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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-21031
QUADRAMED CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1992861
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
22 Pelican Way
SAN RAFAEL, CALIFORNIA, 94901
(Address of Principal Executive
Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 482-2100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 30, 2000, was approximately $149,586,343 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 3, 2000, approximately 25,444,252 shares of the Registrant's
Common Stock, $0.01 par value per share, were outstanding.
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QUADRAMED CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I .................................................................. 3
ITEM 1. BUSINESS ........................................................ 3
ITEM 2. PROPERTIES ...................................................... 12
ITEM 3. LEGAL PROCEEDINGS ............................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 12
PART II ................................................................. 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ... 13
MATTERS
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA .................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................... 14
ITEM 8. FINANCIAL STATEMENTS ............................................ 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................ 31
PART III ................................................................ 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............. 32
ITEM 11. EXECUTIVE COMPENSATION ......................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 32
PART IV ................................................................. 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 33
SIGNATURES .............................................................. 39
POWER OF ATTORNEY ....................................................... 39
INDEX TO FINANCIAL STATEMENTS ........................................... 42
EXHIBIT INDEX ........................................................... 71
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PART I
ITEM 1. BUSINESS.
Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-K may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements include declarations regarding the intent, belief
or current expectations of QuadraMed Corporation and its management. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and uncertainties
and that actual results could differ materially from those indicated by such
forward-looking statements. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include those risks identified in "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Certain Factors
That Might Affect Future Operating Results" and other risks identified from time
to time in QuadraMed Corporation's reports and registration statements filed
with the Securities and Exchange Commission.
OVERVIEW
QuadraMed Corporation ("QuadraMed") leverages its industry expertise and
product breadth to deliver web-enabled, secure product and service solutions
that link the nation's hospitals to their diverse constituents, including
payors, physicians, patients, insurers and governmental agencies. We are focused
on customer service excellence and delivering a return on investment for our
customers through increased efficiency and improved cash flow. We have
implemented our solutions in approximately 4,000 provider sites, representing
more than 60% of the nation's hospitals.
We have a significant talent pool, which, through our active
participation in professional and trade organizations, has helped to shape the
healthcare information technology industry. We also have substantial expertise
in the core components required by the Health Insurance Portability and
Accountability Act of 1996 (HIPAA). In addition to our web-enabled solutions, we
have developed the American Hospital Directory (ahd.com), the most comprehensive
resource for hospital and healthcare benchmarking on the worldwide web. Our site
is the only one of its kind to integrate data from the American Hospital
Association.
In 2000, we reorganized our operations into four functional areas --
product management, development, sales, and customer service. In addition, we
have created four product centers to offer more comprehensive solutions to our
clients. These centers are Financial, Clinical, Health Information Management
(HIM) and Q Solutions.
~ Our Financial Solution Center helps our clients improve cash flow
in several ways including capturing financial information
electronically, checking eligibility at an early stage, monitoring
reimbursement, improving collections, and reducing A/R days.
~ Our Clinical Solution Center helps healthcare organizations
achieve their goals by streamlining clinical processes and
enabling clinicians to obtain easy access to reliable patient
information. Our goal is to achieve positive outcomes that
increase patient and physician satisfaction.
~ Our Health Information Management Solution Center provides
secure access to accurate healthcare information and improves
productivity by eliminating the duplication of medical records
and improving workflow. Our goal is to increase data quality,
produce reliable diagnostic, procedural and regulatory
information and reduce a healthcare organization's exposure to
legal and financial risks associated with providing healthcare.
~ Our Q Solution Center encompasses a suite of products designed to
assist healthcare facilities and enterprises to maintain a
competitive position. These solutions incorporate innovative
technology to capitalize on existing clinical and financial
information and share this information across a broad base of
diverse users. Offerings in the Q Solutions Center include
product and service solutions which span a hospital's enterprise.
QuadraMed was incorporated in September 1993 in California under the name
QuadraMed Corporation and reincorporated in Delaware in 1996. We have expanded
significantly since our inception in 1993, primarily through the acquisition of
other businesses, products and services. Unless the context otherwise requires,
references herein to the "Company", "QuadraMed", "we", "us", and "our" refer to
QuadraMed Corporation, a Delaware corporation, its subsidiaries and QuadraMed
Corporation, its California
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predecessor. Our executive offices are located at 22 Pelican Way, San Rafael,
California 94901 and our telephone number is (415) 482-2100.
We have expanded in part through acquisitions of products, technologies
and businesses. While we have focused recently on integrating our acquisitions,
we have indicated that we may acquire product technologies and businesses in the
future. Our ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of products,
technologies or businesses and management's ability to effectively negotiate and
consummate acquisitions and integrate and operate the new products, technologies
or businesses. There is significant competition for acquisition opportunities in
our industry, which may intensify due to increasing consolidation in the health
care industry, thereby increasing the costs of capitalizing on acquisition
opportunities. We compete for acquisition opportunities with other companies
that have significantly greater financial and management resources than
QuadraMed. The inability to successfully identify appropriate acquisition
opportunities, consummate acquisitions or successfully integrate acquired
products, technologies, operations, personnel or businesses could have a
material adverse effect on our business, financial condition and results of
operations. In addition, acquisitions may divert management's attention from
other business concerns, expose us to the risks of entering markets in which we
have no direct prior experience or to risks associated with the market
acceptance of acquired products and technologies, or result in the loss of key
employees of QuadraMed or the acquired company. Moreover, acquisitions may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt and the recognition of amortization expenses related to goodwill
and other intangible assets, which could have a material adverse effect on our
business, financial condition and results of operations. We may not be able to
identify or successfully complete acquisitions of products, technologies or
businesses in the future. In addition, declines in our stock price will
negatively affect our ability to consummate acquisitions that are accretive to
earnings.
Realizing benefits from acquisitions will depend in significant part upon
the successful integration of the acquired businesses, including their products
and employees, with QuadraMed, and there can be no assurance that such
integration will not entail substantial costs, delays or other problems or that
such integration will be successfully completed. The effort to integrate the
businesses will divert the attention of management from other matters and will
result in significant operational and administrative expense. Any difficulties
encountered in the integration process could have a material adverse effect on
our revenues and operating results of QuadraMed. In addition, the process of
combining the companies could cause the interruption of, or a disruption in, our
business activities, which could have a material adverse effect on our
operations and financial performance. Even if these businesses are successfully
integrated into QuadraMed, the acquired operations may not achieve sales,
productivity and profitability commensurate with our historical or projected
operating results. Failure to achieve such projected results would have a
material adverse effect on our financial performance, and in turn, on the market
value of our Common Stock. There can be no assurance that we will realize any of
the anticipated benefits of our acquisitions, or that such acquisitions will
enhance our business or financial performance.
Acquisitions involve a number of special risks including, without
limitation, managing geographically dispersed operations, failure of the
acquired business to achieve expected results, failure to retain key personnel
of the acquired business, inability to integrate the new business into existing
operations and risks associated with unanticipated events or liabilities,
potential increases in stock compensation expense and increased compensation
expense resulting from newly hired employees, the assumption of unknown
liabilities and potential disputes with the sellers of one or more acquired
entities, all of which could have a material adverse effect on our business,
results of operations and financial condition. Additionally, customer
dissatisfaction or performance problems at a single acquired company could have
an adverse effect on our reputation and its sales and marketing initiatives.
With the addition of significant businesses, our future operations may place a
strain on its management systems and resources. We expect that we will be
required to continue to improve our financial and management controls, reporting
systems and procedures, and will need to expand, train and manage our work
force. There can be no assurance that QuadraMed will be able to effectively
manage these tasks, and the failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
We have entered the market for enterprise products, which exposes us to
additional risks and uncertainties. These enterprise products have considerably
higher average sales prices than other solutions offered by us and therefore
tend to lengthen our sales cycle and increase the potential variability of our
quarterly operating results.
A substantial portion of our revenues have been and are expected to be
derived from the sale of software products and services to hospitals.
Consolidation in the health care industry, particularly in the hospital and
managed care markets, could cause a decrease in the number of existing or
potential purchasers of our products and services or the loss of one or more of
our significant customers, insofar as customers may be acquired by another
company that uses products or services, which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the decision to purchase our products often involves the
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approval of several members of management or the board of directors of a
hospital or health care provider. Consequently, it is difficult for us to
predict the timing or outcome of the buying decisions of customers or potential
customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. We believe that the
commercial value and appeal of our products may be adversely affected if the
current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of our customers are providing services under capitated service
agreements, and a reduction in the use of capitation arrangements as a result of
regulatory or market changes could have a material adverse effect on our
business, financial condition and results of operations. During the past several
years, the health care industry has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates and certain
capital expenditures. Certain proposals to reform the health care system have
been and are being considered by Congress. These proposals, if enacted, could
change the operating environment for our clients in ways that cannot be
predicted. Health care organizations may react to these proposals by curtailing
or deferring investments, including those for our products and services.
Changes in current health care financing and reimbursement systems could
result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of our products by hospital associations or other customers. Any of these
occurrences could have a material adverse effect on our business, financial
condition and results of operations. In addition, many health care providers are
consolidating to create integrated health care delivery systems with greater
regional market power. As a result, these emerging systems could have greater
bargaining power, which may lead to price erosion of our products. If we cannot
maintain adequate price levels, we would experience a material adverse effect on
our business, financial condition and results of operations. Other market-driven
reforms could also have adverse effects on our business, financial condition and
results of operations.
Our performance also depends in significant part upon the continued
service of our executive officers, our product managers and other key sales,
marketing, and development personnel. The loss of the services of any of our
executive officers or the failure to hire or retain other key employees could
have a material adverse effect on our business, financial condition and results
of operations. Additions of new, and departures of existing, personnel can be
disruptive and could have a material adverse effect on our business, financial
condition and results of operations.
AFFINITY(R) and QuadraMed(R) are registered trademarks of QuadraMed. All
other trademarks and trade names referred to in this Annual Report on Form 10-K
are the property of their respective owners.
QUADRAMED'S SUITE OF PRODUCTS
QuadraMed's products are primarily sold with modular, open architecture
design and flexible electronic interfaces. We structure our product offerings to
utilize data from disparate health care information systems, thereby extending
the functional value of existing legacy system investments. As a result of this
modular design, additional applications can be readily integrated into
customers' existing applications. We have enabled our customers to generate
operational efficiencies, improve cash flow and measure the cost and quality of
care.
The following is a list of key products and services included in our
four Solution Centers:
~ Our AFFINITY solution is a web-enabled healthcare information system
that provides clinical and financial information. AFFINITY provides a
patient-centered database designed to enable users to track each patient
throughout the continuum of care, in real time without duplication of
effort. AFFINITY integrates financial information such as patient
accounting and DRG/case mix with clinical data such as medication
charting and plan of care to automate state and federal reporting,
billing, and other administrative activities. By centralizing clinical
and financial data including scheduling, registration, and medical
records information AFFINITY allows users to aggregate information more
productively and cost-effectively to run their business. AFFINITY is
highly scalable and supports both UNIX and Windows NT.
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~ Our AFFINITY Insight(TM) solution is a business intelligence tool for
internal trend analysis and reporting to support informed
decision-making. Insight(TM) facilitates assimilation of critical
information on complex or large volumes of data and enhances
communication among executive managers. With graphics and interactive
displays, Insight(TM) enables users to drill down through layers of
detail to arrive at new views of data, such as revenue and expense per
unit of service, calculations that would otherwise require the help of IS
personnel.
~ Our Electronic Document Management (EDM) solution enables users to
create secure electronic patient folders that combine both computerized
and scanned documents. An electronic patient account folder may include
detailed daily bills and scanned insurance correspondence. Simultaneous
access by multiple users enables a hospital's accounting staff to
receive patient account documentation when needed, translating into
improved cash flow, more expedient billing, and higher productivity in a
provider's business office.
~ Our Electronic Data Interchange (EDI) solution is a Windows(R)-based,
all claims, all-payor, secure, electronic claims submission system. This
product is designed to eliminate outdated manual processes and
facilitate cash flow management. QuadraMed's paperless claims processing
system enables a hospital's staff to edit claims on-line to
payor-specific requirements, including data fields, clinical logic and
data quality. EDI provides customers with valuable financial data
through sophisticated reporting capabilities. When integrated with our
Electronic Remittance Advice (ERA) solution, EDI provides automated
secondary billing to enhance cash flow.
~ Our Master Patient Index (MPI) solution eliminates existing duplicate
medical records and prevents creation of new duplicates at the point of
registration. MPI is designed to enable hospitals to perform accurate
patient searches in an effort to streamline business operations and
report more accurate accounts receivable figures. MPI reduces a
hospital's expenses by eliminating multiple tests and exams. MPI also
reduces the risks associated with catastrophic misdiagnosis, inaccurate
or unnecessary treatment and breach of patient confidentiality.
~ Our Contract Management solution is designed to enable providers to
measure the allocation of revenues and the profitability of contracts
based on specific payor contract terms. Contract Management's pricing
module eliminates labor intensive, error prone manual repricing of bills,
a process that often leads to inaccurate reimbursement. In addition,
Contract Management is used as a modeling tool for managed care contract
negotiation and detailed analysis of contract performance.
~ In the area of compliance, the Company offers several products and
services, including: Inpatient Coding FACTS, Outpatient Coding FACTS,
ComplySource(TM) and compliance consulting and education. Our FACTS
solutions are designed to assist hospitals in managing the complexities
of federal requirements under HIPAA and in submitting accurate billing
and clinical data. The FACTS product complements providers' existing
compliance efforts by monitoring coding and billing practices for
compliance with mandated guidelines. Our ComplySource solution is
designed to provide consolidated access to legal and government
compliance-related documents. ComplySource can be implemented via the
Intranet or Internet. We also offer a wide range of compliance and
consulting services that are designed to add significant value to
clients.
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~ Our Decision Support solution is designed to provide hospital management
with a business intelligence system for on-line analysis of an
organization's performance, from internal financial trends to individual
provider profiling. Multi-dimensional reporting tools access information
from an array of hospital departments. With this information, clients
can address a wide range of issues, such as resource allocation and
patient cost containment.
~ Our EZ CAP Managed Care solution is designed to assist medical groups,
Independent Practice Associations ("IPA's"), hospitals, Physician-
Hospital Organizations ("PHO's") and other organizations that receive
capitation payments from health plans and are at financial risk for
healthcare services. EZ CAP's key functional areas include enrollee
demographic data, benefits verification and co-payment information,
automated authorizations, flexible provider compensation methods, case
management and utilization tools, provider claims processing and claims
data capture, and detailed reporting capabilities.
~ Our A/R Reduction service solution provides resources to reduce A/R
backlog and accelerate cash flow. While hospital staff focuses on data
collection, billing, compliance, and cash posting of current accounts,
we analyze patient accounts to identify outstanding or underpaid third-
party payments and re-bill, and follow up on third-party claims. We
also conduct managed care underpayment reviews and capitation audits.
~ Our CDM (Charge Description Master) service solution is provided to
increase the accuracy of a hospital's charge master, develop
standardized charges throughout a facility, and assure Medicare
compliance. Our goal is to update a hospital's CPT4/HCPCS coding and
create new sources of revenue by identifying unbilled charges. To
minimize lost reimbursement in the future, we also educate hospital
personnel regarding improved charge capture procedures and make
recommendations for a long-term program for the ongoing management of
the CDM.
~ Our WinPFS (Patient-Focused System) solution is a Windows(R)-based
decision support tool designed to ensure that a hospital's nursing staff
is cost-effectively and responsibly allocated. Using case-weighting and
load-leveling to account for the number of patients as well as their
required levels of care, PFS draws comparisons with the National
Benchmarking Database's fifteen years of trend data in over fifty
clinical specialties. In addition, we provide consultation concerning
resource management within the patient care processes to achieve
improved outcomes.
~ Our encoding and grouping solution is designed to maximize productivity
and minimize workflow duplication. With online code books, search
engines, and DRG assignment and Fraud and Abuse tools, we protect the
integrity of a healthcare organization's clinical data and improve
coding compliance capabilities and accuracy for ICD-9-CM, CPT, and HCPCS
codes. We also offer our customers coders for outsourcing when staff
shortages or backlogs occur.
~ Our Chart Management solution runs on a suite of Windows(R)-based
applications that manage patient data from the inception of treatment
until reimbursement. This solution locates and reserves charts,
authenticates and distributes transcribed medical reports,
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completes charts within JCAHO's required time, checks for deficiencies,
manages ROI through secure automatic faxing of medical records, and
speeds the collection of receivables.
~ Our ROI (Release of Information) services are offered as a solution for a
provider's release of information, file management, storage, and staffing
needs. Our goal is to increase office productivity and assure accurate,
efficient, and quick processing of release of information requests, while
increasing compliance with JCAHO standard and confidentiality laws.
~ Our Performance Measurement solutions are designed to provide integrated
comparative perspectives on clinical, financial, and market performance
for a healthcare organization. Clinical views offer comparative,
risk-adjusted, patient-level databases for improving quality and building
networks. Access to integrated clinical and financial resource management
information, external cost and LOS benchmarks, and procedure level
costing provides data for financial planning. In addition, a tool with
critical healthcare planning and market information on an organization
and its competitors provides a basis for high-level strategic planning.
~ Our APC solutions include education, consulting, and information
technology designed to empower a healthcare organization with strategies
for making a successful transition to the Outpatient Prospective Payment
System. Seminars and Internet-based training in "Preparing for APCs"
detail what hospital staff can do in advance to reduce negative financial
impacts. Our APC assessment team reviews a healthcare organization's
process and helps to create an APC readiness plan. Our APC Grouper
application assigns payment classifications to assure proper
reimbursement.
CUSTOMERS
Historically, we have marketed our products primarily to hospitals, with
additional marketing to hospital associations, physician groups, payors and
self-administered employers. Substantially all of our revenues have been derived
from the sale of software products and services to hospitals. With the industry
trend toward the formation of IDNs, we have designed a product suite to
accommodate this emerging industry sector. To date, QuadraMed and its
subsidiaries have approximately 4,000 customers, a substantial majority of which
are hospitals, located in all 50 states, the District of Columbia, Canada, South
Africa and the Philippines. We expect to maintain a high percentage of hospital
customers for the foreseeable future. The health care industry is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care organizations. Changes in
current health care financing and reimbursement systems could result in the need
for unplanned product enhancements, in delays or cancellations of product orders
or shipments or in the revocation of endorsement of our products by hospital
associations or other customers. Any of these occurrences could have a material
adverse effect on our business, financial condition and results of
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operations. In addition, many health care providers are consolidating to create
integrated health care delivery systems with greater regional market power. As a
result, these emerging systems could have greater bargaining power, which may
lead to price erosion of our products. If we are unable to maintain adequate
price levels, we would experience a material adverse effect on our business,
financial condition and results of operations. Other market-driven reforms could
also have unpredictable effects on our business, financial condition and results
of operations.
SALES AND MARKETING
As of March 28, 2000, QuadraMed employed 100 direct sales
representatives, 66 product managers, and a marketing support staff of 15
individuals. We market our products and services through direct sales contacts,
strategic alliances, participation in trade shows and advertisements in industry
publications. In addition, senior management plays an active role in the sales
process by cultivating industry contacts.
RESEARCH AND DEVELOPMENT
As of March 28, 2000, QuadraMed employed 192 people in the areas of
product design, research and development and 129 people in the areas of quality
assurance and technical support. Our product development strategy is focused on
continually enhancing existing products by increasing their functionality and
ease of use. In addition, we are enhancing the reporting capabilities of our
applications, expanding our outpatient and inpatient databases and improving our
comparative reporting and benchmarking capabilities with third-party databases.
A significant amount of our research and development resources are dedicated to
integrating acquired technology into our suite of products.
In fiscal years 1997, 1998, and 1999, our research and development
expenses totaled $15.6 million, $22.5 million, and $23.2 million, respectively,
representing 11.1%, 10.7%, and 9.7%, respectively, of our total revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HIGHLY COMPETITIVE MARKET
Competition in the market for our products and services is intense and is
expected to increase. Increased competition could result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations. We
compete with other providers of health care information software and services,
as well as health care consulting firms. Some principal competitors include,
among others:
- - Healtheon/WebMD Corporation, CIS Technologies, Inc., a division of
National Data Corporation, Inc., and Sophisticated Software, Inc. in the
market for our EDI products;
- - McKesson HBOC, Inc. and SoftMed Corporation Inc. in the market for our
electronic document management products;
- - Eclipsys Corporation and Healthcare Microsystems, Inc., a division of
Health Management Systems Inc. and MediQual Systems, Inc., a division of
Cardinal Health, Inc., in the market for our decision support products;
- - McKesson HBOC, Inc., Shared Medical Systems, Inc., MediTech Corporation
and Eclipsys Corporation in the market for our enterprise products;
- - a subsidiary of Minnesota Mining and Manufacturing, in the market for our
medical records products;
- - FYI Corporation and SMART Corporation in the market for our health
information management services; and
- - Health Management Systems, Inc., HCIA-SACHS Inc., Creg Corportion, and
MediQual Systems, Inc., a division of Cardinal Health, Inc., in the
market for decision support products.
In addition, current and prospective customers evaluate our capabilities
against the merits of their existing information systems and expertise.
Furthermore, major software information systems companies, including those
specializing in the health care industry, not presently offering products that
compete with those offered by us, may enter our markets. In addition, many of
our competitors and potential competitors have significantly greater financial,
technical, product development, marketing and other resources and market
recognition than us. Many of our competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, our competitors may be able to respond more quickly
to new or emerging technologies, changes in customer requirements and political,
economic or regulatory changes in the health care industry and may devote
greater resources to the development, promotion and sale of their products than
us. There can be no assurance that we will be able to compete successfully
against current and future competitors or that such competitive pressures will
not materially adversely affect our business, financial condition and operating
results.
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GOVERNMENT REGULATION AND HEALTH CARE REFORM
The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. The FDA could
determine in the future that any predictive aspects of our products make them
clinical decision tools subject to FDA regulation. Compliance with these
regulations could be burdensome, time consuming and expensive. QuadraMed also
could become subject to future legislation and regulations concerning the
development and marketing of health care software systems. These could increase
the cost and time necessary to market new products and could affect QuadraMed in
other respects not presently foreseeable. QuadraMed cannot predict the effect of
possible future legislation and regulation.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other health care
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by QuadraMed. There can be no
assurance that changes to state or federal laws will not materially restrict the
ability of health care providers to submit information from patient records
using our products.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. We believe that the
commercial value and appeal of our products may be adversely affected if the
current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of our customers are providing services under capitated service
agreements, and a reduction in the use of capitation arrangements as a result of
regulatory or market changes could have a material adverse effect on our
business, financial condition and results of operations. During the past several
years, the health care industry has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates and certain
capital expenditures. Certain proposals to reform the health care system have
been and are being considered by Congress. These proposals, if enacted, could
change the operating environment for our clients in ways that cannot be
predicted. Health care organizations may react to these proposals by curtailing
or deferring investments, including those for our products and services.
INTELLECTUAL PROPERTY
We believe our methodologies, computer software and many of our databases
to be proprietary. We seek to protect our proprietary information through
nondisclosure agreements with our employees. Our policy is to have employees
enter into nondisclosure agreements containing provisions prohibiting the
disclosure of confidential information to anyone outside QuadraMed, requiring
disclosure to us of any new ideas, developments, discoveries or inventions
conceived during employment, and requiring assignment to us of proprietary
rights to such matters that are related to our business.
We also rely on a combination of trade secrets, copyright and trademark
laws, contractual provisions and technical measures to protect its rights in
various methodologies, systems, products and databases. We have no patents or
copyrights covering our software technology. Any infringement or
misappropriation of our proprietary software and databases would disadvantage us
in our efforts to retain and attract new customers in a highly competitive
market and could cause us to lose revenues or incur substantial litigation
expense.
There can be no assurance that measures taken by us to protect our
intellectual property will be adequate or that our competitors will not
independently develop products and services that are substantially equivalent or
superior to ours. Substantial litigation regarding intellectual property rights
exists in the software industry, and we expect that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of products
overlaps. However, due to the nature of our application software, we believe
that patent, trade secret and copyright protection are less significant than our
ability to further develop, enhance and modify our current products.
10
<PAGE> 11
Although we believe that our products do not infringe on the intellectual
property rights of others, there can be no assurance that such a claim will not
be asserted against us in the future, or that a license or similar agreement
will be available on reasonable terms in the event of an unfavorable ruling on
any such claim. Any such claim may require us to incur substantial litigation
expenses or subject us to significant liabilities and could have a material
adverse effect on our business, financial condition and results of operations.
EMPLOYEES
As of March 28, 2000, QuadraMed employed 3,478 people, including 182
in general administration, 321 in product design, research and development
quality assurance and technical support, 115 in sales and marketing and 2,860 in
operations. None of our employees is represented by a union or other collective
bargaining group. We believe our relationship with our employees to be
satisfactory.
11
<PAGE> 12
ITEM 2. PROPERTIES.
Our executive and corporate offices are located in San Rafael,
California, in approximately 33,000 square feet of leased office space under a
lease that expires in 2000. We also maintain several regional offices throughout
the United States.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, QuadraMed may be involved in litigation relating to
claims arising out of our operations in the normal course of business. As of the
date of this Report, we are not a party to any legal proceedings which, if
decided adversely to QuadraMed, would, individually or in aggregate, have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock has been quoted on the Nasdaq National Market since
October 10, 1996 under the symbol "QMDC." The following table sets forth the
range of high and low closing sales prices reported on the Nasdaq National
Market for Company Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1996
Fourth Quarter (October 10, 1996 through December 31, 1996) .... $13 1/2 $8 9/16
Year Ended December 31, 1997
First Quarter .................................................. 12 1/4 9 5/8
Second Quarter ................................................. 10 5/8 6 3/4
Third Quarter .................................................. 20 6 3/4
Fourth Quarter ................................................. 27 1/2 17
Year Ended December 31, 1998
First Quarter .................................................. 35 1/4 18 15/16
Second Quarter ................................................. 33 1/2 22 7/8
Third Quarter .................................................. 31 3/4 19 5/8
Fourth Quarter ................................................. 27 15 1/16
Year Ended December 31, 1999
First Quarter .................................................. 30 7 1/8
Second Quarter ................................................. 12 1/16 4 1/4
Third Quarter .................................................. 10 11/16 6 1/16
Fourth Quarter ................................................. 8 7/8 4 1/2
Year Ended December 31, 2000
First Quarter (through March 3, 2000) .......................... 10 7/8 6 1/2
</TABLE>
As of March 3, 2000, there were approximately 384 holders of record of
our Common Stock. We believe that the number of beneficial holders of Company
Common Stock substantially exceeds this number.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock. We
currently intend to retain all future earnings, if any, to fund the development
and growth of our business and do not anticipate paying any cash dividends on
our Common Stock in the foreseeable future.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA.
The following selected financial data of QuadraMed for the fiscal years
ended December 31, 1995, 1996, 1997, 1998 and 1999, are derived from, and are
qualified by reference to, the audited financial statements and should be read
in conjunction with the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues .................................... $ 73,041 $ 101,076 $ 140,800 $ 210,620 $ 239,585
Loss from operations ........................ (25,033) (8,169) (31,848) (12,174) (9,284)
Net loss .................................... (51,943) (44,351) (37,985) (21,376) (12,330)
Basic and diluted net loss per share(1) ..... $ (5.29) $ (3.98) $ (2.34) $ (0.91) $ (0.49)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ................... $(11,540) $ 7,234 $ 16,457 $ 94,963 $ 80,935
Total assets ................................ 45,327 70,495 124,022 264,733 219,329
Stockholders' equity (deficit) .............. (31,641) 23,213 24,762 68,988 62,581
</TABLE>
- ------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing net income per share. In February 1997, the Financial
Accounting Standards board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which requires
disclosure of basic earnings per share and diluted earnings per share and
is effective for periods ending subsequent to December 15, 1997.
ITEM 7. OTHER INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. OVERVIEW
QuadraMed leverages our industry expertise and product breadth to
deliver web-enabled, secure product and service solutions that link the
nation's hospitals to their diverse constituents, including payors, physicians,
patients, insurers and governmental agencies. We are focused on customer
service excellence and delivering a return on investment for our customers
through increased efficiency and improved cash flow. We have implemented our
solutions in approximately 4,000 provider sites, representing more than 60% of
the nation's hospitals.
We have a significant talent pool, which, through our active
participation in professional and trade organizations, has helped to shape the
healthcare information technology industry. We also have substantial expertise
in the core components required by the Health Insurance Portability and
Accountability Act of 1996 (HIPAA). In addition to our web-enabled solutions, we
have developed the American Hospital Directory (ahd.com), the most comprehensive
resource for hospital and healthcare benchmarking on the worldwide web. Our site
is the only one of its kind to integrate data from the American Hospital
Association.
We have expanded significantly since our inception in 1993, primarily
through the acquisition of other businesses, products and services. Accordingly,
our consolidated financial statements have been restated to include historical
results of entities acquired on a pooling of interests basis. The addition of
historical results of acquired entities should be considered when reading the
period to period comparisons for fiscal years 1997, 1998 and 1999. Additionally,
reference is made to the consolidated financial statements and notes thereto for
the effect of such acquisitions.
14
<PAGE> 15
Since December 1995, we have completed the following significant
acquisitions:
<TABLE>
<CAPTION>
DESCRIPTION OF
COMPANY ACQUIRED COMPANY ACQUIRED POOLING/PURCHASE DATE ACQUIRED
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C>
Healthcare Design Systems Health care financial management Purchase December 1995
and decision support software
Medicus Systems Corporation Health care financial management Purchase November 1997*
and decision support software
Rothenberg Health Systems, Inc. Capitation management software Pooling December 1997
and Healthcare Research Affiliates, and H.E.D.I.S. reporting
Inc. (collectively, "Rothenberg")
Cabot Marsh Corporation Health care compliance and Purchase February 1998
consulting company
Pyramid Health Group, Inc. Cash flow management services Pooling June 1998
("Pyramid") company
Integrated Medical Networks, Inc. Health care financial management Pooling September 1998
("IMN")
The Compucare Company Enterprise wide software Pooling March 1999
</TABLE>
- ----------
* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus
Systems Corporation on November 9, 1997 and the remaining 43.3% in May
1998.
In September 1998, QuadraMed acquired all the outstanding capital stock
of Integrated Medical Networks, Inc.("IMN") in exchange for 1,550,000 shares of
our Common Stock. The acquisition was accounted for as a pooling of interests.
In accordance with pooling accounting rules, our consolidated financial
statements have been restated to include the historical operating results of
IMN for the 1997 and 1996 fiscal years.
In June 1998, QuadraMed acquired all the outstanding capital stock of
Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares of our
Common Stock under the terms and conditions of the acquisition agreement. The
acquisition was accounted for as a pooling of interests. In accordance with
pooling accounting rules, our consolidated financial statements have been
restated to include the historical operating results of Pyramid for the 1997 and
1996 fiscal years.
In March 1998, QuadraMed acquired Velox Systems Corporation ("Velox") for
an aggregate purchase price of 40,562 shares of our Common Stock, the market
value of which was approximately $1,500,000 and approximately $3,100,000 in
cash. In connection with this acquisition, which was accounted for as a
purchase, QuadraMed allocated the purchase price based upon the estimated fair
value of the assets and liabilities assumed. The valuation was based on accepted
appraisal methodologies used at the time of the allocation. Since that time, the
SEC has provided new guidance with respect to the valuation of intangible assets
in purchase business combinations, including in-process R&D ("IPR&D"). In
response to this new guidance, QuadraMed elected to retroactively adjust the
amount of intangibles assigned to IPR&D from the previously reported $4,800,000
to $1,500,000 in the quarter ended March 31, 1998.
In February 1998, QuadraMed acquired Cabot Marsh Corporation ("Cabot
Marsh") for an aggregate purchase price of 382,767 shares of our Common Stock,
the market value of which was approximately $8,400,000 and approximately
$2,800,000 in cash. In connection with this acquisition, which was accounted for
as a purchase, QuadraMed allocated the purchase price based upon the estimated
fair value of the assets and liabilities assumed. The valuation was based on
accepted appraisal methodologies used at the time of the allocation. Since that
time, the SEC has provided new guidance with respect to the valuation of
intangible assets in purchase business combinations, including IPR&D. In
response to this new guidance, QuadraMed elected to retroactively adjust the
amount of intangibles assigned IPR&D from the previously reported $6,200,000 to
$4,200,000 in the quarter ended March 31, 1998.
15
<PAGE> 16
QuadraMed acquired Rothenberg in December 1997. In exchange for all the
outstanding capital stock of Rothenberg, QuadraMed issued 1,588,701 shares of
our common stock. The acquisition was accounted for as a pooling of interests.
In November 1997, QuadraMed acquired 56.7% of Medicus Systems Corporation
("Medicus"). Our purchase price for the 56.7 percent interest in Medicus was
approximately $26.3 million, which was comprised of a cash payment of $21.7
million, the issuance of a note payable for approximately $1.6 million to one
selling stockholder, the value of warrants issued to the selling stockholders of
$700,000, and transaction costs of $2.3 million. In connection with the
acquisition, which was accounted for as a purchase, QuadraMed allocated the
purchase price based upon the estimated fair value of our proportionate share of
the assets acquired and liabilities assumed. Intangible assets acquired
aggregated to $30.2 million, of which $1.7 million, $6.7 million and $21.8
million were assigned to acquired software, acquired intangible assets, and
acquired research and development in-process, respectively. Because there was no
assurance that QuadraMed would be able to successfully complete the development
and integration of the acquired research and development in-process or that it
had alternative future use at the acquisition date, the acquired research and
development in-process to expense we charged in the year ended December 31,
1997. Our proportionate share of net tangible liabilities assumed in the
acquisition totaled approximately $12.8 million. In May 1998, we completed the
acquisition of Medicus by purchasing the remaining 43.3% interest. We allocated
the remaining 43.3% purchase price based on the estimated fair value of the
assets and liabilities assumed. The valuation was based on accepted appraisal
methodologies used at the time of the allocation. Since that time, the SEC
provided new guidance with respect to the valuation of intangible assets in
purchase business combinations, including IPR&D. In response to this guidance,
we elected to retroactively adjust the amount of intangibles assigned to
acquired in-process research and development from the previously reported
$17,146,000 to $4,763,000 in the quarter ended June 30, 1998. The remaining
intangible balance will be amortized over a seven year period.
