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THIS DOCUMENT IS A COPY OF THE FORM 10-QSB FILED ON NOVEMBER 15, 1996
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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)
------------------------
<TABLE>
<S> <C>
DELAWARE 52-1992861
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
80 E. SIR FRANCIS DRAKE BLVD., SUITE 2A,
LARKSPUR, CA 94939
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 461-7725
------------------------
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 [ ] No [X]
QUADRAMED CORPORATION HAS NOT BEEN SUBJECT TO THE FILING REQUIREMENTS OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, FOR THE PAST 90 DAYS. THIS FORM
10-QSB IS THE COMPANY'S FIRST FILING REQUIRED UNDER SUCH ACT.
As of October 31, 1996, there were 5,692,683 shares of the Registrant's
Common Stock outstanding, par value $0.01.
This quarterly report on Form 10-QSB consists of 26 pages of which this is
page 1. The Exhibit Index is located at page 23.
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<PAGE> 2
QUADRAMED CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995......................................... 3.
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995............. 4.
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995...................... 5.
Notes to Condensed Consolidated Financial Statements.......... 6.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 16.
Item 2. Changes in Securities......................................... 18.
Item 3. Defaults Upon Senior Securities............................... 18.
Item 4. Submission of Matters to a Vote of Security Holders........... 18.
Item 5. Other Information............................................. 18.
Item 6. Exhibits and Reports on Form 8-K.............................. 18.
SIGNATURES......................................................................... 20.
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 103 $ 121
Restricted cash.................................................. 31 163
Accounts receivable, net......................................... 3,265 2,413
Prepaid and other................................................ 328 203
------- -------
Total current assets..................................... 3,727 2,900
------- -------
EQUIPMENT AND SOFTWARE:
Equipment and software........................................... 2,175 1,883
Accumulated depreciation and amortization........................ (1,118) (662)
------- -------
Equipment and software, net.............................. 1,057 1,221
------- -------
OTHER ASSETS:
Capitalized software development costs, net...................... 541 196
Acquired software, net........................................... 1,698 1,940
Goodwill, net.................................................... 2,088 2,349
Deferred offering costs.......................................... 737 --
Other............................................................ 41 52
------- -------
Total other assets....................................... 5,105 4,537
------- -------
$ 9,889 $ 8,658
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit................................................... $ 973 $ --
Current maturities of capital lease obligations.................. 75 155
Accounts payable................................................. 1,928 1,119
Accrued liabilities.............................................. 1,675 1,725
Unremitted customer collections.................................. 75 62
Amount payable related to acquisition of Health Care Design
Systems....................................................... 1,250 4,250
Deferred revenue................................................. 1,000 1,970
------- -------
Total current liabilities................................ 6,976 9,281
------- -------
OTHER LIABILITIES:
Amount payable related to acquisition of Health Care Design
Systems....................................................... 3,750 4,500
Capital lease obligations, less current portion.................. 198 237
------- -------
Total other liabilities.................................. 3,948 4,737
------- -------
TOTAL LIABILITIES................................................ 10,924 14,018
------- -------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock.................................................. 25 18
Common stock..................................................... 4 3
Deferred compensation............................................ (359) --
Additional paid-in capital....................................... 13,668 9,139
Accumulated deficit.............................................. (14,373) (14,520)
------- -------
Total stockholders' equity (deficit)..................... (1,035) (5,360)
------- -------
$ 9,889 $ 8,658
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 4
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1996 1995 1996 1995
------ ------ ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Licenses............................................ $3,894 $ 727 $11,021 $ 2,130
Services............................................ 507 684 2,146 2,394
------ ------ ------- -------
Total revenues.............................. 4,401 1,411 13,167 4,524
------ ------ ------- -------
OPERATING EXPENSES:
Cost of licenses.................................... 1,449 393 4,518 1,154
Cost of services.................................... 713 834 2,135 2,881
General and administration.......................... 892 612 2,369 1,677
Sales and marketing................................. 509 263 1,676 810
Research and development............................ 542 49 1,641 194
Amortization of goodwill............................ 120 6 329 44
------ ------ ------- -------
Total operating expenses.................... 4,225 2,157 12,668 6,760
------ ------ ------- -------
INCOME (LOSS) FROM OPERATIONS......................... 176 (746) 499 (2,236)
OTHER INCOME (EXPENSE):
Interest income..................................... -- 14 -- 61
Interest expense.................................... (127) (2) (329) (45)
Other income, net................................... 1 3 (22) 8
------ ------ ------- -------
Total other income (expense)................ (126) 15 (351) 24
------ ------ ------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES....... 50 (731) 148 (2,212)
Provision for income tax............................ -- -- -- --
------ ------ ------- -------
NET INCOME (LOSS)..................................... $ 50 $ (731) $ 148 $(2,212)
====== ====== ======= =======
NET INCOME (LOSS) PER SHARE........................... $ 0.01 $(0.18) $ 0.03 $ (0.53)
====== ====== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING................... 4,568 4,144 4,493 4,144
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 148 $(2,212)
------- -------
Adjustments to reconcile net income (loss) to net cash used for
operating activities --
Depreciation & amortization......................................... 1,044 326
Amortization of deferred compensation............................... 22 --
Changes in assets and liabilities --
Accounts receivable, net............................................ (852) (139)
Restricted cash..................................................... 132 (163)
Other assets........................................................ 11 (41)
Prepaid expenses and other.......................................... (125) (133)
Accounts payable and accrued liabilities............................ 759 (473)
Borrowings to fund advances to customers............................ -- (241)
Unremitted customer collections..................................... 13 (147)
Deferred revenue.................................................... (970) 4
------- -------
Cash provided by (used in) operating activities................ 182 (3,219)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment & software...................................... (292) (121)
Capitalization of computer software development costs.................. (353) (142)
Additions to intangible assets......................................... (78) (25)
------- -------
Cash used for investing activities............................. (723) (288)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations..................... (119) (39)
Borrowings under notes payable......................................... (3,750) (750)
Borrowings under line of credit........................................ 973 --
Issuance of convertible preferred stock................................ 3,890 4,999
Issuance of common stock............................................... 209 5
Proceeds from exercise of common stock options......................... 57 --
Deferred offering costs................................................ (737) --
------- -------
Cash provided by financing activities.......................... 523 4,215
------- -------
Net increase (decrease) in cash and cash equivalents..................... (18) 708
CASH AND CASH EQUIVALENTS, beginning of period........................... 121 130
------- -------
CASH AND CASH EQUIVALENTS, end of period................................. $ 103 $ 838
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 279 $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
Conversion of notes payable to related parties to convertible preferred
stock............................................................... $ 3,890 $ 4,254
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. 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, 1995 included in the Company's Form
SB-2 Registration Statement declared effective by the SEC on October 10, 1996.
