<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 68-0422446
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1003 W. Cutting Blvd., 2nd Floor
Richmond, CA 94804 94804
(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 May 3, 1999, there were 23,604,000 shares of the Registrant's Common
Stock outstanding, par value $0.01. This quarterly report on Form 10-Q consists
of 47 pages of which this is page 1. The Exhibit Index is located at page 29.
================================================================================
<PAGE> 2
QUADRAMED CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED) (UNAUDITED)
(RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,187 $ 66,089
Short-term investments 42,980 23,043
Accounts receivable, net 39,268 39,529
Unbilled receivables 10,235 10,335
Notes and other receivables 5,797 3,989
Prepaid expenses and other 4,277 2,921
--------- ---------
Total current assets 134,744 145,906
Long-term investments 48,741 41,641
Equipment, net 9,686 11,259
Capitalized software development costs, net 5,701 4,803
Acquired software, net 2,986 3,211
Non-marketable investments 4,700 1,200
Intangibles, net 37,719 50,672
Debt offering costs and other 4,924 4,915
--------- ---------
Total assets $ 249,201 $ 263,607
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 484 $ 490
Notes payable 7 2,510
Accounts payable 5,121 4,295
Accrued liabilities 42,248 29,861
Deferred revenue 12,177 13,509
--------- ---------
Total current liabilities 60,037 50,665
Capital lease obligations, less current portion 526 583
Notes payable, less current portion 19,176 19,186
Convertible subordinated debentures 115,000 115,000
Net liabilities of discontinued operations 8,076 9,157
--------- ---------
Total liabilities 202,815 194,591
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 159 159
Additional paid-in capital 267,998 264,751
Deferred compensation (3,743) (3,940)
Unrealized loss on available-for-sale securities (82) (157)
Accumulated deficit (217,946) (191,797)
--------- ---------
Total stockholders' equity 46,386 69,016
--------- ---------
Total liabilities & stockholders' equity $ 249,201 $ 263,607
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
(Restated)
<S> <C> <C>
REVENUES:
Licenses $ 33,377 $ 22,629
Services 26,278 20,324
-------- --------
Total revenues 59,655 42,953
-------- --------
OPERATING EXPENSES:
Cost of licenses 12,830 11,291
Cost of services 16,227 14,086
General and administration 7,500 8,598
Sales and marketing 5,153 4,829
Research and development 5,697 6,112
Amortization of intangibles 2,132 825
Write-off of acquired research and
development in process -- 7,008
Acquisition costs 6,335 --
Impairment of intangible assets 10,592 --
Non-recurring charges 18,752 --
-------- --------
Total operating expenses 85,218 52,749
-------- --------
LOSS FROM OPERATIONS (25,563) (9,796)
OTHER INCOME (EXPENSE), NET:
Interest income (expense), net (457) 68
Other income (expense), net 71 (288)
-------- --------
Total other income (expense), net (386) (220)
-------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST (25,949) (10,016)
Provision for income taxes 200 630
Minority interest in earnings of Medicus -- (380)
-------- --------
NET LOSS $(26,149) $(11,026)
======== ========
NET LOSS PER BASIC AND DILUTED SHARE $ (1.11) $ (0.53)
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 23,604 20,656
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(26,149) $(11,026)
-------- --------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 3,403 1,700
Amortization of deferred compensation 197 --
Write-off of in-process research and development -- 7,008
Impairment of intangible assets 10,592 --
Cash flows from discontinued operations (1,081) (1,611)
Minority interest in earnings of Medicus -- 380
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables 361 61
Prepaid expenses and other (1,356) 459
Accounts payable and accrued liabilities 13,213 (2,162)
Deferred revenue (1,332) 2,910
-------- --------
Cash used in operating activities (2,152) (2,281)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of non-marketable investments (3,000) --
Additions to equipment (440) (1,540)
Increase in notes receivable and other (1,002) (503)
Capitalization of computer software development costs (1,018) (784)
Purchase of short and long-term investments (26,962) (204)
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 used in investing activities (32,422) (10,312)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations (63) (152)
Net borrowings (repayments) under notes payable (2,513) (1,888)
Proceeds from the issuance of common stock
and exercise of common stock warrants and options 3,248 6,162
-------- --------
Cash provided by financing activities 672 4,122
-------- --------
Net decrease in cash and cash equivalents (33,902) (8,471)
CASH AND CASH EQUIVALENTS, beginning of period 66,089 48,384
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 32,187 $ 39,913
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of note receivable to equity investment in VantageMed $ 500 $ --
Issuance of common stock in connection with the InterLink acquisition $ -- $ 1,500
Issuance of common stock in connection with the Cabot Marsh acquisition $ -- $ 8,400
Issuance of common stock in connection with the Velox acquisition $ -- $ 1,500
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
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, 1998 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, 1999 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 and post-contract
customer support fees, third-party hardware sales and other revenues related to
licensing of the Company's software products. Service revenue is composed of
business office and health information management outsourcing, cash flow
management, compliance and consulting services.
The Company's product offering includes a variety of products which can be
licensed individually or as a suite of interrelated products. Products are
licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis. Revenues from term licenses are recognized
monthly or annually over the term of the license arrangement, beginning at the
date of installation. Revenues from perpetual licenses are recognized upon
shipment of the software if there is persuasive evidence of an agreement,
collection of the resulting receivable is probable and the fee is fixed and
determinable. If an acceptance period is required, revenues are recognized upon
the earlier of customer acceptance or the expiration of the acceptance period.
Revenues from certain products, including the Company's enterprise solutions are
recognized on a percentage of completion basis of accounting as determined by
the achievement of certain performance milestones during the product
installation process.
Certain services are also provided to certain of the Company's licensees of
software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites, and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed.
The Company provides business office and health information management
outsourcing, cash flow management, compliance and consulting services to 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.
The Company has
6
<PAGE> 7
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.
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
potentially diluted common shares outstanding during the period. Potentially
diluted common shares consist of stock options, warrants (using the treasury
stock method) and the Company's convertible subordinated debentures. Potentially
diluted common shares are excluded from the dilutive computation only if their
effect is anti-dilutive. As the Company recorded a net loss in the three months
ended March 31, 1999 and 1998, no potentially diluted common shares are included
in diluted weighted average common shares outstanding for those periods.
Comprehensive Income
In 1997, the Financial Accounting Standards Board ("FASB") issued Statements
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income," which was adopted by the Company in the first quarter of 1998. 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 during 1998.
The components of comprehensive loss for the three months ended March 31,
1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------
<S> <C>
Net loss $(26,149)
Unrealized gain (loss) on available-for-sale
Securities 75
--------
Comprehensive loss $(26,074)
========
</TABLE>
There was no difference between net loss and comprehensive income loss during
the first quarter of 1998.
3. Acquisitions
In March 1999, the Company acquired all of the outstanding capital stock of
The Compucare Company ("Compucare") in exchange for 2,957,000 shares of common
stock, of which 295,000 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. Upon
closing of the acquisition, the assets and liabilities of Compucare were
recorded at net book value. The accompanying consolidated financial statements
have been restated to reflect the acquisition of Compucare on a pooling of
interests basis.
The Company acquired Velox Systems Corporation in February 1998 and Cabot
Marsh Corporation and entities affiliated with InterLink in January 1998. All
three acquisitions were accounted for as purchases.
The unaudited pro forma results of operations of the Company and entities
acquired during the three months ended March 31, 1998 for which purchase
accounting was applied (Velox Systems Corporation, Cabot Marsh Corporation, and
entities affiliated with InterLink) are noted as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
Revenue $44,706
Net income (loss) $(5,207)
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
Net income (loss) per share $ (0.25)
</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.
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 THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
QuadraMed $ 46,868 $ 33,673
Compucare $ 12,787 $ 9,280
-------- --------
Consolidated $ 59,655 $ 42,953
======== ========
Net income (loss):
QuadraMed $(20,522) $(11,312)
Compucare $ (5,627) $ 286
-------- --------
Consolidated $(26,149) $(11,026)
======== ========
</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.
5. Line of Credit and Debt Guarantee
In connection with the acquisition of Compucare in March 1999, the
Company assumed a line of credit arrangement with Compucare's bank. Under the
terms of the agreement, the Company may borrow up to $7,000,000 limited to 85
percent of eligible billed receivables plus 50 percent of eligible unbilled
receivables. The Company pays interest at a rate of prime plus 1 percent. All
outstanding borrowings under the line of credit were repaid by the Company in
March 1999. The line of credit was terminated by the Company subsequent to the
repayment of the outstanding balance. The Company also had letters of credit
with its bank for $1,000,000.
In September 1998, the Company entered into an arrangement to guarantee a
line of credit of another company for up to $12,500,000. Outstanding balances
under the line of credit accrue interest at 8.5% and are due October 1, 2001.
The Company has also entered into a reseller agreement with the same company.
Under the terms of the reseller agreement, the Company has a non-exclusive
license to resell the company's software. This reseller agreement remains in
effect for an initial term of three (3) years, expiring on September 29, 2001,
and thereafter is subject to renewal for additional one (1) year terms.
