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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
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, 2001
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 18, 2002 was approximately $233,350,000
(based upon the closing price for shares of the Registrant's common stock
as reported on the Nasdaq SmallCap Market for March 18, 2002). 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 18, 2002, 27,039,375 shares of the Registrant's common
stock, $0.01 par value per share, were outstanding.
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QUADRAMED CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I......................................................................1
Item 1 Business..........................................................1
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................13
Item 4 Submission of Matters to a Vote of Security Holders..............13
PART II....................................................................14
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters...........................................14
Item 6 Selected Financial Data..........................................16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......33
Item 8 Financial Statements and Supplementary Data......................34
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................34
PART III...................................................................34
Item 10 Directors and Executive Officers of the Registrant...............34
Item 11 Executive Compensation...........................................34
Item 12 Security Ownership of Certain Beneficial Owners and
Management....................................................34
Item 13 Certain Relationships and Related Transactions...................35
PART IV....................................................................35
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................35
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 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.
PART I
Item 1. Business
Overview
QuadraMed is dedicated to developing information technology and
providing consulting services that help healthcare professionals deliver
outstanding patient care with optimum efficiency. In 2001, QuadraMed
reported its first year of positive net income since becoming a publicly
traded company in 1996. In management's view, these results illustrate the
effectiveness of QuadraMed's strategy over the past eighteen (18) months in
focusing on the following:
o Integrating business units from the twenty-eight (28)
acquisitions made between 1993 and 1999;
o Reducing overall expenses;
o Increasing revenues;
o Selling non-strategic assets;
o Investing in research and development; and
o Instituting key financial and operational improvements.
QuadraMed initiated a new branding strategy in 2001 that included
the adoption of a new trademark, "We do technology. So you can do
healthcare."(TM) The strategy classified QuadraMed's healthcare technology
products and services into four sub-brands, corresponding to the four
distinct categories of hospital decision-makers who purchase its products:
o Affinity(R) Healthcare Information Systems, which are
generally purchased in a committee decision involving
hospital boards, chief executive officers, chief financial
officers, chief medical officers, chief information
officers, and outside consultants;
o Quantim(R) Health Information Management Software and
Services, which are generally procured by medical record
and health information management professionals;
o Complysource(R) Compliance Solutions, which are generally
engaged by compliance and legal officers and outside legal
counsel; and
o Chancellor(TM) Financial Products and Services, which are
generally secured by chief financial officers and revenue
officers.
In 2000, QuadraMed's operations were realigned into five (5)
distinct business segments. With the sale of the EZ-CAP managed care
software business in August of 2001, QuadraMed now is managed in four (4)
distinct business segments. Although not reported as a business segment,
QuadraMed also generated approximately five percent (5%) of its revenue
from specialty product lines that are not aligned with an operating
division or have been discontinued and is referenced as Other on the
Consolidated Financial Statements. The four (4) segments are as follows:
o Enterprise Division, which provides acute care hospitals
with Affinity integrated enterprise information systems to
manage patient registration, clinical, and financial
information and related products;
o Health Information Management Software Division, which
provides Quantim and Complysource 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 e reimbursement;
o Health Information Management Services Division, which
provides (i) Quantim Health Information Interim Management,
Management Consulting, and Department Outsourcing services;
(ii) Quantim and Complysource Coding, Compliance, and
Education services; (iii) Complysource Regulatory
Compliance services; and (iv) Complysource HIPAA Regulatory
Compliance services; and
o Financial Services Division, which identifies and collects
accounts receivables for hospitals and medical groups and
provides other Chancellor products and services.
Technology and Product Development Strategy
QuadraMed is continuously engaged in the design and development of
new products and enhancements to its existing products. QuadraMed research
and development is guided by the following technology trends that affect
software producers and consumers:
o Computing power, storage capacity, and network bandwidth
have in the past and may continue to double every 18, 12,
and 6 months, respectively;
o The Internet and distributed computing have had and will
likely continue to have a significant impact on the way
software is developed and delivered; and
o Web-native applications with a clean Internet architecture
will likely have a significant role in the future.
In 2001, QuadraMed focused on the development of web-native
applications (designed to run in a web browser) built on n-tiered
architecture (developed in discrete layers separating the user interface
from the business rules and data storage to provide maximum platform
independence) in two product areas:
o In the Affinity product line, a prototype Computerized
Physician Order Entry ("CPOE") system, used to assist
physicians in clinical decision-making and improve patient
safety, was completed. It is now scheduled for a beta
release in the fourth quarter of 2002. Designed with the
assistance of human factors engineers and extensive
usability testing, once operational it will be able to be
deployed in a flexible manner on a variety of platforms,
ranging from traditional PC desktops to wireless handheld
tablet computers and personal digital assistants; and
o In the Quantim product line, a single, fully-integrated
web-native platform that significantly improves and
combines the functionality of several existing health
information management product offerings in coding,
compliance, and data collection was developed. The first
product to be offered on this new platform, QuadraMed
Quantim Compliance (Inpatient and Outpatient Modules), was
delivered to its beta site in the fourth quarter of 2001
and is now generally available for purchase.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of product research and development
spending.
Revenue Model
QuadraMed's revenues, excluding exceptional items, are derived
from two sources: (i) licenses; and (ii) consulting services. License
revenues include amounts received for licenses and software-related
services, such as installation and post-installation customer support fees,
third-party hardware sales, and other software-related revenue. Consulting
services revenues include amounts from outsourcing, specialized staffing,
and analytical services provided by QuadraMed's Health Information
Management Services and Financial Services Divisions.
QuadraMed's software products (enterprise systems and
specific applications) can be licensed individually or as a suite of
inter-related products. Licenses are granted for a specified term
(generally ranging from one to five years, typically with fees paid
monthly, quarterly, or annually) or in perpetuity. Revenues from
enterprise systems are recognized on the basis of percentage of
completion. Revenues from term and perpetual licenses for specific
applications are recognized upon shipment of the software if there is a
definite agreement, collection of the resulting receivable is probable, and
the fee is fixed or determinable. If there is a contractual acceptance
period, revenues are recognized on the earlier of: (i) acceptance; or (ii)
the expiration of the acceptance period. Software-related service revenue
is recognized upon completion of installation. Unbilled receivables consist
of work performed or software delivered that has not been billed pursuant
to the customer contract. Post-installation customer support is recognized
ratably over the term of the support period. Deferred revenue is revenue
received in advance from customers for future work. Costs of software
products include hardware, royalties to third parties, and installation
costs.
QuadraMed's consulting services are rendered under contracts with
healthcare providers that are billed in one of three ways: (i) hourly rates;
(ii) monthly or quarterly fixed fees; or (iii) percentage of cash collections.
For services billed by the hour or on a monthly or quarterly fixed fee, which
are generally related to the Health Information Management Services Division,
revenue is recognized at the end of each month or quarter as services are
provided and billed. Contracts for the Financial Services Division generally
provide for incentive payments based on a percentage of dollars recovered for
the provider. QuadraMed recognizes this incentive revenue either upon
invoicing or upon receipt of payment from the provider. Cost of service
revenues consist primarily of salaries, benefits, and allocated costs related
to providing such services.
Description of Operating Division Products and Markets
Enterprise Division
QuadraMed's Enterprise Division provides hospitals, particularly
acute care hospitals, with integrated enterprise information systems to
manage patient registration, clinical, and financial information. Its
products are sold only in the United States and its primary offices are in
Reston, Virginia; Irvine, California; and Neptune, New Jersey.
