7.1(e)(ii) (but only in the event that all of the shares owned by
QuadraMed are voted in favor of the Merger), Medicus shall promptly reimburse
QuadraMed for all of the out-of-pocket costs and expenses incurred by QuadraMed
in connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
7.4 Amendment. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
Medicus or Merger Sub shall not (i) alter or change the amount or kind of
consideration to be received on conversion of the Medicus Common Stock, (ii)
alter or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of the Agreement if such alteration or change would
adversely affect the holders of Medicus Common Stock or Merger Sub Common Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival at Effective Time. The representations, warranties and
agreements set forth in this Agreement shall terminate at the Effective Time,
except that the agreements set forth in Article I, Section 5.4
(Confidentiality), 5.7 (Affiliates), 5.11 (Employee Benefit Plans), 5.13 (Form
S-8), 5.17 (Reasonable Best Efforts and Further Assurances), 7.3 (Expenses), 7.4
(Amendment), and this Article VIII shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to QuadraMed or Merger Sub, to:
QuadraMed Corporation
80 E. Sir Francis Drake Blvd., Suite 2A
Larkspur, CA 94939
Attention: Keith M. Roberts, Esq.
Vice President and General Counsel
Facsimile No.: (415) 464-3953
Telephone No.: (415) 461-7725
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with a copy to:
Brobeck, Phleger & Harrison LLP
One Market, Spear Tower
San Francisco, CA 94105
Attention: Scott D. Lester, Esq.
Facsimile No.: (415) 442-1010
Telephone No.: (415) 442-0900
(b) if to Medicus, to:
Medicus Systems Corporation
One Rotary Center
Suite 1111
Evanston, Illinois 60201
Attention: Patrick Sommers, President and CEO
Facsimile No: (847) 570-7642
Telephone No.: (847) 570-7503
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207
Attention: William G. Brown, Esq.
Facsimile No.: (312) 372-2098
Telephone No.: (312) 372-1121
8.3 Interpretation. When a reference is made in this Agreement to Exhibits
or Schedules, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The phrase "made available" in this Agreement shall
mean that the information referred to has been made available if requested by
the party to whom such information is to be made available. The phrases "the
date of this Agreement", "the date hereof", and terms of similar import, unless
the context otherwise requires, shall be deemed to refer to November 9, 1997.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Medicus Disclosure Schedule and the QuadraMed
Disclosure Schedule (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, except for the Confidentiality Agreement, which shall
continue in full force and effect, and shall survive any termination of this
Agreement or the Closing, in accordance with its terms; (b) are not intended to
confer upon any other person any rights or remedies hereunder, except as set
forth in Sections 1.6(a)-(c) and (f), 1.7-1.9, 5.11 and 5.14; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided.
8.6 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
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Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware. Each of the parties hereto
irrevocably consents to the exclusive jurisdiction of any court located within
the State of Delaware in connection with any matter based upon or arising out of
this Agreement or the matters contemplated herein, agrees that process may be
served upon them in any manner authorized by the laws of the State of Delaware
for such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
IN WITNESS WHEREOF, Medicus and QuadraMed have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the date first written above.
MEDICUS SYSTEMS CORPORATION
By /s/ PATRICK C. SOMMERS
-------------------------------------
Name: Patrick C. Sommers
Title: CEO
QUADRAMED CORPORATION
By /s/ JOHN V. CRACCHIOLO
-------------------------------------
Name: John V. Cracchiolo
Title: Chief Financial Officer
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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ANNEX B
OPINION OF VOLPE BROWN WHELAN & COMPANY, LLC
VOLPE BROWN WHELAN & COMPANY, LLC
INVESTMENT BANKERS
One Maritime Plaza, San Francisco, CA 94111
(415) 956-8120 FAX (415) 986-6754
December 30, 1997
The Board of Directors
Medicus Systems Corporation
One Rotary Center
Suite 1111
Evanston, IL 60201
Members of the Board:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to the stockholders of Medicus Systems Corporation
("Medicus" or the "Company"), other than QuadraMed Corporation ("QuadraMed"), of
the consideration to be received by such holders pursuant to the Agreement and
Plan of Reorganization dated as of November 9, 1997 (the "Agreement") by and
among Medicus, QuadraMed and Medicus Acquisition Co., a wholly owned subsidiary
of QuadraMed ("Merger Sub").
The Agreement provides that (i) Merger Sub will be merged with and into
Medicus (the "Merger") and (ii) each outstanding share of common stock of
Medicus (the "Medicus Common Stock") will be converted into the right to
receive, at the option of each shareholder, either (x) $7.50 in cash, (y) 0.3125
shares, subject to adjustment as described in the Agreement, (the "Exchange
Ratio") of QuadraMed common stock ("QuadraMed Common Stock") or (z) any
combination of QuadraMed Common Stock and cash, subject to certain adjustments
and restrictions (the "Consideration"). It is our understanding that the
transaction will be accounted for as a purchase for financial reporting purposes
and the Consideration will be taxable to Medicus shareholders when received.
We understand that shortly after the execution of the Agreement, QuadraMed
acquired 56.7%, or 3,111,105 shares, of the outstanding capital stock of Medicus
through transactions with certain shareholders (the "Selling Shareholders"). We
further understand that QuadraMed paid for such shares $7.50 per share in cash
together with warrants entitling the Selling Shareholders to acquire 0.3125
shares of QuadraMed Common Stock for each share of Medicus Common Stock sold at
a price of $24.00 per share, subject to certain adjustments and restrictions.
For the purposes of formulating the Opinion, we have, among other things:
(i) Reviewed the Agreement and Plan of Reorganization dated as of
November 9, 1997 by and among QuadraMed and Medicus;
(ii) Discussed the terms of QuadraMed's acquisition of Resource Health
Partners, L.P. ("RHP") with QuadraMed management;
(iii) Interviewed management of Medicus and QuadraMed concerning the
business prospects, financial outlook and operating plans of each company
individually and combined;
(iv) Reviewed certain historical Medicus and QuadraMed, and certain
projected Medicus and QuadraMed (including RHP) financial statements and
other relevant financial and operating data of Medicus and QuadraMed
prepared by the respective company management teams;
(v) Reviewed the historical stock trading patterns of both QuadraMed
and Medicus and analyzed implied historical exchange ratios as well as the
premium of the Consideration in relation to historical Medicus stock
trading ranges;
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(vi) Reviewed the valuation of selected publicly-traded companies we
deemed comparable and relevant to the Merger;
(vii) Reviewed, to the extent publicly available, the financial terms
of selected merger and acquisition transactions that we deemed comparable
and relevant to the Merger;
(viii) Reviewed the relevant contribution each of Medicus and
QuadraMed is making to the combined company in terms of financial results
and compared the implied values resulting from this analysis with the
Consideration;
(ix) Performed a discounted cash flow analysis of Medicus as a
stand-alone entity based upon financial projections of Medicus management;
(x) Performed a pro forma financial impact analysis of the combined
entity, based upon financial projections provided by Medicus and QuadraMed;
and
(xi) Performed other such studies, analyses and inquiries and
considered other such information as we deemed relevant.
Volpe Brown Whelan & Company, LLC ("VBW&Co.") relied without independent
verification upon the accuracy and completeness of all of the financial,
accounting, legal, tax, operating and other information provided to VBW&Co. by
Medicus and QuadraMed and has relied upon the assurances of Medicus and
QuadraMed that all such information provided by them, respectively, is complete
and accurate in all material respects and that there is no additional material
information known to either of them that would make any of the information made
available to VBW&Co. either incomplete or misleading. Medicus has also retained
outside legal, accounting and tax advisors to advise on matters relating to the
Merger. Accordingly, VBW&Co. has relied on their advice and expresses no opinion
on such matters.
Although we were informed by Medicus of certain discussions by the
management of Medicus with third parties concerning possible business
combinations, we were not requested to consider, and we are expressing no
opinion as to, the relative merits of the Merger as compared to any alternative
business strategies that might exist for Medicus or the effect of any other
transaction in which Medicus might engage.
With respect to the projected financial data of Medicus and QuadraMed
(including RHP), all of which has been provided by the management of Medicus or
QuadraMed, as well as the combined business plan, VBW&Co. has relied upon
assurances of each company that such data has been prepared in good faith on a
reasonable basis reflecting the best currently available estimates and judgments
of Medicus and QuadraMed managements as to the future financial performance of
each company separately and as a combined company. Our Opinion is based, in
large part, on these projected financial data and estimates.
VBW&Co. is relying upon the information provided to it by Medicus and
QuadraMed for the purposes of rendering the Opinion. VBW&Co. expresses no
opinion and has made no investigation with respect to the validity, accuracy or
completeness of the information provided to it and does not warrant any
projections included in such information. Actual results that Medicus or
QuadraMed might achieve in the future as stand-alone entities or as a combined
company may vary materially from those used in VBW&Co.'s analysis.
VBW&Co. has assumed that the Merger will be consummated in accordance with
the terms of the Agreement and that no subsequent changes or amendments will be
made prior to closing. VBW&Co. has, furthermore, not made any independent
appraisals or valuations of any assets of Medicus or QuadraMed, nor has VBW&Co.
been furnished with any such appraisals or valuations. VBW&Co. has performed no
investigations relating to the representations and warranties made by Medicus or
QuadraMed, including representations with respect to intellectual property
rights and status of any litigation pending or threatened against either
company. While VBW&Co. believes that its review, as described herein, is an
adequate basis for the Opinion it has expressed, the Opinion is necessarily
based upon market, economic and other conditions that exist and can be evaluated
as of the date of the Opinion, and any change in such conditions would require a
re-evaluation of the Opinion.
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The Opinion addresses only the financial fairness of the Consideration to
the shareholders other than QuadraMed and does not address the relative merits
of the Merger and any alternatives to the Merger, the relative fairness of the
Consideration in comparison with the purchase price paid to the Selling
Shareholders, Medicus' decision to proceed with or the effect of the Merger, or
any other aspect of the Merger.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, we believe our analyses and the factors utilized in
such analysis must be considered as a whole and that considering any portion of
such analyses or factors, without considering all analyses and factors could
create a misleading or incomplete view of the process underlying the Opinion. In
our analyses, we made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond
Medicus' or QuadraMed's control and are not susceptible to accurate prediction.
No opinion is expressed herein as to the future trading price or range of prices
of any securities of QuadraMed issued prior to or in conjunction with the
Merger. Furthermore, the Opinion does not constitute a recommendation as to the
Board of Directors' decision on whether to support the Merger and recommend it
to Medicus' stockholders and does not constitute a recommendation to
shareholders as to whether to vote in favor of the Merger. The Opinion and
related materials have been prepared for the use and benefit of the Board of
Directors of Medicus and may not be used for any other purpose, except that this
opinion may be included in any filing which Medicus makes with the Securities
and Exchange Commission with respect to the Merger (and included in a proxy
statement related to the Merger).
As a customary part of its investment banking business, VBW&Co. engages in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its business, VBW&Co. and its affiliates may actively trade
the equity securities of Medicus or QuadraMed for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
As you are aware, VBW&Co. has been engaged by QuadraMed to provide
investment banking and financial advisory services to QuadraMed unrelated to the
Medicus transaction. To date no fees have been paid to VBW&Co. by QuadraMed. As
you are also aware, VBW&Co. has also been retained by RHP to provide financial
advice and a fairness opinion to RHP with respect to the acquisition of RHP by
QuadraMed. VBW&Co. will receive a fee for rendering its Opinion, no portion of
which is conditioned upon the Opinion being favorable.
Based upon and subject to the foregoing limitations and restrictions and
after considering such other matters as we deem relevant, it is our opinion
that, as of the date hereof, the Consideration in the Merger is fair, from a
financial point of view, to the stockholders of Medicus, other than QuadraMed.
Very truly yours,
VOLPE BROWN WHELAN & COMPANY, LLC
By: /s/ STEVEN PIPER
----------------------------------
Steven Piper
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ANNEX C
SECTION 262 OF DELAWARE GENERAL CORPORATION LAW
Appraisal Rights -- (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title.
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipt and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale
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of all or substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares of which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consent to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice shall be given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
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entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholder of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "[a] corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or Agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or Agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful." With
respect to derivative actions, Section 145(b) of the DGCL provides in relevant
part that "[a] corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
[by reason of his service in one of the capacities specified in the preceding
sentence] against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper."
Article 5 of Medicus' Amended and Restated Bylaws provides that Medicus
shall indemnify each person who is or was a director or executive officer of
Medicus to the full extent permitted by the DGCL. Such Article also provides
that Medicus may, but is not required to, indemnify its employees and agents
(other than directors and officers) to the extent and in the manner permitted by
the DGCL.
QuadraMed has entered into an indemnification agreement with each of its
directors and officers and intends to maintain insurance for the benefit of its
directors and officers insuring such persons against certain liabilities,
including liabilities under the securities laws.
See Item 22 of this Registration Statement regarding the position of the
Securities and Exchange Commission on indemnification for liabilities arising
under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
2.10: Agreement and Plan of Reorganization, dated as of November 9, 1997,
by and among QuadraMed Corporation and Medicus Systems Corporation
(Incorporated herein by reference from the exhibit with the same number
attached to QuadraMed's Current Report on Form 8-K, as filed with the
Commission on November 21, 1997).
(5) Opinion regarding legality.
5.1: Opinion of Brobeck, Phleger & Harrison LLP.*
II-1
<PAGE> 118
(23) Consents.
23.1: Consent of Arthur Andersen LLP
23.2: Consent of Price Waterhouse LLP
23.3: Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)*
(24) Power of Attorney.
24.1: Power of Attorney (included on the signature page hereto).
(99) Additional Exhibits.
99.1 Form of Proxy
99.2 Form of Election
99.3 Consent of Volpe Brown Whelan & Company, LLC*
- ---------------
* To be filed by Amendment.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
QuadraMed pursuant to the foregoing provisions, or otherwise, QuadraMed has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by QuadraMed of expenses incurred or
paid by a director, officer or controlling person of QuadraMed in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
QuadraMed will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
QuadraMed hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request;
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective;
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of its annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
II-2
<PAGE> 119
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415 will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act, Quadramed Corporation
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Larkspur, State of
California, on January 22, 1998.
QUADRAMED CORPORATION
By: /s/ JAMES D. DURHAM
------------------------------------
James D. Durham
Chairman of the Board, President
and Chief Executive Officer
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 one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement and to sign any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, and all post-effective amendments thereto, and to file the same,
with all exhibits thereto, and all 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 and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact and
agents, or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ---------------------------------- -------------------
<C> <S> <C>
/s/ JAMES D. DURHAM Chairman of the Board and January 22, 1998
- ------------------------------------------- Chief Executive Officer (Principal
James D. Durham Executive Officer)
/s/ JOHN V. CRACCHIOLO Vice President, Chief Financial January 22, 1998
- ------------------------------------------- Officer and Secretary (Principal
John V. Cracchiolo Financial and Accounting Officer)
/s/ JOHN H. AUSTIN Director January 22, 1998
- -------------------------------------------
John H. Austin, M.D.
/s/ ALBERT L. GREENE Director January 22, 1998
- -------------------------------------------
Albert L. Greene
Director
- -------------------------------------------
Kenneth E. Jones
/s/ THOMAS F. McNULTY Director January 22, 1998
- -------------------------------------------
Thomas F. McNulty
/s/ JOAN P. NEUSCHELER Director January 22, 1998
- -------------------------------------------
Joan P. Neuscheler
/s/ CORNELIUS T. RYAN Director January 22, 1998
- -------------------------------------------
Cornelius T. Ryan
</TABLE>
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<PAGE> 121
ANNEX D
================================================================================
UNITED STATES
SECURITIES 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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
COMMISSION FILE NO. 0-27614
MEDICUS SYSTEMS CORPORATION
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO.
36-4056769
ONE ROTARY CENTER, SUITE 1111
EVANSTON, ILLINOIS 60201
(847) 570-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 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 reports), 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 this Form 10-K. [ ]
As of August 21, 1997, there were 5,483,207 shares of common stock
outstanding, and the aggregate market value of the common stock (based upon the
August 21, 1997 closing sale price on the Nasdaq National Market) held by
non-affiliates was approximately $23,290,034.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on November 18, 1997 (Part III).
================================================================================
<PAGE> 122
PART I
ITEM 1. BUSINESS
GENERAL
Medicus Systems Corporation ("Medicus" or the "Company") develops, markets,
and supports a family of specialized integrated software products utilized by
healthcare financial administrators, physicians and nursing executives, health
information and other administrative departments to capture, structure and
analyze clinical, operational and financial information. Medicus' specialized
software applications and services allow these professionals to measure, monitor
and manage organizational performance and optimize outcomes. Many of these
products incorporate features that enable them to facilitate the exchange of
data with information systems used by other Medicus clients. Medicus also
provides product-related maintenance and support services. During the year, the
Company discontinued the line of business which managed the information systems
of healthcare delivery organizations.
Medicus' products are currently used by more than 1,200 clients. Clients
include hospitals, academic medical centers, managed care organizations,
community care networks, integrated health systems, primary care and
multi-specialty physician groups, government agencies, and other organizations.
Basis of Presentation
Prior to March 1, 1996, the Company's predecessor (the "Predecessor
Corporation") operated a software and related services business and a small
managed care business. In February 1995, the Predecessor Corporation adopted a
formal plan to discontinue its managed care business, transfer the assets and
liabilities of this business to a newly-formed subsidiary, and distribute the
shares of this newly-formed subsidiary to its stockholders. In November 1995,
following meetings with the Internal Revenue Service and in order to insure
qualification of the transaction as a tax-free spin-off, the form of the
transaction was changed. Instead of transferring the assets and liabilities of
its managed care business to a newly-formed subsidiary, the Predecessor
Corporation formed a new Delaware subsidiary, Medicus Systems Software, Inc., to
which it transferred all of its assets and liabilities excluding only the
defined assets and liabilities of its managed care business. In turn, the stock
of this newly-formed subsidiary was distributed on a share-for-share basis to
the stockholders of the Predecessor Corporation (the "Distribution"), the name
of the subsidiary was changed to Medicus Systems Corporation, and the name of
the Predecessor Corporation was changed to Managed Care Solutions, Inc. ("MCS").
Simultaneously, the outstanding stock of the Predecessor Corporation was split
in reverse one-for-three so that following the Distribution, the Predecessor
Corporation's stockholders owned one share of the Company (the successor, in
substance, to the Predecessor Corporation which owned all of the assets and was
liable for all obligations of the Predecessor Corporation except those
specifically related to the Predecessor Corporation's managed care business) and
one-third of a share of MCS for every share of the Predecessor Corporation
previously owned.
Although the Company is, in substance, the Predecessor Corporation's
successor, the financial statements of the Company have been prepared as if the
Company had operated as a free-standing entity for all the periods presented
(excluding certain incremental corporate expenses that would have been incurred
had it operated on a stand-alone basis). Accordingly, the financial statements
include those assets, liabilities, revenues and expenses directly attributable
to the Company's operations and exclude those specifically related to the
managed care business. The Company has adopted this presentation because the
Company believes that this presentation most fairly represents its financial
condition, results of operations and changes in stockholders' equity and cash
flows. The financial statements included herein for periods prior to the
Distribution do not necessarily reflect what the financial position and results
of operation of the Company would have been had it operated as a stand-alone
entity during the periods covered, and may not be indicative of future
operations or financial position.
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<PAGE> 123
Software Products and Services
Provider organizations are continuously challenged by purchasers to
demonstrate improvement toward optimal financial and clinical outcomes as they
compete for managed care contracts. Medicus' specialized products are designed
to capture, structure and analyze data in such a way as to assist providers in
optimizing the outcomes that are most important to buyers. Medicus focuses on
providing products in specialized market niches that are critical to the
information and decision support needs of healthcare providers. The Company
employs standard interface systems to accomplish the necessary integration with
existing transaction processing systems.
Clinical Data Systems (CDS)
CDS is an integrated encoding system and data repository that enables the
healthcare provider to classify, capture, validate, and analyze clinical data.
The system is a tool that implements a uniform clinical database to measure and
monitor patient, clinical and financial outcomes. This expert encoding system
aids in optimizing prospective payment reimbursement for both inpatient and
ambulatory care services. It captures and validates clinical indicators,
severity and risk factors as well as patient demographics data, diagnoses and
procedures. Clinical data forms the basis upon which (i) the healthcare provider
identifies cases for clinical appropriateness studies, (ii) the Joint Commission
on Accreditation of Healthcare Organizations (JCAHO), The National Committee on
Quality Assurance utilizing its Health Plan and Employer Data and Information
Set (HEDIS), and state agencies measure performance, and (iii) the health care
provider estimates service volumes and costs in competing for managed care
contracts. By validating data at the point of capture and linking it to a
Diagnosis Related Group (DRG), the clinical data system creates an accurate and
complete data repository that provides the information required to manage costs
and improve clinical effectiveness and service efficiency.
As of May 31, 1997, the Company had licensed CDS software for use by 600
hospitals and other users. These other users include the Health Care Financing
Administration (HCFA), several professional peer review organizations, the
American Hospital Association (AHA), and numerous consulting and auditing firms.
The CDS product line currently includes two integrated modules:
The WinCoder+ module is a Windows-based encoding tool released in 1995. The
WinCoder+ module supports integrated data encoding, editing and
diagnosis-related grouping for all patient types, including inpatient
admissions, emergency room admissions, referrals, and ambulatory admissions and
procedures. Utilizing "expert-system" logic, WinCoder+ delivers advice and
classification guidance to identify errors of omission in clinical documentation
in an effort to optimize Medicare and capitated reimbursement. The system also
captures reliable and consistent clinical data for both the financial and
clinical users. The WinCoder+ product includes a Clinical and Financial
Optimizer which uses "expert-system" logic to assist the user in identifying
errors of omission in clinical documentation, and proposes related codes or
other alternatives which may be applicable and result in more appropriate
reimbursement.
The WinCOLLECT module organizes and structures a uniform clinical data set
to describe a patient population, including its clinical and financial
characteristics, and to evaluate the quality and appropriateness of care.
WinCOLLECT is a data capture system that validates entries for internal
consistency at the point of collection. Because each organization has unique
requirements and is responding to volatile external forces, this module supports
user customization with user-defined tables and calculated fields. WinCOLLECT is
a core technology for the healthcare organization to support medical records,
quality assurance, physician credentialing, utilization review, discharge
planning, infection control and risk management functions. This module captures
the clinical data necessary to meet the external reporting requirements of
JCAHO, HCFA, professional review organizations, state data agencies and other
organizations.
The CDS products are licensed under non-exclusive perpetual licenses.
Leasing options are also offered. Total client fees for CDS products range from
$15,000 to $250,000 and are comprised of license fees charged per module and per
user, implementation, hardware and technical fees. At the time a license is
granted, Medicus generally enters into a one-year maintenance and support
agreement for an annual fee that is based
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<PAGE> 124
on a percentage of the then current license fee and which is renewable at then
current rates for successive one-year terms.
Decision Support Systems (DSS)
This division offers two lines of products, Enterprise Analyst and Resource
Case Management. As of May 31, 1997, Medicus had licensed its DSS software for
use by 150 hospital customers.
The Company recently introduced to the market the Enterprise Analyst -- the
next generation of Decision Support Systems to assist integrated healthcare
delivery systems in responding to the rapidly changing healthcare environment
via a powerful client/server architecture and one of the most comprehensive
functionalities available today.
The Enterprise Analyst is a fully integrated, enterprise wide decision
support system application designed to allow our customers to maximize all
components of value -- quality, outcomes and cost containment. With the
Enterprise Analyst, healthcare organizations capture, manage, and analyze
clinical and operational costs, case mix data, payer contracts, physician
profiles, resource utilization, and patient care outcomes data. The Enterprise
Analyst is comprised of three integrated modules:
Enterprise Costing allows a healthcare enterprise to measure, monitor and
compare costs across the continuum of care for all care settings. This product
allows healthcare managers to easily obtain the information needed to make
optimal decisions regarding resource allocation and cost containment. The system
supports flexible cost determination based on a range of methodologies including
micro-costing, engineered standards, relative value units, activity based
costing, and ratio of cost to charges.
Enterprise Case Mix and Contract Management (CM2) is a powerful, new
combination case mix and contract management system. CM2 features a fully
integrated clinical and financial database. The system is designed to analyze
clinical outcomes against key variables such as revenues, costs, severity,
physician to discover the techniques that result in desirable outcomes and lower
costs. CM2 is designed to calculate reimbursement based on payer contract terms,
track contractual allowances accurately to provide precise profitability
measures and variance analyses of payer contracts, generate payer and patient
letters, and provide a contract modeling capability that can handle any
reimbursement model for more accurate negotiations.
Enterprise Performance Measurement and Modeling (PMM) effectively
integrates strategic planning with the operational planning process across the
enterprise. PMM works in a distributed environment and provides a dynamic
statistics file for comprehensive flexible budgeting and financial modeling. The
system supports enterprise wide detailed wage and salary planning, financial
forecasting, cost allocation, contractual allowance determination, and
procedural rate setting.
Resource Case Management, a line of DSS products, provides case managers
and other personnel the ability to evaluate and manage patient care resources on
a daily basis. The Resource Case Management system is comprised of three
integrated modules each of which addresses a distinct and logical part of the
case management and analysis process:
The Pathway Generator module analyzes historical case data and generates
resource pathways.
The Pathway Monitor module tracks actual resource consumption and related
variation, reports performance, and assigns pathways to cases.
The Reimbursement module calculates expected reimbursement.
The DSS products are licensed under non-exclusive perpetual licenses. Total
client fees for DSS products range from $25,000 to $300,000, depending on the
size of the healthcare organization, and are comprised of license fees charged
for the specific modules that are licensed, along with implementation and
technical fees. At the time a license is granted, the Company generally enters
into a one-year maintenance and support agreement for an annual fee that is
typically based on a percentage of the then current license fee and which is
renewable at then current rates for successive one-year terms.
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Patient Focused Systems (PFS)
This division's main product is InterAct 2000, which is a modular system of
software tools and methodologies designed to manage patient care resource
utilization through workload measurement, staffing against budget, cost and
productivity reporting, and employee scheduling. As of May 31, 1997, PFS
software products were licensed to 450 healthcare organizations. InterAct 2000
includes two integrated modules:
The Workload/Productivity module incorporates a proprietary, research-based
workload measurement methodology applicable to all medical/surgical, mental
health, ambulatory, perinatal, and dialysis populations. This module uses an
organization's own financial and quality of care objectives to generate
assessments of workload and staffing needs against the department's resource
utilization budget. Workload/Productivity tracks direct care provider costs so
managers can understand and control variances in revenue, expenses and
productivity. It also provides data for comparing and benchmarking resource
utilization relative to similar institutions or departments.
Workload/Productivity enables the user to fulfill JCAHO patient care resource
management requirements.
The Personnel/Scheduler module creates balanced staff schedules based on a
specific scheduling algorithm and a set of user defined rules.
Personnel/Scheduler also maintains ongoing personnel records with available
interfaces to payroll and time and attendance systems.
The PFS products are licensed under non-exclusive perpetual licenses. Total
client fees for PFS products range from $20,000 to $100,000, depending on the
size of the healthcare organization, and are comprised of license fees charged
for the specific modules that are licensed along with implementation and
technical fees. At the time a license is granted, Medicus generally enters into
a one-year maintenance and support agreement for an annual fee that is based on
a percentage of the then current license fee and which is renewable at then
current rates for successive one-year terms.
Discontinued Operation
Medicus formerly offered information management services to operate all or
part of the information systems division of selected healthcare provider
organizations. These services were generally performed on the client's premises
by Medicus personnel that functioned as though they were the client's employees.
While the information systems management market presents several attractive
opportunities, it is dominated by many companies with significantly greater
financial and technical resources. As a result, price competition is strong and
sales cycles are traditionally much longer in this sector than in the Company's
core software and service product areas. Because of this, and the fact that
information systems management is not a strong fit with the Company's main focus
on healthcare decision support system opportunities, the Company decided to
discontinue this line of business. The Company will continue providing services
under its existing contract until May 31, 1998, the expiration date of the
contract.