During 1998, we recorded $4,202,000 of non-recurring charges. These
charges primarily related to costs associated with closing of a duplicative
operating facility within our business office outsourcing operations. Such costs
included future rents and lease obligations we were contractually obligated to
fulfill as well as severance packages for employees working out of that office.
In February 1997, we entered into an arrangement to provide EDI
processing and management services to EDI USA, Inc. an organization owned and
established by thirteen independent Blue Cross and Blue Shield Plans to build
and operate an EDI transaction network. QuadraMed and EDI USA, Inc. terminated
this arrangement in December 1997. We recorded non-recurring charges of
$2,492,000 for the year ended December 31, 1997, related to costs incurred in
connection with the processing arrangement and the termination thereof.
As of March 28, 2000, QuadraMed and its subsidiaries had approximately
4,000 customers, approximately 80% of which were hospitals, located in all 50
states, the District of Columbia, Canada, Puerto Rico, South Africa and the
Philippines. We expect to maintain a high percentage of hospital customers. No
single customer accounted for more than 10% of our revenues in 1997, 1998 or
1999.
QuadraMed licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of our software products. Service revenue is
comprised of business office and health information management outsourcing, cash
flow management, compliance and consulting services.
The license product suite is comprised of enterprise-wide systems,
business office solutions, and medical records office solutions. Products can be
licensed individually or as a suite of interrelated products. Products are
licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis. Revenues from enterprise-wide systems are
recognized based upon percentage of completion. 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 an acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
We also provide services to certain of our licensees of software
products. These services consist primarily of consulting and post-contract
customer support. Consulting services generally consist of installation of
software at customer sites, and revenue is recognized upon completion of
installation. Unbilled receivables consist of work performed or software
delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
16
<PAGE> 17
of revenue deferred under annual maintenance and annual license agreements
on which amounts have been received from customers and for which the earnings
process has not been completed.
We also provide business office and health information management
outsourcing, cash flow management, compliance and consulting services to
hospitals under contract service arrangements. Outsourcing revenues typically
consist of fixed monthly fees plus, in the case of business office outsourcing,
incentive-based payments that are based on a percentage of dollars recovered for
the provider for which the service is being performed. The monthly fees are
recognized as revenue on a monthly basis at the end of each month. Incentive
fees based upon collection of accounts from payors are recognized upon payment
by the payor to the customer. Incentive fees based upon acknowledgement from the
customer are recognized upon such acknowledgement. These fees are recorded as
unbilled revenue until the government agency pays the customer. Compliance and
consulting revenues are recognized as the services are provided. We have
experienced operating margins at differing levels related to licenses and
services. The service business has historically realized fluctuating margins
that were significantly lower than margins associated with licenses.
We capitalize a portion of our software costs for internally developed
software products. These capitalized costs relate primarily to the development
of new products and the extension of applications to new markets or platforms
using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives (usually five years) of the
products, commencing when each product is available to the market.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the consolidated statement of operations of QuadraMed expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Licenses ............................... 59.1% 56.9% 53.6%
Services ............................... 40.9 43.1 46.4
----- ----- -----
Total revenues ......................... 100.0 100.0 100.0
Operating expenses:
Cost of licenses ....................... 29.5 25.0 24.0
Cost of services ....................... 27.3 28.3 28.2
General and administration ............. 22.3 15.7 13.1
Sales and marketing .................... 10.1 9.3 9.6
Research and development ............... 11.1 10.7 9.7
Amortization of intangibles ............ 1.2 3.1 3.4
Acquisition costs ...................... 2.2 4.9 2.9
Impairment of intangibles .............. -- -- 4.4
Non-recurring charges .................. 3.3 2.0 7.8
Write-off of acquired in-process
research and development ............. 15.6 6.8 0.7
----- ----- -----
Total operating expenses ............. 122.6 105.8 103.8
----- ----- -----
Loss from operations ........................ (22.6) (5.8) (3.8)
Interest income (expense), net .............. (0.3) (0.2) (1.2)
Other income (expense), net ................. (1.8) (0.1) 0.5
----- ----- -----
Net loss before provision
for income taxes and minority interest .... (24.7) (6.1) (4.5)
Provision for income taxes .................. (0.8) (2.0) (0.6)
Minority interest in income (loss) .......... -- (0.2) --
Loss from discontinued operations ........... (1.2) (0.9) --
Dividend accretion .......................... (0.3) (0.9) --
----- ----- -----
Net loss .................................... (27.0)% (10.1)% (5.1)%
===== ===== =====
</TABLE>
17
<PAGE> 18
Years Ended December 31, 1999 and 1998
Revenues
Licenses. License revenues increased 7.2% to $128.4 million in 1999 from
$119.8 million in 1998. 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. The increase in license
revenues was due principally to sales to new customers associated with our
coding and capitation products and sales to new and existing customers
associated with enterprise products.
Services. Service revenues increased 22.5% to $111.2 million in 1999 from
$90.8 million in 1998. The increase in service revenues was primarily due to new
customers associated with our health information management outsourcing,
compliance and specialty audit services business.
The increase in revenues for 1999 and 1998 reflected the completion of
numerous acquisitions, several of which were significant. QuadraMed currently
expects to complete fewer acquisitions in 2000. As a result, QuadraMed does not
expect revenues to increase at historical rates in the future.
Cost of Revenues
Cost of licenses. Cost of licenses increased 9.3% to $57.5 million in
1999 from $52.6 million in 1998. Cost of licenses consists primarily of
salaries, benefits and allocated costs related to software installations,
hardware costs, customer support and royalties to third parties. As a percentage
of license revenues, cost of licenses increased to 44.8% in 1999 from 43.9% in
1998. Cost of licenses in aggregate and as a percentage of license revenues
increased primarily due to additional personnel hired to support software
installations and customer support for new customers during 1999. Additionally,
in the second half of 1999, QuadraMed experienced an increase in hardware sales,
which typically have a lower margin than the software sales.
Cost of services. Cost of services increased 13.3% to $67.5 million in
1999 from $59.6 million in 1998. Cost of services includes expenses associated
with services performed primarily in connection with health information
management and business office outsourcing, compliance and consulting services.
As a percentage of service revenues, cost of services decreased to 60.7% in 1999
from 65.6% in 1998. The increase in cost of services was due principally to
additional operating costs associated with the health information management
outsourcing services and to a lesser extent, the hiring of additional compliance
consultants. Cost of services as a percentage of service revenues decreased
principally due to a higher revenue contribution from our health information
management outsourcing business unit and, to a lesser extent, the closure of one
of our duplicative operating facilities within our business office outsourcing
operations in the third quarter of 1998. As a result of this facility closure,
we eliminated a lower margin operation. In addition, our audit services provided
higher revenues and operating margins than certain of our other service
businesses in 1999.
Operating Expenses
General and Administration. General and administration expenses decreased
4.9% to $31.4 million in 1999 from $33.0 million in 1998, and decreased as a
percentage of total revenues to 13.1% in 1999 from 15.7% in 1998. The decrease
in general and administration expenses was due to the reduction of certain
overhead costs associated with prior acquisitions as we have centralized many of
our administrative functions. The decrease in general and administration
expenses as a percentage of total revenues was principally due to a combination
of a larger revenue base and the reduction of certain overhead costs.
Sales and Marketing. Sales and marketing expenses increased 17.3% to
$23.1 million in 1999 from $19.7 million in 1998, and increased as a percentage
of total revenues to 9.6% in 1999 from 9.3% in 1998. Sales and marketing
expenses increased primarily due to the addition of sales and marketing
personnel in 1999 and higher advertising costs, which included a more expansive
participation at the annual healthcare information management conference in
February 1999.
Research and Development. Research and development costs include costs
incurred by us to further our efforts to enhance our products, which ultimately
support our license revenues. Research and development expenses increased 3.1%
to $23.2 million in 1999 from $22.5 million in 1998, and decreased as a
percentage of total revenues to 9.7% in 1999 from 10.7% in 1998. Research and
development expenses increased principally due to higher development costs
incurred for our Enovation product lines. As a percentage of total revenues,
research and development expenses decreased primarily due to a larger revenue
base. We capitalized
18
<PAGE> 19
$4.8 million, $3.1 million and $1.2 million of software development costs in
fiscal 1999, 1998 and 1997, respectively, which represented 17.2%, 12.1% and
6.9% of total research and development expenditures in fiscal 1999, 1998 and
1997. Amortization of capitalized software development costs totaled $704,000,
$713,000 and $388,000 in fiscal 1999, 1998 and 1997, respectively. We believe
that research and development expenditures are essential to maintaining our
competitive position. As a result, we intend to continue to make investments in
the development of new products and in the further integration of acquired
technologies into our suite of products.
Amortization of Intangibles. Amortization of intangibles increased to
$8.2 million in 1999 from $6.5 million in 1998. The increase in amortization of
intangibles is due primarily to the purchase of the remaining 43.3% of Medicus
in May 1998, the acquisitions of Cabot Marsh and Velox during the first quarter
of 1998, and the acquisition of MedData in 1999.
Acquisition Costs. QuadraMed incurred $6.9 million of acquisition costs
for the year ended December 31, 1999. These acquisition costs related to the
Compucare acquisition in 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
1998, QuadraMed incurred $10.3 million of acquisition costs associated with the
acquisitions of Pyramid, Codemaster and Integrated Medical Networks. Acquisition
costs relate primarily to financial advisors hired by QuadraMed and the acquired
companies, legal and accounting fees.
Non-recurring Charges. Non-recurring charges totaled $29.4 million in
1999, primarily associated with the closing of duplicative operating facilities
within several of our business units. As a result of our initiatives to
integrate acquired businesses and consolidate duplicate operations, we have
recorded approximately $10.0 million related to severance payments to employees
ranging from several weeks to two years in the case of certain management of
Compucare. Additionally, the charge included $8.8 million of future rents and
lease obligations that we were contractually obligated to fulfill as well as
other incremental costs to wind-down the operations of the offices. This effort
resulted in a work force reduction of more than 100 employees. We recorded $4.2
million of non-recurring charges in 1998. These charges primarily related to
costs associated with closing of a duplicative operating facility within our
business office outsourcing operations. Such costs included future rents and
lease obligations that we were contractually obligated to fulfill as well as
severance packages for employees working out of that office. Such employees were
paid severance packages through November 1998.
Intangible Assets. We 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.
Acquired Research and Development In-Process. In connection with the
acquisition of Med Data Systems (Med Data) in July 1999, and the acquisitions of
Cabot Marsh, Velox, and InterLink during 1998, QuadraMed expensed $1.7 million
and $14.5 million in 1999 and 1998, respectively, of acquired in-process
research and development ("IPR&D"). This amount was expensed as a non-recurring
charge because the IPR&D projects identified had not yet reached technological
feasibility and had no alternative future use. The following table depicts the
allocations to IPR&D for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Med Data .............. $-- $ 1,722
Velox ................. 1,500 --
Cabot Marsh ........... 4,200 --
Medicus (43.3%) ....... 4,763 --
Other acquisitions .... 4,031 --
------- -------
Total ................. $14,494 $ 1,722
======= =======
</TABLE>
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased technology into commercially viable products, estimating
the resulting net cash flows from each project, excluding the cash flows related
to the portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to develop
that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. In each case, the selection of
the applicable discount rate was based on consideration of our weighted average
costs of capital, as well as other factors including the useful life of each
technology, profitability levels of each technology, the uncertainty of
technology advances that were known at the time, and the stage of completion of
each technology.
VELOX. At the acquisition date, Velox was conducting development,
engineering, and testing activities associated with SMARTLINK, a product which
focuses on accounts receivable analysis and reporting in hospitals, large
physician practices, and other entities. Upon completion, this product was
planned to have significant scalability, a multilayer architecture, and the
ability to incorporate Windows NT 5.0 and the next generation of Microsoft SQL
Server. At the acquisition date, Velox was approximately 35% complete
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with the development of this product. We anticipated that SMARTLINK would
be completed in the last half of 1998, after which we expected to begin
generating economic benefits from the value of the completed IPR&D.
Revenues attributable to SMARTLINK were estimated to be $1.3 million in
1998 and $5.0 million in 1999. IPR&D revenue, as a percentage of total projected
company revenue, was expected to peak in 1999 and decline thereafter as new
product technologies were expected to be introduced. Operating expenses
(expressed as a percentage of revenue) average 79% over the projection period.
The costs to complete the IPR&D were expected to be $293,000 in 1998 and
$239,000 in 1999. A risk-adjusted discount rate of 20% as utilized to discount
projected cash flows.
CABOT MARSH. At the acquisition date, Cabot Marsh was conducting
development, engineering, and testing activities associated primarily with the
next generation of RAMS, a compliance product related to inpatient and
outpatient coding. At the acquisition date, Cabot Marsh was approximately 80%
complete with the development of the IPR&D. We anticipated that the project
would be completed in the second half of 1998, after which we expected to begin
generating economic benefits from the value of the completed IPR&D.
Revenues attributable to the next generation of RAMS were estimated to be
$807,000 in 1998 and $11.3 million in 1999. IPR&D revenue, as a percentage of
total projected company revenue, was expected to peak in 1999 and decline
thereafter as new product technologies were expected to be introduced by the
company. Operating expenses (expressed as a percentage of revenue) average 57%
over the projection period. The costs to complete the IPR&D efforts were
expected to be $140,000 in 1998 and $427,000 in 1999. A risk-adjusted discount
rate of 19% was utilized to discount projected cash flows.
MEDICUS. At the acquisition date, Medicus was conducting development,
engineering, and testing activities associated with the next generations of the
company's Clinical Data Systems ("CDS") and Patient Focused Systems ("PFS")
project lines. At the acquisition date, Medicus was approximately 30% and 60%
complete with CDS and PFS, respectively. We anticipated that CDS would be
completed at the end of 1998, with PFS scheduled for completion in mid-1999.
After these release dates, we expected to begin generating economic
benefits from the value of the completed IPR&D.
Revenues attributable to CDS were estimated to be $6.0 million in 1999
and $18.0 million in 2000. IPR&D revenue, as a percentage of total projected
product revenue, is expected to peak in 2000 and decline thereafter as new
product technologies are expected to be introduced by the company. Revenues
attributable to PFS were estimated to be $7.2 million in 2000 and $9.8 million
in 2001. IPR&D revenue, as a percentage of total projected product revenue, was
expected to peak in 2000 and decline thereafter as new technologies were
expected to be introduced. For both projects, operating expenses (expressed as a
percentage of revenue) average 61% over the projection period. The costs to
complete the CDS IPR&D efforts were expected to be $14,000 in 1998 and $1.2
million in 1999. The costs to complete the PFS IPR&D efforts were expected to be
$6,000 in 1998 and $309,000 in 1999. For each of the projects, a risk-adjusted
discount rate of 18% was utilized to discount projected cash flows.
In connection with the acquisition of 56.7% of the outstanding stock of
Medicus in November 1997, QuadraMed allocated $21.9 million related to IPR&D.
This amount was expensed as a non-recurring charge because the IPR&D projects
identified had not yet reached technological feasibility and had no alternative
future use. The amounts allocated to IPR&D for the year ended December 31, 1997
were evaluated based on current industry practices.
MED DATA. At the acquisition date, Med Data was conducting development,
engineering, and testing activities associated with the MEDREC/Chart Completion
Millennium product (Chart Completion). At the acquisition date, Med Data was
approximately 68% complete with this product. We anticipated that Chart
Completion would be completed in late 1999, after which we expected to begin
generating economic benefits from the value of the completed IPR&D.
Revenues attributable to Chart Completion were estimated to be $240,000
in 1999, increasing to $3.3 million in 2000 and peaking at $5.1 million in 2001
and declining thereafter as new product technologies were expected to be
introduced. Operating expenses (expressed as a percentage of revenue) average
58% over the projection period. The costs to complete the IPR&D were expected to
be $236,000 in 1999. A risk-adjusted discount rate of 25% was utilized to
discount projected cash flows.
The SMARTLINK, RAMS, CDS, PFS and products have been completed as of
12/31/99. Chart Completion is expected to be completed in the second quarter of
2000.
Interest income (expense). Interest expense, net was $2.8 million in 1999
and $387,000 in 1998. Interest expense during 1999 was principally due to
interest expense on our $115 million Convertible Subordinated Debentures which
were sold in May 1998, and interest expense on notes payable assumed from the
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<PAGE> 21
acquisition of IMN in September 1998, which were paid in full in April 1999.
Interest expense was partially offset by interest income from our cash and
investments.
Provision for Income Taxes. Provision for income taxes was $1.5 million
in 1999 and $4.3 million in 1998. The provision for income taxes is primarily
due to state and alternative minimum tax liabilities on certain of our legal
entities. Amounts allocated to acquired in-process research and development are
not deductible for tax purposes. For financial reporting purposes, a 100%
valuation allowance of $22.7 million and $20.4 million has been recorded in 1999
and 1998 against our deferred tax assets, which consist primarily of the
benefits associated with our net operating loss carryforwards. We are unable to
conclude that it is more likely than not that these assets will be realizable.
Years Ended December 31, 1998 and 1997
Revenues
Licenses. License revenues increased 44.0% to $119.8 million in 1998 from
$83.2 million in 1997. The increase in license revenues was primarily due to
revenues associated with the acquisition of Medicus and to a lesser extent,
revenues from new customers for our coding, capitation and enterprise solution
software products.
Services. Service revenues increased 57.6% to $90.8 million in 1998 from
$57.6 million in 1997. The increase in service revenues was primarily due to new
customers associated with our health information management outsourcing
business, and to a lesser extent, customers associated with the acquisition of
Cabot Marsh during the first quarter of 1998.
Cost of Revenues
Cost of licenses. Cost of licenses increased 26.7% to $52.6 million in
1998 from $41.5 million in 1997. As a percentage of license revenues, cost of
licenses decreased to 43.9% in 1998 from 49.9% in 1997. Cost of licenses
increased primarily due to additional personnel hired to support software
installations and customer support for new customers during 1998. As a
percentage of license revenues, cost of revenues decreased primarily due to an
increased revenue base during 1998.
Cost of services. Cost of services increased 54.9% to $59.6 million in
1998 from $38.5 million in 1997. As a percentage of service revenues, cost of
services decreased to 65.6% in 1998 from 66.8% in 1997. Cost of services
increased primarily due to additional personnel costs associated with our health
information management outsourcing business and to a lesser extent, additional
operating costs as a result of our acquisition of Cabot Marsh during the first
quarter of 1998.
Operating Expenses
General and Administration. General and administration expenses increased
5.0% to $33.0 million in 1998 from $31.4 million in 1997, and decreased as a
percentage of total revenues to 15.7% in 1998 from 22.3% in 1997. The decrease
in general and administration expense as a percentage of total revenues was
primarily due to a larger revenue base, the reduction of certain overhead costs
associated with prior acquisitions and to a lesser extent, legal and other costs
QuadraMed incurred in 1997 to settle certain litigation initiated in prior
years.
Sales and Marketing. Sales and marketing expenses increased 38.6% to
$19.7 million in 1998 from $14.2 million in 1997, and decreased as a percentage
of total revenues to 9.3% in 1998 from 10.1% in 1997. Sales and marketing
expenses increased primarily from the hiring of additional sales personnel
during 1998 and increased advertising costs, including sponsoring and
participating in more trade shows during 1998. As a percentage of total
revenues, sales and marketing expenses decreased primarily due to a larger
revenue base in 1998.
Research and Development. Research and development expenses increased
44.0% to $22.5 million in 1998 from $15.6 million in 1997, and decreased as a
percentage of total revenues to 10.7% in 1998 from 11.1% in 1997. The increase
in research and development expenses was due to the hiring of additional
programmers from acquired companies and the ongoing development of product
enhancements and new products. As a percentage of total revenues, research and
development expenses decreased primarily due to a larger revenue base.
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Amortization of Intangibles. Amortization of intangibles increased to
$6.5 million in 1998 from $1.7 million in 1997. The increase in amortization of
intangibles is due primarily to the acquisition of 56.7% of Medicus in November
1997, the purchase of the remaining 43.3% of Medicus in May 1998, and the
acquisitions of Cabot Marsh and Velox during the first quarter of 1998.
Acquisition Costs. During the fourth quarter ended December 31, 1997,
QuadraMed completed two acquisitions which were accounted for on a pooling of
interests basis. In connection with these acquisitions, QuadraMed incurred $3.1
million in acquisition and related costs.
Non-recurring Charges. QuadraMed recorded non-recurring charges of $4.7
million in 1997. These non-recurring charges were comprised of $2.5 million
related to the termination of the claims processing arrangement with EDI USA,
Inc. and other charges associated with the write down of certain assets which
were determined to have no future realizable value.
Provision for Income Taxes. Provision for income taxes was $1.1 million
in 1997, primarily comprised of state and alternative minimum tax liabilities.
For financial reporting purposes, a 100% valuation allowance of $15.5 million
has been recorded in 1997 against our deferred tax assets, as management is
unable to conclude that it is more likely than not that these assets will be
realizable.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, QuadraMed completed its initial public offering of
common stock, which resulted in net proceeds to QuadraMed of approximately $26.1
million. In October 1997, QuadraMed completed a follow-on offering of common
stock, which resulted in net proceeds to QuadraMed of approximately $57.3
million. In May 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% per annum. Proceeds to
QuadraMed from the offering were $110.8 million.
At December 31, 1999, QuadraMed had $11.6 million of cash and cash
equivalents, $31.2 million of short and long-term investments and $80.9 million
in net working capital. Net cash used in operating activities was $38.2 million,
$26.5 million and $7.7 million in the years ended December 31, 1999, 1998 and
1997, respectively. Net cash used in operating activities in 1999 was
principally due to an increase in unbilled and accounts receivable, prepaid
expenses and other assets and a decrease in accounts payable and accrued
liabilities and deferred revenue. Accounts receivable increased primarily due to
an increase in receivables associated with our Enterprise products and business
office service businesses. Prepaids and other assets increased primarily due to
prepaid royalties related to purchased technology rights during the second
quarter of 1999. Net cash used in operating activities in 1998 was principally
attributable to our net loss in 1998, a substantial portion of which was
comprised of non-cash charges to write-off acquired in-process research and
development related to the remaining acquisition of 43.3% of Medicus in May 1998
and other acquisitions and acquisition and non-recurring costs recorded during
1998. In addition, while accounts receivable increased during 1998, accounts
payable and accrued liabilities decreased during 1998. The increase in accounts
receivable was primarily due to the significant increase in revenues in 1998,
while the decrease in accounts payable and accrued liabilities was primarily due
to the payment of acquisition and severance related costs associated with
acquisitions in the latter half of 1997 and the pay down of other accrued
liabilities from acquired companies.
Net cash provided by investing activities was $1.6 million in the year
ended December 31, 1999. Net cash used in investing activities was $87.6 million
and $32.3 million in the years ended December 31, 1998 and 1997, respectively.
Investing activities in fiscal year 1999 primarily included the purchase of
technology rights of $6.0 million, the additional equity investment of $3.0
million in VantageMed, $8.2 million paid for acquisitions which primarily
consisted of $5 million paid in the acquisition of Med Data, purchases of
capital equipment, and the capitalization of computer software development
costs. These cash outflows were offset by $33.3 million received from net
maturities of short-term investments. Investing activities in fiscal year 1998
primarily included the purchase of short and long-term investments, cash paid
for several acquisitions and the purchase of equipment by QuadraMed. Investing
activities in fiscal year 1997 primarily included cash paid for the Medicus and
Synergy HMC acquisitions, purchases of equipment and the capitalization of
computer software development costs.
Net cash used in financing activities was $18.4 million in the year ended
December 31, 1999. Net cash provided by financing activities was $131.9 million
and $59.7 million in the years ended December 31, 1998 and 1997, respectively.
Financing activities in 1999 related to the repayment of the outstanding
balances under the line of credit assumed as part of the Compucare acquisition
and under a note payable assumed as part of the IMN acquisition, offset by the
proceeds from the exercise of common stock options. Net cash provided by
financing activities in 1998 primarily related to the offering of $115 million
of Convertible Subordinated Debentures, which raised net proceeds of $110.8
million in April 1998, and to the issuance of $400,000 in convertible promissory
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notes. Additional cash was provided by the exercise of common stock warrants
issued to former Medicus stockholders and the exercise of common stock options
during 1998. Net cash provided by financing activities in fiscal year 1997
included $58.2 million in net proceeds from our follow-on common stock offering
in October 1997.
In September 1998, QuadraMed entered into an arrangement to guarantee a
line of credit of another company for up to $12.5 million. Outstanding balances
under the line of credit accrue interest at 8.5% and are due in October 2001.
QuadraMed was not in compliance with certain covenants under this agreement as
of December 31, 1999. These covenants were waived in exchange for a perfected
security interest in our cash and marketable securities of $12.5 million
effective March 1, 2000. It is uncertain whether we will be required to perform
under this guarantee.
We believe that our current cash and investments will be sufficient to
fund operations at least through December 31, 2000.
YEAR 2000 COMPLIANCE
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. To date, we have
not experienced any year 2000 issues with any of our internal systems or our
products, but we cannot be sure that we will not experience any in the future.
In addition, we have not experienced any year 2000 issues related to any of our
key third party suppliers and customers, but we cannot be sure that we will not
experience any in the future. Costs associated with remediating year 2000
problems in our internal systems were not material.
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 QuadraMed.
In December 1999, the Securities and Exchange Commission ("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. We will adopt
SAB 101 as required in the second quarter of 2000. We are currently evaluating
the effect that such adoption of SAB 101 will have on our financial position or
results of the operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk. Our exposure to market risk for changes in interest
rates primarily relates to our investment portfolio and Convertible Subordinated
Debentures. It is our intent to ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We invest in high-quality issuers, including money market funds, corporate
debt securities and debt securities issued by the United States government. We
invest, by policy, in securities with maturities of two years or less. We do not
invest in derivative financial or foreign investments. The table below presents
fair values of principal amounts and weighted average interest rates for our
investment portfolio at December 31, 1999 (in thousands, except average interest
rates):
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<PAGE> 24
<TABLE>
<CAPTION>
WEIGHTED
AGGREGATE AVERAGE INTEREST
FAIR VALUE RATE
---------- ----
<S> <C> <C>
Cash and cash equivalents:
Money market funds ........................ $11,565 4.72%
------
Total cash and cash equivalents .... $11,565
======
Short-term investments:
Corporate debt securities ................. $16,636 6.67%
Debt securities issued by the U.S.
government ............................... 2,473 5.44%
------
Total short-term investments ....... $19,109
======
Long-term investments:
Corporate debt securities ................. $ 7,164 5.77%
Debt securities issued by the U.S.
government ............................... 4,938 5.33%
------
Total long-term investments ........ $12,102
======
</TABLE>
Outstanding Debt. As of December 31, 1999, we had outstanding long-term
debt of $115,000,000, consisting of Convertible Subordinated Debentures that
mature as follows (in thousands, except average interest rates):
<TABLE>
<CAPTION>
WEIGHTED
MATURITY CARRYING FAIR AVERAGE
DATE AMOUNT VALUE INTEREST RATE
- ---- ------ ----- -------------
<S> <C> <C> <C>
2005 $115,000 $55,200 5.25%
</TABLE>
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We incurred net losses of $37.6 million, $19.5 million and $12.3 million
in fiscal years 1997, 1998 and 1999, respectively. As of December 31, 1999, our
accumulated deficit was $205.5 million. These losses include write-offs for
acquired in-process research and development of $21.9 million, $14.5 million and
$1.7 million in fiscal years 1997, 1998 and 1999. In connection with our
acquisitions, we have and will incur significant non-recurring charges and we
will be required to amortize significant expenses related to goodwill and other
intangible assets in future periods. It is uncertain whether we will be able to
achieve or sustain revenue growth or profitability on a quarterly or annual
basis.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied significantly in the past.
Our quarterly revenues and operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
- - integration of acquired businesses with our business;
- - variability in demand for our products and services;
- - the introduction of product enhancements and new products by us and our
competitors;
- - the timing and significance of announcements concerning our present or
prospective strategic alliances;
- - the termination of, or a reduction in, the products and services we
offer,
- - the loss of customers due to consolidation in the health care industry;
- - delays in product delivery requested by our customers;
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- - the length of the sales cycle for our products or the timing of our
sales;
- - the amount of new potential contracts at the beginning of any particular
quarter;
- - budgeting cycles of our customers and changes in our customer's budgets;
- - our investment in marketing, sales, research and development, and
administrative personnel necessary to support our anticipated operations;
- - costs incurred in connection with our marketing and sale promotional
activities;
- - software defects and other quality factors in our products; and
- - general economic conditions and resulting effects on the health care
industry.
We cannot accurately forecast the timing of our customer purchases due to
the complex procurement decision process associated with most health care
providers and payors. As a result, we typically experience sales cycles that
extend over several quarters. In addition, certain products we acquired as a
result of our acquisition of Integrated Medical Networks in September 1998 and
The Compucare Company in March 1999 have higher average selling prices and
longer sales cycles than many of our other products. This may increase the
volatility of our quarterly operating results. Moreover, our operating expense
levels, which will increase with the addition of acquired businesses, are
relatively fixed. Accordingly, if future revenues are below our expectations, we
would experience a disproportionate adverse affect on our net income and
financial results. Further, it is likely that, in some future quarter, our
revenues or operating results may fall below the expectations of securities
analysts and investors. In such an event, the trading price of our common stock
would likely be materially and adversely affected.
Integration Of Acquired Companies Into QuadraMed
Realizing benefits from acquisitions depends in significant part upon
several factors and is accompanied by a number of risks, including:
- - successful integration of the operations, products and personnel of the
acquired company;
- - possible costs, delays or other problems we may incur to successfully
complete such integration;
- - the potential interruption or disruption of our ongoing business and the
distraction of management from other matters; and
- - significant operational and administrative expense relating to such
integration.
Any difficulties encountered in the integration process could have a
material adverse effect on our business, operating results and financial
condition. Even if we are able to successfully integrate these businesses with
our business, the acquired operations may not achieve sales, productivity and
profitability commensurate with our historical or projected operating results.
Failure to achieve such projected results would have a material adverse effect
on our financial performance, and in turn, on the market value of the our Common
Stock. There can be no assurance that we will realize any of the anticipated
benefits of our acquisitions or that such acquisitions will enhance our business
or financial performance.
Dependence on Acquisition Strategy
We intend to continue to expand in part through acquisitions of products,
technologies and businesses. Our ability to expand successfully through
acquisition depends on many factors, including:
- - the successful identification and acquisition of products, technologies
or businesses;
- - management's ability to effectively negotiate and consummate acquisitions
and integrate and operate the new products, technologies or businesses;
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<PAGE> 26
- - significant competition for acquisition opportunities in our industry,
which may intensify due to increasing consolidation in the health care
industry, thereby increasing the costs of capitalizing on acquisition
opportunities;
- - competition for acquisition opportunities with other companies that have
significantly greater financial and management resources than us;
From time to time, we also 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 our business.
RISKS ASSOCIATED WITH ACQUISITIONS; NEED TO MANAGE CHANGING OPERATIONS
Acquisitions involve a number of special risks including:
- - managing geographically dispersed operations;
- - failure of the acquired business to achieve expected results;
- - failure to retain key personnel of the acquired business;
- - inability to integrate the new business into existing operations and
risks associated with unanticipated events or liabilities;
- - potential increases in stock compensation expense and increased
compensation expense resulting from newly hired employees;
- - the assumption of unknown liabilities and potential disputes with the
sellers of one or more acquired entities; and
- - exposure to the risks of entering markets in which we have no direct
prior experience or to risks associated with the market acceptance of
acquired products and technologies.
We may not be successful in addressing these risks and our failure to do
so could have a material adverse effect on our business, results of operations
and financial condition.
Additionally, customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on our sales and marketing
initiatives and on our reputation. With the addition of the acquired businesses,
our anticipated future operations may place a strain on our management systems
and resources. We expect that we will be required to continue to improve our
financial and management controls, reporting systems and procedures, and will
need to expand, train and manage our workforce. There can be no assurance that
we will be able to effectively manage these tasks, and the failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
Moreover, future acquisitions by us may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and the
recognition of amortization expenses related to goodwill and other intangible
assets. Our inability to successfully deal with these factors could have a
material adverse effect on our business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
We are substantially dependent upon the continued service of our
executive officers, product managers and other key sales, marketing and
development personnel. If we fail to retain the services of any of our executive
officers or fail to hire, retain and motivate other key employees, our business
will be adversely affected. Furthermore, additions of new, and departures of
existing, personnel could have a disruptive effect on our business and
operations.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS; UNCERTAINTY IN THE
HEALTHCARE INDUSTRY
A substantial portion of our revenues have been and are expected to be
derived from the sale of software products and services to hospitals.