Affinity is the division's core product. For the last five (5)
consecutive review periods, Affinity has been selected as the top "Major
Acute Care" software solution in a survey of approximately 3,500 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 hospitals of varying sizes, 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 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 forty (40) applications divided into four major functional and
infrastructure areas:
o Affinity Patient Information Management;
o Affinity Clinical Care Management;
o Affinity Patient Revenue Management; and
o Affinity Financial Management
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 are designed to:
o Streamline their workflow processes;
o Reduce administrative expenses;
o Improve the speed and accuracy of billing processes; and
o Assist in clinical decision-making and documentation.
Affinity's development cycle includes one major annual release to
customers and up to four "update" releases. Content for the annual releases
typically focuses on five (5) major categories:
o Regulatory enhancements required by federal and state
mandates;
o Strategic enhancements to the breadth and depth of
functionality;
o User group enhancements voted on by Affinity customers
pursuant to customer support agreements;
o Corrective maintenance to repair code; and
o Modification retrofits funded by customers.
In 2001, a prototype Affinity CPOE system, used to assist
physicians in clinical decision-making and improve patient safety, was
completed. It is now scheduled for a beta release in the fourth quarter of
2002. Designed with the assistance of human factors engineers and extensive
usability testing, it is designed to be deployed in a flexible manner on a
variety of platforms, ranging from traditional PC desktops to wireless
handheld tablet computers and personal digital assistants. In January of
2002, QuadraMed and Oracle Corporation announced a strategic healthcare
software development agreement under which QuadraMed became the first
member of the Oracle Healthcare Partner Initiative and agreed to develop
its Affinity advanced clinical applications on the Oracle Healthcare
Transaction Base, a web-native service architecture and development
platform focused on individuals and based on industry standards such as
Health Level Seven, version 3. QuadraMed entered the agreement to address
the evolving needs of certain of its IDN customers.
Affinity is currently installed in 171 hospitals in 32 states.
Hospitals generally use committees to make major information technology
purchase decisions. Consequently, purchase decisions are often slow to be
made. The average sales cycle for Affinity is typically 12 to 18 months
from initial contact to contract execution. Affinity sales are normally
generated from six (6) major sources:
o Requests for proposals sent directly to QuadraMed by the
hospital or its retained consultant;
o Referrals and recommendations from consulting firms;
o Healthcare trade shows;
o QuadraMed's sales force;
o Telemarketing; and
o Direct-mail.
In addition to Affinity, QuadraMed's Enterprise Division also
markets an electronic document imaging and management system or "EDM", and
a suite of Master Population Index ("MPI") Software and Services
(MPIspy(R), SmartID(TM), SmartMerge(R), MPI Cleanup), which enable the
identification, correction, and elimination of duplicate patient records in
a facility's master population index. In January of 2001, the division also
began selling QuadraMed's Chancellor Decision Support tools, which included
Contract Management, a contract management system, Performance Measurement,
a clinical and financial outcomes analysis and decision support system, and
Clinical Outcome Practice Evaluator ("COPE"), which electronically
captures, abstracts, and enters data required for Core Measures of the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO").
The following table provides a list of the major products and
services offered by QuadraMed's Enterprise Division:
- ------------------------------------------------------------------------------------------------
Affinity Patient Information Management o Patient Scheduling
o Patient Registration
o Master Population Index
o Community Master Population Index ("CMPI")
o Medical Records Abstracting
o Medical Records Control
o DRG/Case Mix
o Account Workflow
o Electronic Data Interchange
- ------------------------------------------------------------------------------------------------
Affinity Clinical Care Management o Computerized Physician Order Entry ("CPOE")
o Clinician Access
o Order Management
o Ancillary Department Management
o Patient Charting
o Medication Charting
o Plan of Care
o Acuity/Staff Requirements
o Health Notes
o Quality Management
o Utilization Management
- ------------------------------------------------------------------------------------------------
Affinity Financial Management o General Ledger
o Accounts Payable
o Payroll Personnel
o InSight Executive Decision Support
o Performance Measurement
- ------------------------------------------------------------------------------------------------
Affinity Patient Revenue Management o Patient Accounting
o Central Business Office
o Account Workflow
o Contract Management
o Electronic Data Interchange
- ------------------------------------------------------------------------------------------------
o Consulting Services
Affinity Professional Services o Interface and Conversion Services
o Systems Operations Management Services
o Query Services
o Customer Training Courses
o Professional Services
- ------------------------------------------------------------------------------------------------
Affinity Electronic Document Management o Medical Records
o Patient Accounting
o ColdView
o Human Resources
o Workflow
- ------------------------------------------------------------------------------------------------
o MPIspy
Affinity MPI Integrity Management o SmartMerge
o PreciseID Patient Search Algorithm
- ------------------------------------------------------------------------------------------------
o Contract Management
Chancellor Decision Support o Performance Measurement
o Clinical Outcome Practice Evaluator ("COPE")
- ------------------------------------------------------------------------------------------------
QuadraMed primarily markets its Enterprise 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 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. QuadraMed believes that
demand for its Enterprise Division products will increase in the short term
given that government regulatory bodies and the news media continue to
scrutinize patient safety issues, which increases the need to reduce
clinical error and improve quality measures. In addition, QuadraMed
believes that shortages of medical professionals, particularly in nursing,
ancillary, and health information management departments, will increase the
need for hospitals and other healthcare providers to acquire health
information systems that reduce clinical errors, increase hospital
efficiencies, reduce administrative cost, and improve the speed and
accuracy of billing processes.
Health Information Management Software Division
QuadraMed's Health Information Management Software Division
provides Quantim and Complysource software products that are designed to
automate and support hospital and provider health information management
departments in maintaining accurate and timely patient treatment
information and in accurately coding for reimbursement. QuadraMed's Health
Information Management Products fall into three (3) main areas:
o Data Management;
o Compliance Management; and
o Record Management.
The division's products are sold in the United States, Puerto Rico,
and Canada. Its main offices are in Alameda and Vista, California.
QuadraMed's Quantim Health Information Management software
products 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. In 2001, QuadraMed developed a
single, fully-integrated, web-native platform for the Quantim products that
significantly improves and combines the functionality of several existing
health information management product offerings in coding, compliance, and
data collection. The first product to be offered on this new platform,
QuadraMed Quantim Compliance (Inpatient and Outpatient modules), was
delivered to its beta site in the fourth quarter of 2001 and is now
generally available for purchase.
QuadraMed's Data Management solutions enable healthcare facilities
to accurately collect and report patient demographic and clinical
information. QuadraMed's data collection solution, WinCODER+CS, collects
patient demographic and clinical information for state, federal, and JCAHO
regulatory requirements and for facility-specific statistical reporting,
benchmarking, outcomes and performance improvement, marketing, and
planning. QuadraMed's data collection tools provide a patient database
tailored to a facility's data collection requirements. WinCODER+CS provides
a user customizable data collection and has on-line analytical processing
capability.
QuadraMed's coding software products, Quantim Facility Coding
(formerly 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 protocols, data quality edits, and
the professional knowledge of QuadraMed's credentialed health information
management professionals. QuadraMed's grouping products address the
reimbursement methodologies utilized by inpatient and outpatient
prospective payment systems.
