===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-21031
QUADRAMED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1992861
(STATE OR OTHER JURISDICTION (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 May 11, 2001, there were 25,754,696 shares of the Registrant's
Common Stock outstanding, par value $0.01. This quarterly report on Form
10-Q consists of 29 pages of which this is page 1. The Exhibit Index is
located at page 28.
QUADRAMED CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000..................................... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000................. 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 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.................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 26
Item 2. Changes in Securities and Use of Proceeds.................... 26
Item 3. Defaults Upon Senior Securities.............................. 26
Item 4. Submission of Matters to a Vote of Security Holders.......... 26
Item 5. Other Information............................................ 26
Item 6. Exhibits and Reports on Form 8-K............................. 26
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
March 31, December 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 42,873 $ 27,368
Restricted cash 7,511 7,995
Short-term investments 2,065 12,296
Accounts receivable, net of allowance for uncollectible
accounts of $2,680 and $2,404, respectively 41,986 36,879
Unbilled receivables 6,833 7,995
Notes and other receivables 600 689
Prepaid expenses and other current assets 2,178 1,936
------------ ------------
Total current assets 104,046 95,158
------------ ------------
Long-Term Investments 1,006 1,019
Long-Term Notes Receivable 3,600 3,600
Equipment, at cost:
Equipment 29,337 28,774
Less accumulated depreciation and amortization (21,148) (20,200)
------------ ------------
Equipment, net 8,189 8,574
------------ ------------
Capitalized Software Development, net of accumulated
amortization of $6,263 and $5,517, respectively 8,968 9,713
Acquired Software, net of accumulated amortization of $3,666
and $3,441, respectively 1,155 1,380
Intangibles, net of accumulated amortization of $18,890 and $17,443,
respectively 27,147 28,593
Marketable Investments 562 638
Other Long Term Assets 6,141 7,270
------------ ------------
Total Assets $ 160,814 $ 155,945
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligations $ 116 $ 323
Accounts payable 371 699
Accrued payroll and related 7,046 7,515
Accrued interest 2,516 1,006
Other accrued liabilities 9,663 10,256
Deferred revenue 20,543 12,564
------------ ------------
Total current liabilities 40,255 32,363
Capital Lease Obligations, less current portion 90 128
Convertible Subordinated Debentures 115,000 115,000
Net Liabilities of Discontinued Operations 4,133 4,133
------------ ------------
Total liabilities 159,478 151,624
------------ ------------
Stockholders' Equity:
Common stock, $0.01 par, 50,000 shares authorized, 25,755 shares issued
and outstanding 191 191
Additional paid-in-capital 268,485 268,485
Accumulated other comprehensive loss (4,081) (4,028)
Accumulated deficit (263,259) (260,327)
------------ ------------
Total stockholders' equity 1,336 4,321
------------ ------------
Total Liabilities and Stockholders' Equity $ 160,814 $ 155,945
============ ============
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 MONTHS ENDED
MARCH 31,
2001 2000
-------------- ----------------
(Restated)(1)(2)
Revenues:
Licenses $ 22,441 $ 18,171
Services 10,367 15,005
-------------- ----------------
Total revenues 32,808 33,176
Operating Expenses:
Cost of licenses 6,354 7,026
Cost of services 4,698 10,008
General and administration 13,846 14,202
Sales and marketing 3,832 6,124
Research and development 3,523 5,834
Amortization of intangibles and acquired software 1,671 2,176
Impairment of intangible assets 0 927
Non recurring charges 0 12,054
-------------- ----------------
Total operating expenses 33,924 58,351
-------------- ----------------
Loss from Operations (1,116) (25,175)
-------------- ----------------
Other Income (Expense):
Interest (expense) (1,658) (1,652)
Interest income 551 448
Other income (expense), net (628) (60)
-------------- ----------------
Total other (expense), net (1,735) (1,264)
-------------- ----------------
Loss Before Income Taxes (2,851) (26,439)
Income tax (provision) benefit (81) 243
-------------- ----------------
Loss from Continuing Operations (2,932) (26,196)
Income from discontinued operations (net of tax) 0 667
-------------- ----------------
Net Loss Available to Common Stockholders $ (2,932) $ (25,529)
============== ================
Basic and Diluted Net Loss per Share from Continuing Operations $ (0.11) $ (1.03)
============== ================
Basic and Diluted Net Income per Share from Discontinued Operations $ -- $ 0.03
============== ================
Basic and Diluted Net Loss per Share Available to Common
Stockholders $ (0.11) $ (1.00)
============== ================
Weighted Average Common and Equivalent Shares Outstanding:
Basic and Diluted 25,755 25,404
============== ================
(1) Prior year financial statements have been restated to present the
Release of Information ("ROI") Division as a discontinued operation.
(2) Prior year financial statements have been restated to be consistent
with current year reclassification of cost of licenses, cost of
services, general and administration, sales and marketing, and
research and development.
