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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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.)
80 E. SIR FRANCIS DRAKE BLVD., SUITE 2A,
LARKSPUR, CA 94939
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 [X] No [ ]
As of May 5, 1998, there were 12,945,323 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 24.
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QUADRAMED CORPORATION
TABLE OF CONTENTS
<TABLE>
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 3
31, 1997
Condensed Consolidated Statements of Operations for the three months ended 4
March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the three months ended 5
March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
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 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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ASSETS (Restated)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $29,448 $43,689
Short-term investments 1,047 1,032
Accounts receivable, net 13,094 11,639
Unbilled receivables 4,793 4,018
Notes and other receivables 2,671 2,069
Prepaid expenses and other 1,602 1,659
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Total current assets 52,655 64,106
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Equipment, net 5,709 5,578
Capitalized software development costs, net 1,510 1,262
Acquired software, net 3,886 4,178
Long-term investments 1,200 1,200
Intangibles, net 31,126 15,836
Other 318 287
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Total assets $96,404 $92,447
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LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease
obligations $ 116 $ 163
Notes payable 73 1,753
Accounts payable 2,547 1,774
Accrued liabilities 9,884 13,815
Deferred revenue 6,248 5,204
Minority interest 1,037 658
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Total current liabilities 19,905 23,367
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Capital lease obligations, less current portion 334 285
Notes payable, less current portion -- 163
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Total liabilities 20,239 23,815
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STOCKHOLDERS' EQUITY:
Common stock 119 96
Additional paid-in capital 132,566 120,915
Accumulated deficit (56,520) (52,379)
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Total stockholders' equity 76,165 68,632
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Total liabilities & stockholders'
equity $ 96,404 $ 92,447
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998 1997
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REVENUES: (Restated)
<S> <C> <C>
Licenses $11,341 $6,571
Services 5,745 1,126
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Total revenues 17,086 7,697
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OPERATING EXPENSES:
Cost of licenses 3,940 2,591
Cost of services 3,310 861
General and administration 2,023 1,959
Sales and marketing 2,027 1,478
Research and development 1,777 1,022
Amortization of intangibles 779 184
Write-off of acquired research and
development in process 7,008 --
Non-recurring charges -- 334
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Total operating expenses 20,864 8,429
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LOSS FROM OPERATIONS (3,778) (732)
OTHER INCOME, NET:
Interest income, net 574 289
Other income, net 104 28
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Total other income (expense) 678 317
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LOSS BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST (3,100) (415)
Provision for income taxes (662) (33)
Minority interest in Medicus
earnings (379) --
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NET LOSS $(4,141) $ (448)
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NET LOSS PER BASIC AND DILUTED SHARE $ (0.34) $(0.06)
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BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 12,253 7,715
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
<S> <C> <C>
Net loss $(4,141) $ (448)
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Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation & amortization 1,477 614
Amortization of deferred compensation -- 35
Write-off of in-process research and
development 7,008 --
Minority interest in earnings of Medicus 379 --
Changes in assets and liabilities:
Accounts receivable and unbilled receivables (1,750) (620)
Prepaid expenses and other 81 (226)
Accounts payable and accrued liabilities (7,063) (1,156)
Deferred revenue 376 (96)
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Cash used in operating activities (3,633) (1,897)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Cabot Marsh,
net of cash acquired (2,748) --
Cash paid for the acquisition of Velox,
net of cash acquired (3,121) --
Cash paid for the acquisition of the InterLink
entities, net of cash acquired (1,412) --
Additions to equipment (635) (239)
Capitalization of computer
software development costs (274) (96)
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Cash used in investing activities (8,190) (335)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital
lease obligations (49) (21)
Repayments under notes payable (2,834) --
Proceeds from the issuance of common stock 465 103
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Cash provided by (used in)financing activities (2,418) 82
------ ------
Net decrease in cash and cash equivalents (14,241) (2,150)
CASH AND CASH EQUIVALENTS, beginning of period 43,689 20,804
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CASH AND CASH EQUIVALENTS, end of period $29,448 $18,654
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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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, 1997 included in the Company's Annual Report on Form 10-K/A. The unaudited
information contained herein has been prepared on the same basis as the
Company's audited consolidated financial statements and, in the opinion of the
Company's management, includes all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information for
the periods presented. The interim results presented herein are not necessarily
indicative of the results of operations that may be expected for the full fiscal
year ending December 31, 1998 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 is composed of business office outsourcing, cash flow management,
compliance and consulting services. The product suite is comprised of financial
management, decision support, compliance and EDI software. Each of these
elements includes a variety of products which can be licensed individually or as
a suite of interrelated products. Products are licensed either under term
arrangements (which range from one year to three years and typically include
monthly or annual payments over the term of the arrangement) or on a perpetual
basis.
Revenues from term licenses of financial management, decision support and EDI
products are recognized monthly or annually over the term of the license
arrangement, beginning at the date of installation. Revenues from perpetual
licenses of the financial management, decision support and EDI products 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.
The Company provides business office outsourcing, cash flow management
compliance and 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.
Cash flow management services typically consist of fixed fee services and
additional incentive payments based on a certain percentage of revenue returns
realized by the customer as a result of the services provided by the Company.
The fixed fee portion is recognized upon cash collection from the customer.
Compliance and consulting revenues are recognized as the services are provided.
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.
6
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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 INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of stock options and warrants (using the treasury stock 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, 1998 and 1997, no common equivalent shares are included in
diluted weighted average common shares outstanding.
In 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income," which
was adopted by the Company in the first quarter of 1998. SFAS No. 130 requires
companies to report a new, additional measure of income on the income statement
or to create a new financial statement that has the new measure of income on it.
