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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22 PELICAN WAY
SAN RAFAEL, CA 94901 94901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 482-2100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 5, 2001, there were 25,946,542 shares of the
Registrant's Common Stock outstanding, par value $0.01. This quarterly
report on Form 10-Q consists of 62 pages of which this is page 1. The
Exhibit Index is located at page 33.
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QUADRAMED CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Condensed
Consolidated Balance Sheets as of September
30, 2001, and December 31, 2000 (audited).................. 3
Condensed Consolidated Statements of Operations
for the three-month and nine-month periods
ended September 30, 2001, and 2000........................ 4
Condensed Consolidated Statements of Cash Flows
for the nine-month periods ended September 30,
2001, and 2000............................................. 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 31
Item 2. Changes in Securities and Use of Proceeds.................. 31
Item 3. Defaults Upon Senior Securities............................ 31
Item 4. Submission of Matters to a Vote of Security Holders........ 31
Item 5. Other Information.......................................... 31
Item 6. Exhibits and Reports on Form 8-K........................... 31
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September December
Current Assets: 30, 2001 31, 2000
(unaudited) (restated)(1)
Cash and cash equivalents $ 28,282 $ 27,368
Restricted cash 4,536 7,995
Short-term
investments 2,414 12,296
Accounts receivable, net of allowance for uncollectible accounts of $3,706
and $2,404, respectively 35,972 36,879
Unbilled receivables 7,532 7,995
Notes and other receivables 381 689
Prepaid expenses and other current assets 2,195 1,830
------------ -----------
Total current assets 81,312 95,052
------------ -----------
Long-term investments 1,135 1,019
Long-term notes receivable - 3,600
Equipment, at cost:
Equipment 28,327 26,832
Less accumulated depreciation and amortization (20,889) (18,531)
------------ -----------
Equipment, net 7,438 8,301
------------ -----------
Capitalized software development, net of accumulated
amortization of $7,228 and $5,212, respectively 7,735 8,849
Acquired software, net of accumulated amortization of $4,116
and $3,441, respectively 705 1,380
Intangibles, net of accumulated amortization of $21,385 and $17,174, respectively 23,629 27,840
Marketable investments 551 638
Other long term assets 5,290 7,270
------------ -----------
Total Assets $ 127,795 $ 153,949
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligations $ 73 $ 323
Accounts payable 647 699
Accrued payroll and related 5,617 7,223
Accrued interest 1,617 1,006
Other accrued liabilities 9,736 10,256
Deferred revenue 17,565 11,778
------------ -----------
Total current liabilities 35,255 31,285
------------ -----------
35 128
Capital lease obligations, less current portion
Convertible subordinated debentures 73,719 115,000
Net liabilities of discontinued operations 14 3,215
------------ -----------
Total Liabilities 109,023 149,628
------------ -----------
Stockholders' Equity:
Common stock, $0.01 par, 50,000 shares authorized, 25,731 and 25,755 shares issued
and outstanding, respectively 194 191
Treasury stock (821) -
Additional paid-in capital 269,673 268,485
Accumulated other comprehensive loss (4,088) (4,028)
Accumulated deficit (246,186) (260,327)
------------ -----------
Total stockholders' equity 18,772 4,321
------------ -----------
Total Liabilities and Stockholders' Equity $ 127,795 $ 153,949
============ ===========
(1) The year 2000 financial statements have been restated to present
the EZ-Cap software business as a discontinued operation
consistent with current presentation.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
--------------------------- ----------------------------
2001 2000 2001 2000
--------------------------- ----------------------------
(2) Restated (1) (2) Restated (1)
--- ---
Revenues:
Licenses $ 21,703 $ 14,473 $ 62,102 $ 51,100
Services 11,435 12,006 32,437 40,435
------------ ---------- ---------- -----------
Total revenues 33,138 26,479 94,539 91,535
Operating Expenses:
Cost of licenses 4,992 5,482 16,112 16,969
Cost of services 4,612 8,791 14,234 29,538
General and administration 12,316 11,659 37,872 35,936
Sales and marketing 3,802 5,033 11,216 17,550
Research and development 3,152 5,385 10,008 16,846
Amortization of intangibles 1,628 1,738 4,886 5,259
Impairment of intangible assets - - - 927
Non-recurring charges - 13,634 - 41,953
------------ ---------- ---------- -----------
Total operating expenses 30,502 51,722 94,328 164,978
------------ ---------- ---------- -----------
Income (Loss) from Operations 2,636 (25,243) 211 (73,443)
Other Income (Expense):
Interest expense (1,494) (1,658) (4,778) (4,968)
Interest income 343 738 2,048 1,688
Other income (expense), net 41 5 (698) (74)
Write off of convertible promissory note (3,600) - (3,600) -
------------ ---------- ---------- -----------
Total other expense, net (4,710) (915) (7,028) (3,354)
------------ ---------- ---------- -----------
Loss Before Income Taxes (2,074) (26,158) (6,817) (76,797)
Provision for income taxes - - (105) (160)
------------ ---------- ---------- -----------
Loss from Continuing Operations (2,074) (26,158) (6,922) (76,957)
------------ ---------- ---------- -----------
Gain on redemption of bonds (net of applicable tax) 10,504 - 12,908 -
Income from discontinued operations (net of applicable tax) 120 780 1,621 4,757
Gain on sale of division/software business (net of applicable
tax) 6,861 - 6,534 17,208
------------ ---------- ---------- -----------
Net Income (Loss) Available to Common Stockholders $ 15,411 $ (25,378) $ 14,141 $ (54,992)
============ ========== ========== ===========
Earnings Per Common Share:
Basic and Diluted
Continuing operations $ (0.08) $ (1.02) $ (0.27) $ (3.01)
Gain on redemption of bonds (net of tax) 0.41 - 0.50 -
Discontinued operations (net of tax) - 0.03 0.06 0.19
Gain on sale of division (net of tax) 0.27 - 0.25 0.67
------------ ---------- ---------- -----------
Total $ 0.60 $ (0.99) $ 0.54 $ (2.15)
============ ========== ========== ===========
Weighted Average Shares Outstanding:
Basic 25,853 25,753 25,788 25,571
Diluted 25,853 25,753 25,788 25,571
(1) The year 2000 financial statements have been restated to be
consistent with current year reclassification of cost of licenses,
cost of services, and operating expenses for general and
administration, sales and marketing, and research and development.
(2) The year 2001 financial statements reflect the EZ-Cap software business
as a discontinued operation.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine-Month Period Ended
September 30,
------------------------------------
2001 2000
------------- --------------
Cash Flows from Operating Activities: (2) (1)
Net Income (loss) $ 14,141 $ (54,992)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 9,706 10,498
Salaries related to issuance of common stock, cancellation of restricted
shares and forfeiture of
restricted shares and forfeiture of common stock options -- (377)
Write-off of long term investments 980 --
Write-off of acquired software -- 5,600
Write-off of convertible promissory note 3,600 --
Write-off of equipment -- 1,817
Write-off of notes payable -- 900
Write-off of capitalized software -- 1,473
Impairment of intangible assets -- 927
Realized gain on investments (44) --
Gain on redemption of bonds (12,908) --
Gain on the sale of division/software business, net of applicable tax (6,534) (17,208)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net 1,370 26,787
Prepaid expenses and other 505 4,739
Accounts payable and accrued liabilities (1,567) 767
Net liabilities of discontinued operations (4,872) (804)
Deferred revenue 5,738 4,025
------------- --------------
Cash provided by (used in) operating activities 10,115 (15,848)
------------- --------------
Cash Flows from Investing Activities:
Maturity (purchase) of available-for-sale securities, net 12,213 9,209
Additions to equipment (1,542) (2,683)
Purchase of treasury stock (821) --
Proceeds from the sale of division 8,555 25,200
Investment in ChartOne -- (11,661)
Proceeds from disposal of equipment 25 --
Change in restricted cash 1,079 (7,406)
Capitalization of computer software development costs (1,185) (828)
------------- --------------
Cash provided by investing activities 18,324 11,831
------------- --------------
Cash Flows from Financing Activities:
Payments of principal on capital lease obligations (343) (193)
Repayments of notes and loans payable (28,373) (5)
Issuance of common stock through Employee Stock Purchase Plan -- 488
Proceeds from exercise of common stock options to purchase common stock 1,191 441
------------- --------------
Cash (used in) provided by financing activities (27,525) 731
------------- --------------
Net increase (decrease) in cash and cash equivalents 914 (3,286)
Cash and Cash Equivalents, beginning of period 27,368 10,623
------------- --------------
Cash and Cash Equivalents, end of period $ 28,282 $ 7,337
============= ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 3,747 $ 3,047
Cash paid for taxes $ 321 $ 325
Supplemental Disclosure of Noncash Investing and Financing Transactions:
Cancellation of restricted common stock $ -- $ (2,183)
Issuance of common stock in payment of legal expenses $ -- $ 235
Release of restricted cash into short term investments $ 2,380 $ --
(1) Certain amounts in the year 2000 financial statements have been
reclassified to be consistent with current year presentation.
(2) The year 2001 financial statements reflect the EZ-Cap software
business as a discontinued operation.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUADRAMED CORPORATION
QuadraMed Corporation (hereafter "QuadraMed" or the "Company") is
dedicated to developing information technology and providing consulting
services that help healthcare professionals deliver outstanding patient care
with optimum efficiency. Offering real-world solutions for every aspect of
acute care information management, QuadraMed has four main product lines:
Affinity(R) Healthcare Information System, Quantim(R) Health Information
Management Software and Services, Complysource(R) Compliance Solutions, and
Chancellor TM Financial Products and Services. QuadraMed was reincorporated
in Delaware in 1996 after having been originally incorporated in California
in 1993. Its stock is publicly traded under the symbol "QMDC" on The Nasdaq
SmallCap Market. From October 16, 1996, to August 30, 2000, QuadraMed's
stock was traded on The Nasdaq National Market.
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) Basis of Presentation and Principles of Consolidation
These condensed consolidated financial statements include the
accounts of QuadraMed and all its significant business divisions and
subsidiaries and have been prepared in conformity with (i) generally
accepted accounting principles in the United States of America; and (ii)
the rules and regulations of the U.S. Securities and Exchange Commission
("SEC"). All significant intercompany accounts and transactions between
QuadraMed and its subsidiaries are eliminated in consolidation.
