<PAGE> 1
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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 SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-21031
QUADRAMED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1992861
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22 PELICAN WAY
SAN RAFAEL, CA 94901 94901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 482-2100
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 November 8, 2000, there were 25,753,429 shares of the Registrant's
Common Stock outstanding, par value $0.01. This quarterly report on Form 10-Q
consists of 41 pages of which this is page 1. The Exhibit Index is located at
page 33.
================================================================================
<PAGE> 2
QUADRAMED CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ...... 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 ............................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 .................................................. 5
Notes to Condensed Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................ 15
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 .......................................................... 29
</TABLE>
<PAGE> 3
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- --------------
(UNAUDITED) (RESTATED)(1)(2)
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 7,337 $ 10,623
Restricted cash 8,442 1,036
Short-term investments 14,250 19,109
Accounts receivable, net of allowance 35,659 51,280
Unbilled receivables 6,061 17,027
Notes and other receivables 801 2,390
Prepaid expenses and other assets 3,673 6,072
--------- ---------
TOTAL CURRENT ASSETS 76,223 110,537
Long-term investments -- 12,102
Long-term notes receivables 3,600 3,600
Equipment, net 9,257 11,839
Capitalized software development costs, net 10,214 8,958
Acquired software, net 1,605 8,211
Intangibles, net 30,162 38,533
Non-marketable investments 22,257 14,210
Other long-term assets 6,920 9,471
--------- ---------
TOTAL ASSETS $ 160,238 $ 217,461
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 323 437
Notes payable 19 24
Accounts payable 1,181 3,392
Accrued liabilities 23,366 20,377
Deferred revenue 11,173 10,058
--------- ---------
TOTAL CURRENT LIABILITIES 36,062 34,288
Capital lease obligations, less current portion 128 207
Convertible subordinated debentures 115,000 115,000
Net liabilities of discontinued operations 4,516 5,384
--------- ---------
TOTAL LIABILITIES 155,707 152,080
STOCKHOLDERS' EQUITY:
Common stock 191 187
Additional paid-in capital 268,484 270,691
Deferred compensation -- (2,519)
Accumulated other comprehensive loss (3,660) (287)
Accumulated deficit (260,484) (205,492)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 4,531 62,581
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 160,238 $ 217,461
========= =========
</TABLE>
(1) Prior year financial statements have been restated to present the
Release of Information ("ROI") Division as a discontinued operation
consistent with current presentation
(2) Certain balances have been reclassified to be consistent with current
year presentation.
<PAGE> 4
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(RESTATED)(1) (RESTATED)(1)
<S> <C> <C> <C> <C>
REVENUES:
Licenses $ 16,216 $ 32,797 $ 57,290 $ 96,202
Services 12,005 16,563 40,435 48,921
--------- --------- --------- ---------
Total Revenues 28,221 49,360 97,725 145,123
OPERATING EXPENSES:
Cost of licenses 13,090 15,402 40,540 41,082
Cost of services 8,672 11,006 29,084 31,853
General and administration 5,266 3,901 16,771 12,011
Sales and marketing 4,607 5,732 16,189 16,324
Research and development 5,634 5,744 17,018 16,238
Amortization of intangibles 1,781 1,969 5,387 5,761
Write-off of acquired research and
development in process -- 1,722 -- 1,722
Acquisition costs -- -- -- 6,898
Non-recurring charges 13,634 -- 41,953 18,754
Impairment of intangible assets -- -- 927 10,592
--------- --------- --------- ---------
Total Operating Expenses 52,684 45,476 167,869 161,235
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (24,463) 3,884 (70,144) (16,112)
Interest expense (920) (972) (3,280) (2,019)
Other income (expense) 5 137 (74) 263
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (25,378) 3,094 (73,498) (17,868)
Provision for income taxes 0 30 (160) (308)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (25,378) 3,124 (73,658) (18,176)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 0 1,403 18,666 3,558
--------- --------- --------- ---------
NET INCOME (LOSS) (25,378) 4,527 (54,992) (14,618)
========= ========= ========= =========
EARNINGS PER COMMON SHARE DILUTED:
Continuing operations (0.99) 0.12 (2.88) (0.73)
Discontinued operations -- 0.06 0.73 0.14
--------- --------- --------- ---------
Total (0.99) 0.18 (2.15) (0.59)
========= ========= ========= =========
BASIC:
Continuing operations (0.99) 0.12 (2.88) (0.73)
Discontinued operations -- 0.06 0.73 0.14
--------- --------- --------- ---------
Total (0.99) 0.18 (2.15) (0.59)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Diluted 25,753 25,460 25,571 24,834
</TABLE>
(1) Prior year financial statements have been restated to present the ROI
Division as a discontinued operation consistent with current
presentation.
<PAGE> 5
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
SEPTEMBER 30,
---------------------------
2000 1999
----------- ----------
(UNAUDITED) (RESTATED)(1)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(54,992) $(14,618)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,191 9,406
Amortization of deferred compensation 2,519 591
Gain on sale of non-marketable investment (17,208) --
Write-off of capital software 7,490 --
Write-off of in-process R&D -- 1,722
Loss on disposal of assets 1,670 --
Impairment of intangible assets 7,397 10,592
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net 31,177 (17,728)
Prepaid expenses and other 4,949 (7,704)
Accounts payable and accrued liabilities 778 (5,433)
Liabilities related to discontinued operations (869) (3,498)
Deferred revenue 1,115 (5,425)
-------- --------
Cash used in operating activities (5,783) (32,095)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of non-marketable investment 11,661 --
Purchase of technology (3,229) (7,200)
Purchase of non-marketable investments -- (3,000)
Maturity (purchase) of available-for-sale securities, net 11,089 21,042
Purchase of equipment (2,546) (4,103)
Increase in restricted cash (7,406) (1,035)
Increase in notes receivable and other -- (1,637)
Cash paid for 1999 acquisitions -- (7,772)
Capitalization of computer software development costs (4,671) (3,605)
-------- --------
Cash provided by (used in) investing activities 4,898 (7,310)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations (193) (294)
Borrowings (repayments) under notes and loans payable (5) (21,889)
Issuance of common stock through Employee Stock Purchase Plan (2,203) --
Proceeds from exercise of common stock options and warrants to
purchase stock -- 3,197
-------- --------
Cash used in financing activities (2,401) (18,986)
Net decrease in cash and cash equivalents (3,286) (58,391)
CASH AND CASH EQUIVALENTS, Beginning of period 10,623 65,899
-------- --------
CASH AND CASH EQUIVALENTS, End of period 7,337 7,508
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Unrealized (loss) on investments $ (3,373) $ (89)
Security interest in marketable securities related to line of credit $ (7,406) --
Conversion of note receivable to equity investment in VantageMed -- $ 500
Increase in non-marketable securities $ (8,047) --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) Prior year financial statements have been restated to present the ROI
Division as a discontinued operation consistent with current presentation.
<PAGE> 6
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
QuadraMed Corporation and all significant subsidiaries (hereinafter "QuadraMed"
or "Company"). Results of the Release Of Information ("ROI") Division are
reported as discontinued operations because QuadraMed transferred control of
that business in May of 2000 (discussed in Note 6). Unless otherwise indicated,
amounts in these statements exclude the effects of all discontinued operations.
QuadraMed has prepared the statements in conformity with generally
accepted accounting principles for interim financial information and the rules
and regulations of the Securities and Exchange Commission (the "SEC").