Consolidation in the health care industry, particularly in the hospital and
managed care markets, could cause a decrease in the number of existing or
potential purchasers of our products and services, which could adversely affect
our business. In addition, the decision to purchase our products often involves
the approval of several members of management of a hospital or health care
provider. Consequently, it is difficult for us to predict the timing or outcome
of the buying decisions of our customers or potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. We believe that the
commercial value and appeal of our
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products may be adversely affected if the current health care financing and
reimbursement system were to reverse our current evolution to a managed care
model back to a fee-for-service model. In addition, many of our customers are
providing services under capitated service agreements, and a reduction in the
use of capitation arrangements as a result of regulatory or market changes could
have a material adverse effect on our business, financial condition and
operating results. During the past several years, the health care industry has
been subject to increasing levels of governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Certain proposals
to reform the health care system have been and are being considered by Congress.
These proposals, if enacted, could change the operating environment of our
clients in ways that cannot be predicted. Health care organizations may react to
these proposals by curtailing or deferring investments, including those for our
products and services.
Changes in current health care financing and reimbursement systems could
result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of our products by hospital associations or other customers. Any of these
occurrences could have a material adverse effect on our business. In addition,
many health care providers are consolidating to create integrated health care
delivery systems with greater regional market power. As a result, these emerging
systems could have greater bargaining power, which may lead to price erosion of
our products. If we fail to maintain adequate price levels, our business,
financial condition and results of operations would be adversely affected. Other
market-driven reforms could also have adverse effects on our business, financial
condition and results of operations.
HIGHLY COMPETITIVE MARKET
Competition in the market for our products and services is intense and is
expected to increase. Increased competition could result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations. We
compete with other providers of health care information software and services,
as well as health care consulting firms. Some principal competitors include,
among others:
- - Healtheon/WebMD Corporation, CIS Technologies, Inc., a division of
National Data Corporation, Inc., and Sophisticated Software, Inc. in the
market for our EDI products;
- - McKesson HBOC, Inc. and SoftMed Corporation Inc. in the market for our
electronic document management products;
- - Eclipsys Corporation and Healthcare Microsystems, Inc., a division of
Health Management Systems Inc. and MediQual Systems, Inc., a division of
Cardinal Health, Inc., in the market for our decision support products;
- - McKesson HBOC, Inc., Shared Medical Systems, Inc., MediTech Corporation
and Eclipsys Corporation in the market for our enterprise products;
- - a subsidiary of Minnesota Mining and Manufacturing, in the market for our
medical records products; and
- - FYI Corporation and SMART Corporation in the market for our health
information management services.
In addition, current and prospective customers evaluate our capabilities
against the merits of their existing information systems and expertise.
Furthermore, major software information systems companies, including those
specializing in the health care industry, not presently offering products that
compete with those offered by us, may enter our markets. In addition, many of
our competitors and potential competitors have significantly greater financial,
technical, product development, marketing and other resources and market
recognition than us. Many of our competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, our competitors may be able to respond more quickly
to new or emerging technologies, changes in customer requirements and political,
economic or regulatory changes in the health care industry and may
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<PAGE> 28
devote greater resources to the development, promotion and sale of their
products than us. There can be no assurance that we will be able to compete
successfully against current and future competitors or that such competitive
pressures will not materially adversely affect our business, financial condition
and operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 of
the Securities Act and through the exercise of registration rights could lower
the market price of our Common Stock. As of January 31, 2000, approximately
2,272,230 shares are available for sale in the public market subject to
compliance with Rule 144. Certain of our existing stockholders holding an
aggregate of 1,179,220 shares of Common Stock as of January 31, 2000 have rights
under certain circumstances to require us 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 have been 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 our common stock and impair our
ability to raise additional capital through the sale of our securities.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
Our performance depends in large part upon our ability to provide the
increasing functionality required by our customers through the timely
development and successful introduction of new products and enhancements to our
existing suite of products. We have historically devoted significant resources
to product enhancements and research and development and believe that
significant continuing development efforts will be required to sustain our
operations and integrate the products and technologies of acquired businesses
with our products. There can be no assurance that we will successfully or in a
timely manner develop, acquire, integrate, introduce and market new product
enhancements or products, or that product enhancements or new products developed
by us will meet the requirements of hospitals or other health care providers and
payors and achieve or sustain market acceptance.
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
We rely on a combination of trade secrets, copyright and trademark laws,
nondisclosure and other contractual provisions to protect our proprietary
rights. We have not filed any patent applications covering our technology. There
can be no assurance that measures we have taken to protect our intellectual
property will be adequate or that our competitors will not independently develop
products and services that are substantially equivalent or superior to the
products and services we offer.
There is substantial litigation regarding intellectual property rights in
the software industry. We expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products overlaps. We have not
been notified that our 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, we cannot
guarantee that a license or similar agreement will be available to us on
reasonable terms, if at all. Infringement may result in significant monetary
liabilities which would have a material adverse effect on our business,
financial condition and results of operations. We cannot guarantee that we will
be successful in the defense of these or similar claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as our products frequently contain errors or failures,
especially when initially introduced or when new versions are released. Although
we conduct extensive testing on our products, software errors have been
discovered in certain enhancements and products after their introduction. We
cannot guarantee that despite such testing by us, and by our current and
potential customers, products under development, enhancements or shipped
products will be free of errors or performance failures, resulting in, among
other things;
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<PAGE> 29
- - loss of revenues and customers;
- - delay in market acceptance;
- - diversion of resources;
- - damage to our reputation; or
- - increased service and warranty costs.
The occurrence of any of these consequences could have a material adverse
effect upon our business, financial condition and results of operations.
YEAR 2000
As is true for most companies, the Year 2000 computer issue creates a
risk for us. The year 2000 computer problem refers to the potential for system
and processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. If systems do
not correctly recognize date information when the year changes to 2000, there
could be an adverse impact on our operations.
We face risks in four areas: systems used by us to run our business,
systems used by our suppliers, potential warranty or other claims from our
customers, and the potential reduction in spending by other companies on our
products and solutions as a result of significant information systems spending
on Year 2000 remediation. To date, we have not experienced any year 2000 issues
related to any of our key third party suppliers and customers nor do we expect
to experience any in the future. Costs associated with remediating our internal
systems in 1999 were not material.
RISK OF INTERRUPTION OF DATA PROCESSING
We currently process substantially all our customer data at our
facilities in San Rafael, California and Neptune, New Jersey. Although we back
up our data nightly and have safeguards for emergencies such as power
interruption or breakdown in temperature controls, we have no mirror processing
site to which processing could be transferred in the case of a catastrophic
event at either of these facilities. In the event that a major catastrophic
event occurs at either the San Rafael or the Neptune facility, possibly leading
to an interruption of data processing, our business, financial condition and
results of operations could be adversely affected.
RISKS RELATED TO OUTSOURCING BUSINESS
We provide compliance, consulting and business office outsourcing and
cash flow management services, including the billing and collection of
receivables. We acquired the infrastructure for our outsourcing business through
an acquisition. In addition, we often use our software products to provide
outsourcing services. As a result, we have not been required to make significant
capital expenditures in order to service existing outsourcing contracts.
However, if we experience a period of substantial expansion in our outsourcing
business, we may be required to make substantial investments in capital assets
and personnel. We cannot guarantee that we will be able to assess accurately the
investment required and negotiate and perform in a profitable manner any of the
outsourcing contracts we may be awarded. Our failure to either estimate
accurately the resources and related expenses required for a project, or to
complete our contractual obligations in a manner consistent with the project
plan upon which a contract was based, could have a material adverse effect on
our business, financial condition and results of operations. In addition, our
failure to meet a client's expectations in the performance of our services could
damage our reputation and adversely affect our ability to attract new business.
Finally, we could incur substantial costs and expend significant resources
correcting errors in our work, and could possibly become liable for damages
caused by these errors.
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are
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<PAGE> 30
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. The FDA could determine in the future
that any predictive aspects of our products make them clinical decision tools
subject to FDA regulation. Compliance with these regulations could be
burdensome, time consuming and expensive. We could also become subject to future
legislation and regulations concerning the development and marketing of health
care software systems. Such legislation could increase the cost and time
necessary to market new products and could affect us in other respects not
presently foreseeable. We cannot predict the effect of possible future
legislation and regulation.
State governments substantially regulate the confidentiality of patient
records and the circumstances under which such records may be released for
inclusion in our databases. These state laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of the hospital, physician or other health care provider,
regulations governing patient confidentiality rights are evolving rapidly.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal levels. This legislation may
require holders of such information to implement security measures that may
require us to incur substantial expenditures. We are not sure that changes to
state or federal laws will not materially restrict the ability of health care
providers to submit information from patient records using our products.
RISK OF PRODUCT-RELATED CLAIMS
Some of our products and services are used in the payment, collection,
coding and billing of health care claims and the administration of managed care
contracts. If our employees or our products fail to accurately assess, process
or collect these claims, our customers may file claims against us. We have been
and currently are involved in claims for money damages related to services
provided by our accounts receivable management business. We maintain insurance
to protect against certain claims associated with the use of our products, but
there can be no assurance that our insurance coverage would adequately cover any
claim brought against us. A successful claim brought against us that is in
excess of, or is not covered by, our insurance coverage could adversely affect
our business, financial condition and results of operations. Even a claim
without merit could result in significant legal defense costs and would consume
management time and resources. We do not know whether we will be subject to
material claims in the future which may result in liability in excess of our
insurance coverage, or which our insurance may not cover. We may not be able to
obtain appropriate insurance in the future at commercially reasonable rates. In
addition, if we are found liable, we would have to significantly alter our
products resulting in additional unanticipated research and development
expenses.
RISKS ASSOCIATED WITH CERTAIN INVESTMENTS
We have made equity investments to acquire minority interests in certain
early stage companies. We do not have the ability to control the operations of
any of these companies. Investing in such early stage companies is subject to
certain significant risks. There can be no assurance that any of these companies
will be successful or achieve profitability or that we will ever realize a
return on our investments. In addition, to the extent any of such companies fail
or become bankrupt or insolvent, we may lose some or all of our investment.
Losses resulting from such investment could have a material adverse effect on
our operating results.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISION
Our Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
may be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of QuadraMed without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
We have no present plans to issue shares of Preferred Stock.
Further, certain provisions of our Certificate of Incorporation and
Bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. For example, our Board of
Directors is classified into three classes of directors serving staggered,
three-year terms and has the authority without action by our stockholders to
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. In addition, our
Certificate of Incorporation provides that directors may be removed only by the
affirmative vote of the holders of two-thirds of the shares of capital stock of
QuadraMed entitled to vote. Any vacancy on the Board of Directors may be filled
only by vote of the majority of directors then in office. Further, our
Certificate of Incorporation provides that any "Business Combination" (as
therein defined) requires the affirmative vote of two-thirds of the shares
entitled to vote, voting together as a single class. These provisions, and
certain other provisions of the Certificate of Incorporation which may have the
effect of delaying proposed stockholder actions until the next
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<PAGE> 31
annual meeting of stockholders, could have the effect of delaying or preventing
a tender offer for our Common Stock or other changes of control or management of
QuadraMed, which could adversely affect the market price of our Common Stock.
Finally, certain provisions of Delaware law could have the effect of delaying,
deterring or preventing a change in control of 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 stock market in general, and the Nasdaq National Market, has
historically experienced extreme price and volume fluctuations that have often
been unrelated to the operating performance of companies and which has affected
the market price of securities of many companies. The trading price of our
Common Stock is likely to be highly volatile and could also be subject to
significant fluctuations in price in response to such factors as:
- - variations in quarterly results of operations;
- - announcements of new products or acquisitions by us or our competitors;
- - governmental regulatory action;
- - developments or disputes with respect to proprietary rights;
- - general trends in our industry and overall market conditions; and
- - other events or factors, many of which are beyond our control.
The market price of our Common Stock may also be affected by movements in
prices of equity securities in general.
ITEM 8. FINANCIAL STATEMENTS.
Our Consolidated Financial Statements are located on the pages indicated
below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants ................................. F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999 .... F-3
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
and Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999 ................ F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 .... F-5
Notes to Consolidated Financial Statements .................................................... F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on Form
10-K:
1. Financial Statements.
The consolidated financial statements contained herein are as
listed on the "Index" on page 42.
2. Financial Statement Schedule.
Reference is made to Schedule II following the signature pages
hereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K. QuadraMed filed the following reports on Form 8-K
during the last quarter of the fiscal year covered by this Annual Report
on Form 10-K:
None.
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<PAGE> 34
(c) Exhibits.
2.1 Form of Agreement and Plan of Merger by and between
QuadraMed Corporation, a Delaware corporation and QuadraMed
Corporation, a California corporation.(1)
2.2 Assets Purchase Agreement dated December 31, 1995, by and
among QuadraMed Acquisition Corporation, Kaden Arnone, Inc.
and its stockholders.(1)
2.3 Exchange Agreement dated June 25, 1996, by and among
QuadraMed Holdings, Inc., QuadraMed Corporation, and
certain stockholders listed on Schedule A thereto.(1)
2.4 Acquisition Agreement and Plan of Merger dated December 2,
1996, between QuadraMed and InterMed Acquisition
Corporation, a wholly owned subsidiary of QuadraMed and
InterMed Healthcare Systems Inc. and its Stockholders.(2)
2.5 Acquisition Agreement and Plan of Merger, dated as of March
1, 1997, by and among QuadraMed Corporation, Healthcare
Recovery Acquisition Corporation, Healthcare Recovery
Incorporated and its Shareholders (the "HRI Acquisition
Agreement and Plan of Merger").(3)
2.6 First Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 22, 1997.(3) 2.7 Second Amendment
to HRI Acquisition Agreement and Plan of Merger, dated as
of April 24, 1997.(3)
2.7 Reserved.
2.8 Acquisition Agreement and Plan of Merger, dated as of
September 24, 1997, by and among QuadraMed Corporation, HRM
Acquisition Corporation, Healthcare Revenue Management,
Inc. and its Stockholders (the "Acquisition Agreement and
Plan of Merger").(4)
2.9 First Amendment to Acquisition Agreement and Plan of
Merger, dated as of September 29, 1997.(4)
2.10 Agreement and Plan of Reorganization by and between
QuadraMed Corporation and Medicus Systems Corporation,
dated as of November 9, 1997.(5)
2.11 Amendment No. 1 to Agreement and Plan of Reorganization,
dated as of February 26, 1998.(10)
2.12 Amendment No. 2 to Agreement and Plan of Reorganization,
dated as of March 24, 1998.(10)
2.13 Acquisition Agreement and Plan of Merger dated as of
December 29, 1997, by and among QuadraMed Corporation and
Resource Health Partners, L.P.(6)
2.14 Acquisition Agreement and Plan of Merger dated as of
February 2, 1998, by and among QuadraMed Corporation and
Cabot Marsh Corporation.(7)
2.15 Acquisition Agreement and Plan of Merger by and among
QuadraMed Corporation and Pyramid Health Acquisition
Corporation and Pyramid Health Group, Inc. and its
stockholders.(11)
2.16 Acquisition Agreement and Plan of Merger by and among
QuadraMed Corporation and IMN Acquisition Corp. , and IMN
Corp. dated September 30, 1998.(14)
2.17 Acquisition Agreement and Plan of Merger dated December 23,
1998 by and among QuadraMed and Premiere Healthcare
Acquisition Corporation, and Premiere Healthcare
Corporation and its subsidiaries(19)
2.18 Acquisition Agreement and Plan of Merger by and among
QuadraMed Corporation and Compucare Acquisition
Corporation, and The Compucare Company and certain of its
stockholders dated February 3, 1999.(15)
2.19 First Amendment to Acquisition Agreement and Plan of Merger
by and among QuadraMed Corporation and Compucare
Acquisition Corporation and The Compucare Company and
certain of its stockholders, dated March 3, 1999.(18)
3.1 Reserved.
3.2 Reserved
3.3 Reserved.
3.4 Amended and Restated Bylaws of QuadraMed.(1)
3.5 Third Amended and Restated Certificate of Incorporation of
QuadraMed.(16)
4.1 Reference is made to Exhibits 3.4 and 3.5.(1)(16)
4.2 Form of Common Stock certificate.(1)
4.3 Form of Exchange Agreement dated March 16, 1994, by and
among QuadraMed, THCS Holding, Inc. and certain
stockholders listed on Schedule A thereto.(1)
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<PAGE> 35
4.4 Reserved.
4.5 Reserved.
4.6 Reserved.
4.7 Amended and Restated Agreement Regarding Adjustment Shares
dated June 25, 1996, by and among QuadraMed, QuadNet
Corporation and the individuals listed on Schedule A
thereto.(1)
4.8 Amended and Restated Shareholder Rights Agreement dated
June 25, 1996, by and between QuadraMed and the investors
listed on Schedule A thereto.(1)
4.9 Reserved.
4.10 Reserved.
4.11 Form of Warrant to Purchase Common Stock.(1)
4.12 Registration Rights Agreement dated December 5, 1996, by
and between QuadraMed and the investors listed on Schedule
A thereto.(8)
4.13 Registration Rights Agreement, dated as of December 29,
1997, by and among QuadraMed Corporation, Resource Health
Partners, L.P. and certain stockholders.(6)
4.14 Registration Rights Agreement, dated as of June 5, 1998, by
and among QuadraMed Corporation and the stockholders of
Pyramid Health group, Inc. named therein.(11)
4.15 Subordinated Indenture, dated as of May 1, 1998 between
QuadraMed and The Bank of New York. (13)
4.16 Officers' Certificate delivered pursuant to Sections 2.3
and 11.5 of the Subordinated Indenture.(13)
4.17 Registration Rights Agreement dated April 27, 1998 by and
among QuadraMed and the Initial Purchasers named
therein.(13)
4.18 Form of Global Debenture.(13)
4.19 Form of Certificated Debenture.(13)
4.20 Registration Rights Agreement, dated as of September 30,
1998, by and among QuadraMed Corporation, IMN Corp. and the
shareholders of IMN named therein (14)
4.21 Registration Rights Agreement dated December 23, 1998 by
and between QuadraMed and the shareholders listed
therein(19).
4.22 Registration Rights Agreement, dated as of March 3, 1999,
by and among QuadraMed Corporation and the stockholders of
The Compucare Company named therein.(18)
10.1 1996 Stock Incentive Plan of QuadraMed.(1)
10.2 1996 Employee Stock Purchase Plan of QuadraMed.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k)
Plan.(1)
10.4 Form of Indemnification Agreement between QuadraMed and its
directors and executive officers.(1)
10.5 1999 Supplemental Stock Option Plan for QuadraMed
10.6 Lease dated February 26, 1996 for facilities located at
1345 Campus Parkway, Building M, Block #930, Lot #51.02,
Neptune, New Jersey.(1)
10.7 Reserved.
10.8 Reserved.
10.9 Reserved.
10.10 Stock Purchase Agreement dated March 3, 1994, by and
between QuadraMed and James D. Durham.(1)
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Reserved.
10.15 Reserved.
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<PAGE> 36
10.16 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22 Reserved.
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26 Reserved.
10.27 Reserved.
10.28 Reserved.
10.29 Reserved.
10.30 Reserved.
10.31 Reserved.
10.32 Reserved.
10.33 Reserved.
10.34 Reserved.
10.35 Reserved.
10.36 Reserved.
10.37 Reserved.
10.38 Reserved.
10.39 Reserved.
10.40 Form of Stock Purchase Agreement dated as of November 9,
1997 by and among QuadraMed Corporation and certain
stockholders of Medicus Systems Corporation.(5)
10.41 Form of Stock Purchase Warrant dated as of November 9, 1997
issued to certain stockholders of Medicus (including as
Appendix A to Exhibit 10.40).(5)
10.42 Reserved.
10.43 Reserved.
10.44 Reserved.
10.45 Reserved.
10.46 Reserved.
10.47 Reserved.
10.48 Reserved.
10.49 Reserved.
10.50 Reserved.
10.51 Employment Agreement dated January 1, 1999 between James D.
Durham and QuadraMed.(20)
10.52 Employment Agreement dated April 1, 1999 between Michael
Sanderson and QuadraMed. (21)
10.53 Employment Agreement dated April 1, 1999 between Michael
Wilstead and QuadraMed. (21)
10.54 Employment Agreement dated April 1, 1999 between Nancy
Nelson and QuadraMed. (21)
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<PAGE> 37
10.55 Reserved.
10.56 Employment Agreement dated April 1, 1999 between Patrick
Ahearn and QuadraMed. (21)
10.57 Employment Agreement dated April 1, 1999 between Keith
Roberts and QuadraMed. (21)
10.58 Reserved.
10.59 Employment Agreement dated May 18, 1999 between John V.
Cracchiolo and QuadraMed. (21)
21 List of subsidiaries of QuadraMed.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24.1 Power of Attorney (set forth in the signature page hereto).
27.1 Financial Data Schedule for the Year Ended 12/31/1999.
27.2 Financial Data Schedule for the Year Ended 12/31/1998.
27.3 Financial Data Schedule for the Year Ended 12/31/1997.
(1) Incorporated herein by reference from the exhibit with the same number to
our Registration Statement on Form SB-2, No. 333-5180-LA, as filed with
the Commission on June 28, 1996, as amended by Amendment No. 1, Amendment
No. 2 and Amendment No. 3 thereto, as filed with the Commission on July
26, 1996, September 9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference from the exhibit with the same number to
our Current Report on Form 8-K, as filed with the Commission on January
9, 1997.
(3) Incorporated herein by reference from the exhibit with the same number to
our Current Report on Form 8-K, as filed with the Commission on May 9,
1997, as amended on July 8, 1997 and March 10, 1998.
(4) Incorporated herein by reference from the exhibit with the same number to
our Current Report on Form 8-K, as filed with the Commission on October
10, 1997, as amended on March 10, 1998.
(5) Incorporated by reference from the exhibit with the same number to our
Current Report on Form 8-K, as filed with the Commission on November 21,
1997.
(6) Incorporated herein by reference from Exhibit 2.11 to our Current Report
on Form 8-K, as filed with the Commission on January 13, 1998.
(7) Incorporated herein by reference from Exhibit 2.12 to our Current Report
on Form 8-K, as filed with the Commission on February 18, 1998.
(8) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, as
filed with the Commission on August 14, 1997, as amended September 4,
1997.
(9) Incorporated by reference from the exhibit with the same number to our
Registration Statement on Form S-3, No. 333-36189, as filed with the
Commission on September 23, 1997, as amended by Amendment No. 1 and
Amendment No. 2 thereto, as filed with the Commission on October 1, 1997
and October 15, 1997 respectively.
(10) Incorporated by reference from the exhibit with the same number to our
Annual Report on Form 10-K/A for the year ended December 31, 1997, as
filed with the Commission on April 20, 1998.
(11) Incorporated by reference from our Current Report on Form 8-K, as filed
with the Commission on June 11, 1998.
(12) Incorporated by reference from our Current Report on Form 8-K/A filed
with the Commission on June 17, 1998
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<PAGE> 38
(13) Incorporated by reference from our Registration Statement on Form S-3,
No. 333-55775, as filed with the Commission on June 2, 1998, as amended
by Amendment No. 1 thereto, as filed with the Commission on June 17,
1998.
(14) Incorporated by reference from our Current Report on Form 8-K, as filed
with the Commission on October 15, 1998.
(15) Incorporated by reference from Exhibit 2.1 to our Current Report on Form
8-K, as filed with the Commission on February 18, 1999.
(16) Incorporated by reference from the Exhibit with the same number to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
filed with the Commission on August 14, 1998, as amended August 24, 1988.
(17) Incorporated herein by reference from our Annual Report on Form 10-K, as
filed with the Commission on March 31, 1998, as amended April 20, 1998.
(18) Incorporated herein by reference from our Current Report on Form 8-K/A
filed with the Commission on March 22, 1999.
(19) Incorporated herein by reference from our Registration Statement on Form
S-3, No. 333-80617, as filed with the Commission on June 14, 1999, as
amended by Amendment No. 1 thereto, as filed with the Commission on
August 4, 1999.
(20) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 as
filed with the Commission on May 17, 1999.
(21) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 as
filed with the Commission on August 16, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUADRAMED CORPORATION
Date: March 29, 2000
By: /s/ JAMES D. DURHAM
----------------------------------
James D. Durham
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
By: /s/ JOHN V. CRACCHIOLO
----------------------------------
John V. Cracchiolo
President, Chief Financial Officer
and Secretary (Principal Financial
Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, John V. Cracchiolo and
Keith M. Roberts, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES D. DURHAM Chairman of the Board March 29, 2000
- ----------------------------------- and Chief Executive Officer
James D. Durham (Principal Executive Officer)
/s/ JOHN V. CRACCHIOLO President, March 29, 2000
- ----------------------------------- Chief Financial Officer and Secretary
John V. Cracchiolo (Principal Financial Officer)
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALBERT L. GREENE Director March 29, 2000
- -----------------------------------
Albert L. Greene
/s/ SCOTT GROSS Director March 29, 2000
- -----------------------------------
Scott Gross
/s/ MICHAEL J. KING Director March 29, 2000
- -----------------------------------
Michael J. King
/s/ JOAN P. NEUSCHELER Director March 29, 2000
- -----------------------------------
Joan P. Neuscheler
/s/ E. A. ROSKOVENSKY Director March 29, 2000
- -----------------------------------
E. A. Roskovensky
/s/ CORNELIUS T. RYAN Director March 29, 2000
- -----------------------------------
Cornelius T. Ryan
</TABLE>
40
<PAGE> 41
QUADRAMED CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
DESCRIPTION BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS* DEDUCTIONS END OF YEAR
- ----------- ----------------- ------------------ --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts .... $ 2,337 $ 4,577 $ -- $(4,080) $ 2,834
Year ended December 31, 1998
Allowance for doubtful accounts .... $ 2,834 $ 6,089 $1,902 $(5,087) $ 5,738
Year ended December 31, 1999
Allowance for doubtful accounts .... $ 5,738 $ 3,816 $ -- $(4,496) $ 5,058
</TABLE>
* This includes adjustments recorded in purchase accounting associated with
the Company's acquisition of Medicus Systems Corporation in November
1997.