These financial statements reflect all adjustments, in
management's opinion, necessary for a fair presentation of our results of
operations and financial condition. All adjustments that have been included
in these financial statements are of a normal recurring nature.
Results of QuadraMed's Release Of Information ("ROI") Division and
EZ-CAP software business ("EZ-CAP") are reported as discontinued operations
because the Company's control of these businesses was transferred in May
2000, and September 2001, respectively. Unless otherwise indicated, amounts
in these statements exclude the effects of all discontinued operations.
(b) Reclassifications
Certain reclassifications have been made to the 2000 consolidated
financial statements to conform to the 2001 presentation. Specifically,
September 30, 2000, financial statements have been restated to be
consistent with the current classification of cost of licenses, cost of
services, general and administration, sales and marketing, research and
development, marketable investments, and discontinued operations.
(c) Use of Estimates in Preparation of Financial Statements
In preparing these financial statements in conformity with
generally accepted accounting principles in the United States of America,
QuadraMed's management has made estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosed contingent assets and
liabilities, and reported revenues and expenses. Actual results could
differ from these estimates. Significant estimates and assumptions have
been made regarding intangible assets, primarily goodwill, resulting from
QuadraMed's acquisitions.
(d) Cash and Cash Equivalents
QuadraMed treats all certificates of deposit, money market
accounts, and commercial paper with maturities of three months or less, as
cash equivalents.
(e) Restricted Cash
As collateral for stand-by letters of credit, QuadraMed had
restricted cash balances of $4.5 million and $8.4 million at September 30,
2001, and 2000, respectively. These balances are secured with certificates
of deposit.
In June 2001, $2.4 million of restricted cash was released and
then invested in short-term investments.
(f) Investments
QuadraMed considers its short-term and long-term securities,
consisting primarily of debt securities, to be available-for-sale
securities. The difference between cost and amortized cost (cost adjusted
for amortization of premiums and accretion of discounts that are recognized
as adjustments to interest income) and fair value (representing unrealized
holdings gains or losses) are recorded, until realized, as a separate
component of stockholders' equity. Gains and losses on the sale of debt
securities are determined on a specific identification basis. Realized
gains and losses are included in other income (expense) in the accompanying
condensed consolidated statement of operations.
During the nine-month period ended September 30, 2001, $12.2
million in short-term investments matured and were redeemed for cash.
In January 1999, QuadraMed loaned $3.6 million to Purkinje, Inc.
("Purkinje"), pursuant to terms and conditions of a convertible secured
promissory note. Purkinje suspended interest payments on the note in the
third quarter of 2001, and requested that all debenture holders convert
their holdings to preferred stock as part of a recapitalization plan. The
Company believes that the current value of Purkinje preferred stock is
zero, and therefore, recorded a $3.6 million charge during the third
quarter of 2001 to write off the entire investment.
(g) Equipment
Equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life, which is generally
from three to five years. Depreciation expense was $2.4 million and $3.0
million for the nine-month periods ended September 30, 2001, and 2000,
respectively. Leasehold improvements are amortized over the term of the
lease. Maintenance and repairs are expensed as incurred.
(h) Intangibles
Intangibles include goodwill and acquired software, which are
being amortized on a straight-line basis over a period of five to ten
years. Goodwill and acquired software are evaluated quarterly for
impairment and written down to net realizable value if necessary. Goodwill
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.
(i) Revenue Recognition
QuadraMed's revenues are derived from two sources: (1)
software products; and (2) consulting services. Software product 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 QuadraMed's Health Information Management
Services and Financial Services Divisions.
QuadraMed's software products (enterprise-wide 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 or
annually) or in perpetuity. Revenues from enterprise-wide systems are
recognized on the basis of percentage-of-completion. Term licenses for
specific applications are recognized monthly or annually over the term of
the license arrangement, beginning at the date of installation. Revenues
from perpetual licenses for specific applications are recognized upon
shipment of the software if there is persuasive evidence of an agreement,
collection of the resulting receivable is probable, and the fee is fixed
and determinable. If 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 which 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 consideration 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
providers calling for fixed monthly payments and revenue is recognized at
the end of each month as services are provided. Financial Services
management contracts generally provide for incentive payments based on a
percentage of dollars recovered for the provider. QuadraMed recognizes this
additional incentive revenue upon receipt of payment from the provider.
Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.
(j) Income Taxes
QuadraMed accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS No. 109"). 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.
(k) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the sum of the weighted average number of
common shares and common equivalent shares outstanding during the period.
Common equivalent shares consist of shares issuable upon the exercise of
stock options (using the treasury stock method) and convertible
subordinated debentures (using the if-converted method). Common equivalent
shares are excluded from the diluted computation only if their effect is
anti-dilutive. As QuadraMed recorded a net loss from continuing operations
for the nine-month and three-month periods ended September 30, 2001, and
2000, no common equivalent shares are included in the diluted weighted
average common shares for those periods.
(l) Comprehensive Income
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which was adopted by QuadraMed in the first quarter
of 1998. SFAS No. 130 requires companies to report a new, additional
measure of income on the income statement or to create a new financial
statement that has the new measure of income on it.
The components of comprehensive income (loss) for the three-month
and nine-month periods ended September 30, 2001, and 2000, are as follows
(in thousands):
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2001 2000 2001 2000
---------------- ------------ --------------- --------------
Net income (loss) $15,411 $ (25,378) $ 14,141 $ (54,992)
Unrealized gain (loss) on available-for-sale securities 15 88 (60) (3,373)
---------------- -------------- --------------- --------------
Comprehensive income (loss) $15,426 $ (25,290) $ 14,081 $ (58,365)
================ ============== =============== ==============
(m) Software Development Costs
Software development costs are capitalized upon the establishment
of technological feasibility. QuadraMed establishes technological
feasibility upon completion of a detail program design, in accordance with
SFAS No.86. The detail program design 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 us with respect to various factors, including, but not limited
to, anticipated future gross product revenues, estimated economic lives and
changes in software and hardware technology. For the nine-month periods
ended September 30, 2001 and 2000, QuadraMed capitalized software
development costs of $1.2 million, and $0.8 million, respectively. During
the nine-month period ended September 30, 2000, QuadraMed recorded a $1.5
million charge to write-down certain capitalized software assets related to
the acquisition of IMN. In addition, in connection with its acquisition of
Med Data, QuadraMed reclassified $3.6 million of intangible assets to
capitalized software. There was no write-down of capitalized software
during the nine-month period ended September 30, 2001.
Amortization of capitalized software development costs was $2.0
million and $1.7 million for the nine-month periods ended September 30,
2001, and 2000, respectively. Amortization is based upon the greater of the
amount computed using (a) the ratio of current gross revenues for a product
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.
3. STOCK REPURCHASE PROGRAM
In June 2001, QuadraMed's Board of Directors authorized a
twelve-month stock repurchase program whereby the Company may utilize its
cash to acquire QuadraMed common stock in a manner that enhances
stockholder value. In September 2001, the Company repurchased 200,000
shares of common stock at an average price of $4.105 per share. As of
September 30, 2001, up to 5.8 million shares remained authorized for
repurchase under the program. The repurchased shares are held as treasury
stock and may be reissued in the future.
4. SUBORDINATED CONVERTIBLE DEBENTURES
In April 1998, QuadraMed completed an offering of $115 million
principal amount of Convertible Subordinated Debentures (the "Debentures"),
including the underwriters' over-allotment option. The Debentures are due
May 1, 2005, and bear interest at 5.25% per annum. The Debentures are
convertible into common stock at any time prior to the redemption or final
maturity, initially at the conversion price of $33.25 per share (resulting
in an initial conversion ratio of 30.075 shares per $1,000 principal
amount). Net proceeds to QuadraMed from the offering were $110.8 million.
During the nine-month period ended September 30, 2001, QuadraMed
redeemed $41.3 million face value of convertible subordinated debentures at
prices that ranged from $53.00 to $69.75. The Company recognized an
extraordinary gain of $12.9 million after applicable taxes as a result of
the early extinguishment of debt.
5. DISCONTINUED OPERATIONS
On August 31, 2001, QuadraMed consummated the sale of its EZ-CAP
software business, and recorded net proceeds from the sale of $8.5 million
after transaction costs, and a gain after applicable taxes of $6.9 million.
Income associated with the results of discontinued operations for the
EZ-CAP business for the nine-month periods ended September 30, 2001 and
2000, was $1.6 million and $3.3 million, respectively.
On March 31, 2001, QuadraMed consummated the sale of its Electronic
Remittance Advice business. QuadraMed recorded proceeds from the sale of
$24.0 thousand, and a loss after applicable taxes of $327.0 thousand. There
was no material income associated with the results of discontinued
operations for this line during the nine-month period ended September 30,
2001.
In connection with the acquisition of Compucare in March 1999,
QuadraMed assumed the net liabilities of discontinued operations from
previous Compucare acquisitions. Included in this net liability are
balances related to Compucare's sale of two wholly-owned subsidiaries,
Antrim Corporation, in November 1996, and Health Systems Integration, Inc.
("HSII").
Condensed and summarized balance sheet data for the discontinued
operations of Antrim, HSII, and the Company's EZ-CAP software business is
as follows (in thousands):
September 30, December 31,
2001 2000
------------------- ----------------
Assets:
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable - -
Other current assets - 311
------------------- ----------------
Total current assets - 311
Property and equipment, net - 273
Other and intangible assets, net - 1,617
------------------- ----------------
Total assets $ - $ 2,201
=================== ================
Liabilities:
Current liabilities $ 14 $ 5,416
Non-current liabilities - -
------------------- ----------------
Total liabilities 14 5,416
------------------- ----------------
Net liabilities of discontinued operations $ 14 $ 3,215
=================== ================
On August 16, 2001, QuadraMed and its wholly-owned subsidiary,
QuadraMed Operating Corporation, entered into an asset purchase agreement
with OAO Transition, LLC, a Delaware limited liability company ("OAO
Transition"), and OAO Technology Solutions, Inc., a Delaware corporation
(individually and collectively "OAO"), for the sale of certain assets and
related products, used to conduct the EZ-CAP managed care software
business. The assets and related products sold were the major components,
but not the entire suite of assets and products, that comprised the
QuadraMed's EZ-CAP managed care software business. The asset purchase
transaction was finalized on August 31, 2001 for an aggregate purchase
price of approximately $9.0 million, and the opportunity for QuadraMed to
receive up to $5.0 million in additional payments based on EZ-Cap's revenue
growth and customer retention as part of OAO. This transaction has been
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the net assets acquired, including
developed technology, intangible assets and liabilities assumed, based on
their fair value.
