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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
22 Pelican Way
San Rafael, California, 94901
(Address of Principal Executive
Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 482-2100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes _X_ No ____
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 this Form 10-K. ___
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of March 29, 2001, was approximately $54,341,722
(based upon the closing price for shares of the Registrant's common stock
as reported on the Nasdaq SmallCap Market for March 29, 2001). 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 29, 2001, 25,754,696 shares of the Registrant's common
stock, $0.01 par value per share, were outstanding.
QUADRAMED CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I .......................................................... 1
Item 1 Business.................................................. 1
Item 2 Properties................................................ 8
Item 3 Legal Proceedings......................................... 8
Item 4 Submission of Matters to a Vote of Security Holders....... 8
PART II .......................................................... 9
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6 Selected Financial Data................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 7A Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 22
Item 8 Financial Statements and Supplementary Data .............. 22
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 22
PART III ......................................................... 23
Item 10 Directors and Executive Officers of the Registrant........ 23
Item 11 Executive Compensation.................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 36
Item 13 Certain Relationships and Related Transactions............ 38
PART IV .......................................................... 38
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 38
PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, QuadraMed Corporation
("QuadraMed") and its management discuss and make statements regarding
their intentions, beliefs, and current expectations regarding QuadraMed's
future operations and performance. Such statements are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are often identified by words
such as "anticipates," "believes," "expects," "will," "should" and
"intends" and their negatives. QuadraMed Corporation and its management
caution prospective investors that such forward-looking statements are not
guarantees of future performance. Risks and uncertainties are inherent in
QuadraMed's future performance. Factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include, but are not limited to, those discussed in "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
QuadraMed and its management make forward-looking statements based on
currently available information and assume no obligation to update these
statements due to changes in underlying factors, new information, future
developments, or otherwise.
OVERVIEW
QuadraMed is a healthcare information and technology company. It
provides software solutions and consulting services to hospitals and
medical providers to meet their medical records, business and compliance
needs. QuadraMed's solutions have been implemented in over 4000 sites,
including approximately 60% of the hospitals in the United States.
QuadraMed was reincorporated in Delaware in 1996 after having been
originally incorporated in California in 1993.
From 1993 to 1999, acquisition-based growth was an integral part
of QuadraMed's business strategy. During this time, QuadraMed completed
twenty-eight (28) acquisitions, with twenty-three (23) occurring between
1997 and 1999. This rapid growth has had several consequences. First,
QuadraMed has significantly increased the range of health information
management products and services that it offers to healthcare providers.
Second, QuadraMed has increased its market share in the health information
management industry. Third, QuadraMed has acquired access to public markets
and has lowered its capital costs. At the same time, however, integration
issues have delayed anticipated synergies and efficiencies and, since 1997,
QuadraMed has incurred annual after-tax losses. Further, the acquisitions
have produced substantial goodwill that reduces future earnings.
During 2000, QuadraMed focused on integration and making financial
and operational improvements. As part of this strategy, QuadraMed has
reduced expenses, sold non-strategic assets for cash, settled outstanding
litigation, made several management changes, and re-aligned the
organization into five operating divisions:
o Enterprise Products and Services Division, which provides
acute care hospitals with integrated enterprise information
systems to manage patient registration, clinical, and financial
information.
o Health Information Management Products Division, which
provides software products that automate and support hospital
and provider health information management departments in
maintaining accurate and timely patient treatment information
and in accurately coding for appropriate reimbursement.
o Collection Services Division, which identifies and collects
accounts receivables for hospitals and medical groups.
o Health Information Management Services Division, which
provides (1) health information interim management,
management consulting and department outsourcing services;
(2) coding, compliance and education services; (3)
compliance, legal and regulatory services; and (4) charge
description master reviews.
o EZ-CAP Division, which provides (1) software designed to
support managed care risk-taking organizations, such as
medical groups, physician-health organizations, independent
practice associations, and medical service organizations; and
(2) seminars for doctors and medical professionals.
QUADRAMED CORPORATE TRANSACTION HISTORY
Since its incorporation in 1993, QuadraMed has completed
twenty-eight (28) mergers and acquisitions as detailed in the following
table:
COMPANY/ASSETS MERGER/ASSET PURCHASE DATE
Coast Micro, Inc. Asset Purchase October 1993
Seton Financial Merger December 1993
Health Tech, Inc. Asset Purchase June 1994
Healthcare Design Systems Asset Purchase December 1995
InterMed Healthcare Systems, Inc. Merger December 1996
Healthcare Recovery, Inc. dba Synergy HMC Merger March 1997
Queen City Microsystems, Inc. Merger July 1997
Healthcare Revenue Management, Inc. Merger September 1997
Medicus Systems Corporation Merger November 1997
Fleming Softlink Systems, Inc. Merger December 1997
Resource Health Partners, L.P. Merger December 1997
Rothenberg Health Systems, Inc.
Healthcare Research Affiliates, Inc.
IPN, Inc.
Healthcare Cash Management Seminars, Inc. Asset Purchase January 1998
American Medical Network, Inc. Asset Purchase January 1998
Cabot Marsh Corporation Merger February 1998
Velox Systems Corporation Merger March 1998
Vision Software, Inc. Merger May 1998
Pyramid Health Group, Inc. Merger June 1998
Hospital Correspondence Corporation
Microport Applications, Inc.
Pyramid Health Solutions, Inc.
MetriCor, Inc. Merger June 1998
American Hospital Directory, Inc. Asset Purchase July 1998
CodeMaster Corporation Merger August 1998
Integrated Medical Networks, Inc. Merger September 1998
Premier Healthcare Corporation Merger December 1998
The Compucare Company Merger March 1999
Health Systems Integration, Inc.
Pro Intermed, Inc. Merger March 1999
Millennium Consulting Services, LLC Asset Purchase May 1999
Healthcare Financial Informatics Merger June 1999
LinkSoft Technologies, Inc. Merger June 1999
Med Data Systems, Inc. Asset Purchase July 1999
In 2000, QuadraMed divested its medical records management
business, the Release of Information ("ROI") Division, in three
transactions. First, on May 3, 2000, QuadraMed transferred and assigned the
assets and liabilities of the ROI Division to ChartOne, Inc. ("ChartOne"),
a newly formed subsidiary, pursuant to an Asset Contribution Agreement.
Second, on June 7, 2000, Warburg, Pincus Equity Partners, L.P. and certain
of its affiliates ("Warburg Pincus") and Prudential Securities Group, Inc.
("Prudential Securities") purchased 2,520,000 shares of ChartOne's Series A
Preferred Stock, representing approximately 43% of the fully diluted common
stock of Chart One, for an aggregate purchase price of $25.2 million
pursuant to a Securities Purchase Agreement. Third, on October 19, 2000,
QuadraMed sold its remaining interest in ChartOne for approximately $26.6
million in cash to Warburg Pincus and Prudential Securities pursuant to
the terms of a second Securities Purchase Agreement.
DESCRIPTION OF OPERATING DIVISION PRODUCTS AND MARKETS
Enterprise Products and Services Division
QuadraMed's Enterprise Products and Services Division provides
acute care hospitals with integrated enterprise information systems to
manage patient registration, clinical, and financial information.
Affinity(R) is the division's core product. For the last three consecutive
review periods, Affinity has been selected as the top "Major Acute Care"
software solution in a survey of 2,500 hospital chief information officers
and department directors, as reported by KLAS Enterprises in its Healthcare
IT Top 20 report. Product development on Affinity began in 1989. It was
first released in 1991 by The Compucare Company ("Compucare"), which
QuadraMed acquired in 1999.
Affinity is a standards-based, integrated, healthcare information
system. It is highly scaleable and flexible and supports the business
application needs of varying sized hospitals, from small community
facilities to large multi-entity integrated delivery networks ("IDNs"). It
can be implemented on both Microsoft NT and UNIX operating systems and
supports a number of hardware platforms, including Compaq, Hewlett Packard,
IBM, and EMC. Affinity is built on a standards-based architecture
constructed in an ANSI-standard programming language and uses the Cache
database with structured queried language (SQL) access engineered by
InterSystems Corporation.
Affinity's comprehensive and integrated product suite is comprised
of thirty-eight (38) applications divided into three major functional and
infrastructure areas: Financial, Clinical, and Advantage. Affinity clients
typically purchase "core" applications, such as Registration, Medical
Records, Patient Accounting, and Order Management. In addition to "core"
applications, clients frequently purchase additional Affinity applications
that help to streamline their workflow processes, reduce administrative
expenses and improve the speed and accuracy of billing processes, and
assist in clinical decision-making and documentation. Affinity does not
contain laboratory, pharmacy, materiel management, or fixed asset
applications.
Affinity's development cycle revolves around one major annual
release to customers and up to four "update" releases. Content for the
annual releases are centered in five major categories: (i) regulatory
enhancements required by federal and state mandates; (ii) strategic
enhancements to the breadth and depth of functionality; (iii) user group
enhancements voted by Affinity customers pursuant to customer support
agreements; (iv) corrective maintenance to repair code; and (v)
modification retrofits funded by customers.
Affinity is installed in 171 hospitals in 32 states. Hospitals
generally use committees to make information technology purchase decisions.
Consequently, purchase decisions are often slow to be made. The average
sales cycle for Affinity is from 12 to 18 months from initial contact to
contract execution. Affinity sales are typically generated from four major
sources: (i) requests for proposals sent directly to QuadraMed by the
hospital or its retained consultant; (ii) referrals and recommendations
from consulting firms; (iii) health care trade shows; and (iv) QuadraMed's
sales force, which uses its professional relationships, telemarketing and
direct-mail to generate sales.
In addition to Affinity, QuadraMed's Enterprise Products and
Services Division also markets EDM, an electronic document imaging and
management system and QCM, a contract management system. In January of
2001, the division also began selling Performance Measurement, a clinical
and financial outcomes analysis and decision support system, and a suite of
MPI Software and Services (MPIspy, SmartID, SmartMerge, MPI Cleanup), which
enable the identification, correction and elimination of duplicate patient
records in a facility's master patient index.
QuadraMed primarily markets its Enterprise Products and Services
Division products to acute care hospitals. The non-federal acute care
market consists of approximately 5,000 hospitals within the United States
(American Hospital Association Statistics, 2001). Differentiation within
this market is by locale (rural/urban) and bed size (number of beds).
