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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-21031
QUADRAMED CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1992861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 EAST SIR FRANCIS DRAKE BLVD., SUITE 2A, LARKSPUR, CALIFORNIA, 94939
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 461-7725
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
[ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of March 25, 1998 was approximately $384,000,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 25, 1998, approximately 12,581,405 shares of the
Registrant's Common Stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on or about June 1, 1998 are incorporated by
reference into Part III.
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QUADRAMED CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I...................................................................... 1
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 17
ITEM 3. LEGAL PROCEEDINGS.................................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 17
PART II..................................................................... 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................ 19
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA..................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 21
ITEM 8. FINANCIAL STATEMENTS............................................... 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 37
PART III.................................................................... 37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 37
ITEM 11. EXECUTIVE COMPENSATION............................................ 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 37
PART IV..................................................................... 38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 38
SIGNATURES.................................................................. 44
POWER OF ATTORNEY........................................................... 45
INDEX TO FINANCIAL STATEMENTS............................................... 48
EXHIBIT INDEX............................................................... 70
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PART I
ITEM 1. BUSINESS.
Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-K may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 results could differ materially from those indicated by such
forward-looking statements. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include those risks identified in "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Certain Factors
That Might Affect Future Operating Results" and other risks identified from time
to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission, including the registration statements on
Form S-4, filed on January 23, 1998 and Form S-3, filed on January 27, 1998.
OVERVIEW
QuadraMed Corporation ("QuadraMed" or the "Company") 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.
Quadramed's QuanTIM(R) suite of products as an integrated offering of EDI,
financial management, and decision support and compliance solutions for both
providers and payors. In addition, QuadraMed provides compliance, consulting and
business office outsourcing services. To date, the Company's products have been
purchased by over 2,800 health care providers in all 50 states, the District of
Columbia, Canada, South Africa and the Philippines.
The Company was incorporated in September 1993 in California under the
name QuadraMed Corporation and reincorporated in Delaware in 1996. The Company
has expanded significantly since its inception, primarily through the
acquisition of other businesses, products and services. Since its inception, the
Company has completed 17 acquisition transactions, as reflected in the following
table:
COMPANY ACQUIRED DESCRIPTION OF COMPANY ACQUIRED DATE ACQUIRED
Coast Micro, Inc. EDI services October 1993
Seton Financial Accounts receivable management services December 1993
Criterion Healthcare Management Accounts receivable management services December 1993
Trim Healthcare Systems, Inc. Cash flow management services December 1993
Health Information Technology, Inc. Managed care contract administration June 1994
software
Healthview Clinically based provider profiling system December 1994
Healthcare Design Systems Health care financial management and December 1995
decision support software
InterMed Healthcare Systems Inc. Client-server information systems for health December 1996
care payors
Healthcare Recovery, Inc., doing Cash flow management services April 1997
business as Synergy HMC
Queen City Microsystems, Inc. EDI services August 1997
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Healthcare Revenue Management,Inc. Managed care department outsourcing and September 1997
audit services
Medicus Systems Corporation Health care financial management and November 1997*
decision support software
Rothenberg Health Systems, Inc. Capitation management software December 1997
Healthcare Research Affiliates, Inc. H.E.D.I.S. reporting and consulting services December 1997
Fleming Softlink Systems, Inc. EDI software December 1997
Healthcare Cash Management Seminars, Healthcare seminar business January 1998
Inc.
American Medical Network, Inc. Health care decision support software January 1998
Cabot Marsh Corporation Health care consulting and compliance February 1998
company
Velox Systems Corporation Financial management software March 1998
- ------------------
* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus Systems
Corporation on November 9, 1997. It is anticipated that the merger of QuadraMed
and Medicus will be closed in the second quarter of 1998.
Unless the context otherwise requires, references herein to the
"Company" and "QuadraMed" refer to QuadraMed Corporation, a Delaware
corporation, its subsidiaries and QuadraMed Corporation, its California
predecessor. The Company's executive offices are located at 80 East Sir Francis
Drake Boulevard, Suite 2A, Larkspur, California, 94939 and its telephone number
is (415) 461-7725.
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 (including the merger (the "Medicus Merger") with Medicus
Systems Corporation ("Medicus") and the acquisition of Rothenberg Health
Systems, Inc. ("Rothenberg") and Healthcare Research Affiliates, Inc. ("HRA")
from Resource Health Partners, L.P. ("RHP") in two related merger transactions
(referred to as the "Rothenberg Merger")) by the Company in November and
December 1997 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.
The Company has entered into a merger agreement with Medicus and
completed the Rothenberg Merger with the expectation that the Medicus Merger and
the Rothenberg Merger will result in certain benefits to the Company as the
combined company. Realizing the benefits of the Medicus Merger and the
Rothenberg Merger will depend in part upon the successful integration of the
businesses, products and employees of the Company, Rothenberg, HRA and Medicus
in an efficient manner, and there can be no assurance that such integration will
not entail substantial
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costs, delays or other problems or that such integration will be successfully
completed. Combining the companies 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 combining the companies could cause the interruption
of, or a disruption in, the business activities of the constituent companies,
which could have a material adverse effect on the operations and financial
performance of the Company. Even if these companies are successfully integrated
into the Company, the acquired operations may not achieve sales, productivity
and profitability commensurate with the Company's historical operating results
or with projected results of the Company and financial analysts and investors.
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. QuadraMed will incur a significant amortization expense
in future periods as a result of the Medicus acquisition. There can be no
assurance that the Company will realize any of the anticipated benefits of the
Medicus Merger and the Rothenberg Merger or that such acquisitions will enhance
the Company's business or financial performance.
Acquisitions, including the Medicus Merger and the Rothenberg Merger,
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 Medicus and RHP 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 its business, financial condition and results of
operations.
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
potential purchasers of the Company's products and services or the loss of one
or more of the Company's significant customers, insofar as customers may be
acquired by another company that uses products or services provided by a
competitor of the Company. Any of these occurrences could have a material
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.
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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 unpredictable effects on the Company's
business, financial condition and results of operations.
The Company's performance also 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.
DRG[check mark](R) QuadraMed(R) and QuanTIM(R) are registered
trademarks of the Company. ASC[check mark](TM) and the logo of the Company are
trademarks of the Company. All other trademarks and trade names referred to in
this Annual Report on Form 10-K are the property of their respective owners.
THE QUANTIM(R) SUITE OF PRODUCTS
QuanTIM(R), The Information Management system, is QuadraMed's suite of
EDI, financial management, compliance and decision support software products
designed to improve operational efficiencies, assist organizations to more
accurately measure and analyze the cost and quality of care, proactively address
compliance issues and more effectively compete in an increasingly managed care
environment. QuanTIM(R), with its modular, open architecture design and flexible
electronic interface, is designed to utilize data from disparate health care
information systems, thereby extending the functional value of legacy system
investments. As a result of this modular design, additional applications can be
readily integrated into customers' existing applications.
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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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.