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, 1996 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. The product suite is comprised of three primary elements: financial
management, decision support and EDI software. Each of these elements includes a
variety of products which can be licensed individually or as a suite of
interrelated products. EDI and DRG[Check] products are generally licensed under
term arrangements (which range from one year to three years) which typically
include monthly payments over the term of the arrangement. The financial
management and decision support products are generally licensed on a perpetual
basis.
Revenues from term licenses of EDI products are recognized ratably over the
term of the license arrangement, beginning at the date of installation. Revenues
from perpetual licenses of the financial management and decision support
products and DRG[Check] term arrangements that are longer than one year are
recognized upon shipment of the software if there are no significant
post-delivery obligations, payment of the license fee is due within one year and
collectibility is probable. If an acceptance period is required, revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period.
The Company provides business office outsourcing and reimbursement
consulting services to certain hospitals under contract service arrangements.
Business office outsourcing revenues typically consist of fixed monthly fees
plus incentive-based payments that are based on a percentage of dollars
recovered for the provider for which the service is being performed. The monthly
fees are recognized as revenue on a monthly basis at the end of each month.
Incentive fees are recognized as the conditions upon which such fees are based
are realized based on collection of accounts from payors. Reimbursement
consulting services typically consist of fixed fee services and additional
incentive payments based on a certain percentage of revenue returns realized by
the customer as a result of the services provided by the Company. The fixed fee
portion is recognized as revenue upon the completion of the project. Incentive
amounts are recognized upon cash collection from the customer.
Other services are also provided to certain of the Company's licensees of
software product, which consist primarily of consulting and post-contract
customer support. Consulting services generally consist of installation of
software at customer sites and is recognized upon completion of installation.
Such services generally do not include customization or modification of the
underlying software code. If included in a license agreement,
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<PAGE> 7
such services are unbundled at their fair market value based on the value
established by the independent sale of such services to customers. If
customization of the software code is performed, the license and service fees
are recognized together on a percentage-of-completion basis during the
customization period. Post-contract customer support is recognized ratably over
the term of the support period. If support is included in a perpetual license
agreement or a DRG[Check] term arrangement that is longer than one year, such
amounts are unbundled from the license fee at its fair market value based on the
value established by the independent sale of such support to customers.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of Convertible Preferred Stock (using the if converted
method) and stock options and warrants (using the treasury stock method). Common
stock options and warrants are excluded from the computation if their effect is
antidilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the 12 months preceding the
filing date of the Company's initial public offering as if they were outstanding
for all periods presented (under the treasury stock method using an assumed
initial public offering price). Convertible Preferred Stock outstanding during
the period is included (using the if converted method) in the computation as
common equivalent shares even though the effect is antidilutive. Primary and
fully diluted earnings per share were substantially the same in all periods
presented.
3. INITIAL PUBLIC OFFERING
On October 10, 1996, the Company completed its initial public offering of
2,500,000 shares of common stock, which raised net proceeds of approximately
$28,000,000. A portion of the net proceeds were immediately used to retire
$5,000,000 of indebtedness incurred in connection with the Company's acquisition
of the net assets of Healthcare Design Systems and to retire $973,000
outstanding under its line of credit agreement.
4. STOCK PURCHASE PLAN
1996 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 will enable eligible employees to purchase Common Stock at 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 shares have been
issued under the Purchase Plan as of September 30, 1996.
5. REINCORPORATION IN DELAWARE
In June and July 1996, the Company's Board of Directors and shareholders,
respectively, authorized the reincorporation of the Company in Delaware, and on
August 29, 1996 such reincorporation was completed. Effective October 10, 1996,
the Company was authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock.
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 Quarterly Report on Form 10-QSB 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 and that
actual
7
<PAGE> 8
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) demand for the Company's
products and services in the health care information systems and services
markets, (iv) legislative or market-driven reforms in the health care industry,
(v) the Company's ability to develop and introduce new products, (vi) management
of the Company's changing operations, (vii) dependence on key personnel, (viii)
development by competitors of new or superior products or entry into the market
of new competitors, (ix) risks related to product defects, (x) risks associated
with pending litigation, (xi) dependence on intellectual property rights, (xii)
volatility in the Company's stock price, (xiii) the success or failure of
strategic alliances, (xiv) risk of interruption in data processing, and (xv)
other risks identified from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission,
including the registration statement on Form SB-2 related to the Company's
recent initial public offering.
OVERVIEW
QuadraMed develops, markets and sells a suite of financial management and
decision support software products and services designed to enable health care
providers to increase operational efficiency and measure the cost of care and to
facilitate the negotiation of managed care contracts and capitation agreements.
The Company was formed in September 1993 and has completed a number of
acquisitions. In October 1993, QuadraMed acquired the net assets of Coast Micro,
Inc., through which the Company acquired the predecessor of the Company's EDI
product. In November 1993, the Company acquired the net assets of Seton
Financial, through which the Company acquired the foundation of its business
office outsourcing business. In December 1995, the Company purchased the net
assets of Healthcare Design Systems, and thereby acquired the predecessors of
several of the Company's decision support and other related software products.
The Company has experienced operating margins at differing levels related
to licenses and services. The service business has historically realized
fluctuating margins that were significantly lower than margins associated with
licenses.
The Company believes it will experience seasonal patterns in its operating
results, with the second and fourth fiscal quarters having slightly higher
revenues and net income. The Company attributes this seasonality in large part
to software licenses that are based on annual renewals. In addition, the signing
of a major perpetual license agreement could generate an increase in revenues
and net income for any given quarter or fiscal year. The Company typically
experiences long sales cycles for new customers that may extend over several
quarters. As a result, the Company believes that quarterly results of operations
will continue to be subject to significant fluctuations and that its results of
operations for any particular quarter or year may not be indicative of results
of operations for future periods.
The Company believes continued significant investment in the development of
new products and the further development and integration of technologies
acquired from Healthcare Design Systems into the Company's suite of products, as
well as the expansion of its direct sales force, are critical to its success.