6. Discontinued Operations
In connection with the acquisition of Compucare in March 1999, the Company
assumed the net liabilities of discontinued operations from certain prior
acquisitions of Compucare. In November 1996, Compucare consummated the sale of
Antrim Corporation ("Antrim"), a wholly-owned subsidiary of Compucare. In
December of 1996, Compucare announced it was evaluating a plan of "spin-off" or
sale of operations of Health Systems Integration, Inc. ("HSII"), a wholly-owned
subsidiary of Compucare. Compucare completed transactions related to the sale of
HSII's intellectual property and the majority of its customer base in December
1997. The results of operations for the three months ended March 31, 1999 and
1998, respectively, present Antrim and HSII as discontinued operations. Results
from discontinued operations for the three months ended March 31, 1999 and 1998
were not material. The assets and liabilities related to the discontinued
operations have been segregated on each of the aforementioned balance sheets.
Net liabilities related to discontinued operations at March 31, 1999 was
$8,076,000.
8
<PAGE> 9
7. Non-recurring Charges
During the first quarter of 1999, The Company recorded approximately
$18,800,000 of non-recurring charges. Those charges consisted of costs
associated with the closing of several duplicative operating facilities
primarily within the Company's Business Office Division and certain integration
costs related to prior acquisistions. The charge included approximately
$10,000,000 related to severance payments to employees ranging from several
weeks to two years in the case of certain management of Compucare. Such
severance payments are expected to be paid to involuntarily terminated employees
through August of 1999. In addition, the charge included $8,800,000 for future
rents and lease obligations the Company is obligated to fulfill as well as other
incremental costs to wind-down the operations of the offices. Future rents and
lease obligations are expected to be paid through July 2003. In 1997 and 1998,
respectively, the Company closed several other offices related to acquired
companies. At December 31, 1998, there was $1,579,000 accrued for future rents
and lease obligations related to such facilities. During the quarter ended
March 31, 1999, the Company paid $270,000 related to rent and lease obligations
for these facilities.
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Description December 31, 1998 Costs and Expenses Payments March 31, 1999
- ----------- ----------------- ------------------ -------- --------------
<S> <C> <C> <C> <C>
Personal costs ................... $ -- $10,000 $(1,200) $ 8,800
Rents and lease obligations ...... 1,579 3,282 (340) 4,521
Other incremental operating costs -- 5,470 (465) 5,005
------ ------- ------- -------
Total Restructuring Accrual .... $1,579 $18,752 $(2,005) $18,326
====== ======= ======= =======
</TABLE>
8. Impairment of Intangibles
During the quarter ended March 31, 1999, the Company recorded a
$10,600,000 charge for the write-down of certain intangible assets. The
intangible assets were associated with the Business Office Division, and were
related to the acquisitions of Synergy in 1997, InterLink, Velox and American
Hospital Directory in 1998. In accordance with SFAS #121, "Impairment of
Long-Lived Assets", projected cash flows from these product lines was not
sufficient to cover future amortization of the intangible assets and therefore
were written-down during the quarter ended March 31, 1999.
9. Segment Reporting
The Company Reported on three operating segments in 1999: the Business
Office Division (BO), and Health Information Management (HIM) Division and the
Enterprise Division. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses. The Company does not track
long-lived assets by segment and therefore related disclosures are not relevant
and are not presented.
For the quarter ended March 31, 1999 and 1998, respectively, the following
table reports selected segment information required by SFAS No. 131:
<TABLE>
<CAPTION>
1999 1998
---- ----
BO HIM ENTERPRISE TOTAL BO HIM ENTERPRISE TOTAL
------- ------ ---------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License revenues $13,978 $ 6,612 $12,787 $33,377 $ 8,946 $ 4,403 $ 9,280 $ 22,629
Service revenues 6,081 20,197 -- 26,278 4,611 15,713 -- 20,324
------- ------- ------- ------- ------- ------- ------- --------
20,059 26,809 12,787 59,655 13,557 20,116 9,280 42,953
Segment earnings (loss) (24,595) 4,073 (5,627) (26,149) (5,395) (5,918) 287 (11,026)
</TABLE>
9
<PAGE> 10
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
'Software Revenue Recognition,'" which defers for one year the application of
provisions in SOP 97-2 which limit what is considered vendor-specific objective
evidence of the fair value of the various elements in a multiple element
arrangement. All other provisions in SOP 97-2 remain in effect. This SOP was
effective as of March 31, 1998. In December 1998, the AICPA issued SOP 98-9,
"Modification of SOP 97-2, 'Software Revenue Recognition,' With Respect to
Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2, Software
Revenue Recognition, to require recognition of revenue using the "residual value
method" under certain conditions. Effective December 15, 1998, SOP 98-9 amends
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, 'Software
Revenue Recognition,'" to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of this SOP are effective for
transactions entered into in fiscal years beginning after March 31, 1999. The
Company does not anticipate that these statements will have a material adverse
impact on its statement of operations.
In June 1998, the FASB issued SFAS 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 health care 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 SEC.
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.
Accordingly, the Company's consolidated financial statements have been restated
to include historical results of entities acquired on a pooling of interests
basis.
In March 1999, the Company acquired all of the outstanding capital stock of
The Compucare Company ("Compucare") in exchange for 2,957,000 shares of common
stock, of which 295,000 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. Upon
closing of the acquisition, the assets and liabilities of Compucare were
recorded at net book value. The accompanying consolidated financial statements
have been restated to reflect the acquisition of Compucare on a pooling of
interests basis.
10
<PAGE> 11
As of March 31, 1999, QuadraMed and its subsidiaries had more than 3,800
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. No single customer accounted for more than
10% of the Company's revenues in 1997, 1998 or the quarter ended March 31, 1999.
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation and post-contract
customer support fees, third-party hardware sales and other revenues related to
licensing of the Company's software products. Service revenue is composed of
business office and health information management outsourcing, cash flow
management, compliance and consulting services.
The Company's product offering includes a variety of products which can be
licensed individually or as a suite of interrelated products. Products are
licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis. Revenues from term licenses are recognized
monthly or annually over the term of the license arrangement, beginning at the
date of installation. Revenues from perpetual licenses are recognized upon
shipment of the software if there is persuasive evidence of an agreement,
collection of the resulting receivable is probable and the fee is fixed and
determinable. If an acceptance period is required, revenues are recognized upon
the earlier of customer acceptance or the expiration of the acceptance period.
Revenues from certain products, including the Company's enterprise solutions are
recognized on a percentage of completion basis of accounting as determined by
the achievement of certain performance milestones during the product
installation process.
Certain services are also provided to certain of the Company's licensees of
software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites, and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed.
The Company provides business office and health information management
outsourcing, cash flow management compliance and consulting services to 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.
The Company has experienced operating margins at differing levels related to
licenses and services. The service business has historically realized
fluctuating margins that were significantly lower than margins associated with
licenses.
The Company capitalizes a portion of its software costs for internally
developed software products. These capitalized costs relate primarily to the
development of new products and the extension of applications to new markets or
platforms using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives (usually five years) of the
products, commencing when each product is available to the market.
Revenues
License. License revenues for the quarter ended March 31, 1999 increased
47.5% to $33.4 million, compared to $22.6 million in the same period last year.
The increase in license revenues was due principally to new customers associated
with the Company's coding, capitation products and enterprise products from
recently acquired Compucare. 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.
11
<PAGE> 12
Service. Service revenues for the quarter ended March 31, 1999 increased
29.3% to $26.3 million, compared to $20.3 million in the same period last year.
The increase in service revenues was due principally to new customers associated
with the Company's health information management outsourcing and compliance
businesses.
The substantial increase in revenues in 1998 reflect the completion of
numerous acquisitions, several of which were significant. The Company currently
expects to complete fewer acquisitions in 1999. As a result the Company does
not expect revenues to increase at historical rates in the future.
Cost of Revenues
Cost of licenses. Cost of license revenues for the quarter ended March 31,
1999 increased 13.6% to $12.8 million, compared to $11.3 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 38.4% in the quarter ended March 31, 1999, from
49.9% 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 during the quarter is principally due to the leveraging of
costs over an increased revenue base.
Cost of services. Cost of service revenues for the quarter ended March 31,
1999 increased 15.2% to $16.2 million, compared to $14.1 million, in the same
period last year. Cost of services includes expenses associated with services
performed in connection with health information management and business office
outsourcing, compliance and consulting services. As a percentage of service
revenues, cost of services decreased to 61.8% in the quarter ended March 31,
1999 from 69.3% in the same period last year. The increase in cost of services
was due principally to additional operating costs associated with the health
information management outsourcing services and to a lesser extent, the hiring
of additional compliance consultants. Cost of services as a percentage of
service revenues decreased for the quarter ended March 31, 1999, principally due
to a higher revenue contribution from the Company's health information
management outsourcing business unit and to a lesser extent, the closure of one
of the Company's duplicative operating facilities within its business office
outsourcing operations in the third quarter of 1998. As a result of this
facility closure, the Company eliminated a lower margin business.
Operating Expenses
General and Administration. General and administration expenses for the
quarter ended March 31, 1999 decreased 12.8% to $7.5 million, compared to $8.6
million in the same period last year and as a percentage of total revenues
decreased 12.6% for the quarter ended March 31, 1999 from 20.0% in the same
period last year. The decrease in general and administration expenses in
absolute dollars and as a percentage of total revenues for the quarter ended
March 31, 1999 was principally due to a larger revenue base and, to a lesser
extent, the reduction of certain overhead costs associated with prior
acquisitions as the Company has centralized many of its administrative
functions.