41
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
QUADRAMED CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ......................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 ..................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999 ....... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
and Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999 .................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ....... F-5
Notes to Consolidated Financial Statements ....................................................... F-6
</TABLE>
42
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of QuadraMed
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and comprehensive loss and cash flows for each of
the three years in the period ended December 31, 1999. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation and subsidiaries as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
February 24, 2000
43
<PAGE> 44
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 66,531 $ 11,565
Restricted cash .......,,.......................................... -- 1,000
Short-term investments ............................................ 23,043 19,109
Accounts receivable, net of allowance for uncollectible
accounts of $5,738 and $5,058, respectively ................... 39,991 59,740
Unbilled receivables .............................................. 10,335 17,027
Notes and other receivables ....................................... 4,285 2,390
Prepaid expenses and other current assets ......................... 2,574 6,260
--------- ---------
Total current assets ....................................... 146,759 117,091
--------- ---------
LONG-TERM INVESTMENTS ................................................. 41,641 12,102
LONG-TERM NOTES RECEIVABLE ............................................ -- 3,600
EQUIPMENT, at cost:
Equipment ......................................................... 32,338 38,897
Less accumulated depreciation and amortization .................... (20,958) (26,048)
--------- ---------
Equipment, net ................................................ 11,380 12,849
--------- ---------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $2,452 and $3,155, respectively ................... 4,864 8,958
ACQUIRED SOFTWARE, net of accumulated amortization
of $1,610 and $2,610, respectively ................................ 3,211 8,211
INTANGIBLES, net of accumulated amortization
of $8,001 and $15,032, respectively ............................... 50,156 42,268
NON-MARKETABLE INVESTMENTS ........................................... 1,200 4,700
OTHER LONG-TERM ASSETS ................................................ 5,522 9,550
--------- ---------
$ 264,733 $ 219,329
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations ................... $ 474 $ 437
Line of credit .................................................... 2,500 --
Notes payable ..................................................... 279 24
Accounts payable .................................................. 4,389 3,604
Accrued payroll and related ....................................... 10,561 6,867
Accrued interest .................................................. 1,170 1,019
Other accrued liabilities ......................................... 18,402 16,438
Deferred revenue .................................................. 14,021 7,767
--------- ---------
Total current liabilities .................................. 51,796 36,156
CAPITAL LEASE OBLIGATIONS, less current portion ....................... 606 207
NOTES PAYABLE ......................................................... 19,186 --
CONVERTIBLE SUBORDINATED DEBENTURES ................................... 115,000 115,000
NET LIABILITIES OF DISCONTINUED OPERATIONS ............................ 9,157 5,385
--------- ---------
Total liabilities .......................................... 195,745 156,748
--------- ---------
CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par, 50,000 shares authorized,
24,442 and 25,319 shares issued and outstanding, respectively .... 178 187
Additional paid-in capital ........................................ 266,068 270,691
Deferred compensation ............................................. (3,940) (2,519)
Accumulated other comprehensive loss .............................. (157) (287)
Accumulated deficit ............................................... (193,161) (205,491)
--------- ---------
Total stockholders' equity ................................. 68,988 62,581
--------- ---------
$ 264,733 $ 219,329
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE> 45
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Licenses ..................................................... $ 83,226 $ 119,840 $ 128,395
Services ..................................................... 57,574 90,780 111,190
--------- --------- ---------
Total revenues ........................................ 140,800 210,620 239,585
--------- --------- ---------
OPERATING EXPENSES:
Cost of licenses ............................................. 41,542 52,553 57,504
Cost of services ............................................. 38,466 59,567 67,501
General and administration ................................... 31,436 33,016 31,414
Sales and marketing .......................................... 14,197 19,677 23,076
Research and development ..................................... 15,618 22,487 23,173
Amortization of intangibles .................................. 1,719 6,544 8,237
Acquisition costs ............................................ 3,111 10,254 6,898
Non-recurring charges ........................................ 4,705 4,202 18,752
Impairment of intangible assets .............................. -- -- 10,592
Write-off of acquired research and development in process .... 21,854 14,494 1,722
--------- --------- ---------
Total operating expenses .............................. 172,648 222,794 248,869
--------- --------- ---------
LOSS FROM OPERATIONS ............................................. (31,848) (12,174) (9,284)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................................. (1,491) (6,254) (7,671)
Interest income .............................................. 1,021 5,867 4,827
Other income (expense), net .................................. (2,516) (214) 1,315
--------- --------- ---------
Total other expense, net .............................. (2,986) (601) (1,529)
--------- --------- ---------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST ........................................ (34,834) (12,775) (10,813)
PROVISION FOR INCOME TAXES ....................................... (1,136) (4,303) (1,517)
--------- --------- ---------
LOSS BEFORE MINORITY INTEREST .................................... (35,970) (17,078) (12,330)
MINORITY INTEREST IN INCOME (LOSS) ............................... 37 (379) --
--------- --------- ---------
LOSS FROM CONTINUING OPERATIONS .................................. (35,933) (17,457) (12,330)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES .................. (1,704) (1,999) --
--------- --------- ---------
NET LOSS ......................................................... (37,637) (19,456) (12,330)
DIVIDEND ACCRETION ............................................... (348) (1,920) --
--------- --------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ........................ $ (37,985) $ (21,376) $ (12,330)
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE FROM CONTINUING
OPERATIONS .................................................. $ (2.21) $ (0.74) $ (0.49)
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE FROM DISCONTINUED
OPERATIONS .................................................. $ (0.11) $ (0.09) $ --
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE FROM
ACCRETION OF DIVIDENDS ...................................... $ (0.02) $ (0.08) $ --
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE AVAILABLE
TO COMMON STOCKHOLDERS ...................................... $ (2.34) $ (0.91) $ (0.49)
========= ========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC AND DILUTED ............................................ 16,247 23,370 24,979
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 46
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------- ADDITIONAL DEFERRED COMPREHENSIVE
SHARES AMOUNT PAID IN CAPITAL COMPENSATION LOSS
------ ------ --------------- ------------ ----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ............................ 15,278 $ 84 $ 106,358 $ (703) $ --
Issuance of common stock in
Connection with the Synergy HMC acquisition ......... 182 2 1,680 -- --
Issuance of common stock in connection with Healthcare
Revenue Management, Inc acquisition ................. 113 1 2,330 -- --
Amortization of deferred compensation .................... -- -- -- 703 --
Capital contributed to pooled entities ................... -- -- 251 -- --
Distributions by pooled entities ......................... -- -- -- -- --
Spin-off of subsidiary ................................... -- -- -- -- --
Issuance of common stock purchase warrants in connection
with the acquisition of Medicus Systems Corporation . -- -- 700 -- --
Conversion of notes payable to contributed capital ....... -- -- 9,578 -- --
Conversion of notes payable to common stock .............. 745 7 15,643 -- --
Issuance of common stock through
Employee Stock Purchase Plan ......................... 14 -- 135 -- --
Issuance of common stock ................................. 160 1 845 -- --
Issuance of common stock from public
offering, net of issuance costs ...................... 3,467 35 57,293 -- --
Exercise of warrants to purchase common stock ............ 322 -- -- -- --
Exercise of common stock options ......................... 107 1 476 -- --
Dividend accretion ....................................... -- -- -- -- --
Net Loss ................................................. -- -- -- -- --
------ --- ------- --------- ----
BALANCE AT DECEMBER 31, 1997 ............................. 20,388 131 195,289 -- --
------ --- ------- --------- ----
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
DEFICIT EQUITY (DEFICIT) LOSS
------- ---------------- ----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ............................ $(128,949) $ (23,210)
Issuance of common stock in
Connection with the Synergy HMC acquisition ......... -- 1,682
Issuance of common stock in connection with Healthcare
Revenue Management, Inc acquisition ................. -- 2,331
Amortization of deferred compensation .................... -- 703
Capital contributed to pooled entities ................... -- 251
Distributions by pooled entities ......................... (40) (40)
Spin-off of subsidiary ................................... (3,684) (3,684)
Issuance of common stock purchase warrants in connection
with the acquisition of Medicus Systems Corporation . -- 700
Conversion of notes payable to contributed capital ....... -- 9,578
Conversion of notes payable to common stock .............. -- 15,650
Issuance of common stock through
Employee Stock Purchase Plan ......................... -- 135
Issuance of common stock ................................. -- 846
Issuance of common stock from public
offering, net of issuance costs ...................... -- 57,328
Exercise of warrants to purchase common stock ............ -- --
Exercise of common stock options ......................... -- 477
Dividend accretion ....................................... (348) (348)
Net Loss ................................................. (37,637) (37,637) (37,637)
--------- --------- ---------
BALANCE AT DECEMBER 31, 1997 ............................. (170,658) 24,762 (37,637)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 47
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------- ADDITIONAL DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL COMPENSATION LOSS DEFICIT
------ ------ --------------- ------------ ---- -------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock and to record the
effect of an immaterial
acquisition accounted for
as a pooling of interests ....... 507 5 212 -- -- (1,127)
Issuance of common stock in
connection with the
InterLink acquisition ........... 65 1 1,467 -- -- --
Issuance of common stock in
connection with the Cabot
Marsh acquisition ............... 384 4 8,417 -- -- --
Issuance of common stock in
connection with the Velox
acquisition ..................... 41 -- 1,372 -- -- --
Issuance of common stock in
connection with the
Medicus acquisition ............. 892 15 24,518 -- -- --
Issuance of common stock
through Employee Stock
Purchase Plan .................... 38 -- 467 -- -- --
Issuance of restricted shares of
common stock ..................... -- -- 3,940 (3,940) -- --
Issuance of common stock ............. 880 9 8,862 -- -- --
Exercise of warrants to
purchase common stock ............ 907 9 17,404 -- -- --
Exercise of common stock options ..... 340 4 4,120 -- -- --
Net unrealized loss on
available-for-sale securities .... -- -- -- -- (157) --
Dividend accretion ................... -- -- -- -- -- (1,920)
Net loss ............................. -- -- -- -- -- (19,456)
------ --- -------- -------- ----- --------
BALANCE AT DECEMBER 31, 1998 ......... 24,442 178 266,068 (3,940) (157) (193,161)
------ --- -------- -------- ----- --------
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' COMPREHENSIVE
EQUITY (DEFICIT) LOSS
---------------- ----
<S> <C> <C>
Issuance of common
stock and to record the
effect of an immaterial
acquisition accounted for
as a pooling of interests ....... (910)
Issuance of common stock in
connection with the
InterLink acquisition ........... 1,468
Issuance of common stock in
connection with the Cabot
Marsh acquisition ............... 8,421
Issuance of common stock in
connection with the Velox
acquisition ..................... 1,372
Issuance of common stock in
connection with the
Medicus acquisition ............. 24,533
Issuance of common stock
through Employee Stock
Purchase Plan .................... 467
Issuance of restricted shares of
common stock ..................... --
Issuance of common stock ............. 8,871
Exercise of warrants to
purchase common stock ............ 17,413
Exercise of common stock options ..... 4,124
Net unrealized loss on
available-for-sale securities .... (157) (157)
Dividend accretion ................... (1,920)
Net loss ............................. (19,456) (19,456)
-------- --------
BALANCE AT DECEMBER 31, 1998 ......... 68,988 (19,613)
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
47
<PAGE> 48
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------- ADDITIONAL DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL COMPENSATION LOSS DEFICIT
------ ------ --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
connection with
acquisitions accounted
for as a purchase ................ 97 1 634 -- -- --
Issuance of common stock
through Employee Stock
Purchase Plan .................... 91 1 1,039 -- -- --
Amortization of restricted
shares of common stock ........... -- -- -- 955 -- --
Cancellation of restricted
shares of common stock ........... -- -- (582) 466 -- --
Issuance of common stock for
legal settlement ................. 70 -- 346 -- -- --
Exercise of warrants to
purchase common stock ............ 360 4 1,330 -- -- --
Exercise of common stock
options .......................... 259 3 1,588 -- -- --
Compensation related to
accelerated vesting of
common stock options ............. -- -- 268 -- -- --
Net unrealized loss on
available-for-sale securities ... -- -- -- -- (130) --
Net loss ............................. -- -- -- -- -- (12,330)
------ ----- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 ......... 25,319 $ 187 $ 270,691 $ (2,519) $ (287) $(205,491)
====== ===== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' COMPREHENSIVE
EQUITY (DEFICIT) LOSS
---------------- ----
<S> <C> <C>
Issuance of common stock in
connection with
acquisitions accounted
for as a purchase ................ 635
Issuance of common stock
through Employee Stock
Purchase Plan .................... 1,040
Amortization of restricted
shares of common stock ........... 955
Cancellation of restricted
shares of common stock ........... (116)
Issuance of common stock for
legal settlement ................. 346
Exercise of warrants to
purchase common stock ............ 1,334
Exercise of common stock
options .......................... 1,591
Compensation related to
accelerated vesting of
common stock options ............. 268
Net unrealized loss on (130)
available-for-sale securities ... (130)
Net loss ............................. (12,330) (12,330)
--------- ---------
BALANCE AT DECEMBER 31, 1999 ......... $ 62,581 $ (12,460)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
48
<PAGE> 49
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................ $ (37,637) $ (19,456) $ (12,330)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization ............................................... 9,170 10,476 13,759
Amortization of deferred compensation ....................................... 703 -- 1,107
Cash flows from discontinued operations ..................................... 847 (1,760) (3,772)
Write-off of in-process research and development ............................ 21,854 14,494 1,722
Write-off of note payable ................................................... -- -- 1,200
Impairment of intangible assets ............................................. -- -- 10,592
Noncash settlement of litigation ............................................ -- -- 346
Minority interest in net (income) loss ...................................... (37) 379 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net ............................ (5,851) (15,560) (25,997)
Prepaid expenses and other ................................................... (1,926) 67 (8,850)
Accounts payable and accrued liabilities ..................................... 4,838 (13,722) (8,536)
Deferred revenue ............................................................. 322 (1,424) (7,394)
--------- --------- ---------
Cash used for operating activities ........................................ (7,717) (26,506) (38,153)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Cabot Marsh, net of cash acquired .............. -- (2,748) --
Cash paid for the acquisition of Velox, net of cash acquired .................... -- (3,121) --
Cash paid for the acquisition of Synergy HMC, net of cash acquired .............. (2,776) -- --
Cash paid for the acquisition of Medicus
Systems Corporation, net of cash acquired .................................... (21,454) -- --
Cash paid for the acquisitions of other companies, net of cash acquired ........ (286) (6,832) (8,172)
Purchased technology ............................................................ (460) -- (6,000)
Maturity (purchase) of available-for-sale securities, net ....................... (1,032) (63,577) 33,343
Additions to equipment .......................................................... (3,947) (7,682) (6,558)
Restricted cash ................................................................. -- -- (1,000)
Purchase of non-marketable investments .......................................... (1,200) -- (3,000)
Issuance of notes receivable and other .......................................... -- (539) (2,215)
Capitalization of computer software development costs ........................... (1,157) (3,098) (4,798)
--------- --------- ---------
Cash provided by (used for) investing activities ......................... (32,312) (87,597) 1,600
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations .............................. (154) (2,346) (436)
Borrowings (repayments) under notes and loans payable ........................... 1,086 2,503 (21,941)
Issuance of convertible notes payable to related parties ........................ -- 400 --
Proceeds from the issuance of convertible
subordinated notes payable, net of offering costs ........................... -- 110,827 --
Distributions by pooled entities ................................................ (40) (1,370)
Issuance of common stock, net of issuance costs ................................. 58,177 6,530 --
Issuance of common stock through Employee Stock Purchase Plan ................... 135 467 1,040
Proceeds from exercise of common stock options and
warrants to purchase common stock ........................................... 477 14,869 2,924
--------- --------- ---------
Cash provided by (used for) financing activities ......................... 59,681 131,880 (18,413)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............................ 19,652 17,777 (54,966)
CASH AND CASH EQUIVALENTS, beginning of year ........................................ 29,102 48,754 66,531
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year .............................................. $ 48,754 $ 66,531 $ 11,565
========= ========= =========
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...................................................... $ 1,736 $ 8,002 $ 6,315
Cash paid for taxes ......................................................... 483 600 1,659
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS:
Conversion of notes payable and accrued interest to contributed capital ..... $ 9,578 $ -- $ 500
Conversion of notes payable to common stock ................................. 15,650 -- --
Issuance of common stock in connection with the Cabot Marsh acquisition ..... -- 8,400 --
Issuance of common stock in connection with the Velox acquisition ........... -- 1,500 --
Issuance of common stock in connection with the InterLink acquisition ....... -- 1,500 --
Conversion of subordinated notes payable to common stock .................... -- 8,000 --
Issuance of common stock in connection with the Synergy HMC acquisitions .... 2,000 -- --
Issuance of common stock in connection with
acquisition of Healthcare Revenue Management, Inc. ...................... 2,300 -- --
Issuance of common stock warrants and common stock
in connection with acquisition of Medicus Systems Corporation ........... 700 24,533 --
Issuance (cancellation) of restricted common stock .......................... -- 3,940 (582)
Issuance of common stock in connection with other aquisitions ............... -- -- 635
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
50
<PAGE> 51
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. THE COMPANY
QuadraMed Corporation (the "Company", "we" or "us") was incorporated in
California in September 1993. In August 1996, we reincorporated in Delaware. The
Company leverages its industry expertise and product breadth to deliver
web-enabled, secure product and service solutions that link the nation's
hospitals to their diverse constituents, including payors, physicians, patients,
insurers and governmental agencies. The Company is focused on customer service
excellence and delivering a return on investment for its customers through
increased efficiency and improved cash flow. The Company has implemented its
solutions in approximately 4,000 provider sites, representing more than 60% of
the nation's hospitals. We operate in three business segments.
The Company has a significant talent pool, which, through its active
participation in professional and trade organizations, has helped to shape the
healthcare information technology industry. The Company also has substantial
expertise in the core components required by the Health Insurance Portability
and Accountability Act of 1996 (HIPAA). In addition to its web-enabled
solutions, the Company has developed the American Hospital Directory (ahd.com),
the most comprehensive resource for hospital and healthcare benchmarking on the
worldwide web. The Company's site is the only one of its kind to integrate data
from the American Hospital Association.
We are subject to a number of risks, including, but not limited to, our
dependence on the hospital market, uncertainty in the health care industry,
risks associated with acquisitions (successful integration and operation of new
products, technologies or businesses), and our ability to increase market share
for our products from larger competitors. There can be no assurance that we will
successfully integrate acquired subsidiaries or be able to increase market share
for our products from larger competitors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, we consider all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. These investments have consisted of certificates of deposit, money
market accounts and commercial paper with maturities of three months or less.
Restricted Cash
As collateral for stand-by letters of credit, the Company has a
restricted cash balance of $1.0 million at December 31, 1999.
Short and Long-Term Investments
The Company considers its short and long-term securities, consisting
primarily of debt securities, to be available-for-sale-securities and,
accordingly, these securities are stated at fair value. The difference between
amortized cost (cost adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income) and fair
value, representing unrealized holdings gains or losses, are recorded as a
separate component of stockholders' equity until realized. Any gains and losses
on the sale of debt securities are determined on a specific identification
basis. Realized gains and losses are included in other income (expense) in the
accompanying consolidated statement of operations. At December 31, 1998 and
1999, unrealized holding losses were $157,000 and $287,000, respectively. The
amortized cost, aggregate fair value and gross unrealized holding gains and
losses by major security type were as follows:
51
<PAGE> 52
As of December 31, 1998:
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON AVAILABLE-
AMORTIZED AGGREGATE FOR-SALE
COST FAIR VALUE SECURITIES
---- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term:
Debt securities issued by
the United States Government .... $ 8,996 $ 9,003 $ 7
Corporate debt securities ............ 14,040 14,040 --
-------- -------- --------
$ 23,036 $ 23,043 $ 7
======== ======== ========
Long-term:
Debt securities issued by
the United States Government .... $ 22,157 $ 22,162 $ 5
Corporate debt securities ............ 19,648 19,479 (169)
-------- -------- --------
$ 41,805 $ 41,641 $ (164)
======== ======== ========
Total Unrealized Loss .......... $ (157)
========
</TABLE>
As of December 31, 1999:
<TABLE>
<CAPTION>
UNREALIZED
LOSS
ON AVAILABLE-
AMORTIZED AGGREGATE FOR-SALE
COST FAIR VALUE SECURITIES
---- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term:
Debt securities issued by
the United States Government .... $ 2,486 $ 2,473 $ (13)
Corporate debt securities ............ 16,753 16,636 (117)
-------- -------- --------
$ 19,239 $ 19,109 $ (130)
======== ======== ========
Long-term:
Debt securities issued by
the United States Government .... $ 4,997 $ 4,938 $ (59)
Corporate debt securities ............ 7,262 7,164 (98)
-------- -------- --------
$ 12,259 $ 12,102 $ (157)
======== ======== ========
Total Unrealized Loss .......... $ (287)
========
</TABLE>
Notes and other receivables
In December 1997, the Company entered into an agreement with Arcadian
Management Services, Inc. ("Arcadian") to develop a centralized business office
and to provide full business office outsourcing services for its managed
hospitals. In connection with this agreement, the Company purchased certain
accounts receivable from Chama Inc. ("Chama"), a customer of Arcadian, for the
purpose of increasing cash flow while the central business office was being
implemented. In October 1998, Chama filed for reorganization under Chapter 11.
During the first quarter of 1999, the Company wrote-off approximately $1.2
million of the original receivable balance. Prior to the filing, the Company had
perfected a security interest in the receivables purchased from Chama and,
pursuant to a court order, the receivables owned by the Company are being
segregated as they are collected. At December 31, 1998 and 1999, approximately
$2.2 million and $1.2 million, respectively, of these receivables remained
outstanding and due in full. The remaining balances are included in notes and
other receivables on the accompanying consolidated balance sheets. We believe
these remaining receivables are collectible.
In January 1999, we provided a loan of $3.6 million to another company in
exchange for a convertible promissory note. The note is due in full on January
21, 2002. Interest accrues at an annual rate of 8.0% and is due in quarterly
payments beginning upon the one year anniversary of the note, through January
2002. The first interest payment was received in January 2000. At December 31,
1999, the outstanding balance of $3.6 million is included in long-term other
assets on the accompanying consolidated balance sheet. James D. Durham, our
Chairman and Chief Executive Officer, is also director of the debtor.
Also included in notes and other receivables at December 31, 1999, is
accrued interest receivable of approximately $1.3 million related to the
Company's marketable investments. Accrued interest on these investments is paid
to the Company periodically on
52
<PAGE> 53
specified dates depending on the investment instrument. As discussed in Note 2,
included in notes and receivables at December 31, 1998 is $500,000 representing
the balance due under VantageMed's line of credit. The $500,000 outstanding
balance under the line of credit was converted to an additional equity interest
in VantageMed during the first quarter of 1999.
Equipment
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets which
is generally three to five years. Leasehold improvements are amortized over the
term of the lease. Maintenance and repairs are expensed as incurred.
Software Development Costs
Software development costs are capitalized upon the establishment of
technological feasibility, which we define as establishment of a working model
which is typically the beta version of the software. Capitalized software
development costs require a continuing assessment of their recoverability. This
assessment requires considerable judgment by us with respect to various factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic lives and changes in software and hardware technology. We
capitalized software development costs of $1.2 million, $3.1 million and $4.8
million in 1997, 1998 and 1999, respectively. Amortization of capitalized
software development costs was $388,000, $713,000 and $704,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. Amortization is based upon
the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product, generally five years.
Acquired Software
In March 1999, the Company paid $6.0 million in cash to license the
source code of a chart tracking software product. The amount was recorded in the
balance sheet as acquired software and will be amortized over a period of five
years, commencing December 1999.
Intangibles
Intangibles include goodwill, which represents the amount of purchase
price in excess of the fair value of the tangible net assets, acquired software
and other identifiable intangible assets purchased in acquisitions completed by
us. Capitalized amounts are amortized on a straight-line basis over a period of
five to ten years. Goodwill is evaluated quarterly for impairment and written
down to net realizable value if necessary. Intangible assets also include
acquired customer lists, tradenames and assembled work forces which are
amortized on a straight-line basis over a period of five to ten years. During
the quarter ended March 31, 1999, we recorded a $10.6 million charge for the
write-down of certain intangible assets. The intangible assets were associated
with the Business Office Division, primarily related to the acquisitions of
Synergy in 1997, and 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.
Intangible assets include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---- ----
<S> <C> <C>
Customer lists ........................... $ 20,951 $ 20,951
Goodwill ................................. 34,865 34,008
Work force and trade names ............... 2,341 2,341
-------- --------
58,157 57,300
Less: Accumulated amortization .... (8,001) (15,032)
-------- --------
$ 50,156 $ 42,268
======== ========
</TABLE>
Non-Marketable Investments
In July 1997, we acquired an 11 percent equity interest in VantageMed
Corporation ("VantageMed"), a company that develops and sells software to
physician groups. We paid $1,200,000 for our equity interest in VantageMed which
is accounted for on the cost method. In addition, we provided VantageMed a
revolving line of credit in the amount of $500,000. The line of credit had a
stated interest rate of 8% per annum. During 1998, VantageMed borrowed $500,000
against the line of credit. In January 1999, the $500,000 balance outstanding
under the line of credit was converted to an additional equity interest. During
the first quarter of 1999, we also acquired an additional $3.0 million equity
interest in VantageMed in exchange for cash. As of December 31, 1999, we own
12.1% of the capital stock of VantageMed. The investment in VantageMed is
accounted for on the cost method. Subsequent to December 31, 1999, VantageMed
53
<PAGE> 54
registered shares of common stock in an initial public offering. Following the
initial public offering, we owned 6.9% of the capital stock of VantageMed. We
will begin accounting for our investment in VantageMed as a marketable equity
security beginning February 2000.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable, approximate their
fair values. The fair value of our Convertible Subordinated Debentures at
December 31, 1998 and 1999 were $97.8 million and $55.2 million, respectively.
Revenue Recognition
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue consists of business office and health information management
outsourcing, cash flow management, compliance and consulting services.
The license product suite is comprised of enterprise-wide systems,
business office solutions, and medical records office solutions. Products can be
licensed individually or as a suite of interrelated products. Products are
licensed either under term arrangements (which range from one year to three
years and typically include monthly or annual payments over the term of the
arrangement) or on a perpetual basis. Revenues from enterprise-wide systems are
recognized based upon percentage of completion. 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 an acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
Other services are also provided to certain of the Company's licensees of
software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed. Deferred revenue also consists of undelivered
product and services yet to be performed as of year end. The Company expects to
recognize the revenues within one year.
The Company provides business office and health information management
outsourcing, compliance, and consulting services to hospitals under contract
service arrangements. Outsourcing revenues typically consist of fixed monthly
fees plus, in the case of business office outsourcing, incentive-based payments
that are based on a percentage of dollars recovered for the provider for which
the service is being performed. The monthly fees are recognized as revenue on a
monthly basis at the end of each month. Incentive fees based upon collection of
accounts from payors are recognized upon payment by the payor to the customer.
Incentive fees based upon acknowledgement from the customer are recognized upon
such acknowledgement. These fees are recorded as unbilled revenue until the
government agency pays the customer. Compliance and consulting revenues are
recognized as the services are provided.
Cost of license revenues consists primarily of salaries, benefits,
hardware costs and allocated costs related to the installation process and
customer support and royalties to third parties.
Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.
Major Customers
In the years ended December 31, 1997, 1998 and 1999, no single customer
accounted for more than 10% of total revenue.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company does not require collateral on trade accounts receivable as the
Company's customer base consists primarily
54
<PAGE> 55
of hospitals and, to a lesser extent, hospital associations, physician groups,
medical payors and self-administered employers. The Company provides reserves
for credit losses.
Acquisition Costs
During 1997, the Company completed two acquisitions which were accounted
for as a pooling of interests. In connection with these acquisitions, the
Company incurred $3.1 million in acquisition and related costs. During 1998, the
Company incurred $10.3 million of acquisition costs associated with the
acquisitions of Pyramid, Codemaster and Integrated Medical Networks, which were
all accounted for on a pooling of interests basis. Acquisition costs were
related to financial advisors hired by the Company and the acquired companies,
legal and accounting fees. During 1999, the Company incurred $6.9 million of
acquisition costs, of which $6.3 million was associated with the acquisition of
Compucare, which was accounted for as a pooling of interests. The $6.3 million
in costs related to the acquisition of Compucare were primarily for financial
advisor fees of approximately $5.4 million incurred by the Company and Compucare
and to a lesser extent, legal and accounting fees of approximately $900,000.
Non-Recurring Charges
During 1997, the Company incurred non-recurring charges of $4.7 million.
In February 1997, the Company entered into an arrangement to provide EDI
processing and management services to EDI USA, Inc. In connection with this
claims processing arrangement, and the termination thereof in December 1997, the
Company recorded a charge of $2.5 million. As a result of completed acquisitions
accounted for on a pooling of interest basis during 1997 and prior to 1997, the
Company recorded certain charges to write-off assets which were determined to
have no future realizable value.
During 1998, the Company recorded $4.2 million of non-recurring charges.
These charges primarily consisted of $3.0 million of costs associated with the
closing of a duplicative operating facility within the Company's business office
outsourcing operations. Such costs included future rents due for its Howell, New
Jersey office and lease obligations the Company is contractually obligated to
fulfill relating to furniture and equipment which was determined not to have any
future net realizable value. In addition, all of the employees, which
approximated 50, were involuntarily terminated during the third quarter ended
September 30, 1998 as part of the closing of this duplicative facility. The
Company also closed another smaller office for which the Company accrued for
future rent obligations during 1998.
During 1999, the Company recorded $18.8 million of non-recurring charges.
Those charges consisted of costs associated with the closing of several
duplicative operating facilities primarily within the Company's Business Office
Division and certain write-offs related to prior acquisitions. The charge
included approximately $10.0 million related to severance payments to employees
ranging from several weeks to two years in the case of certain management of
Compucare. Such severance payments were paid to involuntarily terminated
employees through August of 1999. In addition, the charge included $8.8 million
for future rents and lease obligations the Company is obligated to fulfill as
well as other incremental costs to wind-down the operations of the offices.
Future rents and lease obligations are expected to be paid through July 2003. At
December 31, 1999, there was $1.5 million accrued for future rents and lease
obligations related to such facilities.
The following table sets forth the Company's restructuring reserves and
the activity against the reserves (in thousands):
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS DECEMBER 31, COSTS DECEMBER 31,
DESCRIPTION 1997 AND EXPENSES PAYMENTS 1998 AND EXPENSES PAYMENTS 1999
- ----------- ---- ------------ -------- ---- ------------ -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Personnel costs .................. $-- $ 820 $ (820) $ -- $ 10,000 $(10,000) $ --
Rents and lease obligations ...... 1,334 1,260 (1,015) 1,579 3,282 (3,394) 1,467
Other incremental
Operating costs .............. -- 940 (940) -- 5,470 (5,470) --
-------- -------- -------- -------- -------- -------- --------
Total Restructuring Accrual ... $ 1,334 $ 3,020 $ (2,775) $ 1,579 $ 18,752 $(18,864) $ 1,467
======== ======== ======== ======== ======== ======== ========
</TABLE>
In-Process Research and Development
In connection with the acquisition of 56.7% of the outstanding stock in
Medicus in November 1997, the Company allocated $21.9 million related to
in-process research and development ("IPR&D")(see Note 13). This amount was
expensed as a non-recurring charge because the IPR&D projects identified had not
yet reached technological feasibility and had no alternative future use.
55
<PAGE> 56
In connection with the acquisitions of Velox, Cabot Marsh, the remaining
43.3% interest in Medicus, and several other purchase business combinations, the
Company allocated $14.5 million to IPR&D for the year ended December 31, 1998
(see Note 13). This amount was expensed as a non-recurring charge because the
IPR&D projects identified had not yet reached technological feasibility and had
no alternative future use. The following table depicts the allocations to IPR&D
for the year ended December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Med Data .............. $ -- $ 1,722
Velox ................. 1,500 --
Cabot Marsh ........... 4,200 --
Medicus (43.3%) ....... 4,763 --
Other acquisitions .... 4,031 --
------- -------
Total ................. $14,494 $ 1,722
======= =======
</TABLE>
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased technology into commercially viable products, estimating
the resulting net cash flows from each project, excluding the cash flows related
to the portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to develop
that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. In each case, the selection of
the applicable discount rate was based on consideration of the Company's
weighted average costs of capital, as well as other factors including the useful
life of each technology, profitability levels of each technology, the
uncertainty of technology advances that were known at the time, and the stage of
completion of each technology.
VELOX. At the acquisition date, Velox was conducting development,
engineering, and testing activities associated with SMARTLINK, a product which
focuses on accounts receivable analysis and reporting in hospitals, large
physician practices, and other entities. Upon completion, this product was
planned to have significant scalability, a multilayer architecture, and the
ability to address Windows NT 5.0 and the next generation of Microsoft SQL
Server. At the acquisition date, Velox was approximately 35% complete with the
development of this product. The Company anticipated that SMARTLINK would be
completed in the last half of 1998, after which the Company expected to begin
generating economic benefits from the value of the completed IPR&D.
Revenues attributable to SMARTLINK were estimated to be $1.3 million in
1998 and $5.0 million in 1999. IPR&D revenue, as a percentage of total projected
company revenue, was expected to peak in 1999 and decline thereafter as new
product technologies were expected to be introduced by the company. Operating
expenses (expressed as a percentage of revenue) average 79% over the projection
period. The costs to complete the IPR&D were expected to be $293,000 in 1998 and
$239,000 in 1999. A risk-adjusted discount rate of 20% was utilized to discount
projected cash flows.
CABOT MARSH. At the acquisition date, Cabot Marsh was conducting
development, engineering, and testing activities associated primarily with the
next generation of RAMS, a compliance product related to inpatient and
outpatient coding. At the acquisition date, Cabot Marsh was approximately 80%
complete with the development of the IPR&D. The Company anticipated that the
project would be completed in the second half of 1998, after which the Company
expected to begin generating economic benefits from the value of the completed
IPR&D.
Revenues attributable to the next generation of RAMS were estimated to be
$807,000 in 1998 and $11.3 million in 1999. IPR&D revenue, as a percentage of
total projected company revenue, was expected to peak in 1999 and decline
thereafter as new product technologies were expected to be introduced by the
company. Operating expenses (expressed as a percentage of revenue) average 57%
over the projection period. The costs to complete the IPR&D efforts were
expected to be $140,000 in 1998 and $427,000 in 1999. A risk-adjusted discount
rate of 19% was utilized to discount projected cash flows.
MEDICUS. At the acquisition date, Medicus was conducting development,
engineering, and testing activities associated with the next generations of the
company's Clinical Data Systems ("CDS") and Patient Focused Systems ("PFS")
project lines. At the acquisition date, Medicus was approximately 30% and 60%
complete with CDS and PFS, respectively. The Company anticipated that CDS would
be completed at the end of 1998, with PFS scheduled for completion in mid-1999.
After these release dates, the Company expected to begin generating economic
benefits from the value of the completed IPR&D.
Revenues attributable to CDS were estimated to be $6.0 million in 1999
and $18.0 million in 2000. IPR&D revenue, as a percentage of total projected
product revenue, is expected to peak in 2000 and decline thereafter as new
product technologies are expected to be introduced by the company. Revenues
attributable to PFS are estimated to be $7.2 million in 2000 and $9.8 million in
2001. IPR&D revenue, as a percentage of total projected product revenue, is
expected to peak in 2000 and decline thereafter as new
56
<PAGE> 57
technologies were expected to be introduced by the Company. For both projects,
operating expenses (expressed as a percentage of revenue) average 61% over the
projection period. The costs to complete the CDS IPR&D efforts were expected to
be $14,000 in 1998 and $1.2 million in 1999. The costs to complete the PFS IPR&D
efforts were expected to be $6,000 in 1998 and $309,000 in 1999. For each of the
projects, a risk-adjusted discount rate of 18% was utilized to discount
projected cash flows.
MED DATA. At the acquisition date, Med Data was conducting development,
engineering, and testing activities associated with the MEDREC/Chart Completion
Millennium product (Chart Completion). At the acquisition date, Med Data was
approximately 68% complete with this product. The Company anticipated that Chart
Completion would be completed in late 1999, after which the Company expected to
begin generating economic benefits from the value of the completed IPR&D.
Revenues attributable to Chart Completion were estimated to be $240,000
in 1999, increasing to $3.3 million in 2000 and peaking at $5.1 million in 2001
and declining thereafter as new product technologies were expected to be
introduced by the company. Operating expenses (expressed as a percentage of
revenue) average 58% over the projection period. The costs to complete the IPR&D
were expected to be $236,000 in 1999. A risk-adjusted discount rate of 25% was
utilized to discount projected cash flows.
The SMARTLINK, RAMS, CDS, PFS and products have been completed and are
available for general sale as of 12/31/99. Chart Completion is expected to be
completed in the second quarter of 2000.
Net Loss Per Share
Basic net loss available to common stockholders per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net loss available to common stockholders per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares consist of stock options
and warrants (using the treasury stock method) and convertible subordinated
debentures (using the if converted method). Common equivalent shares are
excluded from the dilutive computation only if their effect is anti-dilutive. As
the Company recorded a net loss in each of three years in the period ended
December 31, 1999, 1.2 million, 2.8 million and 834,000 common equivalent shares
were not included in diluted weighted average common shares outstanding for the
years ending December 31, 1997, 1998 and 1999, respectively.
Comprehensive Income
In 1997, 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. The
Company has integrated the presentation of comprehensive income (loss) with the
consolidated statements of changes in stockholders' equity (deficit).
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and to
disclose contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the realizability of acquired intangible assets. Due to the
Company's large number of acquisitions generating these intangible assets, the
Company periodically evaluates the integration efforts related to these
acquisitions and the realizability of the related acquired intangible assets.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998
consolidated financial statements to conform to the 1999 presentation.
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
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<PAGE> 58
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.
In December 1999, the Securities and Exchange Commission ("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 second 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
3. LINE OF CREDIT GUARANTEE
In September 1998, the Company entered into an arrangement to guarantee a
line of credit of another company for up to $12.5 million. Outstanding balances
under the line of credit accrue interest at 8.5% and are due in October 2001.
The Company is required to meet certain financial covenants in connection with
the line of credit guarantee, with which the Company was not in compliance at
December 31, 1999. See Note 19 for discussion. The Company has also entered into
a reseller agreement with the same company. Under the terms of the reseller
agreement, the Company has a non-exclusive license to resell the company's
software. This reseller agreement remains in effect for an initial term of three
years, expiring in September 2001, and thereafter is subject to renewal for
additional one year terms.
4. LINE OF CREDIT, NOTES PAYABLE AND DEBENTURES
The Company's notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Note payable to stockholder of
Integrated Medical Networks, Inc., bearing
interest at 7.875%, paid in full April, 1999 .... $ 19,184 $--
Miscellaneous notes payable ........................ 281 24
-------- --------
19,465 24
Less: Current portion ................... (279) (24)
-------- --------
$ 19,186 $--
======== ========
</TABLE>
In April 1998, the Company completed an offering of $115 million
principal amount of Convertible Subordinated Debentures (the "Debentures"),
including the underwriters' over-allotment option. The Debentures are due May 1,
2005 and bear interest at 5.25% per annum. The Debentures are convertible into
common stock at any time prior to the 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). Net proceeds to the Company
from the offering were $110.8 million.
The Company was party to a $7.0 million revolving credit and security
agreement with its bank. The Company paid interest at a rate of prime + 1.5% (or
9.25% at December 31, 1998, weighted average of 9.86% for 1998) on the
outstanding borrowings. The Company had $2.5 million in borrowings at December
31, 1998. The line of credit was repaid and terminated by the Company in March
1999.
During the year ended December 31, 1998, the Company opened $1.0 million
of stand-by letters of credit under a bank financing agreement. During the year
ended December 31, 1999, the Company paid a 1% annual fee to renew the stand-by
letters of credit and secured all of the stand-by letters of credit with a $1.0
million certificate of deposit, recorded in the balance sheet at December 31,
1999 as restricted cash. As of December 31, 1999, none of the letters of credit
were drawn upon.
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<PAGE> 59
5. CAPITAL AND OPERATING LEASE OBLIGATIONS
The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
2000 ............................................... $ 406 $ 8,245
2001 ............................................... 184 6,503
2002 ............................................... 166 4,250
2003 ............................................... 48 3,123
2004 ............................................... -- 2,347
Thereafter ......................................... -- 6,059
------- -------
Total minimum payments ........................ 804 $30,527
=======
Interest on capital lease obligations at a
rate of 8.5% .................................. (160)
-------
Net minimum principal payments ..................... 644
Current maturities ................................. (437)
-------
$ 207
-------
</TABLE>
Rental expense was approximately $5.1 million, $5.1 million and $7.7
million for the years ended December 31, 1997, 1998, and 1999, respectively. At
December 31, 1998 and 1999, the gross book value of equipment leased under
noncancelable capital leases totaled $1.4 million. As of December 31, 1998 and
1999, related accumulated depreciation totaled $699,000 and $1.1 million,
respectively.
6. WARRANTS
In December 1995, the Company issued a warrant to KTU, an affiliate of
the Company's Chief Executive Officer, to purchase up to 134,574 shares of
common stock at an exercise price of $3.75 per share. In June 1996, the
Company's Chief Executive Officer transferred the warrant to Trigon Resources
Corporation, a corporation owned by him and his children.
