<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-21031
QUADRAMED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1992861
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1003 W. CUTTING BLVD., 2ND FLOOR
RICHMOND, CA. 94804 94939
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510)620-2340
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 [ ]
As of August 3, 1998, there were 17,131,452 shares of the Registrant's
Common Stock outstanding, par value $0.01.
This quarterly report on Form 10-Q/A consists of 47 pages of which this
is page 1. The Exhibit Index is located at page 25.
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QUADRAMED CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and six months ended
June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,621 $ 44,139
Short-term investments 12,425 1,032
Accounts receivable, net 20,723 15,971
Unbilled receivables 6,059 4,018
Notes and other receivables 5,492 2,273
Prepaid expenses and other 1,929 2,266
--------- ---------
Total current assets 141,249 69,699
Long-term investments 31,151 --
Equipment, net 6,961 5,841
Capitalized software development costs, net 1,629 1,262
Acquired software, net 3,661 4,178
Non-marketable investments 1,200 1,200
Intangibles, net 34,767 16,130
Debt offering costs and other 4,398 286
--------- ---------
Total assets $ 225,016 $ 98,596
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 124 $ 163
Notes payable 953 10,596
Accounts payable 4,588 2,881
Accrued liabilities 24,388 30,268
Deferred revenue 5,956 5,268
--------- ---------
Total current liabilities 36,009 49,176
Capital lease obligations, less current portion 315 285
Notes payable, less current portion -- 403
Convertible subordinated debentures 115,000 --
--------- ---------
Total liabilities 151,324 49,864
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 131 97
Additional paid-in capital 183,970 129,510
Accumulated other comprehensive loss (116) --
Accumulated deficit (110,293) (80,875)
--------- ---------
Total stockholders' equity 73,692 48,732
--------- ---------
Total liabilities & stockholders' equity $ 225,016 $ 98,596
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Licenses $ 13,255 $ 6,892 $ 24,596 $ 13,463
Services 21,129 13,939 40,486 24,917
-------- -------- -------- --------
Total revenues 34,384 20,831 65,082 38,380
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of licenses 4,311 2,913 8,250 5,504
Cost of services 13,468 8,461 26,143 15,362
General and administration 5,576 5,594 11,123 10,534
Sales and marketing 2,705 2,284 5,195 4,102
Research and development 2,105 1,302 4,032 2,474
Amortization of intangibles 1,155 317 1,969 511
Write-off of acquired research and
development in process 19,816 -- 32,124 --
Non-recurring charges 4,219 360 4,219 694
-------- -------- -------- --------
Total operating expenses 53,355 21,231 93,055 39,181
-------- -------- -------- --------
LOSS FROM OPERATIONS (18,971) (400) (27,973) (801)
OTHER INCOME, NET:
Interest income, net 287 (28) 618 58
Other income, net 163 78 (117) 108
-------- -------- -------- --------
Total other income, net 450 50 501 166
-------- -------- -------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES (18,521) (350) (27,472) (635)
Provision (benefit) for income taxes 1,339 (161) 1,946 (58)
-------- -------- -------- --------
NET LOSS $(19,860) $ (189) $(29,418) $ (577)
======== ======== ======== ========
NET LOSS PER BASIC AND DILUTED SHARE $ (1.23) $ (0.02) $ (1.88) $ (0.05)
======== ======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 16,144 10,691 15,610 10,615
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (29,418) $ (577)
--------- ---------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation & amortization 2,882 1,140
Deferred income taxes -- (69)
Amortization of deferred compensation -- 72
Write-off of in-process research and development 32,124 --
Changes in assets and liabilities:
Accounts receivable and unbilled receivables (6,357) (1,099)
Prepaid expenses and other 115 (260)
Accounts payable and accrued liabilities (8,714) (959)
Deferred revenue 18 (208)
--------- ---------
Cash used in operating activities (9,350) (1,960)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Cabot Marsh,
net of cash acquired (2,748) --
Cash paid for the acquisition of Velox,
net of cash acquired (3,121) --
Cash paid for the acquisition of the InterLink
entities, net of cash acquired (1,412) --
Cash paid for the acquisition of Vision,
net of cash acquired (2,998) --
Purchase of short and long-term investments (42,646) --
Cash paid for the acquisition of Synergy,
net of cash acquired -- (2,771)
Advances under notes receivable and other (2,367) --
Purchase of non-marketable investment -- (2,500)
Additions to equipment (2,093) (830)
Capitalization of computer software development costs (656) (249)
--------- ---------
Cash used in investing activities (58,041) (6,350)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations (90) (56)
Net borrowings (repayments) under notes payable (3,805) 53
Proceeds from the issuance of convertible subordinated
notes payable, net of offering costs 110,827 --
Proceeds from the issuance of common stock
and exercise of common stock warrants 10,941 98
--------- ---------
Cash provided by financing activities 117,873 95
--------- ---------
Net increase (decrease) in cash and cash equivalents 50,482 (8,215)
CASH AND CASH EQUIVALENTS,
beginning of period 44,139 20,376
--------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 94,621 $ 12,161
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with the
InterLink acquisition $ 1,500,000 $ --
Issuance of common stock in connection with the
Cabot Marsh acquisition $ 8,400,000 $ --
Issuance of common stock in connection with the
Velox acquisition $ 1,400,000 $ --
Issuance of common stock in connection with the
Medicus acquisition $ 28,800,000 $ --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1997 included in the Company's Annual Report on Form
10-K/A. The unaudited information contained herein has been prepared on the same
basis as the Company's audited consolidated financial statements and, in the
opinion of the Company's management, includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
information for the periods presented. The interim results presented herein are
not necessarily indicative of the results of operations that may be expected for
the full fiscal year ending December 31, 1998 or any other future period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUES
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue is composed of business office and health information management
outsourcing, cash flow management, compliance and consulting services. The
product suite is comprised of financial management, decision support, compliance
and EDI software. Each of these elements includes a variety of products which
can be licensed individually or as a suite of interrelated products. Products
are licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis.
Revenues from term licenses of financial management, decision support,
compliance and EDI products are recognized monthly or annually over the term of
the license arrangement, beginning at the date of installation. Revenues from
perpetual licenses of the financial management, decision support and EDI
products are recognized upon shipment of the software if there is persuasive
evidence of an agreement, collection of the resulting receivable is probable and
the fee is fixed and determinable. If an acceptance period is required, revenues
are recognized upon the earlier of customer acceptance or the expiration of the
acceptance period.
The Company provides business office and health information management
outsourcing, cash flow management compliance and consulting services to certain
hospitals under contract service arrangements. Outsourcing revenues typically
consist of fixed monthly fees plus, in the case of business office outsourcing,
incentive-based payments that are based on a percentage of dollars recovered for
the provider for which the service is being performed. The monthly fees are
recognized as revenue on a monthly basis at the end of each month. Incentive
fees are recognized as the conditions upon which such fees are based are
realized based on collection of accounts from payors. Cash flow management
services typically consist of fixed fee services and additional incentive
payments based on a certain percentage of revenue returns realized by the
customer as a result of the services provided by the Company. The fixed fee
portion is recognized upon completion of the project with the customer.
Compliance and consulting revenues are recognized as the services are provided.
Other services are also provided to certain of the Company's licensees
of software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites, and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed.
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Cost of license revenues consists primarily of salaries, benefits,
hardware costs and allocated costs related to the installation process, and
customer support and royalties to third parties.
Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the dilutive computation only if their
effect is anti-dilutive. As the Company recorded a net loss in the three and six
months ended June 30, 1998 and 1997, no common equivalent shares are included in
diluted weighted average common shares outstanding.
COMPREHENSIVE INCOME
In 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which was adopted by the Company in the first quarter of 1998. SFAS No. 130
requires companies to report a new, additional measure of income on the income
statement or to create a new financial statement that has the new measure of
income on it. The Company adopted SFAS No. 130 in the current period; however,
the Company has no items of other comprehensive income in any period presented.
The components of comprehensive income (loss) for the three-month period
and six month period ended June 30, 1998 is as follows:
Three months Six Months
Ended Ended
June 30, June 30,
------------ ----------
Net loss ($19,860) ($29,418)
Unrealized loss on available-for-sale
securities ($116) ($116)
-------- --------
Comprehensive loss ($19,976) ($29,534)
======== ========
There was no comprehensive income (loss) during 1997.
3. ACQUISITIONS
In May 1998, the Company completed its acquisition of Medicus Systems
Corporation by purchasing the remaining 43.3% interest of Medicus. The Company
previously purchased 56.7% of the outstanding shares of common stock in November
1997. The acquisition was accounted for as a purchase. The Company allocated the
purchase price of the 43.3% interest based on the estimated fair value of the
assets and liabilities assumed. Approximately $17,146,000 of the total
intangibles was assigned to acquired in-process research and development and
written-off in the quarter ended June 30, 1998. The remaining intangible balance
will be amortized over a 7 year average period.
In June 1998, the Company acquired all of the outstanding capital stock
of Pyramid Health Group, Inc. in exchange for 2,740,000 shares of common stock,
of which 274,000 shares of common stock have been place into escrow for a period
of one year under the terms and conditions of the acquisition agreement. The
acquisition was accounted for as a pooling of interests. Upon closing of the
acquisition, the assets and liabilities of Pyramid were recorded at net book
value. The accompanying consolidated financial statements have been restated to
reflect the acquisition of Pyramid on a pooling of interest basis.
The unaudited pro forma results of operations of the Company, Cabot
Marsh Corporation, Velox Systems Corporation and entities affiliated with
InterLink for the six months ended June 30, 1998 are noted as follows (in
thousands):
<TABLE>
<CAPTION>
ACQUISITIONS
DURING THE SIX
QUADRAMED MONTHS ENDED PRO FORMA PRO FORMA
CORPORATION JUNE 30, 1998(a) ADJUSTMENTS COMBINED
----------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 65,082 $ 1,753 -- $ 66,835
Net income (loss) $(29,418) $ (1,189) $ 32,124 $ 1,517
Net income (loss) per share $ (1.88) $ 0.09
</TABLE>
(a) Includes the results of operations of Cabot Marsh Corporation and entities
affiliated with InterLink for the month of January 1998 and Velox Systems
Corporation for the two months ended February 28, 1998. The results of
operations subsequent to January 31, 1998 for Cabot Marsh and entities
affiliated with InterLink and subsequent to February 28, 1998 for Velox
Systems Corporation are included in QuadraMed Corporation.
7
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A reconciliation of the current consolidated financial statements with
previous reported separate Company information for entities with which the
Company has pooled is presented below (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
QuadraMed $ 37,933 $ 18,167
Pyramid $ 27,149 $ 20,213
-------- --------
Consolidated $ 65,082 $ 38,380
======== ========
Net income (loss):
QuadraMed $(30,087) $ (601)
Pyramid $ 669 $ 24
-------- --------
Consolidated $(29,418) $ (577)
======== ========
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBT
In May 1998, the Company completed an offering of $115 million principal
amount of Convertible Subordinated Debentures, including the underwriters'
over-allotment option. The debentures are due May 1, 2005 and bear interest at
5.25 percent per annum. The Debentures are convertible into Common Stock at any
time prior to redemption or final maturity, initially at the conversion price of
$33.25 per share (resulting in an initial conversion ratio of 30.075 shares per
$1,000 principal amount). Proceeds to the Company from the offering were
$110,827,000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
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. As defined in SFAS 131, 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 will adopt SFAS 131 in fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which establishes accounting
and reporting standards for derivative instruments and hedging activities. The
Company does not expect the adoption of SFAS 133, required beginning January
2000, to have a material effect on its consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the
matters discussed in this Form 10-Q may be considered "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements include declarations regarding the intent, belief or current
expectations of the Company and its management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties; actual results
could differ materially from those indicated by such forward-looking statements.