The Company adopted SFAS No. 130 in the current period; however, the Company has
no items of other comprehensive income in any period presented.
3. ACQUISITIONS
In January 1998, the Company acquired entities affiliated with InterLink
Corporation for an aggregate purchase price of 65,224 shares of the Company's
common stock, the aggregate fair market value of which was $1,500,000 and
approximately $1,700,000 in cash and the extinguishment of notes receivable. In
connection with this acquisition, which was accounted for as a purchase, the
Company allocated the purchase price based upon the estimated fair value of the
assets and liabilities assumed. Approximately $1,300,000 of the total
intangibles was assigned to acquired in-process research and development and
written-off in the quarter ended March 31, 1998. The remaining balance will be
amortized over a ten year period.
In February 1998, the Company acquired Cabot Marsh Corporation ("Cabot
Marsh") for an aggregate purchase price of 382,767 shares of the Company's
common stock, the aggregate fair market value of which was $8,400,000 and
approximately $2,800,000 in cash. In connection with this acquisition, which was
accounted for as a purchase, the Company allocated the purchase price based upon
the estimated fair value of the assets and liabilities assumed. The SEC recently
formulated revised methodology regarding the valuation of acquired research and
development in-process. The SEC has indicated in certain cases that these
guidelines should be applied retroactively while it is the Company's belief that
its original treatment of this transaction was appropriate. The Company has
elected to retroactively adjust its charge for the write-off of acquired
research and development in-process for the acquisition of Cabot Marsh. The
Company has adjusted the amount of intangibles assigned to acquired in-process
research and development and written-off from the previously reported $6,200,000
to $4,200,000 in quarter ended March 31, 1998. The remaining balance will be
amortized over a ten year period.
In March 1998, the Company acquired Velox Systems Corporation ("Velox") for
an aggregate purchase price of 40,562 shares of the Company's common stock, the
aggregate fair market value of which was $1,400,000 and approximately $3,200,000
in cash. In connection with this acquisition, which was accounted for as a
purchase, the Company allocated the purchase price based upon the estimated fair
value of the assets and liabilities assumed. The Company has also elected to
retroactively adjust its charge for the write-off of acquired research and
development in-process associated with its acquisition of Velox. The Company has
adjusted the amount of intangibles assigned to acquired in-process research and
development and written-off from the previously reported $4,800,000 to
$1,500,000 in the quarter ended March 31, 1998. The remaining balance will be
amortized over a seven year average period.
The unaudited pro forma results of operations of the Company, Cabot Marsh
Corporation, Velox Systems Corporation and entities affiliated with InterLink
for the quarter ended March 31, 1998 are noted as follows:
<TABLE>
<CAPTION>
ACQUISITIONS
DURING THE QUARTER
QUADRAMED ENDED PRO FORMA PRO FORMA
CORPORATION MARCH 31, 1998(a) ADJUSTMENTS COMBINED
----------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenue $17,086 $1,753 - $18,839
Net income (loss) $(4,141) $(1,189) $7,008 $ 1,678
</TABLE>
7
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<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) per share $ (0.34) $ 0.12
</TABLE>
(a) Includes the results of operations of Cabot Marsh Corporation and entities
affiliated with InterLink for the month of January 1998 and Velox Systems
Corporation for the two months ended February 28, 1998. The results of
operations subsequent to January 31, 1998 for Cabot Marsh and entities
affiliated with InterLink and February 28, 1998 for Velox Systems
Corporation are included in QuadraMed Corporation.
4. SUBSEQUENT EVENTS
In April 1998, the Company completed an offering of $115 million principal
amount of Convertible Subordinated Debentures, including the underwriters'
over-allotment option. The debentures are due May 1, 2005 and bear interest at
5.25 percent per annum. The Debentures are convertible into Common Stock at any
time prior to redemption or final maturity, initially at the conversion price of
$33.25 per share (resulting in an initial conversion ratio of 30.075 shares per
$1,000 principal amount). Proceeds to the Company from the offering were
$111,550,000.
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 healthcare 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 Securities and Exchange Commission, including the
Annual Report on Form 10-K/A filed on April 20, 1998 and the registration
statement on Form S-4 which became effective on April 27, 1998.
OVERVIEW
QuadraMed develops, markets and sells software products and services designed
to enable health care providers and payors to increase operational efficiency,
improve cash flow, measure the cost of care and effectively administer managed
care contracts. In addition, QuadraMed provides business office outsourcing,
compliance and consulting services. The Company has expanded significantly since
its inception in 1993, primarily through the acquisition of other businesses,
products and services. Through March 1998, the Company has completed 17
acquisition transactions, three of which have been accounted for as poolings of
interests. Accordingly, the Company's consolidated financial statements have
been restated to include historical results of entities acquired on a pooling of
interests basis.
In January 1998, the Company acquired entities affiliated with InterLink
Corporation for an aggregate purchase price of 65,224 shares of the Company's
common stock, the aggregate fair market value of which was $1,500,000 and
approximately $1,700,000 in cash and the extinguishment of notes receivable. In
connection with this acquisition, which was accounted for as a purchase, the
Company allocated the purchase price based on upon the estimated fair value of
the assets and liabilities assumed. Approximately $1,300,000 of the total
intangibles was assigned to acquired in-process research and development and
written-off in the quarter ended March 31, 1998. The remaining balance will be
amortized over a ten year period.