Specifically, the Company's development plans include enhancing the
functionality of its products and rewriting certain of its products, including
those acquired from Healthcare Design Systems, to function within the Microsoft
Windows(TM) NT operating system. Accordingly, the aggregate amounts invested in
research and development and sales and marketing are expected to increase.
REVENUES
Revenues for the quarter ended September 30, 1996 increased 212% to
$4,401,000, compared to $1,411,000 for the same period last year. For the nine
months ended September 30, 1996, revenues were $13,167,000, an increase of 191%
over revenues of $4,524,000 in the same period last year. The significant
increase in revenues was due principally to sales of newly acquired products,
integration of the Company's products and an increase in the number of
customers.
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License revenues for the quarter ended September 30, 1996 increased 436% to
$3,894,000, compared to $727,000 in the same quarter last year. License revenues
for the nine months ended September 30, 1996 increased 417% to $11,021,000
compared to $2,130,000 in the same period last year. The significant increase in
license revenues was primarily due to sales of newly acquired products and, to a
lesser extent, integration of the Company's products and an increase in new
customers.
Service revenues for the quarter ended September 30, 1996 decreased 26% to
$507,000, compared to $684,000 in the same period last year. For the nine months
ended September 30, 1996, service revenues decreased 10% to $2,146,000 compared
to $2,394,000 in the same period last year. The decrease in service revenues
reflects a small decrease in the number of customers in the Company's
outsourcing business which is comprised of projects with a defined period of
service. The Company believes that its planned augmentation in sales and
marketing efforts for this business will contribute to maintaining and perhaps
increasing service revenues related to the outsourcing business, although there
can be no assurance in this regard.
COST OF REVENUES
Cost of license revenues for the quarter ended September 30, 1996 increased
to $1,449,000 from $393,000 in the same period last year. Cost of licenses
includes installation, customer support and royalties. As a percentage of
license revenues, cost of licenses decreased to 37% in the third quarter of 1996
from 54% in the third quarter of 1995. For the nine months ended September 30,
1996, cost of license revenues increased to $4,518,000 from $1,154,000 in the
same period last year. As a percentage of license revenues, cost of licenses
decreased to 41% in the nine months ended September 30, 1996 from 54% in the
nine months ended September 30, 1995. The increase in cost of licenses reflects
an increase in the number installations. The decrease in cost of licenses as a
percentage of license revenues reflects the significant increase in license
revenues during the periods, combined with only a moderate increase in the costs
associated with such license revenues.
Cost of service revenues for the quarter ended September 30, 1996 decreased
to $713,000 from $834,000 in the same period last year. Cost of services
includes expenses associated with services performed in connection with business
office outsourcing and reimbursement consulting. As a percentage of service
revenues, cost of services increased to 141% in the third quarter of 1996 from
122% in the third quarter of 1995. The decline in cost of services reflects a
decrease in the number of personnel who support the service business. The
increase in cost of services as a percentage of service revenues is principally
due to fewer customers in the Company's business office outsourcing business.
Cost of services for the nine months ended September 30, 1996 decreased to
$2,135,000 from $2,881,000 in the same period last year. As a percentage of
service revenues, cost of services decreased to 99% in the nine months ended
September 30, 1996, from 120% in the same period last year. The decrease in cost
of services for the nine months ended September 30, 1996 and as a percentage of
total revenues is principally due to reduced personnel supporting the service
business.
OPERATING EXPENSES
General and administration. General and administration expenses for the
quarter ended September 30, 1996 increased 46% to $892,000, or 20% of total
revenues from $612,000, or 43% of total revenues in the same period last year.
For the nine months ended September 30, 1996, general and administration
expenses increased 41% to $2,369,000, or 18% of total revenues from $1,677,000,
or 37% of total revenues in the same period last year. Increases in general and
administration expense reflect the addition of personnel associated with an
acquisition in December 1995 and higher communication and travel costs
associated with establishing an office on the East Coast. The Company believes
that general and administration expenses will increase in the future, but should
decline slightly as a percentage of total revenues, although there can be no
assurance in this regard.
Sales and Marketing. Sales and marketing expenses for the quarter ended
September 30, 1996 increased 94% to $509,000, or 12% of total revenues from
$263,000, or 19% of total revenues in the same period last year. For the nine
months ended September 30, 1996, sales and marketing expenses increased 107% to
$1,676,000, or 13% of total revenues from $810,000, or 18% of total revenues in
the same period last
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year. The increase in sales and marketing expenses resulted primarily from the
addition of sales personnel and project managers, whose responsibilities include
selling and marketing their respective products. The increase in sales and
marketing expenses can also be attributed in part to increased advertising
expenditures. The Company believes sales and marketing expenses will continue to
increase primarily due to the hiring of additional sales and marketing
personnel, but should remain relatively constant as a percentage of total
revenues, although there can be no assurance in this regard.
Research and Development. Research and development expenses for the
quarter ended September 30, 1996 increased to $542,000, or 12% of total revenues
from $49,000, or 3% of total revenues in the same period last year. For the nine
months ended September 30, 1996, research and development expenses increased to
$1,641,000, or 12% of total revenues from $194,000, or 4% of total revenues in
the same period last year. The increase in research and development expenses
represents a significant increase in the number of personnel dedicated to the
development and enhancement of the Company's products. The Company intends to
continue to invest heavily in the development of new products and in the further
integration of acquired technologies into the Company's suite of products and,
accordingly, believes that these expenses will increase significantly in the
future.
Amortization of goodwill. Amortization of goodwill increased for the
quarter ended September 30, 1996 to $120,000 from $6,000 in the same period last
year. Amortization of goodwill also increased for the nine months ended
September 30, 1996 to $329,000 from $44,000 in the same period last year. The
increase in amortization is primarily the result of amortization of goodwill
associated with an acquisition in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $182,000 and
$(3,219,000) in the nine months ended September 30, 1996 and 1995, respectively.
Net cash used in operating activities in the nine months ended September 30,
1995 was primarily due to the net loss for the period and the payment of
accounts payable and accrued liabilities using the proceeds from the issuance of
convertible Preferred Stock. Net cash provided by operating activities in the
nine months ended September 30, 1996 was principally due to earnings before
depreciation and amortization and an increase in the Company's accounts payable
and accrued liabilities. This was partially offset by an increase in the
Company's accounts receivable and a decrease in deferred revenue. The increase
in accounts payable and accrued liabilities was principally due to deferred
offering costs for the Company's recent initial public offering and the deferral
of payments to vendors. The increase in accounts receivable was primarily due to
an increase in volume of monthly billings, while deferred revenue decreased
primarily due to the timing of payments from customers.
