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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 JUNE 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 August 2, 2001 there were 25,898,876 shares of the Registrant's
Common Stock outstanding, par value $0.01. This quarterly report on Form
10-Q consists of 30 pages of which this is page 1. The Exhibit Index is
located at page 1.
QUADRAMED CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.............................................3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and 2000...................4
Condensed Consolidated Statements of Cash Flows for the three
and six months ended June 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....................................16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.........................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................28
Item 2. Changes in Securities and Use of Proceeds......................28
Item 3. Defaults Upon Senior Securities................................28
Item 4. Submission of Matters to a Vote of Security Holders............28
Item 5. Other Information..............................................29
Item 6. Exhibits and Reports on Form 8-K...............................29
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30, December 31,
ASSETS 2001 2000
------------ -------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 42,832 $ 27,368
Restricted cash 4,254 7,995
Short-term
investments 2,448 12,296
Accounts receivable, net of allowance for uncollectible accounts of $4,100
and $2,404, respectively 37,695 36,879
Unbilled receivables 7,950 7,995
Notes and other receivables 502 689
Prepaid expenses and other current assets 2,402 1,936
------------ -------------
Total current 98,083 95,158
------------ -------------
Long-term investments 1,061 1,019
Long-term notes receivable 3,600 3,600
Equipment, at cost:
Equipment 29,817 28,774
Less accumulated depreciation and amortization (21,883) (20,200)
------------ -------------
Equipment, net 7,934 8,574
------------ -------------
Capitalized software development, net of accumulated
amortization of $6,972 and $5,517, respectively 8,509 9,713
Acquired software, net of accumulated amortization of $3,891
and $3,441, respectively 930 1,380
Intangibles, net of accumulated amortization of $20,336 and $17,443, respectively 25,700 28,593
Marketable
investments 576 638
Other long term
assets 5,951 7,270
------------ -------------
Total Assets $ 152,344 $ 155,945
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligations $ 74 $ 323
Accounts payable 602 699
Accrued payroll and related 8,143 7,515
Accrued interest 959 1,006
Other accrued
liabilities 9,646 10,256
Deferred revenue 20,186 12,564
------------ -------------
Total current liabilities 39,610 32,363
------------ -------------
Capital lease obligations, less current portion 53 128
Convertible subordinated debentures 109,615 115,000
Net liabilities of discontinued operations 70 4,133
------------ -------------
Total Liabilities 149,348 151,624
------------ -------------
Stockholders' Equity:
Common stock, $0.01 par, 50,000 shares authorized, 25,566,488 and
25,756,861 shares issued and outstanding, respectively 191 191
Additional paid-in-capital 268,505 268,485
Accumulated other comprehensive loss (4,103) (4,028)
Accumulated deficit (261,597) (260,327)
------------ -------------
Total stockholders' equity 2,996 4,321
------------ -------------
Total Liabilities and Stockholders' Equity $ 152,344 $ 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------- ----------- -------------
Restated (1) Restated
(1)
Revenues:
Licenses $ 23,016 $ 22,904 $ 45,457 $ 41,075
Services 10,636 13,424 21,003 28,429
------------ ------------ ----------- ------------
Total Revenues 33,652 36,328 66,460 69,504
Operating Expenses:
Cost of licenses 6,173 5,424 12,526 12,450
Cost of services 4,924 10,739 9,622 20,747
General and administration 12,862 10,710 26,708 24,911
Sales and 4,024 6,604 7,856 12,728
marketing
Research and development 3,804 5,663 7,327 11,497
Amortization of intangibles 1,672 1,430 3,343 3,606
Impairment of intangible assets 927
- - -
Non-recurring charges 16,265 28,319
- -
------------ ------------ ----------- ------------
Total operating expenses 33,459 56,835 67,382 115,185
------------ ------------ ----------- ------------
Income (Loss) from Operations 193 (20,507) (922) (45,681)
Other Income (Expense):
Interest expense (1,626) (1,658) (3,284) (3,310)
Interest income 1,154 503 1,705 951
Other income (expense), net (111) (19) (739) (79)
------------ ------------ ----------- ------------
Total other expense, net (583) (1,174) (2,318) (2,438)
------------ ------------ ----------- ------------
Loss Before Income Taxes (390) (21,681) (3,240) (48,119)
Provision for income taxes (23) (403) (104) (160)
------------ ------------ ----------- ------------
Loss from Continuing Operations (413) (22,084) (3,344) (48,279)
------------ ------------ ----------- ------------
Gain on redemption of bonds (net of applicable tax) 2,401 - 2,401 -
Income from discontinued operations (net of applicable tax) - 791 - 1,458
(Loss) gain on sale of division (net of applicable tax) (327) 17,208 (327) 17,208
------------ ------------ ----------- ------------
Net Income (Loss) Available to Common Stockholders $ 1,661 $ (4,085) $ (1,270) $ (29,613)