Sales and Marketing. Sales and marketing expenses for the quarter ended
March 31, 1999 increased 6.7% to $5.2 million, compared to $4.8 million in the
same period last year, and decreased as a percentage of total revenues to 8.6%
from 11.2% in the same period last year. The increase in sales and marketing
expenses resulted principally from the addition of sales and marketing personnel
in 1999 and higher advertising costs, which included a more expansive
participation at the annual healthcare information management conference in
February 1999. 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 March 31, 1999 decreased 6.8% to $5.7 million, compared to $6.1 million in
the same period last year and as a percentage of total revenues decreased to
9.6% from 14.2% in the same period last year. Research and development expenses
decreased principally due to the completion of certain software development
projects during the latter half of 1998 and the reallocation of those resources
to other areas, as well as the further integration of acquired companies and
their development efforts. The Company capitalized $1.0 million and $784,000 of
software development costs in the three months ended March 31, 1999 and 1998,
respectively, which represented 15.2% and 11.4% of total research and
development expenditures for the three months ended March 31, 1999 and 1998,
respectively. The Company believes that research and development expenditures
are essential to maintaining its competitive position. As a result, the Company
intends to continue to make investments in the development of new products and
in the further integration of acquired technologies into the
12
<PAGE> 13
Company's suite of products. The Company believes that these expenses will
increase in the future, both in absolute terms and as a percentage of total
revenues.
Amortization of Intangibles. Amortization of intangibles for the quarter
ended March 31, 1999 increased to $2.1 million compared to $825,000 in the same
periods last year. The increase in the amortization of intangibles is
principally due to the acquisition of remaining 43.3% interest in Medicus in May
1998, and the acquisitions of Cabot Marsh, Velox and the entities affiliated
with InterLink during the first quarter of 1998.
Acquired Research and Development In-Process. In connection with the
acquisitions of Cabot Marsh, Velox and entities affiliated with InterLink during
the first quarter of 1998, the Company expensed $7.0 million of acquired
in-process research and development as the technology had not achieved
feasibility and had no alternative future use. There were no such charges in the
first quarter of 1999.
Acquisition Costs. The Company incurred $6.3 million of acquisition costs
associated with the acquisition of Compucare. Such costs were primarily for
financial advisor fees of approximately $5.4 million incurred by the Company and
Compucare and to a lesser extent, legal and accounting fees of approximately
$900,000.
Non-Recurring Charges. Non-recurring charges of $29.3 million in the first
quarter of 1999 were associated with the closing of duplicative operating
facilities within several of the Company's business units and the write-down of
certain intangibles from past acquisitions which were determined to be
impaired. The Company incurred approximately $18.8 million to close four office
facilities and to reduce the related workforce by more than one hundred
employees. The charge included approximately $10 million related to severance
payments to employees ranging from several weeks to two years in the case of
certain management of Compucare. In addition, the charge included $8.8 million
of future rents and lease obligations the Company is contractually obligated to
fulfill as well as other incremental costs to wind-down the operations of the
offices. The Company recorded a $10.6 million charge to write-down certain
intangible assets from acquired companies in 1997 and 1998. The write-down
related to the acquisitions of Synergy, InterLink, Velox and American Hospital
Directory.
Interest Income (expense), Net. Interest expense, net was $457,000 in the
quarter ended March 31, 1999, compared to interest income of $68,000 for the
same period last year. Interest expense during 1999 was principally due to
interest expense from the Company's $115 million Convertible Subordinated
Debentures which closed in May 1998 and notes payable assumed from the
acquisition of IMN in September 1998, partially offset by interest income from
the Company's cash and investments.
Provision for income taxes. Provision for income taxes decreased to $200,000
in the quarter ended March 31, 1999 compared to a provision for income taxes of
$630,000 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 SFAS
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 $2.2 million and $2.3 million in
the three months ended March 31, 1999 and 1998, respectively. Net cash used in
operating activities in the three months ended March 31, 1999 was principally
due to an increase in the net loss, offset by the write-down of certain
intangible assets and the increase in accounts payable and accrued liabilities
related to the closure of several duplicative office facilities. Excluding the
payment of financial advisor fees of $4.3 million for the acquisition of
Compucare in March 1999, the Company would have reported cash flows provided by
operations of approximately $2.1 million. Net cash used in operating activities
for the three months ended March 31, 1998 related to the net loss for the
period, which was offset by the write-off of in-process research and
development.
13
<PAGE> 14
Net cash used in investing activities was $32.4 million and $10.3 million in
the three months ended March 31, 1999 and 1998, 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 the additional equity investment of $3.0 million in
VantageMed. Investing activities for the three months ended March 31, 1998
related to cash paid for the acquisitions of Cabot Marsh, Velox and entities
associated with InterLink, as well as the purchase of capital equipment and the
capitalization of computer software development costs during 1998.
Net cash provided by financing activities was $672,000 and $4.1 million in
the three months ended March 31, 1999 and 1998, respectively. Financing
activities in the three months ended March 31, 1999 related to the repayment of
the outstanding balances under the line of credit assumed as part of the
Compucare acquisition, offset by the proceeds from the exercise of common stock
options. Cash provided by financing activities in the three months ended March
31, 1998 related to the repayment of notes payable, which was offset by the
issuance of common stock and the proceeds from the exercise of common stock
options.
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. In connection with this agreement, the Company purchased
certain accounts receivable from Chama, Inc. ("Chama"), a customer of Arcadian,
for the purpose of increasing cash flow while the CBO was implemented. As of
March 31, 1999, approximately $1.0 million of these receivables remained
outstanding. The remaining balances are included in notes and other receivables
on the consolidated balance sheet. On October 7, 1998, Chama filed for
reorganization under Chapter 11. Prior to the filing, the Company had perfected
a security interest in the receivables purchased from Chama and, pursuant to a
court order, the receivables owned by the Company are being segregated as they
are collected.
The Company believes that its current cash and investments will be sufficient
to fund operations at least through December 31, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
The Company's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio and Subordinated Convertable
Debentures. The Company invests in high-quality issuers and includes money
market funds, corporate debt securities and securities issued by the United
States Government. It is the Company's intent to ensure the safety and
preservation of its invested principal funds by limiting default risk, market
risk and reinvestment risk. The Company continually reviews both its investment
policy and its investments to ensure this objective is being met.
FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
History of Operating Losses; Uncertain Profitability
We incurred net losses of $37.0 million and $18.5 million for the years ended
December 31, 1997 and 1998, respectively, and a net loss of $26.1 million for
the fiscal quarter ended March 31, 1999. As of March 31, 1999, our accumulated
deficit was $217.9 million. These results include write-offs for acquired
in-process research and development in the years ended December 31, 1997 and
1998 of $21.9 million and $14.5 million, respectively. In connection with our
acquisitions, we have and will incur significant non-recurring charges and will
be required to amortize significant expenses related to goodwill and other
intangible assets in future periods. It is uncertain whether we will be able to
achieve or sustain revenue growth or profitability on a quarterly or annual
basis.
14
<PAGE> 15
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied significantly in the past.
Our quarterly revenues and operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
- - integration of acquired businesses with our business;
- - variability in demand for our products and services;
- - the introduction of product enhancements and new products by us and our
competitors;
- - the timing and significance of announcements concerning our present or
prospective strategic alliances;
- - the termination of, or a reduction in, the products and services we
offer,
- - the loss of customers due to consolidation in the health care industry;
- - delays in product delivery requested by our customers;
- - the length of the sales cycle for our products or the timing of our
sales;
- - the amount of new potential contracts at the beginning of any particular
quarter;
- - budgeting cycles of our customers and changes in our customer's budgets;
- - our investment in marketing, sales, research and development, and
administrative personnel necessary to support our anticipated
operations;
- - costs incurred in connection with our marketing and sale promotional
activities;
- - software defects and other quality factors in our products; and
- - general economic conditions and resulting effects on the health care
industry.
We cannot accurately forecast the timing of our customer purchases due
to the complex procurement decision process associated with most health care
providers and payors. As a result, we typically experience sales cycles that
extend over several quarters. In addition, certain products we acquired as a
result of our acquisition of Integrated Medical Networks in September 1998 and
The Compucare Company in March 1999 have higher average selling prices and
longer sales cycles than many of our other products. This may increase the
volatility of our quarterly operating results. Moreover, our operating expense
levels, which will increase with the addition of acquired businesses, are
relatively fixed. Accordingly, if future revenues are below our expectations, we
would experience a disproportionate adverse affect on our net income and
financial results. Further, it is likely that, in some future quarter, our
revenues or operating results may fall below the expectations of
15
<PAGE> 16
securities analysts and investors. In such an event, the trading price of our
Common Stock would likely be materially and adversely affected.
Integration Of Acquired Companies Into The Company
Realizing benefits from acquisitions depends in significant part upon
several factors and is accompanied by a number of risks, including:
- - successful integration of the operations, products and personnel of the
acquired company;
- - possible costs, delays or other problems we may incur to successfully
complete such integration;
- - the potential interruption or disruption of our ongoing business and the
distraction of management from other matters; and
- - significant operational and administrative expense relating to such
integration.
