<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(c)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
QUADRAMED CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
LOGO
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 6, 1998
To Our Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
QuadraMed Corporation (the "Company"), which will be held at 80 East Sir Francis
Drake Boulevard, Larkspur, California 94939 at 9:00 a.m. on February 6, 1998
(the "Special Meeting"). The purpose of the Special Meeting is to consider and
take action upon a proposal recommended by the Board of Directors to amend the
Company's 1996 Stock Incentive Plan including a 750,000-share increase in the
number of shares of Common Stock authorized for issuance over the term of such
plan. This matter is more fully described in the Proxy Statement accompanying
this Notice.
The Board of Directors has fixed the close of business on January 7, 1998
as the record date for determining those stockholders who will be entitled to
vote at the Special Meeting. The stock transfer books will remain open between
the record date and the date of the Special Meeting.
Representation of at least a majority of all outstanding shares of Common
Stock of QuadraMed Corporation either in person or by proxy is required to
constitute a quorum. Accordingly, it is important that your shares be
represented at the meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE. Your proxy may be revoked at any time prior to the time it is
voted at the Special Meeting.
Please read the accompanying proxy material carefully. Your vote is
important and the Company appreciates your cooperation in considering and acting
on the matter presented.
Sincerely yours,
/s/ James D. Durham
James D. Durham
Chairman of the Board,
President and Chief Executive Officer
January 16, 1998
Larkspur, California
<PAGE> 3
STOCKHOLDERS SHOULD READ THE ENTIRE PROXY STATEMENT
CAREFULLY PRIOR TO RETURNING THEIR PROXIES
------------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
OF
QUADRAMED CORPORATION
TO BE HELD ON FEBRUARY 6, 1998
------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of QUADRAMED CORPORATION ("QuadraMed Corporation" or the
"Company") of proxies to be voted at the Special Meeting of Stockholders (the
"Special Meeting"), which will be held at 9:00 a.m. on February 6, 1998, at 80
East Sir Francis Drake Boulevard, Larkspur, California 94939, or at any
adjournments or postponements thereof, for the purposes set forth in the
accompanying Notice of Special Meeting of Stockholders. This Proxy Statement and
the proxy card were first mailed to stockholders on or about January 16, 1998.
VOTING RIGHTS AND SOLICITATION
The close of business on January 7, 1998 was the record date for
stockholders entitled to notice of and to vote at the Special Meeting of
Stockholders. As of that date, QuadraMed Corporation had 11,916,097 shares of
Common Stock, $.01 par value per share (the "Common Stock") issued and
outstanding. All of the shares of the Company's Common Stock outstanding on the
record date are entitled to vote at the Special Meeting of Stockholders, and
stockholders of record entitled to vote at the meeting will have one vote for
each share of Common Stock so held with regard to each matter to be voted upon.
Shares of the Company's Common Stock represented by proxies in the
accompanying form which are properly executed and returned to QuadraMed
Corporation will be voted at the Special Meeting of Stockholders in accordance
with the stockholders' instructions contained therein. In the absence of
contrary instructions, shares represented by such proxies will be voted FOR the
proposal to approve the amendments to the 1996 Stock Incentive Plan. Management
does not know of any matters to be presented at this Special Meeting other than
those set forth in this Proxy Statement and in the Notice accompanying this
Proxy Statement. If other matters should properly come before the meeting, the
proxy holders will vote on such matters in accordance with their best judgment.
Any stockholder has the right to revoke his or her proxy at any time before it
is voted at the meeting. The affirmative vote of a majority of the Common Stock
present or represented at the meeting and entitled to vote at the Meeting is
required for approval of each of the proposals being submitted to the
stockholders for their consideration. Abstentions and broker non-votes are each
included in the determination of the number of shares present for quorum
purposes. Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders, whereas broker non-votes are not counted for purposes
of determining whether a proposal has been approved.
The entire cost of soliciting proxies will be borne by the Company. Proxies
will be solicited principally through the use of the mails, but, if deemed
desirable, may be solicited personally or by telephone, telegraph or special
letter by officers and regular Company employees for no additional compensation.
Arrangements may be made with brokerage houses and other custodians, nominees
and fiduciaries to send proxies and proxy material to the beneficial owners of
the Company's Common Stock, and such persons may be reimbursed for their
expenses. In addition, QuadraMed has retained a proxy solicitation firm to
assist in mailing and soliciting proxies for the Special Meeting.
<PAGE> 4
PROPOSAL 1
APPROVAL OF AMENDMENTS TO THE 1996 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve a series of
amendments to the Company's 1996 Stock Incentive Plan (the "1996 Plan") which
will (i) increase the maximum number of shares of Common Stock authorized for
issuance over the term of the 1996 Plan from 1,638,297 to 2,388,297 shares, (ii)
increase the maximum number of shares for which any one person may receive
options, separately exercisable stock appreciation rights and direct stock
issuances by an additional 300,000 shares to 500,000 shares in the aggregate per
calendar year, (iii) remove certain restrictions on the eligibility of
non-employee Board members to serve as Plan Administrator and (iv) effect a
series of additional changes to the provisions of the 1996 Plan (including the
stockholder approval requirements) in order to take advantage of the recent
amendments to Rule 16b-3 of the Securities and Exchange Commission ("SEC") which
exempts certain officer and director transactions under the 1996 Plan from the
short-swing liability provisions of the federal securities laws.
The Board of Directors of the Company (the "Board") believes that the
increase in the number of shares available for issuance over the term of the
1996 Plan is necessary in order to assure that the Company will have a
sufficient reserve of Common Stock available to continue to utilize option
grants for purposes of attracting and retaining the services of key individuals
essential to the Company's long-term success. The Board believes that the other
amendments are needed in order to provide the Company with more opportunities to
make equity incentives available to its executive officers and non-employee
Board members as an inducement for their continued service and to facilitate
plan administration in light of the changes to SEC Rule 16b-3.
The 1996 Plan became effective on June 26, 1996 (the "Effective Date") upon
approval by the Board and serves as the successor to the Company's predecessor
1994 Stock Plan (the "1994 Plan"). On the Effective Date, all outstanding
options under the 1994 Plan were incorporated into the 1996 Plan and the 1994
Plan accordingly terminated. The amendments to the 1996 Plan that are the
subject of this Proposal were adopted by the Board at the July 10 and December
18, 1997 Board meetings. The following is a summary of the principal features of
the 1996 Plan, as amended. The summary, however, does not purport to be a
complete description of all the provisions of the 1996 Plan. Any stockholder of
the Company who wishes to obtain a copy of the actual plan document may do so
upon written request to the Company's Secretary at the Company's principal
executive offices in Larkspur, California.