In April 2000, QuadraMed formed ChartOne, Inc., as a wholly-owned
subsidiary ("ChartOne"), and subsequently transferred and assigned to
ChartOne the assets and liabilities of its ROI Division, pursuant to the
terms of an Asset Contribution Agreement, dated May 3, 2000. On June 7,
2000, ChartOne completed the sale of 2,520,000 shares of its Series A
Preferred Stock to Warburg, Pincus Equity Partners, L.P., and certain of
its affiliates, and Prudential Securities Group, Inc. for an aggregate
purchase price of $25.2 million, representing a 43% equity interest in
ChartOne, pursuant to the terms of a Securities Purchase Agreement, dated
May 5, 2000. On October 19, 2000, QuadraMed completed the sale of its
remaining 57% equity interest in ChartOne, represented by 2,130,000 shares
of series B Preferred Stock, 1,200,000 shares of Series C Preferred Stock
and 1 share of Common Stock, to Warburg, Pincus Equity Partners, L.P. and
certain of its affiliates, and Prudential Securities Group Inc. for an
aggregate cash purchase price of $26.6 million, pursuant to a Securities
Purchase Agreement dated September 28, 2000. On the basis of this series of
transactions and associated expenses, QuadraMed recorded a gain of $23.3
million (net of income tax expense of $1.0 million) for the year ended
December 31, 2000.
Results of the Company's ROI division and EZ-CAP software business
have been included in discontinued operations for all periods, as required
by APB No. 30. For the nine-month periods ended September 30, 2001 and 2000,
results from discontinued operations, net of income taxes, were $1.6
million, and $4.8 million, respectively, as set forth below (in thousands):
September 30,
2001 2000
---- ----
Revenues $ 6,353 $ 29,999
Costs and expenses 4,732 25,003
--------------- ---------------
Gain from discontinued operations before income taxes $ 1,621 $ 4,996
Provision for income taxes 0 $ (240)
--------------- ---------------
Income from discontinued operations $ 1,621 $ 4,756
=============== ===============
Discontinued operations have been segregated in the Condensed
Consolidated Statements of Cash Flows and, therefore, noncash items of
income and expense from discontinued operations are included in the change
in net liabilities of discontinued operations.
6. NON-RECURRING CHARGES
During the nine-month period ended September 30, 2001, QuadraMed
recorded no non-recurring charges.
During the nine-month period ended September 30, 2000, QuadraMed
recorded approximately $42.0 million of non-recurring charges. The charges
were primarily related to the discontinuation of the EnOvation product, the
write-down of certain other receivables, payments to employees for
severance agreements, costs associated with office closures and costs
related to further product integration efforts and product consolidation.
These charges also included a write-down of $10.6 million of HealthCast
assets, as well as additional expenses of $5.3 million associated with
officers' separation agreements.
The following table sets forth QuadraMed's restructuring and
non-specific litigation reserves, and the activity against these reserves,
during the current nine month-period ended September 30, 2001 (in
thousands):
Balance at Balances at
Description December 31, 2000 Change (*) September 30, 2001
------------
---------------------- ---------------- ----------------------
Restructure/Other...................... $ 3,206 $ (1,374) $ 1,832
Non-Specific Legal..................... 1,616 (1,599) 17
---------------------- ---------------- ----------------------
Total reserves......................... $ 4,822 $ (2,973) $ 1,849
====================== ================ ======================
* Termination benefits included in restructuring/other payments during 2001 amounted to $0.9 million.
7. INTANGIBLES
(a) Goodwill
During the nine-month periods ended September 30, 2001 and 2000,
amortization of goodwill was $4.2 million and $4.3 million, respectively.
(b) Acquired Software
During the nine-month periods ended September 30, 2001 and 2000,
amortization of acquired software was $0.7 million and $1.0 million,
respectively.
8. CONTINGENCIES OR OTHER UNCERTAINTIES
From time to time in the normal course of its business, QuadraMed
may be involved in litigation relating to its operations. As of September
30, 2001, QuadraMed was not a party to any legal proceedings that, if
decided adversely, would, individually or in the aggregate, have a material
adverse effect on QuadraMed's business, financial condition or results of
operations.
9. INFORMATION ON BUSINESS SEGMENTS
In 2000, QuadraMed realigned its operations into five business
segments, consisting of the Company's Enterprise Products and Services
Division, HIM Software Division, HIM Services Division, Financial Services
Division, and its former EZ-CAP(R) managed care software business, which
was sold during the third quarter of 2001. Although not reported as a
business segment, QuadraMed also generated approximately five percent of
its revenue from specialty product lines that have been discontinued or are
not aligned with an operating division, which is referenced as Other.
This reorganization was undertaken to more closely align products
targeted to shared markets, to more accurately measure financial
performance by product/division, and to establish greater management
accountability. To this end, QuadraMed further refined its operating
segments during the first half of 2001 and again in the third quarter of
2001 to reflect the sale of the material components previously included in
the EZ-CAP Division. The segment results reflected in the exhibits below
have been restated to reflect this realignment for both current and prior
year data. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies.
QuadraMed evaluates financial performance by segment as summarized in the
subsequent table. The financial results for these operating segments for
prior years have been restated on an estimated basis to conform to the
current presentation.
QuadraMed's reportable segments are strategic business units that
offer different products and services. Each segment, with its own unique
position in the healthcare technology and services marketplace, provides
customized expertise for the purchasers of healthcare information
technology and financial solutions.
The Enterprise Division offers QuadraMed's Affinity(R)
enterprise-wide information system products. With its full suite of
applications, Affinity addresses the entire range of financial, patient,
and clinical management needs of single- or multi-facility hospitals.
Principally targeting acute care hospitals across the United States, the
Affinity solution incorporates a patient-centered database designed to
enable users to track each patient throughout the continuum of care in real
time. The system integrates financial information such as patient
accounting and DRG/case mix with clinical data, such as medical charting
and plan of care, to automate federal and state reporting, scheduling,
registration, and medical records information. The Electronic Document
Management solution allows users to create secure electronic patient
folders that combine both computerized and scanned documents. The Master
Patient Index and Performance Measurement products, previously part of the
HIM Software Division, were transferred to the Enterprise Division in the
first half 2001.
The HIM Software Division provides the Company's Quantim(R) health
information management software products, encompassing a suite of
compliance, encoding and grouping, medical record management, and patient
database applications that enable a hospital to accurately track medical
records for internal and external purposes. The coding and grouping
solutions protect the integrity of a healthcare organization's clinical
data and improve accuracy and coding compliance for ICD-9, CPT, and HCPCS
codes. The medical record management product locates and reserves charts,
and authenticates and distributes transcribed medical records. In the first
half of 2001, the nCoder+MD product, previously included in the Company's
former EZ-CAP business, was transferred to this division, and the Master
Patient Index and Performance Measurement product lines, previously
included in this division, were transferred to the Enterprise Division.
The HIM Services Division offers QuadraMed's Quantim(R) and
Complysource(R) Services, which provide healthcare information management
departments with experienced, qualified, and if necessary, credentialed
professionals to perform IT, coding, auditing, accounting, compliance, and
medical record services. The Division also provides experienced executives
for interim assignments in financial and management positions. These
services are offered to acute care facilities, as well as to large
physician, clinic, and ambulatory practices. Effective in the third
quarter, 2001, the Division's services include education services, seminars
and training for healthcare organizations.
The Financial Services Division provides Chancellor(TM) Financial
Services to healthcare providers to reduce accounts receivable backlogs and
accelerate cash flow. The Division conducts analyses of patient accounts to
identify outstanding or underpaid third party payments, to re-bill, and to
follow-up on third party claims.
For the Nine-Month Period Ended September 30, 2001
(in thousands)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services Other (1) Total
-------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 43,359 $ 20,240 $ 14,533 $12,048 $ 4,359 $ 94,539
======================================================================================
--------------------------------------------------------------------------------------
Direct margin (2) $ 9,490 $ 8,006 $ 3,587 $ 5,836 $ (415) $ 26,504
======================================================================================
Interest income $ 873 $ 336 $ 385 $ 253 $ 201 $ 2,048
(1,876) (817) (972) (630) (483) (4,778)
--------------------------------------------------------------------------------------
Interest income (expense), net $(1,003) $ (481) $ (587) $ (377) $ (282) $ (2,730)
======================================================================================
--------------------------------------------------------------------------------------
Depreciation & amortization expense $ 1,360 $ 4,592 $ 831 $ 379 $ 2,544 $ 9,706
======================================================================================
Benefit (provision) for income taxes $ 10 $ 12 $ 60 $ (95) $ (92) $ (105)
======================================================================================
Segment earnings (loss) $ (279) $ (373) $(1,791) $ 2,793 $13,791 14,141
======================================================================================
--------------------------------------------------------------------------------------
Segment assets $26,931 $46,238 $23,671 $ 7,970 $22,985 $127,795
======================================================================================
For the Three-Month Period Ended September 30, 2001
(in thousands)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services Other (1) Total
-------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Total revenues $14,602 $ 7,225 $ 4,329 $ 5,342 $ 1,640 $ 33,138
======================================================================================
--------------------------------------------------------------------------------------
Direct margin (2) $ 4,066 $ 3,133 $ 745 $ 3,164 $ (82) $ 11,026
======================================================================================
Interest income $ 184 $ 50 $ 45 $ 33 $ 31 $ 343
Interest expense $ (601) $ (257) $ (290) $ (192) $ (154) $ (1,494)
--------------------------------------------------------------------------------------
Interest income (expense), net $ (417) $ (207) $ (245) $ (159) $ (123) $ (1,151)
======================================================================================
--------------------------------------------------------------------------------------
Depreciation & amortization expense $ 446 $ 1,534 $ 274 $ 129 $ 901 $ 3,284
======================================================================================
--------------------------------------------------------------------------------------
Benefit (provision) for income taxes $ (32) $ (13) $ 28 $ (74) $ 91 $ -
======================================================================================
--------------------------------------------------------------------------------------
Segment earnings (loss) $ 938 $ 370 $ (835) $ 2,186 $12,752 $ 15,411
======================================================================================
--------------------------------------------------------------------------------------
Segment assets $26,931 $46,238 $23,671 $ 7,970 $22,985 $127,795
======================================================================================
(1) Other includes Specialty Products Division, Discontinued Operations,
non-allocated expenses for bad debt reserve, non-specific legal and
non-recurring charges.