Products such as those offered by the Company frequently contain errors
or failures, especially when initially introduced or when new versions are
released. Although the Company 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 these
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 development 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.
Many computer systems have experienced or will experience problems
handling 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. 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.
The Company currently processes substantially all of 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.
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EDI Products
The Company's EDI products enable providers to edit claims on site,
format detailed claims data for all payors, and electronically submit them for
processing. The edited claims data is the foundation of a detailed database of
information that can be sued with the QuadraMed's financial management, decision
support and compliance products.
QuanTIM(R) EDI is a software application that downloads summary and
detailed claims data from existing legacy financial information systems, and
then edits and formats it to meet payor-specific requirements, including unique
data fields. As part of the editing process, QuanTIM(R) EDI screens the data for
payor-specific demographic, diagnosis or procedure information and identifies
illogical data inputs that are not within expected ranges. For example, the
software would alert the operator if it encountered inputs that indicated that a
male patient had given birth. After the standardized claim has been edited for
payor-specific requirements, QuanTIM(R) EDI transmits the claim to the payor.
QuanTIM(R) ERA is a software application that receives detailed payment
information from payors, known as electronic remittance advice ("ERA"),
translates this data and automatically posts this information to a provider's
financial system. Prior to posting, ERA data is extracted to generate automated
contractual adjustments based on payor-appropriate criteria, applicable
deductibles and co-insurance, and to track write-offs taken at the time of
billing.
Medicare Secondary Billing is a module designed to assist providers in
accelerating the traditional Medicare billing cycle by eliminating the 14-day
payment hold for billing Medigap carriers. The module automatically reviews all
open Medicare claims daily by logging onto the Medicare claims inquiry system,
and then, based on that analysis, generates appropriate, collated, ready-to-mail
UB92s and EOBs for secondary carriers.
Eligibility Determination is a module which automatically verifies the
eligibility of Medicare, Medicaid, Blue Cross and other specified in-patient
admissions types by continuously polling the patient admitting system and then
cross-checking these patient profiles against health plan eligibility and
benefits inquiry databases. This module is designed to assist providers in
proactively managing the risk of uncompensated and undercompensated care.
The 72 Hour Advisor module, which is a complement to the Eligibility
Determination module, is designed to assist providers in identifying instances
when a patient receives outpatient services less than 72 hours prior to being
admitted for an inpatient episode. If all care is not bundled as one episode, a
Medicare billing conflict is created, which is in violation of HCFA regulations
and typically delays payment for all care administered. The 72 Hour Advisor
constantly polls key in-patient and out-patient registration systems to check
for date conflicts within the 72 hour window.
A/R Link is a PC-based system designed to provide EDI connectivity
between hospitals and third-party billing companies handling self-pay portions
of patient charges by automating the transfer and processing of patient account
information. The software automatically queries the hospital patient accounting
system, searches by financial class, identifies self-pay accounts and downloads
relevant files to target sites. The module eliminates the time and staff
involved in manual keying of data, and speeds the overall billing process.
Financial Management and Compliance Products
The Company's financial management and compliance software products
allow providers to track managed care and capitated contract terms and to
hierarchically review medical records information to ensure that bills are
properly coded and include all services rendered. The Company's customers use
this capability to obtain timely and accurate reimbursement, to prevent fraud
and abuse and to measure the profitability of managed care contracts.
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QuanTIM(R) Contract Management is a software application that tracks
providers' multiple managed care, capitated, governmental and other payor
contract terms, including coverage and reimbursement for individual diagnoses
and procedures. The application calculates expected reimbursement and the
contractual allowance, which is the difference between the standard charge
generated by the provider and the actual amount owed by the payor under the
contract. Expected reimbursement and contractual allowance amounts can be posted
automatically to the provider's financial information system at the time of
billing. QuanTIM(R) Contract Management allows providers to measure the
allocation of revenues and the profitability of contracts based on specific
payor contract terms. QuanTIM(R) Contract Management's pricing module eliminates
labor intensive, error prone manual repricing of bills, a process that often
leads to inaccurate reimbursement and financial statements. In addition,
QuanTIM(R) Contract Management is used as a modeling tool for managed care
contract negotiation and detailed analysis of contract performance.
EZ CAP Managed Care Information System is a software application
designed to assist medical groups, IPAs, hospitals, PHOs and other organizations
that receive capitation payments from health plans and are at financial risk for
healthcare services. EZ CAP's key functional areas include enrollee demographic
data, benefits verification and co-payment information, automated
authorizations, flexible provider compensation methods, case management and
utilization tools, provider claims processing and claims data capture, and
detailed reporting capabilities. There are several software options that extend
the functionality of the core EZ CAP system. EZ PARTNER real-time interface
module electronically links EZ CAP to many popular PMSs (Practice Management
Systems) to provide shared information between the systems. EZ LINK modules
provide the ability to electronically receive and transmit data files between EZ
CAP and health plans or providers, via EDI technology. The PCL (Provider
Communications Link) module is designed to provide low cost, remote, real-time
authorized access to EZ CAP functions such as enrollee eligibility checking,
requests for referrals and authorizations, and determination of approval status.
Care Delivery Costing software products are designed to be
workload-driven staffing and care delivery costing analysis tools that address
the informational needs from both the clinical and financial management
perspective. Utilizing well established objective workload measurement
methodologies, patient care managers can utilize these software tools to
optimize the allocation of patient care resources, maintain clinical standards,
utilize benchmarking database resources for comparative analysis and manage
labor costs in a variety of in-patient and out-patient care settings.
Coding and Abstracting software products are designed to consolidate
the flow of patient-related data from disparate hospital systems into a
straightforward Windows-based system. The Coding and Abstracting system is
designed to maximize the productive results of the coding process at the
critical point where proper reimbursement decisions are in the hands of coding
personnel. Knowledge-based methodology and database resources are integrated
with on-line access to clinical notes, definitions, and coding reference guides
to assist in the accurate interpretation and validation of coding and DRG
assignment decisions.
Coding HelpDesk is a software resource tool designed specifically for
Health Information Management (HIM) professionals. HelpDesk includes
ComplySource legal references, but also includes information resources specific
to the concerns of HIM professionals and Compliance Officers, such as fiscal
intermediary response log (as required by the model hospital compliance plan),
carrier bulletins, carrier policy manuals, advanced coding Q&A, and CE Mine, an
on-line educational and testing tool that allows subscribers to attain CE
credits for successfully completing coding tests.
QuanTIM(R) DRG[checkmark] is a software application designed to assist
providers in managing the complexities of the DRG reimbursement system and to
ensure equitable payment based on the submission of a complete and accurate
claim. QuanTIM(R) DRG[checkmark] is not designed to encode or group information
to maximize DRG reimbursement, but instead is designed to ensure appropriate
reimbursement based on accurate and complete billing information. This product
interfaces with legacy financial and medical records information systems prior
to billing to hierarchically review all billing records on a concurrent basis
and to select those bills that have a clinical, financial or statistical reason
to be held in the billing cycle until medical claim coding can be completed.