EQUITY INCENTIVE PROGRAMS
The 1996 Plan contains five (5) separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Salary Investment Option Grant
Program, (iii) a Stock Issuance Program, (iv) an Automatic Option Grant Program,
and (v) a Director Fee Option Grant Program. The principal features of each
program are described below. The Compensation Committee has the exclusive
authority to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to option grants and stock issuances made to the Company's
executive officers and non-employee Board members. The Compensation Committee
and the full Board each have separate but concurrent authority to make option
grants and stock issuances under those programs to all other eligible
individuals. The Compensation Committee also has the exclusive authority to
select the executive officers and other highly compensated employees who may
participate in the Salary Investment Option Grant Program, but neither the
Compensation Committee nor the Board will exercise any administrative discretion
with respect to option grants under the Salary Investment Option Grant Program,
or under the Automatic Option Grant or Director Fee Option Grant Program for the
non-employee Board members. All grants under these three latter programs are
made in strict compliance with the express provisions of each such program. The
term Plan Administrator, as used in this summary, will mean either the
Compensation Committee or the Board, to the extent each such entity is acting
within the scope of its administrative jurisdiction under the 1996 Plan.
2
<PAGE> 5
SHARE RESERVE
As of January 2, 1998, 2,388,297 shares of Common Stock were reserved under
the 1996 Plan, including the 750,000-share increase subject to stockholder
approval as part of this Proposal and including an additional 178,741 shares
which became issuable as of the first trading day of January 1998 pursuant to
the annual automatic share increase provisions of the 1996 Plan. The number of
shares of Common Stock available for issuance under the 1996 Plan automatically
increases on the first trading day of each calendar year by an amount equal to
one and one-half percent (1.5%) of the total number of shares of Common Stock
outstanding on the last trading day of the immediately preceding calendar year.
However, no individual may be granted options, stock appreciation rights and
direct stock issuances for more than 500,000 shares in the aggregate per
calendar year, assuming stockholder approval of the 300,000-share increase in
such limit pursuant to this Proposal.
The shares of Common Stock issuable under the 1996 Plan may be drawn from
shares of the Company's authorized but unissued Common Stock or from shares of
Common Stock reacquired by the Company, including shares repurchased on the open
market. Shares subject to any outstanding options under the 1996 Plan (including
options incorporated from the 1994 Plan) which expire or otherwise terminate
prior to exercise will be available for subsequent issuance. Unvested shares
issued under the 1996 Plan and subsequently repurchased by the Company, at the
option exercise or direct issue price paid per share, pursuant to the Company's
repurchase rights under the 1996 Plan will also be available for reissuance.
However, shares subject to any option surrendered in accordance with the stock
appreciation rights provisions of the 1996 Plan will not be available for
subsequent issuance.
ELIGIBILITY
Employees, non-employee Board members, and independent consultants and
advisors in the service of the Company or its parent and subsidiaries (whether
now existing or subsequently established) are eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs. Executive officers and
other highly compensated employees are also eligible to participate in the
Salary Investment Option Grant Program, and non-employee members of the Board
are also eligible to participate in the Automatic Option Grant and Director Fee
Option Grant Programs.
As of December 31, 1997, six (6) executive officers, six (6) non-employee
Board members and approximately five hundred and five (505) other employees and
consultants were eligible to participate in the Discretionary Option Grant and
Stock Issuance Programs, approximately seven (7) executive officers and other
highly compensated employees were eligible to participate in the Salary
Investment Option Grant Program, and six (6) non-employee Board members were
eligible to participate in the Automatic Option Grant and Director Fee Option
Grant Programs.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the 1996 Plan is the closing selling price per share on that date on the Nasdaq
National Market. On January 2, 1998, the fair market value per share was $27.25.
DISCRETIONARY OPTION GRANT PROGRAM
GRANTS
The Plan Administrator has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants, the time or times when such grants are to be made, the number of
shares subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory option under the federal tax laws, the
vesting schedule (if any) to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding. All expenses
incurred in administering the 1996 Plan are paid by the Company.
3
<PAGE> 6
PRICE AND EXERCISABILITY
Each option grant has an exercise price per share not less than one hundred
percent (100%) of the fair market value per share of Common Stock on the option
grant date, and no option has a term in excess of ten (10) years. The shares
subject to each option generally vest in a series of installments over a
specified period of service measured from the grant date.
The exercise price may be paid in cash or in shares of the Common Stock.
Outstanding options may also be exercised through a same-day sale program
pursuant to which a designated brokerage firm is to effect an immediate sale of
the shares purchased under the option and pay over to the Company, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price for the purchased shares plus all applicable withholding taxes.
An optionee has no stockholder rights with respect to the option shares
until such optionee has exercised the option and paid the exercise price for the
purchased shares. Options are generally not assignable or transferable other
than by will or the laws of inheritance and, during the optionee's lifetime, the
option may be exercised only by such optionee. However, the Plan Administrator
may allow non-statutory options to be transferred or assigned during the
optionee's lifetime to one or more members of the optionee's immediate family or
to a trust established exclusively for one or more such family members, to the
extent such transfer or assignment is in furtherance of the optionee's estate
plan.
TERMINATION OF SERVICE
Upon the optionee's cessation of service, the optionee has a limited period
of time in which to exercise any outstanding option to the extent exercisable
for vested shares. The Plan Administrator has complete discretion to extend the
period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
CANCELLATION/REGRANT PROGRAM
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program which have
exercise prices in excess of the then current market price of the Common Stock
and to issue replacement options with an exercise price based on the market
price of Common Stock at the time of the new grant.
SALARY INVESTMENT OPTION GRANT PROGRAM
GRANTS
The Plan Administrator has complete discretion in implementing the Salary
Investment Option Grant Program for one or more calendar years and in selecting
the executive officers and other highly compensated individuals who are to
participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the calendar
year of participation, file with the Plan Administrator an irrevocable
authorization directing the Company to reduce his or her base salary for the
upcoming calendar year by an amount not less than Ten Thousand Dollars
($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). Each individual
who files a proper salary reduction authorization is automatically granted an
option under the Salary Investment Option Grant Program on or before the last
trading day in January of the calendar year for which that salary reduction is
to be in effect. Stockholder approval of this Proposal will constitute
pre-approval of each option subsequently granted pursuant to the provisions of
the Salary Investment Option Grant Program summarized below and the subsequent
exercise of that option in accordance with its terms.
4
<PAGE> 7
TERMS
Each option is subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Option Grant Program,
except for the following differences:
-- Each option is a non-statutory option.
-- The exercise price per share is equal to one-third of the fair
market value per share of Common Stock on the option grant date, and the
number of option shares is determined by dividing the total dollar amount
of the authorized reduction in the participant's base salary by two-thirds
of the fair market value per share of Common Stock on the option grant
date. As a result, the total spread on the option (the fair market value of
the option shares on the grant date less the aggregate exercise price
payable for those shares) is equal to the dollar amount of the reduction to
the optionee's base salary to be in effect for the calendar year for which
the option grant is made.
-- The option becomes exercisable for the option shares in a series of
twelve (12) successive equal monthly installments upon the optionee's
completion of each calendar month of service in the calendar year for which
the salary reduction is in effect.