(2) Direct margin represents segment results before interest, depreciation,
amortization, taxes and corporate overhead allocations.
For the Nine-Month Period Ended September 30, 2000
(in thousands)
(restated) (3)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services Other (1) Total
-------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Total revenues $ 34,333 $ 17,140 $ 24,724 $ 8,942 $ 6,396 $ 91,535
======================================================================================
--------------------------------------------------------------------------------------
Direct margin (2) $ 5,689 $ 2,634 $ 1,545 $ 890 $(19,007) $ (8,249)
======================================================================================
Interest income $ 868 $ 380 $ 128 $ 108 $ 204 $ 1,688
Interest expense $ (1,694) $ (846) $ (1,219) $ (441) $ (768) $ (4,968)
--------------------------------------------------------------------------------------
Interest income (expense), net $ (826) $ (466) $ (1,091) $ (333) $ (564) $ (3,280)
======================================================================================
--------------------------------------------------------------------------------------
Depreciation & amortization expense $ 1,003 $ 4,283 $ 981 $ 343 $ 3,888 $ 10,498
======================================================================================
--------------------------------------------------------------------------------------
Benefit (provision) for income taxes $ (2) $ 139 $ 64 $ 44 $ (405) $ (160)
======================================================================================
--------------------------------------------------------------------------------------
Segment earnings (loss)
$ 65 $ (4,625) $ (2,130) $(1,478) $(46,824) $(54,992)
======================================================================================
--------------------------------------------------------------------------------------
Segment assets $ 27,474 $ 40,092 $ 27,303 $ 9,529 $ 53,586 $157,984
======================================================================================
For the Three-Month Period Ended September 30, 2000
(in thousands)
(restated) (3)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services Other (1) Total
-------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Total revenues $ 10,964 $ 6,700 $ 6,619 $ 3,074 $ (878) $ 26,479
======================================================================================
--------------------------------------------------------------------------------------
Direct margin (2) $ 3,576 $ 1,895 $ 462 $ 109 $ (9,809) $ (3,767)
======================================================================================
Interest income $ 367 $ 206 $ 42 $ 46 $ 77 $ 738
Interest expense $ (579) $ (348) $ (356) $ (161) $ (214) $ (1,658)
--------------------------------------------------------------------------------------
Interest income (expense), net $ (212) $ (142) $ (314) $ (115) $ (137) $ (920)
======================================================================================
--------------------------------------------------------------------------------------
Depreciation & amortization expense $ 443 $ 1,450 $ 341 $ 148 $ 1,282 $ 3,664
======================================================================================
--------------------------------------------------------------------------------------
Benefit (provision) for income taxes $ (42) $ 21 $ 27 $ 25 $ (31) $ -
======================================================================================
--------------------------------------------------------------------------------------
Segment earnings (loss) $ 1,385 $ (713) $ (902) $ (839) $(24,309) $(25,378)
======================================================================================
--------------------------------------------------------------------------------------
Segment assets $ 27,474 $ 40,092 $ 27,303 $ 9,529 $ 53,586 $157,984
======================================================================================
(1) Other includes Specialty Products Division, Discontinued
Operations, non-allocated expenses for bad debt reserve,
non-specific legal and non-recurring charges.
(2) Direct margin represents segment results before interest,
depreciation, amortization, taxes and corporate overhead
allocations.
(3) September 30, 2000 results have been restated to be consistent
with the current period reclassifications among business segments.
10. SUBSEQUENT EVENTS.
None.
11. RECENT ACCOUNTING PRONOUNCEMENTS.
QuadraMed adopted The Financial Accounting Standards Board (FASB)
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An
Amendment of FASB Statement No. 133," effective January 1, 2001. Because of
QuadraMed's limited use of derivative instruments, QuadraMed has elected
not to account for its derivative instruments as hedges. Accordingly, upon
adoption, the fair values of derivative instruments will be recorded as
assets or liabilities on the balance sheet, and changes in fair values of
these instruments beyond normal sales and purchases will be reflected in
current income. QuadraMed may elect to apply hedge accounting, which has
different financial statement effects, to possible future transactions
involving derivative instruments, if significant. Such an election would
reduce earnings volatility that might otherwise result if changes in fair
values were recognized in current income. The adoption of SFAS No. 133 and
SFAS No. 138 did not have a significant impact on QuadraMed's results of
operations or financial position.
In September 2000, the FASB issued Statement No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - A Replacement of FASB Statement No. 125" ("SFAS No. 140").
SFAS No. 140 is effective for transfers occurring after March 31, 2001, and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS No. 140 has no
significant effect on QuadraMed's accounting or disclosures for the types
of transactions within the scope of the new standard.
In June 2001, the FASB issued statement No. 143 "Accounting for
Asset Retirement Obligations". The statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions
of SFAS No. 143 are required to be applied starting with fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effect that implementation of the new standard will have on its financial
position, results of operations, and cash flows.
In June 2001, the FASB issued statement No. 144 "Accounting for
the Impairment and Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement 121, and accounting and
reporting provisions of APB Opinion No. 30. The provisions of SFAS No. 144
are required to be applied starting with fiscal years beginning after
December 15, 2001. The adoption of this new statement is not expected to
have a material effect on the Company's Financial position, results of
operations, or cash flows.
12. ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED.
In June 2001, the FASB issued statement No. 141 "Business
Combinations". The statement addresses financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business combinations within
the scope of this Statement are to be accounted for using one method, the
purchase method. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. The adoption of the new
Statement is not expected to have a material effect on the Company's
financial position, results of operations, or cash flows.
In June 2001, the FASB issued statement No. 142 "Goodwill and
Other Intangible Assets". The statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in business combination) should be accounted
for in financial statements upon acquisition. In addition, this statement
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements.
Because goodwill and some intangible assets will no longer be amortized
under this statement, the reported amounts of goodwill and intangible
assets (as well as total assets) will not decrease at the same time and in
the same manner as under previous standards. As such, there may be more
volatility in reported income than under previous standards because
impairment losses, if any, are likely to occur irregularly and in varying
amounts. The provisions of SFAS No. 142 are required to be applied starting
with fiscal years beginning after December 15, 2001.
The Company is currently evaluating the effect of impairment tests
required under the new accounting standard and the impact, if any, it will
have on its reported financial position, results of operations and
statement of cash flows. The reduction in goodwill amortization under the
new standard would have increased net income before taxes for the
nine-month periods ended September 30, 2001 and 2000 by approximately $4.2
million and $4.3 million, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q, 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. 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.
Risks and uncertainties that could cause QuadraMed's actual
results to differ from these forward-looking statements are discussed in
Item 3 entitled, "Quantitative and Qualitative Disclosures About Market
Risk."
Overview
QuadraMed is dedicated to developing information technology and
providing consulting services that help healthcare professionals deliver
outstanding patient care with optimum efficiency. Offering real-world
solutions for every aspect of acute care information management, QuadraMed
has four main product lines: Affinity (R) Healthcare Information System,
Quantim (R) Health Information Management Software and Services,
Complysource (R) Compliance Solutions, and Chancellor TM Financial Products
and Services. QuadraMed was reincorporated in Delaware in 1996 after having
been originally incorporated in California in 1993.
From 1993 to 1999, acquisition-based growth was an integral part
of QuadraMed's business strategy. During this time, QuadraMed completed 28
acquisitions, 23 of which occurred between 1997 and 1999. This rapid growth
had several consequences. First, QuadraMed significantly increased the
range of health information management products and services that it offers
to healthcare providers. Second, QuadraMed increased its market share in
the health information management industry. Third, QuadraMed acquired
access to public markets and has lowered its capital costs. At the same
time, however, integration issues have delayed anticipated synergies and
efficiencies, and, since 1997, QuadraMed incurred annual after-tax losses.
Further, the acquisitions have produced substantial goodwill that reduces
earnings through December 31, 2001.
During 2000 and 2001 through the quarter ended September 30, 2001,
QuadraMed focused on integrating its businesses and making financial and
operational improvements. As part of this strategy, QuadraMed has reduced
expenses, sold non-strategic assets for cash, settled outstanding
litigation, made several management changes, and re-aligned the
organization into four operating divisions:
o Enterprise Products and Services Division, which provides
acute care hospitals with integrated enterprise information
systems to manage patient registration, clinical, and
financial information.
o Health Information Management Products Division, which
provides software products that automate and support hospital
and provider health information management departments in
maintaining accurate and timely patient treatment information
and in accurately coding for appropriate reimbursement.
o Health Information Management Services Division, which
provides (1) health information interim management,
management consulting and outsourcing services; (2) coding,
compliance and education services; (3) compliance, legal and
regulatory services; and (4) charge description master
reviews.
o Financial Services Division, which identifies and collects
receivables for hospitals and medical groups.
Revenues
Licenses. License revenues include license, installation,
consulting and post-contract support fees, third-party hardware sales and
other revenues related to licensing of QuadraMed's software products.
License revenues for the quarter ended September 30, 2001 were $21.7
million, compared to $14.5 million in the same period last year. For the
nine-month period ended September 30, 2001, license revenues increased
21.5% to $62.1 million compared to $51.1 million in the same period last
year. The increase in license revenues was principally attributable to
Affinity sales.
Services. Service revenues for the quarter ended September 30,
2001 were $11.4 million, compared to $12.0 million in the same period last
year. For the nine-month period ended September 30, 2001, service revenues
decreased 19.8% to $32.4 million, compared to $40.4 million in the same
period last year. The decrease in service revenues was principally due to
termination of service contracts with a number of hospitals dating back to
fourth quarter 2000.