Net cash used in investing activities was $723,000 and $288,000 in the nine
months ended September 30, 1996 and 1995, respectively. Investing activities
primarily included additions to capital equipment and the capitalization of
computer software development costs.
Net cash provided by financing activities was $523,000 and $4,215,000 in
the nine months ended September 30, 1996 and 1995, respectively. Financing
activities in the nine months ended September 30, 1995 related to the issuance
of convertible Preferred Stock. In the nine months ended September 30, 1996,
financing related to the issuance of convertible notes and the exchange of such
notes for Series B Preferred Stock and borrowings under the Company's line of
credit.
The Company has a credit facility to borrow up to $1,200,000 at the bank's
prime rate plus 1.5% for additional working capital, and financing equipment
purchases. The credit facility contains certain restrictions, including, among
others, obtaining written approval from the bank prior to the payment of
dividends, as well as maintaining minimum liquidity, tangible net worth and net
income levels. The Company was in technical violation of certain covenants in
the credit facility concerning net worth and working capital. However, the
Company received a waiver from the bank to cure the technical violation of these
covenants. The outstanding balance under the line of credit at September 30,
1996 was $973,000 which was repaid in full after the closing of the Company's
recent initial public offering in October 1996.
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In connection with the acquisition of the net assets of Healthcare Design
Systems, the Company paid $3,800,000 at the closing and issued a note payable
for the purchase price of $5,000,000. After the closing of the initial public
offering in October 1996, the Company paid the $5,000,000 due under the note
payable, of which $1,500,000 was deposited into an escrow account until purchase
price adjustments have been finalized.
FACTORS AFFECTING FUTURE PERFORMANCE
DEPENDENCE ON HOSPITAL MARKET; MARKET ACCEPTANCE; DEPENDENCE ON STRATEGIC
ALLIANCES; SYSTEM ENHANCEMENTS
The Company's customers are typically hospitals and other health care
providers, and substantially all of the Company's revenues in 1995 and the nine
months ended September 30, 1996 were derived from the sale of software products
and services to hospitals. The Company's performance is dependent on continued
demand for its products in the health care information systems and services
industry. Consolidation in the health care information systems and services
industry could have a material adverse effect on the Company due to the decrease
in the number of potential purchasers of the Company's products and services or
the acquisition of one or more of the Company's customers by an acquiror that
uses products that compete with those of the Company. Legislative or
market-driven reforms could also have unpredictable effects on the Company's
business, financial condition and results of operations. In addition, the
decision to purchase the Company's products often involves the approval of
several individuals within hospitals and other health care providers.
Consequently, it is difficult for the Company to predict the timing or outcome
of the buying decisions of customers or potential customers.
The Company's future performance is also dependent in part on the success
of its marketing strategy which involves, to a substantial degree, a reliance
upon strategic alliance partners to sell the Company's products as a component
of the integrated systems being marketed by such partner or to endorse the
Company's products. If these strategic alliance partners elect to remove their
product endorsement or elect not to include the Company's products as components
in their integrated systems or are unsuccessful in achieving significant sales
of the systems into which the Company's products are to be integrated, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Moreover, the Company's future performance will depend in large part upon
the Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted significant resources to product enhancements and research
and development and believes that significant continuing development efforts
will be required to sustain the Company's operations. There can be no assurance
that the Company will successfully develop, acquire, introduce and market new
product enhancements or products, or that product enhancements or new products
developed by the Company will meet the requirements of hospitals and other
health care providers and achieve market acceptance.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has expanded, and intends to continue to expand, in substantial
part through acquisitions of products, technologies and businesses. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of products,
technologies or businesses and management's ability to effectively negotiate and
consummate acquisitions and integrate and operate the new products, technologies
or businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to consolidation in the health
care industry, increasing the costs of capitalizing on acquisition
opportunities. The Company competes for acquisition opportunities with other
companies that have significantly greater financial and management resources
than the Company. The inability to successfully identify appropriate acquisition
opportunities, consummate acquisitions or successfully integrate acquired
products, technologies, operations, personnel or businesses could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, acquisitions may divert management's
attention from other business concerns, expose the
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Company to the risks of entering markets in which the Company has no direct
prior experience or to risks associated with the market acceptance of acquired
products and technologies, or result in the loss of key employees of the Company
or the acquired company. Moreover, future acquisitions by the Company may result
in potentially dilutive issuances of equity securities, the incurrence of
additional debt and the recognition of amortization expenses related to goodwill
and other intangible assets, which could adversely affect the Company's
business, financial condition and results of operations. The acquisition of the
net assets of Healthcare Design Systems, completed in December 1995,
substantially increased the number and complexity of value added software
products offered by the Company. The further integration of the Healthcare
Design Systems products and operations into the products and operations of the
Company will divert management attention from other matters, will place further
pressure on the Company's executive officers and may result in additional
administrative expense. As part of the Healthcare Design Systems acquisition,
the Company must assimilate approximately 45 new employees into its operations.
Failure to complete successfully this integration of products and operations and
assimilation of new employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including the following: variability in demand
for the Company's products and services; the number, timing and significance of
announcements and releases of product enhancements and new products by the
Company and its competitors; the timing and significance of announcements
concerning the Company's present or prospective strategic alliances; the
termination of, or a reduction in, offerings of the Company's products and
services; the loss of customers due to consolidation in the health care
industry, delays in product delivery requested by customers; the timing of
revenue recognition; the amount of backlog at the beginning of any particular
quarter; customer budgeting cycles and changes in customer budgets; investments
by the Company in marketing, sales, research and development, and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; software defects and other quality factors;
and general economic conditions. In particular, the timing of revenue
recognition can be affected by many factors, including the timing of customer
purchases which are difficult to predict given the complex procurement decision
process that exists in most health care providers. As a result, the Company
typically experiences sales cycles that extend over several quarters for new
customers. There can be no assurance that the Company will not experience delays
in recognizing revenues in the future. Moreover, the Company's operating expense
levels are relatively fixed and, to a large degree, are based on anticipated
revenues. If revenues are below expectations, net income is likely to be
disproportionately affected. Further, it is likely that in some future quarter
the Company's revenues, backlog or operating results will be below the
expectations of securities analysts and investors. In such event, the trading
price of the Company's Common Stock would likely be materially adversely
affected.