-- Each option remains outstanding for vested shares until the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date the
optionee's service terminates.
The Compensation Committee has approved the implementation of the Salary
Investment Option Grant Program for the 1998 calendar year.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share
not less than one hundred percent (100%) of their fair market value, payable in
cash or through a promissory note payable to the Company. Shares may also be
issued as a bonus for past services, with no cash outlay required of the
participant.
Shares issued as a bonus for past services are fully vested upon issuance.
All other shares issued under the program are subject to a vesting schedule tied
to the performance of service or the attainment of performance goals. The Plan
Administrator, however, has the discretionary authority at any time to
accelerate the vesting of any and all unvested shares outstanding under the 1996
Plan.
AUTOMATIC OPTION GRANT PROGRAM
GRANTS
Under the Automatic Option Grant Program, each individual serving as a
non-employee Board member on October 10, 1996, the date of the Company's initial
public offering of Common Stock (the "IPO"), received at that time an automatic
option grant for 10,000 shares, provided such individual had not previously been
in the Company's employ or received an option grant from the Company. In
addition, each individual who is first elected or appointed as a non-employee
Board member at any time after the Company's IPO will receive at the time of
such initial election or appointment an automatic option grant for 10,000 shares
of Common Stock, provided such individual was not previously in the Company's
employ. At each annual stockholders meeting beginning with the 1997 Annual
Meeting, each individual who is to continue in service as a non-employee Board
member, whether or not that individual is standing for re-election to the Board
at that particular meeting, will automatically be granted at that meeting an
option to purchase 4,000 shares of Common Stock, provided such individual has
served as a non-employee Board member for at least six (6) months. There is no
limit on the number of such 4,000-share options which any one non-employee Board
member may receive over his or her period of Board service, and non-employee
Board members who have previously been in the Company's employ are fully
eligible for one or more 4,000-share option grants over their
5
<PAGE> 8
period of Board service. Stockholder approval of this Proposal will constitute
pre-approval of each option subsequently granted pursuant to the provisions of
the Automatic Option Grant Program summarized below and the subsequent exercise
of that option in accordance with its terms.
TERMS
Each option under the Automatic Option Grant Program has an exercise price
per share equal to 100% of the fair market value per share of Common Stock on
the option grant date and a maximum term of ten (10) years measured from the
grant date.
The option is immediately exercisable for all the option shares, but any
purchased shares are subject to repurchase by the Company, at the exercise price
paid per share, upon the optionee's cessation of Board service prior to vesting
in those shares. Each initial 10,000-share grant vests, and the Company's
repurchase rights lapse, as follows: (i) one-third (1/3) of the option shares
vest upon the optionee's completion of one (1) year of Board service measured
from the option grant date and (ii) the balance of the option shares vest in a
series of twenty-four (24) successive equal monthly installments upon the
optionee's completion of each additional month of Board service over the
twenty-four (24)-month period measured from the first anniversary of such grant
date. Each annual 4,000-share grant vests, and the Company's repurchase right
lapses, in a series of twelve (12) successive equal monthly installments over
the optionee's period of Board service measured from the grant date.
The shares subject to each outstanding automatic option grant will vest
immediately should any of the following occur while the optionee continues in
Board service: (i) the optionee's death or permanent disability, (ii) an
acquisition of the Company by merger or asset sale, (iii) the successful
completion of a tender offer for more than 50% of the Company's outstanding
voting stock or (iv) a change in the majority of the Board effected through one
or more proxy contests for Board membership. Each automatic option grant held by
an optionee upon his or her termination of Board service remains exercisable,
for any or all of the option shares in which the optionee is vested at the time
of such termination, for up to a twelve (12)-month period following such
termination date.
DIRECTOR FEE OPTION GRANT PROGRAM
GRANTS
Each non-employee Board member has the right to apply all or a portion of
his or her total retainer fee otherwise payable in cash each year to the
acquisition of a special option grant under the Director Fee Option Grant
Program. The grant is made automatically on the first trading day in January
following the filing of the stock-in-lieu of cash election and has an exercise
price per share equal to one-third of the fair market value of the option shares
on the grant date. The number of option shares is determined by dividing the
total dollar amount of the retainer fee subject to the director's election by
two-thirds of the fair market value per share of Common Stock on the option
grant date. As a result, the total spread on the option (the fair market value
of the option shares on the grant date less the aggregate exercise price payable
for those shares) is equal to the portion of the retainer fee subject to the
director's election. Stockholder approval of this Proposal will constitute
pre-approval of each option subsequently granted pursuant to the provisions of
the Director Fee Option Grant Program summarized below and the subsequent
exercise of that option in accordance with its terms. As non-employee Board
members do not receive retainer fees, the Director Fee Option Grant Program is
not currently in effect.
TERMS
The options become exercisable for fifty percent (50%) of the option shares
upon the optionee's completion of six (6) months of Board service in the
calendar year for which his or her election is in effect and become exercisable
for the balance of the option shares in a series of six (6) successive equal
monthly installments upon the optionee's completion of each additional month of
Board service during that calendar year. In the event the optionee ceases Board
service for any reason (other than death or permanent disability),
6
<PAGE> 9
the options terminate immediately with respect to any unvested shares subject to
the option at the time. However, the option remains exercisable for the vested
shares subject to the option until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the end of the three (3)-year period measured from
the date of the optionee's cessation of Board service. Should the optionee's
service as a Board member cease by reason of death or permanent disability, then
the option will immediately become exercisable for all the shares of Common
Stock subject to the option and may be exercised for such shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the end
of the three (3)-year period measured from the date of the optionee's cessation
of Board service.
STOCK AWARDS
The following table shows, as to each of the Named Executive Officers in
the Summary Compensation Table and the various indicated individuals and groups,
the number of shares of Common Stock subject to options granted under the 1996
Plan since the June 26, 1996 effective date through December 31, 1997, together
with the weighted average exercise price payable per share.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
OPTIONS GRANTED WEIGHTED AVERAGE
NAME AND TITLE (NUMBER OF SHARES) EXERCISE PRICE
--------------------------------------------- ------------------ ----------------
<S> <C> <C>
James D. Durham.............................. 305,000 $10.68
Chairman of the Board, President and Chief
Executive Officer
John V. Cracchiolo........................... 155,000 $10.66
Executive Vice President, Chief Financial
Officer and Secretary
Frederick Stodolak........................... 60,000 $10.11
Executive Vice President and President,
Value-Added Systems Division
Suzanne Blumenthal........................... 25,000 $11.50
Senior Vice President, Business Development
Eugene Arnone................................ -- --
Executive Vice President and President,
Business Office Outsourcing Services
Division
All executive officers as a group
(seven)(7)................................. 757,100 $10.17
Thomas F. McNulty, Director.................. 4,000 $ 7.75
John H. Austin, M.D., Director............... 4,000 $ 7.75
Albert L. Greene, Director................... 10,000 $ 7.75
Kenneth E. Jones, Director................... 10,000 $ 7.75
Joan P. Neuscheler, Director................. 14,000 $10.79
Cornelius T. Ryan, Director.................. 14,000 $10.79
All non-employee directors as a group
(six)(6)................................... 56,000 $ 9.27
All employees, including current officers who
are not executive officers, as a group
(thirty-five)(35).......................... 247,833 $ 8.70
</TABLE>
As of December 31, 1997, 1,282,929 shares of Common Stock were subject to
outstanding options under the 1996 Plan and 14,567 shares remained available for
future issuance. Through December 31, 1997, 1,802,790 shares of Common Stock
have been issued under the 1996 Plan.