Maintenance and Support Services
Medicus provides training and support services during client implementation
and thereafter, as required. Maintenance and support services include software
updates, enhancements and services which are purchased by substantially all of
the Company's clients under renewable annual contracts. The Company maintains
logging, notification, and follow-up procedures to track client problems
encountered in implementing and operating its products. It also conducts client
conferences to exchange ideas regarding product usage and product extensions.
Management believes that these conferences are valuable in gathering ideas for
future products as well as enhancements to the Company's current product line.
Recurring Revenue
The Company's recurring revenue (defined as revenue generated pursuant to a
multi-year contract or pursuant to an ongoing contract, such as the Company's
standard form of annual maintenance and technical support agreements, which
contemplate continued renewals) was $10.1 million, $9.4 million and $9.0 million
for the three fiscal years ended May 31, 1997, 1996 and 1995, respectively.
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<PAGE> 126
Backlog
As of May 31, 1997 and 1996, the Company's backlog (which consists of
signed contracts or purchase orders for products and services which are expected
to be realized as revenue over the next twelve months plus remaining revenue on
annual maintenance and support contracts) was approximately $9.2 million and
$8.1 million, respectively. Included in backlog is $4.2 million and $4.9 million
of deferred maintenance and support for the fiscal years ended May 31, 1997 and
1996, respectively.
Markets
The primary market for the Company's products and services includes
hospitals, integrated delivery systems and academic medical centers. Table I
below summarizes the Company's primary and secondary markets for its main
product lines and the number of clients that have been licensed to use each of
the Company's three main software products and services.
TABLE I
THE COMPANY'S MAJOR MARKETS
<TABLE>
<CAPTION>
PRODUCTS AND SERVICES PRIMARY MARKETS SECONDARY MARKETS
- ------------------------- -------------------------------- ------------------------------
<S> <C> <C>
Clinical Data Systems All hospitals -- more than 5,000 Physician group practices,
potential customers, of which ambulatory care facilities,
600 are clients governmental review
agencies and consulting firms
Decision Support Systems All hospitals -- more than 5,000 Managed care
potential customers, of which organizations and
150 are clients physician group practices
Patient Focused Systems.. Hospitals with more than Hospitals with fewer than
50 beds -- more than 3,850 50 beds, outpatient ambulatory
potential customers, of which care clinics, nursing homes
and
450 are clients mental health facilities
</TABLE>
As healthcare delivery systems and their respective information systems
have become more integrated, the Company has also placed an increasing emphasis
on the integration of its products by implementing a strategy focused on
upgrading its client base to new versions of its software and cross-selling
additional products to its more than 1,200 existing customers. Because many of
these clients use only one or two of the Company's products, priced between
$15,000 and $300,000, the Company believes this strategy presents an excellent
growth opportunity.
Market Environment
The shift of patient care delivery to less costly settings, such as
outpatient clinics and physician offices, has accelerated the consolidation
trend of healthcare delivery organizations. Employers and government purchasers
of healthcare services have dramatically shifted providers' financial incentives
by capping expenditures through various contract pricing mechanisms.
Additionally, these consumers are devising new, objective indicators for
measuring clinical performance. Healthcare delivery organizations have responded
by radically restructuring care delivery processes. To support these delivery
process changes, providers need access to better data and more information
analysis tools.
Successful healthcare organizations require new cost, profitability and
performance measurement systems to understand their patient populations and the
cost and outcomes of the care they provide. Market forces are significantly
altering the relationships among physicians, hospitals, employers and insurers
(private and government). New paradigms for care delivery, such as case
management, critical or clinical pathways and outcomes monitoring, require a
link between service costs and clinical outcomes. The demand for products such
as the Company's financial and clinical decision support products is growing
rapidly within the context of this increasingly competitive and price-sensitive
market.
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Competition
The healthcare decision support software and services market is highly
competitive. The Company competes with several firms in each of its market
niches, although no one firm competes directly in all niches in which the
Company offers products. Competing firms vary in size and in geographic
coverage. A number of them have greater financial and management resources than
the Company. The Company believes that the principal factors affecting
competition are product functionality, analytical methodologies, flexibility and
ease of use, product enhancements, reliability and quality of implementation and
technical support, documentation, size of installed client base, competitive
pricing, and corporate reputation. The Company believes that it competes
favorably in these areas.
Marketing and Sales
Medicus sells its products through its own direct sales organization. The
Company's sales force has historically been organized along product lines but is
being reorganized to sell the full range of the Company's products. Individual
product sales are made by sales personnel and managers. Large sales
opportunities are pursued by a team including a corporate officer and sales and
technical personnel. The Company's products are also marketed under agreements
with accounting firms, consultants and hospital alliances.
The Company establishes market presence by publishing articles, presenting
talks at professional meetings, assuming leadership positions in professional
organizations, participating in trade shows and advertising in trade magazines.
Prospective clients are identified through these and other methods including
direct mail, telemarketing, product seminars, and requests for proposals from
healthcare organizations.
Technology
The Company's software products, which operate on microcomputers in both a
standalone and network environment utilizing Windows NT, MS-DOS and UNIX
operating systems, are developed with the objective of providing efficient
operation, portability among mainstream hardware platforms and networks,
flexibility in supporting client needs, integrated modularity, and cost
effective support and enhancements. For this reason, VB, C, C++ and SmallTalk
programming languages are utilized for software development. Relational database
management systems for software products are SQL-compatible, with Oracle being
the Company's database system of choice. The support of industry standard
technologies as well as Company-developed proprietary development tools allow
effective and efficient product development and integration among current and
future products. The Company's experience with system interfaces and the
methodologies used for interfacing systems allows effective and rapid
connectivity of Company modules with other client systems.
Product Development
The software industry is characterized by rapid technological change and
the need for a continuing high level of expenditures for the development and
improvement of software products and services. Medicus' approach to designing
and developing successful products is market driven and based on working in
close collaboration with its clients. In developing its products, the Company
utilizes common software design and development tools and techniques.
In order to maintain and improve the market acceptance of its products and
services, the Company believes it must maintain its commitment to product
development and enhancement. For the three fiscal years ended May 31, 1997, 1996
and 1995, the Company spent $4.6 million, $4.1 million and $4.1 million,
respectively, on research and development, representing 56%, 39% and 30% of
software products and services revenue. These expenditures include expensed,
capitalized and client-funded research and development spending.
As of May 31, 1997, the Company employed 40 professional computer
programmers and technical personnel. Most of the Company's technical personnel
are involved, at different times and in varying degrees, in product development
and enhancement.
7
<PAGE> 128
Product Protection
The Company owns various trademarks and servicemarks, including the
federally registered servicemark "Medicus." It does not own any patents or
registered copyrights. The Company believes that patent and copyright
protection, even if available, are less important in its industry than
innovative software engineering skills, technological and engineering experience
and marketing capabilities. The Company relies largely upon its license
agreements with clients and its own security systems, confidentiality procedures
and employee nondisclosure agreements to maintain the trade secrecy of its
products. While the enforceability of such agreements cannot be assured, the
Company believes that they provide a deterrent to unauthorized use of the
Company's proprietary information.
Employees
As of May 31, 1997, the Company employed 161 persons, of whom 65 were based
at the Company's Evanston, IL corporate offices, 45 were based at the Company's
Alameda, CA office, 16 were based at the Company's Chesterfield, MO office, and
35 were based at various other sales and service centers.
ITEM 2. PROPERTIES
The Company's principal office is located in leased space in Evanston
containing approximately 23,200 square feet of space. The lease expires on June
30, 2006. The annual rent for fiscal 1998 for this space is $468,000.
The Company also leases space for offices in Alameda, CA and Chesterfield,
MO. The leases for these two facilities expire on October 31, 1999 and April 30,
1998, respectively, and have an aggregate annual rent of $340,000 for fiscal
1998.
ITEM 3. LEGAL PROCEEDINGS
On July 11, 1997, St. Joseph Hospital filed a lawsuit, St. Joseph Hospital
v. Medicus Systems Corporation, File No. 97-36574, in the District Court of
Harris County, Texas. The Company accepted service of the complaint on August
12, 1997. The complaint alleges primarily breach of a contract to provide case
management software, and seeks unspecified damages, including attorney's fees.
The Company vigorously denies any liability, and intends to file its answer
denying the plaintiff's claims prior to September 8, 1997, the date such answer
is due. The chief executive officers of the Company and the plaintiff have
recently met to discuss the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during
the Medicus Systems Corporation Annual Meeting of Stockholders held March 19,
1997:
<TABLE>
<CAPTION>
VOTES CAST AUTHORITY
DESCRIPTION OF MATTER FOR WITHHELD
- ---------------------------------------------------------- ---------- --------
<S> <C> <C> <C>
1. Election of Directors
William G. Brown.................................... 6,134,711 160,232
Jon E.M. Jacoby..................................... 6,134,897 160,046
Richard C. Jelinek.................................. 6,134,897 160,046
John P. Kunz........................................ 6,134,897 160,046
Risa Lavizzo-Mourey................................. 6,134,897 160,046
Walter J. McNerney.................................. 6,134,797 160,146
Gail L. Warden...................................... 6,134,897 160,046
</TABLE>
8
<PAGE> 129
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST BROKER
FOR AGAINST WITHHELD NON VOTES
---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
2. Proposal to approve the Company's 1996 C.E.O.
Replacement Stock Option Plan...................... 3,972,182 309,015 87,477 1,926,269
3. Proposal to approve the Company's 1996 C.E.O.
Special Stock Option Plan.......................... 4,046,681 251,180 89,168 1,907,914
4. Proposal to approve the amendments to and
restatement of the Company's 1989, 1991, 1993, 1993
Performance and 1994 Stock Option Plans............ 5,878,995 311,162 16,096 88,690
5. Proposal to approve the Company's 1997 Employee
Stock Option and Restricted Stock Plan............. 3,714,827 754,942 12,513 1,812,661
6. Proposal to approve agreements pursuant to which
the Company would repurchase Common Stock and
Voting Preferred Stock from Richard C. Jelinek..... 4,304,924 43,168 20,583 1,926,268
</TABLE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under
the symbol "MECS". Trading commenced March 1, 1996 as a result of the
Distribution.
The following table sets forth, for the periods indicated, the high and low
reported sale prices for the common stock as reported on the Nasdaq National
Market since the Distribution on March 1, 1996.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR 1996
Fourth Quarter............................................. $9.00 $5.25
FISCAL YEAR 1997
First Quarter.............................................. 6.50 4.75
Second Quarter............................................. 6.31 4.50
Third Quarter.............................................. 7.50 4.38
Fourth Quarter............................................. 6.50 5.25
</TABLE>
There were 185 holders of record and approximately 2,160 beneficial holders
of the Company's common stock as of August 21, 1997.
The Predecessor Corporation (prior to March 1, 1996) and the Company
(beginning March 1, 1996) declared quarterly dividends of $0.03 per share in
each of the quarters in fiscal years 1995 and 1996. The Board of Directors of
the Company has determined not to pay dividends on the common stock for the
foreseeable future.
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek
and a trust of which Mr. Jelinek is a beneficiary (the "Trust") one million
shares of Common Stock and 500 shares of Voting Preferred Stock. Also, Mr.
Jelinek agreed to resign as Chairman and agreed, among other things, not to
attempt to seek voting control of the Company for a period of five years. (Mr.
Jelinek continues to serve as a Director.) In exchange, the Company agreed to
pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0 million in 8%
two-year promissory notes, and to issue to Mr. Jelinek and the Trust 400,000
five-year warrants to purchase Common Stock at $8.00 per share. The Company's
Board of Directors approved the Agreement on January 2, 1997, and the Company's
stockholders approved the Agreement at the Annual Meeting of Stockholders on
March 19, 1997. Neither the warrants nor the shares of Common Stock issuable
upon exercise of the warrants were registered under the Securities Act of 1933,
pursuant to the exemption contained in Section 4(2) of that Act.
9
<PAGE> 130
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
financial statements of the Company and the Report on Form 10 filed on January
25, 1996. The financial statements for each of the years in the five-year period
ended May 31, 1997 have been audited by Price Warehouse LLP, independent
accountants. Revenues and operating income (loss) have been restated to exclude
results from the Company's discontinued operation. Also, the assets and
liabilities related to this separate line of business are presented as net
assets of discontinued operations on the 1997 and 1996 Balance Sheet. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Company's Financial Statements and Notes.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues...................... $18,269,700 $19,794,179 $22,507,267 $21,336,870 $18,140,323
Operating income (loss)....... (7,355,865) (7,444,704) 3,540,262 4,379,146 3,225,905
Net income (loss)............. (4,220,018) (3,725,991) 3,024,493 3,224,711 2,116,869
Loss per common share*.......... $ (0.70) -- -- -- --
Pro forma earnings (loss) per
common share*................. -- $ (0.57) $ 0.45 $ 0.51 $ 0.39
Balance Sheet:
Working capital............... $ 2,090,534 $12,627,354 $17,149,499 $21,983,507 $ 9,411,327
Total assets.................. 22,848,672 27,688,565 30,881,842 35,509,776 17,804,670
Stockholders' equity.......... 9,501,609 18,201,237 22,304,371 25,574,678 11,460,792
</TABLE>
- ---------------
* Loss per common share and pro forma earnings (loss) per common share are based
upon the actual capital structure of the Company since March 1, 1996, and the
capital structure of the Predecessor Corporation prior to March 1, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This report contains statements that may be considered forward-looking,
such as the discussion of the Company's strategic goals, new products and cash
flows. These statements speak of the Company's plans, goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements because the realization of those
results is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed in
more detail below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and under "Item 1 -- Business." All
forward-looking statements included in this document are based upon information
presently available, and the Company assumes no obligation to update any
forward-looking statement.
10
<PAGE> 131
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the percent of
revenue represented by certain line items in the Company's Statements of
Operations and (ii) the percentage change in each line item from the prior
period.
<TABLE>
<CAPTION>
PERCENT OF REVENUES PERCENTAGE
FOR THE YEARS ENDED MAY INCREASE (DECREASE)
31, -------------------
------------------------- 1996 TO 1995 TO
1997 1996 1995 1997 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Software products and services................. 44.6% 52.4% 60.0% (21.5)% (23.1)%
Maintenance and support services............... 55.4 47.6 40.0 7.4 4.5
----- ----- ----- ----- -----
100.0 100.0 100.0 (7.7) (12.1)
----- ----- ----- ----- -----
Costs and expenses:
Software products and services................. 36.0 37.5 30.5 (24.5) (5.5)
Maintenance and support services............... 50.4 59.1 48.5 (8.4) 27.2
----- ----- ----- ----- -----
44.0 47.8 37.7 (15.0) 11.3
Marketing, general and administrative.......... 54.9 57.0 37.0 (11.1) 35.6
Research and development....................... 16.8 9.3 9.6 67.0 (14.6)
Restructuring charges.......................... 15.3 23.5 -- (39.9) N/M
Stock repurchase............................... 9.3 -- -- N/M N/M
----- ----- ----- ----- -----
140.3 137.6 84.3 (5.9) 43.6
----- ----- ----- ----- -----
Operating income (loss).......................... (40.3) (37.6) 15.7 (1.2) N/M
Interest and other income........................ 2.0 2.8 3.0 (33.9) (18.2)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes................................... (38.3) (34.8) 18.7 1.4 N/M
Provision for (benefit from) income taxes........ (14.1) (14.2) 6.7 (8.8) N/M
----- ----- ----- ----- -----
Income (loss) from continuing operations......... (24.2) (20.6) 12.0 8.5 N/M
Discontinued operation, net of taxes............. 1.1 1.8 1.4 (42.6) 7.1
----- ----- ----- ----- -----
Net income (loss)................................ (23.1)% (18.8)% 13.4% N/M N/M
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Shown as a percent of related revenues.
Operating revenues are derived from two sources: (1) license fees and the
related services for licensing the Company's software products; and (2)
maintenance and support services related to such software products.
COMPARISON OF FISCAL YEAR 1997 TO FISCAL YEAR 1996
Software Products and Services
Software products and services revenues decreased 22% to $8.1 million in
fiscal 1997 compared to $10.4 million in fiscal 1996. The decrease in revenues
was attributable, in part, to the delay in the release of certain new
Windows-based products, including the next generation of Decision Support
Systems. Also contributing to the decline was a continued lengthening of the
sales cycle, due to complex implementation plans related to the increasing
number of clients migrating from the DOS-based to Windows-based products,
principally in the CDS division. Additionally, the Company experienced a
continuing weakness in its existing markets and product lines, resulting from
price pressures and consolidations in the healthcare industry and in the managed
care environment. Costs and expenses for software products and services
decreased 25% to $2.9 million compared to $3.9 million in fiscal 1996. Costs and
expenses as a percentage of related revenue
11
<PAGE> 132
were 36% and 38% for fiscal 1997 and 1996, respectively. The decrease was due to
cost containment measures initiated by management and a lower volume of services
provided.
Maintenance and Support Services
Maintenance and support services revenues increased 7% to $10.1 million in
fiscal 1997 compared to $9.4 million in fiscal 1996. The increase was primarily
due to the continuing migration of clients to the Company's Windows-based
products, along with modest price increases for certain products. Costs and
expenses decreased 8% to $5.1 million in fiscal 1997 compared to $5.6 million in
fiscal 1996. Costs and expenses as a percentage of related revenue were 50% and
59% for fiscal 1997 and 1996, respectively. The decrease was primarily due to a
shift in focus of technical personnel from maintenance activities to development
activities to complete certain new Windows-based products.
Marketing, General and Administrative
Marketing, general and administrative expenses decreased 11% to $10.0
million in fiscal 1997 compared to $11.3 million in fiscal 1996. The decrease
primarily was due to higher expenses in the prior year related to the increase
in the provision for doubtful accounts, and expenses related to the separation
of the managed care business.
Research and Development
Total expenditures for research and development (including amounts
capitalized and funded by clients) increased 12% to $4.6 million in fiscal 1997
from $4.1 million in fiscal 1996. Research and development costs charged to
expense were $3.1 million in fiscal 1997 compared to $1.8 million in fiscal
1996. The Company did not obtain funding from clients under development service
agreements during the twelve months ended May 31, 1997, compared to $218,000
obtained in fiscal 1996, for its research and development efforts. These
development service agreements provide for retention of ownership of the
products developed by the Company. The Company capitalized software development
costs of $1.8 million in fiscal 1997 and $2.0 million in fiscal 1996 pursuant to
Statement of Financial Accounting Standards No. 86. Costs capitalized in fiscal
1997 were partially offset by $240,000 in provisions recorded as part of the
abandonment of certain development efforts. Total research and development
expenditures (including amounts capitalized and funded by clients) were 56% and
39% of software products and services revenues during fiscal 1997 and 1996,
respectively. During fiscal 1997, the Company's development efforts focused on
the Clinical Data Systems and Decision Support Systems product lines. During
fiscal 1996, the Company's development efforts focused on the Resource Case
Management System, Medicus Architecture (MACH 1), and the Decision Support
Systems product line.
Restructuring Charges
As part of an ongoing evaluation, the Company refined its strategic
planning process during fiscal 1997, and assessed continuing obligations
associated with the implementation of its strategic plan. The Company continued
the process of implementing its plans during 1997 and, following the stock
repurchase from its founder in the quarter ended February 28, 1997, recorded
$2.8 million in restructuring charges to complete its plan, including accruing
costs to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts. Specifically, the
Company decided to relocate operations for its Clinical Data Systems ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs associated with the relocation, which is expected to be completed during
the next nine months, included costs to cancel existing lease agreements, to
terminate employees and to write down abandoned assets. The Company did not
accrue estimated incremental costs of approximately $1.3 million associated with
the relocation. Such costs relate to the orderly transition of the division,
will be incurred during fiscal 1998 and are not accruable as part of the
restructuring charge under generally accepted accounting principles. In
addition, the Company increased it reserves for product line exit costs and
severance costs that relate to the remaining customers of the previously
discontinued Clinical Case Management Systems ("CCM") product line. Also,
certain product development efforts for the Company's Patient
12
<PAGE> 133
Focused Systems ("PFS") products were abandoned, and the associated development
costs, which had been previously capitalized, along with other related product
line exit costs were expensed. The Company has increased its allowance for
doubtful accounts due to the potential for certain additional billed and
unbilled accounts becoming uncollectible as a result of the decisions discussed
above. Direct costs and expenses of the restructuring were 15% of fiscal 1997
revenues.
Stock Repurchase
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary (the "Trust"), one million shares of
Common Stock and 500 shares of Voting Preferred Stock. Also, Mr. Jelinek agreed
to resign as Chairman and agreed, among other things, not to attempt to seek
voting control of the Company for a period of five years. In exchange, the
Company agreed to pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0
million in 8% two-year promissory notes, and to issue to Mr. Jelinek and the
Trust 400,000 five-year warrants to purchase Common Stock at $8.00 per share.
The Company's results of operations for the year ended May 31, 1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
Amounts in excess of the market price of the Common Stock and the exercise price
of the Voting Preferred Stock, aggregating $1,319,000, have been expensed. Also
included are $371,042 in investment banking and other professional fees incurred
to consummate the Agreement.
Interest and Other Income
Interest and other income decreased 34% to $367,000 in fiscal 1997 compared
to $556,000 in fiscal 1996, primarily due to lower average cash balances.
Income Taxes
The Company's effective income tax rate benefit decreased to 37% in fiscal
1997 compared to 41% in fiscal 1996. The decrease was primarily attributable to
the fiscal 1997 net operating loss and stock repurchase transaction.
Discontinued Operation
Results from the Company's discontinued line of business decreased 43% to
$199,000 in fiscal 1997 compared to $347,000 in fiscal 1996, primarily due to
lower revenues from the contract to manage the information systems functions at
Bethesda, Inc. in Cincinnati, Ohio.
COMPARISON OF FISCAL YEAR 1996 TO FISCAL YEAR 1995
Software Products and Services
Software products and services revenues decreased 23% to $10.4 million in
fiscal 1996 compared to $13.5 million in fiscal 1995. The decrease in revenue
was attributable, in part, to a general weakness in the Company's primary
markets and product lines, resulting from continued consolidations in the
healthcare industry and growing price pressures in the current managed
healthcare environment. Also contributing to the decline were delays in the
release of certain Windows-based products, higher than expected turnover in the
sales force, the increasing complexity and size of new contracts and the related
lengthening of the sales cycle. Additionally, the Company continued to
experience increased competition in many of its markets. Costs and expenses for
software products and services decreased 6% to $3.9 million compared to $4.1
million in fiscal 1995. Costs and expenses as a percentage of related revenue
were 38% and 31% for fiscal 1996 and 1995, respectively. The increase was due to
the mix of software, hardware and implementation revenue.
13
<PAGE> 134
Maintenance and Support Services
Maintenance and support services revenues increased 5% to $9.4 million in
fiscal 1996 compared to $9.0 million in fiscal 1995. The increase was primarily
due to a larger installed base of licensed products and modest price increases
for the Company's maintenance and support services. Costs and expenses increased
27% to $5.6 million compared to $4.4 million in fiscal 1995. Costs and expenses
as a percentage of related revenue were 59% and 49% for fiscal 1996 and 1995,
respectively. The increase was primarily due to a shift in focus of technical
personnel to maintenance activities from development activities during fiscal
1996, and incremental expenses related to supporting clients on the Company's
new Windows-based products as well as the technology platforms historically
support by the Company.
Marketing, General and Administrative
Marketing, general and administrative expenses increased 36% to $11.3
million in fiscal 1996 compared to $8.3 million in fiscal 1995. The increase
primarily resulted from an increase in the provision for doubtful accounts,
following a comprehensive analysis necessitated by the current market conditions
in the healthcare industry, and expenses related to the separation of the
managed care business.
Research and Development
Total expenditures for research and development (including amounts
capitalized and funded by clients) remained constant at $4.1 million in fiscal
1996 and 1995. Research and development costs charged to expense were $1.8
million in fiscal 1996 compared to $2.2 million in fiscal 1995. The Company
obtained funding from clients under product development service agreements of
$218,000 and $509,000 in fiscal 1996 and 1995, respectively, for its research
and development efforts. These development service agreements provide for
retention of ownership of the products developed by the Company. The Company
capitalized software development costs of $2.0 million in fiscal 1996 and $1.4
million in fiscal 1995 pursuant to Statement of Financial Accounting Standards
No. 86. Total research and development expenditures (including amounts
capitalized and funded by clients) were 39% and 30% of software products and
services revenues during fiscal 1996 and 1995, respectively. During fiscal 1996,
the Company's development efforts focused on the Resource Case Management
System, Medicus Architecture (MACH 1), and the Decision Support Systems product
line. During fiscal 1995, the Company's development efforts focused on the
Clinical Case Management System, the Resource Case Management System, the
WinCoder+ and Workload/Productivity modules.
Restructuring Charges
During February, 1996, the Company commenced a process to evaluate its
current strategic position, including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation process, the Company recorded $4.7 million in restructuring
charges, representing costs and expenses to exit certain product lines, to
abandon certain product development efforts and to provide for liabilities
resulting from the strategic redirection of the Company, including severance
costs. Specifically, the Company decided to exit the Clinical Case Management
Systems and the Executive Information Systems product lines. Additionally,
product development efforts for the Clinical Data Systems Wincoder V2 project
and portions of the MACH 1 project, which will no longer be utilized in the
Medicus product line, were abandoned and their associated development costs,
which had been previously capitalized, were expensed. Severance costs associated
with an officer and several employees, in addition to the write-off of a portion
of the Contract Management System, were also included in the restructuring
charge. Direct costs and expenses of the restructuring were 24% of fiscal 1996
revenues.
Interest and Other Income
Interest and other income decreased 18% to $556,000 in fiscal 1996 compared
to $680,000 in fiscal 1995, primarily due to lower average cash balances.
14
<PAGE> 135
Income Taxes
The Company's effective income tax rate increased to 41% in fiscal 1996
compared to 36% in fiscal 1995. The increase was primarily attributable to the
fiscal 1996 suspension of the research and development tax credit.
Discontinued Operation
Results from the Company's discontinued line of business increased 7% to
$347,000 in fiscal 1996 compared to $324,000 in fiscal 1995, primarily due to
higher revenues from the contract to manage the information systems functions at
Bethesda, Inc. in Cincinnati, Ohio.
FINANCIAL CONDITION
Liquidity and Capital Resources
As a result of the Company's commitment to expand its software products and
services, funds are required to support its ongoing product research and
development activities and the infrastructure required to serve its customer
base. Historically, cash generated from its operations has been an important
contributor to these needs. As a result of the market factors adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction, the
Company was required to use a significant portion of its cash reserves. It is
expected that, following the restructuring efforts described herein, the Company
will return to a situation where cash from operations will provide an important
source of liquidity to support its normal capital needs, although numerous
factors, including any reductions in revenues from currently anticipated
amounts, could affect the amount of such cash available.
At May 31, 1997, the Company had available cash reserves of approximately
$1.2 million. In addition, the Company had a $2.5 million standby credit
facility available. $1.0 million of the principal amount of the Company's 8%
promissory notes, issued in connection with the Company's stock repurchase
agreement, is due in March 1998. In addition, the Company anticipates cash
outlays of approximately $3.2 million in the next nine months, resulting
primarily from its decision to reorganize its business units and to exit certain
product lines.
The Board of Directors of the Company has determined not to pay dividends
on the common stock for the foreseeable future. While the Company has
experienced negative cash flows from operating activities during the past two
fiscal years, management believes that, as a result of significant reductions in
expenses, its cash flows will improve. While there can be no assurance that this
will occur, the Company currently believes that it will have adequate financial
resources available from operations and the available credit facility to provide
sufficient liquidity to meet its ordinary capital requirements for the
foreseeable future, including the March 1998 payment on the promissory notes and
cash outlays related to the Company's restructuring plan.
During its second fiscal quarter, the Company bills its clients in advance
for the next calendar year's maintenance and support services provided on its
software products. This generates an increase in the Company's accounts
receivable and deferred revenue balances during those periods, and increases
cash balances in subsequent months as the related accounts receivable are
collected.
Impact of Inflation
To date, inflation has not had a material impact on the Company's revenues
or income.
