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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-21031
QUADRAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
22 Pelican Way
San Rafael, CA 94901 94901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415)482-2100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 10, 2000, there were 25,476,794 shares of the Registrant's Common
Stock outstanding, par value $0.01. This quarterly report on Form 10-Q consists
of 28 pages of which this is page 1. The Exhibit Index is located at page 22.
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QUADRAMED CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Condensed Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations 4
for the three months ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows 5
for the three months ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
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Part I. Financial Information
Item 1. Financial Statements
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,995 $ 11,565
Restricted cash and short-term investments 14,900 1,000
Short-term investments 7,816 19,109
Accounts receivable, net 56,447 59,740
Unbilled receivables 8,299 17,027
Notes and other receivables 737 2,390
Prepaid expenses and other current assets 6,775 6,260
--------- ---------
Total current assets 108,969 117,091
Long-term investments -- 12,102
Long-term notes receivable 3,600 3,600
Equipment, net 12,953 12,849
Capitalized software development costs, net 8,262 8,958
Acquired software, net 7,687 8,211
Intangibles, net 39,825 42,268
Investments in equity securities 2,622 4,700
Other long-term assets 9,890 9,550
--------- ---------
Total assets $ 193,808 $ 219,329
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 422 $ 437
Notes payable 22 24
Accounts payable 3,325 3,604
Accrued liabilities 21,479 24,324
Deferred revenue 12,379 7,767
--------- ---------
Total current liabilities 37,627 36,156
Capital lease obligations, less current portion 207 207
Convertible subordinated debentures 115,000 115,000
Net liabilities of discontinued operations 4,858 5,385
--------- ---------
Total liabilities 157,692 156,748
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 188 187
Additional paid-in capital 271,602 270,691
Deferred compensation (2,351) (2,519)
Accumulated other comprehensive loss (2,303) (287)
Accumulated deficit (231,020) (205,491)
--------- ---------
Total stockholders' equity 36,116 62,581
--------- ---------
Total liabilities & stockholders' equity $ 193,808 $ 219,329
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
(Restated)
REVENUES:
Licenses $ 18,171 $ 33,729
Services 29,116 26,343
-------- --------
Total revenues 47,287 60,072
-------- --------
OPERATING EXPENSES:
Cost of licenses 14,148 13,485
Cost of services 18,839 16,307
General and administration 10,135 7,500
Sales and marketing 6,634 5,152
Research and development 6,330 5,696
Amortization of intangibles 2,285 2,132
Acquisition costs -- 6,335
Non-recurring charges 12,054 18,754
Impairment of intangible assets 927 10,592
-------- --------
Total operating expenses 71,352 85,953
-------- --------
LOSS FROM OPERATIONS (24,065) (25,881)
OTHER INCOME (EXPENSE), NET:
Interest expense, net (1,204) (456)
Other income (expense), net (60) 72
-------- --------
Total other expense, net (1,264) (384)
-------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES (25,329) (26,265)
Provision for income taxes (200) (199)
-------- --------
NET LOSS $(25,529) $(26,464)
======== ========
NET LOSS PER BASIC AND DILUTED SHARE $ (1.00) $ (1.08)
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 25,404 24,523
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
--------- ---------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,529) $(26,464)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 3,457 4,287
Amortization of deferred compensation 168 197
Cash flows from discontinued operations (527) (1,081)
Write-off of capital software 1,150 --
Impairment of intangible assets 927 10,592
Noncash settlement of litigation 28 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net 12,021 142
Prepaid expenses and other 798 (2,394)
Accounts payable and accrued liabilities (3,124) 13,402
Deferred revenue 4,612 (880)
-------- --------
Cash used in operating activities (6,019) (2,199)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for immaterial acquisition (244) --
Purchase of non-marketable investments -- (3,000)
Maturity (purchase) of available-for-sale securities, net 9,557 (26,962)
Additions to equipment (1,089) (440)
Restricted cash -- (1,000)
Increase in notes receivable and other -- (1,448)
Capitalization of computer software development costs (643) (1,018)
-------- --------
Cash provided by (used for) investing activities 7,581 (33,868)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations (15) (71)
Borrowings (repayments) under notes and loans payable (2) (2,731)
Issuance of common stock through Employee Stock Purchase Plan 448 514
Proceeds from exercise of common stock options and
warrants to purchase stock 437 3,372
-------- --------
Cash provided by financing activities 868 1,084
-------- --------
Net increase (decrease) in cash and cash equivalents 2,430 (34,983)
CASH AND CASH EQUIVALENTS, beginning of period 11,565 66,531
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,995 $ 31,548
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unrealized gain (loss) on investments $ (2,016) $ 75
Security interest in marketable securities related to
line of credit (13,900) --
Conversion of note receivable to
equity investment in VantageMed $ -- $ 500
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1999 included in the Company's Annual Report on Form 10-K. The unaudited
information contained herein has been prepared on the same basis as the
Company's audited consolidated financial statements and, in the opinion of the
Company's management, includes all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information for
the periods presented. The interim results presented herein are not necessarily
indicative of the results of operations that may be expected for the full fiscal
year ending December 31, 2000 or any other future period.