QuadraMed targets its facility-based coding products to hospitals
with over 100 beds, which represent approximately 68% of the approximately
5,000 non-federal acute care hospitals. QuadraMed markets a specialized
coding product, PTFMD, for Veterans Administration facilities. In December
of 2001, QuadraMed established a new marketing unit for sales to
governmental agencies. QuadraMed also has developed a specialized coding
product for the commercial physician market, nCoder+PTF. In 2002, QuadraMed
will release Quantim Physician Coding. QuadraMed believes that significant
opportunities exist in the physician market for coding product sales.
QuadraMed also believes that new opportunities for its coding products
could develop with the anticipated implementation of ICD-10. This new
coding classification system is expected to require the modification of
coding, billing, and data collections systems and the conversion of
statistical information for proper clinical reporting and claims
submission.
QuadraMed's Quantim Compliance Management products, include
inpatient (Quantim Inpatient Compliance), outpatient (Quantim Outpatient
Compliance), and ambulatory patient classifications ("APCs") (Quantim APC
Compliance). The Quantim Compliance product line is designed to conduct
automated prospective and retrospective reviews of all inpatient and
outpatient claims data (UB92). The screenings within the Quantim Compliance
Management tools include OIG and internally designed targets aimed to
provide 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 and billing
compliance program to identify patterns in coding and physician
documentation. The management reporting module includes boardroom-ready
reports summarizing clinical and financial results. QuadraMed also offers a
compliance tool to screen professional fees and services (HCFA1500),
Quantim ProFEE Compliance Suite. This product is currently implemented in
Veteran's Administration facilities.
QuadraMed's primary market for Quantim Compliance products is the
acute care hospital market. The market for compliance management products
is growing and certain industry reports have estimated that by 2004, 50% of
acute care facilities will implement a software compliance tool. QuadraMed
believes that the advent of the Outpatient Prospective Payment System and
APCs may also provide additional opportunities for its Quantim Outpatient
Compliance tool.
QuadraMed's Record Management product, MEDREC Millennium(R),
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 patient
information system. QuadraMed's primary market for its Record Management
solution is acute care hospitals. The MEDREC Millennium Suite includes
distinctive features for IDNs, outpatient providers, and Veterans
Administration facilities. These tools are designed to monitor a facility's
adherence to patient privacy, disclosure, and patient bill of rights
requirements.
The following table provides a list of software products offered
by QuadraMed's Health Information Management Software Division:
- ---------------------------------------------------------------------------------------------
Quantim Data Management o Physician Coding
o Facility Coding
o nCoder+PTF
o Data Collection
- ---------------------------------------------------------------------------------------------
Quantim Compliance Management o Inpatient Compliance
o Outpatient Compliance
o APC Compliance
o VHA ProFee Compliance Suite
o Auditing Services
- ---------------------------------------------------------------------------------------------
Quantim Record Management o MEDREC Millennium Record Management
o Chart Completion: Retrospective and Concurrent
o Chart Locator
o Correspondence Management
o Enterprise Search and Reporting
o Electronic Signature/Document Distribution
- ---------------------------------------------------------------------------------------------
Complysource Regulatory Compliance o Compliance Assessment and Management Tool
- ---------------------------------------------------------------------------------------------
Complysource HIPAA Compliance o HIPAA Assessment and Management Tool
- ---------------------------------------------------------------------------------------------
QuadraMed's Health Information Management Software Division also
markets QuadraMed's Quantim Education and Training Services, which were
part of the former EZ-CAP division. This business 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.
Health Information Management Services Division
QuadraMed's Health Information Management Services Division
provides services only in the United States. The division's main offices
are in Englewood, Colorado. The division provides the following services:
o Quantim 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 Quantim Health Information Management Consulting Services.
QuadraMed provides qualitative or quantitative health
information project management and consulting services to
hospitals. Examples of services are JCAHO accreditation
review preparation, departmental reviews and assessments,
and implementation of services or systems.
o Quantim 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 Quantim 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 Complysource Regulatory Compliance 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, charge compliance reviews,
and the Complysource Compliance Assessment and Management
software solution.
o Complysource HIPAA Compliance Services. QuadraMed provides
Health Insurance Portability and Accountability Act of 1996
("HIPAA") compliance and education services, HIPAA
assessments, and the Complysource HIPAA Assessment and
Management software solution.
Due to shortages of professionals and the 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,
QuadraMed believes that continued focus on billing and reimbursement
accuracy by government payors and law enforcement agencies will increase
the demand and need for these consulting services. QuadraMed provides
services throughout the country within a regionally-based operations
structure. QuadraMed markets its Health Information Management Services in
a variety of ways, including: (i) requests for proposals sent directly to
QuadraMed; (ii) healthcare trade shows; (iii) QuadraMed's professionals;
(iv) telemarketing; and (v) direct mail to generate sales.
Financial Services Division
QuadraMed's Financial Services Division provides two services that
identify and collect accounts receivables for hospitals and medical groups:
(i) Chancellor Accounts Receivable Management; and (ii) Chancellor Managed
Care Payment Review. QuadraMed's Chancellor Accounts Receivable Management
services provide a variety of third party collection services, including:
o Complete outsourcing that initially bill and collect
accounts from time of service;
o Early out programs that collect accounts of pre-designated
age or amount;
o Aged accounts placement that collect aged accounts on a
one-time basis;
o Resolution of accounts unable to be transferred as part of
conversion to a provider's new health information system;
o Operational assessments of hospital revenue cycles; and
o 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. The Financial Services
Division provides services only to customers in the United States. Its
primary offices are located in Escondido and San Diego, California.
QuadraMed markets its Chancellor 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. Consequently, the business grew throughout 2001 at a
faster rate than in previous years. 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.
In 2001, QuadraMed ceased entering into new contracts for
Capitated Payment Review ("CPR") services. Under CPR contracts, QuadraMed
audited 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.
Centers for Medicare and Medicaid premium. The service was only provided
for healthcare providers with more than 3,000 Medicare HMO enrollees and
most of the customers for this service were located in California. The
decision to end these services was made because QuadraMed was unable to
achieve profitability from this service line.
Other
Approximately five percent (5%) of QuadraMed's revenue is derived
from specialty product lines that are not aligned with an operating
division and are referenced as Other on the Consolidated Financial
Statements. Those products include the Chancellor electronic data
interchange or "EDI" Claims Processing tool, ClaimStar(TM), and the
Chancellor Decision Support products, WinPFS(TM) Productivity and
Benchmarking, which provide critical data required to assess and measure
productivity, track patient population trends, and establish benchmarks
with other healthcare facilities, and related Patient Focused Solutions
Consulting Services. These products are sold only in the United States and
are provided to customers primarily out of offices in Kansas City,
Missouri, and Chicago, Illinois, respectively.
Financial Information About Segments
The financial statements and supplementary data, including
financial information about QuadraMed's operating segments, are included in
this Form 10-K beginning on page F-1.
Customers
QuadraMed primarily markets to acute care hospitals and IDNs,
which account for approximately 90% of its revenues. QuadraMed also sells
products to specialty hospitals and hospital associations. As of December
31, 2001, QuadraMed and its subsidiaries had customers located in all 50
states, the District of Columbia, Puerto Rico, and Canada. QuadraMed
believes that it will maintain a high percentage of its customers for the
foreseeable future. In 2001, 2000, and 1999, no single customer accounted
for 10% or more of QuadraMed's total revenue or the revenue of any one
business division.