============ ============ =========== ============
Earnings Per Common Share:
Basic and Diluted Loss per Share from Continuing Operations $ (0.02) $ (0.86) $ (0.13) $ (1.90)
============ ============ =========== ============
Basic and Diluted Net Income per Share from Discontinued
Operations (net $ - $ 0.03 $ - $ 0.06
of applicable tax) ============ ============ =========== ============
Basic and Diluted (Loss) Gain on Sale of Division (net of $ (0.01) $ 0.67 $ (0.01) $ 0.68
============ ============ =========== ============
Basic and Diluted Gain on Redemption of Bonds (net of applicable $ 0.09 $ - $ 0.09 $ -
tax)
============ ============ =========== ============
Basic and Diluted Net Income (Loss) per Share Available to Common $ 0.06 $ (0.16) $ (0.05) $ (1.16)
Stockholders ============ ============ =========== ============
Weighted Average Shares Outstanding:
Diluted 25,756 25,547 25,755 25,478
Basic 25,756 25,547 25,755 25,478
(1) Prior year 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.
The accompanying notes are an integral part of these condensed consolidated financial statements
QUADRAMED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------------------
2001 2000 (1)
--------------- ----------------
Cash Flows from Operating Activities:
Net loss $
$ (1,270) (29,613)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 6,896 7,126
Write-off of long term investments 980 --
Write-off of acquired software -- 5,600
Write-off of notes payable -- 900
Write-off of capitalized software -- 1,163
Impairment of intangible assets -- 927
Cash flows from discontinued operations (4,063) (673)
Loss (gain) on the sale of division, net of applicable tax 327 (17,208)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net (771) 23,863
Prepaid expenses and other (328) 3,626
Accounts payable and accrued liabilities (126) (3,878)
Deferred revenue 7,573 1,878
--------------- ----------------
Cash provided by (used in) operating activities 9,218 (6,289)
--------------- ----------------
Cash Flows from Investing Activities:
Maturity (purchase) of available-for-sale securities, net 12,154 8,614
Additions to equipment (1,090) (1,978)
Proceeds from the sale of division 24 25,200
Investment in ChartOne -- (11,661)
Disposal of equipment 20 --
Change in restricted cash 1,361 (7,969)
Capitalization of computer software development costs (534) (921)
--------------- ----------------
Cash provided by investing activities 11,935 11,285
--------------- ----------------
Cash Flows from Financing Activities:
Payments of principal on capital lease obligations (324) (21)
Repayments of notes and loans payable (5,385) (4)
Issuance of common stock through Employee Stock Purchase Plan -- 488
Proceeds from exercise of common stock options to purchase common stock 20 441
--------------- ----------------
Cash (used in) provided by financing activities (5,689) 904
--------------- ----------------
Net increase in cash and cash equivalents 15,464 5,900
Cash and Cash Equivalents, beginning of period 27,368 10,623
--------------- ----------------
Cash and Cash Equivalents, end of period $
$ 42,832 16,523
=============== ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $
$ 3,046 3,042
Cash paid for taxes
60 240
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 prior year financial statements have been reclassed to be consistent with current year
presentation.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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 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,
June 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, 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 $4.3 million and $9.0 million at June 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- 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 June 30, 2001, $12.2 million in
short-term investments matured and are 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 $1.7 million and $2.2
million for the six-month periods ending June 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, 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
Services Division and Financial Services Division.
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 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'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 (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 from continuing
operations for the six months and three months ended June 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 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 six months
ended June 30, 2001, and 2000 are as follows (in thousands):
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------- -------------
Net income (loss) $1,661 $ (4,084) $ (1,270) $(29,613)
Unrealized gain (loss) on available-for-sale securities (22) (1,445) (75) (3,461)
------------ ------------ ------------- -------------
Comprehensive income (loss) $1,639 $ (5,529) $ (1,345) $(33,074)
============ ============ ============= =============
(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
FAS-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 six months ended June 30, 2001,
and 2000, the Company capitalized software development costs of $0.5
million, and $0.9 million, respectively. During the six-month period ending
June 30, 2000, QuadraMed recorded a $1.1 million charge to write-down
certain capitalized software assets related to the acquisition of IMN.