2. Summary of Significant Accounting Policies
Revenues
The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue 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.
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.
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Cost of license revenues consists primarily of salaries, benefits, hardware
costs and allocated costs related to the installation process, and customer
support and royalties to third parties.
Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.
Net 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 the three months ended March 31, 2000 and
1999, no common equivalent shares are included in diluted weighted average
common shares outstanding for those periods.
Comprehensive Income
In 1997, the Financial Accounting Standards Board ("FASB") issued Statements
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which was adopted by the Company in the first quarter of 1998. SFAS No.
130 requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that has the new measure
of income on it.
The components of comprehensive loss for the three months ended March 31,
2000 are as follows:
THREE MONTHS
ENDED MARCH 31,
2000 1999
-------- --------
Net loss $(25,529) $(26,464)
Unrealized gain (loss) on
available-for-sale Securities (2,016) 75
-------- --------
Comprehensive loss $(27,545) $(26,389)
======== ========
3. Acquisitions
In March 1999, the Company completed the acquisition of the Compucare Company
("Compucare") by acquiring all the outstanding capital stock of Compucare in
exchange for 2,957,000 shares of common stock. The acquisition was accounted for
as a pooling of interests. Upon closing of the acquisition, the assets and
liabilities of Compucare were recorded at net book value and consisted primarily
of accounts receivable, fixed assets, accounts payable, accrued liabilities, and
deferred revenue.
4. Convertible Subordinated Debt
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 percent 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.
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5. Line of Credit and Debt Guarantee
In connection with the acquisition of Compucare in March 1999, the
Company assumed a $7,000,000 revolving credit and security agreement arrangement
with Compucare's bank. The Company paid interest at a rate of prime plus 1.5
percent. The line of credit was repaid and terminated by the Company in March
1999. Compucare also had $1,000,000 of stand-by letters of credit under a bank
financing agreement. In March 1999, the Company secured all the stand-by letters
of credit with a $1,000,000 certificate of deposit, recorded in the balance
sheet as restricted cash. As of March 31, 2000, none of the letters of credit
were drawn upon.
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 October 1, 2001.
The Company was required to meet specific financial covenants in connection with
this arrangement to guarantee the line of credit. 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 marketable securities of $13.9 million effective March 1, 2000. 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.
6. Discontinued Operations
In connection with the acquisition of Compucare in March 1999, the Company
assumed the net liabilities of discontinued operations from certain prior
acquisitions of Compucare. In November 1996, Compucare consummated the sale of
Antrim Corporation ("Antrim"), a wholly-owned subsidiary of Compucare. In
December of 1996, Compucare announced it was evaluating a plan of "spin-off" or
sale of operations of Health Systems Integration, Inc. ("HSII"), a wholly-owned
subsidiary of Compucare. Compucare completed transactions related to the sale of
HSII's intellectual property and the majority of its customer base in December
1997. The results of operations for the three months ended March 31, 2000 and
1999, respectively, present Antrim and HSII as discontinued operations. Results
from discontinued operations for the three months ended March 31, 2000 and 1999
were not material. The assets and liabilities related to the discontinued
operations have been segregated on each of the aforementioned balance sheets.
Net liabilities related to discontinued operations at March 31, 2000 were
$4,858,000.
7. Non-recurring Charges
During the first quarter of 2000, the Company recorded approximately $12.1
million of non-recurring charges. Those charges were primarily related to the
sunsetting of the EnOvation product, the write-down of certain other
receivables, the payments to employees for severance agreements and costs
associated with office closures. The charge also included costs related to
further product integration efforts and product consolidation.
During the first quarter of 1999, the Company recorded approximately $18.8
million of non-recurring charges. Those charges consisted primarily of severance
payments and future rent and lease obligations associated with the closing of
several duplicative operating facilities primarily within the Company's Business
Office Division and certain integration costs related to prior acquisitions.