7
<PAGE> 10
GENERAL PLAN PROVISIONS
ACCELERATION
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are transferred to the successor corporation. The Plan
Administrator will have complete discretion to grant one or more options under
the Discretionary Option Grant Program which will become fully exercisable for
all option shares in the event those options are assumed in the acquisition and
the optionee's service with the Company or the acquiring entity is involuntarily
terminated within a designated period following such acquisition. The Plan
Administrator will have similar discretion to grant options which will become
fully exercisable for all the option shares should the optionee's service
terminate, whether involuntarily or through a resignation for good reason,
within a designated period following a change in control of the Company (whether
by successful tender offer for more than 50% of the outstanding voting stock or
by proxy contest for the election of Board members). The Plan Administrator may
also provide for the automatic vesting of any outstanding shares under the Stock
Issuance Program upon similar terms and conditions.
Each option outstanding under the Salary Investment Option Grant, Automatic
Option Grant and Director Fee Option Grant Programs will also automatically
accelerate in the event of an acquisition or change in control of the Company.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
STOCK APPRECIATION RIGHTS
The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the Plan:
Tandem stock appreciation rights, which may be granted under the
Discretionary Option Grant Program, provide the holders with the right to
surrender their options for an appreciation distribution from the Company
equal in amount to the excess of (a) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (b) the
aggregate exercise price payable for those shares. Such appreciation
distribution may, at the discretion of the Plan Administrator, be made in
cash or in shares of Common Stock.
Limited stock appreciation rights may be granted under the
Discretionary Option Grant Program to one or more officers of the Company
as part of their option grants. Options with such a limited stock
appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for more than fifty percent (50%) of
the Company's outstanding voting stock. In return for the surrendered
option, the officer will be entitled to a cash distribution from the
Company in an amount per surrendered option share equal to the excess of
(a) the highest price per share of Common Stock paid in connection with the
tender offer over (b) the exercise price payable for such share.
All options granted under the Automatic Option Grant, Salary Investment
Option Grant and Director Fee Option Grant Programs include a Limited Stock
Appreciation Right. With respect to such options, stockholder approval of this
Proposal will constitute pre-approval of each such option granted after the
Special Meeting and the subsequent surrender of that option in accordance with
foregoing provisions. No additional approval of the Plan Administrator or the
Board will be required at the time of the actual option surrender or cash
distribution.
8
<PAGE> 11
CHANGES IN CAPITALIZATION
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
1996 Plan, (ii) the number and/or class of securities for which any one person
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances under the 1996 Plan per calendar year, (iii) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members and (iv) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder.
FINANCIAL ASSISTANCE
The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options or the purchase of
shares under the 1996 Plan. The Plan Administrator will determine the terms of
any such assistance. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued shares
plus all applicable taxes incurred in connection with the acquisition of the
shares.
SPECIAL TAX ELECTION
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.
AMENDMENT AND TERMINATION
The Board may amend or modify the 1996 Plan in any or all respects
whatsoever, subject to any required stockholder approval under applicable law or
regulation. The Board may terminate the 1996 Plan at any time, and the 1996 Plan
will in all events terminate on April 30, 2006.
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1996 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition. For Federal tax purposes, dispositions are divided into
two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held the
shares for more than two (2) years after the option grant date and more than one
(1) year after the exercise date. If either of these two holding periods is not
satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be
9
<PAGE> 12
taxable as ordinary income to the optionee. Any additional gain or loss
recognized upon the disposition will be recognized as a capital gain or loss by
the optionee.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
such distribution for the taxable year in which the ordinary income is
recognized by the optionee.
DIRECT STOCK ISSUANCE
The tax principles applicable to direct stock issuances under the 1996 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options granted with exercise prices equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
direct compensation expense to the Company's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date.
10
<PAGE> 13
Such expense will be accruable by the Company over the period that the option
shares or issued shares are to vest. Option grants or stock issuances at 100% of
fair market value will not result in any direct charge to the Company's
earnings. However, the fair value of those options is required to be disclosed
in the notes to the Company's financial statements, and the Company must also
disclose, in pro-forma statements to the Company's financial statements, the
impact those options would have upon the Company's reported earnings were the
value of those options at the time of grant treated as compensation expense.
Whether or not granted at a discount, the number of outstanding options may be a
factor in determining the Company's earnings per share on a fully-diluted basis.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings.
NEW PLAN BENEFITS
As of December 31, 1997, no options had been granted in reliance upon the
750,000-share increase to the total number of shares reserved for issuance under
the 1996 Plan which is subject to this Proposal. On July 10, 1997, an option for
105,000 shares of Common Stock was granted to James D. Durham on the basis of
the 300,000-share increase to the annual maximum limit on the number of shares
for which any one person may receive options, separately exercisable stock
appreciation rights and direct stock issuances under the 1996 Plan, which
increase is also subject to this Proposal.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Meeting is required
for approval of the amendments to 1996 Plan. Should such stockholder approval
not be obtained, then the 750,000-share increase to the share reserve will not
be implemented, and any stock options granted on the basis of that increase will
immediately terminate without becoming exercisable for the shares of Common
Stock subject to those options, and no additional options will be granted on the
basis of such share increase. In addition, should such stockholder approval not
be obtained, then the option grant to Mr. Durham for 105,000 shares granted on
the basis of the 300,000-share increase to the annual maximum limit on the
number of shares for which any one person may be granted such options will
terminate without ever becoming exercisable for any of the shares of Common
Stock subject to that option, and such annual limit will remain at 200,000
shares. In addition, certain other changes to the provisions of the 1996 Plan
(including certain administrative provisions and stockholder approval
provisions) that were intended to take advantage of the recent amendments to
Rule 16b-3 of the SEC will not be implemented.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE AMENDMENTS TO THE 1996 PLAN.
11
<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding shares of the Company's Common Stock, (ii) each director of
the Company, (iii) each Named Executive Officer listed in the Summary
Compensation Table and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-------------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT
----------------------------------------------------- --------- -------
<S> <C> <C>
Resource Health Partners, L.P........................ 1,588,701 13.3%
c/o Healthcare Research Affiliates, Inc.