There were no write-downs of capitalized software assets for the six-month
period ending June 30, 2001.
Amortization of capitalized software development costs was $1.5
million and $1.1 million for the six months ended June 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. STOCKHOLDERS' EQUITY
In May 2001, the Company's stockholders approved an increase in
the maximum number of shares issuable under the Company's 1996 Stock
Incentive Plan from 3,953,981 to an aggregate total of 5,118,981.
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.
In May 2001, QuadraMed redeemed $5.4 million 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.
5. 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").
During the quarter ended June 30, 2001, QuadraMed consummated the
sale of its discontinued Electronic Remittance Advice product line.
QuadraMed recorded proceeds from the sale of $24 thousand and a loss after
applicable taxes of $327 thousand. There was no material income associated
with the results of discontinued operations for the six-month period ending
June 30, 2001.
Condensed and summarized balance sheet data for the discontinued
operations of Antrim and HSII is summarized as follows, (in thousands):
2001 2000
----------------- ----------------
Assets:
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable - -
Other current assets - 205
----------------- ----------------
Total current assets - 205
Property and equipment, net - -
Other and intangible assets, net - -
----------------- ----------------
Total assets $ - $ 205
================= ================
Liabilities:
Current liabilities 70 4,338
Non-current liabilities - -
----------------- ----------------
Total liabilities 70 4,338
----------------- ----------------
Net liabilities of discontinued operations $ 70 $ 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% 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% 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 six months ended
June 30, 2000, results from discontinued operations, net of income taxes,
were $1.5 million as follows, (in thousands):
June 30, 2000
Revenues $ 23,809
Costs and expenses 22,111
--------------------
Gain from discontinued operations before income taxes
1,698
Provision for income taxes (240)
--------------------
Income from discontinued operations $ 1,458
====================
Net income from discontinued operations was immaterial for the six-month
period ended June 30, 2001.
6. NON-RECURRING CHARGES
During the six-month-period ended June 30, 2001, QuadraMed
recorded no non-recurring charges.
During the six months ended June 30, 2000, QuadraMed recorded
approximately $28.3 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 six months ending June 30, 2001, (in thousands):
Balance at Balances at
Description December 31, 2000 Change (1)(2) June 30, 2001
------------
------------------ -------------------- --------------------
Restructure/Other......... $ 3,206 $ (1,251) $ 1,955
Non-Specific Legal........ 1,616 (533) 1,083
------------------ -------------------- --------------------
Total reserves............ $ 4,822 $ (1,784) $ 3,038
================== ==================== ====================
(1) Termination benefits included in restructuring/other payments during 2001
amounted to $0.7 million.
(2) Non-specific legal reserve was strengthened by $1.0 million during the
quarter to cover potential litigation arising from acquisition related
transactions.
7. INTANGIBLES
During the six months ended June 30, 2001, and 2000, amortization
of intangibles was $3.3 million and $3.6 million, respectively. There were
no charges or write-downs of intangible assets during the quarter ended
June 30, 2001.
During the six-month period ending June 30, 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." In addition, QuadraMed reclassified $3.6
million of intangible assets relating to Med Data to capitalized software.
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 June 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
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. To this end, QuadraMed further refined its operating
segments during the second quarter of 2001. As such, 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 division 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 with 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 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. Additionally, our Master Patient Index
and Performance Measurement products were realigned into this division
during the second quarter 2001. These products were previously reflected as
part of the HIM Software Division.
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. During the
second quarter 2001, the responsibility for nCoder+MD was transferred to
this division from the EZ-Cap Division and as mentioned above, the Master
Patient Index and Performance Measurement product lines previously
reflected in this division were transferred to the Enterprise Division.
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.