The accompanying notes are an integral part of these condensed
consolidated financial statements
===============================================================================
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
------------ ---------------
(Restated)(1)
Cash Flows from Operating Activities:
Net $ (2,932) $ (25,529)
loss
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 3,501 3,457
Amortization of deferred compensation -- 168
Write-off of long term investments 980 --
Write-off of capital software -- 1,150
Impairment of intangible assets -- 927
Noncash settlement of litigation -- 28
Cash flows from discontinued operations -- (527)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net (3,945) 20,594
Prepaid expenses and other (153) (3,339)
Accounts payable and accrued liabilities 120 (7,161)
Deferred revenue 7,979 4,007
--------------- ---------------
Cash provided by (used in) operating activities 5,550 (6,225)
--------------- ---------------
Cash Flows from Investing Activities:
Cash paid for the acquisition of other companies, net of cash acquired -- (244)
Maturity (purchase) of available-for-sale securities, net 10,279 9,557
Additions to equipment (580) (1,089)
Disposal of equipment 17 --
Change in restricted cash 484 --
Capitalization of computer software development costs -- (643)
--------------- ---------------
Cash provided by investing activities 10,200 7,581
--------------- ---------------
Cash Flows from Financing Activities:
Payments of principal on capital lease obligations (245) (15)
Borrowings (repayments) under notes and loans payable -- (2)
Issuance of common stock through Employee Stock Purchase Plan -- 448
Proceeds from exercise of common stock options and warrants to
purchase common stock -- 437
--------------- ---------------
Cash (used in) provided by financing activities (245) 868
--------------- ---------------
Net increase in cash and cash equivalents 15,505 2,224
Cash and Cash Equivalents, beginning of period 27,368 10,623
--------------- ---------------
Cash and Cash Equivalents, end of period $ 42,873 $ 12,847
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes $ 36 $ 128
(1) Prior year financial statements have been restated to present the
Release of Information ("ROI") Division 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
March 31, 2001
1. QUADRAMED CORPORATION
QuadraMed Corporation is a healthcare information technology
leader with software, web-enabled solutions, and professional consulting
services that enable hospitals and providers to efficiently and effectively
manage their delivery of healthcare. QuadraMed provides products and
services facilitating all facets of healthcare information management,
including clinical, patient, financial, compliance, and managed care.
QuadraMed serves more than half of the U.S. hospitals and supports global
healthcare initiatives with a dedicated staff of over 1000 professionals.
QuadraMed was incorporated in California in 1993 and
reincorporated in Delaware in 1996. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) Basis of Presentation and Principles of Consolidation
These condensed consolidated financial statements include the
accounts of QuadraMed Corporation and all significant business divisions
and subsidiaries (hereinafter "QuadraMed") and have been prepared in
conformity with (i) generally accepted accounting principles; 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 that are, 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 are
reported as discontinued operations because control of that business was
transferred in May of 2000. 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,
March 31, 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, 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 $7.5 million and $1.0 million at March 31, 2001
and 2000, respectively. These balances are secured with certificates of
deposit.
(f) Investments
QuadraMed considers its short 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 consolidated
statement of operations.
During the quarter ended March 31, 2001 $10.3 million in
short-term investments matured and is reflected as cash and cash
equivalents on the current balance sheet.
(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 $1.0 million and $1.1
million for quarter ending March 31, 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, which is the amount of purchase
price in excess of the fair value of the tangible net assets, and other
identifiable intangible assets acquired through QuadraMed's acquisitions.
Capitalized amounts are amortized on a straight-line basis over a period of
five to ten years. Goodwill is evaluated quarterly for impairment and
written down to net realizable value if necessary.
(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
Outsourcing, Cash Flow Management Consulting Services, and Compliance
Consulting Services.
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 three years; typically 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 revenue received in advance from
customers for future work. Costs of software products include hardware,
royalties to third parties, and installation costs. QuadraMed also
capitalizes a portion of software product costs for internally developed
software products. These capitalized costs relate primarily to the
development of new products and the extension of applications to new
markets or platforms using existing technologies. The capitalized costs are
amortized on a straight-line basis over the estimated lives of the
products, commencing when each product is available to the market.
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. Cash flow 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 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 and warrants (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 the Company recorded a net (loss) in the three months
ended March 31, 2001 and 2000, no common equivalent shares are included in
diluted weighted average common shares outstanding 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 the Company in the first
quarter of 1998. SFAS No. 130 requires companies to report a new,
additional measure of income on the income statement or to create a new
financial statement that has the new measure of income on it.
The components of comprehensive income (loss) for the three months
ended March 31, 2001 and 2000 are as follows:
THREE MONTHS ENDED
MARCH 31,
(In thousands)
-------------------------------
2001 2000
--------------- -------------
Net income (loss) $ (2,932) $ (25,529)
Unrealized gain (loss) on available-for-sale securities $ (53) $ (2,016)
-------------- ------------
Comprehensive income (loss) $ (2,985) $ (27,545)
============== ============
3. 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.
4. DISCONTINUED OPERATIONS
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. The
two sales were as follows: (1) Antrim Corporation in November, 1996; and
(2) Health Systems Integration, Inc. ("HSII").