Among the important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are: (i) variability in
quarterly operating results, (ii) identification, consummation and assimilation
of acquisitions, (iii) dependence on large orders and customer concentration,
(iv) dependence on hospitals and demand for the Company products and services in
the healthcare information systems and services markets, (v) legislative or
market-driven reforms in the healthcare industry, (vi) the Company's ability to
develop and introduce new products, (vii) management of the Company's changing
operations, (viii) dependence on key personnel, (ix) development by competitors
of new or superior products or entry into the market of new competitors, (x)
risks related to product defects, (xi) risks associated with pending litigation,
(xii) dependence on intellectual property rights, (xiii) volatility in the
Company's stock price and historically low trading volume, (xiv) the success or
failure of strategic alliances, (xv) risk of interruption in data processing,
(xvi) risks associated with certain investments in early stage companies, and
(xvii) other risks identified from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
OVERVIEW
QuadraMed develops, markets and sells software products and services
designed to enable health care providers and payors to increase operational
efficiency, improve cash flow, measure the cost of care and effectively
administer managed care contracts. In addition, QuadraMed provides business
office and health information management outsourcing, as well as compliance and
consulting services. The Company has expanded significantly since its inception
in 1993, primarily through the acquisition of other businesses, products and
services. Through June 1998, the Company has completed 20 acquisition
transactions, five of which have been accounted for as poolings of interests.
Accordingly, the Company's consolidated financial statements have been restated
to include historical results of entities acquired on a pooling of interests
basis.
In May 1998, the Company completed its acquisition of Medicus Systems
Corporation by purchasing the remaining 43.3% interest of Medicus. The Company
previously purchased 56.7% of the outstanding shares of common stock in November
1997. The acquisition was accounted for as a purchase. The Company allocated the
remaining 43.3% purchase price based on the estimated fair value of the assets
and liabilities assumed. Approximately $17,146,000 of the total intangibles was
assigned to acquired in-process research and development and written-off in the
quarter ended June 30, 1998. The remaining intangible balance will be amortized
over a 7 year average period.
In June 1998, the Company acquired all of the outstanding capital stock
of Pyramid Health Group, Inc. in exchange for 2,740,000 shares of common stock,
of which 274,000 shares of common stock have been placed into escrow for a
period of one year under the terms and conditions of the acquisition agreement.
The acquisition was accounted for as a pooling of interests.
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The consolidated financial statements have been restated to reflect the
acquisition of Pyramid on a pooling of interest basis.
As of June 30, 1998, QuadraMed and its subsidiaries had more than 3,200
customers, approximately 80% of which were hospitals, located in all 50 states,
the District of Columbia, Canada, Puerto Rico, South Africa and Singapore. The
Company expects to maintain a high percentage of hospital customers, but also
expects its customer mix to transition to a higher percentage of other
providers, including integrated delivery health care systems ("IDSs"), as well
as physicians, payors and employers. For the year ended December 31, 1995
revenues from one customer were 11%. No single customer accounted for more than
10% of the Company's revenues in 1996, 1997 or the quarter and six months ended
June 30, 1998.
The Company's suite of products, called QuanTim, may be licensed either
as an integrated solution or as individual applications. The Company licenses
its software products pursuant to either a one-time payment for a perpetual
license with the option of purchasing support and maintenance or pursuant to
annual renewable licenses. The latter method provides the Company with a
recurring component to its revenues each year. Revenues from annual renewable
license fees are recognized ratably over the term of the license arrangement.
Revenues from perpetual software license agreements are significantly greater
than license fees under contracts that have annual renewal provisions on a per
deal basis and are generally recognized upon shipment and involve one-time
license fees, which can cause the Company's revenues to vary from quarter to
quarter. To date, a substantial majority of customers who have purchased
perpetual licenses have also purchased annual support and maintenance
agreements, the revenues from which are recognized monthly.
In addition to its software products, the Company provides business
office and health information management outsourcing, cash flow management,
compliance and consulting services. The Company offers partial and full
outsourcing of business office and health information management functions for
hospitals, physicians, home health care agencies and other providers. The
Company often uses its software products in delivering these services. The focus
of these services is to increase the cash flow and improve the efficiencies of
business operations for health care providers. The Company also provides cash
flow management services to update and organize a provider's standard billing
and charge information to facilitate appropriate reimbursement for the provider.
Outsourcing and cash flow management service revenues typically consist of fixed
monthly fees, in the case of business office outsourcing, plus incentive-based
payments based on a percentage of dollars recovered for the provider. The
monthly fees from outsourcing services are recognized as revenues on a monthly
basis, and incentive fees are recognized as revenues based on the collection of
accounts from payors. Compliance and consulting revenues are recognized as the
services are provided. Such services include the formulation of a compliance
program, including compliance assessment, auditing and education expertise. The
Company has experienced operating margins at differing levels related to
licenses and services. The service business has historically realized
fluctuating margins that were significantly lower than margins associated with
licenses.
Pyramid Health Group, Inc. has historically experienced lower operating
margins compare to the Company's operating margins, however the Company expects
to improve such margins by implementing its technology, although there can be no
assurance in this regard.
The Company capitalizes a portion of its software costs for internally
developed software products. These capitalized costs relate primarily to the
development of new products and the extension of applications to new markets or
platforms using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives (usually five years) of the
products, commencing when each product is available to the market.
REVENUES
License. License revenues for the quarter ended June 30, 1998 increased
92.3% to $13.3 million, compared to $6.9 million in the same period last year.
For the six months ended June 30, 1998, license revenues increased 82.7% to
$24.6 million, compared to $13.5 million in the same period last year. The
increase in license revenues was due principally to new customers and revenues
associated with new customers from recent acquisitions. License revenues include
license, installation, consulting and post-contract support fees, third-party
hardware sales and other revenues related to licensing of the Company's software
products.
Service. Service revenues for the quarter ended June 30, 1998 increased
51.6% to $21.1 million, compared to $13.9 million in the same period last year.
For the six months ended June 30, 1998, service revenues increased 62.5% to
$40.5 million, compared to $24.9 million in the same period last year. The
increase in service revenues was due principally to revenues associated with new
customers
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acquired in the Cabot Marsh acquisition in the first quarter of 1998 and new
customers associated with the health information management outsourcing
business.
COST OF REVENUES
Cost of licenses. Cost of license revenues for the quarter ended June
30, 1998 increased 48.0% to $4.3 million, compared to $2.9 million in the same
period last year. For the six months ended June 30, 1998, cost of licenses
increased 49.9% to $8.3 million, compared to $5.5 million in the same period
last year. Cost of licenses consists primarily of salaries, benefits and
allocated costs related to software installations, hardware costs, customer
support and royalties to third parties. As a percentage of license revenues,
cost of licenses decreased to 32.5% in the quarter ended June 30, 1998 from
42.3% in the same period last year. As a percentage of license revenues, cost of
licenses decreased to 33.5% in the six months ended June 30, 1998 from 40.9% in
the same period last year. The increase in cost of licenses was principally due
to additional personnel hired to support software installations and customer
support, while the decrease in cost of licenses as a percentage of license
revenues is principally due to the leveraging of costs over an increased revenue
base.
Cost of services. Cost of service revenues for the quarter ended June
30, 1998 increased 59.2% to $13.5 million, compared to $8.5 million, in the same
period last year. For the six months ended June 30, 1998, costs of services
increased 70.2% to $26.1 million, compared $15.4 million in the same period last
year. Cost of services includes expenses associated with services performed in
connection with business office outsourcing, compliance and consulting services.
As a percentage of service revenues, cost of services increased to 63.7% in the
quarter ended June 30, 1998 from 60.7% in the same period last year. As a
percentage of service revenues, cost of services increased to 64.6% for the six
months ended June 30, 1998 from 61.7% in the same period last year. The increase
in cost of services was due principally to additional operating costs associated
with the operations of Cabot Marsh which was acquired in the first quarter of
1998 and additional personnel costs associated with the Company's health
information management outsourcing division. Cost of services as a percentage of
service revenues increased for the quarter and six months ended June 30, 1998,
principally due to a higher revenue contribution from the Company's health
information management outsourcing division during 1998 and the hiring of
additional personnel associated with new outsourcing contracts which were signed
during 1998.
OPERATING EXPENSES
General and Administration. General and administration expenses for the
quarters ended June 30, 1998 and 1997 remained constant at $5.6 million and as a
percentage of total revenues decreased to 16.2% for the quarter ended June 30,
1998 from 26.9% in the same period last year. For the six months ended June 30,
1998, general and administration expenses increased to $11.1 million, compared
to $10.5 million in the same period last year, and decreased as a percentage of
total revenues to 17.1% , compared to 27.4% in the same period last year. The
decrease in general and administration expenses as a percentage of total
revenues for the quarter and six months ended June 30, 1998 was principally due
to a larger revenue base and, to a lesser extent, the reduction of certain
overhead costs associated with prior acquisitions.
Sales and Marketing. Sales and marketing expenses for the quarter ended
June 30, 1998 increased 18.4% to $2.7 million, compared to $2.3 million in the
same period last year, and decreased as a percentage of total revenues to 7.9%
from 11.0% in the same period last year. For the six months ended June 30, 1998,
sales and marketing expenses increased 26.6% to $5.2 million, compared to $4.1
million in the same period last year, and decreased as a percentage of total
revenues to 8.0%, compared to 10.7% in the same period last year. The increase
in sales and marketing expenses resulted principally from the addition of sales
and marketing personnel and increased advertising costs during 1998. As a
percentage of total revenues, sales and marketing expenses decreased principally
due to a larger revenue base.
Research and Development. Research and development expenses for the
quarter ended June 30, 1998 increased 61.7% to $2.1 million, compared to $1.3
million in the same period last year and as a percentage of total revenues
decreased to 6.1% from 6.3% in the same period last year. For the six months
ended June 30, 1998, research and development expenses increased 63.0% to $4.0
million, compared to $2.5 million in the same period last year and decreased as
a percentage of total revenues to 6.2% compared to 6.4% in the same period last
year. Research and development expenses increased principally due to additional
software programmers hired from prior acquisitions to complete the integration
of acquired software products. The Company capitalized $656,000 and $249,000
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of software development costs in the six months ended June 30, 1998 and 1997,
respectively, which represented 14.0% and 9.1% of total research and development
expenditures for the six months ended June 30, 1998 and 1997, respectively.
Amortization of Intangibles. Amortization of intangibles for the
quarter and six months ended June 30, 1998 increased to $1.2 million and $2.0
million, respectively, compared to $317,000 and $511,000 in the same periods
last year. The increase in the amortization of intangibles is principally due to
the acquisition of 56.7% of Medicus in November 1997, the purchase of the
remaining 43.4% of Medicus in May 1998, and the acquisition of Cabot Marsh,
Velox and the entities affiliated with InterLink during the first quarter of
1998.
Non-Recurring Charges. Non-recurring charges of $4.2 million in the
second quarter of 1998 were primarily associated with acquisition costs incurred
in connection with the acquisition of Pyramid Health Group, Inc. in June 1998.
The acquisition was accounted for on a pooling of interests basis. Non-recurring
charges during the first half of 1997 were associated with start-up costs
incurred for the claims processing arrangement entered into with EDI USA, Inc.