Cost of Revenues
Cost of Licenses. Cost of licenses consists primarily of salaries,
benefits and allocated costs related to software installations, hardware
costs, customer support and royalties to third parties. Cost of licenses
for the quarter ended September 30, 2001 were $5.0 million, 8.9% less than
$5.5 million in the same period last year. As a percentage of license
revenues, cost of licenses were 23.0% for the quarter ended September 30,
2001, compared with 37.9% in the same period last year. For the nine-month
period ended September 30, 2001, cost of license revenues decreased 5.1% to
$16.1 million, compared to $17.0 million in the same period last year. As a
percentage of license revenues, cost of licenses were 25.9% in the
nine-month period ended September 30, 2001, compared with 33.2% in the same
period last year. The decrease in the year to date cost of licenses is
driven by the 21.5% revenue growth and lower expenses.
Cost of Services. Cost of services includes expenses associated
with services performed in connection with health information management
and business office outsourcing, compliance and consulting services. Cost
of services for the quarter ended September 30, 2001 were $4.6 million,
47.5% less than $8.8 million in the same period last year. As a percentage
of service revenues, cost of services were 40.3% for the quarter ended
September 30, 2001, compared with 73.2% in the same period last year. For
the nine-month period ended September 30, 2001, cost of service revenues
decreased 51.8% to $14.2 million, compared to $29.5 million in the same
period last year. As a percentage of service revenues, cost of services
were 43.9% in the nine-month period ended September 30, 2001, compared with
73.0% in the same period last year. The decrease in the year to date cost
of services ratio is driven by the termination of lower margin hospital
service contracts last year, as well as an increase in revenues from our
Financial Services Division, which generates relatively higher margins.
Operating Expenses
General and Administration. General and administration expenses
for the quarter ended September 30, 2001 were $12.3 million, 5.6% more than
$11.7 million in the same period last year. As a percentage of total
revenues, general and administration expenses were 37.2% for the quarter
ended September 30, 2001, compared to 44.0% in the same period last year.
For the nine-month period ended September 30, 2001, general and
administration expenses increased 5.4% to $37.9 million, compared to $35.9
million in the same period last year. As a percentage of total revenues,
general and administration expenses increased to 40.1% for the nine-month
period ended September 30, 2001 from 39.3% in the same period last year.
General and administration expenses increased primarily as a result of higher
incentive compensation accruals, bad debt reserve strengthening, and other
expense accruals.
Sales and Marketing. Sales and marketing expenses for the quarter
ended September 30, 2001 were $3.8 million, 24.5% less than $5.0 million in
the same period last year. As a percentage of total revenues, sales and
marketing expenses were 11.5% for the quarter ended September 30, 2001,
compared to 19.0% in the same period last year. For the nine-month period
ended September 30, 2001, sales and marketing expenses decreased 36.1% to
$11.2 million, compared to $17.6 million in the same period last year. As a
percentage of total revenues, sales and marketing decreased to 11.9% for
the nine-month period ended September 30, 2001 from 19.2% in the same
period last year. Sales and marketing expenses decreased primarily as a
result of the expense actions taken in 2000.
Research and Development. Research and development expenses for
the quarter ended September 30, 2001 were $3.2 million, 41.5% less than
$5.4 million in the same period last year. As a percentage of total
revenues, research and development costs were 9.5% for the quarter ended
September 30, 2001, compared to 20.3% in the same period last year. For the
nine-month period ended September 30, 2001, research and development
expenses decreased 40.6% to $10.0 million, compared to $16.8 million in the
same period last year. As a percentage of total revenues, research and
development expenses decreased to 10.6% for the nine-month period ended
September 30, 2001 from 18.4% in the same period last year. Research and
development expenses decreased primarily as a result of the elimination of
corporate research and development projects and a reduction in the number
of products and product versions supported. QuadraMed believes that
research and development expenditures are essential to maintaining its
competitive position. As a result, QuadraMed intends to continue to make
investments in the development of new products and in the further
integration of acquired technologies. Subject to feasibility tests, some of
these development costs are currently capitalized.
Amortization of Intangibles. Amortization of intangibles for the
quarter ended September 30, 2001 decreased 6.3% to $1.6 million, compared
to $1.7 million in the same period last year. For the nine-month period
ended September 30, 2001 amortization of intangibles decreased 7.1% to $4.9
million compared to $5.3 million in the same period last year. The quarter
to date and year to date decreases resulted from an analysis of the
underlying asset and related amortization rates.
Non-Recurring Charges. There were no non-recurring charges for the
three-month and nine-month periods ended September 30, 2001.
During the nine-month period ended September 30, 2000, QuadraMed
recorded approximately $42.0 million of non-recurring charges. Those
charges were primarily related to the sunsetting of the EnOvation product,
the write-down of certain other receivables, and payments to employees for
severance agreements and costs associated with office closures. In
addition, there were costs related to further product integration efforts
and product consolidation.
Interest Expense. Interest expense was $1.5 and $4.8 million for
the three-month and nine-month periods ended September 30, 2001, compared
to $1.7 and $5.0 million for the same periods last year. Interest expense
in 2001 and 2000 was principally related to QuadraMed's $115.0 million
convertible subordinated debentures, which were issued in May 1998.
Liquidity and Capital Resources
At September 30, 2001, QuadraMed had $28.3 million in cash and
cash equivalents, compared to $27.4 million at December 31, 2000.
In October 1996, QuadraMed completed its initial public offering
of common stock, which resulted in net proceeds of approximately $26.4
million. In October 1997, QuadraMed completed a follow-on offering of
common stock, which resulted in net proceeds of approximately $57.3
million. In April 1998, QuadraMed completed an offering of $115.0 million
principal amount of convertible subordinated debentures, including the
initial purchasers' over-allotment option. The debentures are due May 1,
2005 and bear interest, which is payable semi-annually at 5.25 percent per
annum. Proceeds from the offering were $110.8 million.
During the quarter ended September 30, 2001, QuadraMed redeemed
and cancelled $35.9 million in face value of convertible subordinated
debentures at prices ranging from $66.88 to $69.75. The Company recognized
an extraordinary gain of $10.5 million after applicable taxes as a result
of the early extinguishment of debt.
During the quarter ended June 30, 2001, QuadraMed redeemed and
cancelled $5.4 million in face value of convertible subordinated debentures
at prices ranging from $53.00 to $53.75. The Company recognized an
extraordinary gain of $2.4 million after applicable taxes as a result of
the early extinguishment of debt.
Net cash provided by (used in) operating activities was $10.1
million and ($15.8) million for the nine-month periods ended September 30,
2001 and 2000, respectively. Net cash provided by operating activities for
the nine-month period ended September 30, 2001 principally reflected the
improvement in collections on receivable balances, write-off of convertible
promissory note, and the lower operating expenses. Net cash used in
operating activities for the nine-month period ended September 30, 2000
related to the write-down on certain intangible assets and accounts
receivable, and the sale of the ROI division.
Net cash provided by investing activities was $18.3 million and
$11.8 million for the nine-month periods ended September 30, 2001 and 2000,
respectively. Investing activities for the nine-month period ended
September 30, 2001 primarily related to the maturity of available-for-sale
short-term investments, release of restricted cash, purchase of treasury
stock, and the proceeds from the sale of the EZ-Cap software business. Net
cash provided by investing activities for the nine-month period ended
September 30, 2000 primarily related to proceeds from the sale of the ROI
division and the maturity of available-for-sale short-term investments.
Net cash (used in) provided by financing activities was ($27.5)
million and $0.7 million for the nine-month periods ended September 30,
2001 and 2000, respectively. Net cash used in financing activities for the
nine-month period ended September 30, 2001 primarily related to the
redemption of convertible subordinated debentures, capital lease
obligations, and proceeds from the exercising of common stock options. Net
cash provided by financing activities for the nine-month period ended
September 30, 2000 primarily related to the issuance of common stock
through the Employee Stock Purchase Plan and the proceeds from the
exercising of common stock options.
QuadraMed believes that its cash and investments and borrowing
capacity on September 30, 2001 is sufficient to fund operations at least
through December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Interest Rate Risk
QuadraMed's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio and its convertible
subordinated debentures. QuadraMed intends to ensure the safety and
preservation of its invested principal funds by limiting default risk,
market risk, and reinvestment risk. QuadraMed invests in high-quality
issuers, including money market funds, corporate debt securities, and debt
securities issued by the United States government. QuadraMed has a policy
of investing in securities with maturities of two years or less. QuadraMed
does not invest in derivative financial or foreign investments. The table
below presents fair values of principal amounts and weighted average
interest rates for QuadraMed's investment portfolio as of September 30,
2001, (in thousands, except average interest rates):
Aggregate Weighted Average
Fair Value Interest Rate
---------- -------------
Cash and cash equivalents:
Cash.......................................................... $ 3,804 --
----------
3.12 %
Money market funds............................................ $ 24,478
----------
Total cash and cash equivalents............................... $ 28,282
----------
Short-term investments:
Corporate debt securities..................................... $ 34 6.33 %
----------
Other short-term investment................................... $ 2,380 3.75 %
----------
Total short-term investments.................................. $ 2,414
Long-term investments:
Corporate debt securities..................................... $ 582 6.09 %
----------
Debt securities issued by the U.S. government..............
$ 553 5.46 %
----------
Total long-term investments.................................... $ 1,135
----------
Outstanding Debt. As of September 30, 2001, QuadraMed had
outstanding long-term debt of $73.7 million, as set forth below (in
thousands, except average interest rates):
Nine-Month Period Ended
September 30, 2001
------------------------------------------------------------------
Carrying Fair Maturity Weighted Average
Amount Value Date Interest Rate
------------ ------------- ----------- ---------------------
Convertible Subordinated Debentures (*) $ 73,719 $ 50,774 2005 5.25%
(*) During 2001, QuadraMed redeemed $41.3 million in face value of
convertible subordinated debentures at prices ranging from $53.00
to $69.75. The Company recognized an extraordinary gain of $12.9
million after applicable taxes as a result of the early
extinguishment of debt.