SIX MONTHS ENDED JUNE 30, 2001
(in thousands)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services EZ Cap All Other(1) Total
----------- ---------- -------- -------- -------- ------ ------------ -----
---------------------------------------------------------------------------------------
Total revenues $ 28,756 $ 13,014 $ 9,291 $ 6,706 $ 5,971 $ 2,722 $ 66,460
=======================================================================================
Direct margin(3) $ 5,424 $ 4,873 $ 2,877 $ 2,672 $ 1,549 $ (15,857) $ 1,538
Interest income 689 286 316 220 120 74 1,705
Interest expense (1,274) (559) (637) (438) (232) (144) (3,284)
---------------------------------------------------------------------------------------
Interest income (expense), net $ (585) $ (273) $ (321) $ (218) $ (112) $ (70) $ (1,579)
=======================================================================================
---------------------------------------------------------------------------------------
Depreciation & amortization expense $ 800 $ 3,007 $ 474 $ 211 $ 275 $ 2,129 $ 6,896
=======================================================================================
Benefit (provision) for income taxes $ 37 $ 22 $ 21 $ (18) $ (9) $ (157) $ (104)
=======================================================================================
Segment earnings (loss) $ (1,217) $ (743) $ (690) $ 606 $ 311 $ 463 $ (1,270)
=======================================================================================
---------------------------------------------------------------------------------------
Segment assets $ 26,240 $ 54,023 $ 28,642 $ 6,341 $ 16,497 $ 20,601 $ 152,344
=======================================================================================
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
SIX MONTHS ENDED JUNE 30, 2000
(in thousands)
(restated) (2)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services EZ Cap All Other(1) Total
----------- ---------- -------- -------- -------- ------ ------------ -----
---------------------------------------------------------------------------------------
Total revenues $ 23,368 $ 10,440 $ 17,295 $ 5,868 $ 5,259 $ 7,274 $ 69,504
=======================================================================================
Direct margin(3) $ 2,113 $ 739 $ 1,038 $ 781 $ 292 $ (9,197) $ (4,234)
Interest income 501 174 71 62 98 45 951
Interest expense (1,115) (498) (825) (280) (245) (347) (3,310)
---------------------------------------------------------------------------------------
Interest income (expense), net $ (614) $ (324) $ (754) $ (218) $ (147) $ (302) $ (2,359)
=======================================================================================
---------------------------------------------------------------------------------------
Depreciation & amortization expense $ 560 $ 2,832 $ 579 $ 195 $ 393 $ 2,567 $ 7,126
=======================================================================================
Benefit (provision) for income taxes $ 40 $ 117 $ 36 $ 19 $ 8 $ (380) $ (160)
=======================================================================================
Segment earnings (loss) $ 1,321 $ (3,912) $ (1,185) $ (639) $ (273) $ (22,283) $ (29,613)
=======================================================================================
---------------------------------------------------------------------------------------
Segment assets $ 31,324 $ 42,963 $ 32,510 $ 8,202 $ 10,573 $ 54,246 $ 179,818
=======================================================================================
(1) All Other includes Specialty Division, Products being phased out and Corporate charges to bad debt, legal and non-recurring
charges.
(2) March 31, 2001 and prior results have been restated to be consistent with current period reclassifications among business
segments.
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)
(restated) (2)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services EZ Cap All Other(1) Total
----------- ---------- -------- -------- -------- ------ ------------ -----
---------------------------------------------------------------------------------------
Total Revenues $15,126 $ 4,901 $ 4,809 $ 3,049 $ 3,356 $ 1,567 $ 32,808
=======================================================================================
Direct margin(3) $ 2,680 $ 1,296 $ 1,680 $ 931 $ 1,055 $(7,493) $ 149
=======================================================================================
Interest income 215 90 112 74 37 23 551
Interest expense (619) (280) (345) (229) (114) (71) (1,658)
---------------------------------------------------------------------------------------
Interest income (expense), net $ (404) $ (190) $ (233) $ (155) $ (77) $ (48) $(1,107)
=======================================================================================
---------------------------------------------------------------------------------------
Depreciation & amortization expense $ 446 $ 1,503 $ 239 $ 104 $ 143 $ 1,066 $ 3,501
=======================================================================================
Benefit (provision) for income taxes $ 18 $ 43 $ 11 $ 5 $ (12) $ (146) $ (81)
=======================================================================================
Segment earnings (loss) $ (588) $(1,423) $ (355) $ (154) $ 397 $ (809) $(2,932)
=======================================================================================
---------------------------------------------------------------------------------------
Segment assets $30,150 $ 48,482 $ 30,571 $ 6,420 $19,032 $26,159 $160,814
=======================================================================================
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
THREE MONTHS ENDED MARCH 31, 2000
(in thousands)
(restated) (2)
HIM HIM Financial Consolidated
Description Enterprise Products Services Services EZ Cap All Other(1) Total
----------- ---------- -------- -------- -------- ------ ------------ -----