No such charges were incurred in 1998 as this arrangement was terminated in
December 1997.
Acquired Research and Development In-process. In connection with the
acquisition of Vision Software, Inc. in June 1998 and the consummation of the
purchase of the remaining 43.3% interest of Medicus Systems Corporation in May
1998, the Company expensed $19.8 million related to technologies, which had not
achieved technological feasibility and had no alternative future uses.
Interest Income, Net. Interest income, net was $287,000 in the quarter
ended June 30, 1998, compared to interest expense of $28,000 for the same period
last year. For the six months ended June 30, 1998, interest income, net was
$618,000, compared to $58,000 in the same period last year. Interest income
during 1998 was principally due to higher average cash and cash equivalent
balances as a result of the Company's follow-on offering of Common Stock in
October 1997, which raised net proceeds of $57.3 million. Interest expense in
the quarter ended June 30, 1997 was principally due to interest expense recorded
by Pyramid Healthcare Group, Inc. on its long-term debt.
Provision for income taxes. Provision for income taxes increased to
$1,339,000 in the quarter ended June 30, 1998 compared to an income tax benefit
of $161,000 in the same period last year. The provision for income taxes is
primarily due to state and alternative minimum tax liabilities on certain of the
Company's legal entities. For financial reporting purposes, a 100% valuation
allowance has been recorded against the Company's deferred tax assets under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company completed its initial public offering of
common stock, which resulted in net proceeds to the Company of approximately
$26.4 million. In October 1997, the Company completed a follow-on offering of
common stock, which resulted in net proceeds to the Company of approximately
$57.3 million. In May 1998, the Company completed an offering of $115.0 million
principal amount of Convertible Subordinated Debentures, including the initial
purchasers' over-allotment option. The debentures are due May 1, 2005 and bear
interest, which is payable semi-annually at 5.25 percent per annum. Proceeds to
the Company from the offering were $110.8 million.
Net cash used in operating activities was $9.4 million and $2.0 million
in the six months ended June 30, 1998 and 1997, respectively. Net cash used in
operating activities in the six months ended June 30, 1998 was principally due
to an increase in accounts receivable and a decrease in accounts payable and
accrued liabilities as the Company paid down liabilities associated with
acquired companies. The increase in accounts receivable was principally due to
an increase in revenues for the six months ended June 30, 1998. Net cash used in
operating activities for the six months ended June 30, 1997 was principally due
to an increase in accounts receivable and a decrease in accounts payable and
accrued liabilities as the Company paid down accounts payable and accrued
liabilities with proceeds from its initial public offering in October 1996.
Net cash used in investing activities was $58.0 million and $6.4
million in the six months ended June 30, 1998 and 1997, respectively. Investing
activities primarily included the purchase of short and long-term investments
from the proceeds from the Company's offering of $115.0 million Convertible
Subordinated Debentures and cash paid for the acquisitions of Cabot Marsh,
Velox, entities associated with InterLink and Vision Software, as well as
certain advances to a particular customer and the purchase of capital equipment
and the capitalization of computer software development costs during the first
half of 1998. Investing activities for
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the six months ended June 30, 1997 relate to the $2.5 million investment in EDI
USA, Inc., which was later repurchased by EDI USA, Inc. in the fourth quarter of
1997 and cash paid for the acquisition of Synergy during the second quarter of
1997.
Net cash provided by financing activities was $117.9 million and
$95,000 in the six months ended June 30, 1998 and 1997, respectively. Financing
activities in the six months ended June 30, 1998 related to the offering of
$115.0 million Convertible Subordinated Debentures, which raised net proceeds of
$110.8 million and the exercise in May 1998 of common stock warrants issued to
former Medicus stockholders in November 1997, both of which were offset by the
repayment of indebtedness of acquired companies. Financing activities for the
six months ended June 30, 1997 primarily relate to proceeds from the issuance of
common stock.
In July 1997, the Company entered into an unsecured line of credit
arrangement to borrow up to $5,000,000 at the bank's prime rate. The line of
credit expires in September 1998 and contains financial and non-financial
restrictions including, among others, maintaining a minimum quick ratio, minimum
tangible net worth and a minimum ratio of total liabilities to tangible net
worth. The Company was in compliance with these covenants at June 30, 1998. The
line of credit is unsecured. There were no outstanding balances at June 30,
1998. The line of credit expired on July 31, 1998, but was extended for a 60 day
period by the bank.
In November 1997, the Company acquired 3,111,105 shares of Common Stock
of Medicus Systems Corporation ("Medicus") or 56.7 percent of the then issued
and outstanding shares of Medicus Common Stock from certain selling
stockholders. Pursuant to individual stock purchase agreements (the "Stock
Purchase Agreements"), the Company agreed to pay the selling stockholders $7.50
per share, in cash and a note payable, together with a warrant ("Warrant")
entitling the selling stockholders to acquire 0.3125 shares of QuadraMed Common
Stock for each share of Medicus Common Stock sold at a price of $24 per share
subject to adjustments and certain limitations. The consideration paid by the
Company to selling stockholders in November 1997 was approximately $21.7 million
in cash and a note payable for approximately $1.6 million to a selling
stockholder which was due and repaid by the Company in January 1998. In May
1998, the Company completed its purchase of the remaining 43.3% interest of
Medicus. In connection with the purchase, the Company issued an aggregate of
1,201,221 shares of Common Stock, which included 441,564 shares of Common Stock
issued upon the exercise of warrants issued in November 1997 to certain
stockholders of Medicus. Proceeds to the Company from the exercise of the
warrants was $10.6 million. The $24.3 million aggregate purchase price of the
remaining 43.3% interest of Medicus, which consisted of cash and QuadraMed
Common Stock valued at $18.2 million and options and warrants assumed at $6.1
million, were allocated to the remaining assets and liabilities of Medicus,
acquired software and intangible assets($7.2 million), acquired research and
development in-process($17.1 million) based on a valuation of the acquired net
assets.
In December 1997, the Company entered into an agreement with Arcadian
Management Services, Inc. ("Arcadian") to develop a centralized business office
("CBO") and to provide full business office outsourcing services for its four
managed hospitals. The CBO is located in Fresno, California at the Company's
west coast processing center. Under the terms of the agreement, the Company
receives (i) approximately $70,000 per month and (ii) additional revenue if the
Company meets certain performance-based targets. In connection with this
agreement, the Company purchased certain accounts receivable from Chama, Inc., a
customer of Arcadian ("Chama") for the purpose of increasing cash flow while the
CBO is being implemented. As of June 30, 1998, approximately 3.4 million of
these receivables remained outstanding. The remaining balances are included in
notes and other receivables on the consolidated balance sheet. John H. Austin, a
director of the Company, is President and Chief Executive Officer of Arcadian.
The foregoing transaction was negotiated on an arms-length basis and the Company
believes the terms are no less favorable to the Company than could be obtained
from disinterested third parties.
The Company believes that its current cash and investments in
conjunction with available bank borrowings will be sufficient to fund operations
at least through December 31, 1998.
FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly 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: integration of acquired businesses, variability
in demand for the Company's products and services; the number, timing and
significance of announcements and releases of product enhancements and new
products by the Company and its competitors; the timing and significance of
announcements concerning the Company's present or prospective strategic
alliances; the termination of, or a reduction
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in, offerings of the Company's products and services; the loss of customers due
to consolidation in the health care industry; delays in product delivery
requested by customers; the length of the sales cycle or the timing of sales;
the amount of new potential contracts at the beginning of any particular
quarter; customer budgeting cycles and changes in customer budgets; investments
by the Company in marketing, sales, research and development, and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; software defects and other quality factors;
and general economic conditions.
The timing of customer purchases is difficult to predict given the
complex procurement decision process associated with most health care providers
and payors. As a result, the Company typically experiences sales cycles that
extend over several quarters. Moreover, the Company's operating expense levels,
which will increase with the addition of acquired businesses are relatively
fixed. If revenues are below expectations, net income is likely to be
disproportionately adversely affected. Further, it is likely that in some future
quarter the Company's revenues or operating results will be below the
expectations of securities analysts and investors. In such event, the trading
price of the Company's Common Stock would be materially adversely affected.
INTEGRATION OF ACQUIRED COMPANIES INTO THE COMPANY
The Company expects to realize significant benefits from its recent
acquisitions. Realizing these benefits will depend in significant part upon the
successful integration of the businesses, including their products and
employees, with the Company, 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. The effort to integrate the
businesses will divert the attention of management from other matters and will
result in significant operational and administrative expense. Any difficulties
encountered in the integration process could have a material adverse effect on
the revenues and operating results of the Company. In addition, the process of
integrating the businesses could cause the interruption of, or a disruption in,
the business of the Company, which could have a material adverse effect on the
operations and financial performance of the Company. Even if these businesses
are successfully integrated into the Company, the acquired operations may not
achieve sales, productivity and profitability commensurate with the Company's
historical or projected operating results. Failure to achieve such projected
results would have a material adverse effect on the Company's financial
performance, and in turn, on the market value of the Company's Common Stock.
There can be no assurance that the Company will realize any of the anticipated
benefits of its acquisitions or that such acquisitions will enhance the
Company's business or financial performance.
DEPENDENCE ON ACQUISITION STRATEGY
The Company intends to continue to expand in substantial part through
acquisitions of products, technologies and businesses. The Company's ability to
expand successfully through acquisitions depends on many factors, including the
successful identification and acquisition of products, technologies or
businesses and management's ability to effectively negotiate and consummate
acquisitions and integrate and operate the new products, technologies or
businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to increasing consolidation in
the health care industry, thereby increasing the costs of capitalizing on
acquisition opportunities. The Company competes for acquisition opportunities
with other companies that have significantly greater financial and management
resources than the Company. The inability to successfully identify appropriate
acquisition opportunities, consummate acquisitions or successfully integrate
acquired products, technologies, operations, personnel or businesses could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, acquisitions may divert management's
attention from other business concerns, expose the Company to the risks of
entering markets in which it has no direct prior experience or to risks
associated with the market acceptance of acquired products and technologies, or
result in the loss of key employees of the Company or the acquired company.
Moreover, acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and the
recognition of amortization expenses related to goodwill and other intangible
assets, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS; NEED TO MANAGE CHANGING OPERATIONS
Acquisitions involve a number of special risks including, without
limitation, managing geographically dispersed operations, failure of the
acquired business to achieve expected results, failure to retain key personnel
of the acquired business, inability to integrate the new business into existing
operations and risks associated with unanticipated events or liabilities,
potential increases in stock compensation expense and increased compensation
expense resulting from newly hired employees, the assumption of unknown
liabilities and potential disputes with the sellers of one or more acquired
entities, all of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
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Additionally, customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on the Company's reputation
and its sales and marketing initiatives. With the addition of the acquired
businesses, the Company's anticipated future operations may place a strain on
its management systems and resources. The Company expects that it will be
required to continue to improve its financial and management controls, reporting
systems and procedures, and will need to expand, train and manage its work
force. There can be no assurance that the Company will be able to effectively
manage these tasks, and the failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends in significant part upon the
continued service of its executive officers, its product managers and other key
sales, marketing and development personnel. The loss of the services of any of
its executive officers or the failure to hire or retain other key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. Additions of new, and departures of
existing, personnel can be disruptive and could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS; UNCERTAINTY IN THE HEALTH
CARE INDUSTRY
A substantial portion of the Company's revenues have been and are
expected to be derived from the sale of software products and services to
hospitals. Consolidation in the health care industry, particularly in the
hospital and managed care markets, could cause a decrease in the number of
existing or potential purchasers of the Company's products and services, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the decision to purchase the
Company's products often involves the approval of several members of management
of a hospital or health care provider. Consequently, it is difficult for the
Company to predict the timing or outcome of the buying decisions of customers or
potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company believes that
the commercial value and appeal of its products may be adversely affected if the
current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of the Company's customers are providing services under capitated
service agreements, and a reduction in the use of capitation arrangements as a
result of regulatory or market changes could have a material adverse effect on
the Company's business, financial condition and results of operations. During
the past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform the health care
system have been and are being considered by Congress. These proposals, if
enacted, could change the operating environment for the Company's clients in
ways that cannot be predicted. Health care organizations may react to these
proposals by curtailing or deferring investments, including those for the
Company's products and services.