Future rents and lease obligations are expected to be paid through July 2003. At
December 31, 1999, there was $1,467,000 accrued for future rents and lease
obligations.
The following table sets forth the Company's restructuring reserve and the
activity against the reserve (in thousands):
Additions
Balance at Charged to Balance at
Description December 31, 1999 Costs and Expenses Payments March 31, 2000
- ----------- ----------------- ------------------ -------- --------------
Rents and lease obligations ...... $1,467 $ -- $ (360) $1,107
------ ------- ------- ------
Total Restructuring Accrual .... $1,467 $ -- $ (360) $1,107
====== ======= ======= ======
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8. Impairment of Intangibles
During the quarter ended March 31, 2000, the Company recorded a $927,000
charge for the write-down of certain intangible assets. The intangible assets
were associated with the Business Office Division, and were related to the
acquisition of Velox in 1998. In accordance with SFAS No. 121, "Impairment of
Long-Lived Assets", projected cash flows from this product line were not
sufficient to cover future amortization of the intangible assets and therefore
were written-down during the quarter ended March 31, 2000.
During the quarter ended March 31, 1999, the Company recorded a $10,600,000
charge for the write-down of certain intangible assets. The intangible assets
were associated with the Business Office Division, and were related to the
acquisitions of Synergy in 1997, InterLink, Velox and American Hospital
Directory in 1998. In accordance with SFAS 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.
9. Segment Reporting
The Company reported on three operating segments in 2000 and 1999: the
Business Office Division(BO), the Health Information Management Division(HIM),
and the Enterprise Division(ENT). The 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 division's
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 imaging 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.
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 quarter ended March 31, 2000 and 1999, respectively, the following
table reports selected segment information required by SFAS No. 131:
2000 1999
------------------------------------------ ------------------------------------------
BO HIM ENT TOTAL BO HIM ENT TOTAL
------- ------ ---------- ------- ------- ------- ---------- --------
License revenues $ 4,736 $ 4,172 $ 9,263 $ 18,171 $13,556 $ 6,964 $ 13,209 $ 33,729
Service revenues 7,098 22,018 -- 29,116 5,751 20,592 -- 26,343
------- ------- ------- ------- ------- ------- ------- --------
Total revenue 11,834 26,190 9,263 47,287 19,307 27,556 13,209 60,072
Segment earnings (loss) $(4,278) $(2,086) $(19,165) $(25,529) $ 947 $(5,594) $(21,817) $(26,464)
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. In July 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB Statement No. 133 -- An amendment of FASB Statement
No. 133." SFAS No. 137 defers the implementation of SFAS No. 133 by one year.
This statement is not expected to have a material impact on the financial
condition or results of the operations of the Company.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical financial information contained herein, the matters
discussed in this Form 10-Q may be considered "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include declarations regarding the intent, belief or current expectations of the
Company and its management. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties; actual results could differ materially from
those indicated by such forward-looking statements. Among the important factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements are: (i) variability in quarterly operating
results, (ii) identification, consummation and assimilation of acquisitions,
(iii) dependence on large orders and customer concentration, (iv) dependence on
hospitals and demand for the Company products and services in the healthcare
information systems and services markets, (v) legislative or market-driven
reforms in the health care industry, (vi) the Company's ability to develop and
introduce new products, (vii) management of the Company's changing operations,
(viii) dependence on key personnel, (ix) development by competitors of new or
superior products or entry into the market of new competitors, (x) risks related
to product defects, (xi) risks associated with pending litigation, (xii)
dependence on intellectual property rights, (xiii) volatility in the Company's
stock price and historically low trading volume, (xiv) the success or failure of
strategic alliances, (xv) risk of interruption in data processing, (xvi) risks
associated with certain investments in early stage companies, and (xvii) other
risks identified from time to time in the Company's reports and registration
statements filed with the SEC.
Overview
QuadraMed Corporation (QuadraMed) leverages its industry expertise and
product breadth to deliver 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
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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. Additionally, reference is made to the
consolidated financial statements and notes thereto for the effect of such
acquisitions.
As of March 31, 2000, QuadraMed and its subsidiaries had more than 4,000
customers, approximately 80% of which were hospitals, located in all 50 states,
the District of Columbia, Canada, Puerto Rico, South Africa and Singapore. We
expect to maintain a high percentage of hospital customers, but also expect our
customer mix to transition to a higher percentage of other providers, including
integrated delivery health care systems ("IDSs"), as well as physicians, payors
and employers. No single customer accounted for more than 10% of our revenues in
1999 or the quarter ended March 31, 2000.