Accordingly, these statements are unaudited and certain information and footnote
disclosures normally included in audited annual financial statements have been
condensed or omitted. In the opinion of QuadraMed's management, the condensed
consolidated and unaudited statements include all adjustments (consisting of
only normal recurring adjustments) to fairly present QuadraMed's financial
position for the reported period.
Interim results of operations are not necessarily indicative of annual
results. These statements should be read in conjunction with QuadraMed's audited
consolidated financial statements for the year ended December 31, 1999 included
in the Company's Annual Report on U.S. Securities and Exchange Commission
("SEC") Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues
QuadraMed's revenues are derived from two sources: (1) software
products; and (2) consulting services. Software product revenue includes amounts
received for licenses and software-related services, such as installation and
post-installation customer support fees, third-party hardware sales, and other
software-related revenue. Consulting services revenue includes amounts from
QuadraMed's Health Information Management Outsourcing, Cash Flow Management
Consulting Services, and Compliance Consulting Services.
QuadraMed's software products (enterprise-wide systems, business office
solutions, and medical records office solutions) can be licensed individually or
as a suite of interrelated products. Licenses are granted for a specified term
(ranging from one to three years; typically paid monthly or annually) or in
perpetuity. Revenues from enterprise-wide systems are recognized on a percentage
of completion basis. Term licenses for business office solutions and medical
records office solutions are recognized monthly or annually over the term of the
license arrangement, beginning at the date of installation. Revenues from
perpetual licenses of business office solutions and medical records office
solutions 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 there is a contractual acceptance
period, revenues are recognized on the earlier of (i) acceptance; or (ii) the
expiration of the acceptance period. Software-related service revenue is
recognized upon completion of installation. Unbilled receivables consist of work
performed or software delivered which has not been billed pursuant to the
customer contract. Post-installation customer support is recognized ratably over
the term of the support period. Deferred revenue is revenue received in advance
from customers for future work. Costs of software and software-related services
revenue are primarily salaries, benefits, customer support, hardware and
installation costs, and royalties to third parties.
QuadraMed's consulting services are rendered under contracts with
providers calling for fixed monthly payments and revenue is recognized at the
end of each month as services have been provided. Cash flow management
consulting contracts generally provide for incentive payments based on a
percentage of dollars recovered for the provider. Based on QuadraMed's contract
with the provider, this additional incentive revenue is recognized either upon
recovery or acknowledgement of recovery by the provider. In the case
<PAGE> 7
of acknowledgement of recovery, amounts due QuadraMed are recorded as unbilled
revenue until the provider receives payment from the insurer or government
agency. 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 by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the sum of weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares
consist of shares issuable upon the exercise of stock options and warrants
(using the treasury stock method) and convertible subordinated debentures (using
the if converted method). Common equivalent shares are excluded from the diluted
computation only if their effect is anti-dilutive. As the Company recorded a net
(loss) in the three months ended September 30, 2000 and in the nine months ended
September 30, 2000 and 1999, no common equivalent 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 components of comprehensive income (loss) for the three and nine
months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
(IN THOUSANDS) (IN THOUSANDS)
----------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(25,378) $ 4,527 $(54,992) $(14,618)
Unrealized gain (loss) on available-for-sale
Securities 88 35 (3,373) (89)
-------- -------- -------- --------
Comprehensive income (loss) $(25,290) $ 4,562 $(58,365) $(14,707)
======== ======== ======== ========
</TABLE>
3. ACQUISITIONS
In March 1999, the Company completed the acquisition of the Compucare
Company ("Compucare") by acquiring all the outstanding capital stock of
Compucare in exchange for 2,957,000 shares of common stock. 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 and
consisted primarily of accounts receivable, fixed assets, accounts payable,
accrued liabilities, and deferred revenue.
The Company acquired Med Data in July 1999. The original entry to record
the transaction included $4.9 million in goodwill. Based upon an asset valuation
prepared by an independent appraiser, the Company, in June 2000, reclassified
$2.9 million of the purchase price from goodwill to capitalized software.
4. CONVERTIBLE SUBORDINATED DEBT
In April 1998, QuadraMed completed an offering of Convertible
Subordinated Debentures (the "Debentures") in the principal amount of $115
million, including the underwriters' over-allotment option. QuadraMed received
$110.8 million in net proceeds from the offering. The Debentures bear interest
at an annual rate of 5.25% and mature on May 1, 2005. The Debentures are
convertible into common stock at any time prior to
<PAGE> 8
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).
5. LINE-OF-CREDIT AND DEBT GUARANTEE
At September 30, 2000, the Company had $6.4 million of stand-by letters
of credit outstanding to support performance bonds on large contracts. The
stand-by letters of credit are secured with $6.4 million in certificates of
deposit. Additionally the Company has $2.0 million in escrow guaranteeing the
payment of interest on a line of credit for another company. The $8.4 million is
recorded as restricted cash on the condensed balance sheet.
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 assets and liabilities related to Antrim and HSII, have been
segregated on each of the aforementioned balance sheets. Net liabilities related
to discontinued operations at September 30, 2000 and 1999 were $4.5 million and
$5.4 million, respectively.
QuadraMed created a wholly owned subsidiary named ChartOne, Inc., and
transferred and assigned to ChartOne, Inc. the assets and liabilities of its ROI
Division pursuant to the terms of an Asset Contribution Agreement dated May 3,
2000. On June 7, 2000, ChartOne, Inc., completed the sale of 2,520,000 shares of
its Series A Preferred Stock to Warburg, Pincus Equity Partners, L.P. and
certain of its affiliates, and Prudential Securities Group, Inc. for an
aggregate cash purchase of $25.2 million. The sale of the securities was made
pursuant to the terms of a Securities Purchase Agreement, dated May 5, 2000. On
the basis of these transactions, QuadraMed recorded a gain on sale of ChartOne
for the three and six months ended June 30, 2000 of $17.2 million (net of income
tax expense of $0.8 million).
Results of the ROI Division have been included in discontinued
operations for all periods, as required by APB-30. For the three months ended
September 30, 2000 and 1999, income from discontinued operations were $0 (and
$1.4 million (net of income tax expense of $0.2 million), respectively. For the
nine months ended September 30, 2000 and 1999, income from discontinued
operations were $1.4 million (net of income tax expense of $0.2 million) and
$3.6 million (net of income tax expense of $0.3 million), respectively.
The ROI Division's revenues for the three months ended September 30,
2000 and 1999 were $0 million and $12.7 million respectively. For the nine
months ended September 30, 2000 and 1999 revenues were $23.8 million and $34.6
million respectively.
The following is a summary of the net assets sold on the contribution
date of May 3, 2000:
<TABLE>
<CAPTION>
MAY 3, 2000 DECEMBER 31, 1999
(IN THOUSANDS) (IN THOUSANDS)
-------------- -----------------
<S> <C> <C>
Current Assets $12,176 $ 9,354
Equipment and software 1,034 1,010
Intangibles 3,868 3,735
Other long-term assets 84 79
------- -------
TOTAL ASSETS 17,162 14,178
------- -------
Current Liabilities 3,242 4,668
------- -------
TOTAL LIABILITIES 3,242 4,668
------- -------
Net assets of discontinued operations $13,920 $ 9,510
======= =======
</TABLE>
<PAGE> 9
7. NON-RECURRING CHARGES
During the nine months ended September 30, 2000 the Company recorded
$42.0 million of non-recurring charges. In the third-quarter of 2000, the
Company recorded $13.6 million of non-recurring charges primarily associated
with: (a) the Company's restructuring plan; (b) the write-down of impaired
receivables and other assets from management's review of the balance sheet; and
(c) accruals for pre-existing non-material litigation fees, costs, and expenses.