15
<PAGE> 136
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets as of May 31, 1997 and 1996............................................ F-3
Statements of Operations for the years ended May 31, 1997, 1996 and 1995.............. F-4
Statements of Changes in Stockholders' Equity for the years ended May 31, 1997, 1996
and 1995............................................................................ F-5
Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995.............. F-7
Notes to Financial Statements......................................................... F-8
</TABLE>
16
<PAGE> 137
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Medicus Systems Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Medicus Systems
Corporation at May 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended May 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Chicago, Illinois
July 23, 1997
F-1
<PAGE> 138
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
MAY 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 1,205,135 $ 765,312
Short-term investments.......................................... -- 7,705,380
Accounts receivable and unbilled services, net of allowance for
doubtful accounts of $1,713,008 and $1,222,463,
respectively................................................. 10,500,676 8,451,675
Inventories..................................................... 214,264 235,398
Prepaid expenses and other...................................... 258,725 638,669
Prepaid and deferred income taxes............................... 2,147,416 2,650,076
Due from Managed Care Solutions, Inc............................ -- 647,408
Net assets of discontinued operation............................ 111,381 1,020,764
----------- -----------
14,437,597 22,114,682
----------- -----------
Property and equipment, at cost less accumulated depreciation..... 2,335,175 2,794,932
Internally developed software, at cost less accumulated
amortization of $2,110,378 and $1,729,141, respectively......... 3,087,849 2,152,419
Installment accounts receivable, due after one year, less unearned
interest of $154,647 and $147,963, respectively................. 533,488 398,897
Deferred income taxes............................................. 2,454,563 227,635
----------- -----------
$22,848,672 $27,688,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 597,787 $ 188,777
Accrued compensation............................................ 453,035 1,487,551
Accrued restructuring charges................................... 2,247,416 1,527,461
Other accrued liabilities....................................... 1,138,226 970,140
Deferred revenue................................................ 6,910,599 5,313,399
Notes payable................................................... 1,000,000 --
----------- -----------
12,347,063 9,487,328
=========== ===========
Notes payable..................................................... 1,000,000 --
----------- -----------
Stockholders' equity:
Preferred stock $1,000 par, 500 shares authorized and issued.... 500,000 --
Common stock $.01 par:
Authorized -- 10,000,000 shares
Issued -- 6,487,159 shares and 6,456,447 shares,
respectively................................................ 64,872 64,564
Capital in excess of par value.................................. 22,063,715 21,880,994
Capital in excess of par value -- warrant....................... 944,000 --
Less treasury stock:
Preferred stock, at cost -- 500 shares....................... (500,000) --
Common stock, at cost -- 1,007,002 and 7,002 shares, resp.... (5,687,418) (62,418)
Unrealized loss on short-term investments....................... -- (18,361)
Accumulated deficit............................................. (7,883,560) (3,663,542)
----------- -----------
9,501,609 18,201,237
----------- -----------
$21,848,672 $27,688,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 139
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software products and services.................... $ 8,148,858 $10,374,977 $13,495,033
Maintenance and support services.................. 10,120,842 9,419,202 9,012,234
----------- ----------- -----------
18,269,700 19,794,179 22,507,267
----------- ----------- -----------
Costs and expenses:
Software products and services.................... 2,936,115 3,889,458 4,117,822
Maintenance and support services.................. 5,098,992 5,563,821 4,374,432
----------- ----------- -----------
8,035,107 9,453,279 8,492,254
Marketing, general and administrative............. 10,034,473 11,287,826 8,325,563
Research and development.......................... 3,065,552 1,835,575 2,149,188
Restructuring charges............................. 2,800,391 4,662,203 --
Stock repurchase.................................. 1,690,042 -- --
----------- ----------- -----------
25,625,565 27,238,883 18,967,005
----------- ----------- -----------
Operating income (loss)............................. (7,355,865) (7,444,704) 3,540,262
Interest and other income......................... 367,430 555,742 679,547
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes...................................... (6,988,435) (6,888,962) 4,219,809
Provision for (benefit from) income taxes........... (2,569,365) (2,816,313) 1,519,131
----------- ----------- -----------
Income (loss) from continuing operations............ (4,419,070) (4,072,649) 2,700,678
Discontinued operation, net of taxes................ 199,052 346,658 323,815
----------- ----------- -----------
Net income (loss)................................... $(4,220,018) $(3,725,991) $ 3,024,493
=========== =========== ===========
Earnings (loss) per common and common equivalent
share, pro forma for 1996 and 1995
Continuing operations............................. $ (0.73) $ (0.62) $ 0.40
Discontinued operation............................ 0.03 0.05 0.05
----------- ----------- -----------
$ (0.70) $ (0.57) $ 0.45
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding....................................... 6,007,023 6,539,988 6,704,251
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 140
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CAPITAL
IN
PREFERRED COMMON CAPITAL IN EXCESS OF TREASURY TREASURY
STOCK STOCK EXCESS OF PAR VALUE STOCK STOCK
VALUE PAR VALUE PAR VALUE WARRANT (PREFERRED) (COMMON)
--------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1994...........................
---------- ------ ---------- ------- -------- ----------
Net income....................................
Payments to Predecessor Corporation, net......
Market value adjustment of short-term
investments, net of income taxes............
---------- ------ ---------- ------- -------- ----------
Balance, May 31, 1995...........................
---------- ------ ---------- ------- -------- ----------
Net loss prior to February 29, 1996
distribution................................
Payments to Predecessor Corporation, net......
Market value adjustment of short-term
investments, net of income taxes............
February 29, 1996 distribution of common
stock....................................... 64,320 21,702,593 (62,418)
Net loss subsequent to February 29, 1996
distribution................................
Sale of stock under employee stock purchase
plan........................................ 79 42,574
Sale of stock under employee stock option
plan, including tax benefits................ 165 112,835
Vested portion of stock options applicable to
compensation expense........................ 22,992
Declaration of dividends......................
Market value adjustment of short-term
investments, net of income taxes............
---------- ------ ---------- ------- -------- ----------
Balance, May 31, 1996........................... -- 64,564 21,880,994 -- -- (62,418)
---------- ------ ---------- ------- -------- ----------
Net loss......................................
Stock repurchase.............................. $500,000 944,000 (500,000) (5,625,000)
Sale of stock under employee stock purchase
plan........................................ 308 171,759
Vested portion of stock options applicable to
compensation expense........................ 10,962
Mrkt value adjustment of short-term
investments, net of income taxes............
---------- ------ ---------- ------- -------- ----------
Balance, May 31,1996............................ 500,000 64,872 22,063,715 944,000 (500,000) (5,687,418)
<CAPTION>
UNREALIZED
LOSS ON
SHORT-TERM ACCUM. GROUP
INVESTMENTS DEFICIT EQUITY TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, May 31, 1994........................... 25,574,678 25,574,678
------- ---------- ---------- ----------
Net income.................................... 3,024,493 3,024,493
Payments to Predecessor Corporation, net...... (6,236,370) (6,236,370)
Market value adjustment of short-term
investments, net of income taxes............ (58,430) (58,430)
------- ---------- ---------- ----------
Balance, May 31, 1995........................... (58,430) 22,362,801 22,304,371
------- ---------- ---------- ----------
Net loss prior to February 29, 1996
distribution................................ (253,772) (253,772)
Payments to Predecessor Corporation, net...... (404,534) (404,534)
Market value adjustment of short-term
investments, net of income taxes............ 57,379 57,379
February 29, 1996 distribution of common
stock....................................... (21,704,495) --
Net loss subsequent to February 29, 1996
distribution................................ (3,472,219) (3,472,219)
Sale of stock under employee stock purchase
plan........................................ 42,653
Sale of stock under employee stock option
plan, including tax benefits................ 113,000
Vested portion of stock options applicable to
compensation expense........................ 22,992
Declaration of dividends...................... (191,323) (191,323)
Market value adjustment of short-term
investments, net of income taxes............ (17,310) (17,310)
------- ---------- ---------- ----------
Balance, May 31, 1996........................... (18,361) (3,663,542) -- 18,201,237
------- ---------- ---------- ----------
Net loss...................................... (4,220,018) (4,220,018)
Stock repurchase.............................. (4,681,000)
Sale of stock under employee stock purchase
plan........................................ 172,067
Vested portion of stock options applicable to
compensation expense........................ 10,962
Mrkt value adjustment of short-term
investments, net of income taxes............ 18,361 18,361
------- ---------- ---------- ----------
Balance, May 31,1996............................ -- (7,883,560) -- 9,501,609
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 141
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (4,220,018) $ (3,725,991) $ 3,024,493
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization of property
and equipment............................. 1,097,274 683,281 592,411
Amortization of software.................... 381,238 1,229,408 538,933
Deferred income taxes....................... (62,612) (2,410,259) 383,374
Restructuring charges....................... 1,446,781 4,208,496 --
Stock repurchase............................ 1,319,000 -- --
Provision for doubtful accounts............. 368,361 1,483,173 --
Changes in current assets and current
liabilities:
Accounts receivable and unbilled
services............................... (1,917,262) (1,740,049) (495,179)
Due from Managed Care Solutions, Inc...... 647,408 (647,408) --
Inventories............................... 21,134 (25,451) 67,641
Prepaid expenses and other current
assets................................. (1,371,036) (351,855) (290,798)
Installment accounts receivable........... (134,591) 162,557 (290,685)
Accounts payable.......................... 409,268 (433,420) 187,697
Accrued compensation...................... (1,034,516) 768,542 (320,241)
Other accrued liabilities................. 212,033 195,687 (141,065)
Deferred revenue.......................... 1,597,200 299,375 300,080
------------ ------------ ------------
Net cash provided by (used in) operating
activities..................................... (1,240,338) (303,914) 3,556,661
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment............ (619,932) (806,997) (871,222)
Additions to internally developed software..... (1,593,494) (2,301,701) (1,956,169)
Purchase of short-term investments............. (86,846,102) (42,565,224) (78,747,517)
Proceeds from sale of short-term investments... 89,798,110 39,903,650 61,760,000
Proceeds from maturity of short-term
investments................................. 4,784,360 5,033,377 23,683,611
------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... 5,522,942 (736,895) 3,868,703
------------ ------------ ------------
Cash flows from financing activities:
Sale of preferred stock..................... 500,000 -- --
Sale of common stock........................ 157,219 38,830 --
Stock repurchase............................ (4,500,000) -- --
Payments from Predecessor Corporation....... -- 761,984 1,295,470
Payments to Predecessor Corporation......... -- (1,359,386) (7,338,969)
Dividends paid.............................. -- (191,323) --
------------ ------------ ------------
Net cash used in financing activities............ (3,842,781) (749,895) (6,043,499)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 439,823 (1,790,704) 1,381,865
Cash and cash equivalents:
Beginning of period.................... 765,312 2,556,016 1,174,151
------------ ------------ ------------
End of period.......................... $ 1,205,135 $ 765,312 $ 2,556,016
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 142
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL INFORMATION AND BASIS OF PRESENTATION
Prior to March 1, 1996, the Company's predecessor (the "Predecessor
Corporation") operated a software and related services business and a small
managed care business. In connection with a series of transactions which
occurred on March 1, 1996, the Predecessor Corporation formed a new Delaware
subsidiary, Medicus Systems Software, Inc., to which it transferred all of its
assets and liabilities excluding only the defined assets and liabilities of its
managed care business. In turn, the stock of this newly-formed subsidiary was
distributed on a share-for-share basis to the stockholders of the Predecessor
Corporation (the "Distribution"), the name of the subsidiary was changed to
Medicus Systems Corporation (the "Company"), and the name of the Predecessor
Corporation was changed to Managed Care Solutions, Inc. ("MCS"). The Company is
liable for all obligations of the Predecessor Corporation except those
specifically related to the Predecessor Corporation's managed care business.
Although the Company is, in substance, the Predecessor Corporation's
successor, the financial statements of the Company have been prepared as if the
Company had operated as a free-standing entity for all the periods presented
(excluding certain incremental corporate expenses that would have been incurred
had it operated on a stand-alone basis). Accordingly, the financial statements
include those assets, liabilities, revenues and expenses directly attributable
to the Company's operations and exclude those specifically related to the
managed care business. The Company believes this presentation most fairly
represents its financial condition, results of operations and changes in
stockholders' equity and cash flows. The financial statements included herein
for periods prior to the Distribution do not necessarily reflect what the
financial position and results of operations of the Company would have been had
it operated as a stand-alone entity during the periods covered, and may not be
indicative of future operations or financial position.
The Company and MCS signed a services agreement, pursuant to which the
Company (i) made available to MCS certain services, including tax, accounting,
data processing, cash management, employee benefits, monitoring, operational,
supervisory, insurance purchasing and claims administration consulting services,
and (ii) provided certain financial services to MCS, including analysis and
advice regarding potential financial transactions (including but not limited to
proposed issuance of debt or equity securities, proposed merger or asset
acquisition or sale transactions and dividend, stock split or similar
transactions), assistance in budget and forecast preparation, relations with
financial analysts, financial press, and investors, and crisis management and
control. Such services commenced on March 1, 1996, and continued for one year.
MCS paid the Company $700,000 for such services. In order to compensate the
Company for fixed costs incurred in making such services available, MCS paid
such fees whether or not it elected to utilize the services. MCS also reimbursed
the Company for its out-of-pocket expenses in connection therewith. The services
agreement also provided that the Company would not be liable for any losses or
damages suffered in respect of services to be performed thereunder, other than
by reason of its willful misconduct or gross negligence in performing such
services. Marketing, general and administrative expenses were reduced by
$525,000 and $175,000 in the years ended May 31, 1997 and 1996, respectively, as
a result of this agreement.
NOTE 2. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Medicus develops, markets, and supports a family of specialized integrated
software products utilized by healthcare financial administrators, physicians
and nursing executives, health information and other administrative departments
in the United States and Canada. The Company's software products and services
enable clients to capture, structure and analyze clinical, operational and
financial information thereby allowing these professionals to measure, monitor
and manage organizational performance and optimize outcomes. Medicus also
provides product-related maintenance and support services.
F-6
<PAGE> 143
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
Revenue from software license agreements is recognized upon contract
execution, product delivery and client acceptance in instances where no
remaining obligations under the agreement exist. In instances where minor
obligations remain under a license agreement after the delivery of the product,
a pro rata portion of the revenue is deferred until the minor obligations have
been fulfilled. When the software product has been delivered but significant
obligations are present under a license agreement, the full amount of revenue
under the agreement is deferred and recognized as the related services are
performed. Revenue from maintenance and support agreements is recognized ratably
over the term of the contract.
Inventories
Inventories, which consist primarily of data processing equipment and
forms, are stated at the lower of cost or market value, cost being determined
using specific identification.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon an estimated useful life of five years.
Gains or losses resulting from sales or retirements are recorded as incurred, at
which time related costs and accumulated depreciation are removed from the
accounts. Renewals and betterments are capitalized and depreciated. Maintenance
and repairs are charged to expense as incurred.
Purchased software used in operations is stated at cost. Amortization is
computed using the straight-line method based upon an estimated useful life of
three to five years. The amortization charged to expense in 1997, 1996 and 1995
totaled $305,415, $371,095 and $315,313, respectively.
Internally developed software
Costs of internally developed software (net of accumulated amortization)
aggregating $3,087,849 and $2,152,419 as of May 31, 1997 and 1996, respectively,
consist of certain production costs of computer software to be sold, leased or
otherwise marketed which have been capitalized in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 86. Capitalized
software costs are amortized on a product-by-product basis. Amortization is
computed based upon the ratio of current revenues to total anticipated revenues
or the straight-line method over the estimated life of the product (typically
three years), whichever provides the greater amortization. Amortization expense
for capitalized software costs totaled $381,237, $784,209 and $222,595 during
1997, 1996 and 1995, respectively.
Research and development
Research and development costs, principally the design and development of
proprietary software prior to the establishment of technological feasibility,
are expensed as incurred. Routine maintenance expenses incurred in connection
with specific software applications related to individual contracts are charged
to costs of software products and services as incurred.
Income taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The statement requires an
asset and liability approach for financial accounting and reporting for income
taxes.
F-7
<PAGE> 144
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings per share
Since the capital structure of the Company is comparable to that existing
prior to the Distribution, earnings (loss) per common share is based upon the
actual capital structure of the Company for the period from March 1, 1996
through May 31, 1997, and the capital structure of the Predecessor Corporation
for the period from June 1, 1995 through February 29, 1996. Pro forma earnings
(loss) per common share is based upon the capital structure of the Predecessor
Corporation, and does not necessarily reflect the results of operations of the
Company had it operated as a stand-alone entity during the periods presented,
and may not be indicative of future operations. Weighted average shares used in
the calculation of earnings (loss) per share represent common stock and common
stock equivalents. Common stock equivalents include shares issuable on the
exercise of stock options and the warrant (when dilutive), using the treasury
stock method from the date of grant.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses recognized during the periods presented. Actual results could differ
from those estimates.
Fair value of financial instruments
The carrying amounts reported in the balance sheets for cash, short-term
investments, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued expenses and notes payable approximate fair value
because of the immediate or short-term maturity of these financial instruments.
Statements of cash flows
For purposes of the Statements of Cash Flows, the Company considers cash
and cash equivalents to be cash and overnight investments. Actual cash paid for
income taxes for the years ended May 31, 1997, 1996 and 1995 was $90,561,
$539,559 and $1,427,700, respectively.
Reclassifications
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation. These
reclassifications had no effect on previously reported total assets, total
liabilities, stockholders' equity or results of operations.
NOTE 3. DISCONTINUED OPERATION
Effective May 31, 1997 the Company adopted a plan to discontinue its
contract services line of business. This separate line of business consisted of
information systems management contracts with two customers (one customer during
the year ended May 31, 1997). As a result of this decision, the net assets of
the contract services line of business have been reclassified in the Balance
Sheet at May 31, 1997 and 1996. Also, the results of operations of the contract
services business have been reclassified in the Statements of Operations for the
three years ended May 31, 1997.
F-8
<PAGE> 145
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The assets and liabilities of the discontinued operation consist mainly of
the following:
<TABLE>
<CAPTION>
MAY 31, 1997 MAY 31, 1996
------------ ------------
<S> <C> <C>
Accounts receivable and unbilled services.......... $ 288,457 $1,212,747
Prepaid expenses and other......................... 45,702 70,725
Property and equipment............................. 37,032 54,617
Accounts payable and other accrued liabilities..... (212,771) (276,960)
Accrued compensation............................... (47,039) (40,365)
--------- ----------
$ 111,381 $1,020,764
========= ==========
</TABLE>
The following table summarizes selected financial data of the contract
services business for the years ended May 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................ $10,043,000 $11,271,000 $11,322,000
Operating income.................... 324,000 573,000 506,000
Income tax expense.................. 124,610 226,331 182,146
</TABLE>
The contract services line of business is expected to continue operating
until the expiration of its remaining contract on May 31, 1998. This line of
business is not expected to incur losses or generate significant income prior to
its termination.
NOTE 4. RESTRUCTURING CHARGES
During the third quarter of fiscal 1996, the Company commenced a process to
evaluate its strategic position, including the markets it will pursue and
product offerings in those chosen markets. As a result of decisions made in the
quarter ended February 29, 1996, the Company began a plan resulting in the
recording of approximately $1.6 million in charges to exit certain product lines
and abandon certain development efforts.
Specifically, the Company decided to exit the Executive Information Systems
product line, recording charges to write down related customer accounts and
accrue future costs to provide maintenance associated with existing contractual
obligations. In addition, product development efforts for the Optimizer project
and portions of the MACH 1 project, which will no longer be utilized in the
Medicus product line, were abandoned and their associated development costs,
which had been previously capitalized, were expensed.
During the fourth quarter of fiscal year 1996, the Company continued the
process resulting in additional charges of $3.1 million. The Company decided to
exit the Clinical Case Management Systems product line and abandon development
efforts for the Clinical Data Systems Wincoder V2 project. Severance costs
associated with an officer and several employees, in addition to the write-off
of a portion of the Contract Management System, were also included in the
restructuring charge.
As part of an ongoing evaluation, the Company refined its strategic
planning process during fiscal 1997, and assessed continuing obligations
associated with the implementation of the plan. The Company continued the
process of implementing its plans during 1997 and, following the stock
repurchase from its founder in the quarter ended February 28, 1997, recorded
$2.8 million in charges to complete its plan, including accruing certain costs
to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts. Specifically, the
Company decided to relocate operations for its Clinical Data Systems ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs accrued associated with the relocation, which is expected to be completed
during the next twelve months, included costs to cancel existing lease
agreements, to terminate employees and to write down abandoned assets. In
addition, the Company increased its reserves for product line exit costs and
severance
F-9
<PAGE> 146
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
costs that relate to the remaining customer of the previously discontinued
Clinical Case Management Systems ("CCM") product line. Also, certain product
development efforts for the Company's Patient Focused Systems ("PFS") products
were abandoned, and the associated development costs, which had been previously
capitalized, along with other related product line exit costs were expensed. The
Company has increased its allowance for doubtful accounts due to the potential
for certain additional billed and unbilled accounts to become uncollectible as a
result of the decisions discussed above.
The restructuring charges included in the Statements of Operations for the
years ended May 31, 1997 and May 31, 1996, respectively, were comprised of the
following items:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1997 1996
---------- ----------
<S> <C> <C>
Product line exit costs............................. $ 798,000 $ 856,633
Business unit reorganization costs.................. 705,697 --
Employee termination and severance costs............ 569,868 1,117,086
Accounts receivable and reserves.................... 450,000 787,206
Capitalized software write-downs.................... 276,826 1,901,278
---------- ----------
$2,800,391 $4,662,203
========== ==========
</TABLE>
The Company's revised strategic plan included the termination of three
officers and thirty-nine employees in 1997 and one officer and three employees
in 1996.
At May 31, 1996, restructuring liabilities in the Balance Sheet aggregated
$1,527,461. During the year ended May 31, 1997, the Company increased its
reserve for employee termination and severance costs and product line exits
costs by $569,868 and $798,000, respectively, primarily due to the Company's
decision to relocate its CDS division and increase its CCM product line reserve.
The Company also recorded a $705,697 charge for business unit reorganization
costs associated with the relocation. The Company did not accrue estimated
incremental costs of approximately $1.3 million associated with the relocation.
Such costs relate to the orderly transition of the division, will be incurred
during fiscal 1998 and are not accruable as part of the restructuring charge
under generally accepted accounting principles. During the year ended May 31,
1997 the Company paid $763,844, $233,950 and $31,100 in severance benefits,
product line exit costs, and business unit reorganization costs, respectively.
The Company also reduced its reserve for severance obligations and continuing
obligations on product line exit costs by $124,716 and $200,000, respectively,
as a result of favorable settlements with two of its employees and negotiations
with its customers.
The components of the restructuring reserve at May 31, 1997, which the
Company expects will be paid during the next twelve months, and at May 31, 1996
are as follows:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1997 1996
---------- ----------
<S> <C> <C>
Product line exit costs............................. $ 774,425 $ 410,375
Business unit reorganization costs.................. 674,597 --
Employee termination and severance costs............ 798,394 1,117,086
---------- ----------
$2,247,416 $1,527,461
========== ==========
</TABLE>
NOTE 5. STOCK REPURCHASE
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary (the "Trust"), one million shares of
Common Stock and 500 shares of Voting Preferred Stock. Also, Mr. Jelinek agreed
to resign as Chairman and agreed, among other things, not to attempt to seek
voting control of the Company for a period of five years. (Mr. Jelinek continues
to serve as a Director.) In exchange, the Company
F-10
<PAGE> 147
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreed to pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0 million in
8% two-year promissory notes, and to issue to Mr. Jelinek and the Trust 400,000
five-year warrants to purchase Common Stock at $8.00 per share. The Company's
Board of Directors approved the Agreement on January 2, 1997, and the Company's
stockholders approved the Agreement at the Annual Meeting of Stockholders on
March 19, 1997.
The Company's results of operations for the year ended May 31, 1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
The fair value of consideration exchanged in excess of the market price of the
Common Stock and the exercise price of the Voting Preferred Stock, aggregating
$1,319,000, has been expensed. Also included are $371,042 in investment banking
and other professional fees incurred to consummate the Agreement. The Company
recorded the charge in the quarter ended February 28, 1997.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of May 31, 1997 and 1996 were comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment........................................... $4,358,224 $3,797,976
Furniture and fixtures.............................. 674,796 645,260
Leasehold improvements.............................. 276,355 294,052
Purchased software used in operations............... 2,105,910 2,058,068
---------- ----------
7,415,285 6,795,356
Less -- accumulated depreciation.................... 5,080,110 4,000,424
---------- ----------
$2,335,175 $2,794,932
---------- ----------
</TABLE>
NOTE 7. INCOME TAXES
The provision for (benefit from) income taxes from continuing operations
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Currently payable:
Federal............................ $(2,183,016) $ (344,770) $ 838,701
State.............................. (323,737) (61,284) 297,056
----------- ----------- ----------
(2,506,753) (406,054) 1,135,757
Deferred............................. (62,612) (2,410,259) 383,374
----------- ----------- ----------
$(2,569,365) $(2,816,313) $1,519,131
=========== =========== ==========
</TABLE>
A reconciliation of total taxes based on the federal statutory rate and the
Company's actual total provision (benefit) was as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Income tax at the federal statutory
rate of 34%........................ $(2,266,022) $(2,147,430) $1,606,762
State taxes, net of federal
benefit............................ (197,944) (281,377) 202,736
Research and development tax
credit............................. (111,439) -- (179,659)
Effect of stock repurchase........... 191,760 -- --
Other, net........................... (61,110) (161,175) 71,438
----------- ----------- ----------
$(2,444,755) $(2,589,982) $1,701,277
=========== =========== ==========
</TABLE>
F-11
<PAGE> 148
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of the deferred income tax provision (benefit) from
continuing operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------
1997 1996 1995
--------- ----------- --------
<S> <C> <C> <C>
Provision for doubtful accounts......... $(161,354) $ (255,654) $ --
Net operating loss carried forward...... (244,148) (937,554) --
Capitalization of software costs for
financial reporting purposes.......... 505,930 (350,483) 481,153
Depreciation............................ (14,751) (53,416) (58,122)
Financial reporting reserve recognized
in advance of tax deduction........... (148,289) (813,152) (39,657)
--------- ----------- --------
$ (62,612) $(2,410,259) $383,374
========= =========== ========
</TABLE>
The deferred income tax assets and liabilities were comprised of the
following:
<TABLE>
<CAPTION>
AS OF MAY 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Provision for doubtful accounts...... $ (659,508) $ (498,154) $ (242,500)
Financial reporting reserve
recognized in advance of tax
deduction.......................... (1,066,896) (918,609) (105,457)
Net operating loss carried forward... (3,544,223) (937,554) --
Research and development credit
carryforward....................... (111,439) -- --
short-term investments............. -- (12,628) (40,184)
----------- ----------- ----------
Total deferred tax assets............ (5,382,066) (2,366,945) (388,141)
----------- ----------- ----------
Capitalization of software costs for
financial reporting purposes....... 1,188,822 682,892 1,033,375
Depreciation......................... 12,277 27,028 80,444
----------- ----------- ----------
Total deferred tax liabilities....... 1,201,099 709,920 1,113,819
----------- ----------- ----------
Total net deferred taxes............. $(4,180,968) $(1,657,025) $ 725,678
=========== =========== ==========
</TABLE>
In connection with the Distribution, the Company and MCS agreed to share
the tax burdens of the Predecessor Corporation, based upon the taxable income of
the separate businesses prior to the Distribution. The Company and MCS are also
prohibited from taking any actions which are inconsistent with the tax-free
nature of the Distribution.
The Company will be able to utilize tax net operating losses incurred
subsequent to the Distribution to the extent the Company has taxable income
subsequent to the Distribution.
Management has determined that the net deferred tax asset more likely than
not will be realized in the future and, therefore, has not provided any
valuation allowances against these assets. The Company's net operating loss
carryforwards of $3,544,223 expire in 2011 and 2012, while research and
development tax credits expire in 2012.
NOTE 8. NOTES PAYABLE AND LINE OF CREDIT
On December 5, 1996, the Company reached an agreement in principle with its
founder, Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary (the "Trust"), one million shares of Common Stock and 500
shares of Voting Preferred Stock. In exchange, the Company agreed to pay Mr.