Condensed and summarized balance sheet data for the discontinued
operations of Antrim and HSII is summarized as follows, (in thousands):
Balance as of
March 31, December 31,
2001 2000
--------------------- --------------------
Assets:
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable
- -
Other current assets 205 205
--------------------- --------------------
Total current assets 205 205
Property and equipment, net
- -
Other and intangible assets, net
- -
--------------------- --------------------
Total assets $ 205 $ 205
===================== ====================
Liabilities:
Current liabilities 4,338 4,338
Non-current liabilities - -
--------------------- --------------------
Total liabilities 4,338 4,338
--------------------- --------------------
Net liabilities of discontinued operations $ 4,133 $ 4,133
===================== ====================
QuadraMed created a wholly owned subsidiary named ChartOne, Inc.
and transferred and assigned to ChartOne, Inc. 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, Inc., 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 of $25.2 million
representing 43 percent of the equity interest in ChartOne, Inc. The sale
of the securities was made pursuant to the terms of the Securities Purchase
Agreement, dated May 5, 2000. On October 19, 2000, QuadraMed sold its
remaining 57 percent equity interest in ChartOne, Inc., 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 these transactions, QuadraMed recorded a gain on the sale of ChartOne
for the year ended December 31, 2000 of $ 23.3 million (net of income tax
expense of $1.0 million).
Results of the ROI Division have been included in discontinued
operations for all periods, as required by APB-30. For the three months
ended March 31, 2000, results from discontinued operations, net of income
taxes, were $0.7 million as follows, (in thousands):
March 31, 2000
--------------------
Revenues $ 14,111
Costs and expenses 13,001
--------------------
Gain from discontinued operations before
Income taxes 1,110
Provision for income taxes (443)
--------------------
Income from discontinued operations $ 667
====================
There were no results from discontinued operations during the
quarter ended March 31, 2001.
5. NON-RECURRING CHARGES
During the quarter ended March 31, 2001, QuadraMed recorded no
non-recurring charges.
During the quarter ended March 31, 2000, QuadraMed recorded
approximately $12.1 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.
The following table sets forth QuadraMed's restructuring and
non-specific litigation reserves and the activity against these reserves
during the current three months ending March 31, 2001 (in thousands):
Balance at Balance at
Description December 31, 2000 Change (1) March 31, 2001
------------ ----------------- ---------- --------------
Restructure/Other........ $ 3,206 $ (923) $ 2,283
Non-Specific Legal....... 1,616 (874) 742
-------------------- ---------------- ------------------
Total reserves.......... $ 4,822 $ (1,797) $ 3,025
==================== ================ ==================
(1) Termination benefits included in restructuring/other payments during 2001
amounted to $0.4 million
6. INTANGIBLES
During the quarter ended March 31, 2001 and 2000 amortization of
intangibles was $1.7 million and $2.2 million, respectively. There were no
charges or write-downs of intangible assets during the quarter ended March
31, 2001.
During the quarter ended March 31, 2000, QuadraMed recorded a $0.9
million charge for the write-down of certain intangible assets determined
to be impaired in accordance with SFAS No. 121, "Impairment of Long-Lived
Assets."
7. CONTINGENCIES OR OTHER UNCERTAINTIES
In 1999, QuadraMed settled a legal action brought in 1998 against
its subsidiary, The Compucare Company. Sunquest Corporation, which had
purchased all of the stock of Antrim, Compucare's wholly owned subsidiary,
alleged that Compucare breached certain representations and warranties, and
misrepresented and or failed to disclose certain material facts in the
course of the transaction. In 1999 and 1998, there was an accrual for the
settlement in the net liabilities of discontinued operations in the
accompanying consolidated balance sheets.
From time to time in the normal course of its business, QuadraMed
may be involved in litigation relating to its operations. As of March 31,
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.
8. INFORMATION ON BUSINESS SEGMENTS
QuadraMed reorganized its operations in 2000 to focus on five
operating segments: Enterprise Products and Services Division, HIM Software
Division, HIM Services Division, EZ-Cap Division, and Financial Services
Division. Although not reported as a business segment, QuadraMed also
generated approximately five percent of its revenue from specialty product
lines discontinued or not aligned with an operating division 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. 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 division as summarized in the
subsequent table. The financial results for these operating segments for
prior years have been restated on an estimated basis.
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 IT and financial
solutions.
The Enterprise Division consists of our Affinity Healthcare
Information System and our Electronic Document Management product, which
principally target acute care hospitals across the United States. The
Affinity solution is a healthcare information system that provides
financial and clinical applications. Affinity provides a patient-centered
database designed to enable users to track each patient throughout the
continuum of care in real time. Affinity 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. This Division
also includes our Electronic Document Management solution that enables
users to create secure electronic patient folders that combine both
computerized and scanned documents.
The HIM Software Division represents a suite of compliance,
encoding and grouping, medical record management, and patient database
applications, which enable a hospital to accurately track medical records
for internal and external purposes. The compliance products assist
hospitals in managing the complexities of evolving federal requirements and
in submitting accurate billing and clinical data. 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 addition,
the Master Patient Index solution eliminates existing duplicate medical
records and prevents creation of new duplicates at the point of
registration.