Highly Competitive Market
Competition for products and services in the healthcare
information management and technology industry is intense and is expected
to so remain. QuadraMed competes with other healthcare information software
and services providers and healthcare consulting firms. Some principal
competitors include:
o In the market for enterprise healthcare information systems
in the Enterprise Division: McKesson Corporation, Shared
Medical Systems, Inc., a division of Siemens, MediTech
Corporation, Eclipsys Corporation, Cerner, and
IDX/Corporation;
o In the market for electronic document management products
in the Enterprise Division: McKesson Corporation, SoftMed
Corporation Inc., FileNet, Lanvision, MedPlus, and Eclipsys
Corporation;
o In the market for MPI products and services in the
Enterprise Division: Madison Technologies, Inc., McKesson
Corporation, Shared Medical Systems, Inc., a division of
Siemens, and Medibase;
o In the market for decision support products in the
Enterprise Division: Eclipsys Corporation, Healthcare
Microsystems, Inc., a division of Health Management Systems
Inc., McKesson Corporation, Shared Medical Systems, Inc., a
division of Siemens, and MediQual Systems, Inc., a division
of Cardinal Health, Inc.;
o In the market for compliance, data, and record management
products in the Health Information Management Software
Division: 3M Corporation, SoftMed Corporation, Inc.,
MetaHealth, Eclypsis Corporation, Cascade, and HSS, Inc.;
o In the Health Information Management Services Division:
PricewaterhouseCoopers LLP, KPMG, and Ernst and Young for
compliance products and services and health information
management consulting services; and
o In the Financial Services Division: Advanced Receivables
Strategy, Inc., a division of Perot Systems Corporation,
NCO Group, Inc., Outsourcing Solutions, Inc., Health
Management Systems, Inc., and Triage Consulting Group.
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.
There is substantial state and federal 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, such as 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. The administrative simplification provisions of HIPAA 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, which could
materially impact QuadraMed's business. During the past several years, the
healthcare industry also has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates and
certain capital expenditures. QuadraMed is unable to predict what, if any,
changes will occur as a result of such regulation.
Intellectual Property
QuadraMed relies on a combination of copyright, trademark and trade
secret law, and nondisclosure and non-compete agreements to protect its
proprietary methodologies, computer software, and databases. QuadraMed
maintains the confidentiality of proprietary technology through a policy of
obtaining employment agreements that (i) prohibit employees from disclosing or
using QuadraMed's confidential information, and (ii) require the disclosure
and assignment to QuadraMed of new ideas, developments, discoveries or
inventions related to QuadraMed's business. QuadraMed also initiated a new
branding strategy in 2001 that included the adoption of a new trademark, "We
do technology. So you can do healthcare." QuadraMed also enters into
non-disclosure agreements with business partners and customers in the ordinary
course of business. QuadraMed has obtained trademark registrations in the
United States for most of its corporate and product trademarks, including
QuadraMed, Affinity, Quantim, and Complysource. QuadraMed had not filed for or
obtained any patents for its proprietary technology until 2001, when it sought
a patent on its Affinity CPOE software application. QuadraMed may in the
future seek patents for new products if, in its business judgment, their
importance warrants such steps and is susceptible to protection under the
patent laws. QuadraMed also depends on licenses for certain technology used to
develop its products from third-party vendors.
Employees
QuadraMed believes that it has a satisfactory relationship with
its employees. None of QuadraMed's employees are represented by a union or
other collective bargaining group. The following table provides information
regarding QuadraMed's active employees in the years 2001, 2000, and 1999.
For comparative purposes, the 2000 and 1999 figures have been adjusted to
reflect the divestiture of the EZ-CAP business and to approximate the 2001
organizational structure:
---------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------
Product Design/Research & Development/Quality Assurance 178 163 286
---------------------------------------------------------------------------------
Technical Services & Support 226 178 216
---------------------------------------------------------------------------------
Sales & Marketing 84 58 111
---------------------------------------------------------------------------------
Consulting Services 391 469 779
---------------------------------------------------------------------------------
Senior Management/General Administration 106 107 142
---------------------------------------------------------------------------------
TOTAL 985 975 1,534
---------------------------------------------------------------------------------
Management
The following table sets forth biographical information concerning
QuadraMed's Chief Executive Officer and Executive Officers and senior
management, as of March 18, 2001:
- -----------------------------------------------------------------------------
NAME, AGE, TITLE OCCUPATION AND BACKGROUND
- -----------------------------------------------------------------------------
Lawrence P. English, 61 o Chairman of the Board since December 2000
Chairman of the Board and and Chief Executive Officer since June 2000.
Chief Executive Officer o Founder and Chief Executive Officer of
Lawrence P. English, Inc., a private
turn-around management firm that
consulted to companies such as Amedex
Insurance Company and Paracelsus
Healthcare Corporation, from January 1999
to June 2000.
o Chairman of the Board and Chief Executive
Officer of Aesthetics Medical Management,
Inc., a physician practice management
company for plastic surgeons, from July
1997 to January 1999.
o President of CIGNA Healthcare, one of the
largest HMO providers in the United
States, from March 1992 until August
1996.
o Director of Curative Healthcare
Corporation since May 2000.
o Director of Clarent Hospital Corporation,
formerly Paracelsus Healthcare
Corporation, since May 1999.
Non-Executive Chairman of the Board since
February 2000.
o Bachelor of Arts degree from Rutgers
University.
o Master of Business Administration from
George Washington University.
o Graduate of Harvard Business School's
Advanced Management Program.
- ------------------------------------------------------------------------------
Michael S. Wilstead, 44, o Chief Operating Officer since December
Chief Operating Officer 2001. Previously, President of the Health
Information Management and Software
Divisions and the former EZ-CAP Division.
Joined QuadraMed in July 1998 as Vice
President of Sales.
o Group President at STERIS Corporation, an
infection control and surgical support
products company, from 1995 to 1998.
o Various positions at AMSCO International
and AMSCO Canada, both of which are
medical equipment companies, from 1990 to
1995.
o Bachelor of Science degree in Business
Administration from the University of
Phoenix.
- -------------------------------------------------------------------------------
Mark N. Thomas, 49 o Chief Financial Officer since June 2000.
Chief Financial Officer o Chief Financial Officer of Lifeguard, Inc.,
an independent health plan, from 1998 until
joining QuadraMed.
o Various executive management positions,
including controller, managing director
and treasurer, of Coregis Insurance Group
and Industrial Indemnity Company,
insurance companies owned by Xerox
Corporation, from 1993 to 1997.
o Bachelor of Arts degree in Economics and
Political Science from Occidental
College.
o Double Master of Business Administration
degree in Finance and Strategic Planning
from Wharton School of Business.
o Certificate in executive education in
corporate strategy from the University of
Michigan.
- -------------------------------------------------------------------------------
Michael H. Lanza, 40 o Executive Vice President since September 2000
Executive Vice President and Corporate Secretary since December
and Corporate Secretary 2000.
o Various legal and public affairs
positions at CIGNA Corporation, the
publicly owned employee benefits company,
including Vice President & Assistant
General Counsel, CIGNA International;
Assistant General Counsel, Business
Practices, CIGNA Healthcare; and
Assistant General Counsel, State
Government Affairs, CIGNA Corporation,
from November 1993 to September 2000.
o Political consultant and attorney in
private practice specializing in real
estate development, finance, and work out
from 1986 to 1993.
o Bachelor of Arts from the University of
Connecticut.
o Juris Doctor from the University of
Connecticut School of Law.
- ------------------------------------------------------------------------------
Dean A. Souleles, 41 o Chief Technology Officer since August 2000.
