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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 MARCH 31, 2002
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, CALIFORNIA 94901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 482-2100
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of May 9,2002, there were 27,139,342 of the Registrant's Common
Stock outstanding, par value $0.01.
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QUADRAMED CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Interim Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31,
2001............................................................................................ 1
Interim Condensed Consolidated Statements of Operations for the three months ended March 31,
2002 and 2001................................................................................... 2
Interim Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2002 and 2001................................................................................... 3
Notes to Interim Condensed Consolidated Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 14
Item 6. Exhibits and Reports on Form 8-K............................................................... 15
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
March 31, December 31,
ASSETS 2002 2001
--------------- ---------------
Current Assets
Cash and cash equivalents $ 30,569 $ 29,799
Short-term investments 2,413 2,414
Accounts receivable, net of allowance for uncollectible accounts of $2,724
and $3,388, respectively 40,951 37,454
Unbilled receivables
9,040 7,906
Notes and other receivables
108 282
Prepaid expenses and other current assets
3,264 3,099
--------------- ---------------
Total current assets 86,345 80,954
--------------- ---------------
Restricted Cash 4,356 4,356
Long-term investments 1,120 1,138
Property, Plant, and Equipment, net of accumulated depreciation and amortization
of $22,956 and $22,093, respectively 6,877 6,857
Capitalized software development, net of accumulated amortization of $8,669 and
$7,976, respectively 7,792 7,564
Goodwill and intangibles, net of accumulated amortization of $4,485 and $4,341,
respectively 22,561 22,705
Investment in marketable equity security, net of valuation allowance of $4,250 and
$4,125, respectively 450 575
Other long-term assets
6,444 6,594
Total Assets $ 135,945 $ 130,743
=============== ===============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable
$ 1,008 $ 796
Accrued payroll and related 4,534 6,630
Accrued interest 1,613 645
Other accrued liabilities 4,965 6,595
Deferred revenue 24,594 19,133
--------------- ---------------
Total current liabilities 36,714 33,799
--------------- ---------------
Other long-term liabilities 3,147 3,064
Convertible subordinated debentures 73,719 73,719
--------------- ---------------
Total Liabilities 113,580 110,582
--------------- ---------------
Stockholders' Equity
Common stock, $0.01 par, 50,000 shares authorized, 26,930 and 26,493 shares
issued and outstanding, respectively 205 201
Common stock in treasury at cost, 200 shares
(821) (821)
Additional paid-in-capital 273,648 271,494
Deferred stock-based compensation (1,286) (1,074)
Accumulated other comprehensive loss (4,826) (4,793)
Accumulated deficit (244,555) (244,846)
--------------- ---------------
Total stockholders' equity 22,365 20,161
--------------- ---------------
Total Liabilities and Stockholders' Equity $135,945 $ 130,743
=============== ===============
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
----------------------------------
2002 2001
Revenues
Licenses $ 22,109 $ 19,785
Services 11,050 11,381
---------------- -----------------
Total revenues 33,159 31,166
---------------- -----------------
Operating Expenses
Cost of licenses 6,571 5,762
Cost of services 5,432 5,712
General and administration 11,031 12,609
Sales and marketing 4,894 3,590
Research and development 3,936 3,987
Amortization of intangibles 144 1,628
Total operating expenses 32,008 33,288
---------------- -----------------
Income (Loss) from Operations 1,151 (2,122)
---------------- -----------------
Other Income (expense)
Interest expense (1,063) (1,658)
Interest income 171 551
Other income (expense), net 32 (628)
---------------- -----------------
Total other Income (expense), net (860) (1,735)
---------------- -----------------
Income (Loss) Before Income Taxes 291 (3,857)
Provision for Income Taxes -- (81)
---------------- -----------------
Income (Loss) from Continuing Operations 291 (3,938)
Income from discontinued operations (net of income taxes) -- 1,006
---------------- -----------------
Net Income (Loss) $ 291 $(2,932)
================ =================
Earnings (Loss) Per Share
Basic
Continuing Operations $ 0.01 $ (0.15)
Discontinued operations (net of income taxes) -- 0.04
---------------- -----------------
Total $ 0.01 $ (0.11)
================ =================
Diluted
Continuing Operations $ 0.01 $ (0.15)