The HIM Services Division provides 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
large physician, clinic, and ambulatory practices.
The EZ-CAP Division provides medical groups, independent practice
associations, hospitals, and health plans with a complete managed care
claims payment and management information system incorporating eligibility,
plan benefits, providers, claims, capitation, case management, and customer
service. This Division also includes education services, seminars, and
training for healthcare organizations.
The Financial Services Division provides resources to healthcare
providers to reduce accounts receivables' backlogs and accelerate cash
flow. The Division conducts analysis of patient accounts to identify
outstanding or underpaid third party payments, to re-bill, and to follow-up
on third party claims.
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(in thousands)
HIM Him Financial All Consolidated
Description Enterprise Products Services Services EZ-CAP Other (1) Total
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 13,271 $ 6,449 $ 4,809 $ 3,049 $ 3,653 $ 1,577 $ 32,808
==========================================================================================
Interest income 266 - 74 53 118 40 551
Interest expense (669) (326) (242) (154) (184) (83) (1,658)
------------------------------------------------------------------------------------------
Interest income (expense), net $ (403) $ (326) $ (168) $ (101) $ (66) $ (43) $ (1,107)
==========================================================================================
Depreciation & amortization
expense $ 845 $ 1,594 $ 358 $ 195 $ 212 $ 297 $ 3,501
=========================================================================================
Income tax (provision) benefit
$ (17) $ 72 $ 3 $ 0 $ (16) $ (123) $ (81)
=========================================================================================
Segment earnings (loss) $ 562 $ (2,372) $ (76) $ 10 $ 525 $(1,581) $ (2,932)
==========================================================================================
Segment assets $ 28,875 $ 52,937 $ 28,561 $ 6,324 $18,455 $25,662 $ 160,814
==========================================================================================
(1) All Other includes specialty products, immaterial product lines and
unallocated corporate charges.
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(in thousands)
HIM Him Financial All Consolidated
Description Enterprise Products Services Services EZ-CAP Other (1) Total
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 9,365 $ 5,889 $ 9,531 $ 2,870 $ 2,862 $ 2,659 $ 33,176
==========================================================================================
Interest income 203 92 52 37 64 - 448
Interest expense (468) (295) (476) (143) (137) (133) (1,652)
------------------------------------------------------------------------------------------
Interest income (expense), net $ (265) $ (203) $ (424) $ (106) $ (73) $ (133) $ (1,204)
==========================================================================================
Depreciation & amortization
expense $ 315 $ 1,536 $ 513 $ 159 $ 26 $ 908 $ 3,457
==========================================================================================
Income tax (provision) benefit $ (88) $ (8) $ 90 $ 2 $ (25) $ 272 $ 243
==========================================================================================
Segment earnings (loss) $ 2,945 $ 261 $ (3,000) $ (78) $ 818 $(26,475) $ (25,529)
==========================================================================================
Segment assets $ 42,009 $ 50,827 $ 36,420 $ 7,619 $11,678 $ 40,616 $ 189,169
==========================================================================================
(1) All Other includes specialty products, immaterial product lines and
unallocated corporate charges.
9. SUBSEQUENT EVENTS.
None.
10. 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.
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 a healthcare information and technology company. It
provides software solutions and consulting services to hospitals and
medical providers to meet their medical records, business and compliance
needs. QuadraMed's solutions have been implemented in over 4000 sites,
including approximately 60% of the hospitals in the United States.
QuadraMed was reincorporated in Delaware in 1996 after having been
originally incorporated in California in 1993.
From 1993 to 1999, acquisition-based growth was an integral part
of QuadraMed's business strategy. During this time, QuadraMed completed
twenty-eight (28) acquisitions, with twenty-three (23) occurring between
1997 and 1999. This rapid growth 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 future earnings.
During 2000 and the quarter ended March 31, 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 five
operating divisions:
o Enterprise Products and Services Division, which provides
acute care hospitals with integrated enterprise information
systems to manage patient registration, clinical, and
financial information.
o Health Information Management Products Division, which
provides software products that automate and support hospital
and provider health information management departments in
maintaining accurate and timely patient treatment information
and in accurately coding for appropriate reimbursement.
o 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.
o EZ-CAP Division, which provides (1) software designed to
support managed care risk-taking organizations, such as
medical groups, physician-health organizations, independent
practice associations, and medical service organizations; and
(2) seminars for doctors and medical professionals.
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 March 31, 2001 were $22.4 million,
compared to $18.2 million in the same period last year. The increase in
license revenues was principally attributable to revenue recognized on
several Affinity contracts.
Services. Service revenues for the quarter ended March 31, 2001
were $10.4 million, compared to $15.0 million in the same period last year.