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In February 1998, the Company acquired Cabot Marsh Corporation for an
aggregate purchase price of 382,767 shares of the Company's common stock, the
aggregate fair market value of which was $8,400,000 and approximately $2,800,000
in cash. In connection with this acquisition, which was accounted for as a
purchase, the Company allocated the purchase price based upon the estimated fair
value of the assets and liabilities assumed. The SEC recently formulated revised
methodology regarding the valuation of acquired research and development
in-process. The SEC has indicated in certain cases that these guidelines should
be applied retroactively while it is the Company's belief that its original
treatment of this transaction was appropriate. The Company has elected to
retroactively adjust its charge for the write-off of acquired research and
development in-process for the acquisition of Cabot Marsh. The Company has
adjusted the amount of intangibles assigned to acquired in-process research and
development and written-off from the previously reported $6,200,000 to
$4,200,000 in quarter ended March 31, 1998. The remaining balance will be
amortized over a ten year period.
In March 1998, the Company acquired Velox Systems Corporation for an
aggregate purchase price of 40,562 shares of the Company's common stock, the
aggregate fair market value of which was $1,400,000 and approximately $3,200,000
in cash. In connection with this acquisition, which was accounted for as a
purchase, the Company allocated the purchase price based upon the estimated fair
value of the assets and liabilities assumed. The Company has also elected to
retroactively adjust its charge for the write-off of acquired research and
development in-process associated with its acquisition of Velox. The Company has
adjusted the amount of intangibles assigned to acquired in-process research and
development and written-off from the previously reported $4,800,000 to
$1,500,000 in the quarter ended March 31, 1998. The remaining balance will be
amortized over a seven year average period.
As of March 31, 1998, QuadraMed and its subsidiaries had approximately 2,800
customers, approximately 80% of which were hospitals, located in all 50 states,
the District of Columbia and Canada. The Company expects to maintain a high
percentage of hospital customers, but also expects its customers mix to
transition to a higher percentage of other providers, including integrated
delivery health care systems ("IDSs"), as well as physicians, payors and
employers. For the year ended December 31, 1995 revenues from one customer were
11%. No single customer accounted for more that 10% of the Company's revenues in
1996, 1997 or the quarter ended March 31, 1998.
The Company's suite of products, called QuanTim, may be licensed either as an
integrated solution or as individual applications. The Company licenses its
software products pursuant to either a one-time payment for a perpetual license
with the option of purchasing support and maintenance or pursuant to annual
renewable licenses. The latter method provides the Company with a recurring
component to its revenues each year. Revenues from annual renewable license fees
are recognized monthly or annually over the term of the license arrangement.
Revenues from perpetual software license agreements are significantly greater
than license fees under contracts that have annual renewal provisions on a per
deal basis and are generally recognized upon shipment and involve one-time
license fees, which can cause the Company's revenues to vary from quarter to
quarter. To date, a substantial majority of customers who have purchased
perpetual licenses have also purchased annual support and maintenance
agreements, the revenues from which are recognized monthly.
In addition to its software products, the Company provides business office
outsourcing, cash flow management, compliance and consulting services. The
Company offers partial and full outsourcing of business office functions for
hospitals, physicians, home health care agencies and other providers. The
Company often uses its software products in delivering these services. The focus
of these services is to increase the cash flow and improve the efficiencies of
business operations for health care providers. The Company also provides cash
flow management services to update and organize a provider's standard billing
and charge information to facilitate appropriate reimbursement for the provider.
Business office outsourcing and cash flow management service revenues typically
consist of fixed monthly fees plus incentive-based payments based on a
percentage of dollars recovered for the provider. The monthly fees from
outsourcing services are recognized as revenues on a monthly basis, and
incentive fees are recognized as revenues based on the collection of accounts
from payors. Compliance and consulting revenues are recognized as the services
are provided. Such services include the formulation of a compliance program,
including compliance assessment, auditing and education expertise. The Company
has experienced operating margins at differing levels related to licenses and
services. The service business has historically realized fluctuating margins
that were significantly lower than margins associated with licenses.
The Company capitalizes a portion of its software costs for internally
developed software products. These capitalized costs relate primarily to the
development of new products and the extension of applications to new markets or
platforms using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives (usually five years) of the
products, commencing when each product is available to the market.
REVENUES
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License. License revenues for the quarter ended March 31, 1998 increased
72.6% to $11.3 million, compared to $6.6 million in the same period last year.
The increase in license revenues was due principally to new customers and
revenues associated with new customers from the acquisition of a majority
interest in a Medicus Systems Corporation in November 1997. License revenues
include license, installation, consulting and post-contract support fees,
third-party hardware sales and other revenues related to licensing of the
Company's software products.
Service. Service revenues for the quarter ended March 31, 1998 increased
410.2% to $5.7 million, compared to $1.1 million in the same period last year.
The increase in service revenues was due principally to acquisitions completed
in 1997 and, to a lesser extent, revenues associated with new customers acquired
in the Cabot Marsh acquisition in the first quarter of 1998.
COST OF REVENUES
Cost of licenses. Cost of license revenues for the quarter ended March 31,
1998 increased 52.1% to $3.9 million from $2.6 million in the same period last
year. Cost of licenses consists primarily of salaries, benefits and allocated
costs related to software installations, hardware costs, customer support and
royalties to third parties. As a percentage of license revenues, cost of
licenses decreased to 34.7% in the first quarter of 1998 from 39.4% in the first
quarter of 1997. The increase in cost of licenses was principally due to
additional personnel hired in 1997 to support software installations, while the
decrease in cost of licenses as a percentage of license revenues is principally
due to the leveraging of costs over an increased revenue base.
Cost of services. Cost of service revenues for the quarter ended March 31,
1998 increased 284.4% to $3.3 million from $861,000 in the same period last
year. Cost of services includes expenses associated with services performed in
connection with business office outsourcing, compliance and consulting services.