Jelinek and the Trust $4.5 million in cash and $2.0 million in 8% two-year
promissory notes, and issued to
F-12
<PAGE> 149
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mr. Jelinek and the Trust 400,000 five-year warrants to purchase Common Stock at
$8.00 per share. The scheduled maturities are $1 million March 19, 1998 and $1
million March 19, 1999. Interest costs incurred and paid on the promissory notes
totaled $32,258 for the year ended May 31, 1997.
In April 1997, the Company entered into an agreement with a bank that
provides for a secured, revolving line of credit up to a maximum of $2.5
million. The credit facility, which has an initial maturity date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company. Certain financial covenants and
reporting requirements are also included in the agreement. As of May 31, 1997,
the Company had not utilized the line of credit.
NOTE 9. STOCKHOLDERS' EQUITY
The following table summarizes information regarding stockholders' equity
as of May 31, 1997:
<TABLE>
<CAPTION>
DIVIDEND
TOTAL PAR VOTES RIGHT PER
SHARES SHARES PAR VALUE VALUE PER SHARE
AUTHORIZED ISSUED PER SHARE OUTSTANDING SHARE PER ANNUM
---------- --------- --------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Voting preferred stock........... 500 -- $1,000.00 -- 44,000 (1)
Preferred stock.................. 1,000,000 -- .01 -- (2) (2)
Common stock..................... 10,000,000 6,487,159 .01 $64,872 1 --
</TABLE>
The previous chairman of the board and chief executive officer exercised an
option to purchase all of the authorized and unissued shares of voting preferred
stock at $1,000 per share on March 19, 1997. The Company, as part of the stock
repurchase agreement, immediately repurchased these shares. The voting preferred
stock is currently held in treasury.
The Board of Directors has the authority to determine the rights and
preferences of this preferred stock upon its issuance.
NOTE 10. STOCK OPTIONS AND WARRANTS
Upon the Distribution, the Company adopted various stock option plans of
the Predecessor Corporation. Options to purchase Predecessor Corporation common
stock have been converted into options to purchase Medicus common stock based
upon the fair market value following the Distribution. The Company applies APB
Opinion 25 and related Interpretations to account for its plans. Accordingly, no
compensation cost is generally recognized for its stock option plans and its
employee stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
by SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C> <C>
Net income (loss)................... As reported $(4,220,018) $(3,725,991)
Pro forma (5,187,253) (4,262,364)
Earnings (loss) per share........... As reported (0.70) (0.57)
Pro forma (0.86) (0.65)
</TABLE>
For purposes of SFAS 123, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1996
respectively: no expected dividends, expected volatility of and 76.36% and
72.17%, risk-free interest rates of 6.56% and 6.09% for the stock options; and
lives of 7 years. The weighted-average fair value of options granted in 1997 and
1996 was $4.18 and $5.30 respectively.
F-13
<PAGE> 150
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The stock exercise price of each option is determined by a committee (the
"Committee") of no fewer than two Directors designated by the Board of
Directors, and shall not be less than the fair market value of the stock subject
to the option at the time the option is granted. Each option shall be for such
term of not more than ten years as shall be determined by the Committee at the
date of grant. The Committee shall have full and final authority, in its
absolute discretion, to determine the time or times when each option becomes
exercisable and the duration of the exercise period. The Committee may at its
discretion accelerate the exercisability of any option at any time before
expiration or termination of an option previously granted, extend the terms of
such option, except that an aggregate option period may never exceed ten years.
As of May 31, 1997, the Company had 358,879 options available for grant
under all plans. A summary of the status of the Company's option plans as of May
31, 1997 and 1996, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1997
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVG. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ -- -- 1,387,350 $ 7.53
Conversion at Distribution of options
previously held....................... 1,035,850 $ 7.85 -- --
Granted................................. 368,000 6.28 615,100 5.49
Exercised............................... (16,500) 0.48 -- --
Cancelled/Forfeited..................... -- -- (320,100 6.10
----- -----
Outstanding at End of year.............. 1,387,350 7.53 1,682,350 6.79
===== =====
Options Exercisable at year-end......... 332,950 7.78 414,950 7.70
===== =====
</TABLE>
The following table summarizes information about the stock options
outstanding at May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES AT 5/31/97 LIFE (YRS.) PRICE 5/31/97 PRICE
- ------------------------------------ ----------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.19 to 2.00..................... 19,650 7.8 $ 1.87 19,650 $ 1.87
5.00 to 5.82..................... 529,000 9.5 5.38 7,500 5.25
6.25 to 6.82..................... 644,200 7.9 6.56 169,550 6.69
7.02 to 7.60..................... 182,000 8.6 7.44 47,750 7.29
8.97 to 9.62..................... 273,500 6.9 9.34 153,500 9.34
11.89 to 16.50..................... 34,000 7.4 11.90 17,000 11.90
</TABLE>
The Company realizes an income tax benefit from the exercise of certain
stock options. These income tax benefits result in a decrease in current income
taxes payable and an increase in capital in excess of par value.
A healthcare services organization with which the Company maintains a joint
development agreement holds a warrant to purchase 100,000 shares of the
Company's common stock at a price of $7.80 per share, exercisable any time
before March, 1999. The value of the warrant is being amortized on a
straight-line basis over its six-year life.
The Company's founder, Richard C. Jelinek, holds 400,000 warrants to
purchase common stock at $8.00 per share. The value of the warrant was recorded
as part of the stock repurchase agreement recorded in the quarter ended February
28, 1997.
F-14
<PAGE> 151
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. EMPLOYEE BENEFITS
In connection with the Distribution, the Company adopted an employee stock
purchase plan under which the sale of common stock to employees was authorized.
Employees may designate up to the lesser of $10,000 or 10% of their compensation
for the purchase of stock. The purchase price is the lesser of 85% of the fair
market value of the stock on either the date of grant of a one-year purchase
option or the date the purchase option is exercised. During the year ended May
31, 1997 and the period from March 1, 1996 through May 31, 1996, 29,162 and
7,132 shares, respectively, of common stock were issued under the plan for an
aggregate purchase price of $128,423 and $38,352, respectively. Compensation
cost related to the employee stock purchase plan, as determined based on the
fair value method of SFAS 123, would have aggregated $139,000 and $75,000,
respectively, for the years ended May 31, 1997 and 1996 had the Company adopted
this statement. For purposes of SFAS 123, these amounts were estimated using the
Black-Scholes model with the following assumptions for the years ended May 31,
1997 and 1996, respectively: no expected dividends, an expected life of one
year, expected volatility of 130.17% and 158.17% and risk-free interest rates of
5.40% and 5.45%.
The Company has a contributory retirement savings plan ("401(k) Plan")
which covers eligible employees who qualify as to age and length of service.
Participants may contribute 1% - 15% of their salaries, subject to maximum
contribution limitations imposed by the IRS. The expense of the 401(k) Plan,
consisting of discretionary Company contributions, was $134,795, $121,602 and
$101,512 for the years ended May 31, 1997, 1996 and 1995, respectively.
NOTE 12. COMMITMENTS
The Company has various lease agreements for real and personal property.
These obligations extend through 2006 and in some cases contain renewal options.
As of May 31, 1997, future minimum lease payments for non-cancelable operating
leases in excess of one year are as follows:
<TABLE>
<S> <C>
Year Ending May 31,
1998........................................ $ 977,404
1999........................................ 1,017,264
2000........................................ 847,322
2001........................................ 716,538
2002........................................ 677,786
Thereafter.................................. 2,890,522
----------
$7,126,836
==========
</TABLE>
Rental expense on all operating leases totaled $828,221, $682,400, and
$664,844, during fiscal 1997, 1996 and 1995, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
As discussed in Note 1, the Company and MCS signed a services agreement.
For the year ended May 31, 1997 and during the fourth quarter of fiscal 1996,
the Company charged MCS $525,000 and $175,000, respectively, for services under
this agreement, reducing general and administrative expense by these amounts.
Due from Managed Care Solutions, Inc. on the Balance Sheet includes this charge
plus amounts owing related to the Distribution. During fiscal 1996 and 1995, the
Company provided MCS cash infusions for operating purposes of $250,000 and
$5,000,000, respectively.
The Company has repurchased Common Stock and Voting Preferred Stock from
its founder, Richard C. Jelinek, and a trust of which he is a beneficiary,
pursuant to a transaction described in Note 5 and Note 8. Mr. Jelinek continues
to serve as a Director.
F-15
<PAGE> 152
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. CONCENTRATIONS OF CREDIT RISK
The Company's revenues are generated from clients operating in the
healthcare industry, and accordingly, as of May 31, 1997 and 1996, all of the
Company's trade receivables and installment receivables were from entities in
this industry. The Company has no policy requiring collateral for the extension
of trade credit in the ordinary course of business.
NOTE 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 128, "Earnings per Share," issued in February 1997, changes the
method of calculating earnings per share and will be effective for the Company's
financial statements for the year ending May 31, 1998. Earlier application is
not permitted. However, the Company is permitted to disclose pro forma earnings
per share amounts computed using this Statement in periods prior to adoption.
Upon adoption, all prior period earnings per share data presented shall be
restated to conform to this Statement. The calculation of earnings per share
under this Statement is simpler than prior methods and more consistent with
international accounting standards. Given the Company's historical losses,
common stock equivalents were excluded from prior pro forma earnings per share
calculations because they were anti-dilutive. Therefore, adoption of this
Statement is not expected to have a material impact on amounts previously
reported as pro forma net loss per common share.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997,will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement is
effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its financial
statements for the year ending May 31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company expects to adopt this Statement in its
financial statements for the year ending May 31, 1998.
F-16
<PAGE> 153
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly financial information for the years ended May 31, 1997
and 1996 is supplementary and is provided in the following summary:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
FEBRUARY NOVEMBER
MAY 31, 28, 30, AUGUST 31,
1997 1997 1996 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues................................ $ 4,845,868 $ 4,064,276 $5,162,777 $4,196,779
Total operating expenses...................... 2,075,024 5,259,597 2,121,897 1,378,980
Operating income (loss)....................... (1,399,027) (6,347,410) 109,905 280,667
Net income (loss)............................. (793,571) (3,930,237) 211,574 292,216
Earnings (loss) per common share.............. (0.14) (0.60) 0.03 0.05
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------
FEBRUARY NOVEMBER
MAY 31, 29, 30, AUGUST 31,
1996 1996 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues.................................. $4,871,723 $4,203,719 $5,318,504 $5,400,233
Total operating expenses........................ 5,664,899 3,278,847 2,612,565 2,559,171
Operating income (loss)......................... (5,946,480) (1,596,314) (104,481) 202,571
Net income (loss)............................... (3,472,218) (781,890) 188,090 340,027
Earnings (loss) per common share................ (0.54) -- -- --
Pro forma earnings (loss) per common share...... -- (0.12) 0.03 0.05
</TABLE>
Results of operations for the quarters ended February 28, 1997, May 31,
1996, and February 29, 1996 include restructuring charges discussed in Note 4
and the stock repurchase discussed in Note 5. Total revenues, total operating
expenses, and operating income for all periods have been restated for the
discontinued operation discussed in Note 3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers of the Company, their ages and their positions with the
Company are provided in the table below. The other information called for by
Item 10 is incorporated by reference to the Registrant's Proxy Statement being
sent to stockholders in connection with the 1997 Annual Meeting of Stockholders
to be held on November 18, 1997 (the "Proxy Statement").
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------------------
<S> <C> <C>
Patrick C. Sommers..... 50 President, Chief Executive Officer and Chairman
Angus J. Carroll....... 38 Senior Vice President
Marlon T. Gruen........ 43 Senior Vice President
Robert C. Steffel...... 44 Senior Vice President
Daniel P. DiCaro....... 40 Vice President, Chief Financial Officer and Asst. Secretary
Susan K. Doctors....... 56 Vice President
Lynda D. Hernandez..... 41 Vice President
Timothy K. Rutledge.... 39 Vice President
William G. Brown....... 54 Secretary and Director
</TABLE>
F-17
<PAGE> 154
Officers serve at the pleasure of the Board.
Patrick C. Sommers, President, Chief Executive Officer, and Chairman of the
Board of Directors joined the Company in February 1996. From 1992 to 1996, Mr.
Sommers served as President of Ceridian Employer Services, a $400 million
division of Ceridian Corporation (formerly Control Data Corporation). From 1990
to 1992, Mr. Sommers was President of GTE Information Services, a division of
GTE Corporation, and from 1969 to 1990, he served in successive management
positions with Dun & Bradstreet Corporation, culminating with his position as
President of Dun & Bradstreet Information Resources, Inc.
Angus J. Carroll, Senior Vice President, joined the Company in July 1996
and is responsible for strategic planning and business development. From 1993 to
1996, Mr. Carroll served as Vice President of Business Development at Ceridian
Employer Services. From 1990 to 1993, he was Director of Business Planning at
GTE Corporation. From 1979 to 1990, Mr. Carroll held successive management
positions with Dun & Bradstreet Corporation, culminating with the position of
Assistant Vice President of Computer Development. Mr. Carroll received his
M.B.A. from Fairleigh-Dickinson University.
Marlon T. Gruen, Senior Vice President, joined the company in February 1997
and is responsible for marketing. From 1992 to 1997, Mr. Gruen served as Vice
President of Marketing for Merck-Medco Managed Care, LLC, a division of Merck &
Company. From 1991 to 1992, he was Director of Product Planning at GTE Health
Systems, a division of GTE Corporation. From 1990 to 1991, Mr. Gruen served as
Director of Product Planning at Consumer Health Services, Inc. Prior to that,
from 1977 to 1990, he held successive management positions with Dun & Bradstreet
Corporation, culminating with the position of Assistant Vice President of
Product Planning & Development.
Robert C. Steffel, Senior Vice President, is responsible for the contract
management and information services businesses. Prior to joining the Company in
December 1991, he was Vice President, Information Systems of Specialty Home
Health Care from 1989 to 1991. He also served as Director of Information Systems
and Management Engineering at Curaflex Home Health Care from 1988 to 1989.
Daniel P. DiCaro, Vice President, Chief Financial Officer and Assistant
Secretary, joined the Company in January 1997. Mr. DiCaro was one of the
founders of Imagination Pilots Entertainment (IPE), a joint venture with Time
Warner in consumer multimedia software. Mr. DiCaro served as the Chief Financial
Officer and Chief Operating Officer of IPE from 1994 to 1997. He is currently a
director of IPE. From 1990 to 1994, Mr. DiCaro served as the Chief Financial
Officer of a group of privately held, venture capital backed, software and
information service companies. Previously, he was the Vice President of Finance
for CCC Information Services Inc. (1987 to 1990) and a member of the
international accounting firm of Arthur Young and Company (1984 to 1987). Mr.
DiCaro received his M.B.A. from DePaul University and is a certified public
accountant.
Susan K. Doctors, Vice President, joined the Company in January 1995 and is
responsible for Human Resources and Administration. From 1993 to 1995, she
worked as an independent consultant. Prior to 1993, Ms. Doctors worked 19 years
at Official Airline Guides, Inc. holding successive management positions
culminating with her position as Vice President of Human Resources. Ms. Doctors
received her Masters in Management from the Kellogg Graduate School at
Northwestern University.
Lynda D. Hernandez, Vice President, is responsible for the operations of
the Clinical Data Systems division. Most recently, Ms. Hernandez served as
Senior Director for operations. From 1990 to 1992, she was manager of Technical
Support, Interfaces and Client Services in the Clinical Data Systems division.
Prior to 1990, Ms. Hernandez served in successive technical and management
positions with the Company.
Timothy K. Rutledge, Vice President, is responsible for the operations of
the Decision Support Systems division. He joined the Company in June 1992
following the acquisition of Innovate Software Solutions, Inc. which he
co-founded in 1989. He held successive management positions with that firm until
its acquisition by Medicus. Previously, he served as a manager for Price
Waterhouse.
William G. Brown is a partner of Bell, Boyd & Lloyd, Chicago, IL, legal
counsel to the Company, and has been Secretary and a Director of the Predecessor
Corporation since its incorporation in December 1984, and
F-18
<PAGE> 155
of MCS and the Company since March 1, 1996. Mr. Brown is also a Director of MYR
Group, Dovenmuehle Mortgage and CFC International, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
information under the caption "Compensation" in the Registrant's Proxy Statement
for the 1997 Annual Meeting of Stockholders to be held on November 18, 1997 (the
"Proxy Statement").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
information under the caption "Common Stock Ownership by Management" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
F-19
<PAGE> 156
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-1
Balance Sheets at May 31, 1997 and 1996............................................... F-2
Statements of Operations for the years ended May 31, 1997, 1996 and 1995.............. F-3
Statements of Changes in Stockholders' Equity for the years ended May 31, 1997, 1996
and 1995............................................................................ F-4
Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995.............. F-5
Notes to Financial Statements......................................................... F-6
</TABLE>
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the Financial
Statements or the Notes to Financial Statements.
EXHIBITS
A list of Exhibits is set forth in the Exhibit Index, which index precedes
such exhibits and which is incorporated herein by this reference thereto.
Included in the exhibits listed therein are the following exhibits which
constitute management contracts or compensatory plans or arrangements:
<TABLE>
<S> <C>
(i.) 1989 Stock Option Plan, as amended
(ii.) 1991 Stock Option Plan
(iii.) 1993 Stock Option Plan
(iv.) 1993 Performance Stock Option Plan
(v.) Stock Purchase Plan, as amended
(vi.) Form of Indemnification Contract between Registrant and each officer and
director
(vii.) Retirement Savings Plan
(viii.) 1994 Stock Option Plan
(ix.) 1994 Directors' Stock Option Plan
(x.) 1995 RCM Stock Option Plan
(xi.) 1996 C.E.O. Stock Option Plan
(xii.) 1996 C.E.O. Replacement Stock Option Plan
(xiii.) 1996 C.E.O. Special Stock Option Plan
(xiv.) 1997 Employee Stock Option and Restricted Stock Plan
(xv.) Amendment to and Restatement of the 1989, 1991, 1993, 1993 Performance and
1994 Stock Option Plans
(xvi.) Stock Repurchase and Warrant Agreement between the Company and Richard C.
Jelinek
(xvii.) Stock Repurchase and Warrant Agreement between the Company and the Boston
Safe Deposit and Trust Company of California, or its successors, as trustee
of the Richard C. Jelinek Charitable Remainder Unitrust dated August 3, 1993
</TABLE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended May 31, 1997.
F-20
<PAGE> 157
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------------------
<S> <C>
2 Distribution Agreement between the Predecessor Corporation and the Registrant
(Incorporated by Reference to Exhibit 2(b) to the Predecessor Corporation's
Report on Form 8-K (Commission File No. 0-19393) dated March 1, 1996, as
amended by Form 8-K/A-1 filed on April 30, 1996).
3(a) Restated Certificate of Incorporation (incorporated by reference to Exhibit
4(a) to Registration Statement number 333-3028).
(b) Bylaws (incorporated by reference to Exhibit 3(b) to the Registrant's
Registration Statement on Form 10 (Commission File No. 0-27614)).
10(b) Agreement between the Registrant and Comshare, Inc.**
(c) 1989 Stock Option Plan, as amended**
(c)(1) 1991 Stock Option Plan***
(c)(2) 1993 Stock Option Plan****
(c)(3) 1993 Performance Stock Option Plan****
(c)(4) 1994 Stock Option Plan*****
(c)(5) 1994 Directors' Stock Option Plan#
(c)(6) 1995 RCM Stock Option Plan##
(c)(7) 1996 C.E.O. Stock Option Plan##
(c)(8) 1996 C.E.O. Replacement Stock Option Plan##
(c)(9) 1996 C.E.O. Special Stock Option Plan##
(c)(10) 1997 Employee Stock Option and Restricted Stock Plan (Incorporated by
Reference to Exhibit D to the Company's Proxy Statement dated February 17,
1997 (Commission File No. 0-27614))
(c)(11) Amendment to and Restatement of the 1989, 1991, 1993, 1993 Performance and
1994 Stock Option Plans (Incorporated by Reference to Exhibit C to the
Company's Proxy Statement dated February 17, 1997 (Commission File No.
0-27614))
(e)(1) Stock Repurchase and Warrant Agreement between the Company and Richard C.
Jelinek (Incorporated by Reference to Exhibit E to the Company's Proxy
Statement dated February 17, 1997 (Commission File No. 0-27614))
(e)(2) Stock Repurchase and Warrant Agreement between the Company and the Bostons
Safe Deposit and Trust Company of California, or its successors, as trustee of
the Richard C. Jelinek Charitable Remainder Unitrust dated August 3, 1993
(Incorporated by Reference to Exhibit E to the Company's Proxy Statement dated
February 17, 1997 (Commission File No. 0-27614))
(f) Stock Purchase Plan, as amended##
(g) Form of Indemnification Contract between Registrant and each officer and
director**
(h) Retirement Savings Plan****
(i) Lease of Evanston, IL office##
(j) Lease of Alameda, CA office##
(k) Lease of Cincinnati, OH office***
(l) Lease of Chesterfield, MO office##
(m) Loan and Security Agreement with Cole Taylor Bank
23 Consent of Price Waterhouse LLP
</TABLE>
F-21
<PAGE> 158
- ---------------
* Indicated only on manually signed original of report.
** Incorporated by reference to the exhibit with the same designation filed
as part of Registration Statement No. 33-41253.
*** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1992.
**** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1993.
***** Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1994.
# Incorporated by reference to the exhibit with the same designation filed
as part of the Annual Report on Form 10-K of the Predecessor Corporation
for the fiscal year ended May 31, 1995.
## Incorporated by reference to the exhibit with the same designation filed as
part of the Annual Report on Form 10-K of the Registrant for the fiscal
year ended May 31, 1996.
F-22
<PAGE> 159
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.
MEDICUS SYSTEMS CORPORATION
By: /s/ PATRICK C. SOMMERS
------------------------------------
Patrick C. Sommers
Chairman, Chief Executive Officer
and President
Dated: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<C> <C> <S>
/s/ PATRICK C. SOMMERS Chairman of the Board of August 28, 1997
- --------------------------------------------- Directors, Chief Executive
Patrick C. Sommers Officer and President
/s/ DANIEL P. DICARO Vice President (principal August 28, 1997
- --------------------------------------------- financial and accounting
Daniel P. Dicaro officer)
/s/ WILLIAM G. BROWN Director August 28, 1997
- ---------------------------------------------
William G. Brown
/s/ JON E.M. JACOBY Director August 28, 1997
- ---------------------------------------------
Jon E.M. Jacoby
/s/ RICHARD C. JELINEK Director August 28, 1997
- ---------------------------------------------
Richard C. Jelinek
/s/ JOHN P. KUNZ Director August 28, 1997
- ---------------------------------------------
John P. Kunz
/s/ RISA LAVIZZO-MOUREY Director August 28, 1997
- ---------------------------------------------
Risa Lavizzo-Mourey
/s/ GAIL L. WARDEN Director August 28, 1997
- ---------------------------------------------
Gail L. Warden
</TABLE>
F-23
<PAGE> 160
LOAN AND SECURITY AGREEMENT
DATED AS OF
, 1997
BY AND BETWEEN
COLE TAYLOR BANK
AND
MEDICUS SYSTEMS CORPORATION
<PAGE> 161
COLE TAYLOR BANK
MEDICUS SYSTEMS CORPORATION
LOAN AND SECURITY AGREEMENT
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
Collateral Locations.............................................................. 1.1(G)
Patents, Trademarks, Copyrights and Licenses...................................... 1.1(K)
Form of Software Agreement........................................................ 1.1(Z)
Existing Indebtedness............................................................. 5.1(F)
</TABLE>
<PAGE> 162
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of
, 1997, by and between COLE TAYLOR BANK (the "Lender") and MEDICUS
SYSTEMS CORPORATION ("Borrower").
THE PARTIES HERETO agree as follows:
ARTICLE ONE
DEFINITIONS
SECTION 1.1. Defined Terms. In addition to terms defined elsewhere in this
Agreement or any Supplement or Exhibit hereto, when used herein, the following
terms shall have the following meanings:
(A) "Account Debtor" shall mean any Person who is or who may become
obligated to Borrower under, with respect to, or on account of an Account
Receivable or other Collateral.
(B) "Accounts Receivable" shall mean any and all accounts (as such
term is defined in the UCC) of Borrower and each and every right of
Borrower to (i) the payment of money or (ii) the receipt or disbursement of
products, goods, services or other valuable consideration, whether such
right now exists or hereafter arises, whether such right arises out of a
sale, lease or other disposition of Inventory, or out of a rendering of
services, or any other transaction or event, whether such right is created,
generated or earned by Borrower or by some other Person who subsequently
transfers its interest to Borrower, whether such right is or is not already
earned by performance, and howsoever such right may be evidenced, together
with all other rights and interests (including all liens and security
interests) which Borrower may at any time have by law or agreement against
any Account Debtor or other Person obligated to make any such payment or
against any property of such Account Debtor or other Person. Without
limitation of the foregoing, all amounts due and owing from time to time
pursuant to the Software Agreements shall be deemed to be Accounts
Receivable.
(C) "Affiliate" shall mean any Person which, directly or indirectly,
owns or controls, on an aggregate basis, at least a five percent (5%)
interest in any other Person, or which is controlled by or is under common
control with any other Person.
(D) "Business Day" means any day on which the Lender is open for
business in Chicago, Illinois, other than a Saturday or Sunday.
(E) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(F) "Collateral" shall mean the following property owned by Borrower,
howsoever arising, wherever located and whether now owned or existing or
hereafter existing or acquired:
(i) all Equipment;
(ii) all Accounts Receivable;
(iii) all Inventory;
(iv) any and all monies, reserves, deposits, deposit accounts,
securities, cash, cash equivalents, balances, credits, and interest and
dividends on any of the above, of or in the name of Borrower, now or
hereafter with the Lender and any and all other property of any kind and
description of or in the name of Borrower, now or hereafter, for any
reason or purpose whatsoever, in the possession or control of, or in
transit to, the Lender or any agent or bailee for the Lender;
(v) all chattel paper, contract rights and instruments;
(vi) all General Intangibles;
(vii) all furniture and fixtures;
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<PAGE> 163
(viii) all Software Agreements;
(ix) all computer databases, flow diagrams, software, software
systems, programs, research and stored information;
(x) all source codes and object codes relating to the property
listed in clause (ix) above;
(xi) all books, records and computer records in any way relating to
the above property;
(xii) any and all substitutions, renewals, improvements,
replacements, additions and proceeds of (i) through (xi) above,
including, without limitation, proceeds of insurance policies.
(G) "Collateral Locations" shall mean the locations set forth on
Exhibit 1.1(G) attached hereto.
(H) "Corporate Real Property" shall mean all of the real estate and
the improvements thereon and thereto leased by Borrower at the premises
commonly known as One Rotary Center, Suite 1111, Evanston, Illinois 60201.
(I) "Documents" shall mean this Agreement, the Revolving Note, the
Term Note and any other instruments or documents required or contemplated
hereunder or thereunder, whether now existing or at any time hereafter
arising.
(J) "Equipment" shall mean all machinery and equipment owned by
Borrower, wherever located, whether now owned or hereafter existing or
acquired by Borrower, any additions thereon, accessions thereto or
replacements of parts thereof.
(K) "General Intangibles" shall mean all general intangibles (as such
term is defined in the UCC) owned by Borrower, including, but not limited
to goodwill, trademarks, trade names, licenses, patents, patent
applications, copyrights, inventions, franchises, books and records of
Borrower, designs, trade secrets, registrations, prepaid expenses, all
rights to and payments of refunds, overpayments, rebates and return of
monies, including, but not limited to, sales tax refunds, tax refunds, tax
refund claims and rights to and payments of refunds, overpayments or
overfundings under any pension, retirement or profit sharing plans and any
guarantee, security interests or other security held by or granted to
Borrower to secure payment by an Account Debtor of any of the Accounts
Receivable. Without limitation of the foregoing, "General Intangibles"
shall include the patents, trademarks, copyrights and licenses more fully
described on Exhibit 1.1(K) attached hereto.