In September 1995 and June 1996, the Company issued warrants to its Chief
Executive Officer to purchase up to 355,600 shares of common stock at $3.75 per
share. In connection with the warrant issued in June 1996, the Company recorded
deferred compensation for $381,000, representing the intrinsic value of the
warrant at the date of issuance which would be amortized over the vesting
period. The Company recorded compensation expense of $336,000 for the year ended
December 31, 1997 as a result of the vesting of the warrants. The warrants were
exercised in full during 1999.
In connection with a 1996 bridge loan agreement, the Company issued
warrants to purchase an aggregate of 957,376 shares of common stock at a
purchase price of $3.75 per share. The warrants were partially exercised into
240,960 and 430,705 shares of common stock during 1997 and 1998, respectively.
The remaining warrants expire on January 31, 2001. The value of the warrants at
the date of issuance was nominal; therefore, no value had been assigned to the
warrants for accounting purposes.
In connection with a line of credit arrangement the Company entered into
during 1996, which has since expired, the Company issued a warrant to purchase
common stock. The warrant was exercised into 7,663 shares of common stock during
1998.
In connection with the acquisition of the minority interest in Medicus in
May 1998, a former officer and director of Medicus exercised a warrant to
purchase 67,503 shares of common stock of the Company. In addition, Medicus
issued a warrant to purchase 100,000 shares of common stock to an unaffiliated
entity at $7.80 per share. In connection with the acquisition of the remaining
43.3% minority interest in Medicus in May 1998, the warrant was exercised for
100,000 shares of common stock of the Company. The value of the warrants at the
date of issuance was nominal; therefore, no value had been assigned to the
warrants for accounting purposes.
In connection with the Compucare acquisition in March 1999, the Company
assumed warrants to purchase 71,751 shares of common stock at exercise prices
ranging from $0.15 to $233.09 per share and expiring at various dates through
2006.
In connection with an acquisition in June 1999, the Company assumed
warrants to purchase 6,424 shares of common stock at an exercise price of $0.03
per share, expiring in March 2008. The warrants were partially exercised for
5,396 shares of common stock during the third quarter of 1999.
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<PAGE> 60
7. CONVERTIBLE PREFERRED STOCK
In March 1999, the Company acquired Compucare in a business combination
accounted for as a pooling of interests. During 1997 and 1998 Compucare issued
preferred stock, some of which gave rise to dividend accretions in 1997 and
1998, as reflected in the accompanying consolidated statements of operations.
The 1997 preferred issuance consisted of an exchange of preferred shares with a
value of approximately $15.1 million for debt and associated accrued interest
with a book value of approximately $11.8 million, resulting in a charge of
approximately $3.3 million to interest expense in the 1997 consolidated
statement of operations. Compucare's preferred stock issuances have been
presented as common stock issuances for all periods in the accompanying
consolidated statement of changes in stockholder's equity (deficit).
8. COMMON STOCK
In September 1994, the Company entered into consulting arrangements with
two individuals pursuant to which each individual was issued warrants to
purchase 17,000 shares of common stock at a purchase price of $4.79 per share.
These warrants were exercised for shares of common stock during 1997.
In October 1995, the Company entered into a joint development arrangement
with another software company pursuant to which the Company issued a warrant to
purchase 28,560 shares of common stock at a purchase price of $5.25 per share.
The warrant was partially exercised for 18,984 shares of common stock during
1997. The remaining warrants expire on June 25, 2001.
In connection with the acquisition of Rothenberg Health Systems, Inc. by
Resource Health Partners, L.P. ("RHP") in November 1995 (see Note 13), RHP
granted Class C limited partnership units in RHP to certain officers and
employees of Rothenberg Health Systems, Inc. These units, which were valued at
$440,000, vest over a period of seven years. The related agreements also contain
provisions for accelerated vesting should there be a sale of all or
substantially all of the assets of Rothenberg Health Systems, Inc. With respect
to shares granted to employees who were not shareholders of Rothenberg Health
Systems, Inc. at the date of the acquisition, the Company recorded deferred
compensation expense as a component of stockholders' equity, which was being
amortized ratably over the seven year vesting period. In connection with the
acquisition of Rothenberg Health Systems, Inc., the Company amortized the
remaining deferred compensation during 1997.
In October 1997, the Company completed a follow-on offering of 3,300,000
shares of common stock, of which 2,972,198 shares were offered by the Company
and 327,802 shares were offered by selling stockholders. In addition, the
underwriters exercised an over-allotment option to purchase an additional
495,000 shares. Total proceeds to the Company were $57.3 million net of offering
costs and the underwriters' discount of $4.1 million.
In November 1998, the Company issued 237,000 shares of restricted common
stock with a fair market value of $16.625 per share to certain officers of the
Company. In connection with the common stock issuance, the Company recorded
deferred compensation for $3.9 million, representing the intrinsic value of the
restricted common stock at the date of issuance which will be amortized over the
vesting period of five years. During the fourth quarter of 1999, 35,000 shares
of restricted stock were canceled. Compensation expense recognized during the
year ended December 31, 1999 related to the restricted stock was $839,000.
In 1998, the Board of Directors and Stockholders of the Company approved
an increase to the authorized shares of common stock from 20,000,000 to
50,000,000.
9. STOCK OPTION AND PURCHASE PLANS
Stock Option Plans
1996 Option Plan
Under the Company's 1994 Stock Option Plan and its successor plan, the
1996 Stock Incentive Plan, which became effective in October 1996 (collectively,
the "Option Plan"), the Board of Directors may grant incentive and nonqualified
stock options to employees, directors and consultants. The exercise price per
share for an incentive stock option cannot be less than the fair market value on
the date of grant. The exercise price per share for a nonqualified stock option
cannot be less than 85% of the fair market value on the date of grant. Option
grants under the Option Plan generally expire ten years from the date of grant
and generally vest
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<PAGE> 61
over a four-year period. Options granted under the Option Plan are exercisable
subject to the vesting schedule. As of December 31, 1999, a total of 3,385,041
shares of common stock have been authorized by the Company's stockholders for
grant under the Option Plan.
1997 Stock Option Plan
In 1997, Pyramid, a company acquired in a pooling transaction, adopted
the 1997 Stock Option Plan ("1997 Plan") whereby options could be granted to
employees, directors and consultants. The 1997 Plan was administered by the
Board of Directors or a committee thereof. The 1997 Plan provided for the
issuance of incentive stock options to employees and nonqualified stock options
to employees and consultants. Under the 1997 Plan, the exercise price of all
incentive stock options granted to employees who would be 10% shareholders in
the Company could not be less than 110% of the fair market value of the shares
on the grant date. If granted to any other employee, the exercise price of the
incentive stock options could not be less than the fair market value of the
shares on the grant date. The exercise price for nonqualified stock options to a
person who was a 10% shareholder of the Company could not be less than 110% of
the fair market value of the stock on the date of grant. The exercise price for
nonqualified stock options to any other person could not be less than 85% of the
fair market value of the shares on the date of grant. The options generally
expire ten years from the date of grant. In general, the outstanding options
vest 20% at the first anniversary of the date of grant and 1.67% each month
thereafter. In 1998, options outstanding under the 1997 Plan were merged into
the Company's Option Plan.
1999 Stock Option Plan
In March 1999, the Company adopted the 1999 Stock Option Plan ("1999
Plan") whereby options may be granted to employees, directors and consultants.
The 1999 Plan is administered by the Board of Directors or a committee thereof.
The 1999 Plan provides for the issuance of nonqualified stock options to
employees and consultants. A total of 2,000,000 shares have been reserved for
issuance under the 1999 Plan. The 1999 Plan expires on March 21, 2009, unless
terminated earlier by the Board of Directors. The exercise price of all
incentive stock options granted under the 1999 Plan must not be less than 100%
of the fair market value of the shares on the grant date. Option grants under
the 1999 Plan generally expire ten years from the date of grant, generally vest
over a four-year period and are exercisable subject to the vesting schedule. As
of December 31, 1999, 149,200 shares remain available for grant under the 1999
Plan.
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations.
Under this principle, the Company recognized compensation expense of $268,000
during the year ended December 31, 1999, primarily related to the acceleration
of vesting terms for certain outstanding stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal year 1995.
In accordance with SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models. These models require
subjective assumptions, including future stock price volatility and expected
time to exercise. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. Under SFAS 123,
the Company's Employee Stock Purchase Plan would be compensatory due to a
look-back feature, and $492,000 of compensation would have been recognized in
fiscal year 1999.
Had compensation cost for the Company's option plans been determined
based on the fair value at the grant dates for the awards calculated in
accordance with the method prescribed by SFAS No. 123, the Company's net loss
and net loss per share would have been the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss available to common stockholders ..... As reported $ (37,985) $ (21,376) $ (12,330)
Pro forma $ (39,207) $ (32,754) $ (18,652)
Basic and diluted net loss per share .......... As reported $ (2.34) $ (0.91) $ (0.49)
Pro forma $ (2.41) $ (1.40) $ (0.75)
</TABLE>
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<PAGE> 62
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions for
the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield.............. 0.0% 0.0% 0.0%
Expected stock price volatility...... 73.0% 77.5% 91.7%
Risk-free interest rate.............. 5.50%-5.54% 4.74% 6.49%
Expected life of options............. 4.5 years 6.8 years 5.0 years
</TABLE>
The weighted average fair value of options granted during 1997, 1998, and
1999 was $9.22, $15.98 and $5.17 per share, respectively. Option activity under
the option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Balance, December 31, 1996 .... 903 $ 9.88
Granted ................... 1,980 11.56
Exercised ................. (115) 3.87
Canceled .................. (365) 11.22
------ ------
Balance, December 31, 1997 .... 2,403 9.98
------ ------
Granted ................... 1,621 20.41
Exercised ................. (370) 11.67
Canceled .................. (173) 13.57
------ ------
Balance, December 31, 1998 .... 3,481 15.35
------ ------
Granted ................... 2,542 8.07
Exercised ................. (259) 6.14
Canceled .................. (713) 10.32
------ ------
Balance, December 31, 1999 .... 5,051 $ 12.43
====== ======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/99 CONTRACTUAL LIFE PRICE 12/31/99 PRICE
- --------------- -------- ---------------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 0.11- $ 5.71 363,925 6.85 $ 4.59 349,853 $ 4.72
$ 7.38- $ 9.13 2,837,157 5.82 8.20 423,567 8.64
$ 9.63- $11.50 471,086 6.02 10.84 311,803 10.94
$12.00- $16.63 219,482 4.25 13.92 124,481 14.88
$16.84- $21.34 157,414 6.25 18.58 148,431 18.55
$22.38- $25.81 663,846 7.30 22.99 338,609 23.02
$26.26- $27.97 181,408 7.91 27.75 86,825 27.67
$33.37- $39.16 157,128 7.94 38.89 75,878 38.61
--------- ---- ------ --------- -------
$ 0.11- $39.16 5,051,446 6.12 $12.43 1,859,447 $ 14.23
========= ==== ====== ========= =======
</TABLE>
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in June 1996. A total of 200,000
shares of common stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan enables eligible employees to designate up to 10% of their
compensation for the purchase of stock. The purchase price is 85% of the lower
of the fair market value of the Company's common stock on the first day or the
last day of each six-month purchase period. No compensation expense is recorded
in connection with the plan. The Company issued 13,580, 37,310 and 90,927 shares
of common stock under the Purchase Plan during the years ended December 31,
1997, 1998 and 1999, for an aggregate purchase price of $135,000, $467,000, and
$1,040,000, respectively. The Purchase Plan terminated in January 2000.
10. RELATED PARTY TRANSACTIONS
The Company, through the acquisition of Rothenberg Health Systems, Inc.,
assumed a long-term agreement, expiring in 2010, to provide management services
to Physical Therapy Provider Network, Inc. ("PTPN"), an affiliated entity. Under
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<PAGE> 63
the terms of the agreement, the Company provided PTPN with management services,
employees and facilities and incurred other operating costs on behalf of PTPN.
All employee, facility and other operating costs were directly reimbursed by
PTPN. The Company also received a 50% share of PTPN's net income before taxes,
which is shown in other income (expense) in the consolidated statement of
operations. Direct costs incurred by the Company and reimbursed by PTPN were
$965,000, $988,000, and $1.1 million for the years ended December 31, 1997, 1998
and 1999, respectively.
11. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan (the "Plan"). All eligible
employees can participate in the Plan. Under the terms of the Plan, employees
may elect to contribute up to 15% of their pre-tax compensation to the Plan.
Employee contributions are 100% vested at all times. The Company may make
discretionary contributions to the Plan, which vest annually over a four-year
vesting period. Discretionary contributions of $72,000, $194,000 and $924,000
were made by the Company for the years ended December 31, 1997, 1998 and 1999,
respectively.
In connection with the acquisition of Compucare in March 1999, the
Company assumed Compucare's 401(k) Savings Plan (the "Compucare Plan") which
covers substantially all employees of Compucare. Pursuant to the Compucare Plan,
participants may contribute up to 15% of their annual compensation, which is
generally matched at a rate of 50% of the first 4% of employee contributions.
Participants are immediately vested in their voluntary contributions plus
earnings thereon and vest ratably over three years in employer contributions.
Included in general and administrative expenses are matching contributions
totaling $264,000, $261,000 and $193,000 for the years ended December 31, 1997,
1998 and 1999, respectively. The Compucare Plan was transitioned into the
Company's Plan during 1999.
In connection with the acquisition of Rothenberg Health Systems, Inc. in
December 1997, the Company assumed Rothenberg's 401(k) Savings Plan (the
"Rothenberg Plan"). Pursuant to the Rothenberg Plan, employees could elect to
defer up to 10% of their pre-tax compensation to the Rothenberg Plan. The
Company could make matching contributions up to 25% of the employees'
contribution. For the year ended December 31, 1997, the Company made matching
contributions of $72,000. Employees vested in company contributions based on
their years of service. Partial vesting began after two years of continuous
employment. Contributions fully vested after six years of continuous service. In
addition, the Company, at its discretion, contributed amounts to a profit
sharing pool. These amounts were allocated to the accounts of eligible employees
principally based on the proportion of each eligible employee's compensation to
the total compensation of all eligible employees. The contribution was
determined annually by the Board of Directors of Rothenberg based on the
company's performance and profitability. The Company accrued contributions to
the profit sharing pool of $126,000 for the year ended December 31, 1997. Twenty
percent of the amount allocated to an employee for a given year vested
immediately if the employee had two years of service with the Company or, if the
employee did not have two years of service, after two years of service with the
Company. The remaining amount allocated vested at a rate of 20% for each
additional year so that the Company's contributions would have been fully vested
four years after the date of vesting of the first 20%. Notwithstanding the
foregoing, the Company's contributions immediately vested when the employee
reached age 65 or upon the death or permanent disability of the employee while
employed. The Company transitioned the Rothenberg Plan into the Company's Plan
during 1998.
As a result of the acquisition of 56.7% of Medicus Systems Corporation in
November 1997, the Company assumed Medicus' 401(k) Savings Plan (the "Medicus
Plan"). The Medicus Plan has substantially the same terms and conditions as the
Company's Plan. The Medicus Plan was transitioned into the Company's Plan during
1998.
12. ACQUISITIONS
In April 1997, the Company acquired Healthcare Recovery, Inc., a
successor in interest to the Synergy Companies doing business as Synergy HMC.
The aggregate purchase price was $3.4 million, consisting of $1.4 million in
cash and 181,855 shares of common stock (the aggregate fair market value of
which was $2.0 million). The Company also repaid $1.7 million in indebtedness of
Synergy HMC. The acquisition was accounted for as a purchase. In connection with
the acquisition, the Company recorded $4.9 million of intangibles, which
primarily included customer lists that are being amortized ratably over a seven
year period.
In September 1997, the Company completed the acquisition of Healthcare
Revenue Management, Inc. ("HRM") for consideration consisting of 112,706 shares
of common stock (the aggregate fair market value of which was $2.3 million) and
$200,000 in cash. The acquisition was accounted for as a purchase. Additionally,
an intangible asset for customer lists was recorded in the amount of $3.1
million and will be amortized ratably over a ten year period.
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<PAGE> 64
In December 1997, the Company acquired all of the outstanding capital
stock of Fleming SoftLink Systems, Inc. ("SoftLink") in exchange for 110,857
shares of common stock. The acquisition was accounted for as a pooling of
interests. Upon closing of acquisition, the assets and liabilities of SoftLink
were recorded at net book value and consisted primarily of accounts receivable,
accrued liabilities and, to a lesser extent, deferred revenue. The accompanying
consolidated financial statements have been restated to reflect the acquisition
of SoftLink as a pooling of interests.
In December 1997, the Company acquired all of the assets and assumed all
of the liabilities of RHP, and acquired and merged with its two wholly owned
subsidiaries Resource Holdings, Ltd. ("RHL") and FRA Acquisitions Inc. ("FRA")
(collectively doing business as "Rothenberg Health Systems, Inc."). The mergers
were completed pursuant to an Acquisition Agreement and Plan of Merger (the
"Acquisition Agreement"). The Company issued 1,588,701 shares of its common
stock in exchange for all of the capital stock of RHL and FRA. The acquisitions
were accounted for as poolings of interests. Upon closing of the acquisitions,
the assets and liabilities of Rothenberg Health Systems, Inc. were recorded at
net book value and consisted primarily of cash, accounts receivable and accrued
liabilities. The accompanying consolidated financial statements have been
restated to reflect the acquisition of RHL and FRA as poolings of interests.
In November 1997, the Company acquired 3,111,105 shares of common stock
of Medicus Systems Corporation ("Medicus"), or 56.7% of the then issued and
outstanding shares of Medicus common stock, from certain selling stockholders.
Pursuant to individual stock purchase agreements (the "Stock Purchase
Agreements"), the Company agreed to pay the selling stockholders $7.50 per share
resulting in a total purchase price of approximately $26.3 million. The purchase
price was comprised of a cash payment of $21.7 million, the issuance of a note
payable for approximately $1.6 million to one selling stockholder, which was due
and repaid by the Company in January 1998, warrants to purchase an aggregate of
972,220 shares of QuadraMed common stock at $24 per share, valued at $700,000,
and transaction costs of $2.3 million. In connection with the acquisition, which
was accounted for as a purchase, the Company allocated the purchase price based
upon the estimated fair value of the Company's proportionate share of the assets
acquired and liabilities assumed. Intangible assets acquired aggregated to $30.2
million, of which $1.7 million, $6.7 million and $21.8 million were assigned to
acquired software, acquired intangible assets and acquired research and
development in-process, respectively. Because there was no assurance that the
Company would be able to successfully complete the development and integration
of the acquired research and development in-process or that it had alternative
future use at the acquisition date, the acquired research and development
in-process was charged to expense by the Company in the year ended December 31,
1997. The Company's proportionate share of net tangible liabilities assumed in
the acquisition totaled approximately $12.8 million.
In May 1998, the Company completed its acquisition of Medicus by
purchasing the remaining 43.3% interest in Medicus. The Company allocated the
remaining 43.3% purchase price based on the estimated fair value of the assets
and liabilities assumed. Approximately $4.8 million of the total intangibles was
assigned to acquired in-process research and development and charged to expense
by the Company in the year ended December 31, 1998. The remaining intangible
balance will be amortized over a seven year period.
In January 1998, the Company acquired entities affiliated with InterLink
Corporation for 65,224 shares of the Company's common stock, the aggregate fair
market value of which was $1.5 million, and approximately $1.7 million in cash
and the extinguishment of notes receivable of $250,000. In connection with this
acquisition, which was accounted for as a purchase, the Company allocated the
purchase price based upon the estimated fair value of the acquired assets and
liabilities assumed. Approximately $1.3 million of the total intangibles was
assigned to acquired in-process research and development and charged to expense
by the Company in the year ended December 31, 1998. The remaining intangible
asset will be amortized over a ten year period.
In February 1998, the Company acquired Cabot Marsh Corporation ("Cabot
Marsh") for 382,767 shares of the Company's common stock, the fair market value
of which was approximately $8.4 million, and approximately $2.8 million in cash.
In connection with this acquisition, which was accounted for as a purchase, the
Company allocated the purchase price based upon the estimated fair value of the
assets acquired and liabilities assumed. Approximately $4.2 million of total
intangibles was assigned to acquired in-process research and development and
charged to expense by the Company in the year ended December 31, 1998. The
remaining intangible balance will be amortized over a ten year period.
In March 1998, the Company acquired Velox Systems Corporation ("Velox")
for 40,562 shares of the Company's common stock, the market value of which was
approximately $1.4 million, and approximately $3.1 million in cash. In
connection with this acquisition, which was accounted for as a purchase, the
Company allocated the purchase price based upon the estimated fair value of the
assets acquired and liabilities assumed. Approximately $1.5 million of the total
intangibles was assigned to acquired in-process research and development and
charged to expense by the Company in the year ended December 31, 1998. The
remaining intangible balance is amortized over a seven year period.
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<PAGE> 65
In June 1998, the Company acquired all of the outstanding capital stock
of Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares of
common stock. The acquisition was accounted for as a pooling of interests. Upon
closing of acquisition, the assets and liabilities of Pyramid were recorded at
net book value and consisted primarily of accounts receivable, fixed assets,
accounts payable and accrued liabilities. The accompanying consolidated
financial statements have been restated to reflect the acquisition of Pyramid on
a pooling of interests basis.
In September 1998, the Company acquired all the outstanding capital stock
of Integrated Medical Networks, Inc. ("IMN") in exchange for 1,550,000 shares of
common stock. The acquisition was accounted for as a pooling of interests. Upon
closing of the acquisition, the assets and liabilities of IMN were recorded at
book value and consisted primarily of accounts receivable, fixed assets,
accounts payable, accrued liabilities, and notes payable. The accompanying
consolidated financial statements have been restated to reflect the acquisition
of IMN on a pooling of interests basis.
In 1998, the Company acquired all of the outstanding capital stock of
another healthcare company, in exchange for 507,000 shares of common stock of
the Company. The acquisition was accounted for as a pooling of interests,
however the operations of the acquired company were not material to the Company,
therefore the Company did not restate the consolidated financial statements.
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 accompanying consolidated
financial statements have been restated to reflect the acquisition of Compucare
on a pooling of interests basis.
In July 1999, the Company acquired Med Data Systems, Inc. ("Med Data")
for $5 million in cash. In connection with this acquisition, which was accounted
for as a purchase, the Company allocated the purchase price based upon the
estimated fair value of the assets and liabilities assumed. Approximately $1.7
million of the total intangible was assigned to in-process research and
development and charged to expense by the Company in the year ended December 31,
1999. The remaining intangible balance will be amortized over a seven-year
period.
A reconciliation of the current consolidated statement of operations with
previously reported separate Company information for entities with which the
Company has pooled is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
QuadraMed .................. $ 35,678 $ 90,296 $ 230,305
Rothenberg and Softlink .... 12,483 -- --
Pyramid and IMN ............ 54,699 77,157 --
Compucare .................. 37,940 43,167 9,280
--------- --------- ---------
Consolidated ............. $ 140,800 $ 210,620 $ 239,585
========= ========= =========
Net loss:
QuadraMed .................. $ (22,602) $ (17,196) $ (12,044)
Rothenberg and Softlink .... (4,437) -- --
Pyramid and IMN ............ (8,304) (3,078) --
Compucare .................. (2,642) (1,102) (286)
--------- --------- ---------
Consolidated ............. $ (37,985) $ (21,376) $ (12,330)
========= ========= =========
</TABLE>
The unaudited pro forma results of operations of the Company, Synergy
HMC, HRM and Medicus for the year ended December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
--------
<S> <C>
Revenues ................................ $ 160,116
Net loss ................................ $ (23,782)
Basic and diluted net loss per share .... $ (1.46)
</TABLE>
65
<PAGE> 66
The unaudited pro forma results of operations of the Company, Cabot Marsh
and Velox for the year ended December 31, 1998 are as follows (in thousands):
<TABLE>
PRO FORMA
COMBINED
--------
<S> <C>
Revenues ................................ $ 212,374
Net loss ................................ $ (13,020)
Basic and diluted net loss per share .... $ (0.56)
</TABLE>
Pro forma results have not been presented for the MedData acquisition, as
MedData's results of operations were not significant in relation to the
company's consolidated results of operations.
Results of operations for all acquired companies which have been
accounted for using purchase price accounting have been included for the periods
subsequent to the closing date of each transaction.
13. DISCONTINUED OPERATIONS
In March 1997, Pyramid spun-off a subsidiary to its stockholders by
distributing all of the subsidiary's capital stock in the form of a one-for-one
stock dividend. To reflect this distribution, the $3.7 million fair value of the
net assets of the subsidiary was charged against the Company's accumulated
deficit and has been reflected in the accompanying consolidated statement of
changes in stockholders' equity (deficit).
In November 1996, Compucare, consummated the sale of Antrim Corporation
("Antrim"), a wholly-owned subsidiary of the Company. In December 1996, the
Company announced it was evaluating a plan to "spin-off" or sell the operations
of Health Systems Integration, Inc. ("HSII"), a wholly-owned subsidiary of the
Company. The Company completed transactions related to the sale of HSII's
intellectual property and the majority of its customer base in December 1997.
The results of operations for the three year period ended December 31,
1999 presents HSII and Antrim as discontinued operations, and only the
healthcare provider focused operations of the Company are reflected as
continuing operations. The assets and liabilities relating to the discontinued
operations have been segregated on each of the aforementioned balance sheets.
Condensed and summarized balance sheet and statement of operations data
for the discontinued operations of Antrim and HSII is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents ................. $ -- $ --
Accounts receivable ....................... -- --
Other current assets ...................... 206,000 205,000
---------- ----------
Total current assets .......................... 206,000 205,000
Property and equipment, net ................... -- --
Other and intangible assets, net .............. -- --
---------- ----------
Total assets .................................. 206,000 205,000
========== ==========
Liabilities:
Current liabilities ....................... 7,363,000 3,590,000
Non-current liabilities ................... 2,000,000 2,000,000
---------- ----------
Total liabilities ............................. 9,363,000 5,590,000
---------- ----------
Net liabilities of discontinued operations .... $9,157,000 $5,385,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
---- ----
<S> <C> <C>
Revenues ...................................... $ 22,726,000 $ 3,107,000
Costs and expenses ............................ 24,548,000 5,106,000
------------ ------------
Loss from discontinued operations before
income taxes ............................. (1,822,000) (1,999,000)
Provision for income taxes .................... -- --
------------ ------------
Loss from discontinued operations ............. $ (1,822,000) $ (1,999,000)
============ ============
</TABLE>
No revenues or expenses from discontinued operations were recognized
during the year ended December 31, 1999.
66
<PAGE> 67
14. CONTINGENCIES
In 1996 and 1997, Pyramid settled certain litigation related to copying
charges in various states. Pyramid is currently, and may be in the future, a
party to pricing-related litigation in other states. Pyramid has estimated its
exposure for such litigation, and has accrued such costs at December 31, 1998
and 1999, respectively.
Compucare is involved in legal and administrative proceedings and claims
of various types. While any litigation contains an element of uncertainty,
management presently believes that the outcome of such proceedings or claims
which are pending or known to be threatened, or all of them combined, will not
have a material adverse effect on the Company.
In 1999, the Company settled litigation relating to a legal action
against Compucare by the Sunquest Corporation in July 1998. Sunquest purchased
the stock of Antrim from Compucare in November, 1996. The action alleged that
Compucare breached certain representations and warranties, and misrepresented
and or failed to disclose certain material facts in the course of negotiating
the transaction. As of December 31, 1998 and 1999, the settlement was accrued
for in the net liabilities of discontinued operations in the accompanying
consolidated balance sheets.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
December 31, 1999, the Company was not a party to any legal proceedings which,
if decided adversely to the Company, would, individually or in the aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
15. INCOME TAXES
The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS
No. 109") since its inception. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. The Company incurred net operating losses in each
year through December 31, 1997.
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Research and development credits ............................ $ 818 $ 1,182 $ 1,182
Net operating loss carryforwards ............................ 6,326 11,639 15,740
Accruals and reserves ....................................... 7,222 6,736 5,361
Writeoff of acquired research and development in process .... 2,452 2,207 1,976
-------- -------- --------
16,818 21,764 24,259
-------- -------- --------
Deferred tax liabilities:
Depreciation ................................................ 554 553 1,142
Intangible assets ........................................... 798 849 452
-------- -------- --------
1,352 1,402 1,594
-------- -------- --------
Net deferred tax asset before allowance ......................... 15,466 20,362 22,665
Valuation allowance ............................................. (15,466) (20,362) (22,665)
-------- -------- --------
Net deferred tax asset ...................................... $ -- $ -- $ --
======== ======== ========
</TABLE>
67
<PAGE> 68
The significant components of the provision for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ................................... $ 970 $ 3,674 $ 800
State ..................................... 166 629 717
-------- -------- --------
Total current ............................. 1,136 4,303 1,517
Deferred:
Federal .................................. (10,688) (4,162) (1,958)
State .................................... (1,886) (734) (345)
-------- -------- --------
Total deferred ........................... (12,574) (4,896) (2,303)
Change in valuation allowance, net of
the effect of acquisitions ............... 12,574 4,896 2,303
-------- -------- --------
$ 1,136 $ 4,303 $ 1,517
======== ======== ========
</TABLE>
Reconciliation of the provision for income taxes computed at the
statutory rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate .......... (34)% (34)% (34)%
Change in valuation allowance .... 33 38 21
Acquisition costs ................ 3 27 24
Other taxes and credits .......... 1 2 3
------ ------ ------
3% 33% 14%
====== ====== ======
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset including
the Company's history of losses.
As of December 31, 1999, the Company had net operating loss carryforwards
for Federal and state income tax reporting purposes of approximately $41.5
million and $27.0 million, respectively. These carryforwards expire in various
periods from 2010 to 2018. In addition, the Company had general business credit
carryforwards for federal income tax purposes of approximately $1.6 million,
expiring through 2013. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss and research and development credit carryforwards
to be used in any given year upon the occurrence of certain events, including a
significant change in ownership interest.
16. DISTRIBUTOR AGREEMENT
In 1997, Pyramid entered into a distributor agreement with a software
company whereby the other company granted Pyramid a non-exclusive,
non-transferable right to reproduce, market and license certain of the other
company's software to Pyramid's customers. The initial term of the agreement is
two years. Under the terms of the agreement, Pyramid agreed to a minimum
purchase of software having a value of $2.5 million. Pyramid had not sold any
software to its customers as of December 31, 1997 and does not expect to meet
the $2.5 million minimum purchase commitment. The Company recorded a loss
contingency of $2.5 million in 1997.
17. SEGMENT REPORTING
The Company reported on three operating segments in 1999: the Business
Office Division (BO), Health Information Management Division (HIM) and the
Enterprise Division (ENT). The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. The Company does not
track long-lived assets by segment and therefore related disclosures are not
relevant and are not presented.
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 lines in the Business Office Division target a
provider's chief financial officer as the primary buyer. The divisions'
solutions address the complex administrative and financial management demands
placed on healthcare organizations today, providing the technology and expertise
to increase cash flow and reduce administrative costs. The division is comprised
of the following product and service categories: decision support,
patient-focused solutions, electronic business office, managed care, executive
information systems and business office outsourcing.
QuadraMed's Health Information Management Division's business lines
primarily target medical records directors, as well as chief financial officers
throughout the provider system. The division is comprised of the following
products and services: coding and abstracting, compliance, document imagining
and workflow, and HIM outsourcing and consulting.
The Company's Enterprise Division, consists primarily of Compucare and
provides enterprise systems to providers and integrated delivery networks.
68
<PAGE> 69
Less than 5% of the Company's revenues were generated from Canada. The
Company developed its business divisions as a result of various acquisitions
during 1998. As such, financial performance was not reported to management in
this manner prior to 1998.
For the year ended December 31, 1998, the following table reports
selected segment information required by SFAS No. 131:
<TABLE>
<CAPTION>
BO HIM ENT TOTAL
-- --- --- -----
<S> <C> <C> <C> <C>
License revenues ....................... $ 41,558 $ 23,876 $ 54,406 $ 119,840
Service revenues ....................... 32,250 58,530 -- 90,780
--------- --------- --------- ---------
Total revenues ......................... 73,808 82,406 54,406 210,620
========= ========= ========= =========
Interest income ........................ 5,797 70 -- 5,867
Interest expense ....................... (3,374) (1,586) (1,294) (6,254)
--------- --------- --------- ---------
Interest income (expense), net ......... 2,423 (1,516) (1,294) (387)
========= ========= ========= =========
Depreciation & amortization expense .... 2,981 6,622 873 10,476
========= ========= ========= =========
Provision for income taxes ............. 2,152 2,037 114 4,303
========= ========= ========= =========
Segment earnings (loss) ................ 13,351 (20,333) (14,394) (21,376)
========= ========= ========= =========
Segment assets ......................... $ 179,164 $ 56,000 $ 29,569 $ 264,733
========= ========= ========= =========
</TABLE>
For the year ended December 31, 1999, the following table reports
selected segment information required by SFAS No. 131:
<TABLE>
<CAPTION>
BO HIM ENT TOTAL
-- --- --- -----
<S> <C> <C> <C> <C>
License revenues ....................... $ 40,250 $ 29,360 $ 58,785 $ 128,395
Service revenues ....................... 24,148 87,042 -- 111,190
--------- --------- --------- ---------
Total revenues ......................... 64,398 116,402 58,785 239,585
========= ========= ========= =========
Interest income ........................ 1,294 2,287 1,246 4,827
Interest expense ....................... (1,942) (3,543) (2,186) (7,671)
--------- --------- --------- ---------
Interest income (expense), net ......... (648) (1,256) (940) (2,844)
========= ========= ========= =========
Depreciation & amortization expense .... 2,061 8,932 2,766 13,759
========= ========= ========= =========
Provision for income taxes ............. (22) 1,390 149 1,517
========= ========= ========= =========
Segment earnings (loss) ................ 7,587 (8,303) (11,614) (12,330)
========= ========= ========= =========
Segment assets ......................... $ 53,162 $ 117,064 $ 49,103 $ 219,329
========= ========= ========= =========
</TABLE>
69
<PAGE> 70
18. SUBSEQUENT EVENTS
Security Interest in Cash and Marketable Investments
The Company was required to meet specific financial covenants in
connection with an arrangement to guarantee a line of credit on behalf of
another company for up to $12.5 million. The Company was not in compliance with
certain covenants under this agreement as of December 31, 1999. These covenants
were waived in exchange for a perfected security interest in the Company's cash
and marketable securities of $12.5 million effective March 1, 2000.