West Shore Office Park
5000 Lenker Street
Mechanicsburg, PA 17055
Wells Fargo Bank, N.A.(2)............................ 612,500 5.1
420 Montgomery Street
San Francisco, CA 94163
James D. Durham(3)................................... 634,635 5.1
John V. Cracchiolo(4)................................ 72,241 *
Suzanne J. Blumenthal(5)............................. 33,836 *
Frederick Stodolak(6)................................ 55,786 *
Eugene M. Arnone..................................... 167,688 *
John H. Austin, M.D.(7).............................. 22,666 *
Albert L. Greene(8).................................. 10,000 *
Kenneth E. Jones(8).................................. 10,000 *
Thomas F. McNulty(9)................................. 26,666 *
Joan P. Neuscheler(10)............................... 442,626 3.6
Cornelius T. Ryan(11)................................ 215,439 *
All executive officers and directors as a group (12
persons)(12)....................................... 1,691,583 13.0
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Based upon a Schedule 13G filed on or about February 14, 1997, Wells Fargo
Bank, N.A. has sole voting power with respect to 612,500 shares of Common
Stock and shared investment power with respect to 598,500 of such shares.
All such shares are held in trust accounts for the economic benefit of the
beneficiaries of those accounts.
(3) Includes 90,295 shares of Common Stock owned by Trigon Resources
Corporation ("Trigon"), a corporation owned by Mr. Durham and his two
children, 134,574 shares of Common Stock issuable upon exercise of a
warrant held by Trigon, and 355,600 shares issuable upon exercise of a
warrant held by Mr. Durham. Also includes 54,166 shares issuable upon
exercise of options within 60 days of December 31, 1997. Mr. Durham's
address is 80 East Sir Francis Drake Boulevard, Suite 2A, Larkspur, CA
94939.
(4) Includes 71,666 shares issuable upon exercise of options within 60 days of
December 31, 1997.
12
<PAGE> 15
(5) Includes 32,820 shares issuable upon exercise of options within 60 days of
December 31, 1997.
(6) Includes 19,250 shares issuable upon exercise of options within 60 days of
December 31, 1997.
(7) Includes 22,666 shares issuable upon exercise of options within 60 days of
December 31, 1997.
(8) Includes 10,000 shares issuable upon exercise of options within 60 days of
December 31, 1997.
(9) Includes 26,666 shares issuable upon exercise of options within 60 days of
December 31, 1997.
(10) Includes 179,353 shares of Common Stock owned by, and 249,270 shares of
Common Stock issuable upon exercise of certain warrants issued to,
Tullis-Dickerson Capital Focus, L.P. Also includes 14,000 shares issuable
upon exercise of options held by Ms. Neuscheler and exercisable within 60
days of December 31, 1997. Ms. Neuscheler, a director of the Company, is a
general partner of Tullis-Dickerson Partners, which is the general partner
of Tullis-Dickerson Capital Focus, L.P. Ms. Neuscheler disclaims beneficial
ownership in the shares held by Tullis-Dickerson Capital Focus, L.P.,
except to the extent of her pecuniary interest arising from her general
partnership interest in Tullis-Dickerson Partners. Also includes 231 shares
held in trust for the benefit of Susannah Dickerson and 231 shares held in
trust for the benefit of Caroline Dickerson. Ms. Neuscheler disclaims
beneficial ownership in such shares. Ms. Neuscheler's address is One
Greenwich Plaza, Greenwich, CT 06830.
(11) Includes 65,468 shares of Common Stock owned by Oxford Bioscience Partners
L.P.; 18,465 shares of Common Stock owned by Oxford Bioscience Partners
(Bermuda) Limited Partnership; 91,655 shares of Common Stock issuable upon
exercise of a warrant issued to Oxford Bioscience Partners L.P.; and 25,851
shares of Common Stock issuable upon exercise of a warrant issued to Oxford
Bioscience Partners (Bermuda) Limited Partnership. Also includes 14,000
shares issuable upon exercise of options held by Mr. Ryan and exercisable
within 60 days of December 31, 1997. Mr. Ryan, a director of the Company,
is a general partner of OBP Management L.P. and OBP Management (Bermuda)
Limited Partnership, which are the general partners of Oxford Bioscience
Partners L.P. and Oxford Bioscience Partners (Bermuda) Limited Partnership,
respectively. Mr. Ryan disclaims beneficial ownership in the shares held by
Oxford Bioscience Partners L.P. and Oxford Bioscience Partners (Bermuda)
Limited Partnership, except to the extent of his pecuniary interest arising
from his general partnership interests in OBP Management L.P. and OBP
Management (Bermuda) L.P., respectively. Mr. Ryan's address is 315 Post
Road West, Westport, CT 06880.
(12) Includes 1,132,184 shares issuable upon exercise of certain warrants and
options within 60 days of December 31, 1997.
13
<PAGE> 16
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table set forth certain information regarding the
compensation earned during the last three fiscal years by (i) the Company's
Chief Executive Officer, and (ii) each of the four other most highly compensated
executive officers of the Company serving as such as of the end of the last
fiscal year whose total annual salary and bonus exceeded $100,000. Such
individuals will be hereafter referred to as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- ----------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/WARRANTS
- -------------------------------- ------ -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
James D. Durham................. 1997 $225,000 $100,000 -- 305,000
Chairman of the Board, 1996 187,425 -- -- 101,600
President and Chief 1995 178,003 -- -- 388,574(1)
Executive Officer
John V. Cracchiolo.............. 1997 159,375(2) -- -- 155,000
Executive Vice President, 1996 133,333 52,000 -- --
Chief Financial Officer 1995 73,149(3) -- 14,000(4) 70,000
and Secretary
Frederick Stodolak.............. 1997 179,800 -- -- 60,000
Executive Vice President 1996 118,141(5) -- 134,198(6) --
and President, 1995 -- -- -- 24,000
Value-Added Systems Division
Suzanne J. Blumenthal........... 1997 125,000 3,324(7) -- 25,000
Senior Vice President, 1996 110,000 32,646(8) -- --
Business Development 1995 85,000 28,505(7) 20,400
Eugene M. Arnone................ 1997 127,549(9) -- -- --
Executive Vice President and
President, Business Office
Outsourcing Services Division
</TABLE>
- ---------------
(1) Includes a warrant to purchase 254,000 shares. In September 1996, this
warrant was combined with a warrant to purchase 101,600 shares.
(2) Effective August 1997, Mr. Cracchiolo's annual salary was increased from
$150,000 to $175,000 by the Board of Directors.
(3) Represents salary paid from May 1995 through December 1995.
(4) Represents reimbursement for moving expenses.
(5) Represents salary paid through June 15, 1996 and from November 19, 1996
through December 31, 1996. Mr. Stodolak's annual salary for 1996 was
$175,000. In addition, for the period of September 1, 1996 through November
18, 1996, Mr. Stodolak was a consultant with the Company and received a
$20,000 retainer fee.
(6) For the period June 16, 1996 through August 31, 1996, Mr. Stodolak received
35,786 shares of Common Stock, at $3.75 per share, in lieu of receiving
cash salary. The fair market value of the Common Stock was $7.50 per share.