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The product serves as a "safety net," catching revenues that would otherwise be
lost through billing of incomplete or inaccurately coded data.
QuanTIM(R) ASC[checkmark] is a software application designed to assist
in managing the complexities of ambulatory surgical center ("ASC") reimbursement
and outpatient coding systems. ASC coding is often based on incomplete medical
record information, resulting in missing charges or inaccurate coding of
procedures performed and inaccurate assignment of payment level classifications.
QuanTIM(R) ASC[checkmark] flags incomplete or inaccurate medical claim coding by
hierarchically reviewing billing records prior to billing and identifying those
bills that have clinical, financial or statistical reasons for review.
QuanTIM(R) Electronic Document Management is a software application for
patient accounting and medical records departments that captures, indexes,
stores and retrieves paper-based demographic, clinical and financial information
and records. This product is based on an open software architecture which
utilizes electronic files that integrate financial and ancillary department
electronic information with scanned images of paper documents. The Company
believes that this application improves provider work flow, reduces
administrative cost and helps providers move toward paperless business offices
and medical records departments. Multi-user access to the electronic patient
account file reduces the need for paper files and storage while offering access
to account information from any work station. The combination of existing
electronic financial information and scanned images with multi-user capabilities
effectively creates a complete electronic patient account file that can be
efficiently routed through billing and administration departments, thus
improving work flow. In addition to licensing this software application, the
Company offers customers the option of purchasing the hardware required to
implement this solution.
QuanTIM(R) FACTS, introduced in the third quarter of 1997, is a
software application designed to assist hospitals in managing the complexities
of federal requirements under HIPAA and in submitting accurate billing and
clinical data. The product complements providers' existing compliance efforts by
monitoring coding and billing practices for compliance with mandated guidelines.
QuanTIM(R) FACTS includes the following six modules: a 72-hour rule compliance
module designed to identify claims for non-physician services performed within
three days of a hospital admission; a prospective payment system module designed
to select billing records with a high probability of inaccurate coding which may
lead to overpayments by payees which may, in turn, trigger federal government
fines for inappropriate billing practices; a data quality monitoring tool that
is designed to identify inconsistencies in coding and to flag inclusive codes
that may result in potential overestimates of revenue; a benchmarking study that
utilizes publicly available data to identify a hospital's exposure to potential
fraud and abuse by analyzing correlations between a given hospital's DRG codes
and national norms and identifying a hospital's exposure at the DRG level; a
laboratory report based on a thorough review of a provider's detail billing data
identifying clinical laboratory billing practices of that provider which are of
the type generally scrutinized by the government; and a Medicare Billing
Compliance Guide designed to assist hospitals and other providers in
implementing fraud and abuse compliance programs.
ARIS (Automated Risk Integrity Software) is a software tool designed by
compliance officers and attorneys to capture and assess compliance activity for
each department and entity within a provider organization. ARIS is designed to
create an on-going compliance actin plan in the areas of education, internal
monitoring, plan development and external auditing activities. ARIS's reporting
package is designed to track compliance activity and progress across an
organization.
ComplySource is a legal and compliance software resource package
designed to provide consolidated access to important legal and government
compliance-related documents, layman's synopsis of all statutes related to
healthcare compliance, OIG fraud alerts, and focused database tools such as
compliance disciplinary action, education attendance lists, audit tracking,
mandatory compliance activities and hotline calls.
Decision Support Products
The Company's decision support products generally include database
analysis software and national and regional benchmark data that may be licensed
to the customer. The customer provides its own internally
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generated clinical and financial information to the Company, and the Company
performs risk and severity adjustments on such information based on patient
demographics and health status and formats it for comparison against the
national and regional data. The updated and adjusted data sets are returned to
the customer for use with the database analysis software. The Company's
QuanTIM(R) Performance Measurement System has been accepted for inclusion on the
Joint Commission on Accreditation of Healthcare Organization's initial list of
performance measurement systems.
QuanTIM(R) Clinical Performance Measurement is a software application
that measures clinical outcomes and resource utilization based on diagnosis,
patient, physician and other variables. This product is used as a benchmarking
tool to compare hospital-level information against 101 risk and severity
adjusted outcome indicators. The benchmarking information is derived from a
standardized national set of 10 million patient records. The outcomes database
is organized into six major categories: overall mortality, obstetrics, surgery,
neonatal, radiology and general medical. The customer typically produces reports
that compare its performance against competitor or peer group providers and
against expected outcomes derived from the national and regional data set.
QuanTIM(R) Financial Performance Measurement is a software application
that employs cost accounting, length-of-stay, and other benchmark information to
allow customers to measure cost, clinical resource utilization and profitability
by physician, payor, diagnosis and procedure. Most providers have access to
charge and reimbursement information for procedures and diagnoses, but do not
have accurate measures for the cost of care in these categories. Therefore,
these providers cannot accurately track profitability by procedure or diagnosis.
Through an interface with QuanTIM(R) Clinical Performance Measurement, providers
can benchmark the risk adjusted outcomes and financial performance by physician,
diagnosis, patient and other variables. This application can also be used to
analyze the profitability of managed care and capitated contracts.
QuanTIM(R) Market Analysis Performance Measurement is a software
application that consists of licensed software and database information that is
derived from statewide and national hospital billing data sets and other
demographic and population statistics. This application enables customers to
perform market share, community health assessment, managed care activity and
physician admitting pattern analyses.
Clinical Decision Support software is designed to provide integrated,
proactive medical management through a synthesis of clinical decision support
tools, health and disease management programs, and financial modeling.
Specifically, these modules include:
Resource Case Management: a software tracking and analysis
tool designed to improve care through monitoring and
enhancement of patient care management relative to cost and
quality imperatives.
Pathway Generator: software designed to assist in developing
initial care delivery protocols, or pathways, based on
historical utilization data. Cases can be grouped by DRG
(Diagnostic Related Group), diagnosis, admission and discharge
status and other user-specified characteristics. Pathways are
intended to assist in consistent care delivery results and
predictable care delivery costs within an organization for
specified patient conditions.
Enterprise Costing: software designed to enhance data sharing
within the enterprise so that departments can more effectively
perform distributed queries and updates to their
department-level cost standards. Such queries can assist in
comparative cost analysis and results analysis.
QuanTIM.net is a decision support software application that is designed
to integrate EDI, relational database and Web-enabling technologies into an
interactive, enterprise-wide claims management and decision support solution.
With electronic interfacing technology that links multiple facilities together,
QuanTIM.net serves as a consolidated resource for making data-intensive
financial and clinical decisions across organization lines. Within a framework
that ties all locations together, edited claims can be automatically priced,
risk- and severity-adjusted, and supplemented with public and private
benchmarking data via QuanTIM.net's integrated
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software services prior to electronic claims submission to payors. Enhanced
claims data is consolidated in an Oracle relational database and, via Web
browser technology, is made accessible, on a subscriber basis, across a secure
network available to users throughout an enterprise.