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 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
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the extension of applications to new markets or platforms using existing
technologies. The capitalized costs are amortized on a straight-line basis over
the estimated lives (usually five years) of the products, commencing when each
product is available to the market.
Revenues
License. License revenues for the quarter ended March 31, 2000 decreased
46.1% to $18.2 million, compared to $33.7 million in the same period last year.
The decrease in license revenues was due principally to a decrease in sales due
to delayed purchase decisions resulting from concerns regarding government
regulations and Y2K. License revenues include license, installation, consulting
and post-contract support fees, third-party hardware sales and other revenues
related to licensing of our software products.
Service. Service revenues for the quarter ended March 31, 2000 increased
10.5% to $29.1 million, compared to $26.3 million in the same period last year.
The increase in service revenues was due principally to new customers associated
with our health information management outsourcing, compliance and specialty
audit services business.
Cost of Revenues
Cost of licenses. Cost of license revenues for the quarter ended March 31,
2000 increased 4.9% to $14.1 million, compared to $13.5 million in the same
period last year. Cost of licenses consists primarily of salaries, benefits and
allocated costs related to software installations, hardware costs, customer
support and royalties to third parties. As a percentage of license revenues,
cost of licenses increased to 77.9% in the quarter ended March 31, 2000, from
40.0% in the same period last year. The increase in cost of licenses was
principally due to additional personnel hired to support software installations
and customer support. The increase in cost of licenses as a percentage of
license revenues during the quarter was principally due to the significant
decrease in licensing revenue.
Cost of services. Cost of service revenues for the quarter ended March 31,
2000 increased 15.5% to $18.8 million, compared to $16.3 million, in the same
period last year. Cost of services includes expenses associated with services
performed in connection with health information management and business office
outsourcing, compliance and consulting services. As a percentage of service
revenues, cost of services increased to 64.7% in the quarter ended March 31,
2000 from 61.9% in the same period last year. The increase in cost of services
was due principally to additional operating costs associated with the health
information management outsourcing services and to a lesser extent, the hiring
of additional compliance consultants. Cost of services as a percentage of
service revenues increased for the quarter ended March 31, 2000, principally due
to a lower revenue contribution from the health information management
outsourcing business unit because of the additional operating costs.
Operating Expenses
General and Administration. General and administration expenses for the
quarter ended March 31, 2000 increased 35.1% to $10.1 million, compared to $7.5
million in the same period last year, and as a percentage of total revenues
increased to 21.4% for the quarter ended March 31, 2000 from 12.5% in the same
period last year. The increase in general and administration expenses in
absolute dollars and as a percentage of total revenues for the quarter ended
March 31, 2000 was principally due to outside services provided, legal, auditor
fees, recruitment fees, along with an increase in employee benefit programs. In
addition, general and administration as a percentage of revenue increased due to
a smaller revenue base.
Sales and Marketing. Sales and marketing expenses for the quarter ended March
31, 2000 increased 28.8% to $6.6 million, compared to $5.2 million in the same
period last year, and increased as a percentage of total revenues to 14.0% from
8.6% in the same period last year. The increase in sales and marketing expenses
resulted principally from the addition of sales and marketing personnel in 2000
and higher advertising costs. As a percentage of total revenues, sales and
marketing expenses increased principally due to a smaller revenue base.
Research and Development. Research and development expenses for the quarter
ended March 31, 2000 increased 11.1% to $6.3 million, compared to $5.7 million
in the same period last year and as a percentage of total revenues increased to
13.4% from 9.5% in the same period last year. Research and development expenses
increased principally due to the addition of
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software developers for the purpose of migrating and integrating our products to
a consistent architecture. QuadraMed capitalized $643,000 and $1,018,000 of
software development costs in the three months ended March 31, 2000 and 1999,
respectively, which represented 9.2% and 15.2% of total research and development
expenditures for the three months ended March 31, 2000 and 1999, 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 for the quarter
ended March 31, 2000 increased to $2.3 million compared to $2.1 million in the
same periods last year. The increase in the amortization of intangibles is
principally due to the acquisition of MedData in the second quarter of 1999.
Acquisition Costs. QuadraMed incurred $6.3 million of acquisition costs for
the quarter ended March 31, 1999. These acquisition costs related to the
Compucare acquisition in 1999. Such costs were primarily for financial advisor
fees of approximately $5.4 million incurred by QuadraMed and Compucare and to a
lesser extent, legal and accounting fees of approximately $900,000. There were
no acquisition charges in the first quarter of 2000.