As a percentage of service revenues, cost of services decreased to 57.6% in the
first quarter of 1998 from 76.5% in the first quarter of 1997. The increase in
cost of services was due principally to additional operating costs, including
personnel associated with acquisitions during 1997, and, to a lesser extent,
additional operating costs associated with the acquisition of Cabot Marsh in the
first quarter of 1998. Cost of services as a percentage of service revenues
decreased principally due to the leveraging of costs over an increased revenue
base during the first quarter of 1998.
OPERATING EXPENSES
General and Administration. General and administration expenses for the
quarter ended March 31, 1998 increased 3.3% to $2.0 million from $1.96 million
in the same period last year and as a percentage of total revenues decreased to
11.8% from 25.5% in the same period last year. The decrease in general and
administration expenses as a percentage of total revenues for the quarter ended
March 31, 1998 was principally due to a larger revenue base and, to a lesser
extent, the reduction of certain overhead costs associated with prior
acquisitions.
Sales and Marketing. Sales and marketing expenses for the quarter ended March
31, 1998 increased 37.1% to $2.0 million from $1.5 million in the same period
last year, and decreased as a percentage of total revenues to 11.9% from 19.2%
in the same period last year. The increase in sales and marketing expenses
resulted principally from the addition of sales and marketing personnel and
advertising costs incurred in the first quarter of 1998. As a percentage of
total revenues, sales and marketing expenses decreased principally due to a
larger revenue base.
Research and Development. Research and development expenses for the quarter
ended March 31, 1998 increased 73.9% to $1.8 million from $1.0 million in the
same period last year and as a percentage of total revenues decreased to 10.4%
from 13.3% in the same period last year. Research and development expenses
increased principally due to additional software programmers hired from prior
acquisitions. The Company capitalized $274,000 and $96,000 of software
development costs in the three months ended March 31, 1998 and 1997,
respectively, which represented 13.4% and 8.6% of total research and development
expenditures for the three months ended March 31, 1998 and 1997.
Amortization of Intangibles. Amortization of intangibles for the quarter
ended March 31, 1998 increased to $779,000 from $184,000 in the same period last
year. The increase in the amortization of intangibles is due to the acquisitions
of Synergy in April 1997, Healthcare Revenue Management, Inc. in September 1997,
56.7% of Medicus in November 1997 and, to a lesser extent, the acquisitions of
Cabot Marsh, Velox and the entities affiliated with InterLink during the first
quarter of 1998. The Company expects
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the amortization of intangibles associated with the acquisition of Medicus to
increase in future periods upon the completion of that acquisition.
Non-Recurring Charges. Non-recurring start-up charges of $334,000 in the
first quarter of 1997 were associated with start-up costs incurred for the
claims processing arrangement entered into with EDI USA, Inc. during the first
quarter of 1997. No such charges were incurred in the quarter ended March 31,
1998 as this arrangement was terminated in December 1997.
Acquired Research and Development In-process. In connection with the
acquisitions of Cabot Marsh, Velox and entities affiliated with InterLink during
the first quarter of 1998, the Company expensed $7.0 million of acquired
in-process research and development as the technology had not achieved
feasibility and had no alternative future use. The Company has elected to adjust
its charge for acquired in-process research and development associated with the
acquisitions of Cabot and Velox to follow the SEC's revised methodology
regarding the valuation of acquired in-process research and development. The
related adjustment decreased the Company's acquired in-process research and
development from $12.2 million to $7.0 million in the quarter ended March 31,
1998.
Interest Income (Expense). Interest income was $574,000 in the quarter ended
March 31, 1998, compared to $289,000 for the same period last year. The increase
in interest income during the quarter ended March 31, 1998 was principally due
to higher average cash and cash equivalent balances as a result of the Company's
follow-on offering of Common Stock in October 1997, which raised net proceeds of
$57.3 million.
Provision for income taxes. Provision for income taxes increased to $662,000
in the quarter ended March 31, 1998 from $33,000 in the same period last year.
The provision for income taxes is primarily due to state and alternative minimum
tax liabilities. For financial reporting purposes, a 100% valuation allowance
has been recorded against the Company's deferred tax assets under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Minority Interest in Medicus Earnings. In connection with the acquisition of
a 56.7% interest in Medicus in November 1997, the Company recorded a minority
interest of 43.3% for the outstanding shares of common stock not owned by the
Company. For the quarter ended March 31, 1998, the Company recorded a minority
interest in the earnings of Medicus of $379,000. In May 1998, the Company is
expected to complete the acquisition of the remaining 43.3% of Medicus common
shares not owned by the Company.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company completed its initial public offering of common
stock, which resulted in net proceeds to the Company of approximately $26.4
million. In October 1997, the Company completed a follow-on offering of common
stock, which resulted in net proceeds to the Company of approximately $57.3
million. In April 1998, the Company completed an offering of $115.0 million
principal amount of Convertible Subordinated Debentures, including the
underwriters' over-allotment option. The debentures are due in 2005 and bear
interest at 5.25 percent per annum. Proceeds to the Company from the offering
were $112.6 million.
Net cash used in operating activities was $3.6 million and $1.9 million in
the quarters ended March 31, 1998 and 1997, respectively. Net cash used in
operating activities in the quarter ended March 31, 1998 was principally due to
a decrease in accounts payable and accrued liabilities as the Company paid down
liabilities associated with acquired companies. Net cash used in operating
activities in the quarter ended March 31, 1997 was principally due to a decrease
in accounts payable and accrued liabilities as the Company paid down accounts
payable and accrued liabilities with proceeds from its initial public offering
in October 1996.