Changes in current health care financing and reimbursement systems
could result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of the Company's products by hospital associations or other customers. Any of
these occurrences could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, many
health care providers are consolidating to create integrated health care
delivery systems with greater regional market power. As a result, these emerging
systems could have greater bargaining power, which may lead to price erosion of
the Company's products. The failure of the Company to maintain adequate price
levels would have a material adverse effect on the Company's business, financial
condition and results of operations. Other market-driven reforms could also have
adverse effects on the Company's business, financial condition and results of
operations.
HIGHLY COMPETITIVE MARKET
Competition in the market for the Company's products and services is
intense and is expected to increase. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. The Company's competitors include other providers of
health care information software and services, as well as health care consulting
firms. The combined company's principal competitors include: (i) CIS
Technologies, Inc., a division of National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for its EDI
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products; (ii) Envoy Corp. and MedE AMERICA in the market for its claims
processing service; (iii) Healthcare Cost Consultants, Inc., a division of CIS
Technologies, Inc., and Trego Systems, Inc. in the market for its contract
management products; (iv) IMNET Systems, Inc., Optika Imaging Systems, Inc. and
LanVision Systems, Inc. in the market for its electronic document management
products; (v) Transition Systems, Inc. and Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., HCIA Inc. and MediQual Systems,
Inc., a division of Cardinal Health, Inc., in the market for its decision
support products; (vi) HMS and ARTRAC, a division of Medaphis in the market for
its business office outsourcing services; (vii) a subsidiary of Minnesota Mining
and Manufacturing and CodeMaster, in the market for its medical records
products; and(viii)Transcend Services, Inc. and SMART Corporation in the market
for its health information management services. In addition, current and
prospective customers evaluate the Company's capabilities against the merits of
their existing information systems and expertise. Furthermore, major software
information systems companies, including those specializing in the health care
industry, not presently offering products that compete with those offered by the
Company may enter the Company's markets. In addition, many of the Company's
competitors and potential competitors have significantly greater financial,
technical, product development, marketing and other resources and market
recognition than the Company. Many of the Company's competitors also currently
have, or may develop or acquire, substantial installed customer bases in the
health care industry. As a result of these factors, the Company's competitors
may be able to respond more quickly to new or emerging technologies, changes in
customer requirements and political, economic or regulatory changes in the
health care industry or to devote greater resources to the development,
promotion and sale of their products than the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144
and Rule 701 of the Securities Act and through the exercise of registration
rights could have an adverse effect on the price of the Company's Common Stock.
As of June 30, 1998, approximately 1.1 million shares are available for sale in
the public market subject to compliance with Rule 144 or Rule 701. Certain
existing stockholders holding an aggregate of 186,662 shares of Common Stock as
of June 30, 1998 have rights under certain circumstances to require the Company
to register their shares for future sale.
In June 1998, the Company closed the acquisition of Pyramid Health
Group, Inc. ("Pyramid"). In connection with the acquisition of Pyramid, the
Company issued an aggregate of 2,740,000 shares of Common Stock, all of which
have registration rights. In May 1998, the Company closed the acquisition of
Medicus. In connection with the acquisition of Medicus, the Company issued an
aggregate of 1,201,221 shares of Common Stock, which includes 441,564 shares of
Common Stock issued upon the exercise of warrants issued in November 1997 to
certain former stockholders of Medicus (the"Warrants"). All of the shares of
Common Stock issued in connection with the acquisition of Medicus (including
shares issuable upon exercise of the Warrants) have been registered under the
Securities Act and are freely tradeable. In May 1998, the Company completed an
offering of $115 million principal aggregate amount of Convertible Subordinated
debentures. The Debentures are initially convertible into an aggregate of
3,458,647 shares of the Company's Common Stock at a conversion price of $33.25
per share ( a conversion ratio of 30.075 shares per $1,000 principal amount of
Debentures). The Debentures and the shares of Common Stock issuable upon
conversion of the Debentures have been registered under the Securities Act and
are freely tradable. In December 1997, the Company issued 1,588,701 shares of
Common Stock in connection with the RHP Mergers. The shares of Common Stock
issued in connection with the RHP Mergers have been registered for resale under
the Securities Act and are freely tradeable. An additional 242,590 shares
subject to registration rights were registered for resale concurrently with the
shares issued in connection with the RHP Mergers and are freely tradeable.
Sales of a substantial number of the aforementioned shares of the
Company's Common Stock could adversely affect or cause substantial fluctuations
in the market price of the Company's Common Stock and impair the Company's
ability to raise additional capital through the sale of its securities. Sales of
substantial amounts of Common Stock in the public market under Rule 144 under
the Securities Act, or otherwise, or the perception that such sales could occur,
may adversely affect prevailing market prices of the Common Stock and could
impair the future ability of the Company to raise capital through an offering of
its equity securities.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
The Company's performance will depend in large part upon the Company's
ability to provide the increasing functionality required by its customers
through the timely development and successful introduction of new products and
enhancements to its existing suite of products. The Company has historically
devoted significant resources to product enhancements and research and
development and believes that significant continuing development efforts will be
required to sustain its operations and integrate the products and
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technologies of acquired businesses. There can be no assurance that the Company
will successfully or in a timely manner develop, acquire, integrate, introduce
and market new product enhancements or products, or that product enhancements or
new products developed by the Company will meet the requirements of hospitals or
other health care providers and payors and achieve or sustain market acceptance.
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company.
Substantial litigation regarding intellectual property rights exists in
the software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
products overlaps. Although the Company believes that its products do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has received notice of a claim filed with the
United States Trademark Appeal Board for the cancellation of its registered
QuanTIM(R) trademark, and also has recently received a letter from a separate
third party challenging this trademark. There can be no assurance that the
Company will be successful in its defense of these or similar claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as those offered by the Company frequently contain errors
or failures, especially when initially introduced or when new versions are
released. Although QuadraMed conducts extensive testing, software errors have
been discovered in certain enhancements and products after their introduction.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors or performance failures will not occur in
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 resources, damage to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect upon its business, financial condition and
results of operations.
YEAR 2000
Many computer systems have experienced or will experience problems
processing dates beyond the year 1999. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the internal readiness of its computer
systems and the compliance of its computer products and software sold to
customers for addressing the year 2000 issues. The Company expects to implement
successfully the systems and programming changes necessary to address the year
2000 issues and does not believe that the cost of such actions will have a
material adverse effect on the Company's business, results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on its business, financial condition and results of operations.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. A significant number of the Company's
customers are running product versions that are not year 2000 compliant. While
the Company has been encouraging such customers to migrate to current product
versions, it is possible that the Company may experience increased expenses in
addressing migration issues and may lose customers. In addition, there can be no
assurances that the Company's current products do not contain undetected errors
or defects associated with year 2000 date functions that may result in the
material costs to the Company. Some commentators have stated that significant
amounts of litigation will arise out of year 2000 compliance issues. Because of
the unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.
RISK OF INTERRUPTION OF DATA PROCESSING
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The Company currently processes substantially all its customer data at
its facilities in Larkspur, California and Neptune, New Jersey. While the
Company backs up its data nightly and has safeguards for emergencies such as
power interruption or breakdown in temperature controls, it has no mirror
processing site to which processing could be transferred in the case of a
catastrophic event at either of these facilities. The occurrence of a major
catastrophic event at either the Larkspur or the Neptune facility could lead to
an interruption of data processing and could have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS RELATED TO OUTSOURCING BUSINESS
The Company provides compliance, consulting and business office
outsourcing and cash flow management services, including the billing and
collection of receivables. The infrastructure for the Company's outsourcing
business was acquired by the Company. In addition, the Company often uses its
software products to provide outsourcing services. As a result, the Company has
not been required to make significant capital expenditures in order to service
existing outsourcing contracts. However, if the Company experiences a period of
substantial expansion in its outsourcing business, it may be required to make
substantial investments in capital assets and personnel, and there can be no
assurance that it will be able to assess accurately the investment required and
negotiate and perform in a profitable manner any of the outsourcing contracts it
may be awarded. The Company's failure to estimate accurately the resources and
related expenses required for a project or its failure to complete its
contractual obligations in a manner consistent with the project plan upon which
a contract was based could have a material adverse effect on its business,
financial condition and results of operations. In addition, the Company's
failure to meet a client's expectations in the performance of its services could
damage the Company's reputation and adversely affect its ability to attract new
business. Finally, the Company could incur substantial costs and expend
significant resources correcting errors in its work, and could possibly become
liable for damages caused by these errors.
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine in the future that any predictive aspects of the Company's
products make them clinical decision tools subject to FDA regulation. Compliance
with these regulations could be burdensome, time consuming and expensive. The
Company also could become subject to future legislation and regulations
concerning the development and marketing of health care software systems. Such
legislation could increase the cost and time necessary to market new products
and could affect the Company in other respects not presently foreseeable. The
Company cannot predict the effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal levels. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products and services relate to the payment,
collection, coding and billing of health care claims and the administration of
managed care contracts. Any failure by employees of the Company or by the
Company's products to accurately assess, process or collect such claims could
result in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company that is in excess of, or excluded from, its insurance coverage could
have a material adverse effect on its business, financial condition and results
of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and
17
<PAGE> 18
management time and resources. There can be no assurance that the Company will
not be subject to material claims in the future, that such claims will not
result in liability in excess of the Company's insurance coverage, that the
Company's insurance will cover such claims or that appropriate insurance will
continue to be available to the Company in the future at commercially reasonable
rates. In addition, if liability of the Company were to be established,
substantial revisions to its products could be required that may cause it to
incur additional unanticipated research and development expenses.
RISKS ASSOCIATED WITH CERTAIN INVESTMENTS
The Company has made, and may continue to make in the future, certain
investments in which it obtains a minority equity interest in certain early
stage companies. The Company does not have the ability to control the operations
of any of these companies. Investing in early stage companies is subject to
certain significant risks, and there can be no assurance that any of these
companies will be successful or achieve profitability or that the Company will
ever realize a return on its investments. In addition, to the extent any of such
companies fail or become bankrupt or insolvent, the Company may be required to
report a loss on some or all of its investment, which could have a material
adverse effect on its results of operations during a particular reporting
period.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law applicable to the Company could have
the effect of delaying, deterring or preventing a change in control of the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's Certificate of Incorporation and Bylaws contain certain provisions
that could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. The Company's Board of
Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by the Company's
stockholders to fix the rights and preferences and issue shares of preferred
stock, and to impose various procedural and other requirements that could make
it more difficult for stockholders to effect certain corporate actions. The
Company's Certificate of Incorporation provides that directors may be removed
only by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the Company entitled to vote. Any vacancy on the Board of
Directors may be filled only by vote of the majority of directors then in
office. Further, the Company's Certificate of Incorporation provides that any
"Business Combination" (as therein defined) requires the affirmative vote of
two-thirds of the shares entitled to vote, voting together as a single class.