The aggregate value of the difference between the fair market value and the
purchase price of the shares was $134,198.
(7) Represents commissions earned and paid.
(8) Includes $12,646 for commissions earned and paid.
(9) Represents salary paid from April 1997 through December 1997. Mr. Arnone
resigned from the Company effective December 15, 1997.
14
<PAGE> 17
STOCK OPTIONS
The following table sets forth information concerning the stock option
grants made to each of the Named Executive Officers during the 1997 fiscal year.
No stock appreciation rights were granted during the 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
NUMBER OF ------------------------------------ RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE OR BASE TERM(3)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED(1) FISCAL 1997 SHARE(2) DATE 5% 10%
- ------------------------ ---------- ----------------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James D. Durham......... 200,000 20.5% $ 11.50 1/03/07 $1,446,488 $3,665,608
105,000 10.8 9.125 7/10/07 602,035 1,526,479
John V. Cracchiolo...... 100,000 10.3 11.50 1/03/07 723,229 1,832,804
55,000 5.6 9.125 7/10/07 315,351 799,585
Frederick Stodolak...... 25,000 2.6 11.50 3/10/07 180,807 458,200
35,000 3.6 9.125 1/03/07 200,678 508,827
Suzanne J. Blumenthal... 25,000 2.6 11.50 1/03/07 180,807 458,200
Eugene M. Arnone........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Each option set forth in the table above has a maximum term of ten (10)
years measured from the grant date, subject to earlier termination upon the
executive officer's termination of service with the Company. Each option
will become exercisable for 25% of the option shares upon completion of one
year of service measured from the grant date and will become exercisable for
the remaining shares in equal monthly installments over the next three years
of service thereafter. The option will immediately become exercisable for
all of the option shares upon an acquisition of the Company by merger or
asset sale unless the options are assumed by the successor corporation.
(2) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
purchase procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
federal and state income tax liability incurred by the optionee in
connection with such exercise.
(3) There can be no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price appreciation
over the 10-year option term will be at the assumed 5% and 10% compounded
annual rates or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the Named Executive Officers.
15
<PAGE> 18
OPTION EXERCISES AND YEAR-END VALUES
No SARs were outstanding during the 1997 fiscal year. The following table
sets forth certain information with respect to the Named Executive Officers
concerning option exercises during the 1997 fiscal year as well as the number of
shares of the Company's Common Stock subject to exercisable and unexercisable
stock options which the Named Executive Officers held at the end of the 1997
fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
(#) SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END (1)
ACQUIRED ($) VALUE ----------------------------- ---------------------------
NAME ON EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James D. Durham......... 5,313 63,304 490,174(3) 305,000 $11,641,633 $ 5,129,375
John V. Cracchiolo...... 30,000 388,650 40,000 155,000 950,000 $ 2,610,625
Frederick Stodolak...... -- -- 24,000 60,000 570,000 $ 1,043,125
Suzane J. Blumenthal.... -- -- 36,400 25,000 884,500 $ 400,000
Eugene M. Arnone........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the Company's Common Stock as of December 31, 1997 and the exercise price of
the option.
(2) Calculated by multiplying the number of shares acquired on exercise by the
difference between the fair market value of the shares on the date of
exercise and the exercise price.
(3) Includes 134,574 shares of Common Stock issuable upon exercise of a warrant
held by Trigon Resources Corporation and 355,600 shares of Common Stock
issuable upon exercise of a warrant held by Mr. Durham. See "Security
Ownership of Certain Beneficial Owners and Management."
EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL ARRANGEMENTS
In December 1996, the Company entered into an employment agreement with
Frederick Stodolak, the Company's Executive Vice President and President,
Value-Added Systems Division. Pursuant to the terms of the agreement, Mr.
Stodolak is to receive a base salary of $175,000 per year and is eligible for
such annual cash bonuses as the Board of Directors in its discretion shall
award. The agreement also contains a severance provision pursuant to which Mr.
Stodolak will receive $175,000 if Mr. Stodolak terminates his employment with
cause (as defined in the agreement) or if Mr. Stodolak is terminated by the
Company (i) without cause or (ii) because he has become disabled. The agreement
terminates on December 31, 1998, but will automatically be extended for a period
of 90 days following notice of termination from the Company, unless the Company
provides written notice to Mr. Stodolak, not later than 90 days prior to such
anniversary date, that it will not extend the term of the letter agreement. In
addition, if Mr. Stodolak's employment is terminated without cause in connection
with a Change in Control (as such term is defined in the agreement), his
outstanding options will vest immediately.
In March 1997, the Company entered into a letter agreement with Keith M.
Roberts, the Company's Vice President and General Counsel. Pursuant to the
letter agreement, Mr. Roberts is to receive a base salary of $125,000 for the
1997 calendar year and is eligible for such annual cash bonuses as the Board of
Directors in its discretion shall award. The letter agreement also includes (i)
a provision entitling Mr. Roberts to an option to purchase 85,000 shares of
Common Stock at an exercise price of $9.625 per share, (ii) a provision pursuant
to which all of the outstanding options held by Mr. Roberts will vest
immediately upon a change in control or termination without cause, and (iii) a
provision entitling Mr. Roberts to a severance payment equal to six months
salary upon termination without cause or termination following a change in
control.
In July 1997, the Company entered into a letter agreement with Lemuel C.
Stewart, Jr., the Company's Executive Vice President and President, EDI
Division. Pursuant to the letter agreement, Mr. Stewart is to receive a base
salary of $175,000 for the 1997 calendar year, subject to annual adjustments at
the discretion of the Board of Directors and is eligible for such annual bonuses
as the Board of Directors in its discretion shall award. The letter agreement
also includes the following severance provisions: (i) if Mr. Stewart dies, his
estate
16
<PAGE> 19
will receive a special termination payment equal to one month's salary and (ii)
if Mr. Stewart is terminated (a) by reason of disability, (b) in an Involuntary
Termination other than a Termination for Cause or (c) in connection with a
Change in Control (as those terms are defined in the letter agreement), Mr.
Stewart will receive an aggregate amount equal to his average annual rate of
base salary for the two immediately preceding calendar years and will continue
to receive for a period of 12 months his life, health and disability and other
benefits. In addition, upon an Involuntary Termination other than a Termination
for Cause in connection with a Change in Control (as such term is defined in the
agreement) his outstanding options will vest immediately. The letter agreement
terminates on June 30, 1999, but will automatically renew for a term of one year
on such date and each succeeding anniversary of such date, unless the Company
provides written notice to Mr. Stewart, not later than three months prior to
such anniversary date, that it will not extend the term of the letter agreement.
In January 1997, the Company entered into a letter agreement with James D.
Durham, the Company's President and Chief Executive Officer. This agreement was
amended and restated in November 1997. Pursuant to the letter agreement, Mr.