Net cash used in investing activities was $8.2 million and $335,000 in the
quarters ended March 31, 1998 and 1997, respectively. Investing activities
primarily included cash paid for the acquisitions of Cabot Marsh, Velox and
entities associated with InterLink, as well as the purchase of capital equipment
and the capitalization of computer software development costs for the first
quarter of 1998.
Net cash used in financing activities in the quarter ended March 31, 1998 was
$2.4 million and net cash provided by financing activities in the quarter ended
March 31, 1997 was $82,000. Financing activities in the quarter ended March 31,
1998 related to the repayment of indebtedness of acquired companies, offset by
the proceeds from the issuance of common stock through the Company's Stock
Purchase Plan and the exercise of common stock options.
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In July 1997, the Company entered into an unsecured line of credit
arrangement to borrow up to $5,000,000 at the bank's prime rate. The line of
credit expires in July 1998 and contains financial and non-financial
restrictions including, among others, maintaining a minimum quick ratio, minimum
tangible net worth and a minimum ratio of total liabilities to tangible net
worth. The Company was in compliance with these covenants at March 31, 1998. The
line of credit is unsecured. There were no outstanding balances at March 31,
1998.
In November 1997, the Company acquired 3,111,105 shares of Common Stock of
Medicus Systems Corporation ("Medicus") or 56.7 percent of the then issued and
outstanding shares of Medicus Common Stock from certain selling stockholders.
Pursuant to individual stock purchase agreements (the "Stock Purchase
Agreements"), the Company agreed to pay the selling stockholders $7.50 per
share, in cash and a note payable, together with a warrant ("Warrant") entitling
the selling stockholders to acquire 0.3125 shares of QuadraMed Common Stock for
each share of Medicus Common Stock sold at a price of $24 per share subject to
adjustments and certain limitations. The consideration paid by the Company to
selling stockholders in November 1997 was approximately $21,700,000 in cash and
a note payable for approximately $1,600,000 to a selling stockholder which was
due and repaid by the Company in January 1998. The $24.3 million aggregate
purchase price of the remaining 43.3% interest of Medicus, which consists of
cash or QuadraMed Common Stock valued at $17.8 million and options and warrants
assumed valued at $6.5 million, will be allocated to the remaining acquired
assets and liabilities of Medicus, acquired software and intangible assets ($7.6
million), and acquired research and development in-process ($16.7 million) based
on a preliminary valuation of the acquired net assets. The QuadraMed Common
Stock component of the aggregate purchase price is subject to adjustment based
on the price of QuadraMed's Common Stock on the effective date of the merger.
The maximum aggregate purchase price of the remaining 43.3% interest of Medicus
is $27.0 million.
The Company believes that its current cash and investments in conjunction
with available bank borrowings will be sufficient to fund operations at least
through December 31, 1998.
FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly 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: integration of acquired businesses, 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 length of the
sales cycle or the timing of sales; the amount of new potential contracts 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.
The timing of customer purchases is difficult to predict given the complex
procurement decision process associated with most health care providers and
payors. As a result, the Company typically experiences sales cycles that extend
over several quarters. Moreover, the Company's operating expense levels, which
will increase with the addition of acquired businesses are relatively fixed. If
revenues are below expectations, net income is likely to be disproportionately
adversely affected. Further, it is likely that in some future quarter the
Company's revenues 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.
INTEGRATION OF ACQUIRED COMPANIES INTO THE COMPANY
The Company expects to realize significant benefits from its recent
acquisitions. Realizing these benefits will depend in significant part upon the
successful integration of the businesses, including their products and
employees, with the Company, and there can be no assurance that such integration
will not entail substantial costs, delays or other problems or that such
integration will be successfully completed. The effort to integrate the
businesses will divert the attention of management from other matters and will
result in significant operational and administrative expense. Any difficulties
encountered in the integration process could have a material adverse effect on
the revenues and operating results of the Company. In addition, the process of
integrating the businesses could cause
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the interruption of, or a disruption in, the business of the Company, which
could have a material adverse effect on the operations and financial performance
of the Company. Even if these businesses are successfully integrated into the
Company, the acquired operations may not achieve sales, productivity and
profitability commensurate with the Company's historical or projected operating
results. Failure to achieve such projected results would have a material adverse
effect on the Company's financial performance, and in turn, on the market value
of the Company's Common Stock. There can be no assurance that the Company will
realize any of the anticipated benefits of its recent acquisitions or that such
acquisitions will enhance the Company's business or financial performance.
DEPENDENCE ON ACQUISITION STRATEGY
The Company 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 increasing consolidation in
the health care industry, thereby 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 Company to the risks of
entering markets in which it 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, 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 have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS; NEED TO MANAGE CHANGING OPERATIONS
Acquisitions involve a number of special risks including, without limitation,
managing geographically dispersed operations, failure of the acquired business
to achieve expected results, failure to retain key personnel of the acquired
business, inability to integrate the new business into existing operations and
risks associated with unanticipated events or liabilities, potential increases
in stock compensation expense and increased compensation expense resulting from
newly hired employees, the assumption of unknown liabilities and potential
disputes with the sellers of one or more acquired entities, all of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Additionally, customer dissatisfaction or performance problems at a single
acquired company could have an adverse effect on the Company's reputation and
its sales and marketing initiatives. With the addition of the acquired
businesses, 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.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends in significant part upon the continued
service of its executive officers, its product managers and other key sales,
marketing and development personnel. The loss of the services of any of its
executive officers or the failure to hire or retain other key employees 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.
RISKS RELATED TO HOSPITAL AND MANAGED CARE MARKETS; UNCERTAINTY IN THE HEALTH
CARE INDUSTRY
A substantial portion of the Company's revenues have been and are expected to
be derived from the sale of software products and services to hospitals.