Approximately 2,800 hospitals are located in urban areas and approximately
2,200 are located in rural areas. Hospitals with fewer than 200 beds
constitute approximately 71% of the total acute care market and account for
approximately 28% of the aggregate expenditures by acute care hospitals on
information technology. Hospitals with more than 200 beds constitute
approximately 29% of the acute care hospital market and account for
approximately 72% of acute care hospital spending on information
technology. The acute care hospital market is mature and has been in the
process of consolidating over the past several years. Consequently,
QuadraMed believes that the greatest sales opportunities for its Enterprise
Products and Services Division between now and 2005 will be in the
replacement market for legacy healthcare information systems. Given
Affinity's functional flexibility and ability to interface with other
clinical systems, QuadraMed believes that it has significant opportunities
in the 200 bed or larger hospital market.
From 1998 to 2000, hospital information system sales as a whole
slowed due to expenditures on Year 2000 remediation, industry
consolidation, and generally poor economic conditions for hospitals
primarily due to reimbursement issues associated with managed care
contracts and the Balanced Budget Act of 1997 (the "Balanced Budget Act").
QuadraMed expects that demand for its Enterprise Product and Services
Division products will increase in the short term due to the need for
hospitals to improve quality measures. Government regulatory bodies and the
news media continue to scrutinize patient safety issues, increasing the
need to reduce clinical error. In addition, QuadraMed believes that
shortages of medical professionals, particularly in nursing, ancillary, and
health information management departments, are expected to drive the need
of hospitals and other healthcare providers to acquire health information
systems that reduce clinical errors and increase hospital efficiencies,
administrative cost reduction, and accuracy and speed of billing processes.
Health Information Management Products Division
QuadraMed's Health Information Management Products Division
provides software products that automate and support hospital and provider
health information management departments in maintaining accurate and
timely patient treatment information and in accurately coding for
appropriate reimbursement. QuadraMed's Health Information Management
Products fall into three main areas: (i) Data Management; (ii) Record
Management; and (iii) Compliance Management. The Division includes the
former operations of Medicus Systems Corporation, Med Data Corporation
Systems, Inc. and Codemaster Corporation. QuadraMed's Health Information
Management solutions are based on an enterprise n-tiered architecture that
support a variety of database engines, including Sybase SQL Anywhere,
Microsoft Access, and Oracle Enterprise Edition. The products are developed
in a combination of Microsoft Visual C++, Visual FoxPro, and Borland's
Delphi Enterprise Edition. They are only sold in the United States.
QuadraMed's Data Management solutions enable healthcare facilities
to accurately collect and report patient demographic and clinical
information. QuadraMed's data collection and abstracting solution,
Abstractor+, collects patient demographic and clinical information for
state, federal and Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") regulatory requirements and for facility-specific
statistical reporting, benchmarking, outcomes and performance improvement,
marketing and planning. QuadraMed's data collection tools provide patient
database tailored to a facility's data collection requirements. Abstractor+
is fully integrated with Business Objects to provide a completely user
customizable data collection and analytical processing (OLAP) capability.
QuadraMed's encoding software solutions, nCoder+ and WinCoder,
identify ICD-9-CM and HCPCS/CPT codes for accurate collection and reporting
of patient clinical information. The encoding methodology is
"knowledge-based" and adheres to the U.S. Department of Health and Human
Services Office of the Inspector General ("OIG") recommended use of the
ICD-9-CM Official Coding Source. The encoding tools include official coding
protocol, data quality edits, and the professional knowledge of QuadraMed's
credentialed HIM professionals. QuadraMed's Grouping solutions address the
reimbursement methodologies utilized by the Medicare inpatient and
outpatient prospective payment systems.
QuadraMed targets its standard encoding products to hospitals with
over 100 beds, which are approximately 68% of the approximately 5000
non-federal acute care hospitals. QuadraMed has developed a specialized
encoding product, nCoder+ MD, for Veterans Administration facilities and the
physician market. QuadraMed believes that significant market opportunities
exist in the physician market for encoding product sales. QuadraMed also
believes that new opportunities for its encoding products could develop
with the anticipated implementation of ICD-10 in 2004. This new coding
classification system is expected to require the modification of coding and
data collections systems and the conversion of statistical information for
proper clinical reporting and reimbursement billing.
QuadraMed's Record Management solution, MEDREC Milliennium,
automates the record tracking and location functions, monitors record
completeness, and facilitates the release of information process within
health information management departments. This product assists healthcare
facilities in properly completing records pursuant to JCAHO, state, federal
and medical staff bylaw requirements. QuadraMed's Record Management
solution consists of four main modules that are sold individually or as a
product suite and interface with a facility's health information system.
QuadraMed's primary market for its Record Management solution is
acute care hospitals. The MEDREC Millennium Suite (a 32-bit solution)
includes distinctive features for IDNs, outpatient providers and Veterans
Administration facilities. These tools are designed to monitor a facility's
adherence to the patient privacy rules and patient bill of rights.
QuadraMed's Compliance Management solution, the Fraud and Abuse
Compliance Tracking System (FACTS), includes inpatient (IP-FACTS),
outpatient (OP-FACTS), and clinicals (Clinical FACTS). The FACTS product
line is designed to provide automated, pre-billing monitoring of 100% of
inpatient and outpatient claims data. The screening within the Compliance
Management tools includes OIG and internally designed targets aimed at
providing data quality, coding accuracy and appropriate reimbursement. In
addition to identifying claims with potential errors prior to billing, these
tools work in conjunction with an organization's coding compliance program
to identify patterns in coding and physician documentation. The management
reporting module includes boardroom ready reports summarizing clinical and
financial results. This product line also includes a point of registration
system that determines medical necessity prior to the service being
rendered. The screening is based upon Local Medical Review Policies
("LMRPs") and generates an Advanced Beneficiary Notice ("ABN").
QuadraMed's primary market for Compliance solutions is acute care
hospitals. The market for compliance management products is growing, and
reports have estimated that by 2004, 50% of acute facilities will implement
a software monitoring and auditing tool. QuadraMed believes that the advent
of the Outpatient Prospective Payment System and APCs may also provide
additional opportunities for its outpatient auditing tool.
Collection Services Division
QuadraMed's Collection Services Division provides three services
that identify and collect accounts receivables for hospitals and medical
groups: (i) Accounts Receivable Management; (ii) Managed Care Payment
Review; and (iii) Capitation Payment Review.
QuadraMed's Accounts Receivable Management services provide a
variety of third party collection services, including (i) complete
outsourcing that initially bills and collects accounts from time of
service; (ii) early out programs that collect accounts of pre-designated
age or amount; (iii) aged accounts placement that collect aged accounts on
a one-time basis; and (iv) conversion account resolution that collect
accounts that have not been transferred into a provider's new information
system. In addition to these main accounts receivable services, QuadraMed
also provides operational assessments of hospital revenue cycles and
training and education on business office operations and compliance issues
related to collection. QuadraMed also offers customization of accounts
receivable services and detailed reconciliation reports on its work.
QuadraMed markets its Accounts Receivable Management services to
large or multi-hospital facilities. Historically, most of QuadraMed's
clients for this service have been in California. In 2000, QuadraMed began
to market the services in other states and hired national sales
representatives. QuadraMed anticipates that demand for its Accounts
Receivable Management services should increase in the future as the
hospital and healthcare industry continues to experience increasing
accounts receivable volume, decreasing third party coverage, and
increasingly complex reimbursement mechanisms.
QuadraMed's Managed Care Payment Review services audit managed
care patient accounts for appropriate payment pursuant to managed care
contracts. In providing this service, QuadraMed uses its own proprietary
software that automates many audit functions and permits greater reporting
options.
QuadraMed's Capitation Payment Review services audit payments for
hospitals and medical groups that have accepted financial risk for Medicare
eligible health maintenance organizations ("HMO") enrollees and are paid by
the HMO on a percentage of the U.S. Health Care Finance Administration
("HCFA") premium. The service is only provided for health care providers
with more than 3000 Medicare HMO enrollees. Most of QuadraMed's customers
for this service are located in California.
Health Information Management Services Division
QuadraMed's Health Information Management Services Division provides
the following services:
o Health Information Interim Management. QuadraMed provides
both short-term and long-term interim management for hospital
health information departments. Minimum contract terms for
these services are typically three months. Through this
service, QuadraMed provides hospitals with qualified,
experienced managers.
o Health Information Management Consulting Services. QuadraMed
provides qualitative or quantitative health information
project management and consulting services to hospitals under
contracts for terms of weeks or months. Examples of services
are JCAHO accreditation review preparation, departmental
reviews and assessments, and implementation of services or
systems.
o Health Information Management Department Outsourcing
Services. QuadraMed contracts with hospitals to outsource
their entire health information management departments. These
contracts generally are multi-year and at a fixed fee, with
terms for base line performance.
o Coding, Compliance, and Education. QuadraMed provides
services associated with inpatient and outpatient coding and
coding compliance for hospitals, physicians, and clinic
practices, including backlog coding, coding auditing,
case-mix analysis, coding interim management, coding process
review, and coding education.
o Compliance, Legal, and Regulatory Services. QuadraMed
provides hospital-wide compliance risk assessments and
audits, compliance plan development, Department of Justice
corporate integrity agreement auditing and validation,
compliance help desk services, Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") compliance and
education services, HIPAA assessments, and the ComplySource(R)
(compliance and HIPAA) software solution.
o Charge Description Master Reviews. QuadraMed reviews hospital
charge description masters or charge control databases to
evaluate compliance and appropriate billing. Services are
provided at a hospital or remotely, typically under contracts
with terms of several months.
Due to shortages of professionals and need for broad-based
expertise, QuadraMed expects hospitals to continue to need consulting
services to assist in the management and execution of their health
information management strategies and responsibilities. In addition,
continued focus on billing and reimbursement accuracy by government payors
and law enforcement agencies is expected to continue to drive the demand
and need for these consulting services. QuadraMed provides services
throughout the country within a regionally-based operations structure.
QuadraMed markets it Health Information Management Services in a variety of
ways, including (i) requests for proposals sent directly to QuadraMed; (ii)
healthcare trade shows; and (iii) QuadraMed's professionals, who use their
professional contracts, telemarketing and direct mail to generate sales.