Any difficulties encountered in the integration process could have a
material adverse effect on our business, operating results and financial
condition. Even if we are able to successfully integrate these businesses with
our business, the acquired operations may not achieve sales, productivity and
profitability commensurate with our historical or projected operating results.
Failure to achieve such projected results would have a material adverse effect
on our financial performance, and in turn, on the market value of the our Common
Stock. There can be no assurance that we will realize any of the anticipated
benefits of our acquisitions or that such acquisitions will enhance our business
or financial performance.
Dependence On Acquisition Strategy
We intend to continue to expand in part through acquisitions of
products, technologies and businesses. Our ability to expand successfully
through acquisition depends on many factors, including:
- - the successful identification and acquisition of products, technologies
or businesses;
- - management's ability to effectively negotiate and consummate
acquisitions and integrate and operate the new products, technologies or
businesses;
- - significant competition for acquisition opportunities in our industry,
which may intensify due to increasing consolidation in the health care
industry, thereby increasing the costs of capitalizing on acquisition
opportunities;
- - competition for acquisition opportunities with other companies that have
significantly greater financial and management resources than us;
RISKS ASSOCIATED WITH ACQUISITIONS; NEED TO MANAGE CHANGING OPERATIONS
Acquisitions involve a number of special risks including:
- - 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; and
16
<PAGE> 17
- - the assumption of unknown liabilities and potential disputes with the
sellers of one or more acquired entities; and
- - exposure to the risks of entering markets in which we have no direct
prior experience or to risks associated with the market acceptance of
acquired products and technologies.
Management evaluated and purchased a new management and accounting
system and will implement the system in 1999. Information systems expansion or
replacement can be a complex, costly and time-consuming process, and there can
be no assurance that our system transition and further implementation can be
accomplished without disruption of our business. Any business disruption or
other system transition difficulties could have a material adverse effect on
our business, financial condition and results of operations.
We may not be successful in addressing these risks and our failure to do
so could have a material adverse effect on our business, results of operations
and financial condition.
Additionally, customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on its sales and marketing
initiatives and on our reputation. With the addition of the acquired businesses,
our anticipated future operations may place a strain on our management systems
and resources. We expect that we will be required to continue to improve our
financial and management controls, reporting systems and procedures, and will
need to expand, train and manage our workforce. There can be no assurance that
we will be able to effectively manage these tasks, and the failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
Moreover, future acquisitions by us 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. Our inability to successfully deal with these factors could have a
material adverse effect on our business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
We are substantially dependent upon the continued service of our
executive officers, product managers and other key sales, marketing and
development personnel. If we fail to retain the services of any of our executive
officers or fail to hire, retain and motivate other key employees, our business
will be adversely affected. Furthermore, additions of new, and departures of
existing, personnel could have a disruptive effect on our business and
operations.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS; UNCERTAINTY IN THE
HEALTHCARE INDUSTRY
A substantial portion of our 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 our products and services, which could adversely affect
our business. In addition, the decision to purchase our products often involves
the approval of several members of management of a hospital or health care
provider. Consequently, it is difficult for us to predict the timing or outcome
of the buying decisions of our 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. We believe that the
commercial value and appeal of our 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 our 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 our
business, financial condition and operating results. 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 of our clients in ways that cannot be
predicted. Health care organizations may react to these proposals by curtailing
or deferring investments, including those for our 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 our products by hospital associations or other customers. Any of these
occurrences could have a material adverse effect on our business. 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
our products. If we fail
17
<PAGE> 18
to maintain adequate price levels, our business, financial condition and results
of operations would be adversely affected. Other market-driven reforms could
also have adverse effects on our business, financial condition and results of
operations.
HIGHLY COMPETITIVE MARKET
Competition in the market for our 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 our business, financial condition and results of operations. We
compete with other providers of health care information software and services,
as well as health care consulting firms. Some principal competitors include,
among others:
- - CIS Technologies, Inc., a division of National Data Corporation, Inc.,
and Sophisticated Software, Inc. in the market for our EDI products;
- - MedE AMERICA in the market for our claims processing service;
- - Healthcare Cost Consultants, Inc., a division of CIS Technologies, Inc.,
and Trego Systems, Inc. in the market for our contract management
products;
- - McKesson HBOC, Inc., Optika Imaging Systems, Inc. and LanVision Systems,
Inc. in the market for our electronic document management products;
- - 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 our decision
support products;
- - McKesson HBOC, Inc., Shared Medical Systems, Inc., MediTech Corporation
and Eclipses Corporation in the market for our enterprise products;
- - HMS and ARTRAC, a division of Medaphis in the market for our business
office outsourcing services;
- - a subsidiary of Minnesota Mining and Manufacturing, in the market for
our medical records products; and
- - Transcend Services, Inc. and SMART Corporation in the market for our
health information management services.
In addition, current and prospective customers evaluate our 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 us, may enter our markets. In addition, many of
our competitors and potential competitors have significantly greater financial,
technical, product development, marketing and other resources and market
recognition than us. Many of our competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, our 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 and may devote
greater resources to the development, promotion and sale of their products than
us. There can be no assurance that we will be able to compete successfully
against current and future competitors or that such competitive pressures will
not materially adversely affect our business, financial condition and operating
results.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 of
the Securities Act and through the exercise of registration rights could lower
the market price of our Common Stock. As of April 30, 1999, approximately
1,650,000 shares are available for sale in the public market subject to
compliance with Rule 144. Certain of our existing stockholders holding an
aggregate of 994,991 shares of Common Stock as of April 30, 1999 have rights
under certain circumstances to require us to register their shares for future
sale, excluding shares issued in the acquisitions of Compucare, discussed below.
In March 1999, we closed the acquisition of Compucare. In connection
with the acquisition of Compucare, we issued an aggregate of 2,957,000 shares
of Common Stock, all of which have registration rights. In September 1998, we
closed the acquisition of IMN . In connection with the acquisition of IMN, we
issued an aggregate of 1,550,000 shares of Common Stock and agreed to file a
registration statement under the Securities Act prior to January 1, 1999 to
register all such shares. In June 1998, we closed the acquisition of Pyramid. In
connection with the acquisition of Pyramid, we issued an aggregate of 2,784,508
shares of Common Stock and warrants to purchase 62,710 shares of Common Stock.
All of the shares of Common Stock issued in connection with the acquisitions
of IMN and Pyramid have been registered under the Securities Act and are freely
tradeable.
18
<PAGE> 19
Sales of a substantial number of the aforementioned shares in the public
markets or the prospect of such sales could adversely affect or cause
substantial fluctuations in the market price of the Common Stock and impair our
ability to raise additional capital through the sale of our securities.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
Our performance depends in large part upon our ability to provide the
increasing functionality required by our customers through the timely
development and successful introduction of new products and enhancements to our
existing suite of products. We have historically devoted significant resources
to product enhancements and research and development and believe that
significant continuing development efforts will be required to sustain our
operations and integrate the products and technologies of acquired businesses
with our products. There can be no assurance that we 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 us 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
We rely on a combination of trade secrets, copyright and trademark laws,
nondisclosure and other contractual provisions to protect our proprietary
rights. We have not filed any patent applications covering our technology. There
can be no assurance that measures taken by us to protect our intellectual
property will be adequate or that our competitors will not independently develop
products and services that are substantially equivalent or superior to the
products and services we offer.
There is substantial litigation regarding intellectual property rights
in the software industry. We expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products overlaps. We believe
that our products do not infringe upon the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us in the future. The Company may incur substantial
litigation expenses in defending any such claim regardless of the merit of the
claim. In the event of an unfavorable ruling on any such claim, we cannot
guarantee that a license or similar agreement will be available to us on
reasonable terms, if at all. Infringement may result in significant monetary
liabilities which would have a material adverse effect on our business,
financial condition and results of operations. We cannot guarantee that we will
be successful in the defense of these or similar claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as our products frequently contain errors or failures,
especially when initially introduced or when new versions are released. Although
we conduct extensive testing on our products, software errors have been
discovered in certain enhancements and products after their introduction. We
cannot guarantee that despite such testing by us, and by our current and
potential customers, products under development, enhancements or shipped
products will be free of errors or performance failures, resulting in, among
other things;
- - loss of revenues and customers;
- - delay in market acceptance;
- - diversion of resources;
- - damage to our reputation; or
- - increased service and warranty costs.
The occurrence of any of these consequences could have a material
adverse effect upon our business, financial condition and results of operations.
19
<PAGE> 20
YEAR 2000
As is true for most companies, the Year 2000 computer issue creates a
risk for us. If systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on our operations. We
face risks in four areas: systems used by us to run our business, systems used
by our suppliers, potential warranty or other claims from our customers, and the
potential reduction in spending by other companies on our products and solutions
as a result of significant information systems spending on Year 2000
remediation.
We have conducted a thorough inventory and evaluation of our systems,
equipment and facilities. We have a number of projects underway to replace or
upgrade systems, equipment and facilities that we know to be Year 2000
non-compliant. We have not identified alternative remediation plans if upgrade
or replacement is not feasible. We will consider the need for such remediation
plans as we continue to assess the year 2000 risk. For the Year 2000
non-compliance issues identified to date, the cost of upgrade or remediation is
not expected to be material to our operating results. If implementation of
replacement systems is delayed, or if significant new non-compliance issues are
identified, our results of operations or financial condition could be materially
adversely affected.