Consolidation in the health care industry, particularly in the hospital and
managed care markets, could cause a decrease in the number of existing or
potential purchasers of the Company's products and services, which could have a
material
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adverse effect 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 members of management of a hospital or health
care provider. Consequently, it is difficult for the Company to predict the
timing or outcome of the buying decisions of customers or potential customers.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company believes that
the commercial value and appeal of its products may be adversely affected if the
current health care financing and reimbursement system were to reverse its
current evolution to a managed care model back to a fee-for-service model. In
addition, many of the Company's 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
the Company's business, financial condition and results of operations. During
the past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain proposals to reform the health care
system have been and are being considered by Congress. These proposals, if
enacted, could change the operating environment for the Company's clients in
ways that cannot be predicted. Health care organizations may react to these
proposals by curtailing or deferring investments, including those for the
Company's products and services.
Changes in current health care financing and reimbursement systems could
result in the need for unplanned product enhancements, in delays or
cancellations of product orders or shipments or in the revocation of endorsement
of the Company's products by hospital associations or other customers. Any of
these occurrences could have a material adverse effect on the Company's
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
condition and results of operations. Other market-driven reforms could also have
adverse effects on the Company's business, financial condition and results of
operations.
HIGHLY COMPETITIVE MARKET
Competition in the market for the Company's products and services is intense
and is expected to increase. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. The Company's competitors include other providers of
health care information software and services, as well as health care consulting
firms. The combined company's principal competitors include: (i) CIS
Technologies, Inc., a division of National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for its EDI products; (ii) Envoy
Corp. and MedE AMERICA in the market for its claims processing service; (iii)
Healthcare Cost Consultants, Inc., a division of CIS Technologies, Inc., and
Trego Systems, Inc. in the market for its contract management products; (iv)
IMNET Systems, Inc., Optika Imaging Systems, Inc. and LanVision Systems, Inc. in
the market for its electronic document management products; (v) Transition
Systems, Inc. and Healthcare Microsystems, Inc., a division of Health Management
Systems Inc., HCIA Inc. and MediQual Systems, Inc., a division of Cardinal
Health, Inc., in the market for its decision support products; (vi) HMS and
ARTRAC, a division of Medaphis in the market for its business office outsourcing
services; and (vii) a subsidiary of Minnesota Mining and Manufacturing and
CodeMaster, in the market for its medical records products. In addition, current
and prospective customers evaluate the Company's 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 the
Company may enter the Company's markets. 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, changes in
customer requirements and political, economic or regulatory changes in the
health care industry 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.
SHARES ELIGIBLE FOR FUTURE SALE
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Future sales of Common Stock by existing stockholders under Rule 144 and Rule
701 of the Securities Act and through the exercise of registration rights could
have an adverse effect on the price of the Company's Common Stock. As of March
31, 1998, approximately 1,400,000 shares are available for sale in the public
market subject to compliance with Rule 144 or Rule 701. Certain existing
stockholders holding an aggregate of 497,429 shares of Common Stock as of March
31, 1998 (which amount does not include shares being registered by the Company
as discussed below) have rights under certain circumstances to require the
Company to register their shares for future sale.
During the second quarter of 1998, the Company expects to close the
acquisition of Medicus Systems Corporation. In connection with the acquisition
of Medicus, the Company may issue up to an aggregate of 1,800,000 shares of
Common Stock, which includes up to 972,224 shares of Common Stock issuable upon
the exercise of warrants issued in November 1997 to certain former stockholders
of Medicus (the "Warrants"). Any unexercised portion of the Warrants will expire
at the closing of the acquisition of Medicus. All of the shares of Common Stock
to be issued in connection with the acquisition of Medicus (including shares
issuable upon exercise of the Warrants being registered hereunder) are being
registered under the Securities Act and will be freely tradeable following the
closing of such acquisition. In December 1997, the Company issued 1,588,701
shares of Common Stock in connection with acquisition of Rothenberg and RHP (the
"RHP Mergers"). The shares of Common Stock issued in connection with the RHP
Mergers have been registered for resale under the Securities Act and are freely
tradeable. An additional 242,590 shares subject to registration rights have been
registered for resale and are freely tradeable. As a result of issuance of stock
in the acquisition of Medicus and RHP Mergers, substantial sales of the
Company's Common Stock could occur immediately after the registration of such
equity securities.
Sales of a substantial number of the aforementioned shares of the Company's
Common Stock could adversely affect or cause substantial fluctuations in the
market price of the Company's Common Stock and impair the Company's ability to
raise additional capital through the sale of its securities. Sales of
substantial amounts of Common Stock in the public market under Rule 144 under
the Securities Act, or otherwise, or the perception that such sales could occur,
may adversely affect prevailing market prices of the Common Stock and could
impair the future ability of the Company to raise capital through an offering of
its equity securities.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
The Company's 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 its operations and integrate the products and technologies
of acquired businesses. There can be no assurance that the Company 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 the Company 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
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. 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 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. The Company has received notice of a claim filed with the
United States Trademark Appeal Board for the cancellation of its registered
QuanTIM(R) trademark, and also has recently received a letter from a separate
third party challenging this trademark. There can be no assurance that the
Company will be successful in its defense of these or similar claims.
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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 initially introduced or when new versions are
released. Although QuadraMed conducts extensive testing, software errors have
been discovered in certain enhancements and products after their introduction.
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
products under development or in other enhancements or products after
commencement of commercial shipments, resulting in loss of revenues and
customers, delay in market acceptance, diversion of resources, damage to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect upon its business, financial condition and
results of operations.