Long-term debt is carried at the original offering price, less any
payments of principal. Rates currently available to the Company for
long-term borrowings with similar terms and remaining maturities are used
to estimate the fair value of existing borrowings as the present value of
expected cash flows. The debentures are unsecured, subordinated to all
senior indebtedness and convertible at any time into shares of the
Company's common stock. The debentures will mature on May 1, 2005 and are
redeemable, in whole or in part, at the option of the Company. In order to
estimate the fair value of these debentures, the Company used currently
quoted market prices.
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its convertible subordinated debentures, the
bulk of QuadraMed's debt, is fixed at 5.25%.
Foreign Currency Risk
Although QuadraMed from time-to-time sells its products
internationally, all such transactions are denominated in U.S. currency,
and there is no foreign currency fluctuation risk.
QuadraMed has encountered significant challenges integrating acquired
businesses, and its business, operations, and financial condition have been
adversely affected.
Since its inception, QuadraMed has completed twenty-eight (28)
acquisitions. QuadraMed has encountered significant challenges related to
integrating acquired businesses into its operations and expects these
challenges to continue until integration is complete. Some of the
challenges QuadraMed has encountered or may encounter in integrating
acquired businesses include:
o Interruption, disruption or delay of QuadraMed's ongoing
business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expense;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results
resulting in failure of QuadraMed to realize anticipated
benefits;
o Failure to retain key acquired personnel and difficulty and
expense of training those retained;
o Increases in stock compensation expense and increased
compensation expense resulting from newly hired employees;
o Assumption of liabilities of acquired businesses and
potential for disputes with the sellers;
o Customer dissatisfaction or performance problems related to
acquired businesses;
o Exposure to the risks of entering markets in which QuadraMed
has no direct prior experience and to risks associated with
market acceptance of acquired products and technologies; and
o Platform and technical issues related to integrating systems
from various acquired companies.
All of these factors have had, and QuadraMed expects will continue
to have, an adverse effect on its business, financial condition, and
results of operations at least until the integration of the acquired
businesses is complete. In addition, these problems have led QuadraMed to
refocus its business strategy away from acquisitions, which could lead to
slower future growth and negatively impact its financial condition.
QuadraMed has incurred losses in each of the past three years and could
continue to incur losses in future periods.
QuadraMed incurred net losses of $54.8 million, $12.3 million, and
$21.4 million for the years ended December 31, 2000, 1999, and 1998,
respectively. For the three-month and nine-month periods ended September
30, 2001, QuadraMed reported a net gain of $15.4 million and $14.1 million,
respectively. As of September 30, 2001, QuadraMed's accumulated deficit was
$246.2 million. Furthermore, in connection with its acquisitions, QuadraMed
may incur significant expenses related to goodwill and other intangible
assets in future periods. Accordingly, if QuadraMed's operating results do
not improve to offset these and other expenses, QuadraMed may continue to
experience losses in future periods and may never be profitable.
QuadraMed's quarterly operating results are subject to fluctuations, which
could adversely affect its net income and financial results.
QuadraMed's quarterly operating results have varied significantly
in the past and may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside its control. Accordingly,
quarter-to-quarter comparisons of QuadraMed's 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 Divestiture of, discontinuation of, or reduction in, the
products and services QuadraMed offers;
o Loss of customers due to consolidation in the healthcare
industry;
o Delays in product delivery requested by its customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development, and
administrative personnel necessary to support anticipated
operations;
o Costs incurred for marketing and sales promotional
activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the
healthcare industry;
o Cooperation from competitors on interfaces and implementation
when a customer chooses systems from various vendors;
o Delays in implementation due to product readiness or to
customer induced delays in training or installation;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can
increase demand for new, updated systems;
o Federal regulations that directly affect reimbursements
received, and therefore the amount of money available for
purchasing information systems; and
o The fines and penalties a healthcare provider or system may
incur due to fraudulent billing practices.
QuadraMed's operating expense levels, which increase with the
addition of acquired businesses, are relatively fixed. Accordingly, if
future revenues are below expectations, QuadraMed would experience a
disproportionate adverse affect on its net income and financial results. In
the event of a revenue shortfall, QuadraMed will likely be unable to, or
may elect not to, reduce spending quickly enough to offset any such
shortfall. As a result, it is possible that QuadraMed's future revenues or
operating results may fall below the expectations of securities analysts
and investors. In such a case, the price of QuadraMed's publicly traded
securities may be adversely affected.
The variability and length of QuadraMed's sales cycle for its products may
exacerbate the unpredictability and volatility of QuadraMed's operating
results.
QuadraMed cannot accurately forecast the timing of its customer
purchases due to the complex procurement decision processes of most
healthcare providers and payors. How and when to implement, replace, expand
or substantially modify an information system are major decisions for
customers, and such decisions require significant capital expenditures by
them. As a result, QuadraMed typically experiences sales cycles that extend
over several quarters and QuadraMed has only a limited ability to forecast
the timing and size of specific sales, making the prediction of quarterly
financial performance more difficult.
QuadraMed may not be able to hire and retain necessary qualified personnel
and the uncertainty caused by QuadraMed's management changes could
adversely affect the price of its Common Stock.
In large part, QuadraMed's future success will depend upon its
ability to attract and retain executive officers, product managers, and
other key sales, marketing and development personnel. Competition for
personnel in the software and healthcare information management industry is
intense. At times, QuadraMed has had difficulty attracting and retaining
highly qualified candidates within specific geographic areas or with
specific industry experience. If QuadraMed's competitors increase their use
of valid non-compete agreements, the pool of candidates may narrow in some
geographic areas. The failure to attract, retain, train, and effectively
manage personnel could increase QuadraMed's costs and impair its
development, sales, and customer service efforts.
Changes in procurement practices of hospitals have and may continue to have
a negative impact on QuadraMed's revenues.
A substantial portion of QuadraMed's revenues has been and is
expected to continue to be derived from sales of software products and
services to hospitals. Consolidation in the healthcare industry,
particularly in the hospital and managed care markets, could decrease the
number of existing or potential purchasers of products and services and
could adversely affect QuadraMed's business. In addition, the decision to
purchase QuadraMed's products often involves a committee approval.
Consequently, it is difficult for QuadraMed to predict the timing or
outcome of the buying decisions of its customers or potential customers. In
the quarter ended September 30, 2001, QuadraMed's service revenues
decreased due to the loss of hospital service contracts. In addition, many
healthcare providers are consolidating to create integrated healthcare
delivery systems with greater regional market power. These emerging systems
could have greater bargaining power, which may lead to decreases in prices
for QuadraMed's products, which could adversely affect QuadraMed's
business, financial condition and results of operations.
Changes in the healthcare financing and reimbursement system could
adversely affect the amount of and manner in which QuadraMed's customers
purchase its products and services.
Changes in current healthcare financing and reimbursement systems
could result in unplanned product enhancements, delays or cancellations of
product orders or shipments or reduce the need for certain systems.
QuadraMed could also have the endorsement of products by hospital
associations or other customers revoked. Any of these occurrences could
have a material adverse effect on QuadraMed's business.
The healthcare industry in the United States is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operations of healthcare organizations. The
commercial value and appeal of QuadraMed's products may be adversely
affected if the current healthcare financing and reimbursement system were
to revert to a fee-for-service model. In addition, many of QuadraMed's
customers provide services under capitated service agreements, and a
reduction in the use of capitation arrangements as a result of regulatory
or market changes could have a material adverse effect on QuadraMed's
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other
things, reimbursement rates and capital expenditures. Proposals to reform
the healthcare system have been and are being considered by the United
States Congress. These proposals, if enacted, could change the operating
environment of QuadraMed's customers in ways that cannot be predicted.
Healthcare organizations may react to these proposals by curtailing or
deferring investments, including those for QuadraMed's products and
services. In addition, the regulations promulgated under HIPAA could lead
healthcare organizations to curtail or defer investments in non-HIPAA
related features in the next several years.
If QuadraMed is unable to compete effectively, it could experience price
reduction, reduced gross margins and loss of market share.
Competition for QuadraMed's products and services is intense.
Increased competition could result in reductions in QuadraMed's prices,
gross margins, and market share and have a material adverse affect on
QuadraMed's business, financial condition and results of operations.
QuadraMed competes with other providers of healthcare information software
and services, as well as healthcare consulting firms. Some competitors have
formed business alliances with other competitors that may affect
QuadraMed's ability to work with some potential customers. In addition, if
some of QuadraMed's competitors merge, a stronger competitor may emerge.
Some principal competitors include:
o McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation in the market
for electronic document management products in the Enterprise
Products and Services Division;
o Eclipsys Corporation, Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., McKesson HBOC,
Shared Medical Systems, Inc., a division of Siemens, and
MediQual Systems, Inc., a division of Cardinal Health, Inc.,
in the market for decision support products in the Enterprise
Products and Services Division;
o McKesson HBOC, Inc., Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and IDX/Phamis in the market for enterprise
healthcare information systems in the Enterprise Products and
Services Division;
o Madison, McKesson HBOC, Shared Medical Systems, Inc., a
division of Siemens, and Medibase in the market for MPI
products and services in the Enterprise Products and Services
Division;
o 3M, SoftMed Corporation, Inc., MetaHealth, Eclypsis
Corporation, Cascade, and HSS in the market for medical
records products in the Health Information Management Product
Division; and
o PriceWaterhouseCoopers, KPMG and Ernst and Young for
compliance products and services and health information
management consulting services in the Health Information
Management Services Division.
Current and prospective customers evaluate QuadraMed's
capabilities against the merits of their existing information systems and
expertise. Furthermore, major software information systems companies,
including those specializing in the healthcare industry, that do not
presently offer competing products may enter QuadraMed's markets. Many of
QuadraMed's competitors and potential competitors have significantly
greater financial, technical, product development, marketing and other
resources and market recognition than QuadraMed. Many of these competitors
also have, or may develop or acquire, substantial installed customer bases
in the healthcare industry. As a result of these factors, QuadraMed's
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the
political, economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion and sale of their products than QuadraMed. QuadraMed
may not be able to compete successfully against current and future
competitors, and such competitive pressures could materially adversely
affect QuadraMed's business, financial condition and operating results.
QuadraMed may not be able to introduce or market new products or product
enhancements successfully or in a timely manner, which could adversely
affect its competitive position.