These provisions, and certain other provisions of the Certificate of
Incorporation which may have the effect of delaying proposed stockholder actions
until the next annual meeting of stockholders, could have the effect of delaying
or preventing a tender offer for the Company's Common Stock or other changes of
control or management of the Company, which could adversely affect the market
price of the Company Common Stock.
VOLATILITY OF STOCK PRICE
The stock market historically has experienced volatility which has
affected the market price of securities of many companies and which has
sometimes been unrelated to the operating performance of such companies. The
trading price of the Company's Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or acquisitions by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. The market price may also be affected by
movements in prices of equity securities in general.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
At the Company's 1998 Annual Meeting of Stockholders, the Company's
stockholders approved a proposal to amend the Company's certificate of
incorporation to increase the Company's total authorized Common Stock to
50,000,000 shares.
Between April 1, 1998 and June 30, 1998, the Registrant issued the
following securities which were not registered under the Securities Act of 1933
(the "Securities Act"):
18
<PAGE> 19
(a) the Registrant granted stock options to its employees and Directors
under its 1996 Stock Incentive Plan covering an aggregate of 86,000 shares of
the Registrant's Common Stock, at exercise prices of $23.44 to $28.75 per
share. The Registrant also granted stock options to its employees outside of its
1996 Stock Incentive Plan covering an aggregate of 270,000 shares of the
Registrant's Common Stock, at exercise prices of $23.44 per share.
(b) the Registrant issued an aggregate of 2,740,000 shares of Common
Stock in connection with the acquisition of Pyramid Health Group, Inc.
(c) the Registrant issued an aggregate of 84,025 shares of Common Stock
in connection with the acquisition of MetriCor Inc.
(d) the Registrant issued a principal aggregate amount of $115 million
of Convertible Subordinated Debentures pursuant to Rule 144A which are initially
convertible into 3,458,657 shares of Common Stock.
The sales and issuances of securities in the transactions described
above were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701.
During the period covered by this report, there were no changes in the
rights of holders of any class of securities of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company's 1998 Annual Meeting of Stockholders was held on May 28,
1998 and adjourned on June11, 1998 (the "Annual Meeting"). At the Annual
Meeting, the stockholders voted on the following matters:
(a) Election of Director. The stockholder selected the Class II
nominees to the Board of Directors at the Annual Meeting. The
results of the voting were as follows: (I) Joan P. Neuscheler,
10,394,909 votes for election, 20,876 votes withheld; and (ii)
Cornelius Ryan, 10,394,909 votes for election, 20,876 votes
withheld. Class I Directors of the Company (John H. Austin, M.D.,
Albert L. Greene and Kenneth E. Jones) will continue in office
until 2000 Annual Meeting of Stockholders. Class III Directors of
the Company (James D. Durham and Thomas F. McNulty) will continue
in office until the 1999 Annual Meeting of Stockholders.
(b) Amendment and Restatement of the Company's Certificate of
Incorporation to increase Authorized Common Stock of the Company
to 50,000,000 Shares. The result of the vote was: 6,834,487 votes
for, 3,569,788 votes against, 11,510 abstentions.
ITEM 5. OTHER INFORMATION. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
2.1 Assets Purchase Agreement dated December 31, 1995, by and among
QuadraMed Corporation, a Delaware corporation and California
corporation.(1)
2.2 Assets Purchase Agreement dated December 31, 1995, by and among
QuadraMed Acquisition Corporation, Kaden Arnone, Inc. and its
stockholders.(1)
2.3 Exchange Agreement dated June 25, 1996, by and among QuadraMed
Holdings, Inc., QuadraMed Corporation, and certain stockholders
listed on Schedule A thereto.(1)
2.4 Acquisition Agreement and Plan of Merger dated December 2,
1996, between the Company and InterMed Acquisition Corporation,
a wholly owned subsidiary of the Company and InterMed
Healthcare Systems Inc. and its Stockholders.(2)
2.5 Acquisition Agreement and Plan of Merger, dated as of March 1,
1997, by and among QuadraMed Corporation, Healthcare Recovery
Acquisition Corporation, Healthcare Recovery Incorporated and
its Shareholders (the "HRI Acquisition Agreement and Plan of
Merger").(3)
2.6 First Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 22, 1997.(3)
19
<PAGE> 20
2.7 Second Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 24, 1997.(3)
2.8 Acquisition Agreement and Plan of Merger, dated as of September
24, 1997, by and among QuadraMed Corporation, HRM Acquisition
Corporation, Healthcare Revenue Management, Inc. and its
Stockholders (the "Acquisition Agreement and Plan of
Merger").(4)
2.9 First Amendment to Acquisition Agreement and Plan of Merger,
dated as of September 29, 1997.(4)
2.10 Agreement and Plan of Reorganization by and between QuadraMed
Corporation and Medicus Systems Corporation, dated as of
November 9, 1997.(5)
2.11 Amendment No. 1 to Agreement and Plan of Reorganization, dated
as of February 26, 1998.(10)
2.12 Amendment No. 2 to Agreement and Plan of Reorganization, dated
as of March 24, 1998.(10)
2.13 Acquisition Agreement and Plan of Merger dated as of December
29, 1997, by and among QuadraMed Corporation and Resource
Health Partners, L.P.(6)
2.14 Acquisition Agreement and Plan of Merger dated as of February
2, 1998, by and among QuadraMed Corporation and Cabot Marsh
Corporation.(7)
2.15 Acquisition Agreement and Plan of Merger by and among QuadraMed
Corporation and Pyramid Health Acquisition Corporation and
Pyramid Health Group, Inc. and its stockholders(11)
3.1 Reserved.
3.2 Reserved
3.3 Reserved.
3.4 Amended and Restated Bylaws of the Company.(1)
3.5 Third Amended and Restated Certificate of Incorporation
4.1 Reference is made to Exhibits 3.2 and 3.4.(1)
4.2 Form of Common Stock certificate.(1)
4.3 Form of Exchange Agreement dated March 16, 1994, by and among
the Company, THCS Holding, Inc. and certain stockholders listed
on Schedule A thereto.(1)
4.4 Reserved.
4.5 Reserved.
4.6 Reserved.
4.7 Amended and Restated Agreement Regarding Adjustment Shares
dated June 25, 1996, by and among the Company, QuadNet
Corporation and the individuals listed on Schedule A
thereto.(1)
4.8 Amended and Restated Shareholder Rights Agreement dated June
25, 1996, by and between the Company and the investors listed
on Schedule A thereto.(1)
4.9 Stock Purchase Warrant dated September 27, 1995 issued to James
D. Durham and amendment #1 thereto dated July 10, 1997.(8)
4.10 Reserved.
4.11 Form of Warrant to Purchase Common Stock.(1)
4.12 Registration Rights Agreement dated December 5, 1996, by and
between the Company and the investors listed on Schedule A
thereto.(8)
4.13 Registration Rights Agreement, dated as of December 29, 1997,
by and among QuadraMed Corporation, Resource Health Partners,
L.P. and certain stockholders.(6)
4.14 Registration Rights Agreement, dated as of June 5, 1998, by and
among QuadraMed Corporation and the stockholders of Pyramid
Health group, Inc. named therein.(11)
4.15 Subordinated Indenture, dated as of May 1, 1998 between
QuadraMed and The Bank of New York. (13)
4.16 Officers' Certificate delivered pursuant to Sections 2.3 and
11.5 of the Subordinated Indenture.(13)
4.17 Registration Rights Agreement dated April 27, 1998 by and
among QuadraMed and the Initial Purchasers named therein.(13)
4.18 Form of Global Debenture.(13)
4.19 Form of Certificated Debenture.(13)
10.1 1996 Stock Incentive Plan of the Company.(1)
10.2 1996 Employee Stock Purchase Plan of the Company.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.(1)
10.5 Reserved.
10.6 Lease dated February 26, 1996 for facilities located at 1345
Campus Parkway, Building M, Block #930, Lot #51.02, Neptune,
New Jersey.(1)
20
<PAGE> 21
10.7 Lease dated May 23, 1994 for facilities located at 80 East Sir
Francis Drake Boulevard, Suite 2A, Larkspur, California.(1)
10.8 Reserved.
10.9 Reserved.
10.10 Stock Purchase Agreement dated March 3, 1994, by and between
the Company and James D. Durham.(1)
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Reserved.
10.15 Credit Terms and Conditions dated July 2, 1997, by and between
Imperial Bank and the Company, with addendum thereto.(8)
10.16 Reserved.
10.16.1 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22 Reserved.
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26 Reserved.
10.27 Reserved.
10.28 Reserved.
10.29 Reserved.
10.30 Reserved.
10.31 Reserved.
10.32 Reserved.
10.32 Reserved.
10.34 Reserved.
10.35 Reserved.
10.36 Reserved.
10.37 Reserved.
10.38 Reserved.
10.39 Letter dated July 1, 1997 from the Company to Lemuel C.
Stewart, Jr. regarding terms of employment.(9)
10.40 Form of Stock Purchase Agreement dated as of November 9, 1997
by and among QuadraMed Corporation and certain stockholders of
Medicus Systems Corporation.(5)
10.41 Form of Stock Purchase Warrant dated as of November 9, 1997
issued to certain stockholders of Medicus (including as
Appendix A to Exhibit 10.40).(5)
10.42 Letter dated November 1, 1997 from the Company to James D.
Durham, regarding terms of employment.(5)
10.43 Letter dated November 13, 1997 from the Company to John V.
Cracchiolo, regarding terms of employment.(5)
10.44 Reserved.
10.45 Letter dated January 15, 1998 from the Company to Andrew J.
Hurd, regarding terms of employment.(10)
10.46 Employment Agreement dated September 29, 1997 by and between
Steven D. McCoy and the Company.(10)
10.47 Letter dated March 17, 1998 from the Company to Keith M.
Roberts regarding terms of employment.(10)
21
<PAGE> 22
10.48 Employment Agreement dated February 4, 1998 by and between
Ruthann Russo and the Company.(10)
10.49 Employment Agreement dated June 5, 1998 between Nitin T. Mehta
and the Company
10.50 Mergers and Acquisitions Advisory Fee Agreement dated June 5,
1998 between the Company and Mehta & Company, Inc.(12)
27.1 Financial Data Schedule
(1) Incorporated herein by reference from the exhibit with the same number to
the Company's Registration Statement on Form SB-2, No. 333-5180-LA, as
filed with the Commission on June 28, 1996, as amended by Amendment No. 1,
Amendment No. 2 and Amendment No. 3 thereto, as filed with the Commission
on July 26, 1996, September 9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference from the exhibit with the same number to
the Company's Current Report on Form 8-K, as filed with the Commission on
January 9, 1997.
(3) Incorporated herein by reference from the exhibit with the same number to
the Company's Current Report on Form 8-K, as filed with the Commission on
May 9, 1997, as amended on July 8, 1997 and March 10, 1998.
(4) Incorporated herein by reference from the exhibit with the same number to
the Company's Current Report on Form 8-K, as filed with the Commission on
October 10, 1997, as amended on March 10, 1998.
(5) Incorporated by reference from the exhibit with the same number to the
Company's Current Report on Form 8-K, as filed with the Commission on
November 21, 1997.
(6) Incorporated herein by reference from Exhibit 2.11 to the Company's Current
Report on Form 8-K, as filed with the Commission on January 13, 1998.
(7) Incorporated herein by reference from Exhibit 2.12 to the Company's Current
Report on Form 8-K, as filed with the Commission on February 18, 1998.