YEAR 2000
Many computer systems have experienced or will experience problems processing
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional. The
Company is assessing both the internal readiness of its computer systems and the
compliance of its computer products and software sold to customers for
addressing the year 2000 issues. The Company expects to implement successfully
the systems and programming changes necessary to address the year 2000 issues
and does not believe that the cost of such actions will have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
its business, financial condition and results of operations.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. A significant number of the Company's customers are
running product versions that are not year 2000 compliant. While the Company has
been encouraging such customers to migrate to current product versions, it is
possible that the Company may experience increased expenses in addressing
migration issues and may lose customers. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in the material costs
to the Company. Some commentators have stated that significant amounts of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.
RISK OF INTERRUPTION OF DATA PROCESSING
The Company currently processes substantially all its customer data at its
facilities in Larkspur, California and Neptune, New Jersey. While the Company
backs up its data nightly and has safeguards for emergencies such as power
interruption or breakdown in temperature controls, it 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 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 OUTSOURCING BUSINESS
The Company provides compliance, consulting and business office outsourcing
and cash flow management services, including the billing and collection of
receivables. The infrastructure for the Company's outsourcing business was
acquired by the Company. In addition, the Company often uses its software
products to provide outsourcing services. As a result, the Company has not been
required to make significant capital expenditures in order to service existing
outsourcing contracts. However, if the Company experiences a period of
substantial expansion in its outsourcing business, it may be required to make
substantial investments in capital assets and personnel, and there can be no
assurance that it will be able to assess accurately the investment required and
negotiate and perform in a profitable manner any of the 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
a contract was based could have a material adverse effect on its 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 these errors.
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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. Such legislation 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 levels. 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.
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products and services relate to the payment,
collection, coding and billing of health care claims and the administration of
managed care contracts. Any failure by employees of the Company or by the
Company's products to accurately assess, 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 that is in excess of, or excluded from, its insurance coverage could
have a material adverse effect on its 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 the Company's
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 it to incur additional unanticipated research and development
expenses.
RISKS ASSOCIATED WITH CERTAIN INVESTMENTS
The Company has made, and may continue to make in the future, certain
investments in which it obtains a minority equity interest in certain early
stage companies. The Company does not have the ability to control the operations
of any of these companies. Investing in early stage companies is subject to
certain significant risks, and there can be no assurance that any of these
companies will be successful or achieve profitability or that the Company will
ever realize a return on its investments. In addition, to the extent any of such
companies fail or become bankrupt or insolvent, the Company may be required to
report a loss on some or all of its investment, which could have a material
adverse effect on its results of operations during a particular reporting
period.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law applicable to the Company could have the
effect of delaying, deterring or preventing a change in control of the Company,
including Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's Certificate of Incorporation and Bylaws contain certain provisions
that could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. The Company's Board of
Directors is classified into three classes of directors serving staggered,
three-
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year terms and has the authority without action by the Company's stockholders to
fix the rights and preferences and issue shares of preferred stock, and to
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. The Company's
Certificate of Incorporation provides that directors may be removed only by the
affirmative vote of the holders of two-thirds of the shares of capital stock of
the Company entitled to vote. Any vacancy on the Board of Directors may be
filled only by vote of the majority of directors then in office. Further, the
Company's Certificate of Incorporation provides that any "Business Combination"
(as therein defined) requires the affirmative vote of two-thirds of the shares
entitled to vote, voting together as a single class. These provisions, and
certain other provisions of the Certificate of Incorporation which may have the
effect of delaying proposed stockholder actions until the next annual meeting of
stockholders, could have the effect of delaying or preventing a tender offer for
the Company's Common Stock or other changes of control or management of the
Company, which could adversely affect the market price of the Company Common
Stock.
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 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.
Between January 1, 1998 and March 31, 1998, the Registrant issued the
following securities which were not registered under the Securities Act of 1933
(the "Securities Act"):
(a) the Registrant granted stock options to its employees under its 1996
Stock Incentive Plan covering an aggregate of 735,773 shares of the Registrant's
Common Stock, at exercise prices of $22.375 per share.
(b) the Registrant issued an aggregate of 65,224 shares of Common Stock in
connection with the acquisition of InterLink Corporation.
(c) the Registrant issued an aggregate of 382,767 shares of Common Stock in
connection with the acquisition of Cabot Marsh Corporation.
(d) the Registrant issued an aggregate of 40,562 shares of Common Stock in
connection with the acquisition of Velox Systems Corporation.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701.
During the period covered by this report, there were no changes in the rights
of holders of any class of securities of the Company.
On October 10, 1996, the Company's registration statement on Form SB-2 (SEC
File No. 333-39487) was declared effective pursuant to which the Company
completed its initial public offering (the "Offering"). During the quarter ended
March 31, 1998, the Company used the remainder of the net proceeds of the
Offering to complete acquisitions. As of March 31, 1998, the Company had applied
all net proceeds from the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE
18
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The information required by this item is incorporated by reference from Item
4 of the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997.