The decrease in service revenues was principally due to loss of two large
medical records outsourcing contracts in the fourth quarter of 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 March 31, 2001 were $6.4 million, 9.6% less than $7.0
million in the same period last year. As a percentage of license revenues,
cost of licenses were 28.3% for the quarter ended March 31, 2001, compared
with 38.7% in the same period last year. The decrease in the cost of
licenses and associated increase in margin resulted primarily from tighter
management of 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 March 31, 2001 were $4.7 million, 53.1%
less than $10 million in the same period last year. As a percentage of
service revenues, cost of services were 45.3% for the quarter ended March
31, 2001, compared with 66.7% in the same period last year. The decrease in
the cost of services and associated increase in margin resulted from the
aforementioned management of expenses.
Operating Expenses
General and Administration. General and administration expenses
for the quarter ended March 31, 2001 were $13.8 million, 2.5% less than
$14.2 million in the same period last year. As a percentage of total
revenues, general and administration expenses were 42.2% for the quarter
ended March 31, 2001, compared to 42.8% in the same period last year.
General and administration expenses decreased primarily as a result of the
restructuring actions taken in 2000.
Sales and Marketing. Sales and marketing expenses for the quarter
ended March 31, 2001 were $3.8 million, 37.4% less than $6.1 million in the
same period last year. As a percentage of total revenues, sales and
marketing expenses were 11.7% for the quarter ended March 31, 2001,
compared to 18.5% in the same period last year. Sales and marketing
expenses decreased primarily as a result of the restructuring actions taken
in 2000.
Research and Development. Research and development expenses for
the quarter ended March 31, 2001 were $3.5 million, 39.6% less than $5.8
million in the same period last year. As a percentage of total revenues,
research and development costs were 10.7% for the quarter ended March 31,
2001, compared to 17.6% in the same period last year. Research and
development expenses decreased primarily as a result of a reduction in
product versions and associated maintenance requirements.
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.
Amortization of Intangibles. Amortization of intangibles for the
quarter ended March 31, 2001 decreased 23.2% to $1.7 million, compared to
$2.2 million in the same period last year. The decrease in amortization of
intangibles was primarily due to the write-down of certain intangible
assets during 2000 and reclass of some from goodwill to capitalized
software.
Acquisition Costs. There were no acquisition charges for the
quarter ended March 31, 2001 and 2000.
Non-Recurring Charges. There were no non recurring charges for the
quarter ended March 31, 2001.
Interest Expense. Interest expense was $1.7 million for both the
quarter ended March 31, 2001 and 2000. Interest expense for the quarter
ended March 31, 2001 and 2000 was principally related to QuadraMed's $115
million convertible subordinated debentures, which were issued in May 1998,
partially offset by interest income from QuadraMed's cash and investments.
Interest Income
Interest income for the quarters ended March 31, 2001 and March
31, 2000 was $0.6 million and $0.4 million, respectively. The slight
increase in the quarter ending March 31, 2001 was due to QuadraMed's
increased holdings of cash and cash equivalents and short term investments.
Liquidity and Capital Resources
At March 31, 2001, QuadraMed had $42.9 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.
Net cash provided by (used in) operating activities was $5.6
million and ($6.2) million for the quarter ended March 31, 2001 and 2000,
respectively. The increase in cash provided by operating activities
principally reflected the improvement in collections on receivables
balances and the lower operating expenses.
Net cash provided by investing activities was $10.2 million and
$7.6 million for the quarter ended March 31, 2001 and 2000, respectively.
Investing activities for the quarter ended March 31, 2001 and 2000
primarily related to the maturity of short-term investments.
Net cash (used in) provided by financing activities was ($0.2)
million and $0.9 million for the quarter ended March 31, 2001 and 2000,
respectively. Net cash used in financing activities for the quarter ended
March 31, 2001 related to payments of principal capital lease obligations.
Net cash provided by financing activities for the quarter ended March 31,
2000 primarily related to the proceeds from the exercise of common stock
options and purchases through the Employee Stock Purchase Plan.
QuadraMed believes that its cash and investments and borrowing
capacity on March 31, 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 March 31, 2001
(in thousands, except average interest rates):
Aggregate Weighted Average Interest
Fair Value Rate
Cash and cash equivalents:
Cash................................................... $ 3,179 --
---------
Money market funds................................... $ 39,694 5.21%
---------
Total cash and cash equivalents...................... $ 42,873
=========
Short-term investments:
Corporate debt securities............................ $ 2,065 6.58%
---------
Total short-term investments......................... $ 2,065
=========
Long-term investments:
Corporate debt securities............................ $ 475 6.96%
Debt securities issued by the U.S. government........ 531 6.40%
--------
Total long-term investments.......................... $ 1,006
=========
Outstanding Debt. As of March 31, 2001, QuadraMed had outstanding
long-term debt of $115,000,000, consisting of its convertible subordinated
debentures that mature as follows (in thousands, except average interest
rates):
Maturity Carrying Fair Weighted Average
Date Amount Value Interest Rate
---- ------ ----- -------------
2005 $115,000 $54,050 5.25%
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its convertible subordinated debentures, the
bulk of QuadraMed's debt, is fixed at 5.25%.