Chief Technology Officer Joined QuadraMed in February 2000.
o Chief Technology Officer and Director of
Research and Development for Chase Credit
Systems, Inc., a software and technical
services firm serving the mortgage credit
reporting industry, from March 1997 to
February 2000.
o Technology consultant to Forest Lawn
Mortuary from January to June 1997.
o Chief Technology Officer, SureNet
Corporation, an Internet service
provider, from October 1995 to December
1996.
o Consultant to NASA's Jet Propulsion
Laboratory as principal engineer and
system architect on various space, civil
and defense programs from March 1986 to
October 1995.
- ------------------------------------------------------------------------------
Item 2 Properties
QuadraMed leases all of its facilities and does not own any real
property. As of December 31, 2001, 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. The principal
office locations related to QuadraMed's four (4) business segments are
described in Item 1. QuadraMed believes that its facilities provide
sufficient space for its present needs, and that additional suitable space,
if needed, would be available on reasonable terms.
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
No matters were submitted during the fourth quarter of 2001 to the
vote of security holders through the solicitation of proxies or otherwise.
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
(2 years)
(a) Market Information
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, QuadraMed's common stock 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, 2000
First Quarter ....................... $ 10.500 $ 5.000
Second Quarter....................... 6.000 2.094
Third Quarter........................ 2.969 1.188
Fourth Quarter....................... 1.531 0.625
Year Ended December 31, 2001
First Quarter........................ $ 2.688 $ 0.750
Second Quarter....................... 4.980 1.625
Third Quarter........................ 6.300 3.090
Fourth Quarter....................... 9.250 4.330
Year Ended December 31, 2002
First Quarter until March 18, 2001 $ 11.550 8.420
(b) Holdings
On March 18, 2002, the closing price of QuadraMed's common stock
was $8.63 per share. As of that date, there were approximately 8,252 holders
of record of common stock (excluding beneficial owners whose shares are
held in the name of Cede & Co.), an increase of 7,935 from 317 holders of
record in March of 2001.
(c) Dividends
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.
(d) Recent Sales of Unregistered Securities
In June 1999, QuadraMed issued 435,000 unregistered shares of
QuadraMed common stock in connection with the acquisition of Linksoft
Technologies, Inc. ("Linksoft"). As part of the same transaction, QuadraMed
assumed warrants that, if exercised, require it to issue 6,424 shares of
common stock at an exercise price of $0.03 per share. In 1999, the warrants
were partially exercised and 5,396 shares of common stock were issued.
Warrants that expire in March of 2008 remain outstanding for 1,028 shares
of common stock.
In June 1999, QuadraMed issued 452,807 unregistered shares of
QuadraMed common stock in connection with the acquisition of Healthcare
Financial Informatics ("HFI").
In May 1999, QuadraMed issued 19,633 unregistered shares of
QuadraMed common stock in connection with the acquisition of Millennium
Consulting Services, LLC ("Millennium Consulting").
In March 1999, QuadraMed issued 660,000 unregistered shares of
QuadraMed common stock in connection with the acquisition of Pro Intermed,
Inc. ("Pro Intermed").
In March 1999, QuadraMed issued 2,957,000 unregistered shares
of QuadraMed common stock in connection with the acquisition of Compucare.
As part of the same transaction, QuadraMed assumed warrants that, if
exercised, require it to issue 24,563 shares of common stock. Warrants for
3,941 shares at an exercise price of $61.73 expired in December of 2000.
Warrants for a total of 20,622 shares of common stock remain outstanding,
with 2,690 at an exercise price of $111.54 and a January of 2003
expiration; 11,208 at an exercise price of $223.09 and an October of 2005
expiration; and 6,724 at an exercise price of $0.15 and a February of 2006
expiration.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
This table provides information about QuadraMed common stock
subject to equity compensation plans as of December 31, 2001.
- ---------------------------------------------------------------------------------------------------------
Number of securities
remaining available
for future issuance
Plan Category Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excludes securities
outstanding options outstanding options in column)
=========================================================================================================
Approved By Stockholders* 5,746,800(1) $5.28 3,303,488(2)
- ---------------------------------------------------------------------------------------------------------
* QuadraMed has two active equity compensation plans, the 1996 Stock
Incentive Plan, as amended, and approved by stockholders June 15, 2001
(the 1996 Plan); and the 1999 Supplemental Stock Option Plan, as
amended, and approved by stockholders October 5, 2000 (the 1999 Plan).
(1) Includes 322,692 shares of QuadraMed common stock originally
issuable under various benefit plans of entities acquired by
QuadraMed.
(2) The 1996 Plan provides for automatic future increases in the number
of shares of common stock available for issuance, such that on the
first trading day of each calendar year that number is increased by
an amount equal to 1.5% of the total number of shares of common
stock outstanding on the last trading day of the immediately
preceding calendar year.
(f) Preferred Stock
QuadraMed has authorized 5.0 million shares of preferred stock,
par value $0.01 per share. QuadraMed's board of directors has authority to
provide for the issuance of its shares of preferred stock in series, to
establish from time to time the number of shares to be included in each
such series and to fix the designation, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof, without any further vote or action by the
shareholders. As of December 31, 2001, QuadraMed had no outstanding
preferred stock.
Item 6 Selected Financial Data.
Years Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Consolidated Statement of Operations (In thousands, except per share amounts)
Data:
Revenues $129,435 $120,111 $175,461 $172,228 $140,800
Income (loss) from Operations 2,299 (78,135) (21,251) (19,890) (31,848)
Net Income (loss) 15,481 (54,836) (12,330) (21,376) (37,985)
Basis and diluted net income (loss)
per share (1) $0.60 ($2.14) ($0.49) ($0.91) ($2.34)
------------ ---------- ---------- ----------- ------------
As of December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Consolidated Balance Sheet Data: (In thousands)
Working capital $ 47,155 $ 55,772 $ 76,265 $ 83,472 $ 17,622
Debentures $ 73,719 $115,000 $115,000 $115,000 -
Total assets $130,743 $153,949 $212,238 $256,286 $103,884
Stockholders' equity $ 20,161 $ 4,321 $ 62,581 $ 68,988 $ 33,729
- ---------
(1) See Note 4(e) 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
With the appointment of a new management team in mid-2000,
QuadraMed shifted its strategy from acquisition-based growth to focusing on
integrating its businesses and making various financial and operational
improvements. QuadraMed realigned its organization into five (5) operating
segments with zero-based operating budgets and business plans that
emphasized customer service, product enhancement, increased sales, and
operating profitability. QuadraMed reduced its cost structure by
eliminating redundant management and consolidating offices.
Although QuadraMed reported a significant Loss from Operations in
2000, the operating loss for the third and fourth quarters narrowed
substantially. This improvement reflected lower expenses, excluding
non-recurring charges, and sequential growth in fourth quarter 2000
revenue. During this quarter, QuadraMed sold its remaining interest in
ChartOne, Inc. ("ChartOne") for $26.6 million. These actions enabled
QuadraMed to end 2000 with a slight fourth quarter profit and $48.7 million
of cash and investments.
The operating strategy for 2001 consisted of continued expense
discipline, increased sales activity to improve revenue growth, and
initiation of R&D investments in new products to strengthen and expand
QuadraMed's market position by segment.