EZ-CAP Division
The EZ-CAP Division was established in August of 2000, and
EZ-CAP(R) is the division's core software product. The software automates
administration and management of managed care and at-risk provider
organizations. EZ-CAP tracks patient encounters, determines eligibility
coverage under various benefit structures in multiple health plans,
processes physician authorizations and referrals, tracks patient, provider,
and health plan service incidents, and adjudicates and pays claims. The
first version of EZ-CAP was introduced in 1989 by the predecessor to
Rothenberg Health Systems, Inc., which QuadraMed acquired in 1997.
EZ-CAP's latest release, EZ-CAP Enterprise v4.0, runs on Microsoft
SQL Server 7.0 using client/server architecture on a scalable platform,
Microsoft Windows graphical user interface, and tested functionality.
EZ-CAP has evolved to support complex relationships between its users and
their contracted health plan payors. EZ-CAP also manages sub-contract
agreements that its users may have with providers, providing functionality
to support both provider network development and a variety of reimbursement
methods for professional and institutional providers. EZ-CAP is supported
by a variety of turnkey modules to enhance functionality. These modules
provide access to EZ-CAP information via the Internet, permit electronic
loading of data, and provide connections between EZ-CAP and practice
management or hospital information systems. The product is not customized,
and clients use a core system that is enhanced annually as part of EZ-CAP's
software maintenance option.
EZ-CAP is marketed to and used by at-risk physician groups and
hospitals that administer multiple contracts with managed care
organizations, such as HMOs or preferred provider organizations ("PPOs").
Although managed care organizations continue to undergo considerable
regulatory and public scrutiny, as health costs continue to trend upward,
QuadraMed believes that employers, health plans, and other third party
payors will continue to require the administrative efficiencies that EZ-CAP
provides to at-risk providers. The bulk of EZ-CAP's customers are in the
United States, but international sales have been made in Ghana, Singapore,
the Philippines and South Africa. As various forms of managed care continue
to be adopted globally, QuadraMed believes that additional international
sales opportunities should exist in the future.
QuadraMed's EZ-CAP Division also provides seminars for doctors and
medical professionals in three formats: (i) direct marketing seminars that
are conducted in various locations throughout the country on various
subjects, such as billing collection, coding, and patient satisfaction;
(ii) on-site education seminars that are performed by request at hospitals
and other healthcare organizations; and (iii) on-line education seminars
that are 100% Internet based, with particular emphasis on coding
certification for health information management professionals.
FINANCIAL INFORMATION ABOUT OPERATING DIVISIONS
The financial statements and supplementary data, including
financial information about QuadraMed's operating divisions, are included
in this Form 10-K beginning on page F-1.
CUSTOMERS
Historically, QuadraMed has marketed its products primarily to
hospitals and IDNs, which account for approximately 90% of its revenues.
QuadraMed also sells products to hospital associations, physician groups,
payors and self-administered employers. As of December 31, 2000, QuadraMed
and its subsidiaries had approximately 4,000 customers located in all 50
states, the District of Columbia, Canada, Ghana, the Philippines, Puerto
Rico, Singapore and South Africa. QuadraMed expects to maintain a high
percentage of hospital customers for the foreseeable future. In 2000, 1999,
and 1998, no single customer accounted for 10% or more of QuadraMed's total
revenue or of any one business division.
RESEARCH AND DEVELOPMENT
QuadraMed's product development strategy is focused on maintaining
and improving existing products. In addition, Quadramed carries out its
development to meet changing healthcare regulatory demands. QuadraMed's
research and development is oriented toward enhancing the reporting
capabilities of its applications, expands its outpatient and inpatient
databases, and improves its comparative reporting and benchmarking
capabilities with third-party databases. As part of this process, a
significant amount of QuadraMed's research and development resources are
dedicated to integrating acquired technology.
In 2000, 1999, and 1998, QuadraMed's research and development
expenses respectively totaled $20.7 million, $21.8 million, and $20.6
million, representing 16.1%, 11.4%, and 12.0%, respectively, of its total
revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
HIGHLY COMPETITIVE MARKET
Competition for products and services in the healthcare
information management and technology industry is intense and is expected
to increase. QuadraMed competes with other healthcare information software
and services providers and healthcare consulting firms. Some principal
competitors include, among others:
o McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation in the market
for electronic document management products in the enterprise
products and services division;
o Eclipsys Corporation, Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., McKesson HBOC,
Shared Medical Systems, Inc., a division of Siemens, and
MediQual Systems, Inc., a division of Cardinal Health, Inc.,
in the market for decision support products in the enterprise
products and services division;
o McKesson HBOC, Inc., Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and IDX/Phamis in the market for enterprise
healthcare information systems in the enterprise products and
services division;
o Madison, McKesson HBOC, Shared Medical Systems, Inc., a
division of Siemens, and Medibase in the market for MPI
products and services in the enterprise products and services
division;
o 3M, SoftMed Corporation, Inc., MetaHealth, Eclypsis
Corporation, Cascade, and HSS in the market for medical
records products in the health information management product
division;
o PriceWaterhouseCoopers, KPMG and Ernst and Young for our
compliance products and services and health information
management consulting services in the health information
management services division;
o Physmark, Perot System's Health System Design,
Healtheon/WebMD's Medical Manager Corp., IDX Corporation and
Trigetto's Erisco, for at-risk managed care systems in the
EZ-CAP Division; and
o National consulting firms and on-line providers for physician
and other medical professional seminars in the EZ-CAP Division.
In addition, current and prospective customers evaluate
QuadraMed's capabilities against the merits of their existing information
systems and expertise. Furthermore, major software information systems
companies that do not presently offer products that compete with those
offered by QuadraMed, including those specializing in the healthcare
industry, may enter QuadraMed's markets.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug
and Cosmetic Act. At present, none of QuadraMed's software products are so
regulated. However, they could, in the future, become subject to such
regulation.
There is substantial federal and state regulation of the
confidentiality of patient medical records and the circumstances under
which such records may be disclosed to or processed by QuadraMed as a
consequence of its contacts with various health providers, including the
HIPAA. Although compliance with these laws and regulations is presently
the principal responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are rapidly
evolving. Additional legislation governing the dissemination of medical
record information also has been proposed and may be adopted at the state
level. Moreover, the Administrative Simplification provision of HIPAA
require the promulgation of regulations which will set standards for
electronic transactions, code sets, data security, unique identification
numbers, and privacy of individually identifiable healh information, which
could materially impact QuadraMed's business. In addition, during the past
several years, the healthcare industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement
rates and certain capital expenditures. We are unable to predict what, if
any, changes will occur.
INTELLECTUAL PROPERTY
QuadraMed relies on a combination of copyright, trademark and
trade secret law, and nondisclosure and noncompete agreements to protect
its proprietary methodologies, computer software and databases. QuadraMed
has obtained copyright registrations in the United States for many of its
principal products, including Affinity(R) and EZ-CAP(R). QuadraMed
maintains the confidentiality of proprietary technology through a policy of
obtaining employment agreements that (1) prohibit employees from disclosing
or using QuadraMed's confidential information, and (2) require the
disclosure and assignment to QuadraMed of new ideas, developments,
discoveries or inventions related to QuadraMed's business. QuadraMed also
enters into non-disclosure agreements with business partners and customers.
QuadraMed has obtained trademark registrations in the United States for
most of its corporate and product trademarks, including QuadraMed(R),
Affinity(R), and EZ-CAP(R). Any of these protective measures could prove to
be inadequate, and QuadraMed could become subject to litigation involving
its intellectual property. QuadraMed has not filed for or obtained any
patents for its proprietary technology, though from time to time it may in
the future seek patents for new developments if, in QuadraMed's business
judgment, their importance warrants such steps and is appropriate under the
patent laws. In addition, QuadraMed depends on licenses for certain
technology used to develop its products from a number of third-party
vendors. Most of these licenses are non-exclusive and expire within three
to five years.
EMPLOYEES
As of December 31, 2000, QuadraMed employed 1,030 people,
including 62 in general administration, 178 in product design, research and
development, and quality assurance, 209 in technical services and support,
62 in sales and marketing, 469 in consulting services, and 50 in
operations. As of December 31, 1999, QuadraMed employed 1,610 people,
including 75 in general administration, 309 in product design, research and
development, and quality assurance, 254 in technical services and support,
116 in sales and marketing, 779 in consulting services, and 77 in
operations. None of QuadraMed's employees are represented by a union or
other collective bargaining group. QuadraMed believes that it has a
satisfactory relationship with its employees.
ITEM 2 PROPERTIES
QuadraMed leases all of its facilities and does not own any real
property. As of December 31, 2000, its executive and corporate offices were
located in San Rafael, California, in approximately 33,000 square feet of
leased office space under a lease that expires in 2009. QuadraMed also
maintains offices in Alameda, California; Austin, Texas; Chicago, Illinois;
Englewood, Colorado; Escondido, California; Irvine, California; Irving,
Texas; Kansas City, Missouri; Neptune, New Jersey; Pittsburgh,
Pennsylvania, Portland, Oregon; Princeton, New Jersey; Reston, Virginia;
San Diego, California; Santa Cruz, California; Vista, California; Woodland
Hills, California; and Wyomissing, Pennsylvania. QuadraMed believes that
its facilities provide sufficient space for its present needs, and that
additional suitable space, if needed, will be available on reasonable
terms.
In 2000, QuadraMed closed the following unused or underutilized
offices: Bethlehem, Pennsylvania; Bloomington, Minnesota; Carlsbad,
California; Fresno, California; Glen Allen, Virginia; Howell, New Jersey;
and Middletown, Connecticut.
ITEM 3 LEGAL PROCEEDINGS
In the normal course of business, QuadraMed is involved in
litigation relating to claims arising out of its operations. QuadraMed does
not believe that the ultimate resolution of any pending proceeding will
have a material adverse effect on its business, financial condition or
results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
QuadraMed's annual meeting of stockholders was held on October 6,
2000. Voting was conducted in person and by proxy as follows:
a) Stockholders voted to elect Albert L. Greene, F. Scott Gross
and E. A. Roskovensky as directors, each to serve until the
2003 annual meeting and until their successors are elected
and qualified. Continuing directors, whose terms do not
expire until 2001, are Michael J. King and Cornelius T. Ryan.
Continuing directors, whose terms do not expire until 2002,
are James D. Durham and Lawrence P. English.