(8) Incorporated herein by reference from the exhibit with the same number to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, as filed with the Commission on August 14, 1997, as amended September
4, 1997.
(9) Incorporated by reference from the exhibit with the same number to the
Company's Registration Statement on Form S-3, No. 333-36189, as filed with
the Commission on September 23, 1997, as amended by Amendment No. 1 and
Amendment No. 2 thereto, as filed with the Commission on October 1, 1997
and October 15, 1997 respectively.
(10) Incorporated by reference from the exhibit with the same number to the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1997, as filed with the Commission on April 20, 1998.
(11) Incorporated by reference to the Company's Current Report on Form 8-K, as
filed with the Commission on June 11, 1998.
(12) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed with the Commission on June 17, 1998
(13) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 333-55775, as filed with the Commission on June 2, 1998, as
amended by Amendment No. 1 thereto, as filed with the Commission on June
17, 1998.
b. Reports on Form 8-K.
The Company filed a report on Form 8-K on April 29, 1998 in which it
reported the completion of its offering of $115 million principal aggregate
amount of Convertible Subordinated Debentures pursuant to Rule 144A.
The Company filed a report on Form 8-K on May 11, 1998 in which it
reported the exercise of the over-allotment option in its offering of
Convertible Subordinated Debentures.
The Company filed a report on Form 8-K on May 29, 1998 in which it
reported the acquisition of the remaining 43.3% of Medicus Systems Corporation.
22
<PAGE> 23
The Company filed a report on Form 8-K on June 11, 1998 in which it
reported the acquisition of Pyramid Health Group, Inc. and MetriCor, Inc.
The Company filed a report on Form 8-K/A on June 17, 1998 in which it
amended its previously filed report on Form 8-K relating to the acquisition of
Pyramid Health Group, Inc.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
QUADRAMED CORPORATION (Company)
Date: August 14, 1998 By: /s/ KEITH M. ROBERTS
------------------------------------
Keith M. Roberts
General Counsel and
Chief Financial Officer (Principal
Financial Officer)
By: /s/ BERNIE J. MURPHY
------------------------------------
Bernie J. Murphy
Vice President, Finance and
Chief Accounting Officer (Principal
Accounting Officer)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
3.5 Third Amended and Restated Certificate of Incorporation
10.49 Employment Agreement dated June 5, 1998 between Nitin T. Mehta
and the Company.
27.1 Financial Data Schedule
</TABLE>
25
<PAGE> 1
EXHIBIT 3.5
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QUADRAMED CORPORATION
A Delaware corporation
(Pursuant to Sections 242 and 245
of the Delaware General Corporation Law)
QuadraMed Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
FIRST: That the name of the corporation is QuadraMed Corporation
and that the corporation was originally incorporated on May 9, 1996, pursuant to
the General Corporation Law.
SECOND: The Amended and Restated Certificate of Incorporation of
this corporation shall be restated to read in full as is set forth on Exhibit A
attached hereto.
THIRD: That said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and Section 245 of the General
Corporation Law by obtaining a majority vote of the Common Stock in favor of
said amendment and restatement in the manner set forth in Section 222 of the
General Corporation Law.
IN WITNESS WHEREOF, QuadraMed Corporation has caused its
corporate seal to be hereunto affixed and this Third Amended and Restated
Certificate of Incorporation to be signed by its President and attested to by
its Secretary this 30th day of June, 1998.
QUADRAMED CORPORATION
/s/ John V. Cracchiolo
----------------------------------------
John V. Cracchiolo
President and Chief Operating Officer
ATTEST
/s/ Keith M. Roberts
- --------------------------------------
Keith M. Roberts
Assistant Secretary
<PAGE> 2
EXHIBIT A
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QUADRAMED CORPORATION
FIRST. The name of the corporation is QuadraMed Corporation (the
"Corporation").
SECOND. The address of its registered office in the State of Delaware is
1209 Orange Street, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. (a) The Corporation is authorized to issue 55,000,000 shares of
capital stock, $0.01 par value. The shares shall be divided into two classes,
designated as follows:
<TABLE>
<CAPTION>
Designation of Class Number of Shares Par Value
- -------------------- ---------------- ---------
<S> <C> <C>
Common Stock 50,000,000 $0.01
Preferred Stock 5,000,000 $0.01
----------
TOTAL: 55,000,000
</TABLE>
(b) The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is expressly authorized, in the
resolution or resolutions providing for the issuance of any wholly unissued
series of Preferred Stock, to fix, state and express the powers, rights,
designations, preferences, qualifications, limitations and restrictions thereof,
including without limitation: the rate of dividends upon which and the times at
which dividends on shares of such series shall be payable and the preference, if
any, which such dividends shall have relative to dividends on shares of any
other class or classes or any other series of stock of the Corporation; whether
such dividends shall be cumulative or noncumulative, and if cumulative, the date
or dates from which dividends on shares of such series shall be cumulative; the
voting rights, if any, to be provided for shares of such series; the rights, if
any, which the holders of shares of such series shall have in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation; the rights, if any, which the holders of shares of such
series shall have to convert such shares into or exchange such shares for shares
of stock of the Corporation, and the terms and conditions, including price and
rate of exchange of such conversion or exchange; the redemption rights
(including sinking fund provisions), if any, for shares of such series; and such
other powers, rights, designations, preferences, qualifications, limitations and
restrictions as the Board of Directors may desire to so fix. The Board of
Directors is also expressly authorized to fix the number of shares constituting
such series and to increase or decrease the number of
2
<PAGE> 3
shares of any series prior to the issuance of shares of that series and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not to decrease such number below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
FIFTH. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is authorized to make, alter or repeal any or
all of the Bylaws of the Corporation; provided, however, that any Bylaw
amendment adopted by the Board of Directors increasing or reducing the
authorized number of Directors shall require the affirmative vote of a majority
of the total number of Directors which the Corporation would have if there were
no vacancies. In addition, new Bylaws may be adopted or the Bylaws may be
amended or repealed by the affirmative vote 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. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, 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, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with, this Article
FIFTH.
SIXTH. (a) Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders.
(b) Special meetings of stockholders of the Corporation 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 upon not
fewer than 10 nor more than 60 days' written notice, or (iii) by the holders of
shares entitled to cast not less than 10 percent of the votes at such special
meeting upon not fewer than 10 nor more than 60 days notice. Any request for a
special meeting of stockholders shall be sent to the Chairman and the Secretary
and shall state the purposes of the proposed meeting. Special meetings of
holders of the outstanding Preferred Stock may be called in the manner and for
the purposes provided in the resolutions of the Board of Directors providing for
the issue of such stock. Business transacted at special meetings shall be
confined to the purpose or purposes stated in the notice of meeting.
(c) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, 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, shall be required to alter, change, amend, repeal or adopt any provision
inconsistent with, this Article SIXTH.
3
<PAGE> 4
SEVENTH. (a) The number of Directors which shall constitute the whole
Board of Directors of this corporation shall be as specified in the Bylaws of
this corporation, subject to this Article SEVENTH.
(b) The Directors shall be classified with respect to the time
for which they severally hold office into three classes designated Class I,
Class II and Class III, as nearly equal in number as possible, as shall be
provided in the manner specified in the Bylaws of the Corporation. Each Director
shall serve for a term ending on the date of the third annual meeting of
stockholders following the annual meeting at which the Director was elected;
provided, however, that each initial Director in Class I shall hold office until
the annual meeting of stockholders in 1997, each initial Director in Class II
shall hold office until the annual meeting of stockholders in 1998 and each
initial Director in Class III shall hold office until the annual meeting of
stockholders in 1999. Notwithstanding the foregoing provisions of this Article
SEVENTH, each Director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal.
(c) In the event of any increase or decrease in the authorized
number of Directors, (i) each Director then serving as such shall nevertheless
continue as a Director of the class of which he is a member until the expiration
of his current term, or his early resignation, removal from office or death and
(ii) the newly created or eliminated directorship resulting from such increase
or decrease shall be apportioned by the Board of Directors among the three
classes of Directors so as to maintain such classes as nearly equally as
possible.
(d) Any Director or the entire Board of 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.
(e) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, 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, shall be required to alter, change, amend, repeal or adopt any provision
inconsistent with, this Article SEVENTH.
EIGHTH. (a) 1. In addition to any affirmative vote required by law, any
Business Combination (as hereinafter defined) shall require the affirmative vote
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 (for purposes of this Article EIGHTH, the "Voting
Shares"). 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.
2. The term "Business Combination" as used in this
Article
4
<PAGE> 5
EIGHTH shall mean any transaction which is referred to in any one or
more of the following clauses (A) through (E):
(A) any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any other corporation
(whether or not itself an Interested Stockholder) which is, or after such merger
or consolidation would be, an Affiliate (as hereinafter defined) or Associate
(as hereinafter defined) of an Interested Stockholder; or
(B) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of related
transactions) to or with, or proposed by or on behalf of, any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder, of any
assets of the Corporation or any Subsidiary constituting not less than five
percent of the total assets of the Corporation, as reported in the consolidated
balance sheet of the Corporation as of the end of the most recent quarter with
respect to which such balance sheet has been prepared; or
(C) the issuance or transfer by the Corporation
or any Subsidiary (in one transaction or a series of related transactions) of
any securities of the Corporation or any Subsidiary to, or proposed by or on
behalf of, any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder in exchange for cash, securities or other property (or a
combination thereof) constituting not less than five percent of the total assets
of the Corporation, as reported in the consolidated balance sheet of the
Corporation as of the end of the most recent quarter with respect to which such
balance sheet has been prepared; or
(D) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation, or any spin-off or split-up of
any kind of the Corporation or any Subsidiary, proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(E) any reclassification of securities
(including any reverse stock split), or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any of its Subsidiaries or
any similar transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the percentage of the outstanding shares of (i) any class of equity
securities of the Corporation or any Subsidiary or (ii) any class of securities
of the Corporation or any Subsidiary convertible into equity securities of the
Corporation or any Subsidiary, represented by securities of such class which are
directly or indirectly owned by any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder.
(b) The provisions of section (a) of this Article EIGHTH
shall not be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required by
law and any other provision of this Certificate of
5
<PAGE> 6
Incorporation, if such Business Combination has been approved by two-thirds of
the whole Board of Directors.
(c) For the purposes of this Article EIGHTH:
1. A "person" shall mean any individual, firm,
corporation or other entity.
2. "Interested Stockholder" shall mean, in respect
of any Business Combination, any person (other than the Corporation or any
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
(A) 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
(B) is an Affiliate or Associate of the
Corporation 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
(C) is an assignee of or has otherwise
succeeded to any shares of capital stock of the Corporation which were at any
time within two years prior thereto beneficially owned by any 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.
3. A "person" shall be the "beneficial owner" of
any Voting Shares
(A) which such person or any of its
Affiliates and Associates (as hereinafter defined) beneficially own, directly or
indirectly, or
(B) which such person or any of its
Affiliates or Associates has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii) the right to
vote pursuant to any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly
or indirectly, by any other person with which such first mentioned person or any
of its Affiliates or Associates has any agreement, arrangement or understanding
for the purposes of acquiring, holding, voting or disposing of any shares of
capital stock of the Corporation.
6
<PAGE> 7
4. The outstanding Voting Shares shall include
shares deemed owned through application of paragraph 3 above but shall not
include any other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options, or otherwise.
5. "Affiliate" and "Associate" shall have the
respective meanings given those terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of adoption of this Certificate of Incorporation (the "Exchange Act").