COMPLIANCE AND CONSULTING SERVICES
An important adjunct to QuadraMed's software offerings are the range of
compliance and consulting offerings that are designed to provide value-added
service to clients, and better position the Company as a provider of more
comprehensive solutions. Currently, compliance and consulting services fall
under four main categories: Managed Care, Financial Reviews & Management,
Patient-Focused Studies, and Compliance Services. These services include:
accuracy and compliance assessments of clinical and patient accounting charge
capture mechanisms, managed care contract performance reviews and
re-negotiations (with integrated retrospective payment recovery services for
underperforming contracts), and clinically-oriented, patient-focused data
analysis and reviews by Master prepared Registered Nurses.
One of the fastest growing components of the Company's compliance and
consulting service offerings is in the area of compliance. QuadraMed offers a
comprehensive compliance program, including compliance assessment, auditing and
education expertise through a team of over 100 credentialed healthcare
attorneys, medical record professionals, registered nurses and physicians. These
services improve the ability of healthcare providers to prevent Medicare and
Medicaid fraud and abuse by identifying potentially fraudulent coding in a
medical bill. Many of these services are augmented by the use of integrated
software technologies. These services include: organizational risk and
compliance assessment, clinical data management compliance audits and
assessments, physician and ancillary services compliance audit and education
services, and professional development services which offer subscriber-based,
toll-free "expert help desk" coding and billing compliance assistance and
topical compliance seminar series throughout the country.
BUSINESSES OFFICE AND CONTRACT MANAGEMENT DEPARTMENT OUTSOURCING
In addition to software applications, the Company provides partial and
complete business office and contract management department outsourcing
services, including the billing and collection of receivables for the business
office, and comprehensive managed care contract administration and negotiations
for the contract management department. The Company offers business office
outsourcing services for hospitals, physicians, home health care agencies and
other providers. The focus of these services is to increase cash flow and to
improve operational efficiencies for healthcare providers. Under full
outsourcing arrangements, the Company hires and/or replaces existing personnel
at the facility. The Company typically implements selected components of its
QuanTIM(R) suite of products to enhance the efficiency of the business office or
contract management department. In partial business office outsourcing
arrangements, the Company bills and collects receivables that have aged beyond a
certain point, or that involve specified payer or payment arrangements.
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.
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
expense.
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CUSTOMERS
Historically, QuadraMed has marketed its products primarily to
hospitals, with additional marketing to hospital associations, physician groups,
payors and self-administered employers. Substantially all of the Company's
revenues have been derived from the sale of software products and services to
hospitals. With the industry trend toward the formation of IDSs, the Company has
designed its product suite to accommodate this emerging industry sector. To
date, QuadraMed and its subsidiaries have approximately 2,800 customers, a
substantial majority of which are hospitals, located in all 50 states, the
District of Columbia, Canada, South Africa and the Philippines. The Company
expects to maintain a high percentage of hospital customers for the foreseeable
future, but also expects its customer mix to begin to shift toward other
providers, including IDSs, as well as payors and employers. 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
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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
unpredictable effects on the Company's business, financial condition and results
of operations.
SALES AND MARKETING
As of March 16, 1998, the Company employed 61 direct sales
representatives and product managers, and a marketing support staff of 12
individuals. The Company markets its products and services through direct sales
contacts, strategic alliances, participation in trade shows and advertisements
in industry publications. In addition, senior management plays an active role in
the sales process by cultivating industry contacts.
The Company supplements its marketing arrangements through endorsement
agreements. The Company has endorsement agreements and/or marketing agreements
for certain of its products with state and regional hospital associations in New
Jersey, Iowa, Northern and Central California, Connecticut, Florida, New York,
Ohio, Pennsylvania, Virginia, Wisconsin, Texas, Montana and Illinois.
In addition, the Company is in the process of building a regional
account manager organization within the national sales force that will be
responsible for particular customers rather than particular products. This
approach will require additional training so that sales personnel may become
more familiar with the Company's broader range of product and service offerings.
There can be no assurance that the Company will be successful
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in its efforts to restructure its sales and marketing approach, and any failure
to successfully implement such strategy could have a material adverse effect on
its business, financial condition and results of operations.
TECHNOLOGY
Software Architecture. The Company uses industry standard software
whenever possible to minimize development and maintenance costs. The QuanTIM(R)
suite of products operates on the DOS and Novell Netware operating systems.
Certain of the Company's current products operate on all versions of the
Windows(TM) NT operating system. The Windows(TM) NT versions of some of the
Company's products were released in late 1996, and the Company expects that
Windows(TM) NT versions of its EDI product, which are currently under
development, will be released in 1998. All major software components of
QuanTIM(R) are assembled in a modular architecture for application independence
and to facilitate the replacement of modules as new technology becomes available
and as market demand dictates.
Hardware Platform. The Company's software products operate on PC-based
single and multi-user hardware platforms. In addition, the Company also offers
its imaging product on Sun Microsystems platforms. These platforms also include
high capacity storage devices for the large storage requirements of document
imaging.
RESEARCH AND DEVELOPMENT
As of February 28, 1998, the Company employed 65 people in the areas of
product design, research and development and 41 people in the areas of quality
assurance and technical support. The Company's product development strategy is
focused on continually enhancing existing products by increasing their
functionality and ease of use. In addition, the Company is enhancing the
reporting capabilities for its performance measurement clinical and financial
applications, expanding its outpatient and inpatient databases and improving its
comparative reporting and benchmarking capabilities with third-party databases.
A significant amount of the Company's research and development resources are
dedicated to integrating acquired technology into the Company's suite of
products. See "-Products Under Development and Joint Development Projects."
In fiscal years 1995, 1996, and 1997, the Company's research and
development expenses totalled $864,000, $3.5 million, and $5.1 million,
respectively, representing 8.6%, 12.1%, and 11.4%, respectively, of its total
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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COMPETITION
Competition in the market for the Company's products, and services
(including products and services acquired from Medicus and RHP 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, 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 healthcare 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.
GOVERNMENT REGULATION AND HEALTH CARE REFORM
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine 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.
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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.
INTELLECTUAL PROPERTY
The Company considers its methodologies, computer software and many of
its databases to be proprietary. The Company seeks to protect its proprietary
information through nondisclosure agreements with its employees. The Company's
policy is to have employees enter into nondisclosure agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring disclosure to the Company of any new ideas,
developments, discoveries or inventions conceived during employment, and
requiring assignment to the Company of proprietary rights to such matters that
are related to the Company's business.
The Company also relies on a combination of trade secrets, copyright
and trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems, products and databases. The Company
has no patents or copyrights covering its software technology. Any infringement
or misappropriation of the Company's proprietary software and databases would
disadvantage the Company in its efforts to retain and attract new customers in a
highly competitive market and could cause the Company to lose revenues or incur
substantial litigation expense.
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. However, due to the
nature of its application software, the Company believes that patent, trade
secret and copyright protection are less significant than the Company's ability
to further develop, enhance and modify its current products.