Foreign Currency Risk
Although QuadraMed from time to time sells its products internationally,
all such transactions are denominated in U.S. currency and there is no
foreign currency fluctuation risk.
QuadraMed has encountered significant challenges integrating acquired
businesses, and its business, operations, and financial condition have been
adversely affected.
Since its inception, QuadraMed has completed twenty-eight (28)
acquisitions. QuadraMed has encountered significant challenges related to
integrating acquired businesses into its operations and expects these
challenges to continue until incorporation is complete. Some of the
challenges QuadraMed has encountered or may encounter in integrating
acquired businesses include:
o Interruption, disruption or delay of QuadraMed's ongoing business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expense;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results
resulting in failure of QuadraMed to realize anticipated benefits;
o Failure to retain key acquired personnel and difficulty and
expense of training those retained;
o Increases in stock compensation expense and increased compensation
expense resulting from newly hired employees;
o Assumption of liabilities of acquired businesses and potential for
disputes with the sellers;
o Customer dissatisfaction or performance problems related to
acquired businesses;
o Exposure to the risks of entering markets in which QuadraMed has
no direct prior experience and to risks associated with market
acceptance of acquired products and technologies; and
o Platform and technical issues related to integrating systems from
various acquired companies.
All of these factors have had, and QuadraMed expects will continue
to have, an adverse effect on its business, financial condition and results
of operations at least until the integration of the acquired businesses is
complete. In addition, these 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 in 2000, 1999, and 1998, respectively, and a net loss of $2.9
million for the quarter ended March 31, 2001. As of March 31, 2001,
QuadraMed's accumulated deficit was $263.3 million. Included in these
losses are the effect of both operating losses and write-offs for
in-process research and development of $1.7 million and $14.5 million in
1999 and 1998, respectively. No in-process research and development
write-offs occurred in 2000, or in the quarter ended March 31, 2001.
Furthermore, in connection with its acquisitions, QuadraMed may be required
to amortize significant expenses related to goodwill and other intangible
assets in future periods. Accordingly, if QuadraMed's operating results do
not improve to offset these and other expenses, QuadraMed 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.
In 2000, QuadraMed made several changes in senior executive
management. Uncertainty created by these changes could lead some employees
to seek other employment, and QuadraMed could experience difficulty
replacing them. Moreover, the trading price of QuadraMed's Common Stock
could fluctuate due to uncertainties about its senior executive management.
Changes in procurement practices of hospitals have and may continue to have
a negative impact on QuadraMed's revenues.
A substantial portion of QuadraMed's revenues has been and is
expected to continue to be derived from sales of software products and
services to hospitals. Consolidation in the healthcare industry,
particularly in the hospital and managed care markets, could decrease the
number of existing or potential purchasers of products and services and
could adversely affect QuadraMed's business. In addition, the decision to
purchase QuadraMed's products often involves a committee approval.
Consequently, it is difficult for QuadraMed to predict the timing or
outcome of the buying decisions of its customers or potential customers. In
the quarter ended March 31, 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;
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;
o Physmark, Perot System's Health System Design, Healtheon/WebMD's
Medical Manager Corp., IDX Corporation and Trizetto's Erisco, for
at-risk managed care systems in the EZ-CAP Division; and
o National consulting firms and on-line providers for physician and
other medical professional seminars in the EZ-CAP Division.
Current and prospective customers evaluate QuadraMed's
capabilities against the merits of their existing information systems and
expertise. Furthermore, major software information systems companies,
including those specializing in the healthcare industry, that do not
presently offer competing products may enter QuadraMed's markets. Many of
QuadraMed's competitors and potential competitors have significantly
greater financial, technical, product development, marketing and other
resources and market recognition than QuadraMed. Many of these competitors
also have, or may develop or acquire, substantial installed customer bases
in the healthcare industry. As a result of these factors, QuadraMed's
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the
political, economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion and sale of their products than QuadraMed. QuadraMed
may not be able to compete successfully against current and future
competitors, and such competitive pressures could materially adversely
affect QuadraMed's business, financial condition and operating results.
QuadraMed may not be able to introduce or market new products or product
enhancements successfully or in a timely manner, which could adversely
affect its competitive position.
QuadraMed's performance depends in large part upon its ability to
provide the increasing functionality required by its customers through the
timely development and successful introduction of new products and
enhancements to its existing suite of products. QuadraMed may not
successfully, or in a timely manner, develop, acquire, integrate,
introduce, or market new products or product enhancements. Product
enhancements or new products developed by QuadraMed also may not meet the
requirements of hospitals or other healthcare providers and payors or
achieve or sustain market acceptance. QuadraMed's failure to either
estimate accurately the resources and related expenses required for a
project, or to complete its contractual obligations in a manner consistent
with the project plan upon which a contract was based, could have a
material adverse effect on its business, financial condition and results of
operations. In addition, QuadraMed's failure to meet a customer's
expectations in the performance of its services could damage its reputation
and adversely affect QuadraMed's ability to attract new business.