HIGHLY COMPETITIVE MARKET
Competition in the market for the Company's products and services is
intense and is expected to increase. The Company's competitors include other
providers of health care information software and services, as well as health
care consulting firms. The Company's principal competitors include CIS
Technologies, Inc., a division of National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for its EDI products; Healthcare Cost
Consultants, Inc. ("HCC"), a division of CIS Technologies, Inc. and Trego
Systems, Inc. in the market for its contract management products; IMNET Systems,
Inc., Optika Imaging Systems, Inc. and LanVision Systems, Inc. in the market for
its electronic document management products; Transition Systems, Inc. ("TSI")
and Healthcare Microsystems, Inc., a division of Health Management Systems Inc.
("HMS"), HCIA Inc. and MediQual Systems, Inc. in the market for its decision
support products; and HMS and ARTRAC, a division of Medaphis Corp., in the
market for its business office outsourcing services. In addition, current and
prospective customers evaluate the Company's capabilities against the merits of
their existing information systems and expertise. Furthermore, major health care
information companies not presently offering products that compete with those
offered by the Company may
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enter the Company's markets. Increased competition could result in price
reductions, reduced gross margins, and loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. In addition, many of the Company's competitors and
potential competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry. As
a result of these factors, the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL
The Company's anticipated future operations may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand, train and manage its work force. There
can be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. In 1994, 1995
and 1996 the Company experienced significant turnover in its sales personnel,
including its Senior Vice President of Sales. The Company has hired in the last
year and intends to continue to hire a significant number of additional sales
personnel. Thus, a substantial percentage of the Company's sales force is
currently inexperienced in selling the Company's products and will remain so for
some time. In addition, competition for experienced sales personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain highly qualified employees in the future. If the Company is
unable to hire and retain such personnel, particularly those in key positions,
the Company's business, financial condition and results of operations could be
materially adversely affected. The Company's future success also depends in
significant part upon the continued service of its executive officers, its
product managers and other key sales, marketing, and development personnel. In
April 1996, the Company hired a new President, who must be successfully
integrated into its management team. The loss of the services of any of its
executive officers or other key employees or the inability of the Company to
successfully integrate its new President into its management team could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additions of new and departures of existing personnel can
be disruptive and could have a material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology or registered any of its copyrights with state or federal
agencies. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segment grows and the functionality of products overlaps.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations.
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RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products such as those offered by the Company frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive testing, the Company has discovered
software errors in certain of its enhancements and products after their
introduction. The Company is currently developing various new applications as
well as new versions of certain of its existing applications designed to
function with the Microsoft Windows(TM) NT operating system. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors or performance failures will not occur in these products under
development or in other enhancements or products after commencement of
commercial shipments, resulting in loss of revenues or delay in market
acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH PENDING LITIGATION
The Company is a defendant in several legal proceedings any of which, if
resolved adversely to the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company has agreed to issue to certain principal stockholders additional
shares of Common Stock without payment of further consideration in the event
that the Company is required to pay damages or issue equity securities in excess
of agreed-upon amounts to the plaintiffs in certain pending litigation. Any
issuance of Common Stock under this arrangement or in the related litigation
will cause dilution to the Company's other stockholders, and such dilution could
be significant.
RISK OF INTERRUPTION OF DATA PROCESSING
The Company currently processes large amounts of customer data at its
facilities in Larkspur, California and Neptune, New Jersey. While the Company
has safeguards for emergencies such as power interruption or breakdown in
temperature controls, the Company has no mirror processing site to which
processing could be transferred in the case of a catastrophic event at either of
these facilities. The occurrence of a major catastrophic event at either the
Larkspur facility or the Neptune facility could lead to an interruption of data
processing and could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS RELATED TO PRODUCT CONVERSION TO WINDOWS
The Company intends to enhance its products to run on the Microsoft
Windows(TM) NT operating system. Some potential clients may delay purchasing
decisions until Windows(TM) NT versions of the Company's products are available.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful and timely development, introduction and
marketing of the new Windows(TM) NT versions of its products, or that such
products will achieve or sustain market acceptance. The occurrence of product
conversion problems or the failure to achieve or sustain market acceptance of
the Windows(TM) NT versions could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATED TO OUTSOURCING BUSINESS
The Company provides business office outsourcing, including the billing and
collection of receivables. The infrastructure for the Company's outsourcing
business was acquired by the Company from Seton Financial in November 1993, and
the Company typically uses its software products to provide outsourcing
services. As a result, the Company has not been required to make significant
investments since the acquisition of Seton Financial in order to service
existing outsourcing contracts. However, if the Company experiences a period of
substantial expansion in its outsourcing business, the Company may be required
to make substantial investments in capital assets and personnel, and there can
be no assurance that the Company will be able to assess accurately the
investment required and negotiate and perform in a profitable manner any of the
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outsourcing contracts it may be awarded. The Company's failure to estimate
accurately the resources and related expenses required for a project or its
failure to complete its contractual obligations in a manner consistent with the
project plan upon which its contract was based could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's failure to meet a client's expectations in the
performance of its services could damage the Company's reputation and adversely
affect its ability to attract new business. Finally, the Company could incur
substantial costs and expend significant resources correcting errors in its
work, and could possibly become liable for damages caused by such errors.
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. The FDA could
determine in the future that any predictive aspects of the Company's products
make them clinical decision tools subject to FDA regulation. Compliance with
these regulations could be burdensome, time consuming and expensive. The Company
also could become subject to future legislation and regulations concerning the
development and marketing of health care software systems. These could increase
the cost and time necessary to market new products and could affect the Company
in other respects not presently foreseeable. The Company cannot predict the
effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
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 the Company's products by hospital associations
or other customers. Any of such occurrences could have a material adverse effect
on the Company's business, financial condition and results of operations. During
the past several years, the United States health care industry has been subject
to an increase in governmental regulation of, among other things, reimbursement
rates. Certain proposals to reform the U.S. health care system are periodically
under consideration by Congress. These programs may contain proposals to
increase government involvement in health care and otherwise change the
operating environment for the Company's customers. Health care organizations may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments in cost containment tools and related
technology such as the Company's products. The Company cannot predict what
impact, if any, such factors might have on its business, financial condition and
results of operations. In addition, many health care providers are consolidating
to create integrated health care delivery systems with greater regional market
power. As a result, these emerging systems could have greater bargaining power,
which may lead to price erosion of the Company's products. The failure of the
Company to maintain adequate price levels would have a material adverse effect
on the Company's business, financial
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condition and results of operations. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, financial condition
and results of operations.