Non-recurring Charges. During the first quarter of 2000, QuadraMed recorded
approximately $12.1 million of non-recurring charges. Those charges were
primarily related to the sunsetting of the EnOvation product, the write-down of
certain other receivables, the payments to employees for severance agreements
and costs associated with office closures. The charge also included costs
related to further product integration efforts and product consolidation.
Non-recurring charges of $18.8 million in the first quarter of 1999 were
associated with the closing of duplicative operating facilities within several
of our business units. These charges consisted primarily of severance payments
and future rent and lease obligations.
Intangible assets. We recorded a $927,000 charge in 2000 to write-down
certain intangible assets related to acquisition of Velox in 1998. 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.
Interest Income (Expense), Net. Interest expense, net was $1.2 million in the
quarter ended March 31, 2000, compared to $456,000 for the same period last
year. Interest expense in 2000 and 1999 was principally due to QuadraMed's $115
million Convertible Subordinated Debentures which closed in April 1998,
partially offset by interest income from QuadraMed's cash and investments. The
increase in interest expense in 2000 compared to 1999 is due to less interest
income, from a smaller portfolio of investments, to offset the expense.
Provision for income taxes. Provision for income taxes in the quarter ended
March 31, 2000 was $200,000, which is consistent with the same period last year.
The provision for income taxes is primarily due to state and alternative minimum
tax liabilities on certain of the Company's legal entities. For financial
reporting purposes, a 100% valuation allowance has been recorded against the
Company's deferred tax assets under SFAS No. 109, "Accounting for Income Taxes."
Liquidity and Capital Resources
At March 31, 2000, QuadraMed had $14.0 million in cash and cash equivalents
compared to $11.6 million at December 31, 1999.
In October 1996, QuadraMed completed its initial public offering of common
stock, which resulted in net proceeds of approximately $26.4 million. In October
1997, we completed a follow-on offering of common stock, which resulted in net
proceeds of approximately $57.3 million. In April 1998, QuadraMed completed an
offering of $115.0 million principal amount of Convertible Subordinated
Debentures, including the initial purchasers' over-allotment option. The
debentures are due May 1, 2005 and bear interest, which is payable semi-annually
at 5.25 percent per annum. Proceeds from the offering were $110.8 million.
Net cash used in operating activities was $6.0 million and $2.2 million in
the three months ended March 31, 2000 and 1999, respectively. Net cash used in
operating activities
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in the three months ended March 31, 2000 related to the net loss for the
period, offset by the increase in the deferred revenue for annual maintenance
fees and the decrease in accounts receivable and unbilled receivables related
to the sunsetting of the EnOvation product. Net cash used in the operating
activities for the three months ended March 31, 2000 related to the net loss
for the period, offset by the write-down of certain intangible assets and the
increase in accounts payable and accrued liabilities related to the closure of
several duplicative office facilities.
Net cash provided by investing activities was $7.6 million in the three
months ended March 31, 2000. Net cash used for investing activities was $33.9
million in the three months ended March 31, 1999. Investing activities for 2000
were principally provided by the maturity of long-term investments. Investing
activities for 1999 primarily included the purchase of short and long-term
investments from the proceeds from our offering of $115.0 million Convertible
Subordinated Debentures and the additional equity investment of $3.0 million in
VantageMed.
Net cash provided by financing activities was $868,000 and $1.1 million in
the three months ended March 31, 2000 and 1999, respectively. Financing
activities in the three months ended March 31, 2000 primarily related to the
proceeds from the exercise of common stock options and the purchase through the
Employee Stock Purchase Plan. Financing activities in the three months ended
March 31, 1999 related to the repayment of the outstanding balances under the
line of credit assumed as part of the Compucare acquisition, offset by the
proceeds from the exercise of common stock options and purchase through the
Employee Stock Purchase Plan.
QuadraMed believes that its current cash and investments and borrowing
capacity will be sufficient to fund operations at least through December 31,
2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
QuadraMed's exposure to market risk for changes in interest rates primarily
relates to its investment portfolio and Subordinated Convertible Debentures. The
Company invests in high-quality issuers and includes money market funds,
corporate debt securities and securities issued by the United States Government.