19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL
INFORMATION
Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process research and
development, the Company re-evaluated its IPR&D charges on its 1998
acquisitions. The amounts allocated to IPR&D and intangible assets in the first
and second quarters of 1998 were based on accepted appraisal methodologies used
at the time of the allocations. Since that time, the SEC provided new guidance
with respect to the valuation of intangible assets in purchase business
combinations, including, IPR&D. In response to this new guidance, the Company
elected to retroactively adjust the amount of intangibles assigned to acquired
IPR&D related to these acquisitions. The Company reduced its estimate of the
amount allocated to IPR&D for these acquisitions by $18.2 million from the $32.7
million previously reported in the first, second, and third quarters of 1998 to
$14.5 million. Amortization of intangibles increased $952,000 for the nine
months ended September 30, 1998, related to the amended amounts for the IPR&D.
Company management believes that the amended IPR&D charge of $14.5
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurance, however, that the SEC will
not take issue with any of the assumptions used in the Company's allocations and
require the Company to further revise the amount allocated to IPR&D. The Company
amended its quarterly earnings on Form 10-Q for the first, second, and third
quarters of 1998 (see below). The following table depicts the adjustments made
to the values ascribed to IPR&D during the year ended December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
ACQUISITION AS REPORTED AS RESTATED
- ----------- ----------- -----------
<S> <C> <C>
Velox ................. $ 4,800 $ 1,500
Cabot Marsh ........... 6,200 4,200
Medicus (43.3%) ....... 17,146 4,763
Other acquisitions .... 4,585 4,031
------- -------
Total ................. $32,731 $14,494
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS AMENDED AS AMENDED AS AMENDED
AS REPORTED AND RESTATED AS REPORTED AND RESTATED AS REPORTED AND RESTATED
FOR THE QUARTERS ENDED: MARCH 31, 1998 MARCH 31, 1998 JUNE 30, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
- ----------------------- -------------- -------------- ------------- ------------- ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total Revenues ........... $ 17,086 $ 43,254 $ 34,384 $ 49,647 $ 43,794 $ 56,947
Net Loss ................. (9,441) (11,490) (19,860) (12,898) (3,880) (3,366)
Basic and Diluted Net
Loss Per Share ......... $ (0.77) $ (0.53) $ (1.23) $ (0.57) $ (0.20) $ (0.14)
</TABLE>
<TABLE>
<CAPTION>
AS AMENDED
AS REPORTED AND RESTATED
FOR THE QUARTERS ENDED: MARCH 31, 1999 MARCH 31, 1999
- ----------------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total Revenues ........... $ 59,655 $ 60,072
Net Loss ................. (26,149) (26,465)
Basic and Diluted Net
Loss Per Share ......... $ (1.11) $ (1.08)
</TABLE>
70
<PAGE> 71
EXHIBIT INDEX
10.7 Lease dated November 19, 1998 for facilities located at 22
Pelican Way, San Rafael, California.
21. List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1 Power of Attorney (set forth in the signature page hereto).
27.1 Financial Data Schedule for the Year Ended 12/31/1999.
27.2 Financial Data Schedule for the Year Ended 12/31/1998.
27.3 Financial Data Schedule for the Year Ended 12/31/1997.
<PAGE> 1
EXHIBIT 10.7
LEASE BETWEEN WAREHAM
DEVELOPMENT CORPORATION
AND
QUADRAMED CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. DEFINITIONS 1
2. PREMISES 3
3. DELAY IN POSITION 3
3.1 Option to Extend Term
4. RENT 3
4.1 Base Monthly Rent 4
4.2 Base Monthly Rent Adjustment 4
4.3 Option Term Rent Adjustment 4
4.4 Additional Rent 4
4.4.1 Verification and Audit of Operating Expenses 5
4.5 Security Deposit 5
4.6 Late Charges 5
5. TAXES 5
5.1 Landlord's Taxes 5
5.3 Tenant's Taxes 6
5.4 Tax Contests 6
6. INSURANCE
6.1 Landlord's Insurance 6
6.2 Tenant's Insurance 6
6.3 Waiver of Subrogation 6
6.4 Landlord Indemnification 7
6.5 Tenant Indemnification 7
6.6 Worker's Insurance 7
6.7 Insurance Deductibles 7
7. MAINTENANCE 8
7.1 Premises 8
7.2 Amenities 8
7.3 Alterations 8
7.4 Systems 9
7.5 Liens 9
8. MANAGEMENT 9
9. UTILITIES AND SERVICES 9
9.1 Property 9
9.2 Limitation of Liability 9
10. USE OF PREMISES 10
11. DEFAULTS AND REMEDIES 10
11.1 Default of Tenant 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
11.2 Landlord's Remedies 11
11.3 Landlord's Default 12
12. TERMINATION 12
13. CONDEMNATION OF PREMISES 13
13.1 Total Condemnation 13
13.2 Partial Condemnation 13
13.3 Award to Tenant 13
14. LANDLORD'S ENTRY 13
15. LIMITATION OF LIABILITY AND INDEMNITY 14
15.1 Limitation of Landlord's Liability 14
15.2 Limitation on Enforcement of Remedies 14
16. ASSIGNMENT AND SUBLETTING 14
17. DAMAGE OR DESTRUCTION 15
18. HAZARDOUS MATERIALS 16
18.1 Tenant's Warranties 16
18.1.1 Restrictions on Hazardous Materials 16
18.1.2 Applicable Regulations 16
18.1.3 Restoration 16
18.1.4 Removal 16
18.1.5 Tenant's Written Confirmation 17
18.1.6 Tenant's Duty to Notify Landlord 17
18.2 Landlord's Rights 17
18.3 Tenant's Duty to Indemnify 17
18.4 Right of Entry 18
18.5 Definitions 18
18.5.1 "Hazardous Material" 18
18.5.2 "Environmental Health and Safety Requirements" 18
18.6 Allocation of Responsibilities 18
18.7 Inspections 19
18.8 Cooperation Respecting Regulations 19
18.9 Survival 19
18.10 Special Matters 19
18.10.1 Storage Tanks 19
18.10.2 Flammable Chemicals 19
18.19.3 NFPA Warnings 19
18.11 Landlord's Obligations 19
18.11.1 Compliance with Regulations 19
18.11.2 Restoration 19
18.11.3 Duty to Notify Tenant 19
18.11.4 Indemnity of Tenant 19
19. MISCELLANEOUS PROVISIONS 20
19.1 Waiver 20
19.2 Notices 20
19.3 Construction 20
19.4 Memorandum 20
19.5 Authority 20
19.6 Litigation 20
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
19.7 Subordination of Leasehold 20
19.8 Estoppel 21
19.9 Attornment 21
19.10 Lender's Requests 21
19.11 Reasonable Expenditures 21
19.12 Submission 21
19.13 Arbitration of Disputes 21
19.14 Brokerage 22
19.15 Cooperation 22
19.16 Parking 22
19.17 Non-Disturbance Agreement 23
19.18 Preparation 23
19.19 CC&R's 23
19.20 Limitation and Restrictions Respecting Operating Expenses 23
19.21 Special Allocation of Capital Expenses Related to
Modifications Required by Regulations 23
19.22 Project Schedule 24
20. OVERRIDING CONDITIONS AND OTHER MATTERS 24
20.1 Acquisition of Property 24
20.2 Financing 25
20.3 Acquisition of Entitlements and Permits 25
20.4 Tenant's Cooperation 25
20.5 Landlord's Right to Assign Lease to Newly Formed Entity 25
20.6 Construction 25
20.6.1 Construction of Building Shell 25
20.6.2 Construction of Tenant Improvements 26
20.6.3 Measurement of Rentable and Usable Square
Footage 27
20.7 Delays out to Landlord's Control 28
20.8 Existing Lease 28
20.9 Landfill Disclosure 28
20.10 Acknowledgement of Receipt of Documents 28
SIGNATURE LINES 29
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
EXHIBIT A -Location of Premises in Development
EXHIBIT B -Initial Estimated Schedule of Operating Expenses
EXHIBIT C -Current Conceptual Drawings
EXHIBIT D -Final Space Plans and Working Drawings
EXHIBIT E -Project Schedule
</TABLE>
iii
<PAGE> 5
LEASE BETWEEN WAREHAM
DEVELOPMENT CORPORATION
AND
QUADRAMED CORPORATION
This Lease is made and entered into as of, November 19, 1998 between Wareham
Development Corporation, a California Limited Liability Company ("Landlord")
and QuadraMed Corporation, a California Corporation ("Tenant").
1. DEFINITIONS. Words not defined in this Section or elsewhere in this
Lease have their customary meanings. (1) The "Term" is the total of the
"Initial Term" and all validly exercised Option Terms allowed by this Lease;
the "Initial Term" is ten years; (2) "Commencement Date" is the tenth Day
following the Day on which Landlord provides notice to Tenant that the Premises
are ready for occupancy by Tenant or that the Premises would have been ready
for occupancy by Tenant but for a Tenant Delay. The premises shall be deemed
"ready for occupancy" when construction of the Building, including the Tenant
Improvements, the Premises, the Core Area and Common Area (which includes
landscaping and parking facilities) has reached "Substantial Completion" (as
defined below); the Commencement Date is the first day of the Initial Term; (3)
"Base Monthly Rent" means, subject to adjustment, $2.00 per month per Rentable
Square Foot, payable in advance, without deduction, offset, prior notice or
demand, on the first day of each Month of the Term; (4) "Premises" means the
entire Building which shall be leased to Tenant, consisting of approximately
33,000 rentable square feet, (as shown on Exhibit A and subject to adjustment to
the actual Rentable Square Footage of the Building upon the completion of its
design); (5) As this lease is for the entire Building, the terms "Building" and
"Premises" are used interchangeably; (6) "Property" includes the Building and
land on which it stands commonly known as Site A, Bayview Business Park,
located in San Rafael, California, together with all use rights and interest in
the Amenities (as defined below) pursuant the CC&Rs (as defined below) and the
land on which the Amenities are located within the Park (as defined below); (7)
"Agents" includes employees, agents, guests, invitees and, when applied to
Tenant, subtenants and assignees; (8) "Day", "Month" and "Year" mean calendar
day/month/year; (9) "Lease Year" means consecutive 12-month periods starting on
the Commencement Date, however if the Commencement Date is not the first Day of
a Month, the Lease Year shall run from the first Day of the Month following the
Commencement Date; (10) "Common Area" means the building Shell and core
including HVAC, halls, lobby, elevators, rest rooms, roof, exterior walls and
structural components including common stairways and accessways; (11) "Tax"
means any form of assessment, license, fee, rent, tax, levy, penalty or tax
imposed by any authority having direct or indirect taxing powers (including
Improvement Districts) against Landlord's interest in the Property or personal
property used in the operation of
1
<PAGE> 6
the Property and/or Landlord's business of renting the Property; (12)
"Alteration" includes additions, deletions, modifications and changes (including
utility installations such as ducting, power panels, fluorescent fixtures, base
heaters, conduit and wiring); (13) Except as limited by the provisions of
Paragraph 19.20 of this Lease, "Operating Expenses" include the following: (a)
all fees, cost and expenses incurred for maintenance, servicing, management,
upkeep and repair of the Property and the Premises inclusive of Taxes, insurance
premiums and deductibles, charges assessed by the Park and/or its owner's
association (including, without limitation, dues, fees maintenance costs and
assessments); (b) the costs of compliance with changes required by Regulations
adopted or modified or reinterpreted following the execution of this Lease and
with the requirements of the CC&Rs; and (c) all "Annual Assessments", "Special
Assessments" and "Individual Special Assessments" and the Landlord's "Allocable
Share" of all expenses imposed pursuant to the terms of the CC&Rs (as hereafter
defined); (14) "CC&Rs" means the Declaration of Covenants, Conditions and
Restrictions and Reciprocal Easements for Bayview Business Park dated July, 1989
as amended in October, 1989 and August, 1992, and as they may be amended, from
time to time in the future; (15) Tenant's "Pro Rata Share" is 100% of the total
cost of an item; (16) "Floor Area of the Building", for all purposes, including,
without limitation, the measurement of Usable Square Feet and Rentable Square
Feet as those terms are defined below, is measured from the exterior surface of
exterior walls including core areas; (17) "consent" and "approval", wherever
required from the Landlord and/or the Tenant in this Lease, require reasonable
conduct by the acting party; (18) "Regulation" includes all laws, ordinances,
statutes, regulations and requirements adopted by duly constituted public
authorities now in force or hereafter adopted; (19) "Litigation": includes
judicial actions, arbitrations and administrative proceedings; (20)
intentionally omitted; (21) "Condemnation" includes taking by exercise of
governmental power or the transfer to any condemnor under threat of or during
the of condemnation proceedings; (22) "Usable Square Foot" refers to space
within the total Floor Area of the Building consisting of the square footage of
the Premises less the amount of square footage of the Core Areas; (23) "Rentable
Square Foot" refers to space in the entire Floor Area of the Building including
all Usable Square Feet and the Core Areas; (24) "Core Areas" means the HVAC
installations, elevators, stairs, restrooms, entries and lobbies which would be
shared by tenants in a multi-user building; (25) "Amenities" means common
walkways, driveways, sidewalks, landscaping, parking spaces and driveways which
are part of the Bayview Business Park and which are defined as "Common Area" in
the CC&Rs (but are, in this Lease, referred to as Amenities to avoid confusion;
(26) "Park" means the Bayview Business Park located in San Rafael, California;
(27) "Association" means the Bayview Business Park Owners Association
established pursuant to the CC&Rs; (28) "Completion Date" means the date on
which the Premises (inclusive of Tenant Improvements), Building Shell, Core
Areas and Common Area are Substantially Complete; (29) "Substantially Complete"
or "Substantial Completion" means completion of the construction in all material
respects, but not including minor, cosmetic or "punch-list" items, which will be
deemed achieved upon issuance of a temporary or permanent Certificate of
Occupancy (or signed-off permit in the event that the municipality does not
issue separate Certificates of Occupancy); (30) "Shell" or "Building Shell"
refers to the basic structure, floor divisions and external finish of the
building including, without limitation the exterior walls, roof, foundation and
floors; (31) "Tenant Delays" shall mean any delay resulting directly and
primarily from Tenant's failure to cooperate or to timely cooperate, timely
provide
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plans or drawings, timely approve plans or drawings or timely provide any other
information, approval or cooperation required of Tenant pursuant to the
provisions of this Lease including, without limitation cooperation regarding
value-engineering to reduce any anticipated cost over the Allowance for the
Tenant Improvements and/or cost over the anticipated cost of construction of the
Building Shell; (32) "Projected Completion Date" shall mean that date certain
indicated on the schedule attached hereto as Exhibit E.
2. PREMISES. Landlord hereby leases to Tenant and Tenant shall have
exclusive use of the Premises for the Term. Tenant acknowledges that the
Building and the Property are located within the Park. The Property, the
Building, the Premises and Tenant as the occupant of the Premises are all
subject to the provisions of the CC&Rs and Tenant agrees to abide by the terms,
provisions and requirements of the CC&Rs. The Amenities are a part of the Park
and are available to Tenant to use on a non-exclusive basis for the duration of
Tenant's occupancy of the Premises pursuant to the terms of this Lease.
3. DELAY IN POSSESSION. If Landlord cannot deliver possession of the
Premises to Tenant on the Projected Completion Date, the failure shall not
affect this Lease's validity, or render Landlord liable for resulting damages;
but Tenant shall not be obligated to pay rent until Landlord tenders possession.
If Landlord cannot deliver possession within 180 Days of the Projected
Completion Date (or such other extended date as the parties may mutually agree
upon in writing) for any reason except a delay excludable under the terms of
this Lease (Tenant Delays or delays caused directly and primarily by Force
Majeur), Tenant may terminate this Lease on written notice to Landlord. If
Tenant elects to terminate this Lease pursuant to the provisions of this
Section,then neither Landlord nor Tenant shall have any further obligations
under this Lease and Tenant shall have no further recourse against Landlord
respecting the Lease. Notwithstanding any other provision of this Lease, a delay
in possession caused directly and primarily by a Tenant Delay will not delay the
commencement of the Tenant's obligation to pay Rent or Additional Rent or excuse
Tenant from that obligation.
3.1 OPTION TO EXTEND TERM. Tenant is granted one option to extend
this Lease for an additional five year period (the "Option Term") pursuant to
the provisions of this Lease and exercisable by written notice (the "Option
Notice") delivered to Landlord at least 180 Days before expiration of the
Initial Term. At Landlord's option, Tenant's failure to cure, prior to the
expiration of the Initial Term, any default existing at the time Tenant delivers
the Option Notice shall render the Option Notice invalid and preclude the
commencement of the Option Term.
4. RENT. Tenant shall pay all rent due Landlord in United States dollars
at the address set forth below or such other place as Landlord designates in
writing. If Alterations increase the number of Rentable Square Feet of the
Premises, Base Monthly Rent will increase proportionately. If the obligation to
pay rent commences other than on the first day of a Month, the first payment
shall include rent from the date the obligation commences to the first day of
the following month calculated per diem on the basis of the actual number of
Days in the Month. Base Monthly Rent has been calculated on the basis of 33,000
rentable square feet. Landlord and Tenant acknowledge that the actual square
footage of the Building upon the completion of construction may vary from
33,000. Upon the completion of the drawings upon which the
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building permits are issued and the issuance of the permits, the actual
square footage of the Premises will be calculated from the said drawings. If the
actual square footage of the Premises is greater or less than 33,000, the Base
Monthly Rent will be appropriately adjusted to reflect the actual Rentable
Square Footage of the Premises. Rent shall be due from and after the
Commencement Date. Notwithstanding any other provision of this Agreement, a
Delay in possession resulting directly and primarily from a Tenant Delay shall
not excuse Tenant from the obligation to pay Rent, inclusive of any Additional
Rent required under the provisions of this Lease.
4.1. BASE MONTHLY RENT. The initial Base Monthly Rent (subject to
adjustment as provided in this Lease) shall be $2.00 per Rentable Square Foot,
$66,000 per month.
4.2. BASE MONTHLY RENT ADJUSTMENT. The Base Monthly Rent (subject to
adjustment as provided in this Lease) will increase to $2.10 per Rentable Square
Foot ($69,300 per month) at the end of the 36th Month of the Lease Term and to
$2.15 per Rentable Square Foot ($82,500 per month) at the end of the 72nd month
of the Lease Term.
4.3. OPTION TERM RENT ADJUSTMENT. If Tenant exercises the right to extend
the Term to the Option Term, the Base Monthly Rent will be adjusted effective
the first Day of the first Month of the Option Term to the greater of the Base
Monthly Rent for the last Month of the Initial Term or 95% of the fair market
rental value as of the first day of the last Month of the Initial Term, based on
a third party, non-equity, non-renewal lease of the duration of the Option Term
for comparable quality office buildings in Southern Marin County.
4.4. ADDITIONAL RENT. For each year during the Term, Tenant shall pay to
Landlord, in addition to the Base Monthly Rent and all other payments due under
this Lease, an amount equal to the actual Operating Expenses for that year.
Prior to the beginning of each Lease Year, Landlord will prepare and distribute
to Tenant an "Estimated Schedule" setting out what Landlord believes to be the
reasonably anticipated Operating Expenses for the succeeding Lease Year. The
initial Estimated Schedule is annexed to this Lease as Exhibit B. The last
distributed Estimated Schedule shall remain operational until replaced by a new
Estimated Schedule. Tenant shall make payments against the Operating Expense
Schedule. After the end of each year Landlord will reconcile the actual
Operating Expenses to the Estimated Schedule. If Tenant has paid, on an
estimated basis, an amount less than the actual Operating Expenses for the
affected Year, Tenant shall pay the difference between the Estimated Schedules
and the actual Operating Expenses for the affected Year within 30 days of
receipt of a written reconciliation and invoice. If the Tenant has paid, on an
estimated basis, an amount more than the actual Operating Expenses for the
affected year, Tenant shall receive a rental credit upon delivery to Tenant of
the written reconciliation. If Landlord, for any reason, neglects or fails to
timely provide the required Estimated Schedule or reconciliation of Operating
Expenses to Tenant, such failure shall not be deemed a default under or breach
of this Lease by Landlord for any purpose; neither shall it be deemed a waiver
of any rights of Landlord to collect Tenant's Pro Rata Share of Operating
Expenses, nor shall such failure by Landlord excuse Tenant from performance of
any of Tenant's obligations under the provisions of this Lease. Notwithstanding
any other provision of this Lease, Tenant shall have no obligation to make a
reconciliation payment to Landlord in connection with under-estimated Operating
Expenses until 30 days after receipt of a written reconciliation and invoice.
Payments made by Tenant pursuant to this Paragraph are sometimes called
"Additional Rent."
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4.4.1. VERIFICATION AND AUDIT OF OPERATING EXPENSES.
Should Tenant question the Estimated Schedule or the reconciliation, Landlord
shall provide Tenant with verification of the amounts set forth in the
Estimated Schedule or the year-end reconciliation, as may be appropriate.
Tenant shall have the right to review and audit Operating Expenses and Landlord
will make such records as may reasonably be required for such audit available
to Tenant during normal business hours and upon reasonably notice. Tenant shall
pay the cost and expense of any such audit, unless such audit shows a
discrepancy of at least 5% of Operating Expenses, in which event Landlord shall
pay the costs and expenses of such audit, to a maximum of $2,000.
4.5. SECURITY DEPOSIT. Concurrent with the execution of this
Lease, Tenant shall give Landlord as a security deposit the sum of $66,000 [or
such other sum as may equal the initial Base Monthly Rent if the actual
Rentable Square Footage of the Premises is different than 33,000 Rentable
Square Feet] (the "Deposit"). Landlord shall hold the Deposit as security for
Tenant's faithful performance of all of Tenant's obligations under this Lease
and may, at its option, apply the Deposit to remedy Tenant's default in the
payment of any charge due under this Lease, to repair damages to the Property
caused by Tenant, or to clean the Premises at the end of the Lease Term. If any
portion of the Deposit is so applied by Tenant prior to the last day of the
Lease Term, Tenant shall, within 30 Days after written demand therefor, deliver
to Landlord funds sufficient to restore the Deposit to its original amount.
Landlord shall not be required to keep the Deposit separate from its general
funds. Tenant shall earn no interest on the Deposit. If Tenant fully performs
under this Lease, Landlord shall return any unused portion of the Deposit to the
last holder of Tenant's interest in this Lease upon Tenant's surrender of the
Premises. On any transfer of Landlord's interest in the Lease, the Deposit shall
be transferred to Landlord's successor, and, upon such transfer, Landlord
released from all liability for the Deposit without further action or
documentation.
4.6. LATE CHARGES. Late payment of any sums due hereunder
will cause Landlord to incur costs not contemplated by this Lease, including
without limit, accounting charges and late charges that may be imposed on
Landlord by the terms of loans secured by the Property. If Tenant fails to
deliver to Landlord any moneys due hereunder within 10 Days of the due date,
Tenant shall pay to Landlord a late charge of 5% of the overdue amount which is
agreed to be a reasonably estimate of the costs Landlord will incur by reason
of the late payment, the exact amount of which will be difficult to determine.
Acceptance of a late charge shall not constitute a waiver of the default or
preclude Landlord's exercise of other rights and remedies.
5. TAXES.
5.1. LANDLORD'S TAXES: Landlord shall pay (subject to
Tenant's obligation to reimburse Landlord as an Operating Expense) all Taxes
assessed against Landlord's interest in the Property and personal property used
in its operation. Such taxes shall be considered part of the Operating Expenses
of the Property.
5.2. TENANT'S TAXES: Tenant shall pay directly to the taxing
authority all taxes assessed on Tenant's fixtures, improvements, furnishings,
merchandise, equipment and personal property in and on the Premises. If Tenant
fails to timely pay taxes assessed directly to Tenant, Landlord may (but is not
obligated to) pay the same at any time thereafter. On demand, Tenant shall
repay Landlord amounts so paid by Landlord, together with interest at the
highest rate
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allowable by law:
5.3. TAX CONTESTS: If Tenant desires to contest the validity or
amount of any Tax applicable to the Premises, Tenant shall be entitled to do so
and to defer payment of such Tax until final determination of such contest upon
giving Landlord written notice thereof prior to commencing such contest and
protecting Landlord on demand by obtaining a surety bond in the amount of 150%
of the total amount of Taxes in dispute. The surety bond shall hold Landlord
harmless from any damages or costs incurred in connection with the contest,
Landlord shall, at Tenant's request, cooperate in all reasonable ways requested
by Tenant in connection with the contest of Taxes, provided that Tenant pays
all reasonable costs incurred by Landlord resulting from such cooperation.
6. INSURANCE.
6.1. LANDLORD'S INSURANCE. Landlord shall insure the Property for
100% of its replacement value against loss or damage by those risks normally
included by the insurance industry in the term "All Risk"; any recovery from
such insurance shall belong to Landlord. Landlord shall maintain comprehensive
general liability insurance insuring Landlord (and others named by Landlord,
but not Tenant) against liability for bodily injury, death and property damage
on or about the Property, with combined single limit coverage of at least $2
million. Notwithstanding any other provision of this Lease, if Landlord does
not have earthquake insurance on the Building during the first year of the
Lease Term but thereafter acquires it, Tenant shall only be responsible for
payment of the premium for such insurance which exceeds the premium during the
first year that Landlord has earthquake insurance on the Building.
6.2. TENANT'S INSURANCE. Tenant, at its sole expense, shall maintain:
a) All Risk coverage insurance on all fixtures, improvements, furnishings,
merchandise, equipment and personal property in the Premises; and b) for the
benefit of Tenant, commercial general liability and property damage insurance
against claims for bodily injury, death or property damage occurring in or
about, and/or arising from Tenant's use of, the Premises, with combined single
limit coverage of at least $2,000,000. Such insurance coverage shall not limit
Tenant's liability. Tenant shall furnish to Landlord prior to the Commencement
Date, and at least 30 Days prior to the expiration date of any policy,
certificates indicating that Tenant has acquired replacement insurance and that
all the insurance required of Tenant is in full force and effect, that Landlord
has been named as an additional insured on the liability policy, and that no
such policy will be canceled unless 30 Days' prior written notice has been given
to Landlord. Each liability policy shall include a broad form liability
endorsement and provide that Landlord as an additional insured may recover for
any loss it suffers by reason of acts/omissions of Tenant and its Agents.
Except as Landlord may approve in writing before issuance of such policy, all
policies which Tenant shall obtain hereunder shall be issued by companies with
"AAA" rating by either Moody's Rating Service or Standard & Poor's Rating
service and general policy rating of at least A in Best Insurance Guide's then
most current issue. Policies obtained by Tenant pursuant to this Lease shall be
subject to Landlord's approval.
6.3. WAIVER OF SUBROGATION. Notwithstanding anything to the contrary in
this Lease, the parties release each other and their respective officers,
agents, employees and servants, from all claims for damages, loss expense or
injury to the Premises, and/or to the furnishings and fixtures and equipment or
inventory or other property of either Landlord or
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Tenant in, about or upon the Premises, which is caused by or results from
perils, events or happenings which are covered by insurance in force at the
time of any such loss or by insurance required to be carried hereunder;
provided, however, that such waiver shall be effective only to the extent
permitted by the said insurance and to the extent such insurance coverage is
not prejudiced thereby. Each party shall cause each insurance policy obtained
by it to provide that the insurance company waives all right of recovery by way
of subrogation in connection with any damage covered by such policy.
6.4. LANDLORD INDEMNIFICATION. Tenant will indemnify and save
Landlord harmless from and against any and all claims, actions, damages,
liability and expense relating to loss of life, personal injury and/or property
damage arising from or out of any occurrence in, upon or at the Premises, or
the occupancy or Tenant's use of the Property, to the extent occasioned wholly
or in part by any acts or omissions of Tenant and its Agents. If Landlord
becomes a party to such Litigation commenced by or against Tenant, Tenant shall
defend and hold Landlord harmless from all claims, liabilities, costs and
expenses, and shall pay all costs, expenses and reasonable legal fees incurred
by Landlord in connection with such Litigation. If Tenant is made a party to
Litigation commenced by or against Landlord solely as a result of Landlord's
acts or omissions, Landlord shall defend Tenant and indemnify Tenant against
the costs of such Litigation including expenses and reasonable attorneys' fees.
The provisions of this Paragraph shall be deemed to apply only to those
circumstances where a portion of a loss or claim is not covered by existing
insurance and then only to the extent that such loss or claim is not covered by
insurance. This Paragraph shall not preclude application of comparative
negligence if the parties or their agents are both at fault.
6.5. TENANT INDEMNIFICATION. Landlord will indemnify and save Tenant
harmless from and against any and all claims, actions, damages, liability and
expense relating to loss of life, personal injury and/or property damage
arising from or out of any occurrence in, upon or at the Premises, or the
occupancy of Landlord's use of the Property, to the extent occasioned wholly or
in part by any acts or omissions of Landlord and its Agents. If Tenant becomes
a party to such Litigation commenced by or against Landlord, Landlord shall
defend and hold Tenant harmless from all claims, liabilities, costs and
expenses, and shall pay all costs, expenses and reasonable legal fees incurred
by Tenant in connection with such Litigation. If Landlord is made a party to
Litigation commenced by or against Tenant solely as a result of acts or
omissions by Tenant and/or Tenant's agents, Tenant shall defend Landlord and
indemnify Landlord against the costs, expenses and reasonable attorney's fees
incurred by Landlord in connection with such Litigation. The provisions of this
Paragraph shall apply only to those circumstances where a portion of a loss or
claim is not covered by existing insurance and then only to the extent that
such loss or claim is not covered by insurance. This Paragraph shall not
preclude application of comparative negligence if the parties or their agents
are both at fault.
6.6. WORKER'S INSURANCE. Tenant shall keep in force for the Term and
pay for worker's compensation and other insurance to comply with all applicable
Regulations.
6.7. INSURANCE DEDUCTIBLES: Notwithstanding any other provision of
this Lease, in the event that a deductible must be paid in connection with an
insured loss, then, with respect to each such loss, the Tenant shall pay the
first $10,000 of the deductible and the Landlord shall pay each deductible in
excess of $10,000.
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7. MAINTENANCE AND MODIFICATIONS.
7.1 PREMISES. During the Term, and subject to the CC&Rs, Landlord
shall maintain all improvements and appurtenances upon the Property and Premises
(including all interior walls, doors, doorways, lighting fixtures, plumbing
fixtures and Shell) in good order, condition and repair. Tenant waives the
provisions of any law permitting Tenant to make repairs at Landlord's expense,
including, without limitation, California Civil Code Sections 1941-1946. Tenant
shall notify Landlord in writing of required repairs to the Property. Landlord
shall make necessary repairs in a reasonable time. Maintenance and repairs shall
be completed in a good and workmanlike manner using such methods, supplies and
labor as Landlord deems appropriate in its reasonable discretion. Landlord shall
make commercially reasonable efforts to perform maintenance and repairs with
minimum interference with Tenant's business operations. All such maintenance
expenses shall be considered Operating Expenses of the Property. Should changes
in the terms, interpretation or requirements imposed by or under the authority
of any Regulation affecting the Property occur after the Commencement Date which
changes require modification of any portion of the Property or the Premises, or
should any Regulation adopted after the Commencement Date require such a
modification, Landlord shall cause such modification(s) to occur and Tenant
shall accept such modification(s). Tenant's obligation to pay for repairs under
this paragraph shall not extend to damage and repairs with respect to which any
insurance policy carried by Landlord and insuring the Building makes payment, to
the extent of the payment actually made by the insurance carrier and subject to
the requirement that any deductible applicable to the policy will be treated as
an Operating Expense. Notwithstanding any other provision of this Lease, any
expense associated with a modification to comply with new or changed Regulation
requirements shall be considered Operating Expenses of the Property.
Notwithstanding any other provision of this Lease, Tenant shall not be obligated
to pay for repairs to the extent such repairs result directly from defects in
design, construction or materials of the Building or caused by the intentional
act or omission of Landlord or Landlord's agents. Except as expressly limited by
the provisions of this Paragraph and the definition of Operating Expenses, the
provisions of this paragraph are subject to the provisions of this Lease
obligating Tenant to reimburse Landlord for Operating Expenses and to the
provisions of Paragraph 19.21 of this Lease. Nothing in this paragraph shall be
so interpreted or construed as to limit Landlord's right to reimbursement
pursuant to the provisions of this Lease respecting Operating Expense
reimbursement or the provisions of Paragraph 19.21 of this Lease.
Notwithstanding any other provision of this Lease, Tenant will be responsible
for the cost of any repair or replacement required as a result of the
intentional acts or the negligence of Tenant and its Agents.
7.2. AMENITIES: Tenant acknowledges and understands that the
Association will be responsible for maintenance of the Amenities pursuant to
the provisions of the CC&Rs.