6. "Subsidiary" shall mean any corporation of which
a majority of any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Exchange Act) is owned, directly or
indirectly, by the Corporation; provided, however, that for the purposes of the
definition of Interested Stockholder set forth in paragraph 2 of this section
(c) the term "Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
Corporation.
(d) A majority of the directors shall have the power and
duty to determine for the purposes of this Article EIGHTH on the basis of
information known to them, (1) whether a person is an Interested Stockholder,
(2) the number of Voting Shares beneficially owned by any person, (3) whether a
person is an Affiliate or Associate of another, (4) whether a person has an
agreement, arrangement or understanding with another as to the matters referred
to in paragraph 3 of section (c) or (5) whether the assets subject to any
Business Combination or the consideration received for the issuance or transfer
of securities by the Corporation or any Subsidiary constitutes not less than
five percent of the total assets of the Corporation.
(e) Nothing contained in this Article EIGHTH shall be
construed to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
(f) Notwithstanding anything contained in this Certificate
of Incorporation to the contrary, 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, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article EIGHTH.
NINTH. This Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
TENTH. A Director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, ii) for acts
7
<PAGE> 8
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, iii) under Section 174 of the General Corporation Law
of Delaware or iv) for any transaction from which the Director derived any
improper personal benefit. If the General Corporation Law of Delaware is
hereafter amended to authorize, with the approval of a corporation's
stockholders, further reductions in the liability of a corporation's directors
for breach of fiduciary duty, then a Director of the Corporation shall not be
liable for any such breach to the fullest extent permitted by the General
Corporation Law of Delaware as so amended. Any repeal or modification of the
foregoing provisions of this Article NINTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
8
<PAGE> 1
EXHIBIT 10.49
June 5, 1998
Nitin T. Mehta
58 Greenoaks Drive
Atherton, California 94027-2111
Dear Mr. Mehta:
We are pleased to inform you that the Board of Directors (the "Board")
of QuadraMed Corporation (the "Company") has authorized an employment package
for you which will provide certain assurances concerning the terms and
conditions of your continued employment with the Company and will allow you to
participate in a program of severance benefit payments should your employment
terminate. The purpose of this letter agreement (the "Agreement") is to document
the terms of your employment package by providing you with a formal employment
contract.
The Company considers it essential to the continuing operation of the
Company and in the best interests of its stockholders to assure the continuous
dedication of key management personnel. It is recognized in the context of
public ownership that a termination of an employee's employment without cause
may be sought and that such circumstances could prove distracting to key
executives and detrimental to the ongoing management and administration of the
Company. Such distraction is not in the best interest of the stockholders of the
Company. Accordingly, the Board has determined to discourage the inevitable
distraction to you in the face of potentially disturbing circumstances inherent
in any uncertainty regarding your employment status. This Agreement is intended
to secure and encourage your ongoing retention by providing separation benefits
in the event that your employment is altered as hereinafter described. In order
to induce you to remain in the employ of the Company, and in consideration of
your agreement set forth in Sections 12, 13 and 14 of Part Two hereof, the
Company agrees to pay the severance payments and benefits set forth in this
Agreement, under the circumstances described herein.
Part One of this Agreement sets forth certain definitional provisions to
be in effect for purposes of determining your benefit entitlements. Part Two
specifies the terms and conditions which will apply to your continued employment
with the Company, including the severance payments and benefits to which you
will become entitled in the
<PAGE> 2
event your employment should be terminated. Part Three concludes this Agreement
with a series of general terms and conditions applicable to your employment
benefits.
PART ONE -- DEFINITIONS
DEFINITIONS. For purposes of this Agreement, including in particular the
severance payments and benefits to which you may become entitled under Part Two,
the following definitions will be in effect:
"CHANGE IN CONTROL" means:
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change the
state of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or substantially all
of the assets of the Company in liquidation or dissolution of the Company;
(iii) a transfer of all or substantially all of the Company's assets
pursuant to a partnership or joint venture agreement or similar arrangement
where the Company's resulting interest is less than fifty percent (50%);
(iv) any reverse merger in which the Company is the surviving entity but
in which fifty percent (50%) or more of the Company's outstanding voting stock
is transferred to holders different from those who held the stock immediately
prior to such merger;
(v) on or after the date hereof, a change in ownership of the Company
through an action or series of transactions, such that any person is or becomes
the beneficial owner, directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the securities of the combined
voting power of the Company's outstanding securities;
(vi) a majority of the members of the Board are replaced during any
twelve (12) month period by directors whose appointment or election is not
endorsed by a majority of the members of the Board prior to the date of such
appointment of election; or
(vii) the occurrence of any other event constituting a "change in
control" under Code (as defined below) Section 280G or the Treasury regulations
promulgated thereunder.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"EMPLOYEE" means Nitin T. Mehta.
<PAGE> 3
"EMPLOYEE BENEFIT PLAN" shall have the meaning given the term under
Section 3 of ERISA (as defined below).
"EMPLOYMENT PERIOD" means the period of your employment with the Company
governed by the terms and provisions of this Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect from time to time.
"INVOLUNTARY TERMINATION" means the termination of your employment with
the Company:
(i) involuntarily upon your discharge, dismissal or the Company's
failure to renew this Agreement pursuant to Section 3 of Part Two, whether or
not in connection with a Change in Control; or
(ii) voluntarily or involuntarily, provided such termination occurs in
connection with (a) a change in your position with the Company which materially
reduces your level of responsibility or changes your title from Executive Vice
President and President of the Medical Records Division of the Company, (b) a
reduction in your level of compensation (including base salary, fringe benefits
and any non-discretionary bonuses or other incentive payments earned pursuant to
objective standards or criteria) or (c) a relocation of your principal place of
employment by more than forty-five (45) miles and such change, reduction or
relocation is effected without your written concurrence.
"OPTION" means any option granted to you under the Stock Option Plan (as
defined below) which is outstanding at the time of your Involuntary Termination.
"STOCK OPTION PLAN" means the Company's 1996 Stock Incentive Plan
(including the predecessor 1994 Stock Option Plan), as amended through the date
hereof.
"TERMINATION FOR CAUSE" will mean an Involuntary Termination of your
employment for (i) one or more acts of fraud, embezzlement, misappropriation of
proprietary information, misappropriation of the Company's trade secrets or
other confidential information, a verifiable breach of your fiduciary duties to
the Company or any other verifiable misconduct adversely affecting the business
reputation of the Company in a material manner or (ii) your failure to devote
your full working time and effort to the performance of your duties hereunder;
provided, however, you will have the right to perform incidental services as are
necessary in connection with (a) your private passive investments, (b) your
charitable or community activities, (c) your participation in trade or
professional organizations, but only to the extent such incidental services do
not materially interfere with the performance of your services hereunder and (d)
your service as a director of, or as an unpaid mentor or advisor to, any
business up to a maximum of four (4) working hours per week and (e) in
connection with Mehta & Company, Inc.'s Advisory Fee Agreement.
<PAGE> 4
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
The following terms and conditions will govern your employment with the
Company throughout the Employment Period and will also, to the extent indicated
below, remain in effect following your termination date.
1. Employment And Duties. The Company will continue to employ you as an
executive officer in the position of Executive Vice President and President of
the Medical Records Division of the Company. You agree to continue in such
employment for the duration of the Employment Period and to perform in good
faith and to the best of your ability all services which may be required of you
in your executive position and to be available to render such services at all
reasonable times and places in accordance with reasonable directives and
assignments issued by the Board. During your Employment Period, you will devote
your full time and effort to the business and affairs of the Company within the
scope of your executive office. Your principal place of operations will be 226
Airport Parkway, San Jose, California 95110.
2. At Will Employee. The Company hereby employs you, and you hereby
accept employment by the Company, upon the terms and conditions set forth in
this Agreement. You shall be an employee "at will," terminable at any time by
the Company for cause or without cause, subject to the provisions of this
Agreement.
3. Term; Automatic Extension. The initial term of this Agreement shall
be one year from the effective date hereof. Commencing on the anniversary of the
effective date hereof, and on each succeeding anniversary of the date hereof,
the term of this Agreement shall automatically be extended for one (1)
additional year unless, not later than three (3) months preceding such
anniversary date, the Company shall have given written notice pursuant to
Section 7 of Part Three that it will not extend the term of this Agreement.
4. Compensation.
A. For service in the 1998 calendar year, your base salary will
be paid at the annual rate of One Hundred Seventy-Five Thousand Dollars
($175,000). Your annual rate of base salary may be subject to adjustment each
calendar year by the Board.
<PAGE> 5
B. Your base salary will be paid at periodic intervals in
accordance with the Company's payroll practices for salaried employees.
C. You will be entitled to such bonuses (if any) for service
rendered during the Employment Period as the Board may determine in its sole
discretion and based upon the recommendation of the Company's Compensation
Committee and such additional factors as the Board deems appropriate, including
your individual performance and the Company's financial results. You will be
eligible for QuadraMed's 1998 Executive Bonus Plan and any successor thereto.
D. The Company will deduct and withhold, from the compensation
payable to you hereunder, any and all applicable federal, state and local income
and employment withholding taxes and any other amounts required to be deducted
or withheld by the Company under applicable statute or regulation.
E. You will also be granted a non-qualified stock option to
purchase 150,000 shares of Common Stock of the Company at an exercise price
equal to the fair market value on the date of grant, and subject to other
customary terms and conditions, subject to approval by the Company's Board of
Directors.
5. Expense Reimbursement. You will be entitled to reimbursement from the
Company for all customary, ordinary and necessary business expenses incurred by
you in the performance of your duties hereunder (including membership dues in
professional or other associations relevant to the Company's business), provided
you furnish the Company with vouchers, receipts and other substantiation of such
expenses in accordance with Company policies.
6. Fringe Benefits. During the Employment Period, you will be eligible
to participate in any group life insurance plan, group medical and/or dental
insurance plan, accidental death and dismemberment plan, short-term disability
program and other employee benefit plans, including profit sharing plans,
cafeteria benefit programs and stock purchase and option plans, which are made
available to executives and for which you qualify.
7. Vacation. You will accrue four (4) weeks of paid vacation benefits
during each calendar year of the Employment Period in accordance with the
Company policy in effect for executive officers.
<PAGE> 6
8. Death or Disability.
A. Upon your death or disability during the Employment Period,
the employment relationship created pursuant to this Agreement will immediately
terminate, and no further compensation will become payable to you pursuant to
Part Two, Section 4. In connection with such termination by reason of death, the
Company will only be required to pay you (or your estate) any unpaid
compensation earned under Part Two, Section 4 for services rendered through the
date of your death, together with a special termination payment equal to the
additional amount of base salary you would have earned hereunder had your
employment continued for an additional thirty (30) days. In connection with such
termination by reason of disability, the Company will be required to pay to you
any unpaid compensation earned under Part Two, Section 4 for services rendered
through the date of your disability, together with the severance benefits set
forth in Section 10 below.
B. You will be deemed disabled if you are so characterized
pursuant to the terms of the Company's disability insurance policies applicable
to you from time to time.
C. Upon death or disability the terms of the Stock Option Plan
will apply.
9. Severance Benefits. You will be entitled to receive the severance
benefits specified below in the event there should occur on the termination of
your employment by reason of disability or an Involuntary Termination of your
employment (other than a Termination for Cause).
A. Severance Benefit. The Company will make a severance payment
to you, in one lump sum within thirty (30) days of the date of your disability
or Involuntary Termination, in an aggregate amount equal to the average annual
rate of base salary paid to you by the Company for service rendered in the two
(2) immediately preceding calendar years. In the event that you have been
employed by the Company for one (1) year or less at the time of your Involuntary
Termination, then the Company will make a severance payment to you in an amount
equal to your then current annual base salary. You may elect, in your sole
discretion, to have the severance benefit payable pursuant to this Section 10.A
in monthly installments over a one (1) year period following the date of your
Involuntary Termination.