(L) "Inventory" shall mean any and all goods, finished goods, whole
goods, materials, raw materials, work-in-progress, components or supplies,
wheresoever located and whether now owned or hereinafter acquired and owned
by Borrower, including, without limitation, goods, finished goods, whole
goods, materials, raw materials, work-in-process, components or supplies in
transit, wheresoever located, whether now owned or hereafter acquired by
Borrower, which are held for demonstration, illustration, sale or lease,
furnished under any contract of service or held as raw materials,
work-in-process for manufacturing or processing or supplies for
manufacturing or processing, and all materials used or consumed in the
business of Borrower, and shall include such other property, the sale or
disposition of which has given rise to an Accounts Receivable and which has
been returned to or repossessed or stopped in transit by or on behalf of
Borrower, but shall not include property owned by third parties in the
possession of Borrower.
(M) "Interest Period" means any 90 day period as selected by the
Borrower in the notice required to be sent by Borrower as set forth in
Section 2.3 of this Agreement; provided, however, that each Interest Period
is subject to the following:
(i) If any Interest Period would otherwise end on a day which is
not a Business Day, that Interest Period shall be extended to the next
succeeding Business Day;
(ii) No Interest Period may extend beyond the Revolver Termination
Date; and
(iii) The interest rate for each Interest Period shall be applied
from and including the first day of such Interest Period to, but
excluding, the last day of such Interest Period.
2
<PAGE> 164
(N) "Interest Rate Option Conditions" shall mean all of the following:
(i) no Event of Default shall have occurred; and
(ii) Borrower's Tangible Stockholders Equity as reported in
Borrower's accountant prepared financial statements required to be
delivered to Lender pursuant to Section 5.1(A) of this Agreement is
greater than or equal to $8,500,000.00; and
(iii) no material adverse change has occurred in the business or
financial condition of Borrower; and
(iv) the date is after May 31, 1997.
(O) "Interest Rate Reduction Conditions" shall mean all of the
following:
(i) no Event of Default shall have occurred; and
(ii) Borrower's Tangible Stockholders Equity as reported in
Borrower's accountant prepared financial statements required to be
delivered to Lender pursuant to Section 5.1(A) of this Agreement is
greater than or equal to $10,000,000.00; and
(iii) no material adverse change has occurred in the business or
financial condition of Borrower.
(P) "Liabilities" shall mean all liabilities, indebtedness and
obligations of Borrower to the Lender, howsoever created, arising or
evidenced, whether now existing or hereafter arising, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
due or to become due, primary or secondary, joint or several, whether
existing or arising through discount, overdraft, purchase, direct loan,
participation, operation of law, or otherwise, including, but not limited
to, all liabilities, indebtedness and obligations of Borrower to the Lender
pursuant to any letter of credit, any standby letter of credit or any of
the Documents and reasonable outside attorneys' and paralegals' fees or
charges relating to the preparation of the Documents and the enforcement of
Lender's rights, remedies, powers and security interests under this
Agreement, including, but not limited to, the drafting of any documents in
the preparation and enforcement of the Loans.
(Q) "Libor" shall mean shall mean for each Interest Period, the rate
of interest per annum as determined by Lender to be the rate (rounded
upward, if necessary, to the nearest 1/16 of 1%) at which deposits of
United States dollars in immediately available and freely transferable
funds are offered to Lender in the London Interbank Eurodollar market at
11:00 a.m. (London time) two Business Days prior to the commencement of
such Interest Period for a period equal to such Interest Period and in an
amount equal to the applicable Libor Portion to be outstanding from Lender
during such Interest Period.
(R) "Libor Portion" and "Libor Portions" shall have the meanings set
forth in Section 2.3(B) of this Agreement.
(S) "Loan" shall mean individually, and "Loans" shall mean
collectively, each of the Revolving Loans.
(T) "Net Worth" shall mean the total amount of issued and outstanding
capital stock, plus paid in capital and retained earnings and less treasury
stock.
(U) "Note" shall mean the Revolving Note.
(V) "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party or government (whether
national, federal, state, county, city, municipal or otherwise including,
without limitation, any instrumentality, division, agency, body or
department thereof).
(W) "Portion" shall have the meaning set forth in Section 2.3(B) of
this Agreement.
(X) "Prime Rate" shall mean, as of the date of any determination, the
rate per annum then most recently announced publicly by the Lender as its
prime rate of interest in Chicago, Illinois. The Prime
3
<PAGE> 165
Rate is the interest rate charged by the Lender on commercial loans to a
substantial number of the Lender's good business customers, but it is not
necessarily the Lender's lowest interest rate charged to any customer. The
Prime Rate is subject to change by the Lender without notice of any kind,
except as set forth in the first sentence of this clause.
(Y) "Prime Rate Portion" shall have the meaning set forth in Section
2.3(B) of this Agreement.
(Z) "Software Agreement" shall mean individually, and "Software
Agreements" shall mean collectively, each agreement or license given by
Borrower to its customers or by and between Borrower and any of its
customers for the use, license and/or maintenance of computer programs and
software, whether now existing or hereinafter arising, including, but not
limited to, the form of agreement attached hereto as Exhibit 1.1(Z).
(AA) "Tangible Stockholders Equity" shall mean Borrower's Net Worth
minus the capitalized value of Borrower's software products net of
accumulated amortization.
(BB) "UCC" shall mean the Uniform Commercial Code as enacted and
amended in the State of Illinois.
SECTION 1.2. Other Terms. Accounting terms used in this Agreement which are
not specifically defined shall have the meanings customarily given them in
accordance with generally accepted accounting principles in effect from time to
time. Terms used in this Agreement which are defined in the UCC, shall, unless
the context indicates otherwise or unless otherwise defined in this Agreement,
have the meanings provided for by the UCC.
ARTICLE TWO
LOANS
SECTION 2.1. Loan Amount. Subject to the terms and conditions of this
Agreement, on the date upon which all of the terms and conditions of the
Documents have been met or fulfilled to the satisfaction of Lender (the "Closing
Date"), the Lender agrees to make loans in the aggregate to the Borrower on a
revolving basis (such loans being herein called individually a "Revolving Loan"
and collectively the "Revolving Loans") from time to time in such amounts as the
Borrower may from time to time request up to the maximum amount of $2,500,000.00
(the "Line of Credit"); provided, however, that (A) repayments from time to time
of the Line of Credit shall be available to be reborrowed pursuant to the terms
and conditions of this Agreement; and (B) if the Revolving Loans outstanding at
any time or from time to time exceeds the advance limitations described above,
Borrower shall pay on demand to the Lender such amount necessary to eliminate
such excess; and (C) the Lender's commitment to make Revolving Loans shall
remain in effect for a period to and including October 10, 1999 (the "Revolver
Termination Date"); and (5) notwithstanding anything else contained in this
Agreement, (i) upon the occurrence and continuance of any Event of Default, and
in every such event, the Lender may, in its sole discretion, immediately cease
to make Revolving Loans; and (ii) Borrower shall repay to the Lender on the
Revolver Termination Date all Revolving Loans, plus interest accrued to the date
of payment.
SECTION 2.2. Use of Loan Proceeds. The proceeds of any borrowing by the
Borrower pursuant to the Revolving Loans shall be used by the Borrower solely
for refinancing existing indebtedness of the Borrower, providing working capital
for Borrower and paying for operating expenses of the Borrower and the fees,
costs and expenses of the Lender as provided for in this Agreement.
SECTION 2.3. Revolving Note.
(A) General. The Revolving Loans shall be evidenced by a promissory note
(herein called the "Revolving Note") in form and manner satisfactory to Lender,
dated the date first above written, payable to the order of the Lender, in the
principal amount of the Maximum Line of Credit Amount. The date and amount of
each Revolving Loan made by the Lender and of each repayment of principal
thereon received by the Lender shall be recorded by the Lender in the records of
the Lender and the aggregate unpaid principal
4
<PAGE> 166
amount shown on such records shall be rebuttable, presumptive evidence of the
principal owing and unpaid on the Revolving Note. The failure to record any such
amount on such records shall not, however, limit or otherwise affect the
obligations of the Borrower hereunder or under the Revolving Note to repay the
principal amount of the Revolving Loans together with all interest accruing
thereon. The unpaid principal amount from time to time outstanding on the
Revolving Loans shall be payable as set forth in the Revolving Note. Lender is
hereby authorized to debit any of the Borrower' accounts with Lender and/or make
a Revolving Loan with the proceeds disbursed directly to Lender to make the
required payments pursuant to this Section.
(B) Interest Rate Options.
(i) Interest Rate Option Conditions Not Met. Unless and until all of the
Interest Rate Option Conditions shall have been met, the unpaid principal amount
of the Revolving Note shall only bear interest at the Prime Rate, as in effect
from time to time; provided, however, that upon the occurrence of any Event of
Default, the unpaid amounts due and owing pursuant to the Revolving Note shall
bear interest, whether before or after judgment, until payment in full thereof
at the rate per annum determined by adding 4% to the interest rate which would
otherwise be applicable thereto from time to time. Any change in the interest
rate on the Revolving Note resulting from a change in the Prime Rate shall be
and become effective as of and on the date of the relevant change in the Prime
Rate. Interest accruing pursuant to this clause (i) shall be due and payable on
the first day of each month.
(ii) Interest Rate Option Conditions Met. Commencing with the date on which
all of the Interest Rate Option Conditions shall have been met, the unpaid
principal amount of the Revolving Note shall bear interest as described in this
Section 2.3(B)(ii).
(a) Option. Subject to all of the terms and conditions of this Agreement,
commencing with the date on which all of the Interest Rate Option Conditions
shall have been met, portions of the principal indebtedness evidenced by the
Revolving Note (all of the indebtedness evidenced by the Revolving Note bearing
interest at the same rate for the same period of time being hereinafter referred
to as a "Portion") may, at the option of Borrower, bear interest with reference
to the Prime Rate (the "Prime Rate Portion") or with reference to the Libor
(individually, a "Libor Portion" and collectively, the Libor Portions") and
Portions may be converted at the option of Borrower from time to time from one
basis to another. All of the indebtedness evidenced by the Revolving Note which
is not part of a Libor Portion shall constitute a single Prime Rate Portion. All
of the indebtedness evidenced by the Revolving Note which bears interest with
reference to a particular Libor for a particular Interest Period shall
constitute a single Libor Portion.
(b) Prime Rate Portion. The Prime Rate Portion shall bear interest at the
Prime Rate as in effect from time to time, minus (I) 1/4% unless and until all
of the Interest Rate Reduction Conditions shall have been met; and (II) 1/2%
commencing with the date on which all of the Interest Rate Reduction Conditions
shall have been met; provided, however, that upon the occurrence of any Event of
Default, such Portion shall bear interest, whether before or after judgment,
until payment in full thereof at the rate per annum determined by adding 4% to
the interest rate which would otherwise be applicable thereto from time to time.
Any change in the interest rate on the Prime Rate Portion resulting from a
change in the Prime Rate shall be and become effective as of and on the date of
the relevant change in the Prime Rate. Interest on the Prime Rate Portion shall
be due and payable on the first day of each month.
(c) Libor Portions. Each Libor Portion shall bear interest for each
Interest Period selected therefor at a rate per annum determined by adding (I)
2.25% unless and until all of the Interest Rate Reduction Conditions shall have
been met to Libor for such Interest Period; and (II) 2.00% commencing with the
date on which all of the Interest Rate Reduction Conditions shall have been met
to Libor for such Interest Period, provided, however, that upon the occurrence
of any Event of Default such Portion shall bear interest, whether before or
after judgment, until payment in full thereof through the end of the Interest
Period then applicable thereto at the rate per annum determined by adding 4% to
the interest rate which would otherwise be applicable thereto, and effective at
the end of such Interest Period such Libor Portion shall automatically be
converted into and added to the Prime Rate Portion and shall thereafter bear
interest at the interest rate applicable to the Prime Rate Portion after the
occurrence of an Event Default. At any time and from time to time, Borrower may
identify no more than 5 Libor Portions of the outstanding principal balance of
the Line of Credit. Each Libor
5
<PAGE> 167
Portion shall be in a minimum amount of $250,000.00. Interest on each Libor
Portion shall be due and payable on the last day of each Interest Period
applicable thereto and at maturity (whether by lapse of time, acceleration or
otherwise) and, with respect to any Interest Period applicable to a Libor
Portion in excess of three (3) months, then on the date occurring every three
(3) months after the date such Interest Period began and at the end of such
Interest Period, and interest after maturity shall be due and payable upon
demand. Borrower shall notify Lender on or before 9:00 a.m. (Chicago time) on
the third Business Day preceding the end of an Interest Period applicable to a
Libor Portion whether such Libor Portion is to continue as a Libor Portion, in
which event Borrower shall notify Lender of the new Interest Period selected
therefor, and in the event Borrower shall fail to so notify Lender, such Libor
Portion shall automatically be converted into and added to the Prime Rate
Portion as of and on the last day of such Interest Period. Anything contained
herein to the contrary notwithstanding, the obligation of Lender to create,
continue or effect by conversion any Libor Portion shall be conditioned upon the
fact that at the time no Event of Default shall have occurred and be continuing.
(C) Manner of Option Rate Selection for Revolving Note. Borrower shall
notify Lender (i) by 9:00 a.m. (Chicago time) at least three (3) Business Days
prior to the date upon which it requests that any Libor Portion be created or
that any part of the Prime Rate Portion be converted into a Libor Portion, (each
such notice to specify in each instance the amount thereof and the Interest
Period selected therefor); and (ii) by 1:30 p.m. (Chicago time) on the Business
Day upon which it requests that any Prime Rate Portion be created. If any
request is made to convert a Libor Portion into a Prime Rate Portion available
hereunder, such conversion shall only be made so as to become effective as of
the last day of the Interest Period applicable thereto. All requests for the
creation, continuance or conversion of Portions under this Agreement shall be
irrevocable. Such requests may be written or oral and Lender is hereby
authorized to honor telephonic requests for creations, continuances and
conversions received by it from any person Lender in good faith believes to be a
person authorized to act on behalf of Borrower hereunder, Borrower hereby
indemnifying Lender from any liability or loss ensuing from so acting. Each
determination of Libor made by Lender shall be conclusive and binding absent
manifest error.
(D) Change of Law. Notwithstanding any other provisions of the Documents,
if at any time Lender shall determine in good faith that any change in
applicable laws, treaties or regulations or in the interpretation thereof makes
it unlawful for Lender to create or continue to maintain any Libor Portion, it
shall promptly so notify Borrower and the obligation of Lender to create,
continue or maintain such Libor Portion under this Agreement shall terminate
until it is no longer unlawful for Lender to create, continue or maintain such
Libor Portion. Borrower, on demand, shall, if the continued maintenance of any
Libor Portion is unlawful, at its option, either (i) thereupon prepay the
outstanding principal amount of the affected Libor Portion, together with all
interest accrued thereon and all other amounts payable to Lender with respect
thereto under this Agreement; or (ii) convert the principal amount of the
affected Portion into the Prime Rate Portion available hereunder, subject to the
terms and conditions of this Agreement.
(E) Unavailability of Deposits or Inability to Ascertain
Libor. Notwithstanding any other provision of this Agreement or of the Revolving
Note, if prior to the commencement of any Interest Period, Lender shall
determine that deposits in the amount of any Libor Portion scheduled to be
outstanding during such Interest Period are not readily available to Lender in
the relevant market or by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining Libor, then Lender
shall promptly give notice thereof to Borrower and the obligations of Lender to
create, continue or effect by conversion any Libor Portion in such amount and
for such Interest Period shall terminate and the interest rate on the Revolving
Note shall be converted into a Prime Rate Portion; provided, however, that when
deposits in such amount and for the Interest Period selected by Borrower shall
again be readily available in the relevant market and adequate and reasonable
means exist for ascertaining Libor, Lender shall so notify Borrower and Borrower
then shall have the option of reconverting the method of computing the interest
rate on the Prime Rate Portion into a Libor Portion.
(F) Taxes and Increased Costs. With respect to any Libor Portion, if Lender
shall determine in good faith that any change in any applicable law, treaty,
regulation or guideline (including, without limitation, Regulation D of the
Board of Governors of the Federal Reserve System) or any new law, treaty,
regulation or
6
<PAGE> 168
guideline, or any interpretation of any of the foregoing by any governmental
authority charged with the administration thereof or any central bank or other
fiscal, monetary or other authority having jurisdiction over Lender or its
lending branch or the Libor Portions contemplated by this Agreement (whether or
not having the force of law) shall:
(i) impose, increase, or deem applicable any reserve, special deposit
or similar requirement against assets held by, or deposits in or for the
account of, or loans by, or any other acquisition of funds or disbursements
by, Lender which is not in any instance already accounted for in computing
the interest rate applicable to such Libor Portion;
(ii) subject Lender, any Libor Portion or the Revolving Note to the
extent it evidences such Portion, to any tax (including, without
limitation, any United Stated interest equalization tax or similar tax
however named applicable to the acquisition or holding of debt obligations
and any interest or penalties with respect thereto), duty, charge, stamp
tax, fee, deduction or withholding in respect of this Agreement, any Libor
Portion or the Revolving Note to the extent it evidences such Portion,
except such taxes as may be measured by the overall net income or gross
receipts of Lender or its lending branches and imposed by the jurisdiction,
or any political subdivision or taxing authority thereof, in which Lender's
principal executive office or its lending branch is located;
(iii) change the basis of taxation of payments of principal and
interest due from Borrower to Lender hereunder or under the Revolving Note
to the extent it evidences any Libor Portion (other than by a change in
taxation of the overall net income or gross receipts of Lender); or
(iv) impose on Lender any penalty with respect to the foregoing or any
other condition regarding this Agreement, its disbursement, any Libor
Portion or the Revolving Note to the extent it evidences any Libor Portion;
and Lender shall determine that the result of any of the foregoing is to
increase the cost (whether by incurring a cost or adding to a cost) to
Lender of creating or maintaining any Libor Portion hereunder or to reduce
the amount of principal or interest received or receivable by Lender
(without benefit of, or credit for, any prorations, exemption, credits or
other offsets available under any such laws, treaties, regulations,
guidelines or interpretations thereof), then the interest rate on the
Revolving Note shall be converted to the Prime Rate Portion. If Lender
makes such a determination, Lender shall provide to Borrower a certificate
setting forth the computation of the increased cost or reduced amount as a
result of any event mentioned herein in reasonable detail and such
certificate shall be conclusive if reasonably determined.
(G) Funding Indemnity. In the event Lender shall incur any loss of profit,
and any loss, cost or expense (including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired or contracted to be acquired by Lender to fund or maintain
any Libor Portion, or the relending or reinvesting of such deposits or other
funds or amounts paid or prepaid to Lender) as a result of:
(i) any payment of a Libor Portion on a date other than the last day
of the then applicable Interest Period for any reason, whether before or
after the occurrence of any Event of Default, and whether or not such
payment is required by any provisions of this Agreement; or
(ii) any failure by Borrower to create, borrow, continue or effect by
conversion a Libor Portion on the date specified in a notice given pursuant
to this Agreement; then upon the demand of Lender, Borrower shall pay to
Lender such amount as will reimburse Lender for such loss, cost or expense.
Without limitation of the foregoing, any prepayment of a Libor Portion on a
date other than the last day of the then applicable Interest Period shall
be accompanied by a prepayment penalty equal to the loss Lender shall
suffer as a result of Libor as calculated on the date of such prepayment
for the period of time equal to the Interest Period for such Libor Portion
being prepaid being less than Libor applicable to the Libor Portion being
prepaid. If Lender requests such a reimbursement Lender shall provide
Borrower with a certificate setting forth the computation of the loss of
profit and any loss, cost or expense giving rise to the request for
reimbursement in reasonable detail and such certificate shall be conclusive
if reasonably determined.
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(H) Lending Branch. Lender may, at its option, elect to make, fund or
maintain Portions of the Loans hereunder at such of its branches or offices as
Lender may from time to time elect.
(I) Discretion of Bank as to Manner of Funding. Notwithstanding any
provision of this Agreement to the contrary, Lender shall be entitled to fund
and maintain its funding of all or any part of the Revolving Note in any manner
Lender sees fit; it being understood, however, that for the purposes of this
Agreement all determinations hereunder shall be made as if Lender had actually
funded and maintained each Libor Portion, or its share thereof, during each
Interest Period applicable thereto through the purchase of deposits in the
relevant market in the amount of such Libor Portion, having a maturity
corresponding to such Interest Period and bearing an interest rate equal to the
interest rate applicable to such Libor Portion for such Interest Period.
(J) Prepayments on Libor Portions. Borrower may prepay any Libor Portion of
the Revolving Note only on the last date of the then applicable Interest Period,
in whole or in part (but, if in part, then in an amount not less than
$100,000.00 or such greater amount which is an integral multiple of $100,000.00)
upon three (3) Business Days' prior notice to Lender (which notice shall be
irrevocable once given, must be received by Lender no later than 9:00 a.m.
(Chicago time) on the third Business Day preceding the date of such prepayment
and shall specify the principal amount to be repaid). Any such prepayment shall
be effected by payment of the principal amount to be prepaid and accrued
interest thereon to the end of the applicable Interest Period.
(K) Notations and Requests. All Revolving Loans made against the Revolving
Note, the status of all amounts evidenced by the Revolving Note as constituting
part of the Prime Rate Portion or a Libor Portion and the rates of interest and
Interest Periods applicable to such Portions shall be recorded by Lender on its
books and records or, at its option in any instance, endorsed on schedules to
the Revolving Note and the unpaid principal balance and status, rates and
Interest Periods so recorded or endorsed by Lender shall be prima facie evidence
in any court or other proceeding brought to enforce the Revolving Note of the
principal amount remaining unpaid thereon, the status of the Revolving Loans
evidenced thereby and the interest rates and Interest Periods applicable
thereto; provided, however, that the failure of Lender to record any of the
foregoing shall not limit or otherwise affect the obligation of Borrower to
repay the principal amount of the Revolving Note together with accrued interest
thereon.
SECTION 2.4. Requests for Revolving Loans. Subject to the terms and
provisions of this Agreement, each request by the Borrower for any draw under
the Line of Credit shall be made in accordance with Lender's Automatic Loan
Manager Program.
ARTICLE THREE
COLLATERAL
SECTION 3.1. Security Interests. To secure payment of the Liabilities,
Borrower hereby irrevocably pledges, assigns, transfers, conveys and sets over
to the Lender and hereby grants to the Lender a first and paramount security
interest in and to the Collateral, howsoever arising, wherever located and
whether now owned or existing or hereafter existing or acquired.
SECTION 3.2. Perfection and Filing Requirements. Borrower shall perform any
and all acts requested by the Lender to establish, maintain and continue the
Lender's security interests and liens in the Collateral, including but not
limited to, executing financing statements and such other instruments and
documents when and as reasonably requested by the Lender.
SECTION 3.3. Collection of Accounts Receivable.
(A) Borrower shall establish a "lock box" account at the Lender (the "Lock
Box"), subject to the control of the Lender, and pursuant to Lender's standard
form lock-box agreement (the "Lock Box Agreement"). Borrower, at its expense,
will notify or cause to be notified all Account Debtors to pay directly any sum
or sums then due or to become due on the Accounts Receivable to the Lock Box.
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(B) Unless otherwise provided herein and subject to the provisions of
Section 3.3(A) of this Agreement, Borrower may collect through the Lock Box at
its own expense the Accounts Receivable in the ordinary course of business;
provided, however, that Borrower's authorization to collect through the Lock Box
the Accounts Receivable is subject to the following:
(i) The Lender, at any time after the occurrence of an Event of
Default, may, in its sole discretion, notify any or all of the Account
Debtors that (1) the Accounts Receivable have been assigned to the Lender;
and/or (2) that all further payments on the Accounts Receivable should be
paid solely to the Lender. When requested by the Lender after the
occurrence of an Event of Default, Borrower at its expense will notify or
cause to be notified any or all Account Debtors to pay directly to the
Lender any sum or sums then due or to become due on the Accounts Receivable
or any part thereof and all bills and statements thereafter sent by
Borrower to such Account Debtors shall state that the same have been
assigned to the Lender and are payable solely to the Lender;
(ii) In the event an Account Debtor is notified under Subsection
3.3(B)(i) of this Agreement or one or more Events of Default have occurred
under the terms of this Agreement, the Lender shall have and succeed to all
rights, remedies, securities and liens of Borrower in respect to such
Accounts Receivable or other Collateral, including, but not limited to, the
right of stoppage in transit of any merchandise, guarantees or other
contracts or suretyship with respect to any such merchandise, warranties,
unpaid seller's liens, statutory liens, artisans' liens, or the right to
other collateral security held by or to which Borrower is entitled for the
payment of any such merchandise, and shall have the right to enforce the
same in its name or to direct the enforcement thereof by Borrower for the
benefit of the Lender, and Borrower shall, at the request of the Lender,
deliver to the Lender a separate written assignment of any of the same. The
Lender, however, shall not incur any obligation or liability of Borrower to
any Account Debtor, including, but not limited to, obligations or
liabilities pursuant to any con tract, agreement, warranty, guarantee,
judicial decree or jury award. The Lender, in such an event, is also hereby
irrevocably authorized to receive, open and dispose of all mail addressed
to Borrower, to notify the Post Office authorities to change the address
for delivery of Borrower's mail to an address designated by the Lender, to
endorse Borrower's name on all notes, checks, drafts, bills of exchange,
money orders, commercial paper of any kind whatsoever, and any other
instruments or documents received howsoever in payment of the Accounts
Receivable, or any part thereof, and the Lender or any officer or employee
thereof is hereby irrevocably constituted and appointed agent and
attorney-in-fact for Borrower for the foregoing purpose;
(iii) Borrower shall not collect, compromise or accept any sum in full
payment or satisfaction of any of the Accounts Receivable for materially
less than the amount due without the express written consent of the Lender,
except in the ordinary course of business; and
(iv) The Lender may directly request the Account Debtors for written
confirmations of the Accounts Receivable at any time whether before or
after the occurrence of an Event of Default.
(C) All collections of Accounts Receivable through the Lock Box shall be
deposited into a cash collateral account located at and controlled by Lender and
for bookkeeping purposes be credited against the Line of Credit (1) banking day
after the date of deposit into such cash collateral account with Lender;
provided, however, that (i) all such credits shall be and are conditional
credits which shall only become final upon collection in immediately available
funds; and (ii) any funds that are electronically transferred from another
financial institution to such cash collateral account shall for bookkeeping
purposes be credited against the Line of Credit one (1) banking day after the
date of deposit into such cash collateral account.
SECTION 3.4. Use of Collateral. Borrower shall at all times keep the
Collateral in good condition and repair and free and clear of all unpaid charges
(including, but not limited to, taxes), liens and encumbrances, and shall pay or
cause to be paid all obligations as they come due, including but not limited to,
mortgage payments, real estate taxes, assessments and rent due on the premises
where the Collateral is or may be located, except for charges, liens,
encumbrances and obligations being contested in good faith by Borrower and for
which adequate reserves have been established. Borrower agrees that (except as
provided in the immediately preceding sentence) in the event Borrower fails to
pay such obligations, the Lender may, at its
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sole and arbitrary discretion, pay such obligations for the account of Borrower.
The Lender may, in its sole discretion, discharge taxes, liens or security
interests or other encumbrances at any time levied or placed on the Collateral
and may, in its sole and arbitrary discretion, pay for the maintenance and
preservation of the Collateral. Any payments made by the Lender pursuant to this
Section shall be repayable to the Lender by Borrower immediately upon the
Lender's demand therefor, with interest at a rate equal to the highest interest
rate described in the Note in effect from time to time during the period from
and including the date funds are so expended by the Lender to the date of
repayment, and any such amounts due and owing the Lender shall be an additional
obligation of Borrower to the Lender secured hereunder.
SECTION 3.5. Software Agreements. As additional security for the payment of
the Liabilities, Borrower shall execute and deliver an assignment of all of the
Software Agreements (the "Software Assignment"), in form and manner satisfactory
to Lender.
SECTION 3.6. Patents, Trademarks and Licenses. As additional security for
the payment of the Liabilities, the Borrower shall execute and deliver to Lender
a patent, trademark and license security agreement (the "Patent and Trademark
Agreement") pursuant to which all of the patents, trademarks and licenses of the
Borrower are pledged to Lender, in form and manner satisfactory to Lender.