Although the Company believes that its products do not infringe on the
intellectual rights of others, there can be no assurance that such a claim will
not be asserted 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. 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.
EMPLOYEES
As of February 28, 1998, the Company employed 754 people, including 93
in general administration, 106 in product design, research and development
quality assurance and technical support, 73 in sales and marketing and 482 in
operations. None of the Company's employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees to be satisfactory.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of February
28, 1998, are as follows:
NAME AGE POSITION
James D. Durham 51 Chairman of the Board, President and Chief Executive Officer
John V. Cracchiolo 41 Executive Vice President, Chief Financial Officer and Secretary
Suzanne J. Blumenthal 44 Executive Vice President and President, Business Office Services and Technology Division
Andrew J. Hurd 34 Executive Vice President, Business Development
Steven D. McCoy 47 Executive Vice President and President, Managed Care Division
Keith M. Roberts 33 Executive Vice President, General Counsel and Assistant Secretary
Ruthann Russo 39 Executive Vice President and President, Compliance and Education Division
Lemuel C. Stewart, Jr. 51 Executive Vice President and President, EDI Division
Joanne H. Vaul 39 Executive Vice President and President, Value Added Systems Division
Bernie J. Murphy 32 Vice President, Finance and Chief Accounting Officer
BACKGROUND
James D. Durham founded the Company in September 1993 when he became
its President and Chief Executive Officer and a director. In May 1996, Mr.
Durham became Chairman of the Board. From November 1992 to December 1993, Mr.
Durham served as the Chief Executive Officer of Trim Healthcare Systems, Inc., a
reimbursement consulting services company. From April 1992 to April 1993, Mr.
Durham served as Chief Executive Officer of Care Partners, Inc., an accounts
receivable processing and funding company cofounded by Mr. Durham. From February
1986 until its acquisition by Ameritech in February 1992, Mr. Durham served as
President and Chief Executive Officer of Knowledge Data Systems, Inc., a health
care information systems company. Mr. Durham holds a B.S. with honors in
Industrial Engineering from the University of Florida and an M.B.A. with an
emphasis in Finance from the University of California, Los Angeles and is a
Certified Public Accountant.
John V. Cracchiolo joined the Company in May 1995 as its Executive Vice
President, Chief Financial Officer and Secretary. Prior to joining the Company,
Mr. Cracchiolo worked for PSICOR, Inc., a health care services company, serving
as its Chief Financial Officer from February 1993 to May 1995, and its corporate
Controller from May 1989 to February 1993. Previously, Mr. Cracchiolo worked in
various management positions for software, hardware, defense contractor and
personnel and professional services organizations within the health care and
other industries. Mr. Cracchiolo holds a B.S. in Business Administration from
California State University, Long Beach and is a Certified Public Accountant.
Suzanne J. Blumenthal joined the Company in January 1994 as Vice
President, Sales. From January 1995 to December 1995, Ms. Blumenthal served as
Vice President, Business Development and in January 1996 she became Senior Vice
President, Business Development. In December 1997, Ms. Blumenthal became
President of the Company's Business Office Services and Technology Division.
From October 1992 to December 1993, Ms. Blumenthal served as Vice President,
Sales for StellarNet, a company specializing in EDI software. From March 1988
to October 1992, Ms. Blumenthal served as Western Regional Director for CSC
Healthcare Systems, Inc., a division of Computer Sciences Corporation, which
specializes in managed care software. Ms. Blumenthal holds a B.A. in Urban
Planning from Washington University and a Master's in Healthcare Administration
from George Washington University.
Andrew D. Hurd joined the Company in January 1998 as Executive Vice
President, Business Development. From November 1995 to January 1998, Mr. Hurd
was Vice President, Health Care Financial Services at National Data Corporation,
an EDI company. From 1988 to November 1995, Mr. Hurd was the Vice President and
General Manager of Amsco International, a medical supply company. Mr. Hurd
holds a B.A in Marketing and a B.S in Business Administration from Northern
Arizona University.
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Steven D. McCoy joined the Company in September 1997 as a Senior Vice
President. In February 1998, Mr. McCoy became the Executive Vice President and
President of the Company's Managed Care Division. From July 1987 to September
1997, Mr. McCoy was the President of Healthcare Revenue Management, Inc., a
managed care department outsourcing and audit services company, until that
company was acquired by QuadraMed in September 1997. Mr. McCoy holds a B.S. in
Computer Science from the Air Force Academy.
Keith M. Roberts joined the Company in March 1997 as Vice President and
General Counsel and became Executive Vice President, General Counsel and
Assistant Secretary in February 1998. From May 1995 to March 1997, Mr. Roberts
was an associate of Brobeck, Phleger & Harrison LLP, a private law firm. From
September 1992 to May 1995, Mr. Roberts was an associate of Hale & Dorr, a
private law firm. Mr. Roberts holds a J.D. from Stanford Law School and a B.A.
in economics and philosophy from the University of Rochester.
Ruthann Russo joined the Company in February 1998 as Executive Vice
President and President, Compliance and Education Division. From May 1991 until
February 1998, Ms. Russo was the Chief Executive Officer of Cabot Marsh
Corporation, a health care consulting company, until that company was acquired
by QuadraMed in February 1998. Ms. Russo holds a J.D. from American University
and a B.A. in Liberal Arts from Dickinson College.
Lemuel C. Stewart, Jr. joined the Company in July 1997 as its Executive
Vice President and President, EDI Division. From January 1997 to June 1997, Mr.
Stewart was a general manager of the Virginia-based EDI division of National
Data Corporation ("NDC"), an information systems and services company for the
health care and payment systems markets. From September 1986 to January 1997,
Mr. Stewart was the President, Chief Operating Officer and general manager of
Health Communication Services, Inc., which was acquired by NDC. Mr. Stewart
holds a B.S. in Business/Finance from East Tennessee State University and an
A.A. in Business from Richard Bland College of William and Mary.
Joanne H. Vaul joined the Company in December 1995 as a Senior Vice
President and became Executive Vice President and President, Value Added
Systems Division in February 1998. From December 1991 until December 1995, Ms.
Vaul was the Chief Operating Officer of Healthcare Design Systems, Inc., which
was acquired by the Company in December 1995. Ms. Vaul holds a B.S. in
Accounting and Economics as well as an M.B.A. from Widener University.
Bernie J. Murphy joined the Company in June 1996 as Corporate
Controller. In February 1998, Mr. Murphy became the Company's Vice President,
Finance and Chief Accounting Officer. From July 1988 to June 1996, Mr. Murphy
worked at Arthur Andersen LLP, where he served as a manager in the audit
practice for the last three years of employment with that firm. Mr. Murphy holds
a B.S. in Business Administration from the University of San Francisco and is a
Certified Public Accountant.
ITEM 2. PROPERTIES.