--------------------------------------------------------------------------------------
Total revenues $10,944 $ 4,337 $ 9,515 $ 2,870 $ 2,862 $ 2,648 $ 33,176
======================================================================================
Direct margin(3) $ (479) $(1,176) $ 343 $ 64 $ 150 $ (8,928) $(10,026)
======================================================================================
Interest income 240 62 44 30 51 21 448
Interest expense (547) (217) (476) (143) (137) (133) (1,653)
--------------------------------------------------------------------------------------
Interest income (expense), net $ (307) $ (155) $ (432) $ (113) $ (86) $ (112) (1,205)
======================================================================================
--------------------------------------------------------------------------------------
Depreciation & amortization expense $ 262 $ 1,310 $ 285 $ 90 $ 191 $ 1,319 $ 3,457
======================================================================================
Benefit (provision) for income taxes $ 22 $ 73 $ 7 $ - $ 4 $ 137 $ 243
======================================================================================
Segment earnings (loss) $ (731) $(2,432) $ (249) $ 1 $ (124) $(21,994) $(25,529)
--------------------------------------------------------------------------------------
Segment assets $43,089 $46,513 $39,164 $ 7,691 $12,142 $ 40,570 $ 189,169
======================================================================================
(1) All Other includes Specialty Division, Products being phased out and Corporate charges to bad debt, legal and non-recurring
charges.
(2) March 31, 2001 and prior results have been restated to be consistent with current period reclassifications among business
segments.
(3) Direct margin represents segment results before interest, depreciation, amortization, taxes and corporate overhead allocations
10. SUBSEQUENT EVENTS.
On August 3, 2001, QuadraMed announced that James D. Durham, its
founder and a member of the Company's Board of Directors, had resigned from
the Board.
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.
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 supercedes 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 supercedes
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. 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 that implementation of the new standard will have on
its financial position, results of operations, and cashflows.
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 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. It has over one hundred products and services
facilitating all facets of healthcare information management, including
clinical, patient, financial, compliance, and managed care. QuadraMed
supports more than half of the U.S. hospitals and support global healthcare
initiatives with a dedicated staff of over 1000 professionals. QuadraMed was
reincorporated in Delaware in 1996 after having been originally
incorporated in California in 1993.
QuadraMed has undergone a number of key financial and operational
improvements since June 2000, focused on integrating the large number of
acquisitions carried out from 1993 to 1999. 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 its
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 coding for appropriate reimbursement.
o Financial Services Division, which identifies and collects
accounts receivables for hospitals and medical groups.
o Health Information Management Services Division, which
provides (1) health information interim management,
management consulting and department outsourcing services;
(2) coding, compliance, and education services; (3)
compliance, legal, and regulatory services; and (4) charge
description master reviews.
o EZ-CAP Division, which provides (1) software designed to
support managed care risk-taking organizations, such as
medical groups, physician-health organizations, independent
practice associations, and medical service organizations; and
(2) seminars for doctors and medical professionals.
In the second quarter of 2001, QuadraMed announced that it was
increasing its sales force and embarking on a product development strategy
intended to add new clinical functionality to its AFFINITY(R) product in the
Enterprise Products and Services Division and to improve the overall
performance of its Coding, Abstracting and Compliance products in the
Health Information Management Division.
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 June 30, 2001, were $23.0 million,
compared to $22.9 million in the same period last year. For six months
ended June 30, 2001, license revenues increased 10.7% to $45.5 million
compared to $41.1 million in the same period last year. The increase in
license revenues was principally attributable to increased sales of
Affinity and HIM software products.
Services. Service revenues for the quarter ended June 30, 2001,
were $10.6 million, compared to $13.4 million in the same period last year.
For the six months ended June 30, 2001, service revenues decreased 26.1% to
$21.0 million, compared to $28.4 million in the same period last year. The
decrease in service revenues was principally due to termination of service
contracts dating back to the second half 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 June 30, 2001 were $6.2 million, 13.8% more than $5.4
million in the same period last year. As a percentage of license revenues,
cost of licenses were 26.8% for the quarter ended June 30, 2001, compared
with 23.7% in the same period last year. For the six months ended June 30,
2001, cost of license revenues increased 0.6% to $12.5 million, compared to
$12.4 million in the same period last year. As a percentage of license
revenues, cost of licenses were 27.6% in the six months ended June 30,
2001, compared with 30.3% in the same period last year. The decrease in the
year to date cost of licenses is driven by the 10.7% revenue growth and the
essentially flat cost of sales.