The Company's restructuring plans were aimed at eliminating redundant costs and
overhead. Associated costs consisted of (i) $1.1 million in severance benefits
to terminate approximately 145 employees, (ii) $2.9 million to downsize and
close excess facilities and (iii) $1.2 million of other restructuring expenses.
All terminations and termination benefits were communicated to the affected
employees prior to the end of the third-quarter and are expected to be paid in
full in the fourth-quarter of 2000. At September 30, 2000, remaining liabilities
for restructuring costs totaled $3.8 million and are included in "accrued
liabilities". The balance sheet review by management resulted in charges of $4.2
million, primarily from the elimination of $2.9 million in deferred revenue from
the MPR/CPR business, which will be realized on a cash basis looking forward,
and a reduction in fixed assets not supported by historical asset listings. The
accrual of $4.3 million for pre-existing non-material litigation fee, costs, and
expenses is a non-case specific estimate.
During the first and second quarter of 2000, the Company recorded
approximately $28.3 million of non-recurring charges. Those charges were
primarily related to the discontinuation of the EnOvation product, the
write-down of certain other receivables, payments to employees for severance
agreements, and costs associated with office closures. The charge also included
costs related to further product integration efforts and product consolidation.
The Company further recorded a write-down of $10.6 million of HealthCast assets,
as well as additional expenses of $5.3 million associated with officers'
separation agreements.
During the nine months ended September 30, 1999, the Company recorded
$18.8 million of non-recurring charges. These charges consisted primarily of
severance payments and future rent and lease obligations associated with the
closing of several duplicative operating facilities primarily within the
Company's Business Office Division and certain integration costs related to
prior acquisitions. Future rents and lease obligations are expected to be paid
through July 2003. At December 31, 1999, there was $1.5 million accrued for
future rents and lease obligations.
The following table sets forth the Company's restructuring reserve and
the activity against the reserve (in thousands):
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND SEPTEMBER 30,
1999 EXPENSES PAYMENTS 2000
-------------- -------------- ------------- -------------
DESCRIPTION
<S> <C> <C> <C>
Rents and lease obligations $1,467 $2,931 $ (531) $3,867
Severance 0 426 0 426
Non-specific Legal/Other 0 4,831 0 4,831
------ ------ ------ ------
Total $1,467 $8,188 $ (531) $9,124
====== ====== ====== ======
</TABLE>
8. IMPAIRMENT OF INTANGIBLES
Through the nine months ended September 30, 2000, the Company recorded a
$0.9 million charge for the write-down of certain intangible assets associated
with the Business Office Division and the acquisition of Velox in 1998. In
accordance with SFAS No. 121, "Impairment of Long-Lived Assets", projected cash
flows from this product line were not sufficient to cover future amortization of
the intangible assets and therefore were written-down during the quarter ended
March 31, 2000.
Through the nine months ended September 30, 1999, the Company recorded a
$10.6 million 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 No. 121, "Impairment of
Long-Lived Assets", projected cash flows from these product lines were not
sufficient to cover future amortization of the intangible assets and therefore
were written-down during the quarter ended March 31, 1999.
<PAGE> 10
9. SEGMENT REPORTING
The Company reported on three operating segments in 2000 and 1999: the
Business Office Division (BO), the Health Information Management Division (HIM),
and the Enterprise Division (ENT). The results of the ROI Division, which
previously been included in the HIM and BO Division results, have been excluded
from all periods (See Note 6). The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. The
Company does not track long-lived assets by segment and therefore related
disclosures are not relevant and are not presented.
The Company's reportable segments are strategic business units that
offer different products and services. Each segment, with its own unique
position in the healthcare technology marketplace, yields individual technology
and service criteria. The Company's Business Office Division targets a
provider's chief financial officer as the primary buyer. The division's
solutions address the complex financial management and administrative demands
placed on healthcare organizations today, providing the technology and services
expertise to increase cash flow and reduce administrative costs. The division is
comprised of the following product and service categories: decision support,
cost accounting, data warehousing, patient acuity and staffing solutions,
electronic data interchange (EDI), managed care information systems, executive
information systems, account receivable resolution services, contract management
systems, and managed care and capitation payment audits.
QuadraMed's Health Information Management Division's business lines
primarily target health information management and medical records directors, as
well as chief financial officers throughout the provider system. The division
comprises the following products and services: coding, medical record
abstracting, compliance, document imaging and workflow, master patient index
(MPI) duplicate prevention solutions, chart management, and HIM outsourcing and
consulting.
The Company's Enterprise Division consists primarily of the AFFINITY
solution and provides integrated enterprise wide information systems to
individual hospitals and integrated delivery networks. These systems procurement
decisions are generally driven by committee and include the customer's CEO, CFO,
CIO, and other key managers.
For the nine months ended September 30, 2000 and 1999, respectively, the
following table reports selected segment information required by SFAS No. 131:
<TABLE>
<CAPTION>
2000 1999
(RESTATED) (RESTATED)
(IN THOUSANDS) (IN THOUSANDS)
--------------------------------------------------- --------------------------------------------------
BO HIM ENT TOTAL BO HIM ENT TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License
revenues $ 14,415 $ 17,765 $ 25,113 $ 57,291 $ 32,565 $ 21,109 $ 42,528 $ 96,202
Service
revenues 6,276 34,158 -- 40,434 3,671 45,250 -- 48,921
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL REVENUE $ 20,691 $ 51,923 $ 25,113 $ 97,725 $ 36,236 $ 66,359 $ 42,528 $ 145,123
========= ========= ========= ========= ========= ========= ========= =========
Segment
earnings (loss) $ (12,153) $ (21,337) $ (21,502) $ (54,992) $ (17,735) $ 6,379 $ (3,262) $ (14,618)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
10. SUBSEQUENT EVENTS.
On October 19, 2000, QuadraMed sold its remaining 57% equity interest in
ChartOne, Inc., for $26.6 million in cash to Warburg, Pinkus Equity Partners
L.P., certain of its affiliates, and Prudential Securities Group Inc. pursuant
to a Securities Purchase Agreement dated September 28, 2000. One (1) share of
Common Stock, 2.13 million shares of Series B Preferred Stock, and 1.2 million
shares of Series C Preferred Stock were transferred to the owners of ChartOne,
Inc. The Company will recognize an after tax gain approximating $5 million in
the transaction.
11. RECENT ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. In July 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB Statement No. 133 -- An amendment of FASB Statement
No. 133." SFAS No. 137 defers the implementation of SFAS No. 133 by one year.
This statement is not expected to have a material impact on the financial
condition or results of the operations of the Company.
<PAGE> 11
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company will adopt SAB 101 as required in the fourth
quarter of 2000. Management is evaluating the effect that such adoption of SAB
101 will have on the financial position or results of the operations of the
Company.
The financial information required in this Form 10-Q by Rule 10-01 of
Regulation S-X has been subject to a review by Pisenti & Brinker LLP, the
Company's independent certified public accountants, as described in their report
dated November 2, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements that are subject to risks and uncertainties
are made as part of this Discussion and Analysis of Financial Condition and
Results of Operations and throughout this Form 10-Q. These statements are based
on the beliefs and assumptions of QuadraMed's management. Forward-looking
statements include information concerning possible or assumed actions, events,
or results of QuadraMed's operations. These statements are not guarantees of
performance. Accordingly, QuadraMed and its management claim safe-harbor for all
forward-looking statements under the Private Securities Litigation Reform Act of
1995.