Durham is to receive a base salary of $225,000 for the 1997 calendar year. In
addition, Mr. Durham is eligible for such annual cash bonuses as the Board of
Directors in its discretion shall award, based upon the recommendation of the
Board's Compensation Committee. The letter agreement also contains the following
severance provisions: (i) if Mr. Durham dies, his estate will receive a special
termination payment equal to one months' salary and (ii) if Mr. Durham is
terminated by reason of disability or an Involuntary Termination other than a
Termination for Cause (as those terms are defined in the letter agreement), Mr.
Durham will receive an aggregate amount equal to the sum of (a) his average
annual rate of base salary and (b) his average bonus paid to him by the Company,
in each case for service rendered by Mr. Durham in the two immediately preceding
calendar years and will also continue to receive for a period of 12 months (24
months if Mr. Durham's termination is effected in connection with a Change in
Control, as defined in the letter agreement) his life, health and disability and
other benefits. In addition, upon a Change in Control or an Involuntary
Termination other than a Termination for Cause, Mr. Durham's outstanding options
will vest immediately. The letter agreement terminates on December 31, 1999, and
will automatically renew for a term of one year on such date and each succeeding
anniversary of such date, unless the Company provides written notice to Mr.
Durham, not later than three months prior to such anniversary date, that it will
not extend the term of the letter agreement.
In November 1997, the Company entered into a letter agreement with John V.
Cracchiolo, the Company's Chief Financial Officer. Pursuant to the letter
agreement, Mr. Cracchiolo is to receive a base salary of $175,000 for the 1997
calendar year and is eligible for such annual cash bonuses as the Board of
Directors in its discretion shall award. The letter agreement also contains the
following severance provisions: (i) if Mr. Cracchiolo dies, his estate will
receive a special termination payment equal to one months' salary and (ii) if
Mr. Cracchiolo is terminated by reason of disability or an Involuntary
Termination other than a Termination for Cause (as those terms are defined in
the letter agreement), Mr. Cracchiolo will receive an aggregate amount equal to
his average annual rate of base salary for the two immediately preceding
calendar years and will also continue to receive for a period of 12 months his
life, health and disability and other benefits. In addition, upon a Change in
Control or an Involuntary Termination other than a Termination for Cause, Mr.
Cracchiolo's outstanding options will vest immediately. The term of the
agreement is one year from the effective date and shall be extended
automatically on each succeeding anniversary of the effective date of the
agreement for an additional one (1) year period unless, not later than three (3)
months preceding such anniversary date, the Company shall have given written
notice to Mr. Cracchiolo that it will not extend the term of the letter
agreement.
In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Chief Executive Officer and the other
executive officers under the Company's 1994 Stock Plan (the predecessor equity
incentive program to the 1996 Plan) or the 1996 Plan will automatically
accelerate in full, except to the extent such options are to be assumed by the
successor corporation. In addition, the Compensation Committee as Plan
Administrator of the 1996 Plan will have the authority to provide for the
accelerated vesting of the shares of Common Stock subject to outstanding options
held by the Chief Executive Officer or any other executive officer or any
unvested shares of Common Stock subject to direct issuances held by such
individual, in connection with the termination of the officer's employment
following: (i) a merger or
17
<PAGE> 20
asset sale in which these options are assumed or are assigned or (ii) certain
hostile changes in control of the Company.
DIRECTOR COMPENSATION
Non-employee directors are reimbursed for their reasonable expenses
incurred in connection with attending board meetings. Any non-employee director
who first joins the Board after the June 26, 1996 effective date of the
Company's 1996 Stock Incentive Plan (the "1996 Plan") is granted an option to
purchase 10,000 shares of Common Stock upon joining the Board. In addition, at
each annual meeting of stockholders, each non-employee director is awarded an
option to purchase an additional 4,000 shares of Common Stock. Such options are
immediately exercisable and will have a maximum term of 10 years. However, any
unvested shares purchased under such option will be subject to repurchase by the
Company, at the exercise price paid per share, upon the optionee's cessation of
service as a director prior to vesting in those shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists of Dr. Austin, Ms.
Neuscheler and Mr. Ryan. No member of such Committee was at any time during the
1997 fiscal year or at any other time an officer or employee of the Company. No
executive officer of the Company served on the compensation committee of another
entity or on any other committee of the board of directors of another entity
performing similar functions during the Company's last fiscal year.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Compensation Committee to review and determine the
salaries and bonuses of executive officers of the Company, including the Chief
Executive Officer, and to establish the general compensation policies for such
individuals. The Compensation Committee also has the authority to make
discretionary option grants to the Company's executive officers under the
Company's 1996 Plan.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
GENERAL COMPENSATION POLICY
The Compensation Committee's policy is to provide the Company's executive
officers with compensation opportunities which are tied to their personal
performance, the financial performance of the Company and their contribution to
that performance and which are competitive enough to attract and retain highly
skilled individuals. Each executive officer's compensation package is comprised
of three elements: (i) base salary, (ii) variable incentive awards and (iii)
long-term, equity-based incentive awards.
The Compensation Committee has retained the services of an independent
compensation consulting firm to provide advice on executive compensation
matters, including the base salary levels for executive officers, including the
Chief Executive Officer and the incentive compensation payable to all executive
officers. Specifically, the consulting firm is expected to furnish the Committee
with compensation data for purposes of comparing the Company's executive
compensation levels with those at companies within and outside the industry with
which the Company competes for executive talent and provided the Committee with
specific recommendations for maintaining the Company's executive compensation at
a level competitive with the marketplace.
FACTORS. The principal factors that were taken into account in establishing
each executive officer's compensation package for the 1997 fiscal year are
described below. However, the Compensation Committee may in its discretion apply
entirely different factors, such as different measures of financial performance,
for future fiscal years.
18
<PAGE> 21
CHIEF EXECUTIVE OFFICER COMPENSATION. In setting the base salary level
payable for the 1997 fiscal year to the Company's Chief Executive Officer, James
D. Durham, the Committee reviewed a detailed performance evaluation compiled for
Mr. Durham. The performance evaluation took into consideration Mr. Durham's
qualifications, the level of experience brought to his position and gained while
in the position, the Company goals for which Mr. Durham had responsibility,
specific accomplishments to date, and the importance of Mr. Durham's individual
contributions to the achievement of the Company goals and objectives set for the
prior fiscal year. In addition, the Compensation Committee sought to provide him
with a level of base salary which it believed, on the basis of its understanding
of the salary levels in effect for other chief executive officers at
similar-sized companies in the industry, to be competitive with those base
salary levels.
Mr. Durham has an existing employment agreement with the Company which has
a term of two (2) years (ending December 31, 1999). The annual base salary for
Mr. Durham for 1997 was $225,000. Mr. Durham's variable incentive award for 1997
will be based on the actual financial performance of the Company relative to
corporate objectives. The option grants made to Mr. Durham during 1997 were
based upon his performance and leadership with the Company.