The Company's executive and corporate offices are located in Larkspur,
California, in approximately 11,500 square feet of leased office space under a
lease that expires in June 1998. The Company also maintains several regional
offices throughout the United States. The Company believes that its facilities
are adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in litigation relating
to claims arising out of its operations in the normal course of business. As of
the date of this Report, the Company is not a party to any legal proceedings
which, if decided adversely to the Company, would, individually or in aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of the Stockholders of the Company was held on
February 6, 1998 (the "Special Meeting"). The stockholders voted on a proposal
to approve a series of amendments to the Company's 1996
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Stock Incentive Plan (the "Plan") including (i) a 750,000 share increase in the
number of shares of the Company's Common Stock available for issuance thereunder
and (ii) an increase in the maximum number of shares for which any one person
may receive options, separately exercisable stock appreciation rights and direct
stock issuances by an additional 300,000 shares.
The results of the voting were as follows: 4,598,012 votes in favor of
the proposal, 2,450,184 votes against the proposal, 6,902 abstentions and broker
nonvotes and zero votes withheld.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been quoted on the Nasdaq National
Market since October 10, 1996 under the symbol "QMDC." The following table sets
forth the range of high and low closing sales prices reported on the Nasdaq
National Market for Company Common Stock for the periods indicated.
High Low
Year Ended December 31, 1996
Fourth Quarter (October 10, 1996 through December 31, 1996) $13 1/2 8 9/16
Year Ended December 31, 1997
First Quarter 12 1/4 9 5/8
Second Quarter 10 5/8 6 3/4
Third Quarter 20 6 3/4
Fourth Quarter 27 1/2 17
Year Ended December 31, 1998
First Quarter (through March 30, 1998) 35 1/4 18 15/16
As of March 25, 1998, there were approximately 143 holders of record
of the Company's Common Stock. The Company believes that the number of
beneficial holders of Company Common Stock substantially exceeds this number.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain all future earnings, if any, to
fund the development and growth of its business and does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future.
19.
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ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY DATA.
The following selected financial data of the Company for the fiscal
years ended December 31, 1993, 1994, 1995, 1996 and 1997, are derived from, and
are qualified by reference to, the audited financial statements and should be
read in conjunction with the consolidated financial statements and the notes
thereto.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ 517 $ 6,102 $ 10,035 $ 29,131 $ 44,926
Loss from operations ......................... (793) (4,780) (18,670) (154) (42,569)
Net loss ..................................... (804) (4,865) (18,829) (958) (42,573)
Basic and diluted loss per share(1) .......... $ (.40) $(2.26) $(8.10) $ (0.26) $ (4.91)
======== ======== ======== ======== ========
AS OF DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) .................... $ (1,866) $ (1,494) $ (3,071) $ 21,445 $ 23,578
Total assets ................................. 2,123 2,801 27,212 38,284 99,213
Stockholders' equity (deficit) ............... (667) (1,457) (9,565) 21,332 58,237
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing net income
per share. In February 1997, the Financial Accounting Standards board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which requires disclosure of basic earnings per share and
diluted earnings per share and is effective for periods ending subsequent to
December 15, 1997.
20.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
This Annual Report on Form 10-K contains forward looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 24.
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. QuadraMed utilizes its technology solutions
to offer partial and complete business office outsourcing services to hospitals,
home care entities, MSOs, medical groups and other healthcare providers.
QuadraMed and its subsidiaries have approximately 2,800 healthcare customers. In
addition, QuadraMed has received endorsements from 13 state and regional
hospital associations.
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 a pooling 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. The
addition of historical results of acquired entities should be considered when
reading the period to period comparisons for fiscal years 1995, 1996 and 1997.
Additionally, reference is made to the consolidated financials statements and
notes thereto for the effect of such acquisitions.
Since December 1995, the Company has completed the following
significant acquisitions:
COMPANY ACQUIRED DESCRIPTION OF COMPANY ACQUIRED POOLING/PURCHASE DATE ACQUIRED
Healthcare Design Systems Health care financial management and decision Purchase December 1995
support software
InterMed Healthcare Systems Inc. Client-server information systems for health care Pooling December 1996
payors
Healthcare Recovery, Inc., doing business Cash flow management services Purchase April 1997
as Synergy HMC
Healthcare Revenue Management, Inc. Managed care department outsourcing and audit Purchase September 1997
services
Medicus Systems Corporation Health care financial management and decision Purchase November 1997*
support software
Rothenberg Health Systems, Inc. and Capitation management software and H.E.D.I.S. Pooling December 1997
Healthcare Research Affiliates, Inc. reporting
(collectively, "Rothenberg")
Cabot Marsh Corporation Health care compliance and consulting company Purchase February 1998
- -------------
* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus Systems
Corporation on November 9, 1997. It is anticipated that the merger of the
Company and Medicus will be closed in the second quarter of 1998. See "Recent
Developments -- Acquisition of Medicus Systems Corporation."
As indicated in the table above, the acquisition of Rothenberg was
accounted for on a pooling of interests basis. In accordance with pooling
accounting rules, the Company's consolidated financial statements have been
restated to include the historical operating results of Rothenberg for the
twelve months of the 1997 and 1996 fiscal years and for the last two calendar
months of 1995. As a result, the period to period comparison of the Company's
operating results for fiscal years 1995 and 1996 reflect increases from 1995 to
1996 that are attributable to Rothenberg's short operating history in 1995.
21.
24
In connection with the Company's acquisition of 56.7% of Medicus in
November 1997, the Company recorded a non-recurring charge of $38.5 million in
the year ended December 31, 1997 related to the write-off of acquired in-process
research and development. Additionally, the Company expects that acquisitions in
the first quarter of 1998 will result in additional non-recurring charges
related to acquired in-process research and development in the quarter ended
March 31, 1998.
In February 1997, the Company entered into an arrangement to provide
EDI processing and management services to EDI USA, Inc. an organization owned
and established by thirteen independent Blue Cross and Blue Shield Plans to
build and operate an EDI transaction network. The Company and EDI USA, Inc.
terminated this arrangement in December 1997. The Company recorded non-recurring
charges of $2,492,000 for the year ended December 31, 1997, related to costs
incurred in connection with the processing arrangement and the termination
thereof.
As of February 28, 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 customer mix 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 than 10% of the Company's revenues in
1996 and 1997.
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 on the contract anniversary date. Revenues from
perpetual software license agreements are significantly greater than license
fees under contracts that have annual renewal provisions 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 and cash flow management 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. 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the consolidated statement of operations of QuadraMed expressed as a
percentage of total revenues.
22.