For Against Abstain
--- ------- -------
Albert L. Greene 17,255,956 0 1,383,297
F. Scott Gross 17,307,770 0 1,331,483
E.A. Roskovensky 17,252,895 0 1,386,356
b) Stockholders voted to amend QuadraMed's 1996 Stock Incentive
Plan to (1) increase the maximum number of shares authorized
for issuance under such plan by 500,000 shares and (2)
increase the maximum number of shares for which any one
person may receive options, stock appreciation rights or
direct stock issuances by an additional 500,000 shares to
1,000,000 shares in the aggregate per calendar year. There
were 4,646,645 shares voted for this proposal, 3,379,519
against, 944,539 abstentions and 0 broker non-votes.
c) Stockholders voted to approve QuadraMed's 1999 Supplemental
Stock Option Plan and to increase the number of shares of
QuaraMed's common stock, par value $.01 per share (the
"Common Stock"), issuable upon the exercise of options
granted under the plan from 2,000,000 shares to 4,000,000
shares. There were 6,162,798 shares voted for this proposal,
1,853,991 against, 953,914 abstentions and 0 broker non-votes
d) Stockholders voted to ratify the appointment of Pisenti &
Brinker LLP as independent auditors of QuadraMed for the
fiscal year ending December 31, 2000. There were 18,081,679
shares voted for this proposal, 538,691 against, 18,883
abstentions and 0 broker non-votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 31, 2000, the Nasdaq SmallCap Market began to quote
QuadraMed's Common Stock under the symbol "QMDC". From October 16, 1996 to
August 30, 2000, it had been quoted under the same symbol on the Nasdaq
National Market. The following table sets forth the range of QuadraMed's
Common Stock with high and low closing sales prices as reported on the
applicable Nasdaq market for the indicated periods
HIGH LOW
Year Ended December 31, 1999
First Quarter ............................ 29 7.625
Second Quarter............................ 12.0625 4.25
Third Quarter............................. 10.6875 6.0625
Fourth Quarter............................ 8.875 4.5
Year Ended December 31, 2000
First Quarter............................. 10.5 5
Second Quarter............................ 6 2.094
Third Quarter............................. 2.9687 1.1875
Fourth Quarter............................ 1.5312 0.625
Year Ended December 31, 2001
First Quarter (through March 29, 2001).... 2.688 0.75
On March 29, 2001, the closing price of QuadraMed's Common Stock
was $2.313 per share. As of that date, there were approximately 317 holders
of record of Common Stock (excluding beneficial owners whose shares are
held in the name of Cede & Co.).
QuadraMed has never declared or paid any cash dividends on shares
of its Common Stock. At this time, QuadraMed 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 shares of its Common Stock
in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DATA:
Revenues $128,971 $192,107 $172,228 $140,800 $101,076
Loss from Operations (74,727) (15,443) (16,308) (31,848) (8,169)
Net Loss (54,836) (12,330) (21,376) (37,985) (44,351)
Basis and diluted net loss per share (1) ($2.14) ($0.49) ($0.91) ($2.34) ($3.98)
======= ======= ======= ======= =======
AS OF DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Working capital (deficit) $62,795 $76,249 $83,463 $16,457 $7,234
Total assets $155,945 $214,661 $257,953 $124,022 $70,495
Stockholders' equity (deficit) $4,321 $62,581 $68,988 $24,762 $23,213
- ---------------
(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.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During 2000, QuadraMed moved away from its acquisition-based
growth strategy and began to focus on integrating its various businesses
and making financial and operational improvements. QuadraMed re-aligned its
organization into five operating divisions with zero-based operating budget
plans to emphasize customer service, product management, and expense
efficiencies. QuadraMed reduced its cost structure by eliminating redundant
management and consolidating offices.
Revenue in 2000 decreased from 1999. A number of healthcare
industry factors contributed to this decrease, including the decline in
information technology spending subsequent to Year 2000 remediation
expenditures and reimbursement shortfalls caused in part by the Balanced
Budget Act. Inefficient internal and business controls also contributed to
this decline.
QuadraMed carried out a full review of its assets and liabilities
as of June 30, 2000 and recorded charges for the necessary adjustments in
the third quarter to its balance sheet. In addition, the financial
performance and market position of each product line was re-evaluated as
part of developing strategies to improve integration and achieve synergies.
These actions improved fourth quarter financial results. Revenue
increased sequentially from the previous quarter, expenses were
significantly lower, and cash usage was near break even. QuadraMed also
realized a gain from the sale of its remaining interest in Chart One. In
addition, QuadraMed did not report any non-recurring charges for the
quarter. QuadraMed ended 2000 with a cash position of $48 million following
the ROI division divestiture, an increase relative to the previous year.
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.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Licenses............................... 58.5% 66.8% 69.6%
Services............................... 41.5 33.2 30.4
---- ---- ----
Total revenues......................... 100.0 100.0 100.0
Operating Expenses:
Cost of licenses....................... 19.4 13.7 14.5
Cost of services....................... 27.6 19.5 20.6
General and administration............. 39.1 27.5 29.3
Sales and marketing.................... 16.9 11.9 12.6
Research and development............... 16.1 11.4 12.0
Amortization of intangibles............ 5.6 4.2 3.7
Acquisition costs...................... 0.0 3.6 6.0
Impairment of intangibles.............. 0.7 5.5 0.0
Non-recurring changes.................. 32.5 9.8 2.4
Write-off of acquired in-process
research and development............ 0.0 0.9 8.4
--- --- ---
Total operating expenses............ 157.9 108.0 109.5
----- ----- -----
Loss from operations.......................... (57.9) (8.0) (9.5)
Interest income (expense), net................ (3.6) (1.5) 0.0
Other income (expense) net.................... 0.0 0.7 (0.1)
----- ----- ------
Net loss before provision for
income taxes and minority interest......... (61.5) (8.8) (9.6)
Provision for income taxes.................... (0.1) (0.2) (1.8)
Minority interest in income (loss)............ 0.0 0.0 (0.2)
Loss from discontinued operations............. 19.1 2.6 0.3
Dividend accretion............................ 0.0 0.0 (1.1)
----- --- ----
Net loss...................................... (42.5)% (6.4)% (12.4)%
====== ===== ======
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
QuadraMed currently classifies cost centers by primary activity to
estimate expenses by function. From 1998 to 2000, QuadraMed has implemented
a number of organizational changes, experienced a high level of employee
turnover, and converted to a new accounting system. Consequently, it is
impracticable to characterize the variances in results between 1998 and
1999 and QuadraMed believes that any such characterizations would not
enhance an understanding of its financial condition or results of
operations. As a result, the following Management Discussion and Analysis
focuses primarily on the comparison between 2000 and 1999.
REVENUES
Licenses. License revenues include license, installation,
consulting and post-contract support fees, third-party hardware sales and
other revenues related to licensing of our software products. License
revenues in 2000 were $75.5 million, a 41% decrease from $128.4 million in
1999, and a 37% decrease from $119.8 million in 1998. The decrease in
license revenues in 2000 from 1999 resulted from delayed customer
purchasing decisions, poor operational execution, and the diversion of
management's attention to integrate QuadraMed's numerous acquisitions.
Services. Service revenues were $53.5 million in 2000, a 16%
decrease from $63.7 million in 1999, and approximately 2% greater than
$52.4 million in 1998. The loss of several hospital outsourcing service
contracts was the primary reason for the decline in service revenues in
2000 from 1999.
COST OF REVENUES
Cost of licenses. Cost of licenses consists primarily of salaries,
benefits and allocated costs related to software installations, hardware
costs, and royalties to third parties. Cost of licenses in 2000 were $25.0
million, a 5% decrease from $26.3 million in 1999, and approximately the
same as $24.9 million in 1998. As a percentage of license revenues, cost of
licenses increased to 33.1% in 2000 from 20.5% in 1999 and 20.8% in 1998.
Cost of licenses in the aggregate decreased in 2000 principally as a result
of the lower sales volume and the restructuring actions taken in 2000. The
cost of licenses as a percentage of license revenues increased in 2000
primarily due to the decline in revenue.
Cost of services. Cost of services in 2000 was $35.6 million, a
5% decrease from $37.4 million in 1999, and approximately the same as $35.5
million in 1998. Cost of services includes expenses associated with
services performed primarily in connection with health information
management and business office outsourcing, compliance and consulting
services. As a percentage of service revenues, cost of services increased
to 66.6% in 2000 from 58.8% in 1999 and decreased from 67.8% in 1998. Cost
of services in the aggregate decreased in 2000 primarily as a result of the
restructuring actions taken in 2000, and cost of services as a percentage
of service revenues increased in 2000 principally due to the decline in
revenue.
OPERATING EXPENSES
General and Administration. General and administration expenses
were $50.5 million in 2000, 4.9% less than $53.1 million in 1999, and
approximately the same as $50.4 million in 1998. As a percentage of total
revenues, general and administrative expenses were 39.1% in 2000, 27.5% in
1999, and 29.3% in 1998. The decrease in general and administration
expenses in 2000 was principally due to the restructuring actions taken in
2000. The increase in general and administration expenses in 2000 as a
percentage of total revenues was principally due to the decline in sales
volume.
Sales and Marketing. Sales and marketing expenses were $21.8
million in 2000, 5% less than $22.9 million in 1999, and approximately the
same as $21.7 million in 1998. As a percentage of total revenues, sales and
marketing expenses were 16.9% in 2000, 11.9% in 1999, and 12.6% in 1998.
The decrease in these expenses in 2000 was primarily due to the
restructuring actions taken in 2000. The increase in sales and marketing
expenses in 2000 as a percentage of total revenue was principally due to
the decline in sales volumes.
Research and Development. Research and development costs include
costs incurred to enhance QuadraMed's software products and meet changing
healthcare regulatory demands. Research and development expenses in 2000
were $20.8 million, 5% less than $21.8 million in 1999, and approximately
the same as $20.7 million in 1998. As a percentage of total revenues,
research and development costs were 16.1% in 2000, an increase from 11.4%
in 1999, and 12.0% in 1998. The research and development expense decrease
in 2000 was principally due to the reduction in product versions and
associated maintenance requirements. As a percentage of total revenues,
research and development expenses increased in 2000 primarily due to a
smaller revenue base. QuadraMed capitalized $1.0 million, $4.8 million and
$3.1 million of software development costs in 2000, 1999, and 1998,
respectively, which represented 4.8%, 22.0% and 14.9% of total research and
development expenditures in 2000, 1999, and 1998 respectively. Amortization
of capitalized software development costs totaled $2.4 million, $0.7
million, and $0.7 million in 2000, 1999, and 1998, respectively.