During 2001, QuadraMed successfully increased revenue in all of
its business segments except Health Information Management Services. This
growth reflected increased software sales in the Enterprise and Health
Information Management Software segment, and increased sales in the
Financial Services segment. Revenue for the Health Information Management
Services segment declined during 2001, principally as a result of the
termination of several underpriced outsourcing contracts during 2000, while
the revenue from the consulting and staffing product lines was stable. On
August 31, 2001, QuadraMed sold its EZ-CAP business, the principal
component of the Physician Services segment, to OAO Transition, LLC, and
OAO Technology Solutions, Inc ("OAO"). The EZ-CAP business was QuadraMed's
only business segment devoted to the physician group and regional HMO
market, and its divestiture enabled QuadraMed to focus its remaining
segments solely on the hospital sector. This divestiture eliminated
Physician Services as a segment for 2001 reporting purposes, and the net
earnings of EZ-CAP have been included in Discontinued Operations for 2001
and all prior periods.
As a result of sequential growth in revenue each quarter, tight
control of expenses, and elimination of non-recurring charges, QuadraMed
achieved Income from Operations in 2001 of $2.3 million, a substantial
improvement over the Loss from Operations in 2000 of $78.1 million.
Net income for 2001 was $15.5 million, an increase of $70.3
million over the net loss for 2000 of $54.8 million. This increase
reflected the improvement in income from operations and included: interest
expense on its outstanding convertible subordinated debentures issued as of
May 1, 1998, in the principal amount of $115 million ("Debentures"),
interest income earned on cash and investments, the write-down of
convertible debt held in Purkinje, Inc. ("Purkinje"), gain on the
repurchase of Debentures during 2001, and income from discontinued
operations, including the gains and losses from the sales of the EZ-CAP and
Electronic Remittance Advice ("ERA") businesses. Each of these
non-operating components of net income will be addressed in subsequent
sections of this Management Discussion and Analysis.
Summary of Critical Accounting Issues
QuadraMed's critical accounting issues have a significant impact
on the Management Discussion and Analysis:
(a) Use of Estimates
QuadraMed must make estimates, assumptions, and judgments that
affect the reported amounts of assets and liabilities, contingent assets
and liabilities, revenues and expenses. Significant estimates and
assumptions have been made regarding intangibles, primarily goodwill,
resulting from QuadraMed's acquisitions. QuadraMed bases its estimates,
assumptions, and judgments on historical experience and on various other
assumptions believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
QuadraMed periodically reviews and tests its estimates, including those
related to carried intangibles valuations, income taxes, and product
returns, bad debt, restructuring, pensions and other benefits, and
contingencies and litigation. Actual results may differ from these
estimates.
(b) Revenue Recognition
QuadraMed's revenues, excluding exceptional items, are derived
from two sources: (i) licenses; and (ii) consulting services. License
revenues include amounts received for licenses and software-related
services, such as installation and post-installation customer support fees,
third-party hardware sales, and other software-related revenue. Consulting
services revenues include amounts from outsourcing, specialized staffing,
and analytical services provided by QuadraMed's Health Information
Management Services and Financial Services Divisions.
QuadraMed's software products (enterprise systems and specific
applications) can be licensed individually or as a suite of interrelated
products. Licenses are granted for a specified term (generally ranging from
one to five years, typically with fees paid monthly, quarterly or annually)
or in perpetuity. Revenues from enterprise systems are recognized on
the basis of percentage of completion. Revenues from term and perpetual
licenses for specific applications are recognized upon shipment of the
software if there is a definite agreement, collection of the resulting
receivable is probable, and the fee is fixed or determinable. If there is
a contractual acceptance period, revenues are recognized on the earlier of
(i) acceptance; or (ii) the expiration of the acceptance period.
Software-related service revenue is recognized upon completion of
installation. Unbilled receivables consist of work performed or software
delivered that has not been billed pursuant to the customer contract.
Post-installation customer support is recognized ratably over the term of
the support period. Deferred revenue is revenue received in advance from
customers for future work. Costs of software products include hardware,
royalties to third parties, and installation costs.
QuadraMed applies the provisions of Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" to all transactions involving the sale of software
products and hardware transactions where the software is not incidental.
QuadraMed's consulting services are rendered under contracts with
healthcare providers that are billed in one of three ways: (i) hourly rates;
(ii) monthly or quarterly fixed fees; or (iii) percentage of cash collections.
For services billed by the hour or on a monthly or quarterly fixed fee, which
are generally related to the Health Information Management Services Division,
revenue is recognized at the end of each month or quarter as services are
provided and billed. Contracts for the Financial Services Division generally
provide for incentive payments based on a percentage of dollars recovered for
the provider. QuadraMed recognizes this additional incentive revenue either
upon invoicing or upon receipt of payment from the provider. Cost of service
revenues consists primarily of salaries, benefits and allocated costs related
to providing such services.
(c) Intangibles and Goodwill
Intangibles primarily relate to the value of the installed
customer base, proven research and development, capitalized software and
goodwill, which is the amount of purchase price in excess of the fair value
of the tangible net assets, and other identifiable intangible assets
acquired through QuadraMed's acquisitions, such as trademarks. Capitalized
amounts are amortized on a straight-line basis over a period of five to ten
years. Goodwill is reviewed quarterly for impairment and written down to
net realizable value, if necessary, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Impairment of Long-Lived
Assets. As of January 1, 2002, QuadraMed has adopted SFAS No. 142,
"Goodwill and Intangible Assets", which eliminates the amortization of
goodwill, but requires annual impairment testing. QuadraMed is currently
evaluating the effect that the implementation of the new standard will have
on its financial position, results of operations, and cash flows. QuadraMed
does not expect any impairment of goodwill as a result of adopting SFAS No.
142.
(d) Capitalization and Amortization of Software Development Costs
Software development costs are capitalized upon the establishment
of technological feasibility. In accordance with SFAS No. 86, QuadraMed
establishes technological feasibility upon completion of a detail program
design, which substantiates that the computer software product can be
produced in accordance with its design specifications. Capitalized software
development costs require a continuing assessment of their recoverability.
This assessment requires considerable judgment by QuadraMed with respect to
various factors, including, but not limited to, anticipated future gross
margins, estimated economic lives, and changes in software and hardware
technology.
Amortization is based upon the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of
the product, generally five years.
(e) Income Taxes
QuadraMed accounts for income taxes pursuant to SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 provides for an asset and
liability approach to accounting for income taxes under which deferred
income taxes are provided based upon enacted tax laws and rates applicable
to the periods in which taxes become payable.
Years Ended December 31, 2001, 2000, and 1999
QuadraMed currently classifies its segments by its hospital
constituents, and analyzes revenue by product line within each segment,
with cost centers classified by primary activity to estimate expenses by
function. From 1998 to 2000, QuadraMed implemented a number of
organizational changes, completed numerous acquisitions and divestitures,
experienced a high level of employee turnover, and converted to a new
accounting system. Consequently, it is impracticable to characterize the
variance in results between 1999 and 2000, and QuadraMed believes that any
such characterizations would not enhance an understanding of its financial
condition or results of operations. As a result, this Management Discussion
and Analysis focuses principally on the comparison between 2001 and 2000.
Results of Operations
The following table sets forth, for the periods indicated, certain
items from the consolidated statement of operations of QuadraMed, expressed
as percentage of total revenues.