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products and services relate to the payment or
collection of health care claims. Any failure by employees of the Company or by
the Company's products to accurately process or collect such claims could result
in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company in excess of, or excluded from, its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can
be no assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of its insurance
coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. In addition, if liability of the Company were
to be established, substantial revisions to its products could be required that
may cause the Company to incur additional unanticipated research and development
expenses.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. The trading price of
the Company's Common Stock could also be subject to significant fluctuations in
response to variations in quarterly results of operations, announcements of new
products or acquisitions by the Company or its competitors, governmental
regulatory action, other developments or disputes with respect to proprietary
rights, general trends in the industry and overall market conditions, and other
factors. The market price of the Company's Common Stock may also be
significantly affected by factors such as announcements of new products by the
Company's competitors, as well as variations in the market conditions in the
medical cost containment or software industries in general. The market price may
also be affected by movements in prices of equity securities in general.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Pendleton, et al. v. QuadraMed Corporation, et al. In February 1995,
Richard W. Pendleton ("Pendleton") and Daniel T. Soldahl ("Soldahl") filed a
lawsuit now pending in state court in Marin County, California, naming
QuadraMed, James D. Durham and Walter Channing, Jr. as defendants (collectively,
the "Defendants"). An amended complaint added Coast Micro, Inc. ("Coast") as a
plaintiff. The plaintiffs allege breach of contract, breach of the implied
covenant of good faith and fair dealing, intentional and negligent
misrepresentation, suppression of fact, breach of employment contract,
interference with contractual relationship and conspiracy in connection with the
October 1993 purchase by QuadraMed of the assets of Coast. Pendleton, Soldahl
and Coast allege money damages in the amount of $27 million and Pendleton and
Soldahl seek certain equitable relief, including the issuance of options
covering approximately two percent of the Company's outstanding Common Stock
after this offering, as well as punitive damages. In August 1995, QuadraMed
filed a cross-complaint naming Pendleton and VantageMed Corporation
("VantageMed") as cross-defendants (collectively, the "Cross-Defendants") and
alleging fraud, misappropriation of trade secrets, interference with economic
relations and conspiracy. QuadraMed is seeking an unspecified amount of money
damages and an injunction against disclosure or use by Cross-Defendants of
QuadraMed's confidential information and against further interference by
CrossDefendants with QuadraMed's economic relations with others.
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The Company believes, based in part on its discussions with its litigation
counsel, that it has meritorious defenses to the above-described claims and it
intends to defend the litigation vigorously. However, due to the nature of the
litigation and because the lawsuit is in the pre-trial discovery stage, the
Company cannot determine the total expense or possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. With regard to Pendleton and Soldahl's claims for the
issuance of stock options, it is the Company's position that such parties are
only entitled to stock options covering less than one percent of the Company's
outstanding capital stock after this offering. Regardless of the ultimate
outcome of the litigation, it could result in significant diversion of time by
the Company's personnel. While after consideration of the nature of the claims
and facts relating to the litigation, and after consultation with litigation
counsel, management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition and
results of operations, the results of these proceedings, including any potential
settlement, are uncertain, and there can be no assurance to that effect. The
proceedings are likely to cause the Company to issue stock options to each of
Pendleton and Soldahl, and, as a consequence, additional shares to certain
investors pursuant to an agreement, resulting in dilution to investors
participating in this offering.
THCS Holding, Inc. et al. v. Innovative Financial Strategies, Inc. et
al. In May 1994, THCS Holding, Inc. ("THCS") and QuadraMed filed a lawsuit now
pending in the Superior Court of California, Marin County, naming Innovative
Financial Strategies ("IFS"), Don McCrea-Hendrick ("McCrea-Hendrick") and Ron L.
Ziuraitis ("Ziuraitis") as defendants (collectively, the "Defendants"). THCS and
QuadraMed allege breach of contract, defamation, trade libel and interference
with economic relations and are seeking money damages and an injunction against
any further interference with their economic relationships. The litigation
follows a series of events which culminated in a December 1993 agreement under
which THCS sold its stock in Trim Healthcare Systems, Inc. ("Trim") to
McCrea-Hendrick and Ziuraitis. In October 1994, the Defendants (for purposes of
the cross-complaint, the "Cross-Complainants") filed a cross-complaint. In April
1996, Trim was added as a Cross-Complainant. The amended cross-complaint names
THCS, QuadraMed, certain of their investors and James D. Durham, QuadraMed's
Chief Executive Officer, as defendants and alleges, against QuadraMed,
fraudulent transfer, conspiracy, interference with prospective economic
advantage, intentional misrepresentation and conspiracy. The Company has agreed
to indemnify Mr. Durham against expenses incurred by him in this litigation for
actions in his capacity as an executive officer and director of QuadraMed. In
their claims against QuadraMed, the Cross-Complainants are seeking money damages
ranging in amount from approximately $750,000 to $9.8 million, punitive damages
and certain equitable relief. In connection with the November 1994 and January
1995 Series B financings of the Company, New Enterprises Associates V, L.P. and
CW Ventures II L.P., investors in QuadraMed, agreed to indemnify QuadraMed for
certain amounts paid in settlement or pursuant to a judgment in the litigation.
The Company believes, based in part on its discussions with its litigation
counsel, that it has meritorious defenses to such claims, and it intends to
defend the litigation vigorously. However, due to the nature of the litigation
and because the lawsuit is in the pre-trial discovery stage, the Company cannot
determine the total expense or possible loss, if any, that may ultimately be
incurred either in the context of a trial or as a result of a negotiated
settlement. Regardless of the ultimate outcome of the litigation, it could
result in significant diversion of time by the Company's personnel. While after
consideration of the nature of the claims and facts relating to the litigation,
and after consultation with litigation counsel, management believes that the
resolution of this matter will not have a material adverse effect on the
Company's business, financial condition and results of operations, the results
of these proceedings, including any potential settlement, are uncertain and
there can be no assurance to that effect.