QuadraMed's performance depends in large part upon its ability to
provide the increasing functionality required by its customers through the
timely development and successful introduction of new products and
enhancements to its existing suite of products. QuadraMed may not
successfully, or in a timely manner, develop, acquire, integrate,
introduce, or market new products or product enhancements. Product
enhancements or new products developed by QuadraMed also may not meet the
requirements of hospitals or other healthcare providers and payors or
achieve or sustain market acceptance. QuadraMed's failure to either
estimate accurately the resources and related expenses required for a
project, or to complete its contractual obligations in a manner consistent
with the project plan upon which a contract was based, could have a
material adverse effect on its business, financial condition and results of
operations. In addition, QuadraMed's failure to meet a customer's
expectations in the performance of its services could damage its reputation
and adversely affect QuadraMed's ability to attract new business.
QuadraMed's inability to protect its intellectual property could lead to
unauthorized use of its products, which could have an adverse effect on its
business.
QuadraMed relies on a combination of trade secret, copyright and
trademark laws, nondisclosure, noncompete, and other contractual provisions
to protect its proprietary rights. QuadraMed has not filed any patent
applications covering its technology. Measures taken by QuadraMed to
protect its intellectual property may not be adequate, and QuadraMed's
competitors could independently develop products and services that are
substantially equivalent or superior to QuadraMed's products and services.
Any infringement or misappropriation of its proprietary software and
databases could put QuadraMed at a competitive disadvantage in a highly
competitive market and could cause QuadraMed to lose revenues, incur
substantial litigation expense and divert management's attention from other
operations.
QuadraMed depends on licenses for certain technology used to
develop its products from a number of third-party vendors. Most of these
licenses expire within three to five years. Such licenses can be renewed
only by mutual consent and may be terminated if QuadraMed breaches the
license terms and fails to cure the breach within a specified time period.
If such licenses are terminated, QuadraMed may not be able to continue
using the technology on commercially reasonable terms or at all. As a
result, QuadraMed may have to discontinue, delay or reduce product
shipments until equivalent technology is obtained, which could have a
material adverse effect on QuadraMed's business, financial condition and
results of operations. Most of QuadraMed's third-party licenses are
non-exclusive and competitors may obtain the same or similar technology. In
addition, if vendors choose to discontinue support of the licensed
technology, QuadraMed may not be able to modify or adapt its products.
Intellectual property litigation is increasingly common in the
software industry. The risk of an infringement claim against QuadraMed may
increase over time as the number of competitors in its industry segment
grows and the functionality of products overlaps. Third parties could
assert infringement claims against QuadraMed in the future. Regardless of
the merits, QuadraMed could incur substantial litigation expenses in
defending any such asserted claim. In the event of an unfavorable ruling on
any such claim, a license or similar agreement may not be available to
QuadraMed on reasonable terms, if at all. Infringement may also result in
significant monetary liabilities that could have a material adverse effect
on QuadraMed's business, financial condition and results of operations.
QuadraMed may not be successful in the defense of these or similar claims.
The nature of QuadraMed's products makes them particularly vulnerable to
undetected errors, or bugs, that could reduce revenues, market share or
demand for the company's products and services.
Products such as QuadraMed's may contain errors or failures,
especially when initially introduced or when new versions are released.
Although QuadraMed conducts extensive testing on its products, software
errors have been discovered in certain enhancements and products after
their introduction. Despite such testing by QuadraMed and by its current
and potential customers, products under development, enhancements, or
shipped products may contain errors or performance failures, resulting in,
among other things:
o loss of customers and revenues;
o delay in market acceptance;
o diversion of resources;
o damage to QuadraMed's reputation; or
o increased service and warranty costs.
Any of these consequences could have a material adverse effect on
QuadraMed's business, financial condition, and results of operations.
Because no mirror processing site for its data processing facilities
exists, QuadraMed's business, financial condition, and results of
operations could be adversely affected if these facilities were subject to
a closure from a catastrophic event or otherwise.
QuadraMed currently processes substantially all of its data at its
facilities in Neptune, New Jersey, Irving, Texas, Kansas City, Missouri,
and San Rafael, California. Although QuadraMed backs up its data nightly
and has safeguards for emergencies, such as power interruption or breakdown
in temperature controls, QuadraMed has no mirror processing site to which
processing could be transferred in the case of a catastrophic event at
these facilities. If a major catastrophic event, or any other interruption
or closure, occurs at one of these facilities, leading to an interruption
of data processing, or any other interruption or closure, QuadraMed's
business, financial condition, and results of operations could be adversely
affected.
If QuadraMed products become subject to FDA regulation, QuadraMed may be
required to make substantial product changes that could require a
significant capital investment.
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the FDA under the Federal Food, Drug and Cosmetic Act. At present, none of
QuadraMed's software products are so regulated. In the future, the FDA
could determine that some of QuadraMed's products, because of their
predictive aspects, are clinical decision tools and subject them to
regulation. Compliance with FDA regulations could be burdensome, time
consuming, and expensive. Other new laws and regulations affecting
healthcare software development and marketing also could be enacted in the
future. If so, it is possible that QuadraMed's costs and lengths of time
for product development and marketing could increase and that other
unforeseeable consequences could arise.
Governmental regulation of the confidentiality of patient records could
result in QuadraMed's customers being unable to use its products without
significant modification, which could require substantial expenditures by
QuadraMed.
There is substantial state regulation of the confidentiality of
patient medical records and the circumstances under which such records may
be disclosed to or processed by QuadraMed as a consequence of its contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of the hospital,
physician or other healthcare provider, regulations governing patient
confidentiality rights are rapidly evolving. Additional legislation
governing the dissemination of medical record information also has been
proposed and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, require the promulgation of regulations that will set standards
for electronic transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. A final
regulation governing transaction and code set standards has been published
and is expected to become effective on October 16, 2002. The privacy
regulation has been published as a final regulation and became effective on
April 14, 2001. The HIPAA privacy regulation is complex and far reaching.
Compliance will be required of certain covered entities, including
healthcare providers, health plans, and healthcare clearinghouses.
QuadraMed may be implicated by these regulations either as a covered entity
or as a business associate of a covered entity. The HIPAA and state
healthcare privacy regulations could materially restrict the ability of
healthcare providers to submit information from patient records using
QuadraMed products and services or could require QuadraMed to make
substantial capital expenditures to be in compliance.
HIPAA's data security regulation has been published as a proposal.
At this time, no information is available on when the regulation will be
published as final or whether the regulation will be revised prior to final
publication. At this time, it is not possible to assess the specific
implications of the security regulation on QuadraMed. The regulation may
require holders of individual personal healthcare information, including
QuadraMed, to implement stringent security measures. Implementing such
measures may require substantial capital expenditures by QuadraMed due to
required product, service, and procedure changes.
In addition, during the past several years, the healthcare
industry has been subject to, among other things, increasing levels of
governmental regulation of reimbursement rates and certain capital
expenditures. Certain proposals to reform the healthcare system have been
and are being considered by Congress. These proposals, if enacted, could
change the operating environment for QuadraMed's clients in ways that could
have a negative impact on QuadraMed's business, financial condition and
results of operations. QuadraMed is unable to predict what, if any, changes
will occur.
If QuadraMed's products fail to accurately assess, process, or collect
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.
Provisions in QuadraMed's certificate of incorporation and bylaws and
Delaware law could delay or discourage third parties from acquiring
QuadraMed at a premium, which could adversely affect the price of its
Common Stock.
QuadraMed's board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by holders of QuadraMed's Common
Stock. If preferred stock is issued, the voting and other rights of the
holders of QuadraMed's Common Stock may be subject to, and may be adversely
affected by, the rights of the holders of QuadraMed's preferred stock. The
issuance of preferred stock may have the effect of delaying or preventing a
change of control of QuadraMed that would have been at a premium price to
QuadraMed's stockholders.
Certain provisions of QuadraMed's certificate of incorporation and
bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management difficult. For example, QuadraMed's board
of directors, which is classified into three classes of directors serving
staggered, three-year terms, has the authority to impose various procedural
and other requirements that could make it more difficult for QuadraMed's
stockholders to effect certain corporate actions. In addition, QuadraMed's
certificate of incorporation provides that directors may be removed only by
the affirmative vote of the holders of two-thirds of the shares of
QuadraMed's capital stock entitled to vote. Any vacancy on QuadraMed's
board of directors may be filled only by vote of the majority of directors
then in office. Further, QuadraMed's certificate of incorporation provides
that the affirmative vote of two-thirds of the shares entitled to vote,
voting together as a single class, subject to certain exceptions, is
required for certain business combination transactions. These provisions,
and certain other provisions of QuadraMed's certificate of incorporation,
could have the effect of delaying or preventing (i) a tender offer for
QuadraMed's Common Stock or other changes of control of QuadraMed that
could be at a premium price, or (ii) changes in its management.
In addition, certain provisions of Delaware law could have the
effect of delaying or preventing a change in control of QuadraMed, Section
203 of the Delaware General Corporation Law, for example, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
The trading price of QuadraMed's Common Stock has been, and is expected to
continue to be, extremely volatile.
The NASDAQ Small Cap Market on which QuadraMed is listed, and
stock markets in general, have historically experienced extreme price and
volume fluctuations that have affected companies unrelated to their
individual operating performance. The trading price of QuadraMed's Common
Stock has been and is likely to continue to be highly volatile due to such
factors as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by QuadraMed's
competitors;
o Governmental regulatory action;
o Developments or disputes with respect to proprietary rights;
o General trends in QuadraMed's industry and overall market
conditions.
Movements in prices of equity securities may also affect the
market price of QuadraMed's Common Stock in general.
Future sales of a substantial number of shares of QuadraMed's Common Stock
could cause the price of the stock to decrease or fluctuate substantially.
Existing stockholders of QuadraMed hold a significant number of
shares of Common Stock that may be sold in the future under Rule 144 of the
Securities Act or through the exercise of registration rights. Sales of a
substantial number of these shares in the public markets or the prospect of
such sales could adversely affect or cause substantial fluctuations in the
market price of QuadraMed's Common Stock and convertible debentures and
impair QuadraMed's ability to raise additional capital through the sale of
its securities.
If QuadraMed is unable to achieve profitability, it may be forced to file
for bankruptcy.