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Revenues
Licenses 66.2% 55.4% 63.7%
Services 33.8% 44.6% 36.3%
------ ------ ------
Total Revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating Expenses
Cost of licenses 17.6% 18.9% 12.4%
Cost of services 14.6% 29.7% 21.3%
General and administration 36.5% 39.7% 27.1%
Sales & marketing 12.2% 17.8% 12.2%
Research and development 12.2% 18.2% 13.9%
Amortization of intangibles and acquired software 5.0% 5.8% 4.3%
Write-off of acquired R&D in process 0.0% 0.0% 1.0%
Acquisition costs 0.0% 0.0% 3.9%
Impairment of intangible assets 0.0% 0.8% 6.0%
Non recurring charges 0.0% 34.1% 10.0%
---- ----- -----
Total Operating Expenses 98.1% 165.0% 112.1%
----- ------ ------
Income (Loss) from Operations 1.9% -65.0% -12.1%
---- ------ ------
Other Income (Expense)
Interest (expense) -4.5% -5.5% -4.4%
Interest income 1.8% 1.7% 2.7%
Other income (expense), net -0.5% -0.1% 0.8%
Write off of note receivable -0.1% -0.7% -0.7%
Write off of convertible promissory note -2.8% 0.0% 0.0%
----- ---- ----
Total Other (Expense), net -6.1% -4.6% -1.6%
----- ----- -----
Loss Before Income Taxes -4.2% -69.6% -13.7%
Provision for income taxes 0.0% -0.2% -0.2%
---- ----- -----
Loss from Continuing Operations -4.2% -69.8% -13.9%
----- ------ ------
Gain on redemption of bonds (net of tax) 10.0% 0.0% 0.0%
Income from discontinued operations, (net of tax) 6.3% 24.1% 6.9%
---- ----- ----
Net Income (Loss) Available to Common Shareholders 12.1% -45.7% -7.0%
===== ====== =====
Revenues
Licenses. License revenue includes license, installation,
consulting and post-contract support fees, third-party hardware and
software sales, and other revenues related to the licensing of software
products. License revenues in 2001 were $85.7 million, an increase of $19.1
million or 28.7% over $66.6 million in 2000. The increase principally
represents growth for the Enterprise and Health Information Management
Software segments of 31% and 42%, respectively. With the exception of
modest, inflation-sensitive price increases for maintenance contracts,
revenue growth was derived principally from increased software sales.
Services. Service revenues were $43.7 million in 2001, a decrease
of $9.8 million or 18% from $53.5 million in 2000. The cancellation of
several hospital outsourcing contracts in the Health Information Management
Services segment was the primary reason for the decline in service revenue.
This decline was partially offset by an increase in the Financial Services
segment, which achieved a 44% growth in revenue. Early in 2001, QuadraMed
terminated the CPR services line within the Financial Services segment due
to lack of profitability and concentrated on the accounts receivable and
managed care payment review services.
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 2001 of $22.8
million was slightly above the corresponding 2000 level of $22.7 million
despite higher revenue, reflecting expense reduction actions initiated in
2000 and continued in 2001. The resultant gross margin on license revenue
was 73.4%, an improvement of 7.5 percentage points over the 2000 level of
65.9%.
Cost of Services. Cost of services includes expenses associated
with services performed in connection with the health information
management, business office outsourcing, compliance and consulting
services, and accounts receivable management. Cost of services in 2001 of
$18.9 million were $16.6 million or 47% below the 2000 level of $35.6
million, reflecting a combination of lower revenue and the expense
reductions initiated in 2000 and continued in 2001. The gross margin earned
on services revenue in 2001 was 56.6%, 23.1 percentage points more than the
2001 level of approximately 33.5%.
Operating Expenses
General and Administration. General and Administration expenses
were $47.2 million in 2001, a decrease of 1% compared to $47.7 million in
2000. As a percentage of total revenues, general and administration
expenses decreased 3.2 percentage points to 36.5% in 2001, compared to
39.7% in 2000. The decrease is a result of both the lower expenses and
higher revenue. The decrease in expenses was a result of lower salary and
related expenses resulting from a lower average staffing level in 2001
compared to 2000. The decrease in salary and related expenses was partially
offset by annual salary increases and higher incentive compensation based
on QuadraMed's improved financial performance.
Sales and Marketing. Sales and Marketing expenses declined in 2001
to $15.8 million, compared to $21.4 million in 2000. As a percentage of
revenue, these expenses declined 5.6 percentage points to 12.2% in 2001
from 17.8% in 2000. The decline in expenses was due to the discontinuation
of most corporate marketing, reduced advertising and trade show
participation, and the elimination of several sales positions related to
discontinued products. The cost of Sales and Marketing, however, increased
during the second half of 2001 with the strengthening of the sales force in
each segment and higher commissions on the increased revenue.
Research and Development. Research and Development expenses in
2001 were $15.8 million, compared to $21.9 million in 2000, a decline of
27.6%. As a percentage of revenue, the decrease was 6.0 percentage points
to 12.2% in 2001 from 18.2% in 2000. The decline in expenses was due to the
elimination of corporate R&D projects and a focus on specific product line
development, elimination of support costs for discontinued products, and
the termination of several product development efforts that were not
critical to QuadraMed's core strategies. In addition to these expenses,
QuadraMed capitalized $1.8 million in development costs on products
qualifying for capitalization under the definition of technological
feasibility. Included in this expense was $2.8 million in amortization of
capitalized software development expense related to products that are
currently available.
Amortization of Intangibles. Amortization of Intangibles,
consisting of goodwill and acquired software, declined to $6.5 million in
2001 from $7.0 million in 2000 as certain assets reached the end of their
amortization schedule.
Non-Recurring Charges
QuadraMed incurred no non-recurring charges during 2001.
In 2000, non-recurring charges totaled $41.0 million, primarily
associated with restructuring costs of $11.3 million, asset impairment charges
of $25.4 million, and non-case specific litigation costs of $4.3 million. The
restructuring costs included $2.5 million in severance for terminated
employees; $5.4 million associated with separation agreements for officers;
$2.9 million to dispose of excess space; and $0.5 million in other
restructuring expenses. The remaining liability for restructuring costs
totaled $3.2 million and $1.4 million at December 31, 2000 and 2001,
respectively and were included in Accrued Liabilities. QuadraMed recorded
asset impairment charges of $25.4 million in 2000, consisting of $10.6 million
write-down of assets associated with Health+Cast, $6.2 million associated with
the elimination of the EnOvation product acquired with Integrated Medical
Networks, Inc. ("IMN"), $5.5 million in receivable and other asset
write-downs, and $3.1 million from the write-down of unbilled revenue and the
carrying value of fixed assets. The non-case specific litigation accrual of
$4.3 million was established during 2000 to provide for several immaterial
legal matters. The balances in this reserve were $1.6 million and zero at
December 31, 2000 and 2001, respectively, and were included in Accrued
Liabilities.
Intangible Assets. QuadraMed recorded no charges to intangible assets
in 2001.
QuadraMed recorded a $0.9 million charge in 2000 to write-down
certain intangible assets related to the acquisition of Velox System
Corporation ("Velox"). QuadraMed recorded a $10.6 million charge in 1999 to
write-down certain tangibles assets related to the acquisitions of Healthcare
Recovery, Inc., Health Cash Management Seminars, Inc., American Medical
Network, Inc., Velox, and American Hospital Directory, Inc. made in 1997 and
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 for acquired in-process research and development during 2001 or
2000.
Interest Expense.
Interest expense, net of interest income, was $3.5 million in
2001. This interest expense was principally due to the Debentures, offset
by interest earned from QuadraMed's cash and investments. The 2001 net
interest expense was $1.0 million less than the $4.5 million incurred in
2000. The decrease was attributable to the retirement of $41.3 million in
principal amount of the Debentures during 2001.