Discontinued operations (net of income taxes) -- 0.04
---------------- -----------------
Total $ 0.01 $ (0.11)
================ =================
Weighted Average Shares Outstanding
Basic 26,809 25,755
Diluted 28,593 25,755
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
----------------------------------
2002 2001
--------------- ---------------
Cash Flows from Operating Activities
Net Income (loss) $ 291 $ (2,932)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 1,796 3,358
Amortization of deferred stock-based compensation 136 --
Write-off of purchased accounts receivable -- 980
Realized gain on investments (3) (17)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net (4,631) (3,945)
Prepaid expenses and other 63 (131)
Accounts payable and accrued liabilities (2,326) 154
Net liabilities from discontinued operations -- (5)
Deferred revenue 5,461 8,075
--------------- ---------------
Cash provided by operating activities 787 5,537
--------------- ---------------
Cash Flows from Investing Activities
Purchase of available-for-sale securities (68) (137)
Purchase of property and equipment (882) (568)
Proceeds from the sale of available-for-sale securities 65 172
Proceeds from sale of equipment -- 17
Maturity of available-for-sale securities -- 10,245
Change in restricted cash -- 484
Capitalization of computer software development costs (922) --
--------------- ---------------
Cash (used in) provided by investing activities (1,807) 10,213
--------------- ---------------
Cash Flows from Financing Activities
Payments of principal on capital lease obligations (20) (245)
Proceeds from exercise of common stock options 1,810 --
--------------- ---------------
Cash provided by (used in) financing activities 1,790 (245)
--------------- ---------------
Net increase in cash and cash equivalents 770 15,505
Cash and Cash Equivalents, beginning of period 29,799 27,368
--------------- ---------------
Cash and Cash Equivalents, end of period $ 30,569 $ 42,873
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes $ 349 $ 36
Cash paid for interest 5 2
Supplemental Disclosure of Noncash Financing and Investing Activities:
ssuance of restricted shares of common stock $ 348 $ --
mortization of unrecognized pension costs 116 --
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 1. QUADRAMED CORPORATION
QuadraMed Corporation ("QuadraMed") provides information
technology and consulting services designed to assist healthcare
professionals deliver patient care with optimum efficiency. QuadraMed has
four main product lines: Affinity(R) Healthcare Information System,
Quantim(R) Health Information Management Software and Services,
Complysource(R) Compliance Solutions, and Chancellor(TM) Financial Products
and Services. QuadraMed was reincorporated in Delaware in 1996, having been
originally incorporated in 1993 in California. Since August 31, 2000, its
stock has been publicly traded under the symbol "QMDC" on the Nasdaq
SmallCap Market. From October 16, 1996 to August 30, 2000, QuadraMed's
stock was traded under the same symbol on the Nasdaq National Market.
NOTE 2. BASIS OF PRESENTATION
(a) Principles of Consolidation
The accompanying interim condensed consolidated financial
statements, include the accounts of QuadraMed and all significant business
divisions and subsidiaries, have been prepared in conformity with (i)
generally accepted accounting principles ("GAAP") 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.
(b) Unaudited Interim Results
The accompanying unaudited interim condensed consolidated
financial statements of the Company, as of March 31, 2002 and for the three
months ended March 31, 2002 and 2001 reflect all adjustments, consisting of
normal recurring adjustments, which in the opinion of management, are
necessary for a fair presentation of the results for the interim periods
presented. These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
These financial statements should be read in conjunction with our
annual audited financial statements for the year ended December 31, 2001,
which are included in our annual report on Form 10-K filed with the
Securities and Exchange Commission.
Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full
fiscal year ending December 31, 2002.
(c) Discontinued Operations
Results of QuadraMed's EZ-CAP software business ("EZ-CAP") are
reported as discontinued operations because QuadraMed's control of this
business was transferred in August 2001. Unless otherwise indicated,
amounts in these statements exclude the effects of all discontinued
operations.
(d) Reclassifications
Certain reclassifications have been made to the 2001 interim
condensed consolidated financial statements to conform to the 2002
presentation. Specifically, the March 31, 2001, financial statements have
been reclassified to comply with Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") No. 01-14, Income Statement
Characterization of Reimbursements for `Out-of-Pocket' Expenses Incurred.