Cost of Services. Cost of services includes expenses associated
with services performed in connection with health information management
and financial services, compliance and consulting services. Cost of
services for the quarter ended June 30, 2001 were $4.9 million, 54.1% less
than $10.7 million in the same period last year. As a percentage of service
revenues, cost of services were 46.3% for the quarter ended June 30, 2001,
compared with 80.0% in the same period last year. For the six months ended
June 30, 2001, cost of service revenues decreased 53.6% to $9.6 million,
compared to $20.7 million in the same period last year. As a percentage of
service revenues, cost of services were 45.8% in the six months ended June
30, 2001, compared with 73.0% in the same period last year. The decrease in
the year to date cost of services is driven by tighter control of expenses
and the elimination of some hospital service contracts that had a high cost
of service.
Operating Expenses
QuadraMed was realigned from a functional structure in 2000 to
operating divisions in 2001, and with the revised definitions for Cost of
Licenses and Cost of Services, the 2000 expenses have been reclassed to
conform to the current reporting segments. The expense comparisons by
category are based upon estimates for 2000. For this reason, although the
total operating expenses are substantially lower than the prior year, the
comparisons by expense category are also estimates.
General and Administration. General and administration expenses
for the quarter ended June 30, 2001, were $12.9 million, greater than the
$10.7 million in the same period last year. As a percentage of total
revenues, general and administration expenses were 38.2% for the quarter
ended June 30, 2001, compared to 29.5% in the same period last year. For
the six months ended June 30, 2001, general and administration expenses of
$26.7 million were 7.2% above the $24.9 million in the same period last
year. As a percentage of total revenues, general and administration
expensese increased to 40.2% for the six months ended June 30, 2001, from
35.8% in the same period last year. General and administration expenses
increased primarily as a result of strengthening of incentive compensation
accruals and bad debt reserves. On a sequential basis, General and
Administrative costs declined for the third consecutive quarter.
Sales and Marketing. Sales and marketing expenses for the quarter
ended June 30, 2001, were $4.0 million, 39.1% less than $6.6 million in the
same period last year. As a percentage of total revenues, sales and
marketing expenses were 12.0% for the quarter ended June 30, 2001, compared
to 18.2% in the same period last year. For the six months ended June 30,
2001, sales and marketing expenses decreased 38.3% to $7.9 million,
compared to $12.7 million in the same period last year. As a percentage of
total revenues, sales and marketing decreased to 11.8% for the six months
ended June 30, 2001, from 18.3% in the same period last year. On a
sequential basis, sales and marketing expenses increased over last quarter,
reflecting the addition of sales staff for the Enterprise and HIM
divisions.
Research and Development. Research and development expenses for
the quarter ended June 30, 2001, were $3.8 million, 32.8% less than $5.7
million in the same period last year. As a percentage of total revenues,
research and development costs were 11.3% for the quarter ended June 30,
2001, compared to 15.6% in the same period last year. For the six months
ended June 30, 2001, research and development expenses decreased 36.3% to
$7.3 million, compared to $11.5 million in the same period last year. As a
percentage of total revenues, research and development expenses decreased
to 11.0% for the six months ended June 30, 2001, from 16.5% in the same
period last year. Research and development expenses decreased year over
year primarily as a result of a reduction in product versions and
associated maintenance requirements, however, the level of research and
development increased sequentially over the first quarter of 2001 as the
Company increased development spending on its Affinity and coding
compliance products.
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 June 30, 2001, increased 16.9% to $1.7 million, compared to
$1.4 million in the same period last year. For the six months ended June
30, 2001, amortization of intangibles decreased 7.3% to $3.3 million
compared to $3.6 million in the same period last year. The year to date
decrease resulted from an analysis of the underlying asset and related
amortization rates.
Acquisition Costs. There were no acquisition charges for the three
and six months ended June 30, 2001, and 2000.
Non-Recurring Charges. There were no non-recurring charges for the
three and six months ended June 30, 2001.
During the six months ended June 30, 2000, QuadraMed recorded
approximately $28.3 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 $1.6 and $3.3 million for
the three and six month periods ending June 30, 2001, compared to $1.7 and
$3.3 million for the same period 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, partially offset by
interest income from QuadraMed's cash and investments.