25
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------ ------ ------
Revenues:
Licenses ......................... 65.3% 88.8% 75.4%
Services ......................... 34.7 11.2 24.6
Total revenues ................... 100.0 100.0 100.0
Operating expenses:
Cost of licenses ................. 38.3 35.8 29.1
Cost of services ................. 44.5 13.1 15.6
General and administration ....... 28.0 20.6 18.0
Sales and marketing .............. 17.8 16.3 15.0
Research and development ......... 8.6 12.1 11.4
Amortization of intangibles ...... 1.0 2.6 3.5
Non-recurring charges ............ -- -- 17.4
Write-off of acquired in-
process research and
development .................. 147.9 -- 85.8
------ ------ ------
Total operating expenses ..... 286.1 100.5 195.8
------ ------ ------
Loss from operations .................. (186.1) (0.5) (95.8)
Interest income (expense), net ........ (2.1) (3.5) 2.6
Other income (expense), net ........... 0.5 0.7 0.3
------ ------ ------
Net loss before provision
for income taxes .................... (187.7) (3.3) (92.9)
Provision for income taxes ............ -- -- 1.7
------ ------ ------
Net loss .............................. (187.7) (3.3) (94.6)
====== ====== ======
Years ended December 31, 1997 and 1996
Revenues
Licenses. License revenues increased 30.9% to $33.9 million in 1997
from $25.9 million in 1996. The increase in license revenues was due to license
revenues from new customers and an increase in perpetual license agreements
entered into during the latter half of 1997. Software 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.
Services. Service revenues increased 239.1% to $11.1 million in 1997
from $3.3 million in 1996. The increase in service revenues was due principally
to new customers acquired in the Synergy acquisition in April 1997 and, to a
lesser extent, new customers acquired in the acquisition of Healthcare Revenue
Management, Inc. in September 1997.
Cost of Revenues
Cost of Licenses. Cost of license revenues increased 25.2% to $13.1
million in 1997 from $10.4 million in 1996. 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 38.5% in 1997 from 40.3% in
1996. The increase in cost of licenses was principally due to additional
personnel hired during 1997 to support software installations and, to a lesser
extent, increases in third-party hardware sales. The decrease in cost of
licenses as a percentage of license revenues is
23.
26
principally due to the leveraging of costs over an increased revenue base and to
a higher number of perpetual contracts entered into during 1997, which tend to
have higher operating margins.
Cost of Services. Cost of service revenues increased 82.9% to $7.0
million in 1997 from $3.8 million in 1996. Cost of services includes expenses
associated with services performed in connection with business office
outsourcing and cash flow management services. As a percentage of service
revenues, cost of services decreased to 63.3% in 1997 from 117.4% in 1996. The
increase in cost of services was principally due to additional operating costs
associated with Synergy and, to a lesser extent, additional operating costs
associated with Healthcare Revenue Management, Inc., acquired in April 1997 and
September 1997, respectively. Cost of services as a percentage of service
revenues decreased principally due to the leveraging of costs over an increased
revenue base and the addition of several larger contracts in 1997, which
typically have higher operating margins.
Operating Expenses
General and Administration. General and administration expenses
increased 35.2% to $8.1 million in 1997 from $6.0 million in 1996, and decreased
as a percentage of total revenues to 18.0% in 1997 from 20.6% in 1996. The
increase in general and administration expenses reflects costs associated with
the hiring of additional senior officers in 1997 and an increase the number of
offices throughout the United States. The Company also incurred significant
legal and other costs during 1997 to settle certain litigation initiated in
prior years.
Sales and Marketing. Sales and marketing expenses increased 42.1% to
$6.8 million in 1997 from $4.8 million in 1996, and decreased as a percentage of
total revenues to 15.0% in 1997 from 16.3% in 1996. The increase in sales and
marketing expenses resulted principally from the addition of sales and marketing
personnel and increased advertising efforts associated with advertising in
publications, creating product brochures and participating in industry
conferences during 1997.
Research and Development. Research and development expenses increased
45.3% to $5.1 million in 1997 from $3.5 million in 1996, and decreased as a
percentage of total revenues to 11.4% in 1997 from 12.1% in 1996. The increase
in research and development expenses is principally due to the addition of
personnel. The Company capitalized $607,000, $682,000 and $425,000 of software
development costs in fiscal 1997, 1996 and 1995, respectively, which represented
11.6%, 16.2% and 33.0% of total research and development expenditures in fiscal
1997, 1996 and 1995. Amortization of capitalized software development costs
totaled $155,000, $47,000 and $32,000 in fiscal 1997, 1996 and 1995,
respectively. The Company believes that research and development expenditures
are essential to maintaining its competitive position. As a result, the Company
intends to continue to make investments in the development of new products and
in the further integration of acquired technologies into the Company's suite of
products. The Company believes that these expenses will increase in the future,
but should remain relatively constant as a percentage of total revenues,
although there can be no assurance in this regard.
Amortization of Intangibles. Amortization of intangibles increased to
$1.6 million in 1997 from $766,000 in 1996. The increase in the amortization of
intangibles is due to the acquisitions of Synergy in April 1997, Healthcare
Revenue Management, Inc. in September 1997 and Medicus in November 1997.
Non-Recurring Charges. The Company recorded non-recurring charges of
$7.8 million in 1997. These non-recurring charges were comprised of $2.5 million
related to the termination of the claims processing arrangement with EDI USA,
Inc. in December 1997, $3.1 million relating to two acquisitions in 1997 (which
were accounted for on a pooling of interests basis) and other charges associated
with the write down of certain assets which were determined to have no future
realizable value.
Acquired In-Process Research and Development. In connection with the
acquisition of 56.7% of the outstanding stock of Medicus in November 1997, the
Company recorded a $38.5 million write-off related to acquired in-process
research and development that had not achieved technological feasibility and had
no alternative future use.
24.
27
Interest Income (Expense). Interest income increased to $1.2 million in
1997 compared to interest expense of $1.0 million in 1996. The increase in
interest income resulted from interest earned on higher cash balances, resulting
from the Company's initial public offering of common stock in October 1996 and
follow-on common stock offering in October 1997. The Company's public equity
offerings raised net proceeds of approximately $26.4 million and $57.3 million,
respectively. Interest expense in 1996 was principally the result of debt the
Company incurred in connection with the acquisition of Healthcare Design
Systems, Inc. and for working capital purposes.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $788,000 in 1997 compared to no provision in 1996. The provision for
income taxes in 1997 relates to state and alternative minimum tax liabilities of
the Company. For financial reporting purposes, a 100% valuation allowance of
$12.0 million and $7.3 million has been recorded against the Company's deferred
tax assets in 1997 and 1996, respectively, under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Years ended December 31, 1996 and 1995
Revenues
Licenses. License revenues increased 295.0% to $25.9 million in 1996
from $6.5 million in 1995. The significant increase in license revenues was due
principally to sales associated with businesses acquired in pooling transactions
that are included in revenues for 1996 and, to a lesser extent, an increase in
new customers.
Services. Service revenues decreased 6.4% to $3.3 million in 1996 from
$3.5 million in 1995. The decline in service revenues reflects a decrease in the
number of customers using the Company's accounts receivable management services,
which were comprised of projects with a defined service period, as a result of
certain projects that expired and were not replaced with other service
contracts.