As such, QuadraMed has reclassified prior year balances to include billable
out-of-pocket reimbursable expenses in both license and service revenues
and cost of licenses and services, respectively. The adoption of EITF No.
01-14 does not impact either income (loss) from operations or net income
(loss) but does reduce revenue and gross margins as shown in the following
tables:
For the Three Months Ended For the Three Months Ended
March 31, 2002 March 31, 2001
License Service Total License Service Total
---------------------------------------- -----------------------------------------
Reported revenue $ 22,109 $ 11,050 $ 33,159 $ 19,785 $ 11,381 $ 31,166
Less impact of EITF No. 01-14 272 686 958 219 1,014 1,233
---------------------------------------- -----------------------------------------
Pro-forma revenue $ 21,837 $ 10,364 $ 32,201 $ 19,566 $ 10,367 $ 29,933
======================================== =========================================
For the Three Months Ended For the Three Months Ended
March 31, 2002 March 31, 2001
License Service Total License Service Total
---------------------------------------- -----------------------------------------
Reported gross margin 70.3% 50.8% 63.8% 70.9% 49.8% 63.2%
Impact of EITF No. 01-14 0.9% 3.4% 1.9% 0.8% 4.9% 2.6%
---------------------------------------- -----------------------------------------
Pro-forma gross margin 71.2% 54.2% 65.7% 71.7% 54.7% 65.8%
======================================== =========================================
NOTE 3. GOODWILL AND INTANGIBLES
As of January 1, 2002, QuadraMed has adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142). SFAS No. 142 requires goodwill to be
tested for impairment at least annually, and written off when impaired,
rather than being amortized as previous standards required. With the
adoption of SFAS No. 142, QuadraMed engaged a valuation firm to perform an
impairment test on the carrying value of goodwill as of December 31, 2001.
The valuation firm determined that there was no impairment as of that date.
The table below presents comparable amounts for 2002 and 2001 on a pro
forma basis as if goodwill was not amortized in 2001 (in thousands, except
for per share data):
Three Months Ended
March 31,
-----------------------------------
2002 2001
-----------------------------------
Reported net income (loss) $ 291 $ (2,932)
Add back: Goodwill amortization - 1,404
-----------------------------------
Adjusted net income (loss) $ 291 $ (1,528)
===================================
Basic earnings per share
Reported net income (loss) per share $ 0.01 $ (0.11)
Goodwill amortization - 0.05
-----------------------------------
Adjusted net income (loss) per share $ 0.01 $ (0.06)
===================================
Diluted earnings per share
Reported net income (loss) per share $ 0.01 $ (0.11)
Goodwill amortization - 0.05
-----------------------------------
Adjusted net income (loss) per share $ 0.01 $ (0.06)
===================================
Other intangibles are amortized on a straight-line basis over a
period of five to ten years. These amounts are reviewed quarterly for
impairment and written down to net realizable value, if necessary, in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets. This statement addresses financial accounting for the
impairment or disposal of long lived assets and supersedes SFAS No. 121,
Impairment of Long-Lived Assets.
Amortization of intangibles for the three months ending March 31,
2002 and 2001 was $0.1 and $1.6 million, respectively. As noted above, 2001
results included goodwill amortization of $1.4 million. No impairment
charges were incurred during the three months ended March 31, 2002 and
2001.
NOTE 4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the sum of the weighted average number of
common shares and common equivalent shares outstanding during the period.
Common equivalent shares consist of shares issuable upon the exercise of
stock options (using the treasury stock method) and convertible
subordinated debentures (using the as-converted method). Common equivalent
shares are excluded from the diluted computation only if their effect is
anti-dilutive. As QuadraMed recorded a net loss from continuing operations
for the three months ended March 31, 2001, 103,000 common equivalent shares
were excluded from the net loss per share calculation because they were
anti-dilutive.