SECTION 3.7. Copyrights and Licenses. As additional security for the
payment of the Liabilities, the Borrower shall execute and deliver to Lender a
copyright and license security agreement (the "Copyright Agreement") pursuant to
which all of the copyrights and licenses of the Borrower are pledged to Lender,
in form and manner satisfactory to Lender.
SECTION 3.8. Cross Collateralization. The Borrower acknowledges and agrees
that (A) the Collateral secures all of the Loans and (B) Lender shall not
release any lien on the Collateral unless and until all the Liabilities are paid
in full.
ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES
SECTION 4.1. Borrower. Borrower represents and warrants to the Lender that:
(A) Organization, Etc. It is duly organized, validly existing and in
good standing under the laws of the State of its incorporation and is duly
qualified and in good standing or has applied for qualification as a
foreign corporation authorized to do business in each jurisdiction where,
the failure to be so qualified will have a material adverse effect on the
Borrower's business.
(B) Authorization: No Conflict. The execution and delivery of the
Documents are all within the corporate powers of it, have been duly
authorized by all necessary action, have, or by the time of their execution
and delivery shall have, received all necessary governmental or regulatory
approval (if any shall be required), and do not and will not contravene or
conflict with any provision of (i) law, rule, regulation or ordinance, (ii)
the certificate of incorporation or by-laws of it; or (iii) any agreement
binding upon it or any of their properties, as the case may be.
(C) Validity and Binding Nature. The Documents executed by it are the
legal, valid and binding obligations of it, enforceable against it, in
accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization and other similar laws of
general application affecting the rights and remedies of creditors and
except as the availability of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding therefor
may be brought.
(D) Title to Assets. Except as set forth in Section 4.1(E) of this
Agreement, it has good and marketable title to all assets owned by it,
including, but not limited to, the Collateral, subject to no (i) liens,
encumbrances, security interests, or mortgages; (ii) zoning, building,
fire, health or environmental code violations of any governmental
authority; and (iii) violations of any covenants, conditions or
restrictions of record.
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(E) Liens. None of its assets are subject to any lien, encumbrance or
security interest, except (i) for current taxes not delinquent or taxes
being contested in good faith and by appropriate proceedings and for which
adequate reserves have been established; (ii) liens arising in the ordinary
course of business for sums not due or sums being contested in good faith
and by appropriate proceedings and for which adequate reserves have been
established, but not involving any deposits, advances or borrowed money or
the deferred purchase price of property or services; (iii) liens in favor
of Lender; and (iv) liens specifically permitted pursuant to this
Agreement.
(F) Financial Statements. Its financial statements which have been
previously delivered to Lender have been prepared on a basis and in
conformity with generally accepted accounting principles consistently
applied, are true and correct and fairly present the consolidated financial
condition of it as at the dates of such financial statements and the
results of its operations for the periods then ended, and since the date of
the latest financial statement delivered to Lender there has been no
material adverse change in its financial condition or operations.
(G) Litigation and Contingent Liabilities. No litigation or
arbitration, administrative or governmental proceedings are pending or to
the knowledge of Borrower threatened against it which would, if adversely
determined, materially and adversely affect its financial condition or
continued operations.
(H) No Violations of Laws. It (i) is not in material violation of any
law, ordinance, rule, regulation, judgment, decree or order of any federal,
state or local governmental body or court; and (ii) has obtained all
required permits, certificates, licenses, approvals and other
authorizations from governmental agencies and entities (whether federal,
state or local) necessary to carry on its operation.
(I) Burdensome Obligations. Except for indentures, agreements, leases,
contracts, deeds or other instruments entered into in the ordinary course
of business that are not otherwise precluded or prohibited pursuant to the
Documents, it is not a party to any indenture, agreement, lease, contract,
deed or other instrument, or subject to any partnership restrictions which
could reasonably be expected to materially and adversely affect or impair
the business, assets, operations, properties, or condition, financial or
otherwise, of it.
(J) Taxes. All federal, state and local tax returns required to be
filed by it have been filed with the appropriate governmental agencies and
all taxes due and payable by it have been timely paid.
(K) No Default or Event of Default. No event or condition exists under
any material agreement, instrument or document to which it is a party or
may be subject, or by which it or any of its properties are bound, which
constitutes a default or an event of default thereunder, or will, with the
giving of notice, passage of time, or both, would constitute a default or
event of default thereunder.
(L) Employee Benefit Plans. Each employee benefit plan, if any, (as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended from time to time) maintained by it complies in all
material respects with all applicable requirements of law and regulations
and all payments and contributions required to be made with respect to such
plans have been timely made.
(M) Federal Laws and Regulations. It is not (i) an "investment
company" or a company "controlled", whether directly or indirectly, by an
"investment company", within the meaning of the Investment Company Act of
1940, as amended; (ii) a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company", within the meaning of the
Public Utility Holding Company Act of 1935, as amended; or (iii) engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System).
(N) Fiscal Year. The fiscal year of it ends on May 31 of each year.
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(O) Officers of It. Each Person listed below holds the respective
office or offices in it set forth next to such Person's name:
<TABLE>
<CAPTION>
NAME OFFICE
-------------------------------------------------- ----------
<S> <C>
Patrick Sommers................................... President
</TABLE>
(P) Genuineness of Accounts Receivable. All the Accounts Receivable of
it are genuine and were incurred in the ordinary course of business and are
not in default or have been adequately provided for within reserves.
(Q) Collateral Locations. All of the tangible Collateral is located at
the Collateral Locations.
ARTICLE FIVE
COVENANTS
SECTION 5.1. Borrower. Until all the Liabilities are paid in full, the
Borrower covenants and agrees that:
(A) Financial Statements and Certificates. It will furnish to the
Lender (i) within 90 days after the close of each fiscal year of it, a copy
of (a) the annual audited report of it consisting of at least a balance
sheet, statement of operating results and retained earnings, statement of
cash flows and notes to financial statements, profit and loss statement and
statement of changes in financial position of it prepared on a
consolidating and consolidated basis and in conformity with generally
accepted accounting principles, duly prepared by certified public
accountants of recognized standing selected by it and approved by the
Lender, together with a certificate from such accountants to the effect
that, in making the examination necessary for the signing of such annual
report by such accountants, they have not become aware of any Event of
Default that has occurred and is continuing, or if they have become aware
of any such event, describing it and the steps, if any taken or being taken
to cure it; and (b) Borrower's annual Management Letter prepared by
Borrower's certified public accountants; (ii) within 45 days after the end
of each fiscal quarter, a copy of its form 10Q filed with the securities
and exchange commission; (iii) within 30 days after the end of each fiscal
quarter, (1) a statement showing age and reconciliation of its Accounts
Receivable for the preceding month in such form and detail as Lender may
reasonably request; and (2) a certificate signed by the President or chief
financial officer of it providing that the financial statements being
provided to Lender pursuant to clause (iii)(1) above are true and correct;
(iv) copies of all federal and state tax returns of it, including, but not
limited to, requests for extensions of such tax returns, when and as filed;
(v) copies of any and all reports, examinations, notices, warnings and
citations issued by any governmental or quasi-governmental (whether
federal, state or local), unit, agency, body or entity with respect to it;
and (vi) such other information as the Lender from time to time reasonably
requests.
(B) Books, Records and Inspections. It will (i) maintain complete and
accurate books and records; (ii) permit reasonable access by the Lender to
the books and records of it; and (iii) permit the Lender, upon reasonable
notice, to inspect the properties, whether real or personal, and operations
of it.
(C) Insurance. It will maintain such insurance as may be required by
law and such other insurance to the extent and against such hazards and
liabilities as is customarily maintained by companies similarly situated.
All property insurance policies with respect to the Collateral shall
contain loss payable clauses in form and substance reasonably satisfactory
to the Lender, naming the Lender as a loss payee as its interest may
appear, and providing that such policies and loss payable clauses may not
be canceled, amended or terminated unless at least thirty (30) days prior
written notice thereof has been given to the Lender. All insurance proceeds
received by the Lender may be retained by the Lender, in its sole
discretion, for application to the payment of any of the principal or
interest on the Liabilities then due and owing the Lender by it as the
Lender may determine.
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(D) Taxes and Liabilities. It will pay when due all taxes, assessments
and other liabilities except as contested in good faith and by appropriate
proceedings and for which adequate reserves have been established.
(E) Restriction on Dividends. It will not declare or pay, or authorize
a declaration or payment of, any dividend, whether a cash dividend or stock
dividend, or make any distribution in cash, property or securities in
respect of, any class of its capital stock.
(F) Indebtedness. It will not incur or permit to exist any
indebtedness or liability for borrowed money or for the deferred purchase
price of any property or any services, except (i) the Loans; (ii) current
accounts payable or other liabilities arising in the ordinary course of
business; and (iii) existing indebtedness more fully described on Exhibit
5.1(F) attached hereto.
(G) Liens. It will not create or permit to exist any mortgage, pledge,
title retention lien, or other lien, encumbrance or security interest with
respect to any assets now owned or hereafter acquired and owned, except (i)
liens for current taxes not delinquent or for taxes being contested in good
faith and by appropriate proceedings and for which adequate reserves have
been established; (ii) liens arising in the ordinary course of business for
sums not due or sums being contested in good faith and by appropriate
proceedings and for which adequate reserves shall have been established and
not involving any advances or borrowed money or the deferred purchase price
of property or services; (iii) liens in favor of Lender; and (iv) those
described in Section 4.1(E) of this Agreement.
(H) Guaranties, Loans or Advances. It will not become or be a
guarantor or surety of, or otherwise become or be responsible in any manner
with respect to any undertaking of any other Person, or make or permit to
exist any loans or advances to any other Person, except for the
endorsement, in the ordinary course of collection, of instruments payable
to it or to its order.
(I) Mergers, Consolidations and Sales. It will not be a party to any
merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets or stock of any class of, or any
partnership or joint venture interest in, any other Person, or sell,
transfer, convey or lease all or any substantial part of its assets, or
sell or assign, with or without recourse, any Accounts Receivable, except
with the prior written consent of the Lender.
(J) Self-Dealing. It shall not purchase, acquire or lease any property
from, or sell, transfer or lease any property to (a) any Affiliate, (b) any
officer, director or shareholder of it or any Affiliate, (c) any member of
the immediate family of any of the foregoing, except on terms comparable to
the terms which would prevail in an arms-length transaction between
unaffiliated third parties.
(K) Violation of Law. It will not materially violate any law, statute,
ordinance, rule, regulation, judgment, decree, order, writ or injunction of
any federal, state or local authority, court, agency, bureau, board,
commission, department or governmental body.
(L) Unconditional Purchase Obligations. It will neither enter into or
be a party to any contract for the purchase of materials, supplies or other
property or services if such contract requires that payment be made by it
regardless of whether or not delivery is ever made of such materials,
supplies or other property or services.
(M) Maintenance of Business. It will preserve its corporate existence
in the jurisdiction of establishment, as that may be from time to time, and
it will not operate in any business other than a business substantially the
same as the business of it as in effect on the date of this Agreement.
(N) Employee Benefit Plans. It will (i) maintain each employee benefit
plan as to which it may have any liability in substantial compliance with
all applicable requirements of law and regulations; (ii) make all payments
and contributions required to be made pursuant to such plans in a timely
manner; and (iii) neither establish any new employee benefit plan, agree or
contribute to any multi-employer plan nor amend any existing employee
pension benefit plan in a manner which would increase its obligation to
contribute to such plan.
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(O) Use of Proceeds. It will not permit any proceeds of the Loans to
be used either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying any margin stock" within
the meaning of Regulation U of the Board of Governors of the Federal
Reserve System, as amended from time to time.
(P) Good Title. It shall at all times maintain good and marketable
title to all of its assets.
(Q) Officers of Borrower. One of the following Persons listed below
will at all times hold the respective office or offices in it set forth
next to such Person's name:
<TABLE>
<CAPTION>
NAME OFFICE
----------------------------- --------------------------------------------
<S> <C>
Patrick Sommers.............. President
Daniel P. DiCaro............. Vice President and Chief Financial Officer
</TABLE>
(R) Collateral Locations; Material Adverse Change. It shall give the
Lender (i) 30 days prior written notice of the location of any Collateral
at any place other than the Collateral Locations; and (ii) prompt written
notice of any event, occurrence or other matter which has resulted or may
result in a material adverse change in its financial condition or business
operations.
(S) Fiscal Year. The fiscal year of it shall end on May 31 of each
year.
(T) Bank Accounts. It shall maintain with Lender all of its business
checking and money market accounts; provided, however, that Borrower's
accounts related to its 401K Plan shall not be covered by this Section.
(U) Debt to Tangible Stockholders Equity Ratio. It shall not cause,
suffer or permit the ratio of (i) its total consolidated liabilities minus
deferred revenues to (ii) its Tangible Stockholders Equity to be greater
than 2.0 to 1.0 at any time.
(V) Tangible Stockholders Equity. It shall not cause, suffer or permit
its Tangible Stockholders Equity to be less than $5,500,000.00 at any time.
(W) Minimum Net Income. It shall have a net income after taxes of at
least $750,000.00 for the fiscal year ending May 31, 1998.
(X) Line of Credit. For a period of 30 consecutive days during each
fiscal year of it, there shall be no Revolving Loans outstanding under the
Line of Credit.
ARTICLE SIX
CONDITIONS PRECEDENT
SECTION 6.1. Special Conditions Precedent to the Making of the First
Loan. Lender's obligation to make the first Loan is subject to the fulfillment
of each and every one of the following conditions prior to or contemporaneously
with the making of such first loan:
(A) Delivery of Documents. The Lender shall have received each of the
following, in form and substance satisfactory to the Lender and its
counsel, and where applicable, duly executed and recorded:
(i) Certificates of the Secretary of Borrower certifying as to (a)
all corporate actions taken and consents made by Borrower to authorize
the transactions provided for or contemplated under this Agreement and
the execution, delivery and performance of the Documents; and (b) the
names of the officers or employees of Borrower authorized to sign the
Documents, together with a sample of the true signature of each such
Person. (Lender may conclusively rely on such certificates until
formally advised by a like certificate of any changes therein.);
(ii) Acknowledgment copies from the appropriate governmental
authority of all Uniform Commercial Code financing statements required
to perfect the Lender's security interests in the Collateral;
14
<PAGE> 176
(iii) Copies of Uniform Commercial Code, tax lien and judgment
searches made with such governmental offices as Lender deems necessary;
(iv) Certificates of insurance and loss payable clauses covering
the Collateral and meeting the requirements of this Agreement;
(v) The Revolving Note;
(vi) The Lock Box Agreement;
(vii) The Software Assignment;
(viii) The Patent and Trademark Agreement;
(ix) The Copyright Agreement;
(x) The executed opinion of counsel of counsel to Borrower,
addressed to the Lender and dated the date of this Agreement;
(xi) Certified copies of the Certificate of Incorporation or
Charter and By-laws of Borrower, as restated or amended as to the date
of this Agreement;
(xii) Certificates of good standing for Borrower in the
jurisdiction of its incorporation, in the principal places in which it
conducts business and in places in which it owns real estate and/or
Collateral;
(xiii) A writing from Borrower's certified public accountants
(selected by Borrower and approved by Lender) addressed to Lender
acknowledging that (a) all financial statements prepared by such
accountants are also being prepared for the benefit of Lender and (b)
Lender shall rely on such financial statements;
(xiv) Such other instruments or documents as the Lender may
reasonably request.
SECTION 6.2. General Conditions Precedent to Each Loan. In addition to all
other requirements of this Agreement, including, but not limited to, those set
forth in Section 6.1 of this Agreement, Lender's obligation to make each Loan is
subject to the fulfillment of each and every of the following conditions prior
to or contemporaneously with the making of each and every such Loan:
(A) No Event of Default. No Event of Default shall have occurred and
be continuing, may occur with the giving of notice, the passage of time or
both or shall result from the making of any Loan.
(B) No Material Adverse Change. There shall have been no material
adverse change in the business of the Borrower or the financial condition
of the Borrower from the most recent financial statements submitted by
Borrower to Lender.
(C) Continuation of Representations and Warranties. The
representations and warranties contained in this Agreement shall be true
and correct in all material respects as of the making of any Loan, with the
same effect as though made on such dates.
ARTICLE SEVEN
EVENTS OF DEFAULT
SECTION 7.1. Events of Default. Each of the following acts, occurrences or
omissions shall constitute an event of default under this Agreement (herein
referred to as an "Event of Default"), whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment or order of any court or any order,
rule or regulation of any governmental or nongovernmental body or tribunal:
(A) Borrower shall default in the payment when due of any amount due
and owing to the Lender under the Note; or
15
<PAGE> 177
(B) Except for the Event of Default set forth in Section 7.1(A) of
this Agreement, default, and continuance thereof for 30 days after written
notice thereof to Borrower by the Lender, in the payment of any other
amount owing by Borrower to the Lender pursuant to the Documents or
pursuant to any other agreement, note, instrument or guarantee; or
(C) Any representation or warranty made by Borrower contained in the
Documents shall at any time prove to have been incorrect in any material
respect when made; or
(D) Borrower shall default in the performance or observance of any
term, covenant, condition or agreement on its part to be performed or
observed under the Documents (not constituting an Event of Default under
any other clause of this Section 7.1 of this Agreement) and such default
shall continue unremedied for 30 days after written notice thereof shall
have been given by the Lender to Borrower; or
(E) Either: (i) Borrower shall become insolvent or generally fail to
pay, or admit in writing its inability to pay, such Person's debts as they
become due, or a proceeding under any bankruptcy, reorganization,
arrangement of debt, insolvency, readjustment of debt or receivership law
or statute is filed by or against Borrower or Borrower makes an assignment
for the benefit of creditors; provided, however, that no Event of Default
shall exist pursuant to this Subsection E, Clause (i) due to an involuntary
bankruptcy case, proceeding or petition filed against Borrower unless such
involuntary case, proceeding or petition shall not have been dismissed or
withdrawn within 60 days after the date of such involuntary filing; or (ii)
corporate or other action shall be taken by Borrower for the purpose of
effectuating any of the foregoing; or
(F) If notice is given that the Collateral, or any part of the
Collateral, is subject to levy, attachment, seizure, or confiscation or
uninsured loss; provided, however, that the deductible amount on any
insurance policy currently in effect on the Collateral shall not be
considered an uninsured loss pursuant to this Subsection; or
(G) Borrower shall be dissolved, whether voluntarily or involuntarily
and such Person has not taken all actions required to become reinstated; or
(H) Subject to any applicable cure and/or notice periods, any material
default shall occur under any material agreement, document or instrument
binding upon the Borrower, or the assets of any Borrower, including, but
not limited to, any default in the payment when due of any principal of or
interest on any indebtedness for money borrowed or guaranteed by the
Borrower, or any default in the payment when due, or in the performance or
observance of, any material obligation of, or condition agreed to by, the
Borrower with respect to any purchase or lease of any real or personal
property or services;
(I) Lender, in good faith, deems itself reasonably insecure for any
reason due to any material adverse change in the business, assets or
liabilities, financial condition, results of operations or business
prospects of the Borrower.
ARTICLE EIGHT
REMEDIES
SECTION 8.1. Remedies Upon Default. Upon the occurrence and continuance of
any Event of Default, and the expiration of any applicable cure period, and in
every such event:
(A) notwithstanding anything in the Documents, Lender may, in its sole
and arbitrary discretion, declare the principal of and interest on any or
all of the Loans, any or all of the Notes, and all other amounts owed under
the Documents, to be forthwith due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly
waived; and
(B) Lender may, in its sole and arbitrary discretion, without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived, exercise all of the remedies of a secured
16
<PAGE> 178
party and mortgage holder under applicable law, including, but not limited
to, the UCC, and all of its rights and remedies under the Documents; and
(C) Lender may require Borrower to make the Collateral and the records
pertaining to the Collateral available to the Lender at a place designated
by the Lender which is reasonably convenient or may take repossession of
the Collateral and the records pertaining to the Collateral without the use
of any judicial process and without any prior notice thereof to Borrower;
and
(D) except as otherwise provided by law, Lender may, at its option,
and in its sole and arbitrary discretion, sell the Collateral at public or
private sale upon such terms and conditions as Lender may reasonably deem
proper, and Lender may purchase the Collateral at any such sale, and apply
the net proceeds, after deducting all costs, expenses and attorneys' fees
incurred at any time in the collection of the indebtedness of Borrower to
the Lender and in the protection and sale of the Collateral, to the payment
of said indebtedness, returning the remaining proceeds, if any, to
Borrower, with Borrower remaining liable for any amount remaining unpaid
after such application; and
(E) the Lender may, at its option, and in its reasonable discretion,
grant extensions, compromise claims and settle Accounts Receivable for less
than face value, all without prior notice to Borrower; and
(F) Lender may, at its option, and in its sole and arbitrary
discretion, use, in connection with any assembly or disposition of the
Collateral, any trademark, trade name, trade style, copyright, patent right
or technical process used or utilized by Borrower; and
(G) Borrower shall, upon the request of the Lender, forthwith upon
receipt, transmit and deliver to the Lender in the form received, all cash,
checks, drafts and other instruments for the payment of money (properly
endorsed, where required, so that such items may be collected by Lender)
which may be received by Borrower at any time in full or partial payment of
any Collateral. Borrower shall not commingle any such items which may be so
received by Borrower with any other of its funds or property but shall hold
them separate and apart from their own funds or property and in trust for
the Lender until delivery is made to Lender.
SECTION 8.2. Attorney-in-Fact. Upon the occurrence and during the
continuation of an Event of Default, Borrower hereby appoints Lender as such
Person's attorney-in-fact, with full authority in such Person's place and stead
and in such Person's name or otherwise, from time to time in Lender's sole and
arbitrary discretion, to take any action and to execute any instrument which
Lender may deem necessary or advisable to accomplish the purpose of this
Agreement.
SECTION 8.3. Remedies Are Severable and Cumulative. All provisions
contained herein pertaining to any remedy of the Lender shall be and are
severable and cumulative and in addition to all other rights and remedies
available in the Documents, at law and in equity, and any one or more may be
exercised simultaneously or successively. Any notification required pursuant to
this Article Eight or under applicable law shall be reasonably and properly
given to Borrower at the address and by any of the methods of giving such notice
as set forth in Section 9.3 of this Agreement, at least 10 days before taking
any action.
ARTICLE NINE
MISCELLANEOUS
SECTION 9.1. No Waiver; Modifications in Writing. No failure or delay on
the part of Lender in exercising any right, power or remedy pursuant to the
Documents shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof, or the exercise of any other right, power or remedy. No
amendment, modification, supplement, termination or waiver of any provision of
the Documents, nor any consent by Lender to any departure by Borrower therefrom,
shall be effective unless the same shall be in writing and signed by Lender. Any
waiver of any provision of the Documents and any consent by Lender to any
departure by Borrower from the terms of any provision of the Documents shall be
effective only in the specific instance and for the specific purpose for which
given. No
17
<PAGE> 179
notice to or demand on Borrower in any case shall entitle Borrower to any other
or further notice or demand in similar or other circumstances.
SECTION 9.2. Set-Off. Lender shall have the right to set-off, appropriate
and apply toward payment of any of the Liabilities, in such order of application
as Lender may from time to time and at any time elect, any cash, credit,
deposits, accounts, securities and any other property of Borrower which is in
transit to or in the possession, custody or control of Lender, or any agent,
bailee, or Affiliate of Lender. Borrower hereby grants to Lender a security
interest in all such property.
SECTION 9.3. Notices, etc. All notices, demands, instructions and other
communications required or permitted to be given to or made upon any party
hereto shall be in writing personally delivered or sent by overnight courier or
by facsimile machine, and shall be deemed to be given for purposes of this
Agreement on the day that such writing is delivered or sent by facsimile machine
or one (1) days after such notice is sent by overnight courier to the intended
recipient thereof in accordance with the provisions of this Section 9.3. Unless
otherwise specified in a notice sent or delivered in accordance with the
foregoing provisions of this Section 9.3 of this Agreement, notices, demands,
instructions and other communications in writing shall be given to or made upon
the respective parties hereto at their respective addresses indicated for such
party below:
<TABLE>
<S> <C>
If to the Borrower: Medicus Systems Corporation
One Rotary Center
Suite 1111
Evanston, Illinois 60201
Attention: President
Phone: (847)
Fax No.: (847)
With copies to: J. Craig Walker, Esq.
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Suite 3200
Chicago, Illinois 60602
Phone: (312) 372-1121
Fax No.: (312) 372-2098
If to the Lender: Cole Taylor Bank 850 West Jackson Blvd.
Chicago, Illinois 60607
Attn: Robert J. Mathson
Phone: (312) 491-5400
Fax No.: (312) 738-5529
With a copy to: Steven Bright, Esq.
Boehm, Pearlstein & Bright, Ltd.
33 North LaSalle Street
35th Floor
Chicago, Illinois 60602
Phone: (312) 782-7474
Fax No. (312) 782-0380
</TABLE>
SECTION 9.4. Costs, Expenses and Taxes. Borrower agrees to pay all
out-of-pocket fees and expenses of Lender (including, but not limited to, UCC
Filing and Search Fees and fees and reasonable expenses of outside counsel to
Lender and paralegals) in connection with the making of the Loans and
preparation, administration and enforcement of the Documents and the Loans;
provided, however, that solely with respect to the fees and costs of Lender's
counsel in connection with the preparation and negotiation of the Documents and
making of the Loans on the Closing Date, Borrower shall only be responsible for
all of Lender's counsel's out-of-pocket expenses plus up to $5,000.00 of
Lender's legal fees incurred in connection with the preparation and negotiation
of the Documents and making of the Loans through the Closing Date. In addition,
Borrower
18
<PAGE> 180
shall pay any and all stamp, transfer and other taxes payable or determined to
be payable in connection with the execution and delivery of the Documents and
agrees to hold the Lender harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes.
If any suit or proceeding arising from any of the foregoing is brought against
Lender, Borrower, to the extent and in the manner directed by Lender, will
resist and defend such suit or proceeding or cause the same to be resisted and
defended by counsel approved by Lender. If Borrower shall fail to do any act or
thing which it has covenanted to do under this Agreement or any representation
or warranty on the part of Borrower contained in this Agreement shall be
breached, Lender may, in its sole and arbitrary discretion, after 10 days
written notice is sent to Borrower, do the same or cause it to be done or remedy
any such breach, and may expend its funds for such purpose; and any and all
amounts so expended by the Lender shall be repayable to the Lender by Borrower
immediately upon the Lender's demand therefor, with interest at a rate equal to
the highest interest rate set forth in the Note in effect from time to time
during the period from and including the date funds are so expended by Lender to
the date of repayment, and any such amounts due and owing Lender shall be deemed
to be part of the Liabilities secured hereunder. The obligations of Borrower
under this Section shall survive the termination of this Agreement and the
discharge of the other obligations of Borrower under the Documents.
SECTION 9.5. Computations. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with generally accepted accounting principles applied on a basis
consistent with those at the time in effect.
SECTION 9.6. Further Assurances. Borrower agrees to do such further acts
and things and to execute and deliver to Lender such additional assignments,
agreements, powers, documents and instruments as Lender may reasonably require
or deem advisable to carry into effect the purposes of the Documents, or to
confirm unto Lender its rights, powers and remedies under the Documents.
SECTION 9.7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which counterparts, once they are executed and delivered,
shall be deemed to be an original and all of which counterparts, taken together,
shall constitute but one and the same agreement.
SECTION 9.8. Binding Effect; Assignment. This Agreement shall be binding
upon, and inure to the benefit of, Lender, Borrower and their respective
successors, assigns, representatives and heirs. Borrower shall not assign any of
its rights nor delegate any of its obligations under the Documents without the
prior written consent of Lender and no such consent by Lender shall, in any
event, relieve Borrower of any of its obligations under the Documents.
SECTION 9.9. Headings. Captions contained in this Agreement are inserted
only as a matter of convenience and in no way define, limit or extend the scope
or intent of this Agreement or any provision of this Agreement and shall not
affect the construction of this Agreement.