Risks and uncertainties that could cause QuadraMed's actual results to
differ from these forward-looking statements are discussed in Item 3 entitled,
"Quantitative and Qualitative Disclosures About Market Risk."
OVERVIEW
QuadraMed is a health care information technology leader that provides
software, web-enabled solutions, and consulting services to hospitals and
medical providers to meet their medical records, business, and compliance needs.
QuadraMed's solutions have been implemented in over 4000 sites, including over
60% of the hospitals in the United States. QuadraMed employs 1180 people who are
committed to customer service and shaping the health care information business.
QuadraMed has acquired a number of businesses, products and services
since its inception in 1993. The accounting for several of these acquisitions
was done on a pooling of interests basis, and QuadraMed's consolidated financial
statements have been restated to include historical results of the acquired
entities. The effect of such acquisitions should be considered when making
period-to-period comparisons of QuadraMed's consolidated financial statements
and reference should be made to notes to those financial statements.
QuadraMed's revenues are derived from two sources: (1) software
products; and (2) consulting services. Software product revenue includes amounts
received for licenses and software-related services, such as installation and
post-installation customer support fees, third-party hardware sales, and other
software-related revenue. Consulting services revenue includes amounts from
QuadraMed's Health Information Management Outsourcing, Cash Flow Management
Consulting Services, and Compliance Consulting Services.
QuadraMed's software products (enterprise-wide systems, business office
solutions, and medical records office solutions) can be licensed individually or
as a suite of interrelated products. Licenses are granted for a specified term
(ranging from one to three years; typically paid monthly or annually) or in
perpetuity. Revenues from enterprise-wide systems are recognized on a percentage
of completion basis. Term licenses for business office solutions and medical
records office solutions are recognized monthly or annually over the term of the
license arrangement, beginning at the date of installation. Revenues from
perpetual licenses of business office solutions and
<PAGE> 12
medical records office solutions 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 there is a
contractual acceptance period, revenues are recognized on the earlier: of (i)
acceptance; or (ii) the expiration of the acceptance period. Software-related
service revenue is recognized upon completion of installation. Unbilled
receivables consist of work performed or software delivered which has not been
billed pursuant to the customer contract. Post-installation customer support is
recognized ratably over the term of the support period. Deferred revenue is
revenue received in advance from customers for future work. Costs of software
products are primarily salaries, benefits, customer support, hardware and
installation costs, and royalties to third parties. QuadraMed also capitalizes a
portion of software product 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.
QuadraMed's consulting services are rendered under contracts with
providers calling for fixed monthly payments and revenue is recognized at the
end of each month as services have been provided. Cash flow management contracts
generally provide for incentive payments based on a percentage of dollars
recovered for the provider. Based on QuadraMed's contract with the provider,
this additional incentive revenue is recognized either upon recovery or
acknowledgement of recovery by the provider. In the case of acknowledgement of
recovery, amounts due QuadraMed are recorded as unbilled revenue until the
provider receives payment from the insurer or government agency. Cost of service
revenues consists primarily of salaries, benefits and allocated costs related to
providing such services.
QuadraMed has experienced different operating margins between its
software products and consulting services. The consulting service business has
historically realized fluctuating margins that have been significantly lower
than software product margins.
REVENUES
License revenues for the quarter ended September 30, 2000 were $16.2
million, compared to $32.8 million in the same period last year. For the nine
months ended September 30, 2000, license revenues were $57.3 million compared to
$96.2 million in the same period last year. This decrease is attributable to
delayed customer purchasing decisions stemming from concerns about government
regulation and general hospital industry economic pressures. License revenues
include license, installation, consulting and post-contract support fees,
third-party hardware sales and other revenues related to licensing of our
software products.
Service revenues for the quarter ended September 30, 2000 were $12.0
million, compared to $16.6 million in the same period last year. For the nine
months ended September 30, 2000, services revenues were $40.4 million, compared
to $48.9 million in the same period last year. The decrease in service revenues
was due principally to the loss of hospital service contracts during the quarter
and year-to-date.
COST OF REVENUES
Cost of license revenues for the quarter ended September 30, 2000 were
$13.1 million, 14.9% less than $15.4 million in the same period last year. For
the nine months ended September 30, 2000 cost of license revenues were $40.6
million, compared to $41.1 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. Cost of licenses were 80.7% of license revenues in the quarter ended
September 30, 2000, compared with 47.0% in the same period last year. They were
70.8% of license revenues in the nine months ended September 30, 2000, compared
with 42.7% in the same period last year.
Cost of service revenues for the quarter ended September 30, 2000
decreased 21.2% to $8.7 million, compared to $11.0 million, in the same period
last year. For the nine months ended September 30, 2000, cost of services
revenues decreased 8.7% to $29.1 million, compared to $31.9 million, in the same
period last year. Cost of services includes expenses associated with services
performed in connection with health information
<PAGE> 13
management and business office outsourcing, compliance and consulting services.
As a percentage of service revenues, cost of services increased to 72.2% in the
quarter ended September 30, 2000 from 66.4% in the same period last year. As a
percentage of service revenues, cost of services were 71.9% in the nine months
ended September 30, 2000 compared with 65.1% 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.
OPERATING EXPENSES
General and administration expenses for the quarter ended September 30,
2000 were $5.3 million, compared to $3.9 million in the same period last year.
For the nine months ended September 30, 2000, general and administration
expenses were $16.8 million, compared to $12.0 million in the same period last
year. This increase for the three and nine months ended September 30, 2000 was
principally due to increases in outside services for legal, audit and
recruitment services fees, and an increase in the employee benefit program
costs.
Sales and marketing expenses for the quarter ended September 30, 2000 were
$4.6 million, compared to $5.7 million in the same period last year. For the
nine months ended September 30, 2000, sales and marketing expenses were $16.2
million, compared to $16.3 million in the same period last year. The decrease in
sales and marketing expenses principally resulted from personnel reductions.
Research and development expenses for the quarter ended September 30,
2000 were $5.6 million, compared to $5.7 million in the same period last year.
For the nine months ended September 30, 2000 research and development expenses
were $17.0 million, compared to $16.2 million in the same period last year. This
increase was mainly due to the addition of software developers to migrate and
integrate our products to a consistent architecture.
QuadraMed believes that research and development expenditures are
essential to maintaining its competitive position. As a result, QuadraMed
intends to continue to make investments in the development of new products and
in the further integration of acquired technologies.
Amortization of intangibles for the quarter ended September 30, 2000
decreased 9.5% to $1.8 million compared to $2.0 million in the same period last
year. For the nine months ended September 30, 2000 amortization of intangibles
decreased 6.5% to $5.4 million compared to $5.8 million in the same period last
year.
There were no acquisition charges for the three and nine months ended
September 30, 2000. The Company incurred $6.9 million of acquisition costs for
the nine months ended September 30, 1999. These acquisition costs related to the
Compucare acquisition in the first quarter of 1999. Such costs were primarily
for financial advisor fees of approximately $5.7 million incurred by QuadraMed
and Compucare and to a lesser extent, legal and accounting fees of approximately
$1.2 million.
During the nine months ended September 30, 2000 the Company recorded
$42.0 million of non-recurring charges. In the third-quarter of 2000, the
Company recorded $13.6 million of non-recurring charges primarily associated
with: (a) the Company's restructuring plan; (b) the write-down of impaired
receivables and other assets from management's review of the balance sheet; and
(c) accruals for pre-existing non-material litigation fees, costs, and expenses.