7.3 ALTERATIONS. Tenant shall make no Alteration to the Property or
the Premises without Landlord's prior written consent. Landlord may impose such
conditions upon approval of an Alteration as Landlord may deem appropriate.
Every Alteration shall be done under supervision of a licensed contractor and
in accordance with plans and specifications furnished to and approved by
Landlord prior to commencement of work. If an Alteration increases the number
of Rentable Square Feet allocable to the Premises, the Base Monthly Rent shall
be increased in proportion to the resulting increase in the number of Rentable
Square Feet allocable to the Premises. Tenant shall give Landlord 7 Days'
advance written notice prior to starting
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construction of each Alteration. Each Alteration shall remain in place and
become the property of Landlord, unless, at the time of consent, Landlord
required removal of the Alteration on Termination, in which case, Tenant shall
remove such Alteration(s) and restore the Premises to their pre-Alteration
condition at Termination. Notwithstanding the foregoing, Tenant shall have the
right, without prior approval of the Landlord, to make interior, non-structural
alterations to the Premises which do not affect the Building systems and which
cost less than $25,000 in the aggregate, provided that such alterations are
otherwise performed in accordance with the terms and conditions of this Lease,
in compliance with the CC&Rs and with all applicable Regulations. Tenant shall
make no Alteration or any nature to the Amenities without the prior written
consent of the Landlord and the Association.
7.4. SYSTEMS. The heating/air-conditioning ("HVAC"), plumbing and
electrical systems (collectively "Systems") shall not be used for any purpose
other than for which they were constructed.
7.5. LIENS. Tenant shall keep the Property and the area owned by
the Association, inclusive of all the Amenities, free of liens arising out of
obligations incurred, work performed or materials furnished for or to Tenant.
Tenant shall indemnify Landlord from all costs, liens and encumbrances from work
performed or materials furnished by or at Tenant's direction. If Tenant fails to
obtain removal of such lien within 20 Days following its imposition, Landlord
shall have the right, but not the obligation, to obtain such release by such
means as it deems proper, including payment of the underlying claim. On demand,
Tenant shall reimburse Landlord for all such sums paid and expenses incurred by
Landlord in connection therewith (including attorneys' fees and costs) together
with interest at the highest rate allowable by law from the date Landlord makes
such payment until the date of reimbursement.
8. MANAGEMENT. The Wareham Property Group, Inc., an affiliate of
Landlord, or another affiliated or unaffiliated third party, will manage the
Property for a fee which will not exceed 5% of the Base Monthly Rent plus
reimbursement of reasonable expenses directly related to the operation of the
Property (which fee and expenses shall be an Operating Expense of the
Property). Notwithstanding the preceding sentence, reimbursement of expenses to
any entity related to the Landlord shall be limited to duties directly related
to the performance of the Landlord's obligations under the terms of this Lease.
9. UTILITIES AND SERVICES.
9.1. PROPERTY. Landlord will make HVAC and utilities for heating
and lighting use available to the Property at all times. Tenant shall pay to
Landlord as Additional Rent the estimated cost of supplying these utilities to
the Property (such expense being considered an Operating Expense).
9.2. LIMITATION OF LIABILITY. Landlord shall not be in default
under the provisions of this Lease or be liable for any damages directly or
indirectly resulting from the following conditions: (1) the interruption of use
of any equipment in connection with the furnishing of any of the services
described in Paragraph 9.1 of this lease; (2) failure to furnish or delay in
furnishing any services referred to in Paragraph 9.1 of this lease where
failure or delay is caused by accident or any condition or event beyond
Landlord's reasonable control; (3) the limitation, curtailment or rationing of,
or restriction on, use of water, electricity, gas or any other from of
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energy serving the Premises. Landlord shall not be liable under any
circumstances for a loss of or injury to property or business, however
occurring, through or in connection with or incidental to failure to furnish any
such services or for any consequential or incidental damages related to such a
loss or injury or circumstances. Notwithstanding the foregoing provisions of
this Paragraph, if utility service to the Premises is unavailable for a period
exceeding 15 consecutive days, then from and after the 16th consecutive day
without utility service and until utility service is restored, Tenant shall be
entitled to an abatement of rent unless the disruption of the utility service
results in whole, or in part, from the acts and/or omissions of Tenant
(inclusive of Tenant's agents, servants, employees, guests, invitees, operatives
and/or contractors) in which case there shall be no abatement of rent.
10. USE OF PREMISES. This Lease is subject to all Regulations governing the
Property and its use and to the CC&Rs and Tenant shall comply with all
applicable Regulations and with the CC&Rs. Tenant has not entered into this
Lease relying on any representation by Landlord or its Agents as to suitability
of the Premises for the conduct of Tenant's business. Tenant has made its own
analysis of suitability of the Premises for its intended use. Tenant shall: 1)
use the Premises for only general office, storage, warehousing, shipping and
other legal, related uses; 2) pay Landlord the full amount of any increased
insurance premium resulting from Tenant's use of the premises; 3) at its sole
expense, promptly comply with all Regulations and the requirements of any board
of fire underwriters or other similar body now or hereafter constituted relating
to or affecting Tenant's particular use of the Premises. Tenant shall not: 1)
sell or permit to be kept, used or sold in or about the premises any articles
prohibited by a standard form policy of fire insurance; 2) do or permit anything
to be done in or about the Property which will obstruct or interfere with rights
of other occupants of the Property or injure or annoy them; 3) maintain or
permit any nuisance in or about the Property; 4) commit or suffer to be
committed any waste in or upon the Property; 5) conduct or allow any auction or
similar sale upon the Property; 6) do or permit anything to be done in or about
the Property which will violate any Regulation [the judgment of any court of
competent jurisdiction, a binding arbitration award, administrative or
regulatory determination or Tenant's admission in any Litigation (whether or not
Landlord is a party) that Tenant has violated a Regulation shall be conclusive
of that fact between Landlord and Tenant]; 7) place a sign upon the Property
without prior written approval of Landlord and the Association; 8) do or permit
anything to be done which will increase existing insurance premiums for the
Property or cause cancellation of any policy covering the Property. However,
Tenant shall not be required to comply with or cause the Premises to comply with
any Regulations requiring the construction of improvements in the Premises
unless the compliance with any of the foregoing is necessitated by Tenant's
particular use of the Premises.
11. DEFAULTS AND REMEDIES.
11.1. TENANT'S DEFAULT. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Tenant:
(a) Tenant's failure to pay any Rent or charges required to be paid by Tenant
under this Lease within 5 days of Landlord's delivery of written notice from or
on behalf of Landlord to Tenant that said amounts are past due (this provision
relates only to a delay in payment constituting a breach or default under the
lease and
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not to the imposition of late charges); (b) Tenant's abandonment of the Premises
for 30 or more consecutive Days; (c) Tenant's failure to promptly and fully
perform any other covenant, condition or agreement contained in this Lease
where such failure continues for 30 days after written notice from Landlord to
Tenant of such default; (d) the levy of a writ of attachment or execution on
this Lease or on any of the property of Tenant located in the Premises; (e) the
making by Tenant of a general assignment for the benefit of its creditors or of
an arrangement, composition, extension or adjustment with its creditors; (f)
the filing by or against Tenant of a petition for relief or other proceeding
under federal bankruptcy laws or state or other insolvency laws, which petition
is not removed or which action is not dismissed within 90 days of its filing,
or the assumption by any court or administrative agency, or by a receiver,
trustee or custodian appointed by either, of jurisdiction, custody or control
of the Premises or of Tenant or any substantial part of its assets or property;
or (g) if the interest of Tenant under this Lease is held by a partnership or
by more than one person or entity, the occurrence of any act or event described
in parts (e) or (f) above in respect of any partner principal in the Tenant
entity. Except as otherwise specified by this Paragraph, in the event a
non-monetary default occurs which cannot reasonably be cured within the time
period specified above and Tenant commences corrective action within said time
period, Tenant shall not be subject to penalty under this Lease so long as
Tenant prosecutes such corrective action diligently and continuously to
completion.
11.2 LANDLORD'S REMEDIES. In the event of Tenant's default hereunder,
then in addition to any other rights or remedies Landlord may have under this
Lease or under law, Landlord may elect either of the remedies set forth in
Paragraphs 11.2(a) or 11.2(b). Notwithstanding any other provision of this
Lease, the Lessor has the remedy described in California Civil Code Section
1951.4 (Lessor (Landlord) may continue lease in effect after Lessee's
(Tenant's) breach and abandonment and recover rent as it becomes due, if Lessee
(Tenant) has the right to sublet or assign, subject only to reasonable
limitations):
(a) To immediately terminate this Lease and Tenant's right to
possession of the Premises by giving written notice to Tenant and to
recover from Tenant an award of damages equal to the sum of (i) the worth
at the time of award of the unpaid rental which had been earned at the
time of termination, (ii) the worth at the time of award of the amount by
which the unpaid rental which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
affirmatively proves could have been reasonably avoided, (iii) the worth
at the time of award of the amount by which the unpaid rental for the
balance of the term after the time of award exceeds the amount of such
rental loss that Tenant affirmatively proves could be reasonably avoided,
(iv) any other amount necessary to compensate Landlord for all the
detriment either proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, and (v) all such other amounts
in addition to or in lieu of the foregoing as may be permitted from time
to time under applicable law; or
(b) To have this Lease continue to effect for so long as Landlord
does not terminate this Lease and Tenant's right to possession of the
Premises, in which event Landlord shall have the right to enforce all of
the rights and remedies provided by this Lease and by law, including the
right to recover the rental and other charges
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payable by Tenant under this Lease as they become due.
For purposes of this Section 11, the worth at the time of award of the amounts
referred to in Paragraph 11.2(a)(1) and 11.2(a)(ii) shall be computed by
allowing interest at the highest rate allowable by law, and the worth at time
of award of the amount referred to in part 11.2(a)(iii) shall be computed by
discounting such amount at the rate specified in California Civil Code Section
1951.2(b) or any successor statute. In such computations, the rent due shall
include Base Monthly Rent plus the aggregate amount of all Additional Rents,
charges and other amounts payable by Tenant pursuant to the provisions of this
Lease.
11.3 LANDLORD'S DEFAULT. Landlord will be in default if Landlord fails to
perform any obligation required of Landlord (other than a delay in delivery of
possession as provided for in Section 3 of this Lease) with 30 Days after
written notice by Tenant to Landlord, specifying how Landlord has failed to
perform such obligation; provided that if the nature of Landlord's obligation
is such that more than 30 Days are required for performance, then Landlord
shall not be in default if Landlord commences performance within 30 day period
and thereafter diligently prosecutes the same to completion. If Landlord's
default deprives Tenant of the use of all or substantially all of the Premises
for the purposes for which they are let, pursuant to the provisions of this
Lease, then upon the occurrence of a Landlord default as defined by this
Paragraph, Tenant shall have the right to an abatement of that portion of the
Base Monthly Rent required by this Lease which is, to the whole of the Base
monthly Rent, equal to the ratio that the portion of the Premises of which
Tenant has been deprived of use as a result of Landlord's default bears to the
entirety of the Premises. Such abatement shall continue until the Landlord has
cured its default. If Landlord's default continues uncured for a period of 30
Days, Tenant shall have the right to terminate this Lease upon 30 days written
notice to Landlord. If Tenant elects to terminate this Lease, Tenant shall
vacate the Premises by the 30th Day following the delivery of the notice of
Tenant's election to terminate and shall deliver the Premises to the Landlord
in the condition required by the provisions of this Lease governing
termination. If Tenant has not exercised the right to terminate established by
this Paragraph prior to Landlord's curing of the default, Tenant shall be
deemed to have waived the right to terminate the Lease as a result of that
Default. Except as expressly set forth in this Lease, Tenant shall not have any
right whatsoever to terminate this Lease or to withhold, reduce or offset any
amount against any payments of rents or charges due and payable under this
Lease.
12. TERMINATION. Upon expiration of the Term or early termination of
this Lease (collectively "Termination"), Tenant shall deliver up and surrender
to Landlord possession of the Premises in as good order and condition as when
Tenant took possession excepting only ordinary wear and tear. Tenant's
obligation with respect to the surrender of the Premises shall be fulfilled if
Tenant surrenders possession of the Premises in the condition existing at the
Commencement Date (including the improvements described on Exhibits C and D,
ordinary wear and tear, casualties, condemnation, Hazardous Materials (other
than those released or emitted by Tenant in or about the Premises), and
alterations or other interior improvements which Landlord states in writing may
be surrendered at the termination of the Lease, excepted. Upon Termination,
Landlord may reenter the Premises and remove all persons and property
therefrom. If Tenant fails to remove anything that Tenant is required or
entitled to remove from the Premises on Termination, Landlord may remove the
same and store or dispose of such item(s) in accordance
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with Civil Code Sections 1980-91. Tenant shall pay to Landlord on demand all
expenses incurred in such removal and storage and in cleaning the Premises. If
the Premises are not surrendered at the end of the Term, Tenant shall indemnify
Landlord against all losses resulting from Tenant's delay in surrendering the
Premises. If Tenant remains in possession of the Premises after expiration of
the Term and if Landlord and Tenant have not executed an express written
agreement as to such holding over, then such occupancy shall be a tenancy from
month to month at a Base Monthly Rent fixed at 125% of the Base Monthly Rent in
effect immediately prior to such expiration, such payments to be made as herein
provided. In the event of such holding over, all terms of this Lease including
the obligation for payment of all charges owing hereunder shall remain in force
and effect on said month to month basis. The voluntary or other surrender of
this Lease by Tenant, if accepted by Landlord, or a mutual cancellation
thereof, shall not work a merger, but shall, at the Landlord's option,
terminate or operate as an assignment to Landlord of any or all subleases or
subtenancies.
13. CONDEMNATION OF PREMISES.
13.1. TOTAL CONDEMNATION. If the entire Premises are taken by
Condemnation during the Term, this Lease shall terminate on the date of
transfer of possession and Tenant shall have no claim against Landlord for the
value of the unexpired Term.
13.2. PARTIAL CONDEMNATION. If any portion of the Premises is
taken by Condemnation during the Term, this Lease shall remain in full force
and effect; except that if a partial taking leaves the Premises unsuitable for
occupancy, Tenant may terminate this Lease effective on the date transfer of
possession is required unless Landlord makes other comparable arrangements for
Tenant's space. Landlord and Tenant shall each have the right to terminate this
Lease effective on the date transfer of possession is required in the event of
Condemnation of more than 25% of the Usable Square Feet in the Premises. Either
party may exercise its right to terminate this Lease by serving written notice
to the other within 30 Days of their receipt of notice of condemnation, except
that Tenant's notice shall be ineffective if Landlord serves notice upon Tenant
of Landlord's election to provide alternate space equivalent to that condemned
within 10 Days of Tenant's delivery of notice to Landlord pursuant to this
Paragraph. Tenant shall have the right of approval of replacement space. All
rent and other obligations of Tenant under this Lease shall be paid to the date
of Termination; Tenant shall have no claim against Landlord for any unexpired
portion of the Term. If this Lease is not canceled after a partial taking, Base
Monthly Rent and Tenant's Pro Rata Share shall be adjusted to reflect the net
change in the number of Rentable Square Feet allocable to the Premises. TENANT
WAIVES CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1265.130.
13.3. AWARD TO TENANT. In the event of Condemnation, Tenant
may claim from the condemnor such compensation as Tenant may separately recover
for moving costs, loss of business, fixtures or equipment belonging to Tenant.
Tenant shall have no other right to recover from Landlord or the condemnor for
any additional claims arising out of such taking.
14. LANDLORD'S ENTRY. Landlord and its Agents may enter the Premises
at all reasonable times to: inspect; make repairs or Alternations; post "For
Lease" signs during the last 120 Days of the Term; show the Premises during the
last 120 days of the Term; and/or to post notices of nonresponsibility.
Landlord shall have such right of entry without any rebate of rent
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to Tenant for any loss of occupancy or quiet enjoyment of the Premises.
Landlord shall provide 24 hours' notice of intended entry except under
circumstances Landlord deems an emergency.
15. LIMITATION OF LIABILITY AND INDEMNITY: This Section 15,
inclusive of all paragraphs and subparagraphs, supersedes each and every other
provision of this Lease.
15.1. LIMITATION OF LANDLORD'S LIABILITY. SUBJECT TO THE
PROVISIONS OF PARAGRAPHS 6.7 AND 18.11.4 OF THIS LEASE, LANDLORD SHALL NOT BE
LIABLE FOR AMOUNTS EXCEEDING INSURANCE COVERAGE MAINTAINED BY LANDLORD UNDER
THIS LEASE ("EXISTING COVERAGE") RESPECTING ANY INJURY OR DAMAGE, PROXIMATE OR
REMOTE, OCCURRING THROUGH OR CAUSED BY REPAIRS OR ALTERATIONS TO THE PROPERTY,
UNLESS THE INJURY OR DAMAGE ARISES FROM LANDLORD'S NEGLIGENCE, WILLFUL
MISCONDUCT, OR BREACH OF THIS LEASE ("LANDLORD'S ACTS"). EXCEPT FOR LOSSES
ARISING FROM LANDLORD'S ACTS, LANDLORD SHALL HAVE NO LIABILITY IN EXCESS OF
EXISTING COVERAGE FOR ANY INJURY OR DAMAGE OCCASIONED BY DEFECTIVE ELECTRIC
WIRING, OR THE BREAKING, BURSTING, STOPPAGE OR LEAKING OF THE PLUMBING,
AIR-CONDITIONING, HEATING, FIRE CONTROL SPRINKLER SYSTEMS OR GAS, SEWER OR
STEAM PIPES.
15.2. LIMITATION ON ENFORCEMENT OF REMEDIES. NOTWITHSTANDING
ANY OTHER PROVISION OF THIS LEASE, TENANT AND ITS AGENTS SHALL, UNDER ALL
CIRCUMSTANCES, BE ABSOLUTELY LIMITED TO LANDLORD'S INTEREST IN THE PROPERTY FOR
SATISFACTION OF ANY AND ALL JUDGMENTS, AWARDS AND/OR ORDERS AGAINST LANDLORD
RELATING TO OR ARISING OUT OF TENANT AND ITS AGENTS' OCCUPANCY AND USE OF THE
PROPERTY AND/OR IN THE EVENT OF ANY DEFAULT BY LANDLORD UNDER THIS LEASE; AND
NO OTHER PROPERTY OF LANDLORD OR ITS PARTNERS OR PRINCIPALS, DISCLOSED OR
UNDISCLOSED, SHALL BE SUBJECT TO LEVY, EXECUTION OR OTHER ENFORCEMENT PROCEDURE
FOR THE SATISFACTION OF TENANT AND ITS AGENTS' REMEDIES WITH RESPECT TO THIS
LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT HEREUNDER, OR THE USE AND
OCCUPANCY OF THE PROPERTY AND THE PREMISES BY TENANT AND ITS AGENTS. TENANT, ON
BEHALF OF TENANT AND ITS AGENTS, WAIVES ALL RIGHTS TO COLLECT OR ENFORCE ANY
AND ALL ORDERS, AWARDS AND/OR JUDGMENTS AGAINST LANDLORD IN EXCESS OF
LIMITATIONS IMPOSED BY THIS SECTION 15. TENANT SHALL REQUIRE EVERY SUBTENANT
AND ASSIGNEE OF TENANT AGREE TO BE BOUND BY THE WAIVER SET FORTH IN THIS
SECTION. LANDLORD'S EXPOSURE AS SET FORTH IN THIS SECTION IS CUMULATIVE AND IN
THE AGGREGATE (AS TO ALL JUDGMENTS, AWARDS AND ORDERS AGAINST LANDLORD ARISING
IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, OR THE
USE AND OCCUPANCY OF THE PROPERTY BY TENANT AND ITS AGENTS). LIMITS IMPOSED BY
THIS SECTION INCLUDE DUTIES OF EXPRESS AND/OR IMPLIED INDEMNITY. "LANDLORD"
INCLUDES ALL PERSONS AND ENTITIES WHO NOW OR HEREAFTER OWN AN INTEREST IN
LANDLORD.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not directly or
indirectly: (1) assign this Lease in whole or in part; (2) sublet any part or
all of the Premises; (3) license the use of all or any part of the Premises,
the Property or any business conducted thereon; or (4) encumber or hypothecate
this Lease (collectively "Transfer"), without first obtaining Landlord's
written consent. The transfer of shares of stock, partnership interests or
other ownership interests in Tenant resulting in a change in the effective
control of Tenant, or any merger, consolidation or other reorganization of
Tenant is a Transfer of this Lease. Tenant's request for consent to any
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assignment, sublease or other transfer shall be in writing and shall include the
following: (a) the name and legal composition of the proposed transferee; (b)
the nature of the proposed transferee's business to be carried on in the
Premises; (c) the terms and provisions of the proposed assignment or sublease;
and (d) such financial and other information as Landlord may request concerning
the proposed transferee or concerning the proposed assignment or sublease. Any
Transfer of this Lease, in whole or in part, without Landlord's prior written
consent shall constitute a default under this Lease. Landlord's consent to any
Transfer shall not constitute a waiver of the need for such consent to any
subsequent Transfer. Tenant may, without Landlord's prior written consent sublet
the Premises or assign the Lease to a subsidiary, affiliate, division or
corporation, controlling, controlled by or under common control with Tenant.
Notwithstanding any other provision of this Lease, tenant may transfer all
rights and obligations of Tenant under the provisions of this Lease to the
surviving corporation in the event of a merger or to the purchaser of all of the
assets of the corporation or the entity resulting from any other business
combination or restructuring in which Tenant cases to exist as an independent
entity without obtaining Landlord's consent provided that the surviving entity
which will become responsible for the Tenant's obligations under this lease
shall have a net worth (after consideration of all actual and contingent
liabilities) not less than that of the Tenant's net worth as of the date of this
Lease incrementally increased by a compounding 10% per annum, and provides
evidence reasonably satisfactory to Landlord of its ability to meet the
financial obligations of the Tenant under the terms of the Lease.
Notwithstanding any Transfer with or without Landlord's consent, Tenant shall
remain fully liable on this Lease unless expressly released by Landlord in
writing. Without limiting other reasons or circumstances, Landlord and Tenant
agree that it is reasonable for Landlord to withhold consent if, in Landlord's
judgment: (i) the financial strength of the proposed assignee is not
commensurate with the obligations of the Lease; (ii) the proposed use would be
incompatible with the use of the rest of the Property; or (iii) the proposed use
would generate traffic and/or wear and tear materially in excess of Tenant's
use. If Landlord consents to a Transfer, Tenant shall pay Landlord's reasonable
attorney's fees incurred in connection with such consent. Tenant shall pay to
Landlord, as received, 50% of all Excess Rent received by Tenant directly or
indirectly in respect of Transfer of all or any part of this Lease or of the
Premises. "Excess Rent" means, in the case of an assignment, all consideration
and, in the case of a sublease, all consideration in excess of the rents and
charges reserved under this Lease. Tenant, however, shall not be required to pay
Landlord any Excess Rent until Tenant has deducted therefrom the costs to Tenant
to effectuate the assignment or sublease, including attorneys' fees, leasing
commissions and remodeling costs.
17. DAMAGE OR DESTRUCTION. Each party may terminate this Lease if the
Premises or the Building are damaged to an extent exceeding 50% of the then
replacement cost of the Premises (in the event of damage limited to the
Premises) or 33% of the Building (in the event of damage not limited to the
Premises). Landlord may also terminate this Lease if the Premises or the
Building are damaged by an uninsured peril to an extent exceeding 33% of the
then replacement cost of the Premises (in the event of damage limited to the
Premises) or 25% of the Building (in the event of damages not limited to the
Premises). If a party elects Termination
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under this section, the terminating party shall deliver written notice to the
non-terminating party within 30 Days of the occurrence of the damage. Tenant
shall have 30 Days to vacate the Premises unless they are unsafe for occupancy,
in which case, Tenant shall immediately vacate. TENANT WAIVES SECTION 1932(2),
AND SECTION 1933(4) OF THE CALIFORNIA CIVIL CODE. If this Lease is not
terminated pursuant to this Section, Landlord shall, within 90 Days of the
occurrence of the damage, proceed to repair the Building, on substantially the
same plan as existed immediately before the occurrence of damage. Tenant shall
be liable for repair and replacement of all fixtures, leasehold improvements,
furnishings, merchandise, equipment and Tenant's personal property not covered
by insurance. The Base Monthly Rent will be reduced during the repair period in
the proportion that the unusable part of the Premises bears to the whole.
Notwithstanding any other provision of this Lease, if the discounted present
value of the Base Monthly Rent due for the remaining Term, using as the
discount rate the prime commercial lending rate in effect at the Bank of
America, NT&SA, as of the date of the damage is less than the cost of repairing
the damage to the Premises, Landlord may terminate this Lease on 10 Days'
written notice to Tenant.
18. HAZARDOUS MATERIALS.
18.1. TENANT'S WARRANTIES. Tenant's obligations are:
18.1.1. RESTRICTIONS ON HAZARDOUS MATERIALS. Hazardous
Material (as defined below) shall not be brought upon, manufactured, generated,
disposed of, handled, used, kept or stored (collectively "Handled" or
"Handling") in, on, about or under the Property by Tenant and its Agents without
Landlord's prior written consent.
18.1.2. APPLICABLE REGULATIONS. If any Hazardous Material
is Handled, in, on, about or under the Property by Tenant and its Agents,
Tenant shall bear all responsibility for ensuring that such material shall be
handled in compliance with all Environmental, Health and Safety Requirements
regulating such Hazardous Material. Tenant shall procure, maintain in effect
and comply with all conditions and requirements of any and all permits,
licenses and other governmental and regulatory approvals or authorizations
required by Environmental, Health or Safety Requirements relating to the
Handling of Hazardous Material. Tenant shall give Landlord copies of all such
permits, licenses, or other regulatory approvals within 5 Days of receipt.
18.1.3. RESTORATION. If, as a result of actions caused or
permitted by Tenant and its Agents, Hazardous Material in, on, about or under
the property or any adjoining property results in contamination of the Property
or other property, Tenant, at it sole expense, shall promptly take all actions
as are necessary to remove the Hazardous Material on the Property due to the
actions of Tenant and/or Tenant's Agents and return the Property and/or the
other affected property to the condition existing prior to such contamination
("Restoration"). Tenant shall not, however, undertake Restoration without first
providing Landlord with written notice and obtaining Landlord's approval of the
restoration procedures, work and contractor. Tenant shall effect Restoration in
compliance with all Environmental, Health and Safety Requirements. Tenant shall
not enter into any settlement agreement, consent decree or compromise respecting
any claims relating to Hazardous Material connected with the Property without
first notifying Landlord of its intention to do so and affording Landlord ample
opportunity to appear, intervene or appropriately assert and protect Landlord's
interests.
18.1.4. REMOVAL. On Termination, Tenant shall remove
from the Property all
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Hazardous Materials in, on, about or under the Property Handled by Tenant and
its Agents and all receptacles and containers therefor, and shall cause such
Hazardous Materials, receptacles and containers to be Handled, transported and
disposed of pursuant to all applicable Environmental, Health and Safety
Requirements. Hazardous Materials, receptacles and containers shall be removed
by duly licensed haulers, transported to and disposed of at duly licensed
facilities for the disposal of such Hazardous Materials, receptacles or
containers. Tenant shall deliver to Landlord copies of all documentation
relating to Handling of Hazardous Materials, receptacles or containers
therefor, reflecting legal and proper Handling. Tenant shall, at its sole
expense, repair all damage to the Property resulting from its removal of
Hazardous Materials, receptacles and containers. Tenant shall continue to pay
rent until completion of such removal and repairs.
18.1.5. TENANT'S WRITTEN CONFIRMATION. Tenant shall execute such
documents as Landlord may request as to Tenant's knowledge of the presence of
Hazardous Materials in, on, about or under the Property. On each anniversary of
the Commencement Date, Tenant shall give Landlord a letter stating that during
the preceding year Tenant complied with this Section 18, or, if Tenant has not
so complied, stating the details of noncompliance.
18.1.6. TENANT'S DUTY TO NOTIFY LANDLORD. Tenant shall notify
Landlord in writing immediately upon learning of: (1) enforcement, cleanup,
remediation or other action threatened, instituted or completed by any
governmental or regulatory agency or private person with respect to the
Property or any adjoining property relating to Hazardous Materials; (2) any
claim threatened or made by any person against Tenant, Landlord, the Property
or any adjoining landowner, tenant or property for personal injury,
compensation or any other matter relating to Hazardous Materials; and (3) any
reports made by or to any governmental or regulatory agency with respect to the
Property or any adjoining property relating to Hazardous Materials, including
without limitation, any complaints, notices or asserted violations in
connection therewith. Tenant shall supply to Landlord as promptly as possible,
and in any event within 5 Days after Tenant first receives or sends the same,
copies of all claims, reports, complaints, notices, warnings, asserted
violations or other documents relating in any way to the foregoing.
18.2. LANDLORD'S RIGHTS. Landlord and its Agents shall have the right to
communicate, verbally or in writing, with any regulatory agency or any
environmental consultant on any matter respecting the Property relating to
Hazardous Materials. Landlord shall be entitled to copies of all notices,
reports or other documents issued by or to any such regulatory agency or
consultant respecting the Property relating to Hazardous Materials.
18.3. TENANT'S DUTY TO INDEMNIFY. If the Handling by Tenant and its Agents
of Hazardous Materials results in contamination of the Property, Tenant shall
indemnify, defend, protect and hold Landlord and its Agents and all of
Landlord's partners or other affiliates, together with all their directors,
officers, shareholders, employees, agents, contractors and attorneys, harmless
from and defend them against any and all claims, damages, penalties, fines,
costs, liabilities and losses (including, without limitation, diminution in
value of the Property, damages for the loss or restriction on use of rental or
usable space or of any other amenity of the Property, damages arising from any
adverse impact on marketing of space in the Property, other consequential
damages and sums paid in settlement of claims, attorneys' fees, consultants'
fees and experts' fees) which arise during or after the Term as a result of
such contamination. This indemnification includes, without limitation, costs
incurred in connection with removal or restoration work required by any
regulatory agency and/or private persons because of the
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presence of Hazardous Materials in the soil or groundwater in, on, about or
under the Property or any adjoining property as a result of the acts of Tenant
and its Agents and legal fees and expenses incurred by Landlord relating to
such claims, demands, investigations and responses.
18.4. RIGHT OF ENTRY. If contamination of the Property by Hazardous
Materials occurs or if any lender or regulatory agency requires an
investigation to determine if there is contamination of the Property or any
adjoining property, then Landlord and its Agents shall have the right, at any
reasonable time and from time to time, to enter the Premises to perform
monitoring, testing or other analyses, and to review applicable documents,
notices, or other materials. If such contamination resulted from the conduct of
Tenant and its Agents, Tenant shall pay, on delivery of Landlord's invoice, all
costs and expenses reasonably incurred by Landlord in connection with such
investigation, monitoring, and testing.
18.5. DEFINITIONS. The following terms shall have the following
meanings:
18.5.1. "HAZARDOUS MATERIAL": means (a) any petroleum or
chemical products, whether in liquid, solid, or gaseous form, or any fraction
or by-product thereof, (b) asbestos or asbestos-containing materials, (c)
polychlorinated biphenyls (PCBs), (d) radon gas, (e) underground storage tanks,
(f) any explosive or radioactive substances, (g) lead or lead-based paint, or
(h) any other substance, material, waste or mixture now or hereafter during the
term of this lease listed, defined or otherwise determined by any governmental
authority to be hazardous, toxic, dangerous or otherwise regulated, controlled
or giving rise to liability under any Environmental Health and Safety
Requirements.
18.5.2. "ENVIRONMENTAL HEALTH AND SAFETY REQUIREMENTS" means
any federal, state or local law or rule (whether imposed by statute,
administrative or judicial order, or common law), now in force or hereafter
enacted, governing health, safety, industrial hygiene, the environment, natural
resources, or Hazardous Materials, including, without limitation, such laws
governing or regulating the use, generation, storage, removal, recovery,
treatment, handling, transport, disposal, control, discharge of, or exposure to
Hazardous Materials. All Environmental Health and Safety Requirements are
Regulations under the terms of this Lease.
18.6. ALLOCATION OF RESPONSIBILITIES. ALL LIABILITY ARISING FROM THE
TRANSPORTATION OR HANDLING OF HAZARDOUS MATERIALS IN, ON, UNDER, AND/OR ABOUT
THE PROPERTY OR ADJOINING PROPERTY BY TENANT AND ITS AGENTS SHALL, AT ALL TIMES,
REMAIN TENANT'S SOLE RESPONSIBILITY, EVEN IF THE HAZARDOUS MATERIALS ORIGINATE
FROM THE PROPERTY. NO ACT BY LANDLORD OR ITS AGENTS SHALL CONSTITUTE ASSUMPTION
BY LANDLORD OF ANY OBLIGATIONS, DUTIES, LIABILITIES OR RESPONSIBILITIES
PERTAINING TO TENANT'S COMPLIANCE WITH ANY ENVIRONMENTAL, HEALTH OR SAFETY
REQUIREMENTS. NOTWITHSTANDING TERMINATION OF THIS LEASE, TENANT SHALL RETAIN ALL
LIABILITY AND RESPONSIBILITY FOR COMPLIANCE WITH REGULATIONS AND ENVIRONMENTAL,
HEALTH OR SAFETY REQUIREMENTS CONCERNING TENANT AND ITS AGENTS' HANDLING OF
HAZARDOUS MATERIALS. TENANT SHALL INDEMNIFY AND HOLD LANDLORD AND ITS AGENTS,
HARMLESS FROM ALL COSTS AND EXPENSES ASSOCIATED WITH SUCH COMPLIANCE INCLUDING
THE OBLIGATIONS IMPOSED BY THE CC&Rs UPON LANDLORD TO INDEMNIFY THE ASSOCIATION,
THE BOARD OF THE
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ASSOCIATION AND EVERY OTHER OWNER AND THEIR RESPECTIVE TENANTS, AGENTS,
EMPLOYEES, REPRESENTATIVES, DIRECTORS, AND OFFICERS AGAINST LOSS, EXPENSE AND
LIABILITY ARISING FROM THE TRANSPORTATION OR HANDLING OF HAZARDOUS MATERIALS BY
TENANT AND ITS AGENTS.