It is the Company's intent to ensure the safety and preservation of its invested
principal funds by limiting default risk, market risk and reinvestment risk. The
Company continually reviews both its investment policy and its investments to
ensure this objective is being met.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We incurred net losses of $19.5 million and $12.3 million in fiscal years
1998 and 1999, respectively, and a net loss of $25.5 million for the fiscal
quarter ended March 31, 2000. As of March 31, 2000, our accumulated deficit was
$231.0 million. These losses include write-offs for acquired in-process research
and development of $14.5 million and $1.7 million in fiscal years 1998 and 1999
respectively. 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
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offer,
- - the loss of customers due to consolidation in the health care industry;
- - delays in product delivery requested by our customers;
- - the length of the sales cycle for our products or the timing of our
sales;
- - the amount of new potential contracts at the beginning of any particular
quarter;
- - budgeting cycles of our customers and changes in our customer's budgets;
- - our investment in marketing, sales, research and development, and
administrative personnel necessary to support our anticipated operations;
- - costs incurred in connection with our marketing and sale promotional
activities;
- - software defects and other quality factors in our products; and
- - general economic conditions and resulting effects on the health care
industry.
We cannot accurately forecast the timing of our customer purchases due to the
complex procurement decision process associated with most health care providers
and payors. As a result, we typically experience sales cycles that extend over
several quarters. In addition, certain products we acquired as a result of our
acquisition of Integrated Medical Networks in September 1998 and The Compucare
Company in March 1999 have higher average selling prices and longer sales cycles
than many of our other products. This may increase the volatility of our
quarterly operating results. Moreover, our operating expense levels, which will
increase with the addition of acquired businesses, are relatively fixed.
Accordingly, if future revenues are below our expectations, we would experience
a disproportionate adverse affect on our net income and financial results.
Further, it is likely that, in some future quarter, our revenues or operating
results may fall below the expectations of 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
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We intend to continue to expand in part through acquisitions of products,
technologies and businesses. Our ability to expand successfully through
acquisition depends on many factors, including:
- - the successful identification and acquisition of products, technologies
or businesses;
- - management's ability to effectively negotiate and consummate acquisitions
and integrate and operate the new products, technologies or businesses;
- - significant competition for acquisition opportunities in our industry,
which may intensify due to increasing consolidation in the health care
industry, thereby increasing the costs of capitalizing on acquisition
opportunities; and
- - 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.
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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 has been and is expected to be, derived
from the sale of software products and services to hospitals. Consolidation in
the health care industry, particularly in the hospital and managed care markets,
could cause a decrease in the number of existing or potential purchasers of our
products and services, which could adversely affect our business. In addition,
the decision to purchase our products often involves the approval of several
members of management of a hospital or health care provider. Consequently, it is
difficult for us to predict the timing or outcome of the buying decisions of our
customers or potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. We believe that the
commercial value and appeal of our products may be adversely affected if the
current health care financing and reimbursement system were to reverse 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
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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 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 March 31, 2000, approximately 2,272,230
shares were 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 March 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 were 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
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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:
- - 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.
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
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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 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
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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 were 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 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 has
been and is likely to continue 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;
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- - 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports On Form 8-K.
(a) 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)
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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)
4.4 Reserved.
4.5 Reserved.
4.6 Reserved.
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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. (22)
10.6 Lease dated February 26, 1996 for facilities located at
1345 Campus Parkway, Building M, Block #930, Lot #51.02,
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Neptune, New Jersey.(1)
10.7 Lease dated November 19, 1998 for facilities located at 22
Pelican Way, San Rafael, California.(22)
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.
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.
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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)
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.
27.1 Financial Data Schedule for the Quarter Ended 03/31/2000.
27.2 Financial Data Schedule for the Quarter Ended 03/31/1999.
(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
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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
(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.
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(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.
(22) Incorporated herein by reference from our Annual Report on Form 10-K, as
filed with the Commission on March 30, 2000, as amended May 1, 2000.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on March 31, 2000 in which it
reported changes in registrant's certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
QUADRAMED CORPORATION (Company)
Date: May __, 2000 By: /s/ JAMES D. DURHAM
-------------------------------------
James D. Durham
Chairman of the Board and Chief
Executive Officer (Principal
Executive Officer
By: /s/ JOHN V.CRACCHIOLO
-------------------------------------
John V. Cracchiolo
President, Chief Financial Officer
And Secretary (Principal
Financial Officer)
EXHIBIT INDEX
EXHIBIT
NO.
- -------
27.1 Financial Data Schedule for the Quarter Ended 03/31/2000
27.2 Financial Date Schedule for the Quarter Ended 03/31/1999
28