We are also in the process of contacting our critical suppliers to
determine that such suppliers' operations and the products and services they
provide are Year 2000 compliant. To date, we are unaware of any current
suppliers that are not Year 2000 ready. In the event that our suppliers are not
Year 2000 compliant, we will seek alternative sources of supplies. However, such
failures remain a possibility and could have an adverse impact on our results of
operations or financial condition.
We believe our current products are Year 2000 compliant. However, since
all customer situations cannot be anticipated, particularly those involving
third party products, we may see an increase in warranty and other claims as a
result of the Year 2000 transition. In addition, litigation regarding Year 2000
compliance issues is expected to escalate. For these reasons, the impact of
customer claims could have a material adverse impact on our results of
operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their information systems' spending to fund
such upgrades and modifications and divert spending away from our products and
solutions. Such changes in our customers' spending patterns could have a
material adverse impact on our sales, operating results or financial condition.
RISK OF INTERRUPTION OF DATA PROCESSING
We currently process substantially all our customer data at our
facilities in Richmond, California and Neptune, New Jersey. Although we back up
our data nightly and have safeguards for emergencies such as power interruption
or breakdown in temperature controls, we have no mirror processing site to which
processing could be transferred in the case of a catastrophic event at either of
these facilities. In the event that a major catastrophic event occurs at either
the Richmond or the Neptune facility, possibly leading to an interruption of
data processing, our business, financial condition and results of operations
could be adversely affected.
20
<PAGE> 21
RISKS RELATED TO OUTSOURCING BUSINESS
We provide compliance, consulting and business office outsourcing and
cash flow management services, including the billing and collection of
receivables. We acquired the infrastructure for our outsourcing business through
an acquisition. In addition, we often use our software products to provide
outsourcing services. As a result, we have not been required to make significant
capital expenditures in order to service existing outsourcing contracts.
However, if we experience a period of substantial expansion in our outsourcing
business, we may be required to make substantial investments in capital assets
and personnel. We cannot guarantee that we will be able to assess accurately the
investment required and negotiate and perform in a profitable manner any of the
outsourcing contracts we may be awarded. Our failure to either estimate
accurately the resources and related expenses required for a project, or to
complete our contractual obligations in a manner consistent with the project
plan upon which a contract was based, could have a material adverse effect on
our business, financial condition and results of operations. In addition, our
failure to meet a client's expectations in the performance of our services could
damage our reputation and adversely affect our ability to attract new business.
Finally, we could incur substantial costs and expend significant resources
correcting errors in our 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 our products
make them clinical decision tools subject to FDA regulation. Compliance with
these regulations could be burdensome, time consuming and expensive. We could
also 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 us in other respects not presently foreseeable. We cannot predict the
effect of possible future legislation and regulation.
State governments substantially regulate the confidentiality of patient
records and the circumstances under which such records may be released for
inclusion in our databases. 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 us to incur substantial expenditures. We are not sure that changes to
state or federal laws will not materially restrict the ability of health care
providers to submit information from patient records using our products.
RISK OF PRODUCT-RELATED CLAIMS
Some of our products and services are used in the payment, collection,
coding and billing of health care claims and the administration of managed care
contracts. If our employees or our products fail to accurately assess, process
or collect these claims, our customers may file claims against us. We have been
and currently are involved in claims for money damages related to services
provided by our accounts receivable management business. We maintain insurance
to protect against certain claims associated with the use of our products, but
there can be no assurance that our insurance coverage would adequately cover any
claim brought against us. A successful claim brought against us that is in
excess of, or is not covered by, our insurance coverage could adversely affect
our business, financial condition and results of operations. Even a claim
without merit could result in significant legal defense costs and would consume
management time and resources. We do not know whether we will be subject to
material claims in the future which may result in liability in excess of our
insurance coverage, or which our insurance may not cover. We may not be able to
obtain appropriate insurance in the future at commercially reasonable rates. In
addition, if we are found liable, we would have to significantly alter our
products resulting in additional unanticipated research and development
expenses.
21
<PAGE> 22
RISKS ASSOCIATED WITH CERTAIN INVESTMENTS
We have made equity investments to acquire minority interests in certain
early stage companies. We do not have the ability to control the operations of
any of these companies. Investing in such early stage companies is subject to
certain significant risks. There can be no assurance that any of these companies
will be successful or achieve profitability or that we will ever realize a
return on our investments. In addition, to the extent any of such companies fail
or become bankrupt or insolvent, we may lose some or all of our investment. We
intend to continue to make additional investments in such companies in the
future. Losses resulting from such investment could have a material adverse
effect on our operating results.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISION
Our Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
may be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
We have no present plans to issue shares of Preferred Stock.
Further, certain provisions of our Certificate of Incorporation and
Bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. For example, our Board of
Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by our stockholders to
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. In addition, our
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, our
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 our Common Stock.
Finally, certain provisions of Delaware law 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.
VOLATILITY OF STOCK PRICE
The stock market in general, and the Nasdaq National Market, has
historically experienced extreme price and volume fluctuations that have often
been unrelated to the operating performance of companies and which has affected
the market price of securities of many companies. The trading price of our
Common Stock is likely to be highly volatile and could also be subject to
significant fluctuations in price in response to such factors as:
- - variations in quarterly results of operations;
- - announcements of new products or acquisitions by us or our competitors;
- - governmental regulatory action;
- - developments or disputes with respect to proprietary rights;
- - general trends in our industry and overall market conditions; and
- - other event or factors, many of which are beyond our control.
22
<PAGE> 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds.
Between December 31, 1998 and March 31, 1999, the Registrant issued the
following securities which were not registered under the Securities Act of 1933
(the "Securities Act"):
(a) the Registrant issued an aggregate of 2,957,000 shares of Common Stock in
connection with the acquisition of The Compucare Company.
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. None
Item 5. Other Information. None
Item 6. Exhibits and Reports On Form 8-K.
a. Exhibits
<TABLE>
<S> <C>
2.1 Form of Agreement and Plan of Merger by and between QuadraMed
Corporation, a Delaware corporation and QuadraMed Corporation, a
California corporation.(1)
2.2 Assets Purchase Agreement dated December 31, 1995, by and among
QuadraMed Acquisition Corporation, Kaden Arnone, Inc. and its
stockholders.(1)
2.3 Exchange Agreement dated June 25, 1996, by and among QuadraMed
Holdings, Inc., QuadraMed Corporation, and certain stockholders
listed on Schedule A thereto.(1)
2.4 Acquisition Agreement and Plan of Merger dated December 2, 1996,
between the Company and InterMed Acquisition Corporation, a wholly
owned subsidiary of the Company and InterMed Healthcare Systems
Inc. and its Stockholders.(2)
2.5 Acquisition Agreement and Plan of Merger, dated as of March 1,
1997, by and among QuadraMed Corporation, Healthcare Recovery
Acquisition Corporation, Healthcare Recovery Incorporated and its
Shareholders (the "HRI Acquisition Agreement and Plan of
Merger").(3)
2.6 First Amendment to HRI Acquisition Agreement and Plan of Merger,
dated as of April 22, 1997.(3)
2.7 Second Amendment to HRI Acquisition Agreement and Plan of Merger,
dated as of April 24, 1997.(3)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
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)
2.16 Acquisition Agreement and Plan of Merger by and among QuadraMed
Corporation and IMN Acquisition Corp. , and IMN Corp. dated
September 30, 1998.(14)
2.17 Acquisition Agreement and Plan of Merger by and among QuadraMed
Corporation and Compucare Acquisition Corporation, and The
Compucare Company and certain of its stockholders dated February
3, 1999.(15)
2.18 First Amendment to Acquisition Agreement and Plan of Merger by and
among QuadraMed Corporation and Compucare Acquisition Corporation
and The Compucare Company and certain of its stockholders, dated
March 3, 1999.(18)
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 of the
Company.(16)
4.1 Reference is made to Exhibits 3.2 and 3.5.(1)(16)
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
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
named therein.(13)
4.18 Form of Global Debenture.(13)
4.19 Form of Certificated Debenture.(13)
4.20 Registration Rights Agreement, dated as of September 30, 1998, by
and among QuadraMed Corporation, IMN Corp. and the shareholders of
IMN named therein (14)
4.21 Registration Rights Agreement, dated as of March 3, 1999, by and
among QuadraMed Corporation and the stockholders of The Compucare
Company named therein.(18)
10.1 1996 Stock Incentive Plan of the Company.(1)
10.2 1996 Employee Stock Purchase Plan of the Company.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.(1)
10.5 Reserved.
10.6 Lease dated February 26, 1996 for facilities located at 1345
Campus Parkway, Building M, Block #930, Lot #51.02, Neptune, New
Jersey.(1)
10.7 Lease dated May 23, 1994 for facilities located at 80 East Sir
Francis Drake Boulevard, Suite 2A, Larkspur, California.(1)
10.8 Reserved.
10.9 Reserved.
10.10 Stock Purchase Agreement dated March 3, 1994, by and between the
Company and James D. Durham.(1)
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Reserved.
10.15 Credit Terms and Conditions dated July 2, 1997, by and between
Imperial Bank and the Company, with addendum thereto.(8)
10.16 Reserved.
10.16.1 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22 Reserved.