Liquidity and Capital Resources
At June 30, 2001, QuadraMed had $42.8 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% per annum.
Proceeds from the offering were $110.8 million.
In May 2001, QuadraMed redeemed $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 $9.2
million and ($6.3) million for the six months ended June 30, 2001, and
2000, respectively. Net cash provided by operating activities for the
six months ended June 30, 2001 principally reflected the improvement in
collections on receivable balances and the lower operating expenses. Net
cash used in operating activities for the six months ended June 30, 2000,
related to the write-down on certain intangible assets and accounts
receivable and the sale of division.
Net cash provided by investing activities was $11.9 million and
$11.3 million for the six months ended June 30, 2001 and 2000,
respectively. Investing activities for the six months ended June 30, 2001
primarily related to the maturity of available-for-sale short-term
investments and release of restricted cash. Net cash provided by investing
activities for the six months ended June 30, 2000 primarily related to
proceeds from the sale of division and the maturity of available-for-sale
short-term investments.
Net cash (used in) provided by financing activities was ($5.7)
million and $0.9 million for the six months ended June 30, 2001, and 2000,
respectively. Net cash used in financing activities for the six months
ended June 30, 2001, primarily related to the redemption of convertible
subordinated debentures and capital lease obligations. Net cash provided by
financing activities for the six months ended June 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 June 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 June 30, 2001,
(in thousands, except average interest rates):
Aggregate Weighted Average
Fair Value Interest Rate
Cash and cash equivalents:
Cash......................................................... $ 3,282 --
--------
Money market funds........................................... $ 39,550 3.98 %
--------
Total cash and cash equivalents.............................. $ 42,832
--------
Short-term investments:
Corporate debt securities.................................... $ 34 6.73 %
--------
Debt securities issued by the U.S. government................ $ 34 6.35 %
--------
Other short-term investment.................................. $ 2,380 3.75 %
--------
Total short-term investments................................. $ 2,448
--------
Long-term investments:
Corporate debt securities.................................... $ 503 6.42 %
--------
Debt securities issued by the U.S. government.............. $ 558 5.87 %
========
Total long-term investments.................................... $ 1,061
========
Outstanding Debt. As of June 30, 2001, QuadraMed had outstanding
long-term debt of $109,615, consisting of (in thousands, except average
interest rates):
Six Months Ended
June 30, 2001
-----------------------------------------------------------------
Carrying Fair Maturity Weighted Average
Amount Value Date Interest Rate
------------ ------------- ---------- ------------------
Convertible Subordinated Debentures (1) $ 109,615 $ 70,702 2005 5.25%
(1) In May 2001, QuadraMed redeemed $5.4 million in face value of convertible subordinated debentures at prices ranging from
$53.00 to $53.75 and recognized an extraordinary gain of $2.4 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. 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 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 gain of $1.7
million for the quarter ended June 30, 2001, and a net loss of $1.3 for the
six months ended June 30, 2001. As of June 30, 2001, QuadraMed's
accumulated deficit was $261.6 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 June 30, 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.
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 June 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;
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 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 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.
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 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.
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 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 August 2, 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.
At the QuadraMed's annual meeting of stockholders held on June 15,
2001, the stockholders elected each of the nominees for Class II director
on the Board of Directors. The vote totals were as follows:
Nominee For Withheld Authority
------- --- ------------------
Michael J. King 19,814,193 1,787,165
Cornelius T. Ryan 20,791,255 810,103
The following directors' terms of office continue until the annual
meeting indicated: Lawrence P. English (Class III term expires at the 2002
annual meeting); and Albert L. Green, F. Scott Gross and E. A. Roskovensky
(Class I term expires at the 2003 annual meeting).
The following matters were also submitted to and approved by a
vote of the stockholders with the results of the voting being as shown:
Broker
Proposal For Against Abstain Non-Votes
-------- --- ------- ------- ---------
Amend the Company's 1996 Stock
Incentive Plan (i) to increase
the number of shares
authorized for issuance from
3,953,981 to 5,118,981, and 18,132,908 2,588,174 880,276 --
(ii) to qualify the shares for
purposes of Sections 162(m)
and 422 of the Internal
Revenue Code of 1985, as
amended; and
Ratify the appointment of
Pisenti & Brinker LLP as 21,176,168 417,014 8,176 --
independent auditors for the
fiscal year ending December
31, 2001.