QuadraMed's inability to protect its intellectual property could lead to
unauthorized use of its products, which could have an adverse effect on its
business.
QuadraMed relies on a combination of trade secret, copyright and
trademark laws, nondisclosure, noncompete and other contractual provisions
to protect its proprietary rights. QuadraMed has not filed any patent
applications covering its technology. Measures taken by QuadraMed to
protect its intellectual property may not be adequate, and QuadraMed's
competitors could independently develop products and services that are
substantially equivalent or superior to QuadraMed's products and services.
Any infringement or misappropriation of its proprietary software and
databases could put QuadraMed at a competitive disadvantage in a highly
competitive market and could cause QuadraMed to lose revenues, incur
substantial litigation expense and divert management's attention from other
operations.
QuadraMed depends on licenses for certain technology used to
develop its products from a number of third-party vendors. Most of these
licenses expire within three to five years. Such licenses can be renewed
only by mutual consent and may be terminated if QuadraMed breaches the
license terms and fails to cure the breach within a specified time period.
If such licenses are terminated, QuadraMed may not be able to continue
using the technology on commercially reasonable terms or at all. As a
result, QuadraMed may have to discontinue, delay or reduce product
shipments until equivalent technology is obtained, which could have a
material adverse effect on QuadraMed's business, financial condition and
results of operations. Most of QuadraMed's third-party licenses are
non-exclusive and competitors may obtain the same or similar technology. In
addition, if vendors choose to discontinue support of the licensed
technology, QuadraMed may not be able to modify or adapt its products.
Intellectual property litigation is increasingly common in the
software industry. The risk of an infringement claim against QuadraMed may
increase over time as the number of competitors in its industry segment
grows and the functionality of products overlaps. Third parties could
assert infringement claims against QuadraMed in the future. Regardless of
the merits, QuadraMed could incur substantial litigation expenses in
defending any such asserted claim. In the event of an unfavorable ruling on
any such claim, a license or similar agreement may not be available to
QuadraMed on reasonable terms, if at all. Infringement may also result in
significant monetary liabilities that could have a material adverse effect
on QuadraMed's business, financial condition and results of operations.
QuadraMed may not be successful in the defense of these or similar claims.
The nature of QuadraMed's products makes them particularly vulnerable to
undetected errors, or bugs, that could reduce revenues, market share or
demand for the company's products and services.
Products such as QuadraMed's may contain errors or failures,
especially when initially introduced or when new versions are released.
Although QuadraMed conducts extensive testing on its products, software
errors have been discovered in certain enhancements and products after
their introduction. Despite such testing by QuadraMed and by its current
and potential customers, products under development, enhancements, or
shipped products may contain errors or performance failures, resulting in,
among other things:
o loss of customers and revenues;
o delay in market acceptance;
o diversion of resources;
o damage to QuadraMed's reputation; or
o increased service and warranty costs.
Any of these consequences could have a material adverse effect on
QuadraMed's business, financial condition, and results of operations.
Because no mirror processing site for its two customer data processing
facilities exists, QuadraMed's business, financial condition, and results
of operations could be adversely affected if either of these facilities
were subject to a closure from a catastrophic event or otherwise.
QuadraMed currently processes substantially all of its customer
data at its facilities in Austin, Texas and Neptune, New Jersey. Although
QuadraMed backs up its data nightly and has safeguards for emergencies,
such as power interruption or breakdown in temperature controls, QuadraMed
has no mirror processing site to which processing could be transferred in
the case of a catastrophic event at either of these facilities. If a major
catastrophic event occurs at either the Austin or the Neptune facility,
possibly leading to an interruption of data processing, or any other
interruption or closure, QuadraMed's business, financial condition, and
results of operations could be adversely affected.
QuadraMed may not be able to respond effectively to an increase in its
outsourcing business, which could have a negative impact on revenues.
QuadraMed provides compliance, consulting, and health information
management outsourcing and accounts receivable management services,
including the billing and collection of receivables. If QuadraMed
experiences a period of substantial expansion in its outsourcing business,
QuadraMed may be required to make substantial investments in capital assets
and personnel. QuadraMed may not be able to assess accurately, or have the
funds required for, any investment, and it may not be able to negotiate and
perform in a profitable manner any of the outsourcing contracts it may be
awarded.
QuadraMed may be required to make substantial changes to its products if
they become subject to FDA regulation, which could require a significant
capital investment.
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the FDA under the Federal Food, Drug and Cosmetic Act. At present, none of
QuadraMed's software products are so regulated. In the future, the FDA
could determine that some of QuadraMed's products, because of their
predictive aspects, are clinical decision tools and subject them to
regulation. Compliance with FDA regulations could be burdensome, time
consuming, and expensive. Other new laws and regulations affecting
healthcare software development and marketing also could be enacted in the
future. If so, it is possible that QuadraMed's costs and lengths of time
for product development and marketing could increase and that other
unforeseeable consequences could arise.
Governmental regulation of the confidentiality of patient records could
result in QuadraMed's customers being unable to use its products without
significant modification, which could require substantial expenditures by
QuadraMed.