18.7. INSPECTIONS. Tenant will cooperate with the completion of
inspections of the Property as required by applicable Regulations. Tenant shall
provide to Landlord a copy of the reports for each such inspection within 15
days of Tenant's receipt of such reports.
18.8. COOPERATION RESPECTING REGULATIONS. Tenant will not
interfere with Landlord's acts pursuant to the above-referenced Regulations.
Tenant will comply with reasonable procedures promulgated by Landlord pursuant
to such Regulations. Landlord shall have no duty to establish any procedures or
to supervise in any way Tenant's activities on the Property.
18.9. SURVIVAL. The covenants, agreements and indemnities set
forth in this Section 18 shall survive Termination and shall not be affected by
any investigation, or information obtained as a result of any investigation, by
or on behalf of Landlord or any prospective Tenant.
18.10. SPECIAL MATTERS.
18.10.1. STORAGE TANKS: TENANT SHALL NOT INSTALL ANY
STORAGE TANKS ON THE PROPERTY WITHOUT LANDLORD'S PRIOR WRITTEN CONSENT.
18.10.2. FLAMMABLE CHEMICALS: Tenant shall store all
flammable chemicals in a metal storage cabinet. Flammable Chemicals includes,
without limitation, turpentine, thinner, brush cleaner, solvents and other
combustible products.
18.10.3. NFPA WARNINGS: If Tenant uses any chemicals on
the Premises, Tenant shall post an NFPA diamond on the exterior side of the door
to the Premises.
18.11. LANDLORD'S OBLIGATIONS. Landlord's obligations are:
18.11.1. COMPLIANCE WITH REGULATIONS. If Landlord and its
Agents Handle Hazardous Material in, on, about or under the Property, such
material shall be Handled in compliance with all Environmental, Health and\
Safety Requirements.
18.11.2. RESTORATION. If, as a result of Landlord's
bringing Hazardous Material upon the Property, any contamination of the Property
or the surrounding environment occurs, Landlord shall promptly take all
necessary actions to return the Property and/or the surrounding environment to
the condition existing prior to such contamination.
18.11.3. DUTY TO NOTIFY TENANT. Landlord shall notify
Tenant in writing upon learning of: (1) enforcement, cleanup, remediation or
other action threatened, instituted or completed by any regulatory agency or
private person with respect to the Property relating to Hazardous Materials; (2)
any claim threatened or made against Landlord respecting the Tenant or the
Property for personal injury, compensation or any other matter relating to
Hazardous Materials; and (3) reports made by or to any regulatory agency
respecting the Property, complaints, notices or asserted violations in
connection therewith. Landlord shall supply to Tenant copies of claims, notices,
warnings, or other documents relating to the foregoing.
18.11.4. INDEMNITY OF TENANT. If Hazardous Materials,
resulting from Landlord's acts, contaminate the Property, or if the Property is
contaminated on the Commencement Date (excluding remediated contaminations
currently monitored pursuant to an approved remediation plan), Landlord shall
indemnify, defend, protect and hold Tenant and its Agents harmless from all
claims, damages, penalties, costs, liabilities and losses, including
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reasonable attorneys fees, resulting from such contamination.
19. MISCELLANEOUS PROVISIONS.
19.1. WAIVER. No waiver of any breach of this Lease shall be
construed as a waiver of any other breach. Landlord's acceptance of rent after
Tenant's breach shall not be a waiver of any preceding breach of this Lease by
Tenant, even if known by Landlord at the time.
19.2. NOTICES. Notices, requests, demands and other
communications shall be in writing personally delivered or sent by certified
mail, return receipt requested, postage prepaid, or by a nationally recognized
overnight delivery service (such as, by way of example, Federal Express or UPS
Overnight Delivery Service) properly addressed to the other party at the
address set forth by its signature below, or at such other address as may be
designated in writing by one party to the other. Notice shall be effective on
personal delivery or on the date indicated on the post office's certified mail
receipt of delivery.
19.3. CONSTRUCTION. This Lease shall be construed pursuant to
California law. The invalidity of any provision of this Lease shall not affect
the remainder. All terms of this Lease shall be construed to mean either the
singular or the plural, masculine, feminine or neuter, as the situation may
demand. Headings are descriptive only and not determinative of meaning. Time is
of the essence in performance of all obligations. This Lease constitutes the
entire agreement between the parties respecting the subject matters that it
addresses. This Lease supersedes all prior oral and written agreements
respecting the hiring or the Premises. Provisions of this Lease may be waived,
amended or repealed only by all parties' written consent. This Lease binds and
inures to the benefit of the parties' heirs, personal representatives,
successors and assigns. Should any provision of this Lease require judicial
interpretation, it is agreed that the court interpreting or construing the same
shall not apply a presumption that the terms shall be more strictly construed
against one party by reason of the rule that a document is to be construed more
strictly against the party responsible for its preparation; the parties agree
that all parties have participated in the preparation of this Lease.
19.4. MEMORANDUM. If Landlord requests a memorandum of Lease,
the parties shall execute, acknowledge and record such a document.
19.5. AUTHORITY. Each individual executing this Lease for a
corporation warrants that he is duly authorized to execute and deliver the
Lease for the corporation and that the Lease binds the corporation in accordance
with its terms. Each individual executing this Lease on behalf of a partnership
warrants that he is duly authorized to execute and deliver this Lease for the
partnership and that this Lease binds the partnership in accordance with its
terms.
19.6. LITIGATION. All Litigation arising out of or in
connection with this Lease shall be venued in Marin County, California. The
prevailing party shall recover costs of suit and attorneys' fees, whether or
not the matter proceeds to judgment or award.
19.7. SUBORDINATION OF LEASEHOLD. This Lease shall, at all
times, be subordinate to the lien of any loan that Landlord may secure with the
Property. Landlord shall obtain a non-disturbance agreement from the lender
secured by the Property at the time Tenant first occupies the Property, which
agreement shall provide that absent Tenant's default, the lienholder will allow
Tenant to remain in possession of the Premises, subject to the provisions of
this Lease, for the duration of the Term. Landlord shall use its best efforts
to obtain a similar non-disturbance agreement from any and all subsequent
lenders secured by the Property during the Term. Tenant
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shall execute written instruments to effect such subordination respecting new
lenders secured by the Property, conditioned upon the lender providing the
non-disturbance agreement for Tenant.
19.8. ESTOPPEL. Within 15 Days of Landlord's request, Tenant shall
complete, execute and deliver to Landlord a certification: (a) that this Lease
is unmodified and in full force and effect (or if modified, stating the nature
of such modification and certifying that this Lease as so modified is in full
force and effect); (b) of the date to which the rent and other charges are paid;
(c) that Tenant knows of no uncured defaults on the part of Landlord hereunder,
or specifying such defaults, if any are claimed; and (d) of the date of
commencement and expiration of the Term. Tenant's failure to timely deliver the
document constitutes a certification that Landlord is not in default under the
Lease and the terms of the Lease are in force without modification. Prospective
purchasers, lenders or lender's assignees may rely upon such certification.
19.9. ATTORNMENT. In the event of a sale of the Property or the
completion of foreclosure against the Property, Tenant shall attorn to the
Landlord's successor in interest.
19.10. LENDER'S REQUESTS. Tenant shall consent to Lease amendments
requested by any lender against the Property, provided that such amendments do
not materially affect Tenant's obligations. Tenant shall timely supply
financial information requested by such lender.
19.11. REASONABLE EXPENDITURES. Any expenditure by a party permitted
or required under the Lease, for which such party is entitled to demand and does
demand reimbursement from the other party, shall be limited to the fair market
value of the goods and services involved, shall be reasonably incurred, and
shall be substantiated by documentary evidence available for inspection and
review by the other party or its representative during normal business hours.
19.12. SUBMISSION. Submission of this document to Tenant does not
create a reservation for a lease or any rights respecting the Premises prior to
Landlord's execution.
19.13. ARBITRATION OF DISPUTES. NOTWITHSTANDING ANY OTHER PROVISION OF
THIS LEASE, THE PROVISIONS OF THIS SECTION APPLY TO ALL DISPUTES ARISING OUT OF
THE LEASE SAVE AND EXCEPT UNLAWFUL DETAINER PROCEEDINGS; NOTHING IN THIS
AGREEMENT SHALL BE INTERPRETED TO REQUIRE LANDLORD TO SUBMIT UNLAWFUL DETAINER
PROCEEDINGS TO ARBITRATION, IF A CONTROVERSY, CLAIM OR DISPUTE EXCLUDING
UNLAWFUL DETAINER PROCEEDINGS AND ISSUES RAISED IN CONNECTION THEREWITH
(COLLECTIVELY "DISPUTE"). THE TERM "DISPUTE" SHALL NOT BE CONSTRUED TO INCLUDE
UNLAWFUL DETAINER PROCEEDINGS. IN THE EVENT THAT A DISPUTE BETWEEN THE PARTIES
ARISES OUT OF THIS LEASE, THE DISPUTE SHALL BE SUBMITTED TO BINDING ARBITRATION
TO BE CONDUCTED UNDER THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN
ARBITRATION ASSOCIATION. JUDGMENT ON THE ARBITRATOR'S AWARD MAY BE ENTERED IN
ANY COURT OF COMPETENT JURISDICTION. CALIFORNIA CODE OF CIVIL PROCEDURE SECTION
1283.05 SHALL APPLY TO SUCH ARBITRATION.
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NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISIONS
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY
TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO
NEUTRAL ARBITRATION.
19.14. BROKERAGE. Landlord and Tenant each warrants and represents for the
benefit of the other that it has had no dealings with any real estate broker or
agent in connection with the negotiation of this Lease and that it knows of no
other real estate broker or agent who is or might be entitled to a real estate
brokerage commission or finder's fee in connection with this Lease. Each party
shall indemnify and hold harmless the other from and against any and all
liabilities or expenses arising out of claims made by any broker or individual
for commissions or fees resulting from the actions of the indemnifying party in
connection with this Lease.
19.15. COOPERATION. Tenant will not interfere with Landlord's actions
pursuant to any Regulation affecting the Property or with respect to the CC&Rs,
however Landlord agrees to provide to Tenant the constructive benefit of the
CC&R's by cooperating with Tenant to enforce the provisions of the CC&R's in
order to obtain for Tenant all benefits entitled to be derived from the CC&R's.
Landlord agrees to vote against material changes to the CC&R's which would
adversely impact Tenant's rights or reduce Landlord's obligations under the
provisions of this Lease. Tenant will comply with all reasonable procedures
promulgated by Landlord relating to the matters covered by such Regulations and
the CC&Rs as to which it receives written notice. Landlord has no duty to
establish procedures or regulations or to supervise Tenant's activities for any
purpose including, without limitation, the Handling of Hazardous Materials.
19.16. PARKING. Tenant shall have the use of no fewer off-street parking
places than
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is required by the applicable Regulations respecting the Property based on the
Rentable Square Footage of the Property. Landlord anticipates that the Tenant
shall have at least 70 off street parking spaces based on current plans for the
construction of the Building. Parking spaces within the area of the Restricted
Common Area (as defined by the CC&Rs) and designated on the Parking Plan of the
Association as assigned to the Building, shall be for Tenant's exclusive use.
Any and all other parking spaces made available to Tenant shall be for the
Tenant's non-exclusive use.
19.17. NON-DISTURBANCE AGREEMENT. Landlord shall use its reasonable best
efforts to obtain, for Tenant's benefit, execution of a Non-Disturbance
Agreement by the beneficiary of any deed of trust or lien now or hereafter,
during the Term, secured by the Property.
19.18. PREPARATION. Tenant has had the opportunity to review this Lease
and have it reviewed by such legal counsel and other advisors as Tenant deems
necessary or appropriate. Tenant understands that this document affects
significant legal rights. Each party has been represented by separate counsel
of its own selection respecting the preparation of this Lease.
19.19. CC&RS. The CC&Rs shall be treated as Regulations under this Lease
and the failure to abide by the CC&Rs shall be treated as a failure to comply
with applicable Regulations.
19.20. LIMITATIONS AND RESTRICTIONS RESPECTING OPERATING EXPENSES:
Notwithstanding any other provision of this Lease, the following shall not be
included as Operating Expenses: (1) legal fees, brokerage commissions,
advertising costs and other related expenses incurred in connection with the
leasing of the Building; (2) damage and repairs covered under any warranty or
insurance policy carried by Landlord in connection with the Building or the
Property; (3) damage and repairs necessitated by the gross negligence or
willful misconduct of Landlord or Landlord's employees, contractors or agents;
(4) salaries of service personnel to the extent that such service personnel
perform services not solely in connection with the management, operation,
repair or maintenance of the Building or Common Areas; (5) Landlord's general
overhead expenses not related to the Building; (6) payments of principal or
interest on any mortgage or other encumbrance, ground lease payments, points
commissions and legal fees associated with financing (as used in this
subparagraph, however, "encumbrance" does not include Taxes or assessments
against the Property); (7) depreciation; (8) legal fees, accountants' fees and
other expenses incurred in connection with disputes with other tenants or
occupants of the Building or associated with the enforcement of any other
leases respecting the Building or any portion of the Building; (9) costs
(including permit, license and inspection fees) incurred in renovating or
otherwise improving, decorating, painting or altering space for other tenants
or other occupants or vacant space in the Building (excluding Common Areas and
Core Areas); (10) the cost of any service provided to Tenant or other occupants
of the Building for which Landlord is entitled to be reimbursed (other than
reimbursement by Tenant as provided elsewhere in this Lease); (11) any other
expense which, under generally accepted accounting principals and practice
would not be considered a normal maintenance and operating expense, except as
limited by the provisions of Paragraph 19.21 of this Lease.
19.21. SPECIAL ALLOCATION OF CAPITAL EXPENSES RELATED TO MODIFICATIONS
REQUIRED BY REGULATIONS: Except as provided by the provisions of this Lease
relating to Hazardous Materials, in the event that Landlord should be required
to make a capital improvement or upgrade to the Building in order to comply
with Regulations, the cost of each such upgrade shall be pro-rated over its
useful life and the portion of the pro-rated cost allocable to each year of the
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Term shall be included as an Operating Expense for that year.
19.22. PROJECT SCHEDULE: Landlord has prepared and attached as
Exhibit E to this Lease a timeline showing the estimated time frame for the
acquisition of the Property, obtaining the required permits (including those
required to be obtained by Tenant for the Tenant Improvements and those required
to be obtained by Landlord for the construction of the Building Shell,
construction and the Substantial Completion of the improvements (the "Project
Schedule"). The parties acknowledge that the Project Schedule is not a binding
commitment on the Landlord, but only the Landlord's current best estimate of the
time frame for the completion of the project. Landlord will revise the Project
Schedule and provide a copy of the Revised Project Schedule to Tenant within 20
days of the commencement of construction of the improvements. Landlord agrees
that if Landlord anticipates any material variance from the Project Schedule
annexed as an Exhibit to this Lease, Landlord will provide Tenant with a further
Revised Project Schedule.
20. OVERRIDING CONDITIONS AND OTHER MATTERS:
20.1. ACQUISITION OF PROPERTY. Landlord has entered into a contract
to purchase the Property; however, escrow for the acquisition of the Property
has not yet closed. Should Landlord not acquire the title to the Property for
any reason, including, without limitation, unsatisfactory conditions discovered
in the course of Landlord's due diligence investigation which the Seller is
unable or unwilling to remedy, either Landlord or Tenant shall have the right
to terminate this Lease upon written notice to the other. If either party
terminates this Lease pursuant to the provisions of this paragraph, then this
Lease shall be of no force or effect and Landlord and Tenant shall be relieved
of any further responsibility or obligation in connection with performance
required under this Lease. Landlord's acquisition of the Property shall be an
express condition of this Lease for the benefit of both parties.
20.2 FINANCING. Tenant acknowledges that Landlord's ability to
construct the Building is premised upon Landlord's ability to obtain necessary
construction and permanent financing. Landlord does not anticipate a problem in
obtaining such financing, however, Landlord's obtaining of construction and
permanent financing under commercially reasonable terms and market financing
rates, for the acquisition and improvement of the Property, is a condition to
this Lease, which condition is for Landlord's exclusive benefit. Should
Landlord not obtain the required construction and permanent financing for the
acquisition and improvement of the Property for any reason, Landlord shall have
the right to terminate this Lease upon written notice to Tenant. Landlord's
acquisition of construction and permanent financing is a condition of this
Lease for Landlord's benefit. If Landlord does not waive this condition by
December 31, 1998, Tenant shall have the right to terminate this Lease on
written notice to Landlord. Notwithstanding the foregoing, if Landlord obtains
construction and permanent financing commitments after December 31, 1998 and
Tenant has not delivered to Landlord written notice of termination of this
lease pursuant to the provisions of this paragraph prior to the date on which
Landlord acquires such financing commitments, then the right to terminate this
lease pursuant to this paragraph shall terminate and this condition will be
deemed satisfied in a timely manner. If Landlord or Tenant terminates this
Lease pursuant to the provisions of this paragraph, then this Lease shall be of
no force or effect and Landlord and Tenant shall be relieved of any further
responsibility or obligation in connection with performance required under this
Lease.
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20.3 ACQUISITION OF ENTITLEMENTS AND PERMITS. Tenant acknowledges
that Landlord's ability to construct the Building is premised upon Landlord's
ability to obtain necessary governmental approvals and permits. Landlord does
not anticipate a problem in obtaining such approvals and permits, however,
Landlord's obtaining of all required permits and approvals (including
applicable use permits) under commercially reasonable terms and in a timely
fashion is a condition to this Lease, which condition is for Landlord's and
Tenant's mutual benefit. Should Landlord not obtain the required approvals and
permits by April 15, 1999, for any reason, Landlord and Tenant shall each have
the right to terminate this Lease upon written notice to the other.
Notwithstanding the foregoing, if Landlord obtains all necessary approvals and
permits after April 15, 1999 and Tenant has not delivered to Landlord written
notice of termination of this lease pursuant to the provisions of this
paragraph prior to the date on which Landlord acquires all necessary permits
and approvals, then the right to terminate this lease pursuant to this
paragraph shall terminate and this condition will be deemed satisfied in a
timely manner. If Landlord or Tenant terminates this Lease pursuant to the
provisions of this paragraph, then this Lease shall be of no force or effect
and Landlord and Tenant shall be relieved of any further responsibility or
obligation in connection with performance required under this Lease. Nothing in
this Lease shall be construed as obligating the Landlord to obtain the building
permits or the Tenant Improvements. Tenant shall have sole responsibility for
the timely obtaining and delivery of the permits for the Tenant Improvements.
20.4 TENANT'S COOPERATION. Tenant shall cooperate with Landlord
respecting all applications for construction and permanent financing and in all
applications for permits and approvals, provided that Tenant shall not be
required to incur any material expense or liability in connection with such
cooperation.
20.5 LANDLORD'S RIGHT TO ASSIGN LEASE TO NEWLY FORMED ENTITY. The
parties acknowledge and agree that Landlord intends to create a new California
Limited Liability Company (Company). Wareham Development Corporation or an
affiliated entity will be the Managing Member of the Landlord once the company
is formed. Landlord shall have the absolute and unrestricted right to transfer
this Lease, together with all rights, duties and obligations of the Landlord
hereunder to Company. Tenant agrees that upon Landlord's delivery of written
notice to Tenant of said transfer and assignment, Company shall be the Landlord
for all purposes under this Lease and shall have the rights and duties of the
Landlord hereunder as though Company had signed this Lease at its inception. At
such time, Wareham Development Corporation shall have no further obligations as
the Landlord under the terms of this Lease.
20.6 CONSTRUCTION. Tenant acknowledges that the Building has not yet
been constructed. Landlord and Tenant have agreed that, subject to the
conditions and terms of this Lease, Landlord will build a Building on the
Property for lease to Tenant pursuant to the provisions of this Lease. Landlord
shall cause the Building and Tenant Improvements to be constructed in a good
and workmanlike manner and in compliance with applicable Regulations. The
Building shall be constructed in accordance with plans and specifications
mutually acceptable to Landlord and Tenant.
20.6.1 CONSTRUCTION OF BUILDING SHELL. Landlord shall
construct the Building Shell in accordance with plans and specifications
mutually approved by Landlord and Tenant, which approval shall not be
unreasonably withheld. Exhibit C to this Lease is the
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current conceptual drawing for the Building. The parties agree that the drawings
require further revision and will work together cooperatively to review, revise
and finalize the conceptual drawings. Once the final drawings are prepared, they
will be annexed to this Lease as Exhibit C, replacing the current conceptual
drawings for the Building attached upon signing of this Lease. Landlord has
based the rent structure on a shell construction cost not exceeding $50 per
Rentable Square Foot including core items such as HVAC, elevators, stairs and
restrooms. Landlord agrees that Landlord will exhaust any project construction
contingency funds available for the construction of the Shell prior to
increasing the initial Base Monthly Rent above the amount based on the $50 per
rentable Square Foot shell cost figure. If the actual construction cost for the
Shell exceeds $50 plus the prorated construction contingency funds available for
the construction of the Shell per Rentable Square Foot, the parties agree that
the Base Monthly Rent will be proportionately increased to reflect the increase
in the actual per square foot cost of construction. By way of example, if the
cost per Rentable Square Foot is $53.00 and the available contingency fund is $2
per square foot, the Base Monthly Rent rates provided for in this Lease will be
increased by 2% per Rentable Square Foot. Any increase in the cost of the shell
in excess of 10% above the sum of the $50 per square foot shell figure and the
construction contingency funds shall require Tenant's approval. In the event
Tenant refuses to approve a cost increase, Tenant and landlord shall work, in
good faith, to determine how to modify the construction so as to reduce the cost
and avoid the increase. Landlord agrees to immediately notify Tenant in the
event that Landlord has a reasonable expectation that the cost of the
construction of the Shell is likely to exceed $50 per Rentable Square Foot in
order to enable Tenant to participate with Landlord in the discussion of how to
address that anticipated overage with the anticipated result of value
engineering the costs down to as close as possible to $50 per Rentable Square
Foot.
20.6.2. CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord and Tenant
will cooperate in the preparation of working drawings for the Tenant
Improvements, utilizing the services of Tenant's designer, Erik Ibsen of
Ibsen/Senty Architecture ("Designer"). As used in this Lease, "Tenant
Improvements" refers to the interior portion of the Premises exclusive of the
Shell. The final space plans and working drawings approved by both Landlord and
Tenant shall be attached to this Lease as Exhibit D. It shall be Tenant's
obligation to timely produce the final space plans and working drawings and to
obtain all required permits respecting the construction of the Tenant
Improvements. Time is of the essence in this effort. The parties will make all
reasonable efforts to expedite the preparation and approval of the space plans
and working drawings for the Tenant Improvements. The Project Schedule annexed
as an Exhibit to this Lease will set out a deadline for the delivery of the
final space plan and working drawings. In the event that the Designer fails to
timely deliver the final space plan and the working drawings, any delay
resulting from that failure will be considered a Tenant Delay. In the event of a
Tenant Delay, Landlord will work with the contractor and utilize commercially
reasonable measures to attempt to eliminate or reduce the impact of the Tenant
Delay upon the Completion Date.
Landlord will pay an amount equal to $35.00 per Usable Square Foot of the
Premises ("Allowance") expendable for the costs of the design and construction
of the Tenant Improvements. Any costs incurred by Landlord in excess of the
Allowance shall be Tenant's obligation and if expended by Tenant within 15 Days
of Delivery to Tenant of invoices and other
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documentation will reimburse Landlord therefor. In the event that Landlord
anticipates construction of the Tenant Improvements will cost more than $35.00
per Usable Square Foot, Landlord shall promptly advise Tenant of that fact and
provide Tenant with an estimate of the overage. Tenant shall promptly either
approve the overage and accept financial responsibility for all costs in excess
of the Allowance or agree with Landlord on appropriate modifications of the
build-out to reduce the cost of the construction of the Tenant Improvements.
Landlord will accept bids on all aspects of the construction of the Tenant
Improvements and will exercise commercially reasonable judgment in determining
which bid to accept. Nothing in this Lease shall be construed as obligating
Landlord to accept the lowest bid if, in the Landlord's judgment good reason
exists to accept a different or higher bid.
Any costs for Tenant Improvements in excess of the Allowance will be Tenant's
obligation and if expended by Landlord will be reimbursed by Tenant on demand.
Notwithstanding the foregoing, Landlord reserves the right to require Tenant to
deposit any anticipated cost for Tenant Improvements exceeding the Allowance
with Landlord prior to the start of construction.
Landlord agrees to immediately notify Tenant in the event that Landlord has a
reasonable expectation that the cost of the construction of the Tenant
Improvements are likely to exceed $35 per Rentable Square Foot in order to
enable Tenant to participate with Landlord in the discussion of how to address
that anticipated overage with the anticipated result of value engineering the
costs down to the amount of the Allowance, or as close as is possible to that
amount.
Landlord shall notify Tenant not less than 10 Days prior to the date on which
Landlord expects to achieve Substantial Completion of the Premises, Core Area
and Common Areas (including landscaping and parking facilities); Landlord will
make reasonable efforts to provide more than 10 Days notice to the Tenant, but
the Landlord's failure to provide more than 10 Days notice prior to Substantial
Completion shall not be construed as a default under the provisions of this
Lease. Forthwith upon such notification, Landlord and Tenant shall schedule a
walk-through of the Premises. Upon the conclusion of the walk-through, Tenant
shall prepare and deliver to Landlord a punch-list identifying any items Tenant
deems deficient. Upon delivery of the punch-list to Landlord, Tenant shall be
deemed to have accepted the Premises subject to correction of the Punch List
items. Tenant's failure to deliver a punch-list to Landlord within three Days of
the date of the walk-through shall be deemed Tenant's waiver of objection to any
deficiencies and Tenant's acceptance of the Premises.
20.6.3. MEASUREMENT OF RENTABLE AND USABLE SQUARE FOOTAGE. Because
the Building has not yet been constructed, Usable Square Footage and Rentable
Square Footage will be determined after the completion of plans for construction
of the building upon which building permits have been issued (the "Plans").
Landlord will calculate the Usable Square Feet and advise Tenant of the
calculation forthwith upon completion of the Plans and the issuance of the
permits. Landlord will advise Tenant of the completion of the Plans and make a
copy of the Plans available to the Tenant. Tenant shall have the right to
measure the Usable Square Footage and Rentable Square Footage and to object to
Landlord's calculations of the Usable Square Footage and/or Rentable Square
Footage in writing within 10 Days of the date on which the Landlord notifies the
Tenant of the Landlord's calculations. Tenant's failure to object within
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such 10 Day period shall constitute Tenant's acceptance of the Landlord's
measurements as correct and the Landlord's measurements shall, thereafter, be
conclusively presumed correct for all purposes related to this Lease.
20.7 DELAYS OUT OF LANDLORD'S CONTROL. Notwithstanding any other
provision of this Lease, delays in the commencement date caused by weather,
acts of God, labor strikes, or other circumstances outside of Landlord's
control (including delays in the transfer of title to the Property caused by or
as a result of the actions of or limitations upon the current title holder of
the Property, shall not create a breach or default by Landlord respecting the
terms of this Lease. No such delay shall be included in the calculation of the
time period referred to in Paragraph 3 of this Lease.
20.8 EXISTING LEASE. Landlord acknowledges that Tenant is currently
obligated under the terms of a lease with Point Richmond R&D Associates, a
California Limited Partnership for space located in Point Richmond Tech Center
1, Building D, 1003 West Cutting Boulevard, Richmond, California (the "PR
Lease"). The PR Lease contains a provision allowing for termination upon the
construction of the Premises. Coincident with Tenant's relocation from the
premises demised by the PR Lease to the Premises demised by this Lease, the PR
Lease shall terminate. Upon Tenant's removal from the Premises demised by the
PR Lease, any deposit that Tenant placed with the landlord of the PR Lease,
less appropriate charges to the deposit, will be refunded to Tenant. Landlord
will make such arrangements and provide such notices as may be required to
effect such termination and refund. The provisions of this paragraph shall be
of no force or effect unless and until Tenant moves into the Premises. Tenant
shall not terminate the PR Lease unless and until Tenant moves into the
Premises.
20.9 LANDFILL DISCLOSURE. Tenant acknowledges that Landlord has disclosed
to Tenant, as required by the CC&Rs that the Park contains landfill subject to
Regulation under Title 144, California Code of Regulations, Division 7 ("Title
14"). Leachate monitoring and control, ground water monitoring and gas
monitoring and control of the property owned by the Association (including the
Amenities) during postclosure, and postclosure maintenance, control, land use,
and reporting will be conducted by the Association in compliance with the
requirements of Title 14. The costs of such monitoring, control and reporting
will be charged to the Landlord by the Association and will be included as an
Operating Expense under the provisions of this Lease.
10.10 ACKNOWLEDGMENT OF RECEIPT OF DOCUMENTS. Tenant acknowledges receipt
of a complete copy of the: (a) Phase I environmental Site Assessment Report
dated October 30, 1998 prepared for Landlord by Kleinfelder, Inc.; (b)
Declaration of Covenants, Conditions and Restrictions and Reciprocal Easements
for Bayview Business Park dated July, 1989 as amended in October, 1989 and
August, 1992; (c)
QuadraMed Lease 110398
28
<PAGE> 33
LANDLORD: TENANT:
WAREHAM DEVELOPMENT CORPORATION QUADRAMED CORPORATION,
a California Corporation a California Corporation
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ KEITH ROBERTS
----------------------------- -----------------------------
Authorized Signature Authorized Signature
KEITH ROBERTS, EVP & CFO
-----------------------------
Please print name and title
Date: 11/19/98 Date: 11/17/98
------------------- -------------------
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
1120 Nye Street, Suite 400 1003 W. Cutting Boulevard
San Rafael, CA 94901 Building D
Richmond, California 94804
QuadraMed Lease 110398
29
<PAGE> 34
EXHIBIT A
LOCATION OF PREMISES IN DEVELOPMENT
<PAGE> 35
[MAP OF THE AREA SURROUNDING AND
INCLUDING THE PREMISES]
<PAGE> 36
EXHIBIT B
INITIAL ESTIMATED SCHEDULE OF OPERATING EXPENSES
<PAGE> 37
EXHIBIT C
CURRENT CONCEPTUAL DRAWINGS
<PAGE> 38
EXHIBIT E
PROJECT SCHEDULE
(to be completed and attached to lease prior to 12/1/98)
<PAGE> 39
EXHIBIT D
FINAL SPACE PLANS AND WORKING DRAWINGS
(to be completed and attached to lease according to the Schedule)
<PAGE> 40
COMMENCEMENT DATE AGREEMENT
PELICAN WAY, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, ("LANDLORD") AND
QUADRAMED CORPORATION, A CALIFORNIA CORPORATION ("TENANT"), HAVE ENTERED INTO A
CERTAIN OFFICE LEASE DATED AS OF NOVEMBER 19, 1998 (THE "LEASE").
WHEREAS, Landlord and Tenant wish to confirm and memorialize the Commencement
Date and Expiration Date of the Lease:
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and in the Lease, Landlord and Tenant agree as follows:
1. Unless otherwise defined herein, all capitalized terms shall have the
same meaning ascribed to them in the Lease.
2. The Commencement Date (as defined in the Lease) of the Lease is:
December 6, 1999.
3. The Expiration Date (as defined in the Lease) of the Lease is:
December 31, 2009.
4. Tenant hereby confirms the following.
(a) That it has accepted possession of the premises pursuant to the
terms of the Lease;
(b) That the Landlord Work is Substantially Complete; and
(c) That the Lease is in full force and effect.
5. Except as expressly modified hereby, all terms and provisions of the
Lease as hereby ratified and shall remain in full force and effect and
binding on the parties hereto.
6. The Lease and this Commencement Date Agreement contain all of the
terms, covenants, conditions and agreements between the Landlord and
the Tenant relating to the subject matter herein. No prior other
agreements or understandings pertaining to such matters are valid or
of any force and effect.
TENANT: LANDLORD:
QUADRAMED CORPORATION PELICAN WAY, LLC
a California Corporation a California Limited Liability Company
By: /s/ KEITH ROBERTS By: /s/ RICHARD K. ROBBINS
---------------------------------- ----------------------------------
Print Name: Keith Roberts Print Name: Richard K. Robbins
---------------------------------- ----------------------------------
Its: EVP General Counsel Its: Managing Member
---------------------------------- ----------------------------------
By: /s/ JAMES D. DURHAM
----------------------------------
Print Name: James D. Durham
----------------------------------
Its: Chairman & CEO
----------------------------------
Page 1 of 2
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
QuadraMed Operating Company (DE)
Premier Healthcare Corporation (WA)
ProInterMed, Inc. (CA)
Healthcare Financial Infomatics (CA)
LinkSoft Technologies, Inc. (DE)
The Compucare Company (DE)
Pacer Acquisition Corporation (DE)
Health Systems Integration, Inc. (MN)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 24, 2000 with respect to the consolidated financial
statements and schedule included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (File No. 333-16385, File
No. 333-35937, File No. 333-56171, and File No. 333-75945).
/s/ ARTHUR ANDERSEN LLP
------------------------------------
ARTHUR ANDERSEN LLP
San Jose, California
March 24, 2000
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
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