If QuadraMed's financial condition deteriorates, QuadraMed may be
forced to seek relief under Chapter 11 of the U.S. Bankruptcy Code. Chapter
11 permits a company to remain in control of its business, protected by a
stay of all creditor action while the company attempts to negotiate and
confirm a plan of reorganization with its creditors. If QuadraMed commenced
a Chapter 11 case it would expect deterioration in its customer
relationships, a reduction in orders, the loss of suppliers, and an erosion
of employee morale. QuadraMed may be unsuccessful in its attempts to
confirm a plan of reorganization with its creditors. Many Chapter 11 cases
are unsuccessful, and virtually all involve substantial expense and damage
to the business. If QuadraMed were unsuccessful in obtaining confirmation
of a plan of reorganization, its assets could be liquidated and could be
insufficient to pay all of its security holders.
QuadraMed may lose some or all of its equity investments in early stage
companies if such companies become bankrupt or insolvent or do not succeed
in executing their business strategy appropriately.
QuadraMed has made equity investments and acquired minority
interests in certain early stage companies. QuadraMed does not have the
ability to control the operations of these companies and these investments
are subject to significant risks. There is no guarantee that QuadraMed will
realize any return on such investments. QuadraMed could also lose some or
all of its principal investment if these companies become bankrupt or
insolvent or do not succeed in executing their business strategy.
Review of Financial Statements.
The financial information required in this Form 10-Q by Rule 10-01
of Regulation S-X has been subject to a review by Pisenti & Brinker LLP,
the Company's independent certified public accountants, as described in
their report dated October 29, 2001.
The unaudited condensed consolidated financial statements
contained herein have been prepared on the same basis as QuadraMed's
audited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. Management is continuing to review QuadraMed's financial
statements and will obtain the assistance of outside resources as deemed
necessary. Management's review is not expected to result in any material
adjustments or charges; however, there can be no assurance that additional
adjustments and/or charges will not be required.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
10.5 Amendment of Employment Agreement between Lawrence P.
English and QuadraMed, dated September 20, 2001.*
10.6 Amendment of Employment Agreement between Michael H.
Lanza and QuadraMed, dated September 19, 2001.*
10.7 Amendment of Employment Agreement between Dean Souleles
and QuadraMed, dated September 19, 2001.*
10.8 Amendment of Employment Agreement between Mark N. Thomas
and QuadraMed, dated September 20, 2001.*
10.9 Amendment of Employment Agreement between Michael S.
Wilstead and QuadraMed, dated September 20, 2001.*
10.10 Letter Agreement between QuadraMed and Peter T. van der
Grinten, dated October 4, 2001.*
15 Accountant's Letter.
27.1 Financial Data Schedule for the Quarter Ended 09/30/2001.
27.2 Financial Data Schedule for the Quarter Ended 09/30/2000.
----------------------
* Management contract, or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
On August 16, 2001, QuadraMed filed a Current Report on Form 8-K in
which it reported in Item 5 that it had entered into an asset purchase
agreement with OAO Technology Solutions, Inc. and its wholly owned subsidiary
OAO Transition, LLC, for the sale of certain assets used to conduct
QuadraMed's EZ-CAP managed care software business for a purchase price equal
to $9.0 million and the opportunity to receive up to $5.0 million in
additional payments based on EZ-Cap's revenue growth and customer retention as
part of OAO. The election on August 13, 2001 of Joseph L. Feshbach, chairman
of the board of Curative Health Services, Inc., to QuadraMed's board of
directors was also reported.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
QUADRAMED CORPORATION (Company)
Date: November 14, 2001 By: /s/ Lawrence P. English
------------------------------
Lawrence P. English
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark N. Thomas
------------------------------
Mark N. Thomas
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
3.4 Amended and Restated Bylaws of QuadraMed. (1)
3.5 Third Amended and Restated Certificate of Incorporation of
QuadraMed. (5)
4.1 Reference is made to Exhibits 3.4 and 3.5. (1) (5)
4.2 Form of Common Stock certificate. (1)
4.3 Form of Warrant to Purchase Common Stock. (1)
4.4 Registration Rights Agreement dated December 5, 1996, by and
between QuadraMed and the investors listed on Schedule A
thereto. (2)
4.5 Registration Rights Agreement, dated as of June 5, 1998, by and
among QuadraMed Corporation and the stockholders of Pyramid
Health Group, Inc. named therein. (3)
4.6 Subordinated Indenture, dated as of May 1, 1998, between
QuadraMed and The Bank of New York. (4)
4.7 Officers' Certificate delivered pursuant to Sections 2.3 and
11.5 of the Subordinated Indenture. (4)
4.8 Registration Rights Agreement dated April 27, 1998, by and among
QuadraMed and the Initial Purchasers named therein. (4)
4.9 Form of Global Debenture. (4)
4.10 Form of Certificated Debenture. (4)
4.11 Registration Rights Agreement dated December 23, 1998, by and
between QuadraMed and the shareholders listed therein. (7)
4.12 Registration Rights Agreement, dated as of March 3, 1999, by and
among QuadraMed Corporation and the stockholders of The
Compucare Company named therein. (6)
10.1 Grantor Trust Agreement by and between QuadraMed and Wachovia
Bank, N.A., dated January 1, 2000.(8)
10.2 Grantor Trust Agreement Amendment by and between QuadraMed and
Wachovia Bank, N.A., dated January 1, 2000.(8)
10.3 QuadraMed 1996 Stock Incentive Plan, as amended April 18,
2001.(8)
10.4 Amendment of Severance Agreement between James D. Durham and
QuadraMed, dated July 31, 2001.(8)
10.5 Amendment of Employment Agreement between Lawrence P. English
and QuadraMed, dated September 20, 2001.
10.6 Amendment of Employment Agreement between Michael H. Lanza and
QuadraMed, dated September 19, 2001.
10.7 Amendment of Employment Agreement between Dean Souleles and
QuadraMed, dated September 19, 2001.
10.8 Amendment of Employment Agreement between Mark N. Thomas and
QuadraMed, dated September 20, 2001.
10.9 Amendment of Employment Agreement between Michael S. Wilstead
and QuadraMed, dated September 20, 2001.
10.10 Letter Agreement between QuadraMed and Peter T. van der Grinten,
dated October 4, 2001.
15 Accountant's Letter.
(1) Incorporated herein by reference to the Company's
Registration Statement on Form SB-2, No 333-5l80-LA, as
filed with the Commission on June 28, 1996, as amended by
Amendment No. l, Amendment No. 2 and Amendment No. 3
thereto, as filed with the Commission on July 26, 1996,
September 9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, as
filed with the Commission on August 14, 1997, as amended
September 4, 1997.
(3) Incorporated herein by reference to the Company's Current
Report on Form 8-K, as filed with the Commission on June
11, 1998.
(4) Incorporated herein by reference to the Company's
Registration Statement on Form S-3, No. 333-55775, as filed
with the Commission on June 2, 1998, and as amended by
Amendment No. 1 thereto, as filed with the Commission on
June 17, 1998.
(5) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, as
filed with the Commission on August 14, 1998, as amended on
August 24, 1988.
(6) Incorporated herein by reference to the Company's Current
Report on Form 8-K/A filed with the Commission on March 22,
1999.
(7) Incorporated herein by reference to the Company's
Registration Statement on Form S-3, No. 333-80617, as filed
with the Commission on June 14, 1999, and as amended by
Amendment No. l thereto, as filed with the Commission on
August 4, 1999.
(8) Incorporated by reference the Company's Quarterly Report on
Form 10-Q, filed August 14, 2001.
EXHIBIT 15
Independent Accountants' Report
-------------------------------
To the Stockholders and Board of Directors
QuadraMed Corporation ("QuadraMed")
San Rafael, California
We have reviewed the accompanying condensed consolidated balance sheet of
QuadraMed and its subsidiaries as of September 30, 2001, the related
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2001 and 2000 and the related
condensed consolidated statements of cash flows for the nine-month periods
ended September 30, 2001 and 2000. These condensed consolidated financial
statements are the responsibility of QuadraMed's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles in the United States of America.
We have audited, in accordance with generally accepted auditing standards
in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive loss, and cash flows for
the year then ended (not presented herein); and in our report dated March
6, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2000,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Pisenti & Brinker LLP
Petaluma, California
October 29, 2001
ARCTICLE 5
27.1 Financial Data Schedule for the Quarter Ended 09/30/2001.
27.2 Financial Data Schedule for the Quarter Ended 09/30/2000.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
NINE- MONTHPERIODS ENDED SEPTEMBER 30, 2001 AND 2000 UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
PERIOD-TYPE 9-MOS 9-MOS
FISCAL-YEAR-END DEC-31-2001 DEC-31-2000
PERIOD-START JAN-01-2001 JAN-01-2000
PERIOD-END SEP-30-2001 SEP-30-2000
CASH 32,818 15,779
SECURITIES 2,414 14,250
RECEIVABLES 47,591 44,870
ALLOWANCES (3,706) (2,350)
PREPAID 2,195 3,507
CURRENT ASSETS 81,312 76,056
LONG TERM INVESTMENTS 1,135 22,257
EQUIPMENT 28,327 28,017
ACCUM DEPRECIATION (20,889) (19,146)
OTHER LONG TERM ASSETS 37,910 50,800
TOTAL ASSETS 127,795 157,984
CURRENT LIABILITIES 35,255 35,008
DEBT - BONDS 73,719 115,000
OTHER LIABILITIES 49 3,444
TOTAL LIABILITIES 109,023 153,452
COMMON STOCK 194 191
OTHER SHAREHOLDER EQUITY 18,578 4,341
TOTAL LIABILITIES & STCOKHOLDERS EQUITY 127,795 157,984
TOTAL-REVENUES 94,539 91,535
COST OF GOODS SOLD 30,346 46,507
OTHER OPERATING EXPENSES 63,982 118,471
LOSS FROM OPERATIONS 211 (73,443)
INTEREST EXPENSE (4,778) (4,968)
INTEREST INCOME 2,048 1,688
OTHER EXPENSES (4,298) (74)
LOSS PRE INCOME TAX (6,817) (76,797)
PROVISION FOR INCOME TAX (105) (160)
EXTRAORDINARY 21,063 21,965
NET-INCOME 14,141 (54,992)
EPS-BASIC 0.54 (2.15)
EPS-DILUTED 0.54 (2.15)