Three Months Ended
March 31,
------------------------------------
2002 2001
------------------------------------
(in thousands, except per share amounts)
Net Income (loss) $ 291 $ (2,932)
---------------- ------------------
Shares used to compute basic net income
(loss) per share (weighted average shares
outstanding during the period) 26,809 25,755
Dilutive common equivalent shares:
Stock options 1,784 -
---------------- ------------------
Shares used to compute diluted
net income (loss) per share 28,593 25,755
---------------- ------------------
Basic net income (loss) per share $ 0.01 $ (0.11)
================ ==================
Diluted net income (loss) per share $ 0.01 $ (0.11)
================ ==================
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months
ended March 31, 2002 and 2001 are as follows (in thousands):
Three Months Ended
March 31,
------------------------------------
2002 2001
------------------------------------
Net income (loss) $ 291 $ (2,932)
Unrealized loss on available for sale securities, net of tax (149) (53)
Amortization of unrecognized pension costs, net of tax 116 -
---------------- -----------------
Comprehensive income (loss), net of income taxes $ 258 (2,985)
================ =================
NOTE 6. DIVESTITURES
On August 16, 2001, QuadraMed and its wholly-owned subsidiary,
QuadraMed Operating Corporation, entered into an asset purchase agreement
for the sale of certain assets and related products used to conduct the
EZ-CAP managed care software business to OAO Transition, LLC, a Delaware
limited liability company ("OAO Transition"), and OAO Technology Solutions,
Inc., a Delaware corporation (individually and collectively "OAO"). The
asset purchase transaction closed on August 31, 2001, for an aggregate
purchase price of approximately $9.0 million, and the opportunity for
QuadraMed to receive up to $5.0 million in additional payments based on
EZ-CAP's revenue growth and customer retention as part of OAO over the 18
months following closing. QuadraMed received net proceeds from the sale of
$8.6 million, and recorded a gain after applicable taxes of $6.9 million
during 2001. Income, net of applicable taxes, associated with the EZ-CAP
discontinued operations for the three months ended March 31, 2001 was $1.0
million.
On March 31, 2001, QuadraMed sold its discontinued Electronic
Remittance Advice product line. QuadraMed recorded proceeds from the sale
of $24,000, and a loss after applicable taxes of $327,000 during the second
quarter of 2001. There was no material income associated with the results
of discontinued operations for this product line during the three months
ended March 31, 2001.
NOTE 7. CONTINGENCIES
From time to time in the normal course of its business, QuadraMed
may be involved in litigation relating to its operations. As of March 31,
2002, 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.
NOTE 8. SEGMENT REPORTING
QuadraMed aligns its operations into five segments for management
reporting purposes. These segments are based on product functionality and
shared target markets. This alignment allows management to more accurately
measure financial performance by product/division and to establish greater
management accountability. QuadraMed's five (5) business segments are (i)
the Enterprise Division, (ii) the Health Information Management Software
Division, (iii) the Health Information Management Services Division, (iv)
the Financial Services Division and, (v) specialty product lines that have
been discontinued or are not aligned with an operating division that are
referenced as Other. The segment results reflected in the following tables
have been reclassified 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
described in the Notes to the Financial Statements contained in QuadraMed's
2001 Annual Report on Form 10-K. QuadraMed evaluates financial performance
by segment as summarized in the subsequent table. The financial results for
these operating segments for prior years have been reclassified on an
estimated basis to conform to the current presentation.
The Enterprise Division offers QuadraMed's Affinity
enterprise-wide information system products. With its full suite of
applications, Affinity is designed to address a wide range of financial,
patient, and clinical management needs of single- or multi-facility
hospitals. Principally targeting acute care hospitals across the United
States, the Affinity solution incorporates a patient-centered database
designed to enable users to track each patient throughout the continuum of
care. The system integrates financial information such as patient
accounting and DRG/case mix with clinical data such as medical charting and
plan of care to automate federal and state reporting, scheduling,
registration, and medical records information. The Electronic Document
Management solution is designed to allow users to create secure electronic
patient folders that combine both computerized and scanned documents. The
Master Population Index and Performance Measurement products are also
reflected in this division.
The Health Information Management Software Division provides
QuadraMed's Quantim health information management software products,
encompassing a suite of compliance, encoding and grouping, medical record
management, and patient database applications that are designed to enable a
hospital to accurately track medical records for internal and external
purposes. Additionally, the division offers Complysource Compliance
Solutions that are designed to support hospitals in managing the
complexities of evolving federal requirements and in submitting accurate
billing and clinical data. The coding and grouping products aim to 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 is designed to locate and reserve charts, and
authenticate and distribute transcribed medical records.