OTHER EXECUTIVE OFFICER COMPENSATION. In setting base salaries for
executive officers other than the Chief Executive Officer, the Compensation
Committee reviewed a report provided by an independent consultant for
comparative compensation purposes. A peer group of companies was identified for
such comparative purposes. In selecting the peer group companies, the
Compensation Committee focused primarily on whether those companies were
actually competitive with the Company in seeking executive talent, whether those
companies had a management style and corporate culture similar to the Company's
and whether similar positions existed within their corporate structure.
The base salary for each executive officer other the Chief Executive
Officer reflects the salary levels for comparable positions at the peer group
companies as well as the individual's personal performance and internal
alignment considerations. The relative weight given to each factor varies with
each individual in the sole discretion of the Compensation Committee. Each
executive officer's base salary is adjusted each year on the basis of (i) the
Compensation Committee's evaluation of the officer's personal performance for
the year and (ii) the competitive marketplace for persons in comparable
positions.
VARIABLE INCENTIVE AWARDS. To reinforce the attainment of Company goals,
the Committee believes that a substantial portion of the annual compensation of
each executive officer should be in the form of variable incentive pay. The
annual incentive pool for executive officers is determined on the basis of the
Company's achievement of the financial performance targets established at the
beginning of the fiscal year and the executive's individual contribution.
LONG-TERM, EQUITY-BASED INCENTIVE AWARDS. The goal of the Company's
long-term equity-based incentive awards is to align the interests of executive
officers with stockholders and to provide each executive officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. The Committee determines the size of
long-term, equity-based incentives according to each executive's position within
the Company and sets the incentives at a level it considers appropriate to
create a meaningful opportunity for stock ownership. In addition, the Committee
takes into account an individual's recent performance, his or her potential for
future responsibility and promotion, and comparable awards made to individuals
in similar positions with comparable companies. The relative weight given to
each of these factors varies among individuals at the Committee's discretion.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code disallows a tax deduction to
publicly held companies for compensation paid to certain of their executive
officers, to the extent that compensation exceeds $1 million per covered officer
in any fiscal year. The limitation applies only to compensation which is not
considered to be performance-based. Non-performance based compensation paid to
the Company's executive officers for the 1997 fiscal year did not exceed the $1
million limit per officer, and the Compensation Committee does not anticipate
that the non-performance based compensation to be paid to the Company's
executive officers for
19
<PAGE> 22
fiscal 1998 will exceed that limit. Because it is unlikely that the cash
compensation payable to any of the Company's executive officers in the
foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any action to limit or
restructure the elements of cash compensation payable to the Company's executive
officers. The Compensation Committee will reconsider this decision should the
individual cash compensation of any executive officer ever approach the $1
million level.
The Board of Directors did not modify any action or recommendation made by
the Compensation Committee with respect to executive compensation for the 1997
fiscal year. It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short and long-term.
Submitted by the Compensation Committee of the Company's Board of
Directors:
Dr. John Austin, Joan Neuscheler and Cornelius Ryan.
20
<PAGE> 23
PERFORMANCE GRAPH
The following chart, which was produced by Research Data Group, depicts the
Company's performance for the period beginning on October 10, 1996 (the
Company's initial public offering date) and ending December 31, 1997, as
measured by total stockholder return on the Company's Common Stock compared with
the total return of the NASDAQ Stock Market (U.S.) Index and the NASDAQ Computer
and Data Processing Index. Upon request, the Company will furnish stockholders a
list of the component companies of such indexes.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN*
AMONG QUADRAMED CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD QUADRAMED NASDAQ STOCK NASDAQ COMPUTER &
(FISCAL YEAR COVERED) CORPORATION MARKET (U.S.) DATA PROCESSING
<S> <C> <C> <C>
10/10/96 100 100 100
12/96 95 104 103
11/97 130 135
12/97 227 + +
</TABLE>
* ASSUMES $100 INVESTED ON 10/10/96 IN STOCK OR INDEX - INCLUDING REINVESTMENT
OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
+ DATA NOT AVAILABLE SUBSEQUENT TO NOVEMBER 30, 1997.
21
<PAGE> 24
STOCKHOLDER PROPOSALS
From time to time stockholders present proposals which may be proper
subjects for inclusion in the proxy statement and for consideration at an annual
meeting. To be included in the proxy statement for the 1998 annual meeting,
proposals must have been received by the Company no later than December 12,
1997.
Stockholders may present proposals which are proper subjects for
consideration at an annual meeting, even if the proposal is not submitted by the
deadline for inclusion in the proxy statement. To do so, the stockholder must
comply with the procedures specified by the Company's By-laws. The Company's
By-laws require all stockholders who intend to make proposals at an annual
stockholders meeting to submit their proposals to the Company 60 to 90 days
before the anniversary date of the previous year's annual meeting. To be
eligible for consideration at the 1998 annual meeting, proposals which have not
been submitted by the deadline for inclusion in the proxy statement must be
received by the Company between February 20 and March 21, 1998. The provision is
intended to allow all stockholders to have an opportunity to consider business
expected to be raised at the meeting.
OTHER MATTERS
Management does not know of any matters to be presented at the Special
Meeting other than those set forth herein and in the Notice accompanying this
Proxy Statement. If a stockholder vote is necessary to transact any other
business at the Special Meeting, the proxyholders intend to vote their proxies
in accordance with their best judgment related to such business.
It is important that your shares be represented at the meeting, regardless
of the number of shares that you hold. YOU ARE, THEREFORE, URGED TO EXECUTE
PROMPTLY AND RETURN THE ACCOMPANYING PROXY IN THE ENVELOPE THAT HAS BEEN
ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the meeting may
revoke their proxies and vote in person or, if they prefer, may abstain from
voting in person and allow their proxies to be voted.
By Order of the Board of Directors,
/s/ James D. Durham
James D. Durham
Chairman of the Board
January 16, 1998
Larkspur, California
22
<PAGE> 25
QUADRAMED CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
FEBRUARY 6, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints JOHN V. CRACCHIOLO and KEITH M. ROBERTS
and each of them, the attorneys and proxies of the undersigned, each with full
power of substitution, to vote all the shares of Common Stock of QuadraMed
Corporation (the "Company") which the undersigned is entitled to vote at the
Special Meeting of Stockholders of the Company to be held at 80 East Sir Francis
Drake Boulevard, Larkspur, California 94939 at 9:00 a.m. on February 6, 1998,
and at any adjournments or postponements thereof, and authorizes and instructs
the proxies to vote in the manner directed below:
1. On the proposal to approve and adopt the amendments to the Company's 1996
Stock Incentive Plan including a 750,000-share increase in the number of
shares of Common Stock authorized for issuance over the term of such plan.
[ ] 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: ______________________________, 1998
_______________________________________________________
Signature
_______________________________________________________
Signature if jointly held (if joint or common ownership)
Please sign exactly as name or names appear at left,
including the title "Executor," "Guardian," etc. if the
same is indicated. When joint names appear both should
sign. If stock is held by a corporation this proxy
should be executed by a proper officer thereof, whose
title should be given.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE TODAY