QuadraMed believes that research and development expenditures are
essential to maintaining its competitive position. As a result, QuadraMed
intends to continue to make investments in the development of new products,
enhancement of existing products, and in the further integration of
acquired technologies.
Amortization of Intangibles. Amortization of intangibles decreased
to $7.2 million in 2000 from $8.0 million in 1999, and an increase from
$6.5 million 1998. The decrease in amortization of intangibles was
primarily due to the write-down of certain intangible assets during 2000.
In addition, in 2000 QuadraMed reclassified $3.6 million of intangible
assets to capitalized software in relation to the Med Data Systems, Inc.
("Med Data") acquisition.
Acquisition Costs. There were no acquisition charges for the year
ended December 31, 2000. In 1999, QuadraMed incurred $6.9 million of
acquisition costs, of which $6.3 million were associated with the
acquisition of Compucare, which was accounted for as a pooling of
interests. The $6.3 million in costs related to the acquisition of
Compucare were primarily for financial advisor fees of approximately $5.4
million incurred by QuadraMed and Compucare and to a lesser extent, legal
and accounting fees of approximately $900,000. In 1998, $10.3 million of
acquisition costs were associated with the acquisitions of Pyramid Health
Group Inc., ("Pyramid") Codemaster Corporation and Integrated Medical
Networks, Inc. ("IMN") which were all accounted for on a pooling of
interests basis. Acquisition costs were related to fees for financial
advisors, legal counsel, and accounting firms hired by QuadraMed and the
acquired companies.
Non-Recurring Charges. Non-recurring charges totaled $42.0 million
in 2000, primarily associated with the following categories:
(a) Restructuring Costs -- $11.3 million
QuadraMed's restructuring plans were aimed at eliminating
redundant costs and overhead and consolidating offices. These costs
include: $2.5 million in severance for terminated employees; $5.4 million
associated with separation agreements for officers; $2.9 million to
downsize and close excess facilities; and $0.5 million in other
restructuring expenses. At December 31, 2000, the remaining liability for
restructuring costs totaled $3.2 million and is included in "accrued
liabilities."
(b) Asset Impairment Charges -- $26.4 million
QuadraMed recorded charges for a $10.6 million write-down of
assets associated with a transaction with Health+Cast L.L.C., $6.2 million
in charges associated with the elimination of the EnOvation product, and
$5.5 million in certain receivable writedowns and costs associated with
discontinued operations. In addition, the balance sheet review by
management resulted in charges of $4.1 million, primarily from the
elimination of write-down of unbilled revenue and a reduction in the
carrying value of fixed assets.
(c) Non-case-specific litigation costs -- $4.3 million
An accrual of $4.3 million for non-case-specific litigation fees,
costs, and expenses was set up during the 2000. As of December 31, 2000,
the balance in this reserve was $1.6 million and is included in "accrued
liabilities".
In 1999, Non-recurring charges totaled $18.8 million, primarily
associated with severance payments and future rent and lease obligations
associated with the closing of several duplicative operating facilities and
certain integration costs related to prior acquisitions. Non-recurring charges
in 1998 totalled $4.2 million, primarily due to costs associated with closing
a duplicative operating facility.
Intangible Assets. QuadraMed recorded a $0.9 million charge in
2000 to write-down certain intangible assets related to the acquisition of
Velox Systems Corp. ("Velox"). QuadraMed recorded a $10.6 million charge in
1999 to write-down certain intangible assets related to acquisitions of
companies made in 1997 and 1998, specifically related to the acquisitions
of Healthcare Recovery, Inc., InterLink, Velox and American Hospital
Directory, Inc. No charges to intangible assets were made during 1998. In
addition, in 2000 QuadraMed reclassified $3.6 million of intangible assets
relating to Med Data to capitalized software, and $0.5 million of
acquisition costs from long term assets to intangibles.
Acquired In-Process Research and Development. There were no
charges to acquired in-process research and development during 2000. In
conjunction with the acquisition of Med Data during 1999, QuadraMed
recorded a $l.7 million shortage for acquired in-process research and
development charge as the technology had not achieved technological
feasibility and had no alternative future use. During 1998, in connection
with the acquisitions of Velox, Cabot Marsh Corporation, the remaining
43.3% interest in Medicus Systems Corporation and several other purchase
business combinations, QuadraMed allocated $14.5 million to acquired
in-process research and development.
Interest Expense. Interest expense, net of interest income, was
$4.5 million in 2000, $2.8 million in 1999, and $0 in 1998. Interest
expense in 2000 and 1999 was principally due to QuadraMed's $115 million
Convertible Subordinated Debentures issued in May 1998, offset by interest
income from QuadraMed's cash and investments. The increase in interest
expense in 2000 compared to 1999 is the result of less interest income from
a smaller portfolio of investments.
Provision for Income Taxes. Provision for income taxes was $0.2
million in 2000, $0.5 million in 1999 and $3.0 million in 1998. The
provision for income taxes was primarily due to state and alternative
minimum tax liabilities on certain of QuadraMed's legal entities. For
financial reporting purposes, a 100% valuation allowance has been recorded
against QuadraMed's deferred tax assets under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, QuadraMed had $27.4 million in cash and cash
equivalents, $12.3 million of short-term investments and $62.8 million in
net working capital compared to $10.6 million, $19.1 million and $76.3
million, respectively, in 1999.
Net cash used in operating activities was $13.5 million in 2000
compared to $39.5 million in 1999. Net cash used in operating activities in
2000 related to the net loss for the period, offset by the write-down of
certain intangible assets and the increase in accounts payable and accrued
liabilities. The increase in net cash used in operating activities in 1999
was principally due to an increase in unbilled products and accounts
receivable, prepaid expenses and other assets and a decrease in accounts
payable, accrued liabilities, and deferred revenue.
Net cash provided by investing activities was $29.5 million in
2000 compared to $2.6 million in 1999. Investing activities for 2000 were
comprised primarily of the approximately $40.4 million in proceeds from the
sale of our interest in ChartOne. Other investing activities included cash
outflows to purchase capital assets of $2.9 million and an increase in
restricted cash of $7.0 million. Investing activities for 1999 primarily
included the purchase of short and long-term investments using the proceeds
from the $115.0 million offering of convertible subordinated debentures and an
additional equity investment of $3.0 million in VantageMed Corporation.
Net cash provided by financing activities was $0.7 million in
2000, an improvement over the $18.4 million used in financing activities in
1999. Financing activities in 2000 primarily related to the proceeds from
the exercise of Common Stock options and purchases through the Employee
Stock Purchase Plan. Net cash used in financing activities was greater in
1999 primarily due to repayment of outstanding balances under the line of
credit assumed as part of the Compucare acquisition, partially offset by
the proceeds from the exercise of Common Stock options and purchases
through the Employee Stock Purchase Plan.
In May 1998, QuadraMed issued $115 million in convertible
subordinated debentures. The debentures are due May 1, 2005 and bear
interest at an annual rate of 5.25%, which is payable semi-annually. From
time to time, QuadraMed may repurchase some of its convertible subordinated
debentures in the open market.
QuadraMed believes that it will have sufficient liquidity and
operating cash flows to fund its scheduled debt service and other
obligations over the next twelve months.
INFLATION
The majority of QuadraMed's revenue is derived from perpetual and
long-term customer contracts. Term contracts range from one (1) to five (5)
years and generally allow price increases annually based on external
measures of inflation. QuadraMed has increased some of its prices under
these contract provisions. Accordingly, inflation has not had, and QuadraMed
does not believe that inflation will have, a significant impact on its
financial condition.
BUSINESS RISKS
QUADRAMED HAS ENCOUNTERED SIGNIFICANT CHALLENGES INTEGRATING ACQUIRED
BUSINESSES, AND ITS BUSINESS, OPERATIONS, AND FINANCIAL CONDITION HAVE BEEN
ADVERSELY AFFECTED.
Since its inception, QuadraMed has completed twenty-eight (28)
acquisitions. QuadraMed has encountered significant challenges related to
integrating acquired businesses into its operations and expects these
challenges to continue until incorporation is complete. Some of the
challenges QuadraMed has encountered or may encounter in integrating
acquired businesses include:
o Interruption, disruption or delay of QuadraMed's ongoing
business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expense;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results
resulting in failure of QuadraMed to realize anticipated
benefits;
o Failure to retain key acquired personnel and difficulty and
expense of training those retained;
o Increases in stock compensation expense and increased
compensation expense resulting from newly hired employees;
o Assumption of liabilities of acquired businesses and
potential for disputes with the sellers;
o Customer dissatisfaction or performance problems related to
acquired businesses;
o Exposure to the risks of entering markets in which QuadraMed
has no direct prior experience and to risks associated with
market acceptance of acquired products and technologies; and
o Platform and technical issues related to integrating systems
from various acquired companies.
All of these factors have had, and QuadraMed expects will continue
to have, an adverse effect on its business, financial condition and results
of operations at least until the integration of the acquired businesses is
complete. In addition, these problem have led QuadraMed to refocus its
business strategy away from acquisitions, which could lead to slower future
growth and negatively impact its financial condition.
QUADRAMED HAS INCURRED LOSSES IN EACH OF THE PAST THREE YEARS AND COULD
CONTINUE TO INCUR LOSSES IN FUTURE PERIODS.
QuadraMed incurred net losses of $54.8 million, $12.3 million, and
$21.4 million in 2000, 1999 and 1998, respectively. As of December 31,
2000, QuadraMed's accumulated deficit was $260.3 million. Included in these
losses are the effect of both operating losses and write-offs for
in-process research and development of $1.7 million and 14.5 million in
1999 and 1998, respectively. No in-process research and development
write-offs occurred in 2000. Furthermore, in connection with its
acquisitions, QuadraMed may be required to amortize significant expenses
related to goodwill and other intangible assets in future periods.
Accordingly, if QuadraMed's operating results do not improve to offset
these and other expenses, QuadraMed will continue to experience losses in
future periods and may never be profitable.
QUADRAMED'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH
COULD ADVERSELY AFFECT ITS NET INCOME AND FINANCIAL RESULTS.