ITEM 5. OTHER INFORMATION. NONE
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
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<S> <C>
2.1 Assets Purchase Agreement dated December 31, 1995, by and among
QuadraMed Corporation, a Delaware corporation and California
corporation.(1)
2.2 Assets Purchase Agreement dated December 31, 1995, by and among
QuadraMed Acquisition Corporation, Kaden Arnone, Inc. and its
stockholders.(1)
2.3 Exchange Agreement dated June 25, 1996, by and among QuadraMed
Holdings, Inc., QuadraMed Corporation, and certain stockholders
listed on Schedule A thereto.(1)
2.4 Acquisition Agreement and Plan of Merger dated December 2, 1996,
between the Company and InterMed Acquisition Corporation, a
wholly owned subsidiary of the Company and InterMed Healthcare
Systems Inc. and its Stockholders.(2)
2.5 Acquisition Agreement and Plan of Merger, dated as of March 1,
1997, by and among QuadraMed Corporation, Healthcare Recovery
Acquisition Corporation, Healthcare Recovery Incorporated and
its Shareholders (the "HRI Acquisition Agreement and Plan of
Merger").(3)
2.7 Second Amendment to HRI Acquisition Agreement and Plan of
Merger, dated as of April 24, 1997.(3)
2.8 Acquisition Agreement and Plan of Merger, dated as of September
24, 1997, by and among QuadraMed Corporation, HRM Acquisition
Corporation, Healthcare Revenue Management, Inc. and its
Stockholders (the "Acquisition Agreement and Plan of
Merger").(4)
2.9 First Amendment to Acquisition Agreement and Plan of Merger,
dated as of September 29, 1997.(4)
2.10 Agreement and Plan of Reorganization by and between QuadraMed
Corporation and Medicus Systems Corporation, dated as of
November 9, 1997.(5)
2.11 Amendment No. 1 to Agreement and Plan of Reorganization, dated
as of February 26, 1998.(10)
2.12 Amendment No. 2 to Agreement and Plan of Reorganization, dated
as of March 24, 1998.(10)
2.13 Acquisition Agreement and Plan of Merger dated as of December
29, 1997, by and among QuadraMed Corporation and Resource Health
Partners, L.P.(6)
2.14 Acquisition Agreement and Plan of Merger dated as of February 2,
1998, by and among QuadraMed Corporation and Cabot Marsh
Corporation.(7)
3.1 Reserved.
3.2 Second Amended and Restated Certificate of Incorporation of the
Company.(1)
3.3 Reserved.
3.4 Amended and Restated Bylaws of the Company.(1)
4.1 Reference is made to Exhibits 3.2 and 3.4.(1)
4.2 Form of Common Stock certificate.(1)
4.3 Form of Exchange Agreement dated March 16, 1994, by and among
the Company, THCS Holding, Inc. and certain stockholders listed
on Schedule A thereto.(1) 4.4 Reserved.
4.5 Reserved.
4.6 Reserved.
4.7 Amended and Restated Agreement Regarding Adjustment Shares dated
June 25, 1996, by and among the Company, QuadNet Corporation and
the individuals listed on Schedule A thereto.(1)
4.8 Amended and Restated Shareholder Rights Agreement dated June 25,
1996, by and between the Company and the investors listed on
Schedule A thereto.(1)
4.9 Stock Purchase Warrant dated September 27, 1995 issued to James
D. Durham and amendment #1 thereto dated July 10, 1997. (8)
4.10 Reserved.
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20
<PAGE> 21
<TABLE>
<S> <C>
4.11 Form of Warrant to Purchase Common Stock.(1)
4.12 Registration Rights Agreement dated December 5, 1996, by and
between the Company and the investors listed on Schedule A
thereto.(8)
4.13 Registration Rights Agreement, dated as of December 29, 1997,
by and among QuadraMed Corporation, Resource Health Partners,
L.P. and certain stockholders.(6)
10.1 1996 Stock Incentive Plan of the Company.(1)
10.2 1996 Employee Stock Purchase Plan of the Company.(1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.(1)
10.5 Reserved.
10.6 Lease dated February 26, 1996 for facilities located at
1345 Campus Parkway, Building M, Block #930, Lot #51.02,
Neptune, New Jersey.(1)
10.7 Lease dated May 23, 1994 for facilities located at 80 East
Sir Francis Drake Boulevard, Suite 2A, Larkspur, California.(1)
10.8 Reserved.
10.9 Reserved.
10.10 Stock Purchase Agreement dated March 3, 1994, by and between the
Company and James D. Durham.(1)
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Reserved.
10.15 Credit Terms and Conditions dated July 2, 1997, by and between
Imperial Bank and the Company, with addendum thereto.(8)
10.16 Reserved.
10.16.1 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22 Reserved.
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26 Reserved.
10.27 Reserved.
10.28 Reserved.
10.29 Reserved.
10.30 Reserved.
10.31 Reserved.
10.32 Reserved.
10.32 Reserved.
10.34 Reserved.
10.35 Reserved.
10.36 Reserved.
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21
<PAGE> 22
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: March 12, 1999 By: /s/ KEITH M. ROBERTS
------------------------------------
Keith M. Roberts
General Counsel and
Chief Financial Officer (Principal
Financial Officer)
By: /s/ BERNIE J. MURPHY
------------------------------------
Bernie J. Murphy
Vice President, Finance and
Chief Accounting Officer (Principal
Accounting Officer)
24
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE
MONTHS ENDED MARCH 31, 1998 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 43,689
<SECURITIES> 1,032
<RECEIVABLES> 12,590
<ALLOWANCES> 951
<INVENTORY> 0
<CURRENT-ASSETS> 52,655
<PP&E> 15,729
<DEPRECIATION> 10,020
<TOTAL-ASSETS> 91,104
<CURRENT-LIABILITIES> 19,905
<BONDS> 0
0
0
<COMMON> 119
<OTHER-SE> 70,746
<TOTAL-LIABILITY-AND-EQUITY> 91,104
<SALES> 17,086
<TOTAL-REVENUES> 17,086
<CGS> 7,250
<TOTAL-COSTS> 13,614
<OTHER-EXPENSES> (299)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,479)
<INCOME-TAX> 662
<INCOME-CONTINUING> (4,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,141)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