SECTION 9.10. Entire Agreement. This Agreement, together with the
Documents, contains the entire agreement between the parties hereto with respect
to the transactions contemplated herein and supersede all prior representations,
agreements, covenants and understandings, whether oral or written, related to
the subject matter of the Agreement. Except as specifically set forth in this
Agreement, Lender makes no covenants to Borrower, including, but not limited to,
any other commitments to provide any additional financing to Borrower.
SECTION 9.11. Governing Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Illinois and for all purposes shall
be construed in accordance with the laws of the State of Illinois.
SECTION 9.12. Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
19
<PAGE> 181
SECTION 9.13. Conflict. In the event of any conflict between this Agreement
and any of the other Documents, the terms and provisions of this Agreement shall
govern and control.
SECTION 9.14. Jurisdiction; Waiver. BORROWER ACKNOWLEDGES THAT THIS
AGREEMENT IS BEING SIGNED BY THE LENDER IN PARTIAL CONSIDERATION OF LENDER'S
RIGHT TO ENFORCE IN THE JURISDICTION STATED BELOW THE TERMS AND PROVISION OF
THIS AGREEMENT AND THE DOCUMENTS. BORROWER CONSENTS TO JURISDICTION IN THE STATE
OF ILLINOIS AND VENUE IN ANY FEDERAL OR STATE COURT IN THE COUNTY OF COOK FOR
SUCH PURPOSES AND THEY WAIVE ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND
VENUE. BORROWER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST LENDER IN ANY
JURISDICTION EXCEPT THE AFORESAID COUNTY AND STATE. LENDER AND BORROWER HEREBY
EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY
WITH RESPECT TO ANY MATTER WHATSOEVER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THE LOANS, THE DOCUMENTS AND/OR THE TRANSACTIONS WHICH ARE THE
SUBJECT OF THE DOCUMENTS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered at Chicago, Illinois as of the date first above
written.
BORROWER:
MEDICUS SYSTEMS CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
LENDER:
COLE TAYLOR BANK
By:
------------------------------------
Title:
---------------------------------
EXHIBIT 1.1(G) TO MEDICUS SYSTEMS CORPORATION -
LOAN AND SECURITY AGREEMENT
COLLATERAL LOCATIONS
1. One Rotary Center
Suite 1111
Evanston, Illinois 60201
2. 1301 Marina Village Parkway
Suite 105
Alameda, California 94501
3. 16120 Chesterfield Parkway South
Suite 120
Chesterfield, Missouri 63017
20
<PAGE> 182
TYPE 10-K/A
SEQUENCE: 1
DESCRIPTION: AMENDMENT #2 TO 10K
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.
MEDICUS SYSTEMS CORPORATION
By: /s/ PATRICK C. SOMMERS
------------------------------------
Patrick C. Sommers
Chairman, Chief Executive Officer
and President
Dated: December 10, 1997
ARTICLE 5
LEGEND
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED MAY 31, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENTS.
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END MAY-31-1997
PERIOD-START JUN-01-1996
PERIOD-END MAY-31-1997
CASH 1,205,135
SECURITIES 0
RECEIVABLES 12,213,684
ALLOWANCES 1,713,008
INVENTORY 214,264
CURRENT-ASSETS 14,437,597
PP&E 7,415,285
DEPRECIATION 5,080,110
TOTAL-ASSETS 22,848,672
CURRENT-LIABILITIES 12,347,063
BONDS 1,000,000
PREFERRED-MANDATORY 500,000
PREFERRED 0
COMMON 64,872
OTHER-SE 8,936,737
TOTAL-LIABILITY-AND-EQUITY 22,848,672
SALES 18,269,700
TOTAL-REVENUES 18,269,700
CGS 8,035,107
TOTAL-COSTS 8,035,107
OTHER-EXPENSES 3,065,552
LOSS-PROVISION 0
INTEREST-EXPENSE 32,258
INCOME-PRETAX (6,988,345)
INCOME-TAX (2,569,365)
INCOME-CONTINUING (4,419,070)
DISCONTINUED 199,052
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (4,220,018)
EPS-PRIMARY (0.70)
EPS-DILUTED (0.70)
<PAGE> 183
================================================================================
UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A-1
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
COMMISSION FILE NO. 0-27614
MEDICUS SYSTEMS CORPORATION
A DELAWARE CORPORATION
36-4056769
IRS EMPLOYER IDENTIFICATION NO.
ONE ROTARY CENTER, SUITE 1111
EVANSTON, ILLINOIS 60201
(847) 570-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 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 reports), 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 Registration 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 this Form 10-K. [X]
As of August 21, 1997, there were 5,483,207 shares of common stock
outstanding, and the aggregate market value of the common stock (based upon the
August 21, 1997 closing sale price on the Nasdaq National Market) held by
non-affiliates was approximately $23,290,034.
================================================================================
<PAGE> 184
MEDICUS SYSTEMS CORPORATION
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets at May 31, 1997 and 1996............................................... F-3
Statements of Operations for the years ended May 31, 1997, 1996 and 1995.............. F-4
Statements of Changes in Stockholders' Equity for the years ended May 31, 1997, 1996
and 1995............................................................................ F-5
Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995.............. F-7
Notes to Financial Statements......................................................... F-8
</TABLE>
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the Financial
Statements or the Notes to Financial Statements.
EXHIBITS
A list of Exhibits is set forth in the Exhibit Index, which index precedes
such exhibits and which is incorporated herein by this reference thereto.
Included in the exhibits listed therein are the following exhibits which
constitute management contracts or compensatory plans or arrangements:
<TABLE>
<C> <S>
(i.) 1989 Stock Option Plan, as amended
(ii.) 1991 Stock Option Plan
(iii.) 1993 Stock Option Plan
(iv.) 1993 Performance Stock Option Plan
(v.) Stock Purchase Plan, as amended
(vi.) Form of Indemnification Contract between Registrant and each officer and director
(vii.) Retirement Savings Plan
viii.) 1994 Stock Option Plan
(ix.) 1994 Directors' Stock Option Plan
(x.) 1995 RCM Stock Option Plan
(xi.) 1996 C.E.O. Stock Option Plan
(xii.) 1996 C.E.O. Replacement Stock Option Plan
xiii.) 1996 C.E.O. Special Stock Option Plan
(xiv.) 1997 Employee Stock Option and Restricted Stock Plan
(xv.) Amendment to and Restatement of the 1989, 1991, 1993, 1993 Performance and 1994
Stock Option Plans
(xvi.) Stock Repurchase and Warrant Agreement between the Company and Richard C. Jelinek
(xvii.) Stock Repurchase and Warrant Agreement between the Company and the Boston Safe
Deposit and Trust Company of California, or its successors, as trustee of the
Richard C. Jelinek Charitable Remainder Unitrust dated August 3, 1993
</TABLE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended May 31, 1997.
2
<PAGE> 185
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE*
- ------------- ---------------------------------------------------------------------- ------------
<C> <S> <C> <C> <C>
2 Distribution Agreement between the Predecessor Corporation and the
Registrant (Incorporated by Reference to Exhibit 2(b) to the
Predecessor Corporation's Report on Form 8-K (Commission File No.
0-19393) dated March 1, 1996, as amended by Form 8-K/A-1 filed on
April 30, 1996).......................................................
3(a) Restated Certificate of Incorporation (incorporated by reference to
Exhibit 4(a) to Registration Statement number 333-3028)...............
(b) Bylaws (incorporated by reference to Exhibit 3(b) to the Registrant's
Registration Statement on Form 10 (Commission File No. 0-27614))......
10(b) Agreement between the Registrant and Comshare, Inc.**.................
(c) 1989 Stock Option Plan, as amended**..................................
(c) (1) 1991 Stock Option Plan***.............................................
(c) (2) 1993 Stock Option Plan****............................................
(c) (3) 1993 Performance Stock Option Plan****................................
(c) (4) 1994 Stock Option Plan*****...........................................
(c) (5) 1994 Directors' Stock Option Plan#....................................
(c) (6) 1995 RCM Stock Option Plan##..........................................
(c) (7) 1996 C.E.O. Stock Option Plan##.......................................
(c) (8) 1996 C.E.O. Replacement Stock Option Plan##...........................
(c) (9) 1996 C.E.O. Special Stock Option Plan##
(c) (10) 1997 Employee Stock Option and Restricted Stock Plan (Incorporated by
Reference to Exhibit D to the Company's Proxy Statement dated February
17, 1997 (Commission File No. 0-27614))...............................
(c) (11) Amendment to and Restatement of the 1989, 1991, 1993, 1993 Performance
and 1994 Stock Option Plans (Incorporated by Reference to Exhibit C to
the Company's Proxy Statement dated February 17, 1997 (Commission File
No. 0-27614)).........................................................
(e) (1) Stock Repurchase and Warrant Agreement between the Company and Richard
C. Jelinek (Incorporated by Reference to Exhibit E to the Company's
Proxy Statement dated February 17, 1997 (Commission File No.
0-27614)).............................................................
(e) (2) Stock Repurchase and Warrant Agreement between the Company and the
Boston Safe Deposit and Trust Company of California, or its
successors, as trustee of the Richard C. Jelinek Charitable Remainder
Unitrust dated August 3, 1993 (Incorporated by Reference to Exhibit E
to the Company's Proxy Statement dated February 17, 1997 (Commission
File No. 0-27614))....................................................
(f) Stock Purchase Plan, as amended##.....................................
(g) Form of Indemnification Contract between Registrant and each officer
and director**........................................................
(h) Retirement Savings Plan****...........................................
(i) Lease of Evanston, IL office##........................................
(j) Lease of Alameda, CA office##.........................................
(k) Lease of Cincinnati, OH office***.....................................
(l) Lease of Chesterfield, MO office##....................................
</TABLE>
3
<PAGE> 186
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE*
- ------------- ---------------------------------------------------------------------- ------------
<C> <S> <C> <C> <C>
(m) Loan and Security Agreement with Cole Taylor Bank###..................
23 Consent of Price Waterhouse###........................................
27 Financial Data Schedule...............................................
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Indicated only on manually signed original of report.
** Incorporated by reference to the exhibit with the same designation filed as part of
Registration Statement No. 33-41253.
*** Incorporated by reference to the exhibit with the same designation filed as part of
the Annual Report on Form 10-K of the Predecessor Corporation for the fiscal year
ended May 31, 1992.
**** Incorporated by reference to the exhibit with the same designation filed as part of
the Annual Report on Form 10-K of the Predecessor Corporation for the fiscal year
ended May 31, 1993.
***** Incorporated by reference to the exhibit with the same designation filed as part of
the Annual Report on Form 10-K of the Predecessor Corporation for the fiscal year
ended May 31, 1994.
# Incorporated by reference to the exhibit with the same designation filed as part of
the Annual Report on Form 10-K of the Predecessor Corporation for the fiscal year
ended May 31, 1995.
## Incorporated by reference to the exhibit with the same designation filed as part of
the Annual Report on Form 10-K of the Registrant for the fiscal year ended May 31,
1996.
### Filed as part of the Annual Report on Form 10-K of the Registrant for the fiscal year
ended May 31, 1997, as originally filed on August 28, 1997.
</TABLE>
4
<PAGE> 187
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.
MEDICUS SYSTEMS CORPORATION
By: /s/ PATRICK C. SOMMERS
------------------------------------
Patrick C. Sommers
Chairman, Chief Executive Officer
and President
Dated: December 10, 1997
5
<PAGE> 188
ANNEX E
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
MEDICUS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-4056769
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OF ORGANIZATION)
ONE ROTARY CENTER, SUITE 1111,
EVANSTON, ILLINOIS 60201 (847) 570-7500
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER)
</TABLE>
COMMISSION FILE NUMBER 0-27614
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
There were 5,523,169 shares of common stock outstanding as of January 12, 1998.
================================================================================
<PAGE> 189
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER
30, MAY 31,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents....................................... $ 244,217 $ 1,205,135
Accounts receivable and unbilled services, net of allowance for
doubtful accounts of $1,290,459 and 1,713,008................ 13,224,602 10,500,676
Inventories..................................................... 181,572 214,264
Prepaid expenses and other...................................... 235,616 258,725
Prepaid and deferred income taxes............................... 1,756,163 2,147,416
Net assets of discontinued operation............................ -- 111,381
----------- -----------
15,642,170 14,437,597
----------- -----------
Property and equipment, net of accumulated depreciation of
$5,578,254 and $5,080,110....................................... 1,977,827 2,335,175
Internally developed software, net of accumulated amortization of
$2,648,322 and $2,110,378....................................... 2,673,710 3,087,849
Installment accounts receivable due after one year, net of
unearned interest of $117,309 and $154,647...................... 431,345 533,488
Deferred income taxes............................................. 3,414,474 2,454,563
----------- -----------
$24,139,526 $22,848,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................ $ 251,608 $ 597,787
Accrued compensation............................................ 554,716 453,035
Accrued restructuring charge.................................... 1,627,616 2,247,416
Other accrued liabilities....................................... 1,475,901 1,138,226
Deferred revenue................................................ 9,872,854 6,910,599
Notes payable................................................... 1,000,000 1,000,000
----------- -----------
14,782,695 12,347,063
----------- -----------
Notes payable..................................................... 1,000,000 1,000,000
----------- -----------
Stockholders' equity
Preferred stock $1,000 par, 500 shares authorized and issued.... 500,000 500,000
Common stock $.01 par:
Authorized -- 10,000,000 shares
Issued -- 6,492,803 and 6,487,159 shares, respectively.......... 64,928 64,872
Capital in excess of par value.................................. 22,310,767 22,063,715
Capital in excess of par value -- warrant....................... 944,000 944,000
Less treasury stock:
Preferred stock, at cost -- 500 shares.......................... (500,000) (500,000)
Common stock, at cost -- 1,007,002 shares....................... (5,687,418) (5,687,418)
Accumulated deficit............................................. (9,275,446) (7,883,560)
----------- -----------
8,356,831 9,501,609
----------- -----------
$24,139,526 $22,848,672
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 190
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Software products and services.................................. $ 1,384,083 $2,286,033
Maintenance and support services................................ 2,384,357 2,876,744
----------- ----------
3,768,440 5,162,777
Costs and expenses
Software products and services.................................. 528,763 724,747
Maintenance and support services................................ 1,387,933 1,397,150
----------- ----------
1,916,696 2,121,897
Marketing, general and administrative........................... 2,662,236 2,232,201
Research and development........................................ 522,375 698,774
----------- ----------
5,101,307 5,052,872
----------- ----------
Operating income (loss)........................................... (1,332,867) 109,905
Interest and other income, net.................................. 6,023 155,303
----------- ----------
Income (Loss) from continuing operations before income taxes...... (1,326,844) 265,208
----------- ----------
Provision for (benefit from) income taxes....................... (510,835) 98,876
----------- ----------
Income(Loss)from continuing operations............................ (816,009) 166,332
Discontinued operation, net of taxes.............................. (69,068) 45,242
----------- ----------
Net income (loss)................................................. $ (885,077) $ 211,574
=========== ==========
Earnings (loss) per common and common equivalent share
Continuing operations........................................... $ (0.15) $ 0.02
Discontinued operation.......................................... (0.01) 0.01
----------- ----------
$ (0.16) $ 0.03
=========== ==========
Weighted average common and common equivalent shares
outstanding..................................................... 5,500,536 6,496,990
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 191
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Software products and services................................... $ 3,627,943 $4,101,769
Maintenance and support services................................. 4,760,407 5,257,787
----------- ----------
8,388,350 9,359,556
Costs and expenses
Software products and services................................... 1,247,031 1,238,540
Maintenance and support services................................. 2,515,083 2,262,337
----------- ----------
3,762,114 3,500,877
Marketing, general and administrative............................ 5,385,899 4,263,893
Research and development......................................... 1,503,434 1,204,214
----------- ----------
10,651,447 8,968,984
----------- ----------
Operating income (loss)............................................ (2,263,097) 390,572
Interest and other income, net................................... 8,872 275,397
----------- ----------
Income (loss) from continuing operations before income taxes....... (2,254,225) 665,969
Provision for (benefit from) income taxes........................ (867,876) 258,419
----------- ----------
Income(loss)from continuing operations............................. (1,386,349) 407,550
Discontinued operation, net of taxes............................... (5,537) 96,240
----------- ----------
Net income (loss).................................................. $(1,391,886) $ 503,790
=========== ==========
Earnings (loss) per common and common equivalent share
Continuing operations............................................ $ (0.25) $ 0.06
Discontinued operation........................................... 0.00 0.02
----------- ----------
$ (0.25) $ 0.08
=========== ==========
Weighted average common and common equivalent shares outstanding... 5,501,233 6,485,121
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 192
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
NOVEMBER 30, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Income (loss) from continuing operations.................... $(1,386,349) $ 407,550
Adjustments to reconcile to net cash from operating
activities:
Depreciation of property and equipment................... 498,144 557,087
Amortization of internally developed software............ 537,944 151,588
Deferred income taxes.................................... (468,832) 119,507
Accrued restructuring charge............................. (540,153) (646,281)
Allowance for doubtful accounts.......................... 150,000 --
Changes in certain current assets and current
liabilities:
Accounts receivable and unbilled services.............. (2,953,573) (3,032,605)
Due from Managed Care Solutions, Inc................... -- 515,361
Inventories............................................ 32,692 15,962
Prepaid expenses and other current assets.............. (76,717) 719,239
Accounts payable....................................... (346,179) 1,371,842
Accrued compensation................................... 101,681 (1,358,114)
Deferred revenue....................................... 2,962,255 (531,386)
Other, net............................................... 421,971 91,466
----------- -----------
(1,067,116) (1,618,784)
----------- -----------
Cash flows from investing activities
Additions to property and equipment......................... (140,796) (312,695)
Additions to internally developed software.................. (123,805) (946,749)
Proceeds from maturity of short-term investments............ -- 3,594,793
Proceeds from sale of short-term investments................ -- 58,588,023
Purchases of short-term investments......................... -- (59,896,661)
----------- -----------
(264,601) 1,026,711
----------- -----------
Cash flows from financing activities
Sale of common stock........................................ 247,108 79,476
----------- -----------
247,108 79,476
----------- -----------
Net decrease in cash and cash equivalents..................... (1,084,609) (512,597)
Cash and cash equivalents, beginning of period................ 1,205,135 765,312
Net cash activity from discontinued operation................. 123,691 571,994
----------- -----------
Cash and cash equivalents, end of period...................... $ 244,217 $ 824,709
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 193
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In management's opinion, the financial statements of Medicus Systems
Corporation (the "Company" or "Medicus") reflect all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the operating results for the quarters and six months ended
November 30, 1997 and 1996. Certain reclassifications have been made in the
prior period financial statements to conform to the current period presentation.
These reclassifications had no effect on previously reported total assets, total
liabilities, equity or results of operations.
Operating results for the interim periods are not necessarily indicative of
the results to be expected for the full year. The financial information included
herein should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
May 31, 1997.
During the quarter and six months ended November 30, 1996, Medicus
performed certain administrative services for Managed Care Solutions, Inc.
("MCS") under a services agreement resulting from the spin off of the Company
from MCS on March 1, 1996. During the quarter and six months ended November 30,
1996, the Company received $175,000 and $350,000, respectively, in consideration
for these services, and reduced marketing, general and administrative expenses
by this amount.
NOTE 2. QUADRAMED ACQUISITION
On November 9, 1997, QuadraMed Corporation, a Delaware corporation
("QuadraMed") acquired (the "Acquisition") 56.7% of the outstanding capital
stock of the Company. The Acquisition was completed by means of Stock Purchase
Agreements, dated as of November 9, 1997, with certain stockholders of the
Company (the "Selling Stockholders"). Pursuant to the terms of the Stock
Purchase Agreements, the Selling Stockholders agreed to sell an aggregate of
3,111,105 shares of Medicus Common Stock to QuadraMed. In consideration for the
transfer of these shares to QuadraMed, QuadraMed paid to the Selling
Stockholders $7.50 per share, in cash, without interest, or approximately $23.3
million, together with warrants (the "Warrants") entitling the Selling
Stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of the Medicus Common Stock sold (subject to adjustment in accordance with the
Agreement). The Warrants entitle the Selling Stockholders to purchase QuadraMed
Common Stock at a price of $24.00 per share, on the terms set forth in the
Warrants.
Simultaneously with the execution of the Stock Purchase Agreements,
QuadraMed and the Company entered into an Agreement and Plan of Reorganization
dated as of November 9, 1997 (the "Agreement") pursuant to which a wholly-owned
subsidiary of QuadraMed will be merged, subject to the approval of the
stockholders of QuadraMed, with and into the Company (the "Merger"). At the
effective time of the Merger, the stockholders of the Company participating in
the Merger will exchange all outstanding shares of Medicus Common Stock for any
of (i) a cash payment of $7.50 per share of Medicus Common Stock, (ii) 0.3125
shares of QuadraMed Common Stock per share of Medicus Common Stock sold (subject
to adjustment in accordance with the Agreement), or (iii) a combination of
QuadraMed Common Stock and cash. In addition, all stock options previously
issued by Medicus and outstanding at the time of the Merger will be assumed by
QuadraMed at an exchange ratio of 0.3565 shares of QuadraMed Common Stock for
each share of Medicus Common Stock subject to such options. The Acquisition is
intended to qualify as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986 and will be accounted for as a
purchase transaction.
The acquisition is subject to approval of the Company's stockholders at a
Special Meeting of Stockholders. The terms of the acquisition are set forth in
the Agreement filed with the Securities and Exchange Commission by QuadraMed on
November 21, 1997.
6
<PAGE> 194
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. RESTRUCTURING CHARGES
During February, 1996, the Company commenced a process to evaluate its
current strategic position, including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation process, the Company recorded $4.7 million in restructuring
charges, representing costs and expenses to exit certain product lines, to
abandon certain product development efforts and to provide for liabilities
resulting from the strategic redirection of the Company, including severance
costs. Specifically, the Company decided to exit the Clinical Case Management
Systems ("CCM") and the Executive Information Systems product lines.
Additionally, product development efforts for the Clinical Data Systems Wincoder
V2 project and portions of the MACH 1 project, which will no longer be utilized
in the Medicus product line, were abandoned and their associated development
costs, which had been previously capitalized, were expensed. Severance costs
associated with an officer and several employees, in addition to the write-off
of a portion of the Contract Management System, were also included in the
restructuring charge.
As part of an ongoing evaluation, the Company refined its strategic
planning process during fiscal 1997, and assessed continuing obligations
associated with the implementation of the plan. The Company continued the
process of implementing its plans during 1997 and, following the stock
repurchase from its founder in the quarter ended February 28, 1997, recorded
$2.8 million in charges to complete its plan, including accruing certain costs
to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts. Specifically, the
Company decided to relocate operations for its Clinical Data Systems ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs accrued associated with the relocation included costs to cancel existing
lease agreements, to terminate employees and to write down abandoned assets. In
addition, the Company increased its reserves for product line exit costs and
severance costs that relate to the remaining customer of the previously
discontinued CCM product line. Also, certain product development efforts for the
Company's Patient Focused Systems ("PFS") products were abandoned, and the
associated development costs, which had been previously capitalized, along with
other related product line exit costs were expensed. The Company also increased
its allowance for doubtful accounts due to the potential for certain additional
billed and unbilled accounts to become uncollectible as a result of the
decisions discussed above.
The components of the restructuring reserve, which the Company expects will
be utilized during the next six months, are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
------------ ----------
<S> <C> <C>
Product line exit costs............................. $ 671,978 $ 774,425
Business unit reorganization costs.................. 418,550 674,597
Employee termination and severance costs............ 537,088 798,394
---------- ----------
$1,627,616 $2,247,416
========== ==========
</TABLE>
During the quarter ended November 30, 1997, the Company paid $161,436 in
business unit reorganization costs related to the relocation of the CDS division
and $86,857 in severance benefits and employee termination costs. During the six
months ended November 30, 1997, the Company incurred $79,647 in write-downs of
accounts receivable and $22,800 in product line exit costs related to the
remaining customer of the previously discontinued CCM product line. The Company
also paid $256,047 in business unit reorganization costs related to the
relocation of the CDS division and $261,306 in severance benefits and employee
termination costs.
7
<PAGE> 195
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4. DISCONTINUED OPERATION
Effective May 31, 1997 the Company adopted a plan to discontinue its
contract services line of business. This separate line of business consisted of
information systems management contracts with Bethesda, Inc. As a result of this
decision, the net assets of the contract services line of business, principally
accounts receivable and unbilled services, property and equipment, and accounts
payable and other accrued liabilities have been reclassified in the Balance
Sheets at November 30, 1997 and May 31, 1997. In addition, the results of
operations of the contract services business have been reclassified in the
Statements of Operations for the quarters and six months ended November 30, 1997
and 1996 and in the Statements of Cash Flows for the six months ended November
30, 1997 and 1996.
The following table summarizes unaudited selected financial data of the
contract services business for the quarters and six months ended November 30,
1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............ $2,501,000 $2,539,000 $5,002,000 $5,036,000
Operating income
(loss)............ (112,000) 73,000 (9,000) 156,000
</TABLE>
In December 1997, following meetings with representatives from both Medicus
and Bethesda, Inc., the contracts to manage the information systems functions
were terminated, effective December 31, 1997. As a result, the Company recorded
$150,000 in related settlement costs for the quarter and six months ended
November 30, 1997.
NOTE 5. EARNINGS PER SHARE
Earnings (loss) per common share have been computed by dividing net income
(loss) by the weighted average of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
on the exercise of stock options and the warrant (when dilutive), using the
treasury method from the date of grant. Common stock equivalents are not
included in the calculation of loss per share because they are antidilutive.
NOTE 6. NOTE PAYABLE AND LINE OF CREDIT
On December 5, 1996, the Company reached an agreement in principle with its
founder, Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary (the "Trust"), one million shares of Medicus Common Stock
and 500 shares of Medicus Voting Preferred Stock. In exchange, the Company
agreed to pay Mr. Jelinek and the Trust $4.5 million in cash and $2.0 million in
8% two-year promissory notes, and issued to Mr. Jelinek and the Trust 400,000
five-year warrants to purchase Medicus Common Stock at $8.00 per share. Interest
costs incurred and paid on the promissory notes totaled $40,040 and $79,705 for
the quarter and six months ended November 30, 1997. In December 1997, the notes
and related interest were redeemed in their entirety by QuadraMed.
In April 1997, the Company entered into an agreement with a bank that
provides for a secured, revolving line of credit up to a maximum of $2.5
million. The credit facility, which has an initial maturity date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company. Certain financial covenants and
reporting requirements are also included in the agreement. As of November 30,
1997, the Company had not utilized the line of credit.
8
<PAGE> 196
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS
This report contains statements that may be considered forward-looking,
such as the discussion of the Company's strategic goals, new products and cash
flows. These statements speak of the Company's plans, goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements because the realization of those
results is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed in
more detail below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward-looking statements included in
this document are based upon information presently available, and the Company
assumes no obligation to update any forward-looking statement.
The Company's quarterly operating results historically have varied
depending upon such factors as the timing of significant sales and the timing of
new product introductions. Consequently, the results for any one quarter may not
be indicative of future operating results.
The following table sets forth for the periods indicated (i) the percent of
revenues represented by certain line items in the Company's Statements of
Operations and (ii) the percentage change in each line item from the prior year
period.
<TABLE>
<CAPTION>
PERCENT OF REVENUES PERCENT OF REVENUES
THREE MONTHS ENDED PERCENTAGE SIX MONTHS ENDED PERCENTAGE
------------------- INCREASE ------------------- INCREASE
NOV. 30, NOV. 30, (DECREASE) NOV. 30, NOV. 30, (DECREASE)
1997 1996 1996 TO 1997 1997 1996 1996 TO 1997
-------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Software products and services....... 37% 44% (39)% 43% 44% (12)%
Maintenance and support services..... 63 56 (17) 57 56 (9)
--- --- --- --- --- ---
100 100 (27) 100 100 (10)
--- --- --- --- --- ---
Costs and expenses
Software products and services....... 38 32 (27) 34 30 1
Maintenance and support services..... 58 49 (1) 53 43 11
--- --- --- --- --- ---
51 41 (10) 45 37 7
Marketing, general and 70 43 19 64 46 26
administrative....................