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.
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
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 Reserved.
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.(5)
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)
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.(16)
10.50 Mergers and Acquisitions Advisory Fee Agreement dated June 5, 1998
between the Company and Mehta & Company, Inc.(12)
10.51 Employment Agreement dated January 1, 1999 between James D.
Durham and the Company.
21 List of subsidiaries of the Company.(17)
27.1 Financial Data Schedule
</TABLE>
(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.
26
<PAGE> 27
(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 from the Company's Current Report on Form 8-K,
as filed with the Commission on June 11, 1998.
(12) Incorporated by reference from the Company's Current Report on Form 8-K/A
filed with the Commission on June 17, 1998
(13) Incorporated by reference from 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.
(14) Incorporated by reference from the Company's Current Report on Form 8-K,
as filed with the Commission on October 15, 1998.
(15) Incorporated by reference from Exhibit 2.1 to the Company's Current Report
on Form 8-K, as filed with the Commission on February 18, 1999.
(16) Incorporated 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,
1998, as filed with the Commission on August 14, 1998, as amended
August 24, 1988.
(17) Incorporated herein by reference from the Company's Annual Report on Form
10-K, as filed with the Commission on March 31, 1998, as amended April
20, 1998.
(18) Incorporated herein by reference from the Company's Current Report on
Form 8-K/A filed with the Commission on March 22, 1999.
b. Reports on Form 8-K.
The Company filed a report on Form 8-K on February 18, 1999 in which it
reported the acquisition of The Compucare Company.
The Company filed a report on Form 8-K on March 15, 1999 in which it amended
and restated certain financial statements to reflect the pooling of interests
for accounting purposes for the Company's acquisitions of Pyramid and IMN.
The Company filed a report on Form 8-K/A on March 22, 1999 in which it
amended its previously filed report on Form 8-K relating to the acquisition of
The Compucare Company.
27
<PAGE> 28
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: May 17, 1999 By: /s/ KEITH M. ROBERTS
-------------------------------------
Keith M. Roberts
Executive Vice President, General
Counsel and Assistant Secretary
By: /s/ BERNIE J. MURPHY
-------------------------------------
Bernie J. Murphy
Vice President, Finance and Chief
Accounting Officer (Principal
Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.51 Employment Agreement dated January 1, 1999
27.1 Financial Data Schedule
</TABLE>
29
<PAGE> 1
EXHIBIT 10.51
[QUADRAMED LOGO]
January 1, 1999
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
31 West Short Road
Belvedere, California 94920
Dear Mr. Durham:
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, 14 and 15 of Part Two hereof, the
Company agrees to pay the severance payments and benefits set forth in this
Agreement, under the circumstances described herein.
This Agreement supersedes any written or oral employment agreement between
you and the Company prior to the date hereof, including the prior letter
agreement dated November 1, 1997.
Part One of this Agreement sets forth certain definitional provisions to
be in effect for purposes of determining your benefit entitlements. Part Two
specifies the terms and conditions which will apply to your continued
employment with the Company, including the severance payments and benefits to
which you will become entitled in the event your employment should be
terminated. Part Three concludes this Agreement with a series of general terms
and conditions applicable to your employment benefits.
<PAGE> 2
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 2
PART ONE -- DEFINITIONS
DEFINITIONS. For purposes of this Agreement, including in particular the
severance payments and benefits to which Employee 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) a stockholder approved sale, transfer or other disposition of all or
substantially all of the assets 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; or
(vi) a majority of the members of the Board are replaced during any
twelve-month period by directors whose appointment or election is not endorsed
by a majority of the members of the Board prior to the date of such appointment
of election.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"EMPLOYEE" means James D. Durham.
"EMPLOYEE BENEFIT PLAN" shall have the meaning given the term under
Section 3 of ERISA.
"EMPLOYMENT PERIOD" means the period of Employee's employment with the
Company governed by the terms and provisions of this Agreement.
<PAGE> 3
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 3
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
in effect from time to time.
"INVOLUNTARY TERMINATION" means the termination of Employee's employment
with the Company:
(i) involuntarily upon Employee's 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 Employee's position with the Company or any
successor which materially reduces Employee's level of responsibility or
changes Employee's title from Chairman and Chief Executive Officer, as such
responsibility and title apply to the ultimate parent entity or similar entity
in control of the Company (both before and after any Change in Control), (b) a
reduction in Employee's 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 Employee's
principal place of employment by more than forty-five (45) miles and such
change, reduction or relocation is effected without Employee's written
concurrence.
"OPTION" means any option or share purchase right granted to Employee
under the Stock Option Plan which is outstanding at the time of a Change in
Control or Employee's 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 Employee's
employment for (i) one or more alleged acts of fraud, embezzlement,
misappropriation of proprietary information, misappropriation of the Company's
trade secrets or other confidential information, a verifiable breach of
Employee's fiduciary duties to the Company or any other verifiable misconduct
adversely affecting the business reputation of the Company in a material manner
or (ii) Employee's failure to devote his full working time and effort to the
performance of his duties hereunder; provided, however, Employee will have the
right to perform incidental services as are necessary in connection with (a) his
private passive investments, (b) his charitable or community activities and (c)
his participation in trade or professional organizations, but only to the extent
such incidental services do not materially interfere with the performance of
Employee's services hereunder.
<PAGE> 4
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 4
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
The following terms and conditions will govern Employee's employment with
the Company throughout the Employment Period and will also, to the extent
indicated below, remain in effect following Employee's termination date.
1. EMPLOYMENT AND DUTIES. The Company will continue to employ Employee as
an executive officer in the position of Chairman and Chief Executive Officer.
Employee agrees to continue in such employment for the duration of the
Employment Period and to perform in good faith and to the best of Employee's
ability all services which may be required of Employee in his 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 Employee's Employment Period, Employee will devote his full
time and effort to the business and affairs of the Company within the scope of
his executive office. Employee's principal place of operations will be at the
Company's corporate offices in Richmond, California.
2. TERM OF AGREEMENT. This Agreement shall be effective as of the date
hereof. The term of this Agreement shall continue in effect for a period of two
(2) years from the effective date hereof, subject to the provisions of this Part
Two, unless sooner terminated by the parties in accordance with the provisions
hereof. No termination or expiration of this Agreement shall affect any rights,
obligations or liabilities of Employee or the Company that shall have accrued on
or prior to the date of termination or expiration.
3. AUTOMATIC EXTENSION. Commencing on the second anniversary of the
effective date hereof, and on each succeeding anniversary of such date, the
term of this Agreement shall be automatically be extended for one (1) additional
year unless, not later than three (3) months preceding such anniversary date,
either party to this Agreement shall have given written notice to the other
party pursuant to Section 6 of Part Three that such party will not extend the
term of this Agreement.
4. COMPENSATION.
A. For service in the 1999 calendar year, Employee's base salary will
be paid at the annual rate of Three Hundred Sixty Thousand Dollars ($360,000).
Employee's annual rate of base salary may be subject to adjustment each
calendar year by the Board.
B. Employee's base salary will be paid at periodic intervals in
accordance with the Company's payroll practices for salaried employees.
C. Employee 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
<PAGE> 5
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 5
the recommendation of the Company's Compensation Committee and such additional
factors as the Board deems appropriate, including Employee's individual
performance and the Company's financial results. Employee will be eligible to
participate in all bonus plans applicable to the Company's executives.
D. The Company will deduct and withhold, from the compensation
payable to Employee hereunder, any and all applicable federal, state and local
income and employment withholding taxes and any other amounts required to be
deducted or withheld by the Company under applicable statute or regulation.
5. EXPENSE REIMBURSEMENT. Employee will be entitled to reimbursement
from the Company for all customary, ordinary and necessary business expenses
incurred by Employee in the performance of his duties hereunder, provided
Employee furnishes the Company with vouchers, receipts and other substantiation
of such expenses in accordance with Company policies. Employee will also be
entitled to continued reimbursement of $750 per month with respect to the
automobile currently leased or owned by him or as otherwise approved by the
Board and with respect to mileage driven in accordance with the Company's then
existing policies. The Company will also pay or reimburse Employee for the
costs of the preparation of his federal, state and local income tax returns by
the Company's independent certified public accounting firm.
6. FRINGE BENEFITS. During the Employment Period, Employee 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 Employee qualifies.
7. VACATION. Employee will accrue four (4) weeks of paid vacation
benefits during each calendar year of the Employment Period in accordance with
the Company policy in effect for executive officers.
8. DEATH OR DISABILITY.
A. Upon Employee's 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
Employee pursuant to Part Two, Section 4. In connection with such termination
by reason of death, the Company will only be required to pay Employee (or his
estate) any unpaid compensation earned under Part Two, Section 4 for services
rendered through the date of Employee's death, together with a special
termination payment equal to the additional amount of base salary Employee
would have earned hereunder had his employment continued for an additional
thirty (30) days. In connection with such termination by
<PAGE> 6
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 6
reason of disability, the Company will be required to pay to employee any
unpaid compensation earned under Part Two, Section 4 for services rendered
through the date of his disability, together with the severance benefits set
forth in Section 9 below. However, the Company's obligation to provide such
severance benefits shall be reduced and offset, dollar-for-dollar, by any
income continuation payments provided Employee under any disability
income/insurance programs funded by the Company on Employee's behalf.