Writeoff of Convertible Promissory Note
In the third quarter of 2001, Purkinje, the issuer of a $3.6
million convertible promissory note to QuadraMed, failed to make its
regularly scheduled quarterly interest payment. As part of a
recapitalization plan, Purkinje exchanged preferred stock for all of its
outstanding convertible promissory notes. QuadraMed believes that the value
of this preferred stock was zero and, accordingly, recorded a $3.6 million
charge in the third quarter of 2001. See Note 11(d) to Consolidated
Financial Statements.
Provision for Income Taxes
Provision for income taxes was zero and $0.2 million in 2001 and
2000, respectively. 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." During 2001, QuadraMed reduced its net operating loss carry forward
from $67.5 million to $48.3 million by applying positive taxable income to
this balance. See Note 25 to Consolidated Financial Statements.
Gain on Redemption of Bonds
During 2001, QuadraMed repurchased $41.3 million in Debentures on the
open market for a total of $28.4 million in cash, resulting in a gain of $12.9
million. See Note 14 to Consolidated Financial Statements.
Income from Discontinued Operations
QuadraMed recorded income from discontinued operations of $8.2
million in 2001, a decrease of $20.8 million from 2000. The 2001 figure
included the net gain on the sale of the EZ-CAP business of $6.6 million
and earnings from this business, prior to its sale on August 31, 2001, of
$1.6 million.
The 2000 figure included a net gain of $23.3 million from the sale
of ChartOne and $4.3 million and $1.4 million in earnings from EZ-CAP and
ChartOne, respectively. See Note 6 to Consolidated Financial Statements.
Liquidity And Capital Resources
At December 31, 2001, QuadraMed held $29.8 million in cash and
cash equivalents, $2.4 million in short-term investments, $4.4 million in
restricted cash, and $1.1 million in long-term investments, totaling $37.7
million. The comparable figures for 2000 were $27.4 million, $12.3 million,
$8.0 million, and $1.0 million, totaling $48.7 million.
Net cash provided by operating activities was $12.0 million in
2001 compared to $13.8 million used by operating activities in 2000. The
increase in cash flow reflected the substantial improvement in operating
earnings plus the increase in deferred revenue in response to improved
billing practices and business growth, partially offset by the uses for the
increase in prepaid expenses, lower accounts payable, and extinguishment of
other liabilities established for previous acquisitions. The accounts
receivable balance was stable from 2000 to 2001.
Net cash provided by investing activities was $17.4 million in
2001, a decrease of $12.4 million compared to $29.8 million in 2000. The
sources of the $17.4 million were principally the maturity of $12.2 million
in short-term investments reinvested in cash equivalents and the sale of
the EZ-CAP business for net proceeds of $8.7 million, offset partially by
$2.2 million in capital expenditures and $1.8 million in capitalized
research and development costs. The prior-year net cash from investing
activities was higher due principally to the $40.4 million in net proceeds
from the sale of ChartOne.
Net cash used for financing activities was $27.0 million in 2001,
compared to $0.7 million provided by financing activities in 2000. The 2001
result principally reflected $28.4 million expended for Debenture
repurchases, net of $1.8 million in cash proceeds from the exercise of
options to purchase common stock.
In May 1998, QuadraMed issued the Debentures in a principal amount
of $115 million. The Debentures mature on May 1, 2005, and bear interest at
an annual rate of 5.25%. During 2001, QuadraMed repurchased and retired
$41.3 million of the Debentures at an average price of $670 per $1,000 in
principal amount. Management has been authorized by the board of directors
to repurchase the Debentures at its discretion, subject to parameters
established by the board.
During 2001, QuadraMed used $0.8 million to repurchase 200,000
shares of its common stock on the open market at an average price of $4.05,
and has the authority to repurchase up to a total of 6 million shares.
Investment in Marketable Equity Securities of $0.6 million
represents the fair market value of QuadraMed's investment in the stock of
Vantage Med, a publicly traded healthcare technology company.
The following table summarizes financial data for contractual
obligations and other commercial commitments for the year ended December
31, 2001 (in thousands):
Payments Due by Period
---------------------------------------------------------
Less
than 1 1-3 4-5 After 5
Contractual Obligations Total year years years years
- ------------------------------------------------------------------------------------------------------------
Long-term debt $ 87,265 $ 3,870 $ 7,740 $ 75,654 $ -
Capital lease obligations 97 78 19 - -
Operating leases 30,110 4,792 8,066 5,861 11,391
Other long-term obligations 7,775 - - - 7,775
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Total contractual cash
obligations $125,247 $ 8,740 $ 15,825 $ 81,515 $ 19,166
=======================================================================
Amount of Commitment Expiration
Per Period
--------------------------------------------------------
Total Less
Amounts than 1 1-3 4-5 After 5
Other Commercial Commitments Committed year years years years (1)
- -----------------------------------------------------------------------------------------------------------
Standby letters of credit $ 4,356 $ 1,136 $ 100 - $ 3,120
-----------------------------------------------------------------------
Total commercial commitments $ 4,356 $ 1,136 $ 100 - $ 3,120
=======================================================================
(1) Includes $2.4 million for existing surety bond requirement at December
31, 2001. Actual requirements may be less as work is completed towards
underlying contract.
QuadraMed believes that it will have sufficient liquidity and
operating cash flows to fund its scheduled debt service and other
obligations through at least December 31, 2002.
Inflation
The majority of QuadraMed's revenue is derived from perpetual and
long-term customer contracts. The term of contracts range from one (1) to
five (5) years and the contracts generally allow price increases annually
based on external measures of inflation. QuadraMed has increased some of
its prices under these contract provisions. QuadraMed's maintenance
contract terms also allow annual price increases based on external measures
of inflation. Accordingly, inflation has not had, and QuadraMed does not
believe that it will have, a significant impact on its financial condition.
Business Risks
QuadraMed Faces Product Development Risks Associated With Rapid Technological
Changes.
The healthcare software market is highly fragmented and
characterized by ongoing technological developments, evolving industry
standards, and rapid changes in customer requirements. QuadraMed's success
depends on its ability to timely and effectively:
o offer a broad range of software products;
o enhance existing products and expand product offerings;
o respond promptly to new customer requirements and industry
standards; and
o remain compatible with popular operating systems and
develop products that are compatible with the new or
otherwise emerging operating systems.
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 its 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, non-compete, and other contractual
provisions to protect its proprietary rights. In 2001, QuadraMed filed its
first patent application covering its developed technology, the Affinity
CPOE software application. 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 from a number of third-party vendors
for certain technology used to develop and operate its products. 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 Its 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.
If QuadraMed's Products Fail To Accurately Assess, Process, Or Collect
Healthcare 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.
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 Health
Information 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 health information and the circumstances under which such
information 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 health information also has been proposed
and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, requires the United States Department of Health and Human
Services ("HHS") to promulgate regulations that will set standards for
certain electronic health transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. HHS has
published a final regulation governing transaction and code set standards
that has a compliance date of October 16, 2002. A recent modification to
the HIPAA, however, provides covered entities with an additional year to
comply with the transaction and code set standards, e.g. to October 2003,
provided they meet certain criteria. HHS has also published a final privacy
regulation that has a compliance date of April 2003. 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.
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.
HHS has published a proposed HIPAA data security regulation. At
this time, no information is available on when HHS may issue a final
security regulation 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 protected health 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.
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 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 QuadraMed's 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 expec