Seton Financial. Seton Financial, a division of QuadraMed ("Seton"), is a
defendant in two separate lawsuits in which the plaintiffs allege losses
resulting from Seton's role in processing and collecting health care benefit
receivables for health care providers. The plaintiff in one action (filed in
January 1996 and pending in the United States District Court for the District of
New Jersey) is American Infusion, Inc. and the plaintiffs in the other action
(filed in October 1995 and pending in the Superior Court of California, Marin
County) are Option Care, Inc., River City Pharmacists, Inc., Jergensen/Zwick
Inc., Pharmacare, Inc., Pharmacare, Inc. Fresno, Pharmacare, Inc. Visalia,
Option Care Enterprises, Inc., and Owens Pharmacy, Inc. American
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Infusion alleges damages in the amount of $5.3 million and plaintiffs in the
other action allege damages in excess of $800,000. Both plaintiffs also seek
punitive damages. Each of the plaintiffs alleges losses as a result of Seton's
role in collecting health care benefit receivables. These actions are being
defended by the Company's errors and omissions insurance carrier under a
reservation of rights that entitles the insurance carrier to seek reimbursement
from the Company of amounts paid if it later determines that the losses are not
covered by the policy. The errors and omissions insurance policy has a policy
limit of $1.0 million. The Company believes, based in part on its discussions
with its litigation counsel, that it has meritorious defenses to all of the
claims, and it intends to defend the litigation vigorously. However, due to the
nature of the litigation and because the lawsuits are at an early pre-trial
stage, the Company cannot determine the total expense or possible loss, if any,
that may ultimately be incurred either in the context of a trial or as a result
of a negotiated settlement. While management believes that the resolution of
these matters will not have a material adverse effect on the Company's business,
financial condition and results of operations, the results of these proceedings,
including any potential settlement, are uncertain and there can be no assurance
to that effect.
ITEM 2. CHANGES IN SECURITIES. 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
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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)
3.1 The Company's Second Amended and Restated Certificate of Incorporation.(2)
3.2 The Company's Amended and Restated Bylaws.(3)
4.1 Reference is made to Exhibits 3.1 and 3.2.(2)(3)
4.2 Form of certificate of the Company's Common Stock.(1)
4.3 Form of Exchange Agreement dated March 16, 1994, by and among the Company, THCS
Holding, Inc. and certain stockholders listed on Schedule A thereto.(1)
4.4 Amended and Restated Agreement Regarding Adjustment Shares dated June 25, 1996, by
and among the Company, QuadNet Corporation and the individuals listed on Schedule A
thereto.(4)
4.5 Amended and Restated Shareholder Rights Agreement dated June 25, 1996, by and between
the Company and the investors listed on Schedule A thereto.(5)
4.6 Stock Purchase Warrant dated September 27, 1995 issued to James D. Durham.(6)
4.7 Stock Purchase Warrant dated June 26, 1996 issued to James D. Durham.(7)
4.8 Form of Warrant to Purchase Common Stock.(8)
10.1 1996 Stock Incentive Plan of the Company.(1)
10.2 1996 Employee Stock Purchase Plan of the Company.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4 Form of Indemnification Agreement between the Company and its directors and executive
officers.(1)
10.5 Reserved.
10.6 Lease dated February 26, 1996 for facilities located at 1345 Campus Parkway, Building
M, Block #930, Lot #51.02, Neptune, New Jersey.(1)
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10.7 Lease dated May 23, 1994 for facilities located at 80 East Sir Francis Drake
Boulevard, Suite 2A, Larkspur, California.(1)
10.8 Lease Agreement dated December 14, 1989 for facilities located at 1130 East Shaw
Avenue, Suites 108 and 209, Fresno, California.(1)
10.9 Employment Agreement dated March 1, 1994 by and between James D. Durham and the
Company.(1)
10.10 Stock Purchase Agreement dated March 3, 1994, by and between the Company and James D.
Durham.(1)
10.11 Letter dated April 17, 1995 from James D. Durham, as President and Chief Executive of
QuadraMed Corporation, to John V. Cracchiolo regarding terms of employment.(1)
10.12 Letter dated March 14, 1996 from James D. Durham, as President and Chief Executive
Officer of QuadraMed Corporation, to Robert Burrows regarding terms of employment.
10.13 Letter from Walter Channing to Thomas McNulty effective December 1995, regarding
service as Chairman of the Board of Directors.(1)
10.14 Agreement dated May 11, 1994, by and between Colson Investments and the Company.(1)
10.15 Credit Terms and Conditions dated January 18, 1996, by and between Imperial Bank and
the Company, with addendum thereto.(1)
10.16 Security and Loan Agreement (Accounts Receivable) dated January 18, 1996, by and
between Imperial Bank and the Company(1), and as amended by Amendment No. 1 to
Security and Loan Agreement (Accounts Receivable) dated January 18, 1996, by and
between the Company and Imperial Bank.
10.17 General Security Agreement (Tangible and Intangible Personal Property) dated January
18, 1996, by and between Imperial Bank and the Company.(1)
10.18 ERA/Secondary Billing and Claimstar Licenses Agreement dated April 10, 1995, by and
between the Company and Blue Cross of California, as amended by the Second Amendment
dated April 19, 1995.(1)
10.19 Cooperative Agreement dated June 30, 1995, by and between The Compucare Company and
the Company, with Amendment thereto.(1)
10.20 Agreement dated April 1, 1995, by and between the Company and National Electronic
Information Corporation (now Envoy Corporation).(1)
10.21 QuadraMed Corporation Cooperative Marketing Agreement dated August 15, 1995, by and
between the Company and Health Systems Design Corporation.(1)
10.22 Agreement to Market QuadraMed Software dated June 1, 1996 between the Company and
Health Communication Services, Inc.(1)
10.23 Joint Marketing and Services Agreement dated November 1, 1995, by and between
QuadraMed Acquisition Corporation, the Company and Kaden Arnone, Inc.(1)
10.24 License Agreement dated November 1, 1994, by and between the Company and
Learned-Mahn, Inc.(1)
10.25 Master Agreement dated June 1, 1995, by and between Premier Health Alliance, Inc. and
the Company.(1)
10.26 Agreement dated October 3, 1995, by and between Shared Services Healthcare, Inc. and
the Company.(1)
10.27 Letter Agreement dated March 3, 1994 by and between NJUP Plus and the Company.(1)
10.28 Endorsement Agreement dated November 1, 1994, by and between ServiShare of Iowa and
the Company, relating to ContraQ.(1)
10.29 Endorsement Agreement dated November 1, 1994, by and between ServiShare of Iowa and
the Company, relating to ClaimStar.(1)
10.30 Memorandum of Understanding dated October 24, 1995, by and between the Company and
St. Anthony Publishing, Inc. (now NexUS Capital Healthcare Information Corp.).(1)
10.31 Software Development Agreement dated August 3, 1995, by and between St. Joseph's
Hospital of Atlanta, Inc. and the Company.(1)
</TABLE>
19
<PAGE> 20
<TABLE>
<C> <S>
10.32 Letter Agreement dated December 27, 1995, by and between the Company and UniHealth,
with related Joint Development Proposal for a Capitation Management System dated
October 20, 1995.(1)
11.1 Calculation of Net Income (Loss) Per Share.
27.1 Financial Data Schedule.
</TABLE>
- - ---------------
(1) Incorporated herein by reference from the exhibit with the same number to
the Company's Registration Statement on Form SB-2, No. 333-5180, 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
(collectively "Form SB-2").