The Company's restructuring plans were aimed at eliminating redundant costs and
overhead. Associated costs consisted of: (i) $1.1 million in severance benefits
to terminate approximately 145 employees, (ii) $2.9 million to downsize and
close excess facilities; and (iii) $1.2 million of other restructuring expenses.
All terminations and termination benefits were communicated to the affected
employees prior to the end of the third-quarter and are expected to be paid in
full in the fourth-quarter of 2000. At September 30, 2000, remaining liabilities
for restructuring costs totaled $3.8 million and are included in "accrued
liabilities". The balance sheet review by management resulted in charges of $4.2
million, primarily from the elimination of $2.9 million in deferred revenue from
the MPR/CPR business, which will be realized on a cash basis looking forward,
and a reduction in fixed assets not supported by historical asset listings. The
accrual of $4.3 million for pre-existing non-material litigation fee, costs, and
expenses is a non-case specific estimate.
During the first and second quarter of 2000, the Company recorded
approximately $28.3 million of non-recurring charges. Those charges were
primarily related to the discontinuation of the EnOvation product, the
write-down of certain other receivables, payments to employees for severance
agreements, and costs associated with office closures. The charge also included
costs related to further product integration efforts and product consolidation.
The Company further recorded a write-down of $10.6 million of HealthCast assets,
as well as additional expenses of $5.3 million associated with officers'
separation agreements.
During the nine months ended September 30, 1999, the Company recorded
$18.8 million of non-recurring charges. These charges consisted primarily of
severance payments and future rent and lease obligations associated with the
closing of several duplicative operating facilities primarily within the
Company's Business Office Division and certain integration costs related to
prior acquisitions. Future rents and lease obligations are expected to be paid
through July 2003. At December 31, 1999, there was $1.5 million accrued for
future rents and lease obligations.
<PAGE> 14
During the first and second quarter 2000, QuadraMed recorded
approximately $28.3 million of non-recurring charges. Those charges were
primarily related to the discontinuation of the EnOvation product, the
write-down of certain other receivables, payments to employees for severance
agreements, and costs associated with office closures. The charges also included
costs related to further product integration efforts and product consolidation.
Non-recurring charges of $18.8 million in the first quarter of 1999 were
associated with the closing of duplicative operating facilities within several
of our business units. These charges consisted primarily of severance payments
and future rent and lease obligations. The Company further recorded a write-down
of $10.6 million of HealthCast assets, as well as additional expenses of $5.3
million associated with officers' severance agreements.
In connection with the acquisition of MedData in July 1999, the Company
expensed $1.7 million acquired in-process research and development as the
technology had not achieved technological feasibility and had no alternative
future use.
QuadraMed recorded a $0.9 million charge in 2000 to write-down certain
intangible assets related to acquisition of Velox in 1998. The Company recorded
a $10.6 million charge in 1999 to write-down certain intangible assets related
to acquisitions of companies made in 1997 and 1998. The write-down related to
the acquisitions of Synergy, InterLink, Velox and American Hospital Directory.
Interest expense, net was $0.9 million and $3.3 million in the three and
nine months ended September 30, 2000, compared to $0.9 million and $2.0 million
for the same period last year. Interest expense in 2000 and 1999 was principally
due to QuadraMed's $115 million Convertible Subordinated Debentures, which
closed in April 1998, partially offset by interest income from QuadraMed's cash
and investments. The increase in interest expense in 2000 compared to 1999 is
due to less interest income, from a smaller portfolio of investments.
Provision for income taxes in the nine months ended September 30, 2000
was $0.2 million. 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
At September 30, 2000, QuadraMed had $7.3 million in cash and cash
equivalents, compared to $10.6 million at December 31, 1999.
In October 1996, QuadraMed completed its initial public offering of
common stock, which resulted in net proceeds of approximately $26.4 million. In
October 1997, QuadraMed completed a follow-on offering of common stock, which
resulted in net proceeds of approximately $57.3 million. In April 1998,
QuadraMed 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 from the
offering were $110.8 million.
Net cash used in operating activities was ($5.8 million) and ($32.1
million) in the nine months ended September 30, 2000 and 1999, respectively. Net
cash used in operating activities in the nine months ended September 30, 2000
related to the net loss for the period excluding the gain on the sale of
ChartOne, offset by the increase in the deferred revenue for annual maintenance
fees and the decrease in accounts receivable and unbilled receivables related to
the sun setting of the EnOvation product. Net cash used in the operating
activities for the nine months ended September 30, 2000 related to the net loss
for the period, offset by the write-down of certain intangible assets and the
increase in accounts payable and accrued liabilities related to the Company's
restructuring plan.
<PAGE> 15
Net cash provided by investing activities was $4.9 million in the nine
months ended September 30, 2000. Net cash used for investing activities was $7.3
million in the nine months ended September 30, 1999. Investing activities for
2000 included the gain on the sale of ChartOne and the maturity of long-term
investments. Investing activities for 1999 primarily included the purchase of
short and long-term investments from the proceeds from our offering of $115.0
million Convertible Subordinated Debentures and the additional equity investment
of $3.0 million in VantageMed.
Net cash used in financing activities was $2.4 million and $19.0 million
in the nine months ended September 30, 2000 and 1999, respectively. Financing
activities in the nine months ended September 30, 2000 primarily related to the
proceeds from the exercise of common stock options and the purchase through the
Employee Stock Purchase Plan. Financing activities in the nine months ended
September 30, 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 and purchase through the
Employee Stock Purchase Plan.
QuadraMed believes that its cash and investments and borrowing capacity
on September 30, 2000 is sufficient to fund operations at least through December
31, 2000. In light of subsequent events (See Note 10), QuadraMed believes that
it has sufficient liquidity to fund its continuing operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
INTEREST AND FOREIGN CURRENCY RISK
QuadraMed invests cash principally in short-term U.S. Government
securities and in a money management account on which interest is calculated
daily. Accordingly, QuadraMed's investment interest rate risk is nominal.
QuadraMed is not exposed to material changes in debt interest rate risk because
the interest rate on the Subordinated Convertible Debentures, the bulk of
QuadraMed's debt, is fixed at 5.25%. Although QuadraMed from time-to-time sells
its products internationally, all such transactions are denominated in U.S.
currency and there is no foreign currency fluctuation risk.
EQUITY INVESTMENT RISK
QuadraMed has made equity investments to acquire minority interests in
certain early stage companies. QuadraMed does not have the ability to control
the operations of any of these companies. These investments are subject to
certain significant risks and there is no guarantee of any return on them.
QuadraMed could also lose some or all of its principal investment if these
companies fail or become bankrupt or insolvent.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
QuadraMed incurred net losses of $19.5 million and $12.3 million in
fiscal years 1998 and 1999, respectively, and a net loss of $55.0 million for
the nine months ended September 30, 2000. As of September 30, 2000, QuadraMed's
accumulated deficit was $260.5 million. Those losses include the effect of both
operating losses and write-offs for acquired in-process research and
development. In connection with its acquisitions, QuadraMed will be required to
amortize significant expenses related to goodwill and other intangible assets in
future periods.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
QuadraMed quarterly operating results have varied significantly in the
past and may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside QuadraMed's control. These factors include:
- Success in integrating acquired businesses;
- Demand variability for QuadraMed's products and services;
- Introduction of product enhancements and new products by QuadraMed and
its competitors;
- The timing and significance of announcements concerning QuadraMed
present or prospective strategic alliances;
- The discontinuation of, or a reduction in, the products and services
QuadraMed offer;
- The loss of customers due to consolidation in the health care industry;
<PAGE> 16
- Delays in product delivery requested by QuadraMed customers;
- The varied length of the sales cycle for QuadraMed's products or the
timing of QuadraMed's sales;
- Customer budget cycle fluctuation;
- QuadraMed's investment in marketing, sales, research and development,
and administrative personnel necessary to support anticipated
operations;
- Costs incurred for marketing and sales promotional activities;
- Software defects and other product quality factors;
- General economic conditions and their impact on the health care
industry;
- Cooperation from competitors on interfaces and implementation when a
customer chooses systems from various vendors;
- Delays in implementation due to product readiness;
- The final negotiated sales price of any given system;
- Federal regulations that can increase demand for new, updated systems
(compliance, HIPAA, ICD-10, etc.);
- Federal regulations that directly affect the reimbursements received,
and therefore the amount of money available for purchasing information
systems; and
- The fines and penalties a healthcare provider or system may incur due
to fraudulent billing practices.