There is substantial state regulation of the confidentiality of
patient medical records and the circumstances under which such records may
be disclosed to or processed by QuadraMed as a consequence of its contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of the hospital,
physician or other healthcare provider, regulations governing patient
confidentiality rights are rapidly evolving. Additional legislation
governing the dissemination of medical record information also has been
proposed and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, require the promulgation of regulations that will set standards
for electronic transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. A final
regulation governing transaction and code set standards has been published
and is expected to become effective on October 16, 2002. The privacy
regulation has been published as a final regulation and 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 SmallCap Market on which QuadraMed is listed, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of QuadraMed's Common Stock has
been and is likely to continue to be highly volatile due to such factors
as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by QuadraMed's
competitors;
o Governmental regulatory action;
o Developments or disputes with respect to proprietary rights;
o General trends in QuadraMed's industry and overall market
conditions.
The market price of QuadraMed's Common Stock may also be affected
by movements in prices of equity securities in general.
Future sales of a substantial number of shares of QuadraMed's Common Stock
could cause the price of the stock to decrease or fluctuate substantially.
Existing stockholders of QuadraMed hold a significant number of
shares of Common Stock that may be sold in the future under Rule 144 of the
Securities Act or through the exercise of registration rights. Sales of a
substantial number of the aforementioned shares in the public markets or
the prospect of such sales could adversely affect or cause substantial
fluctuations in the market price of QuadraMed's Common Stock and
convertible debentures and impair QuadraMed's ability to raise additional
capital through the sale of its securities.
If QuadraMed is unable to achieve profitability, it may be forced to file
for bankruptcy.
If QuadraMed's financial condition deteriorates and QuadraMed is
unable to reduce its losses or obtain additional financing, QuadraMed may
be forced to seek relief under Chapter 11 of the U.S. Bankruptcy Code.
Chapter 11 permits a company to remain in control of its business,
protected by a stay of all creditor action while the company attempts to
negotiate and confirm a plan of reorganization with its creditors. If
QuadraMed commenced a Chapter 11 case it would expect deterioration in its
customer relationships, a reduction in orders, the loss of suppliers, and
an erosion of employee morale. QuadraMed may be unsuccessful in its
attempts to confirm a plan of reorganization with its creditors. Many
Chapter 11 cases are unsuccessful, and virtually all involve substantial
expense and damage to the business. If QuadraMed were unsuccessful in
obtaining confirmation of a plan of reorganization, its assets could be
liquidated and could be insufficient to pay all of its securityholders.
QuadraMed may lose some or all of its equity investments in early stage
companies if such companies become bankrupt or insolvent or do not succeed
in executing their business strategy appropriately.
QuadraMed has made equity investments and acquired minority interests in
certain early stage companies. QuadraMed does not have the ability to
control the operations of these companies and these investments are subject
to significant risks. There is no guarantee that QuadraMed will realize any
return on such investments. QuadraMed could also lose some or all of its
principal investment if these companies become bankrupt or insolvent or do
not succeed in executing their business strategy.
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 May 3, 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.
The exhibits listed on the accompanying Exhibit Index are filed as part
of this quarterly report.
(b) REPORTS ON FORM 8-K:
None.
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: May 15, 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)
4.11 Form of Warrant to Purchase Common Stock. (1)
4.12 Registration Rights Agreement dated December 5, 1996, by and
between QuadraMed and the investors listed on Schedule A
thereto. (2)
4.14 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)
4.15 Subordinated Indenture, dated as of May 1, 1998 between
QuadraMed and The Bank of New York. (4)
4.16 Officers' Certificate delivered pursuant to Sections 2.3 and
11.5 of the Subordinated Indenture. (4)
4.17 Registration Rights Agreement dated April 27, 1998 by and among
QuadraMed and the Initial Purchasers named therein. (4)
4.18 Form of Global Debenture. (4)
4.19 Form of Certificated Debenture. (4)
4.21 Registration Rights Agreement dated December 23, 1998 by and
between QuadraMed and the shareholders listed therein. (7)
4.22 Registration Rights Agreement, dated as of March 3, 1999, by and
among QuadraMed Corporation and the stockholders of The
Compucare Company named therein. (6)
15 Accountant's Letter.
(1) Incorporated herein by reference from the exhibit with the same
number to our 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 from the exhibit with the same
number to our 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 by reference from our Current Report on Form 8-K,
as filed with the Commission on June 11, 1998.
(4) Incorporated by reference from our Registration Statement on
Form S-3, No. 333-55775, as filed with the Commission on June 2,
1998, as amended by Amendment No. 1 thereto, as filed with the
Commission on June 17, 1998.
(5) Incorporated by reference from the exhibit with the same number
to our 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 from our Current Report on Form
8-K/A filed with the Commission on March 22, 1999.
(7) Incorporated herein by reference from our Registration Statement
on Form S-3, No. 333-80617, as filed with the Commission on June
14, 1999, as amended by Amendment No. l thereto, as filed with
the Commission on August 4, 1999.