(2) Incorporated herein by reference from Exhibit 3.2 to the Company's
Registration Statement on Form SB-2.
(3) Incorporated herein by reference from Exhibit 3.4 to the Company's
Registration Statement on Form SB-2.
(4) Incorporated herein by reference from Exhibit 4.7 to the Company's
Registration Statement on Form SB-2.
(5) Incorporated herein by reference from Exhibit 4.8 to the Company's
Registration Statement on Form SB-2.
(6) Incorporated herein by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2.
(7) Incorporated herein by reference from Exhibit 4.10 to the Company's
Registration Statement on Form SB-2.
(8) Incorporated herein by reference from Exhibit 4.11 to the Company's
Registration Statement on Form SB-2.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUADRAMED CORPORATION
(Company)
Date: November 13, 1996 By: /s/ JOHN V. CRACCHIOLO
------------------------------------
John V. Cracchiolo
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
- - ------- ------------
<C> <S> <C>
10.16 Amendment No. 1 to Security and Loan Agreement (Accounts Receivable) dated
January 18, 1996, by and between QuadraMed Corporation and Imperial
Bank...................................................................... 24
11.1 Calculation of Net Income (Loss) Per Share................................ 25
27.1 Financial Data Schedule................................................... 26
</TABLE>
21
<PAGE> 1
EXHIBIT 10.16
AMENDMENT NO. 1 TO SECURITY AND LOAN AGREEMENT (ACCOUNTS
RECEIVABLE) DATED JANUARY 18, 1996, BY AND BETWEEN
QUADRAMED CORPORATION ("BORROWER") and IMPERIAL BANK
("BANK")
- - ---------------------------------------------------------
This Amendment No. 1 is executed as of September 5, 1996.
Page 1, Paragraph 1 of the Security and Loan Agreement (Accounts Receivable)
(herein called "Agreement") is hereby amended in its entirety to read as
follows:
1. Bank hereby commits, subject to all of the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as may be
determined by Bank up to, but no exceeding in the aggregate unpaid principal
balance, the following Borrowing Base:
80% of Eligible Accounts and in no event more than $1,2000,000.00
Page 1, Paragraph 4(C) of the Agreement is hereby amended in its entirety to
read as follows:
4.C. "Eligible Accounts" means all of Borrower's Accounts excluding, however,
(1) all Accounts under which payment is not received within 90 days from
invoice date, (2) all Accounts against which the account debtor or any other
person obligated to make payment thereon asserts any defense, offset,
counterclaim or other right to avoid or reduce the liability represented by the
Account and (3) any Accounts if the account debtor or any other person liable
in connection therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or whose
credit standing in unacceptable to Bank and Bank has so notified Borrower.
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall determine are eligible from time to time.
Page 2, Paragraph 17 is to be added as follows:
If any delinquent payment, interest payment, principal payment or principal
balance payment due hereunder is delinquent ten or more days, Obligor agrees to
pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing in this paragraph is to be construed as
any obligation on the part of the holder of this note to accept payment of any
payment pass due or less than the total unpaid principal balance after
maturity. All principals shall be applied first to any late charges owing, than
to interest and the remainder, if any, to principal.
All other terms, conditions and provisions of the Agreement shall remain
unchanged and in full force and effect.
Quadramed Corporation Imperial Bank
By: /s/ John V. Cracchiolo By: /s/ Neal A. Tandowsky
------------------------ -------------------------
John V. Cracchiolo Neal A. Tandowsky
Executive Vice President Vice President
<PAGE> 1
EXHIBIT 11.1
QUADRAMED CORPORATION
STATEMENTS OF COMPUTATION OF COMMON SHARES AND EQUIVALENTS
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1996 1995 1996 1995
------- ------ ------ -------
<S> <C> <C> <C> <C>
Primary
Net income (loss) $ 50 $ (731) $ 148 $(2,212)
======= ====== ====== =======
Weighted average common shares outstanding 385 334 352 334
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 2,789 835 1,485 835
Common stock option grants 9 -- 210 --
Adjustments to reflect requirements of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83:
Common stock issuances -- 50 33 50
Preferred stock issuances -- 1,960 1,307 1,960
Preferred stock and common stock warrants 1,385 965 1,106 965
------- ------ ------ -------
Total weighted average common shares and
equivalents 4,568 4,144 4,493 4,144
======= ====== ====== =======
Net income (loss) per share $ 0.01 $(0.18) $ 0.03 $ (0.53)
======= ====== ====== =======
Fully Diluted
Net income (loss) $ 50 $ (731) $ 148 $(2,212)
======= ====== ====== =======
Weighted average common shares outstanding 385 334 352 334
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 2,789 835 1,485 835
Common stock option grants 9 -- 210 --
Adjustments to reflect requirements of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83:
Common stock issuances -- 50 33 50
Preferred stock issuances -- 1,960 1,307 1,960
Preferred stock and common stock warrants 1,385 965 1,106 965
------- ------ ------ -------
Total weighted average common shares and
equivalents 4,568 4,144 4,493 4,144
======= ====== ====== =======
Net income (loss) per share $ 0.01 $(0.18) $ 0.03 $(0.53)
======= ====== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 103,000
<SECURITIES> 0
<RECEIVABLES> 3,473,000
<ALLOWANCES> 208,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,727,000
<PP&E> 2,175,000
<DEPRECIATION> 1,118,000
<TOTAL-ASSETS> 9,889,000
<CURRENT-LIABILITIES> 6,976,000
<BONDS> 0
0
25,000
<COMMON> 4,000
<OTHER-SE> (705,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,889,000
<SALES> 13,167,000
<TOTAL-REVENUES> 13,167,000
<CGS> 6,653,000
<TOTAL-COSTS> 12,668,000
<OTHER-EXPENSES> 22,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 329,000
<INCOME-PRETAX> 148,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 148,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