................................................................................
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Grantor Trust Agreement by and between QuadraMed and
Wachovia Bank, N.A., dated January 1, 2000.*
10.2 Grantor Trust Agreement Amendment by and between QuadraMed
and Wachovia Bank, N.A., dated January 1, 2000.*
10.3 QuadraMed 1999 Supplemental Stock Option Plan, as adopted *
10.4 QuadraMed 1996 Stock Incentive Plan, as amended April 18,
2001.*
10.5 Amendment of Severance Agreement between James D. Durham and
QuadraMed, dated July 31, 2001.*
15 Accountant's Letter.
27.1 Financial Data Schedule for the Quarter Ended 06/30/2001.
27.2 Financial Data Schedule for the Quarter Ended 06/30/2000.
---------
* Management contract, or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
On April 20, 2001, QuadraMed filed a Current Report on Form 8-K in
which it reported in Item 5 the record and meeting dates for the Company's
annual meeting of stockholders and the date after which stockholder
proposals would be considered untimely.
On June 12, 2001, QuadraMed filed a Current Report on Form 8-K in
which it reported in Item 5 that it had issued a press release announcing
projected revenues for 2001 and establishment of a stock repurchase
program.
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: August 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)
4.11 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)
10.1 Grantor Trust Agreement by and between QuadraMed and
Wachovia Bank, N.A., dated January 1, 2000.
10.2 Grantor Trust Agreement Amendment by and between QuadraMed
and Wachovia Bank, N.A., dated January 1, 2000.
10.3 QuadraMed 1999 Supplemental Stock Option Plan, as adopted
10.4 QuadraMed 1996 Stock Incentive Plan, as amended April 18,
2001
10.5 Amendment of Severance Agreement between James D. Durham and
QuadraMed, dated July 31, 2001.
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.
EXHIBIT 10.1
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EXHIBIT 10.2
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EXHIBIT 10.3
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EXHIBIT 10.4
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EXHIBIT 10.5
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EXHIBIT 15
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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 June 30, 2001, and the related
condensed consolidated statements of operations and cash flows for the
three and six months ended June 30, 2001, and 2000. These condensed
consolidated financial statements are the responsibility of QuadraMed's
management.
We conducted our review 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 review, 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
August 2, 2001
ARCTICLE 5
27.1 Financial Data Schedule for the Quarter Ended 06/30/2001.
27.2 Financial Data Schedule for the Quarter Ended 06/30/2000.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED JUNE 30, 2001 AND 2000 UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
PERIOD-TYPE 6-MOS 6-MOS
FISCAL-YEAR-END DEC-31-2001 DEC-31-2000
PERIOD-START JAN-01-2001 JAN-01-2000
PERIOD-END JUN-30-2001 JUN-30-2000
CASH 47,086 25,528
SECURITIES 2,448 14,747
RECEIVABLES 50,247 48,193
ALLOWANCES (4,100) (2,775)
PREPAID 2,402 5,145
CURRENT ASSETS 98,083 90,838
LONG TERM INVESTMENTS 4,661 22,257
EQUIPMENT 29,817 15,509
ACCUM DEPRECIATION (21,883) (4,245)
OTHER LONG TERM ASSETS 41,666 55,459
TOTAL ASSETS 152,344 179,818
CURRENT LIABILITIES 39,610 29,762
DEBT - BONDS 109,615 115,000
OTHER LIABILITIES 123 4,919
TOTAL LIABILITIES 149,348 149,681
COMMON STOCK 191 191
OTHER SHAREHOLDER EQUITY 2,805 29,946
TOTAL LIABILITIES & STCOKHOLDERS EQUITY 152,344 179,818
TOTAL-REVENUES 66,460 69,504
COST OF GOODS SOLD 22,148 33,197
OTHER OPERATING EXPENSES 45,234 81,988
LOSS FROM OPERATIONS (922) (45,681)
INTEREST EXPENSE (3,284) (3,310)
INTEREST INCOME 1,705 951
OTHER EXPENSES (739) (79)
LOSS PRE INCOME TAX (3,240) (48,119)
PROVISION FOR INCOME TAX (104) (160)
EXTRAORDINARY 2,074 18,666
NET-INCOME (1,270) (29,613)
EPS-BASIC (0.05) (1.16)
EPS-DILUTED (0.05) (1.16)