Research and development............. 14 14 (25) 18 13 25
--- --- --- --- --- ---
135 98 1 127 96 19
--- --- --- --- --- ---
Operating income (loss)................ (35) 2 N/M (27) 4 N/M
Interest and other income, net....... -- 3 (96) -- 3 (97)
--- --- --- --- --- ---
Income (Loss) from continuing (35) 5 N/M (27) 7 N/M
operations before income taxes.......
Provision for (benefit from) income (14) 2 N/M (10) 3 N/M
taxes.............................
--- --- --- --- --- ---
Income (Loss) from continuing (21) 3 N/M (17) 4 N/M
operations...........................
Discontinued operation, net of taxes... (2) 1 N/M -- 1 N/M
--- --- --- --- --- ---
Net income (loss)...................... (23)% 4% N/M (17)% 5% N/M
=== === === === === ===
</TABLE>
Shown as a percent of related revenues.
Operating revenues are derived from two sources: (1) license fees and the
related services for licensing the Company's proprietary software products; and
(2) maintenance and support services related to such software products.
9
<PAGE> 197
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
SOFTWARE PRODUCTS AND SERVICES
Revenues decreased 39% to $1.4 million for the quarter and 12% to $3.6
million for the six months, primarily due to sales force turnover and continued
weakness in the Company's primary markets and product lines. Also contributing
to the decline for the six months were delays in the release of certain Windows
based products from the Clinical Data Systems and Decision Support Systems
divisions. Costs and expenses decreased 27% for the quarter but increased 1% for
the six months, compared to the corresponding prior year period, and as a
percentage of related revenues, increased to 38% from 32% for the quarter and to
34% from 30% for the six months. The decrease for the quarter and six months
resulted primarily from lower personnel and service-related expenses, partially
offset by increased amortization of capitalized software for the newly released
products. In addition, costs and expenses for the six months ended November 30,
1996 included the effect of the Company's decision to reduce its reserve for
continuing obligations on product line exit costs by $200,000, as a result of
favorable negotiations with its customers.
MAINTENANCE AND SUPPORT SERVICES
Revenues decreased 17% to $2.4 million for the quarter and 9% to $4.8
million for the six months, primarily due to modest increases associated with
customer migrations being more than offset by discontinued support services on
individual modules from the Company's PFS customers as well as slightly higher
cancellations overall. Costs and expenses for the quarter decreased 1% but
increased 11% for the six months compared to the corresponding prior year
periods, and as a percentage of related revenues, increased to 58% from 49% for
the quarter and to 53% from 43% for the six months. The increase for the six
months is primarily due to additional labor costs incurred to support new
product releases from the Clinical Data Systems and Decision Support Systems
divisions and higher labor costs resulting from shifts to maintenance and
support activities from development activities.
MARKETING, GENERAL AND ADMINISTRATIVE
Expenses increased 19% to $2.7 million for the quarter and 26% to $5.4
million for the six months. The increase was primarily due to $162,000 and
$301,000 in costs and expenses, for the quarter and six months, respectively,
related to the move of the Alameda office. Additionally, costs and expenses for
the quarter and six months ended November 30, 1996 include the effect of
$175,000 and $350,000, respectively, in administrative fees the Company received
as a result of the services agreement with MCS. Costs and expenses for the
quarter ended November 30, 1996 also include the effect of the Company's
decision to reduce its reserve for future severance obligations by $100,000, due
to favorable settlements with two of its employees.
RESEARCH AND DEVELOPMENT
Actual research and development expenses decreased 52% to $576,000 for the
quarter and 29% to $1,627,000 for the six months. Research and development costs
presented in the accompanying financial statements were $522,000 and $1,503,000
for the quarter and six months, respectively, compared to $699,000 and
$1,204,000 in the corresponding prior year periods. The Company also capitalized
software development costs of $54,000 and $124,000 during the quarter and six
months, respectively, compared to $476,000 and $947,000 in the corresponding
prior year periods, reflecting the release of new products in the quarter ended
August 31, 1997 and the resulting cessation of software cost capitalization.
Actual research and development expenditures were 42% and 45% of software
products and services revenues for the quarter and six months ended November 30,
1997, respectively, compared to 52% and 56% in the corresponding prior year
periods.
During the first six months of fiscal 1998, the Company's development
efforts were focused on the Decision Support Systems product line and the
Clinical Data Systems product line. During the first six months of fiscal 1997,
the Company was engaged in several development projects, including the Resource
Case Management System, and the Decision Support Systems and Clinical Data
Systems product lines.
10
<PAGE> 198
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND OTHER INCOME, NET
Interest and other income, net decreased 96% to $6,000 for the quarter and
97% to $9,000 for the six months, primarily due to lower average cash balances
and interest expense incurred relating to the promissory notes.
INCOME TAXES
The Company's effective tax rate was 38.5% for the quarter and six months
ended November 30, 1997, compared to 37.3% and 38.8% in the corresponding prior
periods.
FINANCIAL CONDITION
As a result of the Company's commitment to expand its software products and
services, funds are required to support its ongoing product research and
development activities and the infrastructure required to serve its customer
base. Historically, cash generated from its operations has been an important
contributor to these needs. As a result of the market factors adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction, the
Company was required to use a significant portion of its cash reserves. It is
expected that, following the restructuring efforts begun in prior periods, the
Company will return to a situation where cash from operations will provide an
important source of liquidity to support its normal capital needs, although
numerous factors, including any reductions in revenues from currently
anticipated amounts, could affect the amount of such cash available.
At November 30, 1997, the Company had available cash reserves of $244,000.
In addition, the Company had a $2.5 million standby credit facility as well as
funds from QuadraMed available. The Company anticipates cash outlays of
approximately $1.7 million in the next six months, resulting primarily from its
decision to reorganize its business units and to exit certain product lines.
However, cash outlays related to the Company's 8% promissory notes no longer
exist since the notes were redeemed in their entirety by QuadraMed in December,
1997.
While the Company has experienced negative cash flows from operating
activities during the past two fiscal years, management believes that, as a
result of significant reductions in expenses, its cash flows will improve. While
there can be no assurance that this will occur, the Company currently believes
that it will have adequate financial resources available from operations and the
available credit facility and intercompany (QuadraMed) sources to provide
sufficient liquidity to meet its ordinary capital requirements for the
foreseeable future, including cash outlays related to the Company's
restructuring plan.
During its second fiscal quarter, the Company billed its clients in advance
for the next calendar year's maintenance and support services provided on its
software products. This generated an increase in the Company's accounts
receivable and deferred revenue balances, and will increase cash balances in
subsequent months as the related accounts receivable are collected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," issued in February 1997, changes the method of calculating earnings per
share and will be effective for the Company's financial statements for the year
ending May 31, 1998. Earlier application is not permitted. However, the Company
is permitted to disclose pro forma earnings per share amounts computed using
SFAS 128 in periods prior to adoption. Upon adoption, all prior period earnings
per share data presented shall be restated to conform to SFAS 128. The
calculation of earnings per share under SFAS 128 is simpler than prior methods
and more consistent with international accounting standards. Because a majority
of the Company's common stock equivalents have exercise prices in excess of the
Company's Common Stock price, the Company does not believe that the adoption of
SFAS 128 will have a significant impact on amounts reported as net income (loss)
per common share.
11
<PAGE> 199
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were submitted to a vote of security holders during the
Medicus Systems Corporation Annual Meeting of Stockholders held November 17,
1997:
<TABLE>
<CAPTION>
VOTES
CAST AUTHORITY
DESCRIPTION OF MATTER FOR WITHHELD
- ------------------------------------------------ --------- ---------
<S> <C> <C> <C>
1. Election of Directors:
William G. Brown 5,157,437 18,877
Dorsey R. Gardner 5,157,623 18,691
Jon E. M. Jacoby 5,157,623 18,691
Richard C. Jelinek 5,151,778 24,536
John P. Kunz 5,157,323 18,991
Risa Lavizzo-Mourey 5,157,623 18,691
Patrick C. Sommers 5,157,578 18,736
Gail L. Warden 5,157,623 18,691
</TABLE>
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
---------- ---------- ----------- ---------
<C> <S> <C> <C> <C> <C>
2. Proposal to approve the 5,102,927 48,794 10,604 13,989
Company's 1997 Directors'
Stock Option Plan
</TABLE>
ITEM 5. OTHER INFORMATION.
On November 9, 1997, QuadraMed Corporation, a Delaware corporation
("QuadraMed") acquired (the "Acquisition") 56.7% of the outstanding capital
stock of the Company. The Acquisition was completed by means of Stock Purchase
Agreements, dated as of November 9, 1997, with certain stockholders of the
Company (the "Selling Stockholders"). Pursuant to the terms of the Stock
Purchase Agreements, the Selling Stockholders agreed to sell an aggregate of
3,111,105 shares of Medicus Common Stock to QuadraMed. In consideration for the
transfer of these shares to QuadraMed, QuadraMed paid to the Selling
Stockholders $7.50 per share, in cash, without interest, or approximately $23.3
million, together with warrants (the "Warrants") entitling the Selling
Stockholders to acquire 0.3125 shares of QuadraMed Common Stock for each share
of the Medicus Common Stock sold (subject to adjustment in accordance with the
Agreement). The Warrants entitle the Selling Stockholders to purchase QuadraMed
Common Stock at a price of $24.00 per share, on the terms set forth in the
Warrants.
Simultaneously with the execution of the Stock Purchase Agreements,
QuadraMed and the Company entered into an Agreement and Plan of Reorganization
dated as of November 9, 1997 (the "Agreement") pursuant to which a wholly-owned
subsidiary of QuadraMed will be merged, subject to the approval of the
stockholders of QuadraMed, with and into the Company (the "Merger"). At the
effective time of the Merger, the stockholders of the Company participating in
the Merger will exchange all outstanding shares of Medicus Common Stock for any
of (i) a cash payment of $7.50 per share of Medicus Common Stock, (ii) 0.3125
shares of QuadraMed Common Stock per share of Medicus Common Stock sold (subject
to adjustment in accordance with the Agreement), or (iii) a combination of
QuadraMed Common Stock and cash. In addition, all stock options previously
issued by Medicus and outstanding at the time of the Merger will be assumed by
QuadraMed at an exchange ratio of 0.3565 shares of QuadraMed Common Stock for
each share of Medicus Common Stock subject to such options. The Acquisition is
intended to qualify as a tax-free reorganization within the meaning of Section
368 (a) of the Internal Revenue Code of 1986 and will be accounted for as a
purchase transaction.
12
<PAGE> 200
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (dated November 9, 1997) with the
Securities and Exchange Commission on November 10, 1997.
13
<PAGE> 201
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICUS SYSTEMS CORPORATION
--------------------------------------
(Registrant)
January 14, 1998 /s/ PATRICK C. SOMMERS
--------------------------------------
Patrick C. Sommers
President
(Chief Executive Officer)
January 14, 1998 /s/ BERNIE J. MURPHY
--------------------------------------
Bernie J. Murphy
Vice President
(Chief Financial Officer)
14
<PAGE> 202
ARTICLE 5
LEGEND
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENT.
PERIOD-TYPE 3-MOS
FISCAL-YEAR-END MAY-31-1998
PERIOD-START SEP-01-1997
PERIOD-END NOV-30-1997
CASH 244,217
SECURITIES 0
RECEIVABLES 14,515,061
ALLOWANCES 1,290,459
INVENTORY 181,572
CURRENT-ASSETS 15,642,170
PP&E 7,556,081
DEPRECIATION 5,578,254
TOTAL-ASSETS 24,139,256
CURRENT-LIABILITIES 14,782,695
BONDS 1,000,000
PREFERRED-MANDATORY 0
PREFERRED 500,000
COMMON 64,928
OTHER-SE 7,791,903
TOTAL-LIABILITY-AND-EQUITY 24,139,256
SALES 3,768,440
TOTAL-REVENUES 3,768,440
CGS 1,916,696
TOTAL-COSTS 1,916,696
OTHER-EXPENSES 522,375
LOSS-PROVISION 0
INTEREST-EXPENSE 40,040
INCOME-PRETAX (1,326,844)
INCOME-TAX (510,835)
INCOME-CONTINUING (816,009)
DISCONTINUED (69,068)
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (885,077)
EPS-PRIMARY (0.16)
EPS-DILUTED (0.16)
<PAGE> 203
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Price Waterhouse, LLP
99.1 PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
99.2 FORM OF ELECTION
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Proxy Statement/Prospectus of our reports dated March 5, 1997
included in QuadraMed Corporation's Form 10-K for the year ended December 31,
1996 and to all references to our Firm included in this Proxy
Statement/Prospectus.
ARTHUR ANDERSEN LLP
January 21, 1998
San Jose, California
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of QuadraMed
Corporation of our report dated July 23, 1997 appearing on page F-2 of the
Medicus Systems Corporation Annual Report on Form 10-K for the year ended May
31, 1997. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
PRICE WATERHOUSE LLP
Chicago, Illinois
January 19, 1998
<PAGE> 1
Exhibit 99.1
PROXY PROXY
MEDICUS SYSTEMS CORPORATION
Special Meeting of Stockholders
__________, 1998
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Patrick C. Sommers and William G.
Brown, and each of them, the attorneys and proxies of the undersigned, each
with full power of substitution, to vote all shares of Common Stock of Medicus
Systems Corporation which the undersigned would be entitled to vote if
personally present at the Special Meeting of Stockholders of Medicus Systems
Corporation to be held at One Rotary Center, Suite 1111, Evanston, Illinois
60201 at _:__ on __________, 1998, and at any adjournments or postponements
thereof, as indicated herein.
The shares represented by this proxy will be voted as directed herein,
but if no direction is given, the shares will be voted FOR the proposal set
forth in Item 1 hereof and other matters properly presented before the
Stockholders at the Special Meeting. This proxy can be revoked at any time
before it is voted, either in person at the Special Meeting, by written notice
to the Secretary of the Company, or by delivery of a later-dated proxy.
PLEASE MARK THIS PROXY AND SIGN AND DATE IT ON THE REVERSE SIDE
AND RETURN IT IN THE ENCLOSED ENVELOPE
(Continued and to be signed on reverse side.)
<PAGE> 2
PLEASE MARK VOTE BY CHECKING BOX, USING DARK INK ONLY:
1. Adoption and approval of that certain Agreement and Plan of
Reorganization, dated as of November 9, 1997, by and among QuadraMed
Corporation and Medicus Systems Corporation and the transactions
contemplated thereby.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, proxies are authorized to transact and vote upon
such other business as may properly come before the meeting or any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL SET FORTH ABOVE. IF
NO INSTRUCTION TO THE CONTRARY IS INDICATED, THIS PROXY WILL BE VOTED FOR ITEM
1.
Dated
__________________________________________
__________________________________________
Signature(s)
Please sign exactly as your name (or names) appears herein.
Executors, administrators, trustees and others signing in representative
capacity should indicate the capacity in which they sign. Where there is more
than one owner, each should sign.
2.
<PAGE> 1
Exhibit 99.2
FORM OF ELECTION
PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS CONTAINED BELOW
IMPORTANT: THIS FORM OF ELECTION, PROPERLY COMPLETED AND EXECUTED IN
ACCORDANCE WITH THE INSTRUCTIONS ON THE REVERSE SIDE MUST BE RECEIVED BY FIRST
NATIONAL BANK OF BOSTON (THE "EXCHANGE AGENT") PRIOR TO THE CLOSE OF BUSINESS
(5:00 P.M. NEW YORK CITY TIME ) ON ____________, 1998 (THE "ELECTION
DEADLINE").
HOLDERS OF MEDICUS COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES
TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS WHICH WILL
BE SENT PROMPTLY AFTER THE EFFECTIVE TIME OF THE MERGER. HOLDERS OF MEDICUS
COMMON STOCK NEED ONLY RETURN THIS FORM OF ELECTION PRIOR TO THE ELECTION
DEADLINE.
NOTWITHSTANDING THE ELECTIONS MADE BELOW, THE AMOUNT OF CASH AND THE
NUMBER OF SHARES OF QUADRAMED COMMON STOCK TO BE ISSUED IN THE MERGER IS
SUBJECT TO PRORATION IN ACCORDANCE WITH THE TERMS OF THE MERGER AGREEMENT.
EXCHANGE AGENT:
FIRST NATIONAL BANK OF BOSTON
If by Mail: If by Hand: If by Overnight Courier:
Facsimile (for eligible institutions only): (___) ___-____
Confirm facsimile by telephone ONLY: (781) 575-2338
This Form of Election and any other required documents should be sent
by each holder of Medicus Common Stock (as defined below) to the Exchange Agent
at one of the addresses set forth above. Delivery of this Form of Election to
an address other than as set forth above will not constitute a valid delivery.
If you have any questions regarding this Form of Election, please call the
Exchange Agent collect at (781) 575-2338.
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
The undersigned agrees to deliver the stock certificates (the
"Certificates") identified in Column 1 of Box A below representing the total
number of shares of Common Stock of Medicus Systems Corporation ("Medicus"),
par value $.01 per share (the "Medicus Common Stock"), set forth in Column 2 of
Box A. Delivery of the Certificates will be made in accordance with
instructions provided by the Exchange Agent promptly after the effective time
of the Merger, as described below.
The Medicus Common Stock is being purchased pursuant to the terms of
an Agreement and Plan of Reorganization, dated as of November 9, 1997 (the
"Merger Agreement"), by and among QuadraMed Corporation and Medicus, pursuant
to which a wholly owned subsidiary of QuadraMed will be merged with and into
Medicus
<PAGE> 2
(the "Merger"), and each share of Medicus Common Stock issued and outstanding
at the effective time of the Merger will be converted into the right to receive
any of (i) a cash payment of $7.50 per share of Medicus Common Stock (a "Cash
Election"), (ii) 0.3125 shares of Common Stock, par value $.01 per share, of
QuadraMed (the "QuadraMed Common Stock") for each share of Medicus Common Stock
(a "Stock Election"), subject to adjustment and certain limitations as provided
in the Merger Agreement, or (iii) a combination of cash and QuadraMed Common
Stock.
Column 3 of Box A indicates the total number of shares of Medicus
Common Stock to be surrended by the undersigned. The total number of Medicus
Common Stock listed in Column 4 of Box A represent the undersigned's Cash
Election and shall be converted into cash upon consummation of the Merger at
the rate of $7.50 per share of Medicus Common Stock. The total number of
Medicus Common Stock listed in Column 5 of Box A represent the undersigned's
Stock Election and shall be converted into .3125 shares of QuadraMed Common
Stock, subject to adjustment and certain limitations as provided in the
following paragraph (the "Exchange Ratio").
The Exchange Ratio is subject to the following adjustments: (1) if
the QuadraMed Stock Value exceeds $27.60, then the Exchange Ratio shall be the
quotient obtained by dividing (A) $8.625 by (B) the QuadraMed Stock Value, and
(2) if the QuadraMed Stock Value is less than $24.00, then the Exchange Ratio
shall be the quotient obtained by dividing (A) $7.50 by (B) the QuadraMed Stock
Value. Additionally, if the QuadraMed Stock Value is less than $20.40, then
QuadraMed may elect, at its sole discretion, to cause all or any portion of the
shares of Medicus Common Stock to be converted into the Per Share Cash Amount
(the "QuadraMed Cash Election"). The "QuadraMed Stock Value" is equal to the
average of the closing prices of QuadraMed Common Stock during the fifteen (15)
days prior to the second day prior to the date of the Special Meeting. If the
QuadraMed Stock Value (as defined below) is less than $20.40, then QuadraMed
may, at its sole discretion, elect to have all or any portion of the shares of
Medicus Common Stock converted into cash. QuadraMed will issue no more than
1,800,000 shares of QuadraMed Common Stock pursuant to the Merger and pursuant
to the exercise of warrants held by certain former stockholders of Medicus,
which shares are subject to pro rata allocation in the event stock elections by
Medicus stockholders and warrant exercises exceed the share limitation.
Consummation of the Merger is subject to various conditions, including
the affirmative vote of holders of a majority of the outstanding shares of
Medicus Common Stock entitled to vote at the Special Meeting.
NONE OF QUADRAMED, MEDICUS, THE MEDICUS BOARD OF DIRECTORS OR THE
QUADRAMED BOARD OF DIRECTORS OR TRUSTEES MAKES ANY RECOMMENDATION AS TO WHETHER
STOCKHOLDERS OF MEDICUS SHOULD ELECT TO RECEIVE CASH OR SHARES. EACH MEDICUS
STOCKHOLDER MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO SUCH ELECTION.
All questions as to the validity, form and eligibility of any election
made hereunder shall be determined by QuadraMed (or the Exchange Agent agent if
QuadraMed so delegates), and such determination shall be conclusive and
binding. Neither QuadraMed nor the Exhange Agent shall have any obligation to
to notify any person of a defect in a Form of Election submitted to the
Exchange Agent. The Exchange Agent shall also make all computations
contemplated by the Merger Agreement and all such computations shall be
conclusive and binding on the holders of Medicus Common Stock. A holder of
Medicus Common Stock who does not submit a Form of Election which is received
by the Exchange Agent prior to the Election Deadline shall be deemed to have
made a Non-Election. If QuadraMed or the Exchange Agent shall determine that
any purported Cash Election or Stock Election was not properly made, such
purported Cash Election or Stock Election shall be deemed to be of no force and
effect and the stockholder making such purported Cash Election or Stock
Election shall be deemed to have made a "Non-Election".
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE ACCEPTANCE AND
DELIVERY OF ANY FORMS OF ELECTION BY OR TO THE EXCHANGE AGENT (OR ANY OTHER
AUTHORIZED PERSON) WILL NOT OF ITSELF CREATE ANY RIGHT TO RECEIVE CASH OR
QUADRAMED SHARES
2.
<PAGE> 3
IN EXCHANGE FOR THE MEDICUS COMMON STOCK LISTED ON THIS FORM OF ELECTION AND
THAT SUCH RIGHT WILL ARISE ONLY IF THE MERGER IS CONSUMMATED AND ONLY TO THE
EXTENT PROVIDED IN THE MERGER AGREEMENT. THE UNDERSIGNED FURTHER UNDERSTANDS
AND AGREES THAT THE ELECTION MADE ON THIS FORM SHALL BE IRREVOCABLE UNLESS IT
IS PROPERLY REVISED OR WITHDRAWN IN ACCORDANCE WITH INSTRUCTION 4 OR 5 OF THIS
FORM.
BOX A: ELECTION AND DESCRIPTION OF SHARES DEPOSITED
________________________________________________________________________________
NAME AND ADDRESS OF HOLDER OF RECORD AS SHOWN ON RECORDS OF MEDICUS CORPORATION
<TABLE>
<S> <C> <C> <C> <C>
COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5
NUMBER OF NUMBER OF
SHARES SHARES FOR
NUMBER(S) OF REPRESENTED NUMBER OF WHICH
CERTIFICATES BY NUMBER OF SHARES FOR QUADRAMED
TO BE CERTIFICATES SHARES TO BE WHICH CASH IS SHARES ARE
DELIVERED IN COLUMN 1 SURRENDERED ELECTED ELECTED
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
TOTALS
- ----------------------------------------------------------------------------------
</TABLE>
THE TOTAL OF THE MEDICUS COMMON STOCK LISTED IN COLUMN 4 AND COLUMN 5
SHOULD EQUAL THE NUMBER OF MEDICUS COMMON STOCK LISTED IN COLUMN 3. IF THE
NUMBER OF MEDICUS COMMON STOCK LISTED IN COLUMN 3 IS LESS THAN THE NUMBER OF
MEDICUS COMMON STOCK LISTED IN COLUMN 2, THE EXCESS MEDICUS COMMON STOCK WILL,
UNLESS OTHERWISE REQUESTED IN WRITING, BE NON-ELECTING SHARES FOR PURPOSES OF
THE MERGER AGREEMENT.
3.
<PAGE> 4
SIGN HERE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of Owner(s)
- --------------------------------------------------------------------------------
Name(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number
- --------------------------------------------------------------------------------
(Must be signed by registered holder(s) exactly as name(s) appear on the
certificates as indicated in Box A, or by person(s) authorized to become
registered holder(s). See Instruction 2.)
4.
<PAGE> 5
INSTRUCTIONS FOR COMPLETING FORM OF ELECTION
FORMING PART OF THE TERMS AND CONDITIONS OF THIS FORM OF ELECTION
RETURN DATE: EACH HOLDER OF RECORD OF MEDICUS COMMON STOCK SHALL HAVE
THE RIGHT TO MAKE AN ELECTION REQUEST BY SUBMITTING THE FORM OF ELECTION,
TOGETHER WITH ANY ITEMS REQUIRED BY INSTRUCTION 3 BELOW TO FIRST BANK OF
BOSTON, THE EXCHANGE AGENT, BY 5:00 P.M., NEW YORK CITY TIME, ON
_________________, 1998.
1. DELIVERY OF FORM OF ELECTION. This Form of Election should be
completed and signed by the holder or holders of record of the Medicus Common
Stock. This Form of Election, completely filled in and signed, together with
any other documents required by Instruction 3 should be delivered by hand or
sent by mail to First Bank of Boston at the address set forth on the cover page
of this Form of Election. The method of delivery of all documents is at the
option and risk of the stockholder, but if delivery is by mail, registered mail
with return receipt requested, properly insured, is recommended. For your
convenience a return envelope is enclosed.
2. SIGNATURES. This Form of Election must be signed by or on
behalf of the holder(s) of record of the certificates. In the case of joint
tenants, both should sign. If the certificates for the Medicus Common Stock
deposited are registered in different forms of the name of any person signing
this Form of Election (e.g., "John Smith" on one certificate and "J. Smith" on
another), it will be necessary for such person either to sign this Form of
Election in each way in which the certificates are registered or to sign as
many Forms of Election as there are different registrations. When signing as
agent, attorney, administrator, executor, guardian, trustee, or in any other
fiduciary or representative capacity, or as an officer of a corporation on
behalf of the corporation, please give full title as such.
3. SUPPORTING EVIDENCE. In case any Form of Election is executed
by an agent, attorney, administrator, executor, guardian, trustee, or in any
other fiduciary or representative capacity, or by an officer of a corporation
on behalf of the corporation, there should be submitted with the Form of
Election, documentary evidence of appointment and authority to act in such
capacity (including court orders and corporate resolutions where necessary), as
well as evidence of the authority of the person making such execution to
assign, sell or transfer shares. Such documentary evidence of authority must be
in form satisfactory to Quadramed.
4. MODIFICATION OF ELECTION. The holder of any of the Medicus
Common Stock listed on this Form of Election may at any time prior to 5:00
p.m., New York City time, on _________________, 1998 revise the request made on
this Form of Election by submitting a new, subsequently dated, Form of Election
identical to this Form of Election (i) containing the new election request and
(ii) signed and completed in accordance with the Instructions on this Form of
Election.
5. WITHDRAWAL OF ELECTION. The holder of the shares of Medicus
Common Stock listed on this Form of Election may at any time prior to 5:00
p.m., New York City time, on _______________________, 1998 withdraw his
election by written notice to Exchange Agent at the address set forth on the
cover page.
6. MISCELLANEOUS. All questions as to the validity, form and
eligibility of any Election made hereunder shall be determined by QuadraMed (or
the Exchange Agent agent if QuadraMed so delegates), and such determination
shall be conclusive and binding. Neither QuadraMed nor the Exhange Agent shall
have any obligation to to notify any person of a defect in a Form of Election
submitted to the Exchange Agent. The Exchange Agent shall also make all
computations contemplated by the Merger Agreement and all such computations
shall be conclusive and binding on the holders of Medicus Common Stock. A
holder of Medicus Common Stock who does not submit a Form of Election which is
received by the Exchange Agent prior to the Election Deadline shall be deemed
to have made a Non-Election. If QuadraMed or the Exchange Agent shall
determine that any purported Cash
5.
<PAGE> 6
Election or Stock Election was not properly made, such purported Cash Election
or Stock Election shall be deemed to be of no force and effect and the
stockholder making such purported Cash Election or Stock Election shall be
deemed to have made a "Non-Election".
7. ADDITIONAL COPIES. Additional copies of the Form of Election
may be obtained from the Exchange Agent.
In order to be effective, this Form of Election and accompanying items
must be submitted to the Exchange Agent at its address as set forth herein
prior to 5:00 p.m., New York City time, on ____________________, 1998.
6.