QuadraMed cannot accurately forecast the timing of its customer sales
due to the complex procurement decision process associated with most health care
providers and payors. As a result, QuadraMed typically experiences sales cycles
that extend over several quarters. In addition, QuadraMed's AFFINITY solution
has higher average selling prices and longer sales cycles than many of
QuadraMed's other products. This may increase the volatility of QuadraMed's
quarterly operating results. Moreover, QuadraMed's operating expense levels,
which will increase with the addition of acquired businesses, are relatively
fixed. Accordingly, if future revenues are below QuadraMed's expectations, there
would be a disproportionate adverse affect on net income and financial results.
Further, it is likely that, in some future quarter, QuadraMed's revenues or
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of QuadraMed's common stock would
likely be materially and adversely affected.
INTEGRATION OF ACQUIRED COMPANIES INTO QUADRAMED
QuadraMed, since its inception, has made over twenty-five (25)
acquisitions. 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 QuadraMed may incur to
successfully complete such integration;
- The potential interruption or disruption of QuadraMed's ongoing business
and the distraction of management from other matters;
- Significant operational and administrative expense relating to such
integration;
- Managing geographically dispersed operations;
- Failure of the acquired business to achieve expected results;
- Failure to retain key personnel of the acquired business;
- Potential increases in stock compensation expense and increased
compensation expense resulting from newly hired employees;
- The assumption of unknown liabilities and potential disputes with the
sellers of one or more acquired entities;
- Exposure to the risks of entering markets in which QuadraMed has no
direct prior experience or to risks associated with the market
acceptance of acquired products and technologies; and
- Possible platform and technical issues related to integrating systems
from various acquired companies.
From time to time, QuadraMed's acquisitions have resulted in disputes
with the sellers of one or more of the acquired entities. QuadraMed is a party
to a number of legal proceedings arising out of previous acquisitions. While
QuadraMed does not believe that the adverse determination of any such pending
litigation, individually, would have a material adverse effect on QuadraMed's
business, financial condition, results of operations, cash flows or prospects,
the adverse determination of such proceedings could, in the aggregate, have such
a material adverse effect.
Additionally, customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on QuadraMed's sales and
marketing initiatives and on QuadraMed's reputation. With the addition of the
acquired businesses, QuadraMed's anticipated future operations may place a
strain on QuadraMed's management systems and resources. QuadraMed expects that
it will be required to continue to improve its financial and management
controls, reporting systems and procedures, and will need to expand, train and
manage QuadraMed's workforce. There can be no assurance that QuadraMed will be
able to effectively manage these tasks, and the failure to do so could have a
material adverse effect on QuadraMed's business financial condition and results
of operations.
Any difficulties encountered in the integration process could have a
material adverse effect on QuadraMed's business, operating results and financial
condition. Even if QuadraMed is able to successfully integrate these businesses,
the acquired operations may not achieve sales, productivity and profitability
commensurate with QuadraMed's historical or projected operating results. Failure
to achieve such projected results would have a material adverse effect on
QuadraMed's financial performance, and in turn, on the market value of
QuadraMed's Common Stock. There can be no assurance that QuadraMed will realize
any of the anticipated benefits of the acquisitions or that such acquisitions
will enhance QuadraMed's business or financial performance.
At this time, QuadraMed's strategy does not call for expansion through
further acquisition. From time to time, QuadraMed, however, will consider
various strategic alternatives, including potential business combinations,
divestitures of business units, strategic partnerships and discontinuance of
lines of business. Each of these strategic alternatives carries certain risks
that are difficult to predict but which may have a material adverse effect on
QuadraMed's business.
<PAGE> 17
DEPENDENCE ON KEY PERSONNEL
In large part, QuadraMed's future success will depend upon its ability
to attract and retain executive officers, product managers, and other key sales,
marketing and developing personnel. Competition for personnel in the software
and health care information management business is intense. At times, QuadraMed
has had difficulty attracting and retaining highly qualified candidates within
specific geographic areas or with certain specific industry experience. If
QuadraMed's competitors increase their use of valid non-compete agreements, the
pool of candidates may narrow in certain geographic areas. the failure to
attract, retain, train, and effectively manage personnel could increase
QuadraMed's costs and impair its development, sales, and customer service
efforts.
In 2000, there have been changes in several of QuadraMed's senior
executive positions. QuadraMed has hired or promoted qualified candidates for
these positions. The uncertainty created by these changes could cause
fluctuations in the price of QuadraMed's stock and lead some QuadraMed employees
to seek other employment.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS; UNCERTAINTY IN THE
HEALTHCARE INDUSTRY
A substantial portion of QuadraMed's revenues have been and are expected
to be derived from the sale of software products and services to hospitals.
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 QuadraMed's products and services, which could adversely
affect QuadraMed's business. In addition, the decision to purchase QuadraMed's
products often involves the approval of several members of management of a
hospital or health care provider. Consequently, it is difficult for QuadraMed to
predict the timing or outcome of the buying decisions of its customers or
potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. QuadraMed believes that
the commercial value and appeal of our products may be adversely affected if the
current managed care health care financing and reimbursement system were to
revert to a fee-for-service model. In addition, many QuadraMed customers provide
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 QuadraMed's 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
QuadraMed's clients in ways that cannot be predicted. Health care organizations
may react to these proposals by curtailing or deferring investments, including
those for QuadraMed's products and services.
Changes in current health care financing and reimbursement systems could
result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of QuadraMed's products by hospital associations or other customers and reduce
the need for certain systems. Any of these occurrences could have a material
adverse effect on QuadraMed's 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 QuadraMed's products. If
QuadraMed fails to maintain adequate price levels, its business, financial
condition and results of operations could be adversely affected. Other
market-driven reforms could also have adverse effects on QuadraMed's business,
financial condition and results of operations.
HIGHLY COMPETITIVE MARKET
Competition in the market for QuadraMed's products and services is
intense and is expected to increase. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect QuadraMed's business, financial condition and
results of operations. QuadraMed competes with other
<PAGE> 18
providers of health care information software and services, as well as health
care consulting firms. Some competitors have alliances with other competitors
that may affect our ability to work with certain prospects. In addition, if some
of our competitors merge, a stronger competitor may emerge. Some principal
competitors include, among others:
- Healtheon/WebMD Corporation, National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for EDI products;
- McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet, Lanvision,
MedPlus, and Eclipsys Corporation in the market for electronic document
management products;
- Eclipsys Corporation, Healthcare Microsystems, Inc., a division of
Health Management Systems Inc., and MediQual Systems, Inc., a division
of Cardinal Health, Inc., in the market for decision support products;
- McKesson HBOC, Inc., Shared Medical Systems, Inc., MediTech Corporation,
Eclipsys Corporation, Cerner, and IDX/Phamis in the market for
enterprise healthcare information systems;
- 3M,SoftMed Corporation, Inc., MetaHealth, Eclypsis Corporation, Cascade,
and HSS in the market for medical records products;
- Madison and Medibase in the market for MPI products and services,
- PriceWaterhouseCoopers, KPMG, Ernst and Young for our compliance
products and services and health information management consulting
services, and
- Physmark, Computer Sciences Corp., Health Systems Design, and Medical
Manager for managed care capitation management system.