QuadraMed's quarterly operating results have varied significantly
in the past and may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside its control. Accordingly,
quarter to quarter comparisons of our operating results may not be a good
indication of our future performance. Some of the factors causing these
fluctuations include:
o Variability in demand for products and services;
o Introduction of product enhancements and new products by
QuadraMed and its competitors;
o Timing and significance of announcements concerning present
or prospective strategic alliances;
o Discontinuation of, or reduction in, the products and
services QuadraMed offers;
o Loss of customers due to consolidation in the healthcare
industry;
o Delays in product delivery requested by its customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development, and
administrative personnel necessary to support anticipated
operations;
o Costs incurred for marketing and sales promotional
activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the
healthcare industry;
o Cooperation from competitors on interfaces and implementation
when a customer chooses systems from various vendors;
o Delays in implementation due to product readiness or to
customer induced delays in training or installation;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can
increase demand for new, updated systems;
o Federal regulations that directly affect reimbursements
received, and therefore the amount of money available for
purchasing information systems; and
o The fines and penalties a healthcare provider or system may
incur due to fraudulent billing practices.
QuadraMed's operating expense levels, which increase with the
addition of acquired businesses, are relatively fixed. Accordingly, if
future revenues are below expectations, QuadraMed would experience a
disproportionate adverse affect on its net income and financial results. In
the event of a revenue shortfall, QuadraMed will likely be unable to, or
may elect not to, reduce spending quickly enough to offset any such
shortfall. As a result, it is possible that QuadraMed's future revenues or
operating results may fall below the expectations of securities analysts
and investors. In such a case, the price of QuadraMed's publicly traded
securities may be adversely affected.
THE VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR PRODUCTS MAY
EXACERBATE THE UNPREDICTABILITY AND VOLATILITY OF OUR OPERATING RESULTS.
QuadraMed cannot accurately forecast the timing of its customer
purchases due to the complex procurement decision processes of most
healthcare providers and payors. How and when to implement, replace, expand
or substantially modify an information system are major decisions for
customers, and such decisions require significant capital expenditures by
them. As a result, QuadraMed typically experiences sales cycles that extend
over several quarters. In addition, certain products QuadraMed acquired as
a result of its acquisitions of IMN and Compucare have higher average
selling prices and longer sales cycles than many of its other products. As
a result, QuadraMed has only a limited ability to forecast the timing and
size of specific sales, making the prediction of quarterly financial
performance more difficult.
QUADRAMED MAY NOT BE ABLE TO HIRE AND RETAIN NECESSARY QUALIFIED PERSONNEL
AND THE UNCERTAINTY CAUSED BY QUADRAMED'S MANAGEMENT CHANGES COULD
ADVERSELY AFFECT THE PRICE OF ITS COMMON STOCK.
In large part, QuadraMed's future success will depend upon its
ability to attract and retain executive officers, product managers, and
other key sales, marketing and development personnel. Competition for
personnel in the software and healthcare information management industry is
intense. At times, QuadraMed has had difficulty attracting and retaining
highly qualified candidates within specific geographic areas or with
specific industry experience. If QuadraMed's competitors increase their use
of valid non-compete agreements, the pool of candidates may narrow in some
geographic areas. The failure to attract, retain, train, and effectively
manage personnel could increase QuadraMed's costs and impair its
development, sales, and customer service efforts.
In 2000, QuadraMed also made several changes in senior executive
management. Uncertainty created by these changes could lead some employees
to seek other employment and QuadraMed could experience difficulty
replacing them. Moreover, the trading price of QuadraMed's Common Stock
could fluctuate due to uncertainties about its senior executive management.
CHANGES IN PROCUREMENT PRACTICES OF HOSPITALS HAVE AND MAY CONTINUE TO HAVE
A NEGATIVE IMPACT ON QUADRAMED'S REVENUES.
A substantial portion of QuadraMed's revenues has been and is
expected to continue to be derived from sales of software products and
services to hospitals. Consolidation in the healthcare industry,
particularly in the hospital and managed care markets, could decrease the
number of existing or potential purchasers of products and services and
could adversely affect QuadraMed's business. In addition, the decision to
purchase QuadraMed's products often involves a committee approval.
Consequently, it is difficult for QuadraMed to predict the timing or
outcome of the buying decisions of its customers or potential customers. In
2000, QuadraMed's license revenues decreased. QuadraMed attributed this
decline in large part to delayed customer purchasing decisions stemming
from concerns about government regulation and general hospital industry
economic pressures. Moreover, QuadraMed's service revenues decreased due to
the loss of hospital service contracts. If either of these trends
continues, QuadraMed's business will be adversely affected. In addition,
many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater regional market power. These emerging systems
could have greater bargaining power, which may lead to decreases in prices
for QuadraMed's products, which could adversely affect QuadraMed's
business, financial condition and results of operations.
CHANGES IN THE HEALTH CARE FINANCING AND REIMBURSEMENT SYSTEM COULD
ADVERSELY AFFECT THE AMOUNT OF AND MANNER IN WHICH QUADRAMED'S CUSTOMERS
PURCHASE ITS PRODUCTS AND SERVICES.
Changes in current healthcare financing and reimbursement systems
could result in unplanned product enhancements, delays or cancellations of
product orders or shipments or reduce the need for certain systems.
QuadraMed could also have the endorsement of products by hospital
associations or other customers revoked. Any of these occurrences could
have a material adverse effect on QuadraMed's business.
The healthcare industry in the United States is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operations of healthcare organizations. The
commercial value and appeal of QuadraMed's products may be adversely
affected if the current healthcare financing and reimbursement system were
to revert to a fee-for-service model. In addition, many of QuadraMed's
customers provide 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 QuadraMed's
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other
things, reimbursement rates and capital expenditures. Proposals to reform
the healthcare system have been and are being considered by the United
States Congress. These proposals, if enacted, could change the operating
environment of QuadraMed's customers in ways that cannot be predicted.
Healthcare organizations may react to these proposals by curtailing or
deferring investments, including those for QuadraMed's products and
services. In addition, the regulations promulgated under HIPAA could lead
healthcare organizations to curtail or defer investments in non-HIPAA
related features in the next several years.
IF QUADRAMED IS UNABLE TO COMPETE EFFECTIVELY, IT COULD EXPERIENCE PRICE
REDUCTION, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
Competition for QuadraMed's products and services is intense and
is expected to increase. Increased competition could result in reductions
in QuadraMed's prices, gross margins, and market share and have a material
adverse affect on QuadraMed's business, financial condition and results of
operations. QuadraMed competes with other providers of healthcare
information software and services, as well as healthcare consulting firms.
Some competitors have formed business alliances with other competitors that
may affect QuadraMed's ability to work with some potential customers. In
addition, if some of our competitors merge, a stronger competitor may
emerge. Some principal competitors include:
o McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation in the market
for electronic document management products in the enterprise
products and services division;
o Eclipsys Corporation, Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., McKesson HBOC,
Shared Medical Systems, Inc., a division of Siemens, and
MediQual Systems, Inc., a division of Cardinal Health, Inc.,
in the market for decision support products in the enterprise
products and services division;
o McKesson HBOC, Inc., Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and IDX/Phamis in the market for enterprise
healthcare information systems in the enterprise products and
services division;
o Madison, McKesson HBOC, Shared Medical Systems, Inc., a
division of Siemens, and Medibase in the market for MPI
products and services in the enterprise products and services
division;
o 3M, SoftMed Corporation, Inc., MetaHealth, Eclypsis
Corporation, Cascade, and HSS in the market for medical
records products in the health information management product
division;
o PriceWaterhouseCoopers, KPMG and Ernst and Young for our
compliance products and services and health information
management consulting services in the health information
management services division;
o Physmark, Perot System's Health System Design,
Healtheon/WebMD's Medical Manager Corp., IDX Corporation and
Trigetto's Erisco, for at-risk managed care systems in the
EZ-CAP Division; and
o National consulting firms and on-line providers for physician
and other medical professional seminars in the EZ-CAP Division.
Current and prospective customers evaluate QuadraMed's
capabilities against the merits of their existing information systems and
expertise. Furthermore, major software information systems companies,
including those specializing in the healthcare industry, that do not
presently offer competing products may enter QuadraMed's markets. Many of
QuadraMed's competitors and potential competitors have significantly
greater financial, technical, product development, marketing and other
resources and market recognition than QuadraMed. Many of these competitors
also have, or may develop or acquire, substantial installed customer bases
in the healthcare industry. As a result of these factors, QuadraMed's
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the
political, economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion and sale of their products than QuadraMed. QuadraMed
may not be able to compete successfully against current and future
competitors, and such competitive pressures could materially adversely
affect QuadraMed's business, financial condition and operating results.
QUADRAMED MAY NOT BE ABLE TO INTRODUCE OR MARKET NEW PRODUCTS OR PRODUCT
ENHANCEMENTS SUCCESSFULLY OR IN A TIMELY MANNER, WHICH COULD ADVERSELY
AFFECT ITS COMPETITIVE POSITION.
QuadraMed's performance depends in large part upon its 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. QuadraMed may not
successfully, or in a timely manner, develop, acquire, integrate, introduce
or market new products or product enhancements. Product enhancements or new
products developed by QuadraMed also may not meet the requirements of
hospitals or other healthcare providers and payors or achieve or sustain
market acceptance. QuadraMed's failure to either estimate accurately the
resources and related expenses required for a project, or 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,
QuadraMed's failure to meet a customer's expectations in the performance of
its services could damage its reputation and adversely affect QuadraMed's
ability to attract new business.
QUADRAMED'S INABILITY TO PROTECT ITS INTELLECTUAL PROPERTY COULD LEAD TO
UNAUTHORIZED USE OF ITS PRODUCTS, WHICH COULD HAVE AN ADVERSE EFFECT ON ITS
BUSINESS.
QuadraMed relies on a combination of trade secret, copyright and
trademark laws, nondisclosure, noncompete and other contractual provisions
to protect its proprietary rights. QuadraMed has not filed any patent
applications covering its technology. Measures taken by QuadraMed to
protect its intellectual property may not be adequate, and QuadraMed's
competitors could independently develop products and services that are
substantially equivalent or superior to QuadraMed's products and services.
Any infringement or misappropriation of its proprietary software and
databases could put QuadraMed at a competitive disadvantage in a highly
competitive market and could cause QuadraMed to lose revenues, incur
substantial litigation expense and divert management's attention from other
operations.
QuadraMed depends on licenses for certain technology used to
develop its products from a number of third-party vendors. Most of these
licenses expire within three to five years. Such licenses can be renewed
only by mutual consent and may be terminated if QuadraMed breaches the
license terms and fails to cure the breach within a specified time period.