B. Employee will be deemed disabled if he is so characterized
pursuant to the terms of the Company's disability insurance policies applicable
to Employee from time to time or, if no such policy is applicable, if Employee
is unable to perform the essential functions of his duties for physical or
mental reasons for one hundred twenty (120) consecutive days, or one hundred
eighty (180) days during any twelve (12) month period.
C. Upon death or disability the terms of the Stock Option Plan will
apply.
9. SEVERANCE BENEFITS. Employee will be entitled to receive only the
severance benefits specified below in the event there should occur a
termination of Employee's employment by reason of disability or an Involuntary
Termination of Employee's employment (Other than a Termination for Cause):
A. SEVERANCE BENEFIT. The Company will make a severance payment to
Employee, in one lump sum within thirty (30) days of the date of his
Involuntary Termination, in an aggregate amount equal to the sum of (i) three
(3) times Employee's then-current rate of base salary plus (ii) three (3) times
Employee's then-current maximum bonus. Employee may elect, in his sole
discretion, to have the severance benefit payable pursuant to this Section 9.A.
in monthly installments over a one year period following the date of his
Involuntary Termination.
B. WELFARE BENEFITS. For a period of twenty-four (24) months,
Employee (and his dependents, as applicable) shall be provided by the Company
with the same life, health and disability plan participation, benefits and other
coverages to which he was entitled as an employee immediately before the
disability or the Involuntary Termination. In the event that under applicable
law or the terms of the relevant Employee Benefit Plans such participation,
benefits and/or coverage cannot be provided to Employee following his
Involuntary Termination, such coverage and/or benefits shall be provided
directly by the Company pursuant to this Agreement on a comparable basis. In its
sole discretion, the Company may obtain such coverage and benefits for Employee
through private insurance acquired at the Company's expense. Amounts paid or
payable to or on behalf of Employee pursuant to any "employee welfare benefit
plan," as defined in ERISA, providing health and/or disability benefits, that is
sponsored by the Company or an affiliate of the Company, shall be credited
against amounts due under this Section 9-B. To the maximum extent permitted by
applicable law, the benefits provided under this Section 9.B shall be in
discharge of any obligations of the Company or any rights of
<PAGE> 7
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 7
Employee under the benefit continuation provisions under Section 4980A of the
Code and Part VI of Title I of ERISA ("COBRA") or any other legislation of
similar import.
C. OPTION ACCELERATION. Solely in connection with the Involuntary
Termination of Employee's employment (other than Termination for Cause), whether
before or after a Change in Control transaction, each of Employee's Options
under the Stock Option Plan and all restricted or unvested stock granted by the
Company will (to the extent not then otherwise exercisable or vested)
automatically accelerate and vest and any repurchase rights with respect thereto
will terminate so that each such Option or share of restricted or unvested
Common Stock will become immediately exercisable and fully exercisable or vested
as of the date of termination. Each such accelerated Option, together with all
of Employee's other vested Options, will remain exercisable following Employee's
Involuntary Termination and may be exercised for any or all of the option
shares, including the accelerated shares, in accordance with the exercise
provisions of the Option agreement evidencing the grant during the full term of
such Option agreement.
D. RELEASE OF COMPANY. Receipt of severance benefits pursuant to
this Section 9 shall be in lieu of all other amounts payable by the Company to
Employee and in settlement and complete release of all claims Employee may have
against the Company other than those arising out of the severance benefits due
and payable under Sections 9 and 17 of Part Two of this Agreement and Employee's
rights under Part Three of this Agreement. Employee acknowledges and agrees that
execution of a mutual general release of claims setting forth the terms of this
Section 9.D. and otherwise reasonably acceptable to the Company and Employee
shall be a condition precedent to the Company's obligation to pay severance
benefits hereunder.
10. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT. The Company and Employee
acknowledge and agree that the termination of this Agreement in any fashion
shall have no effect on the rights of the Company, Employee and any other
parties pursuant to that certain Split-Dollar Insurance Agreement dated
November 5, 1998 by and between the Company, Employee and a trust for the
benefit of Employee's family including, without limitation, the Company's
obligation to pay life insurance premiums thereunder.
11. OPTION/VESTING ACCELERATION UPON CHANGE IN CONTROL.
A. To the extent the acquiring company in any Change in Control
transaction does not assume or otherwise continue in full force and effect the
Employee's outstanding Options under the Stock Option Plan, those Options shall
automatically accelerate and vest so that each such Option will, immediately
prior to the Change of Control, become fully exercisable for all the option
shares and shall terminate immediately after the Change in Control transaction.
<PAGE> 8
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 8
B. The following provisions shall govern any Options which are to be
assumed or otherwise continued in effect in the Change in Control and any
restricted or unvested shares of Common Stock held by the Employee at the time
of the Change in Control.
The Options shall accelerate and vest at the time of the Change in Control
so that each Option will become exercisable for all of the Option shares
immediately prior to the Change in Control transaction, except to the extent
the Option parachute payment attributable to such accelerated vesting would
otherwise result in an excess parachute payment under Code Section 280G. Any
Option which does not accelerate and vest at the time of the Change in Control
by reason of the foregoing limitation shall continue to become exercisable and
vest in accordance with the vesting schedule applicable to that Option
immediately prior to the Change in Control.
Any restricted or unvested shares of Common Stock held by the Employee at
the time of the Change in Control shall immediately vest at that time and the
Company's repurchase rights with respect to those shares shall terminate, except
to the extent the parachute payment attributable to such accelerated vesting,
when added to the parachute payment attributable to the acceleration of the
Employee's outstanding Options, would result in an excess parachute payment
under Code Section 280G. The Company's repurchase rights with respect to any
restricted or unvested shares which do not vest at the time of the Change in
Control by reason of the foregoing limitation shall continue in effect and shall
be assigned to any successor entity in the Change in Control transaction, and
Employee shall continue to vest in those shares in accordance with the vesting
schedule in effect for the shares immediately prior to the Change in Control.
Any Option which does not accelerate, and any restricted or unvested
shares of Common Stock which do not vest at the time of the Change in Control by
reason of the foregoing limitations shall immediately vest in full pursuant to
the provisions of Section 9.C upon any Involuntary Termination of Employee's
employment following the Change in Control (other than a Termination for
Cause). Each such accelerated Option, together with each of the Employee's
other vested Options shall remain exercisable and outstanding for the full term
of the Option agreement evidencing such Option and may be exercised for any or
all of the Option shares, including the accelerated shares, in accordance with
the provisions of such Option agreement.
All determinations concerning the application of the parachute payment
provisions of Code Section 280G to the accelerated vesting of Options and
shares pursuant to this Section 11 shall be made in accordance with the
procedures set forth in Section 17.B.
Each Option which is assumed or otherwise continued in effect will be
appropriately adjusted to apply to the number and class of securities which
would have been issued to Employee in the consummation of the Change in Control
transaction had the Option been exercised immediately prior to such
transaction, and appropriate adjustments will be made
<PAGE> 9
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 9
to the Option exercise price payable per share, provided the aggregate exercise
price will remain the same.
12. RESTRICTIVE COVENANT. During the Employment Period, Employee will
not directly or indirectly, whether for Employee's own account or as an
employee, consultant or advisor, provide services to any business enterprise
other than the Company, unless otherwise authorized by the Company in writing.
13. NON-SOLICITATION AND NON-DISPARAGEMENT. During any period for which
Employee is receiving compensation payments pursuant to Part Two, Section 4 and
one (1) year thereafter, Employee will not directly or indirectly (i) solicit
any Company employee, independent contractor or consultant to leave the
Company's employ or otherwise terminate such person's relationship with the
company for any reason or interfere in any other manner with the employment or
other relationships at the time existing between the Company and its current
employees, independent contractors or consultants, (ii) solicit any of the
Company's customers for products or services substantially similar to those
offered by the Company, or (iii) disparage the Company or any of its
stockholders, directors, officers, employees or agents.
14. CONFIDENTIALITY.
A. Employee hereby acknowledges that the Company may, from time to
time during the Employment Period, disclose to Employee 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. Employee
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
section shall be construed to prevent Employee from disclosing the amount of
his salary.
B. All documents and data (whether written, printed or otherwise
reproduced or recorded) containing or relating to any such proprietary
information of the Company which come into Employee's possession during the
Employment Period will be returned by Employee to the Company immediately upon
the termination of the Employment Period or upon any earlier request by the
Company, and Employee will not retain any copies, notes or excerpts thereof.
Notwithstanding the foregoing, Employee shall be entitled to retain his file or
Rolodex containing names, addresses and telephone numbers and personal diaries
and calendars; provided, however, that Employee shall continue to be bound by
the terms of Section 14.A. above to the extent such retained materials
constitute confidential information.
<PAGE> 10
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 10
C. Employee's obligations under this Section 14 will continue in
effect after the termination of his employment with the Company, whatever the
reason or reasons for such termination, and the Company will have the right to
communicate with any of Employee's future or prospective employers concerning
his continuing obligations under this Section 14.
15. OWNERSHIP RIGHTS.
A. All materials, ideas, discoveries and inventions pertaining to
the Company's business or clients, including (without limitation) all patents
and copyrights, patent applications, patent renewals and extensions and the
names, addresses and telephone numbers of customers, will belong solely to the
Company.