B. Welfare Benefits. For a period of twelve (12) months, you (and
your dependents, as applicable) shall be provided by the Company with the same
life, health and disability plan participation, benefits and other coverages to
which you were entitled as an employee immediately before the disability or the
Involuntary Termination. In the event that under applicable law or the terms of
the relevant Employee Benefit
<PAGE> 7
Plans such participation, benefits and/or coverage cannot be provided to you
following your Involuntary Termination, such coverage and/or benefits shall be
provided directly by the Company pursuant to this Agreement on a comparable
basis. In its sole discretion, the Company may obtain such coverage and benefits
for you through private insurance acquired at the Company's expense. Amounts
paid or payable to you or on your behalf pursuant to any "employee welfare
benefit plan," as defined in ERISA, providing health and/or disability benefits,
that is sponsored by the Company or an affiliate of the Company, shall be
credited against amounts due under this Section 10.B. To the maximum extent
permitted by applicable law, the benefits provided under this Section 10.B shall
be in discharge of any obligations of the Company or any of your rights under
the benefit continuation provisions under Section 4980A of the Code and Part VI
of Title I of ERISA ("COBRA") or any other legislation of similar import.
C. Option Acceleration. In connection with the Involuntary
Termination of your employment (other than Termination for Cause), each of your
Options under the Stock Option Plan will (to the extent not then otherwise
exercisable) automatically accelerate so that each such Option will become
immediately exercisable for the total number of shares purchasable thereunder.
Each such accelerated Option, together with all of your other vested Options,
will remain exercisable for a period of three (3) years following your
Involuntary Termination and may be exercised for any or all of the
accelerated shares in accordance with the exercise provisions of the Option
agreement evidencing the grant.
10. Option Acceleration Upon a Change in Control. Upon the occurrence of
a Change in Control, each of your Options under the Stock Option Plan will (to
the extent not then otherwise exercisable) automatically accelerate so that each
such Option will become immediately exercisable for the total number of shares
purchasable thereunder. Each such accelerated Option, together with all of your
other vested Options, will remain exercisable for a period of three (3) years
following a Change in Control and may be exercised for any or all of the
accelerated shares in accordance with the exercise provisions of the Option
agreement evidencing the grant.
11. Restrictive Covenant. During the Employment Period, you will not
directly or indirectly, whether for your own account or as an employee,
consultant or advisor, provide services to any business enterprise other than
the Company, except as provided in this Agreement or Mehta & Company, Inc.'s
Advisory Fee Agreement or otherwise authorized by the Company in writing.
12. Non-Solicitation and Non-Disparagement. During any period for which
you are receiving compensation payments pursuant to Part Two, Section 4, you
will not directly or indirectly (i) solicit any Company employee, independent
contractor
<PAGE> 8
or consultant to leave the Company's employ or otherwise terminate such person's
relationship with the Company for any reason or interfere in any other manner
with the employment or other relationships at the time existing between the
Company and its current employees, independent contractors or consultants, (ii)
solicit any of the Company's customers for products or services substantially
similar to those offered by the Company or (iii) disparage the Company or any of
its stockholders, directors, officers, employees or agents.
13. Confidentiality.
A. You hereby acknowledge that the Company may, from time to time
during the Employment Period, disclose to you confidential information
pertaining to the Company's business and affairs and client base, including
(without limitation) customer lists and accounts, other similar items indicating
the source of the Company's income and information pertaining to the salaries,
duties and performance levels of the Company's employees. You will not, at any
time during or after such Employment Period, disclose to any third party or
directly or indirectly make use of any such confidential information, including
(without limitation) the names, addresses and telephone numbers of the Company's
customers, other than in connection with, and in furtherance of, the Company's
business and affairs. Nothing contained in this paragraph shall be construed to
prevent you from disclosing the amount of your salary.
B. All documents and data (whether written, printed or otherwise
reproduced or recorded) containing or relating to any such proprietary
information of the Company which come into your possession during the Employment
Period will be returned by you to the Company immediately upon the termination
of the Employment Period or upon any earlier request by the Company, and you
will not retain any copies, notes or excerpts thereof. Notwithstanding the
foregoing, you shall be entitled to retain your file or Rolodex containing
names, addresses and telephone numbers and personal diaries and calendars;
provided, however, that you shall continue to be bound by the terms of Section
14.A. above to the extent such retained materials constitute confidential
information.
C. Your obligations under this Section 14 will continue in effect
after the termination of your employment with the Company and for a period of
two (2) years thereafter, whatever the reason or reasons for such termination,
and the Company will have the right to communicate with any of your future or
prospective employers concerning your continuing obligations under this Section
14.
14. Ownership Rights.
A. All materials, ideas, discoveries and inventions pertaining to
the Company's business or clients, including (without limitation) all patents
and copyrights,
<PAGE> 9
patent applications, patent renewals and extensions and the names, addresses and
telephone numbers of customers, will belong solely to the Company.
B. All materials, ideas, discoveries and inventions which you may
devise, conceive, develop or reduce to practice (whether individually or jointly
with others) during the Employment Period will be the sole property of the
Company and are hereby assigned by you to the Company, except for any idea,
discovery or invention (i) for which no Company equipment, supplies, facility or
trade secret information is used, (ii) which is developed entirely on your own
time and (iii) which neither (a) relates at the time of conception or reduction
to practice, to the Company's business or any actual or demonstrably-anticipated
research or development program of the Company nor (b) results from any work
performed by you for the Company. The foregoing exception corresponds to the
assignment of inventions precluded by California Labor Code Section 2870,
attached as Exhibit A.
C. You will, at all times whether during or after the Employment
Period, assist the Company, at the Company's sole expense, in obtaining,
maintaining, defending and enforcing all legal rights and remedies of the
Company, including, without limitation, patents, copyrights and other
proprietary rights of the Company. Such assistance will include (without
limitation) the execution of documents and assistance and cooperation in legal
proceedings. After termination of your employment with the Company, you will be
compensated for actual time spent in connection with assistance pursuant to this
Section 15.C. at the rate of $150 per hour.
D. You will execute and be bound by all the terms and provisions
of the Company's standard Proprietary Information Agreement, and nothing in this
document will be deemed to modify or affect your duties and obligations under
that agreement.
15. Termination of Employment.
A. The Company (or any successor entity resulting from a Change
in Control) may terminate your employment under this Agreement at any time for
any reason, with or without cause, by providing you with at least seven (7) days
prior written notice. However, such notice requirement will not apply in the
event there is a Termination for Cause under subparagraph D below.
B. In the event there is a termination of your employment by
reason of disability or an Involuntary Termination of your employment with the
Company (other than Termination for Cause) during the Employment Period, you
will become entitled to the benefits specified in Part Two, Section 10 in
addition to any unpaid compensation earned by you under Part Two, Section 4 for
services rendered prior to such termination.
<PAGE> 10
C. Should your employment with the Company terminate by reason of
your death during the Employment Period, no severance benefits will be payable
to you under Part Two, Section 10, and only the limited death benefits provided
under Part Two, Section 9 will be payable.
D. The Company may at any time, upon written notice, terminate
your employment hereunder for any act qualifying as a Termination for Cause.
Such termination will be effective immediately upon such notice.
E. Upon such Termination for Cause, the Company will only be
required to pay you any unpaid compensation earned by you pursuant to Part Two,
Section 4 for services rendered through the date of such termination, and no
termination or severance benefits will be payable to you under Part Two, Section
10.
PART THREE -- MISCELLANEOUS PROVISIONS
16. Mitigation. You shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise. The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish your existing rights which would accrue solely as a result of
the passage of time, under any Company Employee Benefit Plan, "Payroll practice"
(as defined in ERISA), compensation arrangement, incentive plan, stock option or
other stock-related plan.
17. Successors. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company, including, without
limitation, any corporation or corporations acquiring directly or indirectly all
or substantially all of the stock, business or assets of the Company whether by
merger, consolidation, division, sale or otherwise (and such successor shall
thereafter be deemed "the Company" for the purposes of this Agreement). The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance satisfactory to
you, to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement entitling you to the benefits hereunder, as though
you were subject to Involuntary Termination. This Agreement shall be binding
upon and inure to your benefit, your successors, assigns, executors,
administrators or beneficiaries.
<PAGE> 11
18. Death. Death benefits to which you may become entitled under Part
Two, Section 9 will be made, on the due date or dates hereunder had you
survived, to the executors or administrators of your estate. Should you die
before you exercise your outstanding vested options, then each such option may
be exercised, within twelve (12) months after your death, by the executors or
administrators of your estate or by any person to whom the option is transferred
pursuant to your will or in accordance with the laws of inheritance. In no
event, however, may any such vested option be exercised after the specified
expiration date of the option term.
19. Indemnification. The indemnification provisions for officers and
directors under the Company's Bylaws will (to the maximum extent permitted by
law) be extended to you, during the period following your Involuntary
Termination, with respect to any and all matters, events or transactions
occurring or effected during your Employment Period.
20. Miscellaneous. The provisions of this Agreement will be construed
and interpreted under the laws of the State of California. This Agreement
incorporates the entire Agreement between you and the Company relating to the
terms of your employment and the subject of severance benefits and supersedes
all prior agreements and understandings with respect to such subject matter.
This Agreement may only be amended by written instrument signed by you and an
authorized officer of the Company.
21. Arbitration. Any controversy which may arise between you and the
Company with respect to the construction, interpretation or application of any
of the terms, provisions, covenants or conditions of this Agreement or any claim
arising from or relating to this Agreement will be submitted to final and
binding arbitration in San Francisco, California in accordance with the rules of
the American Arbitration Association then in effect.
22. Notices. Any notice required to be given under this Agreement shall
be deemed sufficient, if in writing, and sent by certified mail, return receipt
requested, via overnight courier, or hand delivered to the Company at 80 East
Sir Francis Drake Boulevard, Suite 2A, Larkspur, California 94939, and to you at
your most recent address reflected in the permanent Company records. Copies of
each such notice delivered by either the Company or you shall be provided by the
Company to each current member of the Board at each such director's current
address as listed in the Company's records.
<PAGE> 12
Please indicate your acceptance of the foregoing provisions of this
Agreement by signing the enclosed copy of this Agreement and returning it to the
Company.
Very truly yours,
QUADRAMED CORPORATION
By:
Name:
Title:
ACCEPTED BY AND AGREED TO:
Nitin T. Mehta
Dated:
<PAGE> 13
EXHIBIT A
Section 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE WILL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.
(a) Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for his
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE
MONTHS ENDED JUNE 30, 1998 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 94,621
<SECURITIES> 43,576
<RECEIVABLES> 24,019
<ALLOWANCES> 3,296
<INVENTORY> 0
<CURRENT-ASSETS> 141,249
<PP&E> 12,722
<DEPRECIATION> 5,761
<TOTAL-ASSETS> 225,016
<CURRENT-LIABILITIES> 36,009
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 73,561
<TOTAL-LIABILITY-AND-EQUITY> 225,016
<SALES> 34,384
<TOTAL-REVENUES> 34,384
<CGS> 17,779
<TOTAL-COSTS> 35,576
<OTHER-EXPENSES> (450)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,521)
<INCOME-TAX> 1,339
<INCOME-CONTINUING> (19,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,860)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