If such licenses are terminated, QuadraMed may not be able to continue
using the technology on commercially reasonable terms or at all. As a
result, QuadraMed may have to discontinue, delay or reduce product
shipments until equivalent technology is obtained, which could have a
material adverse effect on QuadraMed's business, financial condition and
results of operations. Most of QuadraMed's third-party licenses are
non-exclusive and competitors may obtain the same or similar technology. In
addition, if vendors choose to discontinue support of the licensed
technology, QuadraMed may not be able to modify or adapt its products.
Intellectual property litigation is increasingly common in the
software industry. The risk of an infringement claim against QuadraMed may
increase over time as the number of competitors in its industry segment
grows and the functionality of products overlaps. Third parties could
assert infringement claims against QuadraMed in the future. Regardless of
the merits, QuadraMed could incur substantial litigation expenses in
defending any such asserted claim. In the event of an unfavorable ruling on
any such claim, a license or similar agreement may not be available to
QuadraMed on reasonable terms, if at all. Infringement may also result in
significant monetary liabilities that could have a material adverse effect
on QuadraMed's business, financial condition and results of operations.
QuadraMed may not be successful in the defense of these or similar claims.
THE NATURE OF QUADRAMED'S PRODUCTS MAKES THEM PARTICULARLY VULNERABLE TO
UNDETECTED ERRORS, OR BUGS, THAT COULD REDUCE REVENUES, MARKET SHARE OR
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES.
Products such as QuadraMed's may contain errors or failures,
especially when initially introduced or when new versions are released.
Although QuadraMed conducts extensive testing on its products, software
errors have been discovered in certain enhancements and products after
their introduction. Despite such testing by QuadraMed and by its current
and potential customers, products under development, enhancements, or
shipped products may contain errors or performance failures, resulting in,
among other things:
o loss of customers and revenues;
o delay in market acceptance;
o diversion of resources;
o damage to QuadraMed's reputation; or
o increased service and warranty costs.
Any of these consequences could have a material adverse effect on
QuadraMed's business, financial condition, and results of operations.
BECAUSE NO MIRROR PROCESSING SITE FOR ITS TWO CUSTOMER DATA PROCESSING
FACILITIES EXISTS, QUADRAMED'S BUSINESS, FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED IF EITHER OF THESE FACILITIES
WERE SUBJECT TO A CLOSURE FROM A CATASTROPHIC EVENT OR OTHERWISE.
QuadraMed currently processes substantially all of its customer
data at its facilities in Austin, Texas and Neptune, New Jersey. Although
QuadraMed backs up its data nightly and has safeguards for emergencies,
such as power interruption or breakdown in temperature controls, QuadraMed
has no mirror processing site to which processing could be transferred in
the case of a catastrophic event at either of these facilities. If a major
catastrophic event occurs at either the Austin or the Neptune facility,
possibly leading to an interruption of data processing, or any other
interruption or closure, QuadraMed's business, financial condition, and
results of operations could be adversely affected.
QUADRAMED MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO AN INCREASE IN ITS
OUTSOURCING BUSINESS, WHICH COULD HAVE A NEGATIVE IMPACT ON REVENUES.
QuadraMed provides compliance, consulting, and health information
management outsourcing and accounts receivable management services,
including the billing and collection of receivables. If QuadraMed
experiences a period of substantial expansion in its outsourcing business,
QuadraMed may be required to make substantial investments in capital assets
and personnel. QuadraMed may not be able to assess accurately, or have the
funds required for, any investment, and it may not be able to negotiate and
perform in a profitable manner any of the outsourcing contracts it may be
awarded.
QUADRAMED MAY BE REQUIRED TO MAKE SUBSTANTIAL CHANGES TO ITS PRODUCTS IF
THEY BECOME SUBJECT TO FDA REGULATION, WHICH COULD REQUIRE A SIGNIFICANT
CAPITAL INVESTMENT.
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the FDA under the Federal Food, Drug and Cosmetic Act. At present, none of
QuadraMed's software products are so regulated. In the future, the FDA
could determine that some of QuadraMed's products, because of their
predictive aspects, are clinical decision tools and subject them to
regulation. Compliance with FDA regulations could be burdensome, time
consuming, and expensive. Other new laws and regulations affecting
healthcare software development and marketing also could be enacted in the
future. If so, it is possible that QuadraMed's costs and lengths of time
for product development and marketing could increase and that other
unforeseeable consequences could arise.
GOVERNMENTAL REGULATION OF THE CONFIDENTIALITY OF PATIENT RECORDS COULD
RESULT IN QUADRAMED'S CUSTOMERS BEING UNABLE TO USE ITS PRODUCTS WITHOUT
SIGNIFICANT MODIFICATION, WHICH COULD REQUIRE SUBSTANTIAL EXPENDITURES BY
QUADRAMED.
There is substantial state regulation of the confidentiality of
patient medical records and the circumstances under which such records may
be disclosed to or processed by QuadraMed as a consequence of its contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of the hospital,
physician or other healthcare provider, regulations governing patient
confidentiality rights are rapidly evolving. Additional legislation
governing the dissemination of medical record information also has been
proposed and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, require the promulgation of regulations that will set standards
for electronic transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. A final
regulation governing transaction and code set standards has been published
and is expected to become effective on October 16, 2002. The privacy
regulation has been published as a final regulation and is expected to
become effective on April 14, 2001. The HIPAA privacy regulation is complex
and far reaching. Compliance will be required of certain covered entities,
including healthcare providers, health plans, and healthcare
clearinghouses. QuadraMed may be implicated by these regulations either as
a covered entity or as a business associate of a covered entity. The HIPAA
and state healthcare privacy regulations could materially restrict the
ability of healthcare providers to submit information from patient records
using QuadraMed products and services or could require QuadraMed to make
substantial capital expenditures to be in compliance.
HIPAA's data security regulation has been published as a proposal.
At this time, no information is available on when the regulation will be
published as final or whether the regulation will be revised prior to final
publication. At this time, it is not possible to assess the specific
implications of the security regulation on QuadraMed. The regulation may
require holders of individual personal healthcare information, including
QuadraMed, to implement stringent security measures. Implementing such
measures may require substantial capital expenditures by QuadraMed due to
required product, service, and procedure changes.
In addition, during the past several years, the healthcare
industry has been subject to, among other things, increasing levels of
governmental regulation of reimbursement rates and certain capital
expenditures. Certain proposals to reform the healthcare system have been
and are being considered by Congress. These proposals, if enacted, could
change the operating environment for QuadraMed's clients in ways that could
have a negative impact on QuadraMed's business, financial condition and
results of operations. QuadraMed is unable to predict what, if any, changes
will occur.
IF QUADRAMED'S PRODUCTS FAIL TO ACCURATELY ASSESS, PROCESS, OR COLLECT
HEALTH CARE CLAIMS OR ADMINISTER MANAGED CARE CONTRACTS, QUADRAMED COULD BE
SUBJECT TO COSTLY LITIGATION AND BE FORCED TO MAKE COSTLY CHANGES TO ITS
PRODUCTS.
Some of QuadraMed's products and services are used in the payment,
collection, coding and billing of healthcare claims and the administration
of managed care contracts. If QuadraMed's employees or QuadraMed's products
fail to accurately assess, process or collect these claims, customers could
file claims against QuadraMed. QuadraMed's insurance coverage may not
adequately cover such claims. A successful claim that is in excess of, or
is not covered by, insurance coverage could adversely affect QuadraMed's
business, financial condition, and results of operations. Even a claim
without merit could result in significant legal defense costs and could
consume management time and resources. In addition, claims could increase
QuadraMed's premium such that appropriate insurance could not be found at
commercially reasonable rates. Furthermore, if QuadraMed were found liable,
QuadraMed may have to significantly alter one or more of its products,
possibly resulting in additional unanticipated research and development
expenses.
PROVISIONS IN QUADRAMED'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE LAW COULD DELAY OR DISCOURAGE THIRD PARTIES FROM ACQUIRING
QUADRAMED THE COMPANY AT A PREMIUM, WHICH COULD ADVERSELY AFFECT THE PRICE
OF ITS COMMON STOCK.
QuadraMed's board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by holders of QuadraMed's Common
Stock. If preferred stock is issued, the voting and other rights of the
holders of QuadraMed's Common Stock may be subject to, and may be adversely
affected by, the rights of the holders of QuadraMed's preferred stock. The
issuance of preferred stock may have the effect of delaying or preventing a
change of control of QuadraMed that would have been at a premium price to
our stockholders.
Certain provisions of QuadraMed's certificate of incorporation and
bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management difficult. For example, QuadraMed's board
of directors, which is classified into three classes of directors serving
staggered, three-year terms, has the authority to impose various procedural
and other requirements that could make it more difficult for QuadraMed's
stockholders to effect certain corporate actions. In addition, QuadraMed's
certificate of incorporation provides that directors may be removed only by
the affirmative vote of the holders of two-thirds of the shares of
QuadraMed's capital stock entitled to vote. Any vacancy on QuadraMed's
board of directors may be filled only by vote of the majority of directors
then in office. Further, QuadraMed's certificate of incorporation provides
that the affirmative vote of two-thirds of the shares entitled to vote,
voting together as a single class, subject to certain exceptions, is
required for certain business combination transactions. These provisions,
and certain other provisions of QuadraMed's certificate of incorporation,
could have the effect of delaying or preventing (i) a tender offer for
QuadraMed's Common Stock or other changes of control of QuadraMed that
could be at a premium price, or (ii) changes in its management.
In addition, certain provisions of Delaware law could have the
effect of delaying or preventing a change in control of QuadraMed, Section
203 of the Delaware General Corporation Law, for example, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
THE TRADING PRICE OF QUADRAMED'S COMMON STOCK HAS BEEN, AND IS EXPECTED TO
CONTINUE TO BE, EXTREMELY VOLATILE
The NASDAQ SmallCap Market on which QuadraMed is listed, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of QuadraMed's Common Stock has
been and is likely to continue to be highly volatile due to such factors
as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by QuadraMed's
competitors;
o Governmental regulatory action;
o Developments or disputes with respect to proprietary rights;
o General trends in QuadraMed's industry and overall market
conditions.
The market price of QuadraMed's Common Stock may also be affected
by movements in prices of equity securities in general.