Current and prospective customers evaluate QuadraMed's capabilities
against the merits of their existing information systems and expertise. Major
software information systems companies, including those specializing in the
health care industry not presently competing with QuadraMed, may enter the
market. Existing and potential competitors may have significantly greater name
recognition and financial, technical, product development, marketing and other
resources. Many competitors also currently have, or may develop or acquire,
substantial installed healthcare industry customer bases. As a result of these
factors, QuadraMed's competitors may be able to respond more quickly to new or
emerging technologies, changes in customer requirements, and political, economic
or regulatory changes and may devote greater resources to the development,
promotion and sale of their products. There can be no assurance that QuadraMed
will be able to compete successfully against current and future competitors or
that such competitive pressures will not materially adversely affect QuadraMed's
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 QuadraMed's Common Stock. As of September 30, 2000,
approximately 2,516,510 shares were available for sale in the public market
subject to compliance with Rule 144. As of September 30, 2000, certain of
QuadraMed's existing stockholders holding an aggregate of 616,100 shares of
Common Stock have rights under certain circumstances to require QuadraMed to
register their shares for future sale.
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. 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. In connection with
the acquisition of Compucare, we issued an aggregate of 2,957,000 shares of
common stock. All of these shares were subsequently registered for resale under
the Securities Act.
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 QuadraMed's common stock and
impair QuadraMed's ability to raise additional capital through the sale of
QuadraMed's securities.
<PAGE> 19
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
QuadraMed's performance depends in large part upon its ability to
provide the increasing functionality required by its customers through the
timely development and successful introduction of new products and enhancements
to its existing suite of products. QuadraMed has historically devoted
significant resources to product enhancements and research and development and
believe that significant continuing development efforts will be required to
sustain QuadraMed's operations and integrate the products and technologies of
acquired businesses with our products. There can be no assurance that QuadraMed
will successfully or in a timely manner develop, acquire, integrate, introduce
and market new product enhancements or products, or that product enhancements or
new products developed by 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
QuadraMed relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. QuadraMed has not filed any patent applications covering its
technology. There can be no assurance that measures QuadraMed has taken to
protect its intellectual property will be adequate or that its competitors will
not independently develop products and services that are substantially
equivalent or superior to the products and services QuadraMed offers.
There is substantial litigation regarding intellectual property rights
in the software industry. QuadraMed has not been notified that its products
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. QuadraMed 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, QuadraMed 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 QuadraMed's business, financial condition and results of
operations. QuadraMed cannot guarantee that it will be successful in the defense
of these or similar claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as QuadraMed's frequently contain errors or failures,
especially when initially introduced or when new versions are released. Although
QuadraMed conducts extensive testing on its applications, software errors have
been discovered in certain enhancements and products after their introduction.
QuadraMed cannot guarantee that, despite such testing and testing by its 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 QuadraMed's reputation; or
- Increased service and warranty costs.
The occurrence of any of these consequences could have a material
adverse effect upon QuadraMed's business, financial condition and results of
operations.
<PAGE> 20
RISK OF INTERRUPTION OF DATA PROCESSING
QuadraMed currently processes substantially all of its customer data at
its facilities in San Rafael, California and Neptune, New Jersey. Although
QuadraMed backs up data nightly and has safeguards for emergencies, such as
power interruption or breakdown in temperature controls, QuadraMed has 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 San Rafael or the Neptune facility
leading to an interruption of data processing, QuadraMed's business, financial
condition and results of operations could be adversely affected.
RISKS RELATED TO QUADRAMED'S BUSINESS
QuadraMed provides compliance, consulting, HIM outsourcing, and cash
flow management services, including the billing and collection of receivables.
QuadraMed acquired the infrastructure for its outsourcing business through an
acquisition. QuadraMed uses its software products to provide outsourcing
services. As a result, QuadraMed has not been required to make significant
capital expenditures in order to service existing outsourcing contracts. If
QuadraMed experiences a period of substantial expansion in its outsourcing
business, QuadraMed may be required to make substantial investments in capital
assets and personnel. QuadraMed cannot guarantee that it will be able to assess
accurately the investment required and negotiate and perform in a profitable
manner any of the outsourcing contracts, may be awarded. QuadraMed's failure to
either estimate accurately the resources and related expenses required for a
project, or to complete QuadraMed's 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, QuadraMed's failure to meet a client's expectations in
the performance of its services could damage its reputation and adversely affect
its ability to attract new business. Finally, QuadraMed could incur substantial
costs and expend significant resources correcting errors in QuadraMed's work,
and could possibly become liable for damages caused by these errors.
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine in the future that any predictive aspects of QuadraMed's
products make them clinical decision tools subject to FDA regulation. Compliance
with these regulations could be burdensome, time consuming and expensive.
QuadraMed 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 the Company in other respects not presently foreseeable.
QuadraMed cannot predict the effect of possible future legislation and
regulation.
<PAGE> 21
State governments substantially regulate the confidentiality of patient
records and the circumstances under which such records may be released for
inclusion in QuadraMed's 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 substantial expenditures. QuadraMed is 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 QuadraMed's products.
RISK OF PRODUCT-RELATED CLAIMS
Some of QuadraMed's products and services are used in the payment,
collection, the coding and billing of health care claims, and the administration
of managed care contracts. If QuadraMed's employees or its products fail to
accurately assess, process or collect these claims, customers may file claims
against the Company. QuadraMed has been and currently is involved in claims for
money damages related to services provided by its accounts receivable management
business. QuadraMed maintains insurance to protect against certain claims
associated with the use of our products, but there can be no assurance that
QuadraMed's insurance coverage would adequately cover any claim brought against
it. A successful claim that is in excess of, or is not covered by, insurance
coverage could adversely affect QuadraMed's 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. QuadraMed
does not know whether it will be subject to material claims in the future which
may result in liability in excess of QuadraMed's insurance coverage, or which
its insurance may not cover. QuadraMed may not be able to obtain appropriate
insurance in the future at commercially reasonable rates. In addition, if
QuadraMed were found liable, it would have to significantly alter its products
resulting in additional unanticipated research and development expenses.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISION
QuadraMed's 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 QuadraMed without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. QuadraMed has no present plans to issue shares of Preferred
Stock.
Further, certain provisions of QuadraMed's Certificate of Incorporation
and Bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. For example, QuadraMed's Board
of Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by its stockholders to
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. In addition,
QuadraMed's Certificate of Incorporation provides that directors may be removed
only by the affirmative vote of the holders of two-thirds of the shares of
capital stock of QuadraMed entitled to vote. Any vacancy on the Board of
Directors may be filled only by vote of
<PAGE> 22
the majority of directors then in office. Further, QuadraMed's Certificate of
Incorporation provides that any "Business Combination" (as therein defined)
requires the affirmative vote of two-thirds of the shares entitled to vote,
voting together as a single class. These provisions, and certain other
provisions of the Certificate of Incorporation, which may have the effect of
delaying proposed stockholder actions until the next annual meeting of
stockholders, could have the effect of delaying or preventing a tender offer for
QuadraMed's Common Stock or other changes of control or management of QuadraMed,
which could adversely affect the market price of QuadraMed's Common Stock.