Cost of Revenues
Cost of Licenses. Cost of license revenues increased 171.5% to $10.4
million in 1996 from $3.8 million in 1995. This increase is principally due to
the cost of licenses associated with the Rothenberg business (which was acquired
in a pooling transaction) and to an increase in the number of software license
installations during 1996. As a percentage of license revenues, cost of licenses
decreased to 40.3% in 1996 from 58.6% in 1995. The decrease in cost of licenses
as a percentage of license revenues reflects the significant increase in license
revenues with higher operating margins during 1996.
Cost of Services. Cost of service revenues decreased 14.3% to $3.8
million in 1996 from $4.5 million in 1995. As a percentage of service revenues,
cost of services decreased to 117.4% in 1996 from 128.2% in 1995. The decline in
cost of services and as a percentage of service revenues reflects a decrease in
the number of service personnel.
Operating Expenses
General and Administration. General and administration expenses
increased 113.5% to $6.0 million in 1996 from $2.8 million in 1995. The increase
in general and administration expenses is due to expenses associated with
businesses acquired in pooling transactions, the addition of personnel
associated with the Healthcare Design Systems acquisition in December 1995 and
higher communication and travel costs associated with establishing an office on
the East Coast. As a percentage of total revenues, general and administration
expenses decreased to 20.6% in 1996 from 28.0% in 1995.
25.
28
Sales and Marketing. Sales and marketing expenses increased 166.3% to
$4.8 million in 1996 from $1.8 million in 1995. The increase in sales and
marketing expenses resulted primarily from the addition of sales personnel and
project managers in connection with acquisitions and is attributable in part to
increased advertising expenditures during 1996. As a percentage of total
revenues, sales and marketing expenses declined to 16.3% in 1996 from 17.8% in
1995.
Research and Development. Research and development expenses increased
307.2% to $3.5 million in 1996 from $864,000 in 1995. 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. As a percentage of total revenues, research and development expenses
increased to 12.1% in 1996 from 8.6% in 1995.
Amortization of Intangibles. Amortization of goodwill increased to
$766,000 in 1996 from $102,000 in 1995. The increase in amortization is
primarily the result of amortization of goodwill associated with the acquisition
of Healthcare Design Systems in December 1995 and amortization previously
associated with Rothenberg, which was not included in the Company's results of
operations until November 1995.
Acquired In-Process Research and Development. In 1995, the Company
recorded a $6.2 million write-off related to acquired in-process research and
development that had not achieved technological feasibility and had no
alternative future use. In addition, Rothenberg recorded a write-off of $8.6
million associated with acquired in-process research and development during
1995.
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.
At December 31, 1997, the Company had $43.7 million of cash and cash
equivalents, $1.0 million of short-term investments and $23.6 million in net
working capital. Net cash used in operating activities was $1.8 million,
$218,000 and $4.0 million in the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in operating activities in fiscal year 1997 was
principally attributable to the Company's net loss in 1997, a substantial
portion of which was comprised of a non-cash charge to write-off acquired
in-process research and development related to the Medicus acquisition in
November 1997. Net cash used in operating activities in fiscal year 1996 was
principally attributable to investments in the Company's infrastructure and net
cash used in operating activities in fiscal year 1995 was principally
attributable to a net loss by the Company.
Net cash used in investing activities was $29.9 million, $2.9 million
and $893,000 in the years ended December 31, 1997, 1996 and 1995, respectively.
Investing activities in fiscal year 1997 primarily included cash paid for the
Medicus and Synergy acquisitions, purchases of equipment and the capitalization
of computer software development costs. Investing activities in fiscal years
1996 and 1995 related to additions to capital equipment and the capitalization
of computer software development costs.
Net cash provided by financing activities was $54.6 million, $12.2
million and $14.7 million in the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities in fiscal year 1997
included $57.3 million in proceeds from the Company's follow-on common stock
offering in October 1997, which was partially offset by the repayment of notes
payable in connection with the November 1997 acquisition of Medicus. Net cash
provided by financing activities in fiscal year 1996 included proceeds from the
issuance of convertible preferred stock and proceeds from the Company's initial
public offering, which proceeds were offset by repayment of notes payable. Net
cash provided by financing activities in fiscal year 1995 included borrowings
related to notes payable and contributed capital to Rothenberg.
26.
29
In April 1997, Medicus entered into an agreement with a bank that
provided for a secured revolving line of credit up to a maximum of $2,500,000.
There were no outstanding balances at December 31, 1997. The line of credit
agreement was terminated by the Company in January 1998.
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 certain 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 not in compliance with certain of these covenants at
December 31, 1997; however, the Company received a waiver from the bank for
noncompliance with such financial covenants. There were no outstanding balances
at December 31, 1997.
YEAR 2000 COMPLIANCE
Many computer systems 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 to address any 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.
27.
30
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), which was adopted by the Company in the quarter ended December 31,
1997, and in accordance with this standard all prior periods presented have been
restated to conform to its provisions. Under the new requirements for
calculating earnings 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 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 each of the three years in the period ended December 31, 1997, no common
equivalent shares are included in diluted weighted average common shares
outstanding.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and
displaying comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements and is effective
for fiscal years beginning after December 15, 1997. The adoption of this
statement will not have a material impact on the Company's results of operations
or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement establishes
standards for reporting selected segment information quarterly and to report
entity-wide disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will not have a material impact on the
Company's results of operations or financial position.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to other information in this Annual Report on Form 10-K,
the following are important factors that should be considered in evaluating the
Company and its business.
History of Operating Losses; Uncertain Profitability
The Company incurred net losses of $18.8 million, $958,000 and $42.5
million for the years ended December 31, 1995, 1996 and 1997, respectively, and
as of December 31, 1997 had an accumulated deficit of $69.3 million. Although
the Company recorded net income of $153,000 and $1.4 million for the years ended
December 31, 1996 and December 31, 1997, respectively, these results do not
include the effect of the Medicus Merger and the Rothenberg Merger. On a pro
forma basis, after giving effect to the Rothenberg Merger and the Company's
acquisition of the Synergy Companies, Health Resource Management and Medicus,
the Company's net loss for the years ended December 31, 1996 and 1997 would have
been $9.2 million and $51.7 million, respectively. In connection with its
acquisitions, the Company has and will incur significant non-recurring charges
and will be required to amortize significant expenses related to goodwill and
other intangible assets in future periods. There can be no assurance that the
Company will be able to achieve or sustain revenue growth or profitability on a
quarterly or annual basis.
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: integration of
acquired businesses, variability
28.
31
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 for new customers. The Company expects that these
factors will continue to result in variations in quarterly revenues and
operating results. 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 has entered into merger agreement with Medicus and
completed the Rothenberg Merger with the expectation that the Medicus Merger and
the Rothenberg Merger will result in certain benefits to the Company as the
combined company. Realizing the benefits of the Medicus Merger and the
Rothenberg Merger will depend in part upon the successful integration of the
businesses, products and employees of the Company, Rothenberg and Medicus in an
efficient manner, 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. Combining the companies will divert the attention of
management from other ma