FUTURE SALES OF A SUBSTANTIAL NUMBER OF SHARES OF QUADRAMED'S COMMON STOCK
COULD CAUSE THE PRICE OF THE STOCK TO DECREASE OR FLUCTUATE SUBSTANTIALLY.
Existing stockholders of QuadraMed hold a significant number of
shares of Common Stock that may be sold in the future under Rule 144 of the
Securities Act or through the exercise of registration rights. Sales of a
substantial number of the aforementioned shares in the public markets or
the prospect of such sales could adversely affect or cause substantial
fluctuations in the market price of QuadraMed's Common Stock and
convertible debentures and impair QuadraMed's ability to raise additional
capital through the sale of its securities.
IF QUADRAMED IS UNABLE TO ACHIEVE PROFITABILITY, IT MAY BE FORCED TO FILE
FOR BANKRUPTCY.
If QuadraMed's financial condition deteriorates and QuadraMed is
unable to reduce its losses or obtain additional financing, QuadraMed may
be forced to seek relief under Chapter 11 of the U.S. Bankruptcy Code.
Chapter 11 permits a company to remain in control of its business,
protected by a stay of all creditor action while the company attempts to
negotiate and confirm a plan of reorganization with its creditors. If
QuadraMed commenced a Chapter 11 case it would expect deterioration in its
customer relationships, a reduction in orders, the loss of suppliers, and
an erosion of employee morale. QuadraMed may be unsuccessful in its
attempts to confirm a plan of reorganization with its creditors. Many
Chapter 11 cases are unsuccessful, and virtually all involve substantial
expense and damage to the business. If QuadraMed were unsuccessful in
obtaining confirmation of a plan of reorganization, its assets could be
liquidated and could be insufficient to pay all of its securityholders.
QUADRAMED MAY LOSE SOME OR ALL OF ITS EQUITY INVESTMENTS IN EARLY STAGE
COMPANIES IF SUCH COMPANIES BECOME BANKRUPT OR INSOLVENT OR DO NOT SUCCEED
IN EXECUTING THEIR BUSINESS STRATEGY APPROPRIATELY.
QuadraMed has made equity investments and acquired minority
interests in certain early stage companies. QuadraMed does not have the
ability to control the operations of these companies and these investments
are subject to significant risks. There is no guarantee that QuadraMed will
realize any return on such investments. QuadraMed could also lose some or
all of its principal investment if these companies become bankrupt or
insolvent or do not succeed in executing their business strategy.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
QuadraMed's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio and its convertible
subordinated debentures. It is QuadraMed's intent to ensure the safety and
preservation of its invested principal funds by limiting default risk,
market risk and reinvestment risk. QuadraMed invests in high-quality
issuers, including money market funds, corporate debt securities, and debt
securities issued by the United States government. QuadraMed has a policy
of investing in securities with maturities of two years or less. QuadraMed
does not invest in derivative financial or foreign investments. The table
below presents fair values of principal amounts and weighted average
interest rates for QuadraMed's investment portfolio as of December 31, 2000
(in thousands, except average interest rates):
AGGREGATE WEIGHTED AVERAGE
FAIR VALUE INTEREST RATE
Cash and cash equivalents:
Money Market funds............................ $27,368 6.42%
-------
Total cash and cash equivalents........... $27,368
=======
Short-term investments:
Corporate debt securities..................... $ 7,302 6.05%
Debt issued by the U.S. government............ 4,994 5.31%
--------
Total short-term investments......... $12,296
========
Long-term investments:
Corporate debt securities..................... $ 500 6.63%
Debt securities issued by the U.S. government. 519 5.83%
--------
Total long-term investments.......... $ 1,019
========
Outstanding Debt. As of December 31, 2000, QuadraMed had
outstanding long-term debt of $115,000,000, consisting of its convertible
subordinated debentures that mature as follows (in thousands, except
average interest rates):
Maturity Carrying Fair Weighted Average
Date Amount Value Interest Rate
---- ------ ----- -------------
2005 $115,000 $41,113 5.25%
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its convertible subordinated debentures, the
bulk of QuadraMed's debt, is fixed at 5.25%.
FOREIGN CURRENCY RISK
Although QuadraMed from time-to-time sells its products
internationally, all such transactions are denominated in U.S. currency and
there is no foreign currency fluctuation risk.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included in
this Report on Form 10-K beginning on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
QuadraMed reported a change in accountants Current Reports on Form
8-K filed with the Securities and Exchange Commission ("SEC") on March 31,
2000 and May 15, 2000.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
QuadraMed's Bylaws provide for the appointment of seven directors,
divided into three classes designated Class I, Class II and Class III, and
their election at QuadraMed's annual meeting of stockholders. The term for
each class of directors is three years and directors serve until their
successors are elected and qualified, or until their earlier resignation or
removal. No family relationships exist between any of QuadraMed's current
directors and executive officers. The following chart lists QuadraMed's
directors by class and provides information regarding their age,
occupation, and tenure on the Board.
CLASS I - DIRECTORS CONTINUING IN OFFICE UNTIL THE
2003 ANNUAL MEETING OF STOCKHOLDERS
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
Albert L. Greene Chairman of the Board of
HealthCentral.com 1997 51
F. Scott Gross President and Chief Executive 2000 55
Officer of Primus Management, Inc.
E. A. Roskovensky President and Chief Executive 1999 56
Officer of Davis Wire Corporation
and President and Chief Operating
Officer of Robertson-Ceco Corp.
CLASS II - DIRECTORS CONTINUING IN OFFICE UNTIL
THE 2001 ANNUAL MEETING
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
Michael J. King Chairman and Chief Executive 1999 62
Officer of Healthscribe, Inc.
Cornelius T. Ryan Founding General Partner of Oxford Partners 2000 69
LP, and Oxford Bioscience Partners, LP
CLASS III - DIRECTORS CONTINUING IN OFFICE UNTIL THE
2002 ANNUAL MEETING OF STOCKHOLDERS
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
James D. Durham Chairman, Market Insite Group 1993 54
Lawrence P. English Chairman of the Board and Chief Executive 2000 60
Officer of QuadraMed
The following is certain biographical information, as of March 6,
2001, regarding the current members of QuadraMed's Board of Directors.
LAWRENCE P. ENGLISH has been Chief Executive Officer and a director of
QuadraMed since June 12, 2000. From January 1999 until immediately prior to
joining QuadraMed, Mr. English was the founder and Chief Executive Officer
of Lawrence P. English, Inc., a private turn-around management firm, where
he consulted to such organizations as Amedex Insurance Company and
Paracelsus Healthcare Corporation. From July 1997 to January 1999, Mr.
English was Chairman of the Board and Chief Executive Officer of Aesthetics
Medical Management, Inc., a physician practice management company for
plastic surgeons. From March 1992 until August 1996, Mr. English was
president of CIGNA Healthcare, one of the largest HMO providers in the
United States. Mr. English has been a director of Curative Healthcare
Corporation since May 2000. He also has been Director of Paracelsus
Healthcare Corporation since May 1999 and was elected Non-Executive
Chairman of the Board in February 2000. Mr. English holds a Bachelor of
Arts degree from Rutgers University and a Master of Business Administration
from George Washington University. He also graduated from Harvard Business
School's Advanced Management Program.
JAMES D. DURHAM has been a director of QuadraMed since 1993. He served as
Chairman of the Board of QuadraMed from May, 1996 until December 31, 2000
and served as its Chief Executive Officer until June 12, 2000. Mr. Durham
founded QuadraMed in September 1993 when he became its President and Chief
Executive Officer and director. Mr. Durham is currently serving as chairman
of Market Insite Group, a company which provides products and services to
match businesses to geographic location. He is also a part-time employee of
QuadraMed. Mr. Durham, a certified public accountant, holds a Bachelor of
Science degree with honors in Industrial Engineering from the University of
Florida and a Master of Business Administration with an emphasis in Finance
from the University of California, Los Angeles.
ALBERT L. GREENE has been a director of QuadraMed since May 1997. Mr.
Greene is the Chairman of the Board of HealthCentral.com, an online
consumer health information and products service company. He has served as
Chairman of HealthCentral.com since November 2000 and was its Chief
Executive Officer from November 2000 until FebRuary 2001. From 1997 to
2000, Mr. Greene was the President of HealthCentral.com. From June 1996
until September 1998, Mr. Greene was the Chief Executive Officer of Sutter
Health East Bay, a healthcare delivery system and the parent company of
Alta Bates Health System. From May 1990 until March 1998, Mr. Greene served
as the President and Chief Executive Officer of Alta Bates Medical Center,
a 527-bed acute care hospital located in Berkeley, California. From January
1996 until March 1998, Mr. Greene also served as the President and Chief
Executive Officer of Alta Bates Health System, the parent company of Alta
Bates Medical Center. Mr. Greene has been a director of Sierra Health
Services, a health and worker insurance company, since April of 2000. Mr.
Greene received a Masters of Hospital Administration from the University of
Michigan, and is presently a diplomat of the American College of Healthcare
Executives and a member of the American Hospital Association. Mr. Greene is
past chair of the California Healthcare Association.
F. SCOTT GROSS has been a director of QuadraMed since March 2000. Mr. Gross
is currently the founder, President and Chief Executive Officer of Primus
Management, Inc., a health services management he founded in 1989. Mr.
Gross has been a director of Fountain View, Inc., a nursing home chain,
since 1999. Mr. Gross holds a Bachelor of Science degree in Biology from
California State University, Northridge, and a Masters Degree in Public
Administration (Healthcare Management Option) from the University of
Southern California.
MICHAEL J. KING has been a director of QuadraMed since May 1999. Mr. King
has been the Chief Executive Officer of Healthscribe, Inc. since June 1999.
From September 1996 until May 1999, Mr. King served as Chairman of the
Board of Directors and Chief Executive Officer of The Compucare Company, a
healthcare information systems company acquired by QuadraMed in March 1999.
Prior to joining The Compucare Company, Mr. King was Chairman of the Board
of Directors, Chief Executive Officer and President of Software AG of the
Americas, an Enterprise Information Systems Company. He has been a director
of Osprey Systems, an e-business consulting services firm, from 1999 to the
present. Mr. King holds a degree in Mechanical Engineering from the
University of Sheffield and a Master of Business Administration equivalent
in Management Studies from the University of Hatfield.
E. A. ROSKOVENSKY has been a director of QuadraMed since May 1999. Mr.
Roskovensky has been the President and Chief Operating Officer of
Robertson-CECO Corp., a company that manufacture