B. All materials, ideas, discoveries and inventions which Employee
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 Employee 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 Employee's 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 Employee for the Company. The foregoing
exception corresponds to the assignment of inventions precluded by California
Labor Code Section 2870, attached as Exhibit A.
C. Employee will, at all times whether during or after the
Employment Period, assist the Company, at the Company's sole expense, in
obtaining, maintaining, defending and enforcing all legal rights and remedies
of the Company, including, without limitation, patents, copyrights and other
proprietary rights of the Company. Such assistance will include (without
limitation) the execution of documents and assistance and cooperation in legal
proceedings.
D. Employee will continue to be bound by all the terms and
provisions of Employee's existing Proprietary Information Agreement with the
Company, and nothing in this document will be deemed to modify or affect
Employee's duties and obligations under those other agreements.
16. TERMINATION OF EMPLOYMENT.
A. The Company (or any successor entity resulting from a Change in
Control) may terminate Employee's employment under this Agreement at any time
for any reason, with or without cause, by providing Employee with at least
seven (7) days prior written notice.
<PAGE> 11
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 11
However, such notice requirement will not apply in the event there is a
Termination for Cause under subsection D below.
B. In the event there is a termination of Employee's employment by
reason of disability or an Involuntary Termination of his employment with the
Company (other than Termination for Cause) during the Employment Period,
Employee will become entitled to the benefits specified in Part Two, Section 9
in addition to any unpaid compensation earned by Employee under Part Two,
Section 4 for services rendered prior to such termination. However, in the
event of such disability, the Company's obligation to provide benefits under
Part Two, Section 9 shall be reduced and offset, dollar-for-dollar, by any
income continuation payments provided Employee under any disability
income/insurance program funded by the Company on Employee's behalf.
C. Should Employee's employment with the Company terminate by
reason of his death during the Employment Period, no severance benefits will be
payable to Employee under Part Two, Section 9, and only the limited death
benefits provided under Part Two, Section 8 will be payable.
D. The Company may at any time, upon written notice, terminate
Employee's 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 Employee any unpaid compensation earned by Employee 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 Employee under Part
Two, Section 9.
17. TAX EFFECT OF PAYMENTS.
A. GROSS-UP PAYMENT. In the event that it is determined that any
payment or distribution of any type to or for Employee's benefit made by the
Company, by any of its affiliates, by any person who acquires ownership or
effective control of the Company or ownership of a substantial portion of the
Company's assets (within the meaning of Section 280G of the Code and the
regulations thereunder) or by any affiliate of such person, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (the "Total Payments"), would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest or penalties, are
collectively referred to as the "Excise Tax"), then Employee shall be entitled
to receive an additional payment (a ""Gross-Up Payment") in an amount such that
after payment by Employee of all taxes imposed upon the Gross-Up Payment,
including any Excise
<PAGE> 12
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 12
Tax, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Total Payments.
B. DETERMINATION BY ACCOUNTANT. All mathematical determinations and
all determinations of whether any of the Total Payments are "parachute payments"
(within the meaning of Section 280G of the Code) that are required to be made
under this Section 17, including all determinations of whether a Gross-Up
Payment is required, of the amount of such Gross-Up Payment and of amounts
relevant to the last sentence of this Section 17, shall be made by an
independent accounting firm selected by Employee and reasonably acceptable to
the Company from among the largest five (5) accounting firms in the United
States (the "Accounting Firm"), which shall provide its determination, together
with detailed supporting calculations regarding the amount of any Gross-Up
Payment and any other relevant matters (the "Determination"), both to the
Company and to Employee within five (5) business days of Employee's termination
date, if applicable, or such earlier time as is requested by the Company or by
Employee (if Employee reasonably believes that any of the Total Payments may be
subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax
is payable by Employee, it shall furnish Employee with a written statement that
such Accounting Firm has concluded that no Excise Tax is payable (including the
reasons therefor) and that Employee has substantial authority not to report any
Excise Tax on Employee's federal income tax return. If a Gross-Up Payment is
determined to be payable, it shall be paid to Employee within five (5) business
days after the Determination is delivered to the Company or to Employee. Any
Determination by the Accounting Firm shall be binding upon the Company and
Employee, absent manifest error. All of the costs and expenses of the Accounting
Firm shall be borne by the Company.
C. UNDERPAYMENTS AND OVERPAYMENTS. As a result of uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made
by the Company should have been made ("Underpayments") or that Gross-Up Payments
will have been made by the Company which should not have been made
("Overpayments"). In either event, the Accounting Firm shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the amount of such Underpayment shall promptly be paid by the
Company to or for Employee's benefit. In the case of an Overpayment, Employee
shall, at the direction and expense of the Company, take such steps as are
reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company
and otherwise reasonably cooperate with the Company to correct such Overpayment;
provided, however, that (i) Employee shall in no event be obligated to return to
the Company an amount greater than the net after-tax portion of the Overpayment
that Employee has retained or has received as a refund from the applicable
taxing authorities and (ii) this provision shall be interpreted in a manner
consistent with the intent of this Section 17, which is to make Employee whole,
on an after-tax basis, for the application of the Excise Tax, it being
<PAGE> 13
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 13
understood that the correction of an Overpayment may result in Employee's
repaying to the Company an amount which is less than the Overpayment.
PART THREE - MISCELLANEOUS PROVISIONS
1. MITIGATION. Employee shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise and no future income earned by Employee from employment
or otherwise shall in any way reduce or offset any payments due to Employee
hereunder. The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish Employee's existing rights which would accrue solely as a result of
the passage of time, under any Company Employee Benefit Plan, "Payroll
practice" (as defined in ERISA), compensation arrangement, incentive plan,
stock option or other stock-related plan.
2. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company, including, without
limitation, any corporation or corporations acquiring directly or indirectly
all or substantially all of the stock, business or assets of the Company
whether by merger, consolidation, division, sale or otherwise (and such
successor shall thereafter be deemed "the Company" for the purposes of this
Agreement). The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement entitling Employee to
the benefits hereunder, as though Employee was subject to Involuntary
Termination. This Agreement shall be binding upon and inure to the benefit of
Employee, his successors, assigns, executors, administrators or beneficiaries.
3. INDEMNIFICATION. The indemnification provisions for officers and
directors under the Company's Bylaws and any applicable indemnification
agreement between Employee and the Company will (to the maximum extent
permitted by law) be extended to Employee, during the period following
Employee's Involuntary Termination, with respect to any and all matters, events
or transactions occurring or effected during Employee's Employment Period.
4. 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 Employee and the Company relating to
the terms of his employment and the subject of severance benefits and
supersedes all prior agreements and understandings with
<PAGE> 14
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 14
respect to such subject matter. This Agreement may only be amended by written
instrument signed by Employee and an authorized officer of the Company.
5. Arbitration. Any controversy which may arise between Employee 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.
6. 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 1003 West
Cutting Boulevard, 2nd Floor, Richmond, California 94804, and to Employee at
his most recent address reflected in the permanent Company records. Copies of
each such notice delivered by either the Company or Employee shall be provided
to each current member of the Board at each such director's current address as
listed in the Company's records.
7. Legal Costs. If any legal action or other proceeding is brought by
Employee for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, Employee shall be entitled to recover reasonable
attorneys fees and other costs incurred in that action or proceeding, in
addition to any other relief to which Employee may be entitled, in the event
and to the extent that Employee prevails in such action or other proceeding.
Notwithstanding anything herein above to the contrary, as between Employee and
the Company, the Company shall bear all legal costs and expenses of defending
the validity of this Agreement against any third party. The Company shall bear
all legal costs and expenses incurred in the event the Company should contest
or dispute the characterization of any amounts paid pursuant to this Agreement
as being nondeductible under Section 280G of the Code or subject to imposition
of an excise tax under Section 4999 of the Code.
[Remainder of Page Intentionally Left Blank]
<PAGE> 15
James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
January 1, 1999
Page 15
Please indicate your acceptance of the foregoing provisions of this
Agreement by signing the enclosed copy of this Agreement and returning it to
the Company.
Very truly yours,
QUADRAMED CORPORATION
By: /s/ JOAN P. NEUSCHELER
-------------------------------------
Title: Chairperson Compensation
Committee of the Board of
Directors
ACCEPTED BY AND AGREED TO:
/s/ JAMES D. DURHAM
- -----------------------------
James D. Durham
Dated: 1/1/99
<PAGE> 16
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 MARCH 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 32,187
<SECURITIES> 42,980
<RECEIVABLES> 45,844
<ALLOWANCES> 6,576
<INVENTORY> 0
<CURRENT-ASSETS> 134,744
<PP&E> 26,901
<DEPRECIATION> 17,215
<TOTAL-ASSETS> 249,901
<CURRENT-LIABILITIES> 60,037
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 46,227
<TOTAL-LIABILITY-AND-EQUITY> 249,201
<SALES> 59,655
<TOTAL-REVENUES> 59,655
<CGS> 21,393
<TOTAL-COSTS> 85,218
<OTHER-EXPENSES> (71)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 457
<INCOME-PRETAX> (25,949)
<INCOME-TAX> 200
<INCOME-CONTINUING> (26,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,149)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