Finally, certain provisions of Delaware law could have the effect of delaying,
deterring or preventing a change in control of QuadraMed, including Section 203
of the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years from the date the person became an interested stockholder
unless certain conditions are met.
VOLATILITY OF STOCK PRICE
The NASDAQ National and Small Cap markets, and stock markets in general,
have historically experienced extreme price and volume fluctuations that have
affected companies unrelated to their individual operating performance. The
trading price of QuadraMed's Common Stock has been and is likely to continue to
be highly volatile due to such factors as:
- Variations in quarterly results of operations;
- Announcements of new products or acquisitions by QuadraMed's
competitors;
- Governmental regulatory action;
- Developments or disputes with respect to proprietary rights;
- General trends in QuadraMed's industry and overall market conditions;
or
- Other events or factors, many of which are beyond QuadraMed's control.
The market price of QuadraMed's Common Stock may also be affected by
movements in prices of equity securities in general.
CONTINUING REVIEW OF FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements contained
herein have been prepared on the same basis as the Company's audited
consolidated financial statements and, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information for the periods presented. Management is
continuing to review the Company's financial statements and will obtain the
assistance of outside resources as deemed necessary. Management's review is not
expected to result in any material adjustments or charges; however, there can be
no assurance that additional adjustments and/or charges will not be required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
<PAGE> 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
(a) Michael H. Lanza Employment Agreement. The Company entered into a
letter agreement on September 18, 2000 with Michael H. Lanza, pursuant to which
Mr. Lanza is employed as the Company's Executive Vice President.
Mr. Lanza shall be paid for service in the 2000 calendar year a base
salary at the annual rate of $210,000. Mr. Lanza's base salary is subject to
annual adjustment by the Board. In addition, Mr. Lanza will be eligible for a
discretionary bonus of up to 40% of base salary. Mr. Lanza will also be paid a
bonus based on a phantom stock account of 95,293 shares as follows: (i) on
February 25, 2001 an amount equal to the value of 43,672 shares of QuadraMed
stock two business days prior; (ii) on February 26, 2002 an amount equal to the
value of 29,306 shares of QuadraMed stock two business days prior; (iii) on
February 23, 2003 an amount equal to the value of 22,315 shares of QuadraMed
stock two business days prior. In the event of an Involuntary Termination (as
defined in the letter agreement), Mr. Lanza will receive actual common shares of
QuadraMed in an amount equal to the remaining phantom shares described above, in
addition to his other severance benefits described below. Subsequent bonuses
will be established by the Board in its sole discretion and based upon the
recommendation of the Compensation Committee and such additional factors as the
Board deems appropriate, including Mr. Lanza's individual performance and the
Company's financial results. Mr. Lanza is eligible to participate in all other
bonus plans applicable to the Company's executives.
Mr. Lanza received a grant of stock options to purchase 200,000 shares
of common stock at an exercise price of $1.50, subject to vesting over a
four-year period. Under the letter agreement, the Company also will reimburse
Mr. Lanza $65,000 for relocation expenses.
The letter agreement also includes the following severance provisions:
(i) if Mr. Lanza dies, his estate will be paid any unpaid compensation for
services rendered through the date of death; together with a special termination
payment equal to 30 days base salary; (ii) if Mr. Lanza is disabled, he will be
paid any unpaid compensation for services rendered through the date of
disability, together with the severance benefits payable in the event of an
Involuntary Termination of employment (other than a Termination for Cause),
offset, dollar-for-dollar by any income continuation payments provided under any
policies or programs funded by the Company on his behalf; (iii) if Mr. Lanza is
terminated by reason of an Involuntary Termination other than a Termination for
Cause (as those terms are defined in the letter agreement), Mr. Lanza will
receive in one lump sum within thirty days of the date of such an Involuntary
Termination, an aggregate amount equal to one-times Mr. Lanza's then-current
base salary; alternatively, at Mr. Lanza's option, he may receive the severance
payment in monthly installments over a one year period following the date of
Involuntary Termination. In addition, if Mr. Lanza is terminated by reason of
Involuntary Termination (other than a Termination for Cause) he will receive a
lump sum payment equal to his annual bonus of 40% of base compensation. Mr.
Lanza (or his dependents, as applicable) shall also be provided with the same
life, health and disability participation, benefits and other coverages for a
period of 12 months after his disability or involuntary termination.
In connection with an Involuntary Termination (other than a Termination
with Cause), whether before or after a Change in Control (as defined in the
letter agreement), Mr. Lanza's options granted under the Company's Stock Option
Plan and all restricted or unvested common stock granted by the Company (to the
extent not otherwise vested) will automatically accelerate and vest and any
repurchase rights with respect thereto will terminate so that
<PAGE> 24
each such option or share will be immediately exercisable and fully vested as of
the date of termination and all such vested options shall remain exercisable for
a period of three years following the Involuntary Termination. In addition, to
the extent any acquiring company in a Change in Control transaction does not
assume or otherwise continue in force Mr. Lanza's outstanding options, those
options shall automatically accelerate and vest so that each such option,
immediately prior to the Change in Control, becomes fully exercisable; such
options shall terminate immediately after the Change in Control.
To the extent the acquiring company in any Change in Control transaction
does not assume or otherwise continue in full force and effect Mr. Lanza'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 in Control, become fully exercisable for all the option
shares and shall terminate immediately after the Change in Control transaction.
The letter agreement includes the following provisions with respect to
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
Mr. Lanza at the time of the Change in Control.
The options will 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 Internal Revenue 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 will 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 Mr. Lanza 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 the acceleration of Mr. Lanza'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 Mr. Lanza 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 upon any
Involuntary Termination of Mr. Lanza's employment following the Change in
Control (other than a Termination for Cause). Each such accelerated option,
together with each of Mr. Lanza's other vested options shall remain exercisable
and outstanding for a period of three (3) years and may be exercised for any or
all of the option shares, including the accelerated shares, in accordance with
the provisions of the option agreement evidencing such option.
Each option will be appropriately adjusted to apply to the number and
class of securities which would have been issued to Mr. Lanza 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
to the option exercise price payable per share, provided the aggregate exercise
price will remain the same.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.68 Employment Agreement, dated September 18, 2000, between Michael
H. Lanza and QuadraMed Corporation.
15 Accountant's Letter.
27.1 Financial Data Schedule for the Quarter Ended 09/30/2000.
27.2 Financial Data Schedule for the Quarter Ended 09/30/1999.
(b) REPORTS ON FORM 8-K:
The Company filed a Form 8-K (Item 5), dated August 16, 2000, on August
17, 2000, in which it announced October 5, 2000 as the date for its
Annual Meeting of Stockholders.
<PAGE> 25
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: November 14, 2000 By:
---------------------------------------
Lawrence P. English
Chief Executive Officer (Principal
Executive Officer)
By:
---------------------------------------
Mark N. Thomas
Chief Financial Officer
(Principal Financial Officer)
<PAGE> 26
EXHIBIT INDEX
10.68 Employment agreement, date September 18, 2000, between Michael H.
Lanza and QuadraMed Corporation.
15 Accountant's Letter.
27.1 Financial Data Schedule for the Quarter Ended 09/30/2000.
27.2 Financial Data Schedule for the Quarter Ended 09/30/1999.