The Health Information Management Services Division offers Quantim
and Complysource Services, which are designed to provide healthcare
information management departments with experienced, qualified, and if
necessary, credentialed professionals to perform information technology,
coding, auditing, accounting, compliance, and medical record services. The
division also provides experienced executives for interim assignments in
financial and management positions. These services are offered to acute
care facilities, as well as, to large physician, clinic, and ambulatory
practices.
The Financial Services Division provides QuadraMed's Chancellor
Financial Products resources to healthcare providers to reduce accounts
receivable backlogs and accelerate cash flow. The division conducts
analyses of patient accounts to identify outstanding or underpaid third
party payments, to re-bill, and to follow-up on third party claims.
Although not reported as a business segment, QuadraMed also
derives approximately four percent of its revenue from Specialty Products
that are included in Other. Patient Focused Solutions ("PFS") provides
productivity and staffing information principally for hospital nursing
staff. Electronic Data Interchange ("EDI") interfaces with the hospital
information system to download claims data automatically on a daily basis.
Claims are edited onsite and formatted to payer-specific requirements.
Summary financial data by business segment follows for the three months
ended March 31, 2002 and 2001 (in thousands):
For the Three Months Ended March 31, 2002
HIM HIM Financial All Other Consolidated
Description Enterprise Software Services Services (1) Total
----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Total revenues $16,465 $ 7,328 $ 4,099 $ 4,007 $ 1,260 $ 33,159
===================================================================================
Direct margin (loss) (2) 4,529 2,249 392 1,595 (7,470) 1,295
Corporate shared expenses (666) (887) (121) (121) 1,795 -
-----------------------------------------------------------------------------------
Contribution margin (loss) 3,863 1,362 271 1,474 (5,675) 1,295
-----------------------------------------------------------------------------------
Interest income 81 31 29 22 8 171
Interest expense (456) (210) (198) (146) (53) (1,063)
-----------------------------------------------------------------------------------
Interest income (expense), net (375) (179) (169) (124) (45) (892)
-----------------------------------------------------------------------------------
Intangibles amortization - (144) - - - (144)
Corporate overhead (2,001) (919) (871) (639) 4,430 -
Other expense and taxes 3 2 2 1 24 32
-----------------------------------------------------------------------------------
Net income (loss) $ 1,490 $ 122 $ (767) $ 712 $ (1,266) $ 291
===================================================================================
-----------------------------------------------------------------------------------
Segment assets $30,454 $35,196 $ 9,790 $ 8,190 $ 52,315 $ 135,945
===================================================================================
-----------------------------------------------------------------------------------
Total depreciation and amortization (3) $ (322) $ (562) $ (39) $ (49) $ (824) $ (1,796)
===================================================================================
(1) All other includes specialty products division, discontinued operations, and non-allocated expenses.
(2) Direct margin represents segment results before interest, amortization of intangibles, taxes, and corporate overhead
allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation and capitalized software amortization reflected
in direct margin; debt offering costs as reflected in interest expense; and acquired software amortization which is reflected
separately in the above schedule.
For the Three Months Ended March 31, 2001 (4)
HIM HIM Financial All Other Consolidated
Description Enterprise Software Services Services (1) Total
----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Total revenues $ 15,395 $ 5,419 $ 5,711 $ 3,048 $ 1,593 $ 31,166
===================================================================================
Direct margin (loss)(2) 2,680 1,303 1,680 931 (7,088) (494)
Corporate shared expenses (652) (371) (423) (113) 1,559 -
Contribution margin (loss) 2,028 932 1,257 818 (5,529) (494)
Interest income 54 19 22 15 441 551
Interest expense (619) (300) (345) (229) (165) (1,658)
Interest income (expense), net (565) (281) (323) (214) 276 (1,107)
Intangibles amortization - (1,175) (207) (75) (171) (1,628)
Corporate overhead (1,525) (920) (788) (491) 3,724 -
Other expense and taxes (30) (14) (13) (11) (641) (709)
Income from discontinued operations - - - - 1,006 1,006
-----------------------------------------------------------------------------------
Net income (loss) $ (92) $ (1,458) $ (74) $ 27 $ (1,335) $ (2,932)
===================================================================================
-----------------------------------------------------------------------------------
Segment assets $ 25,796 $ 38,028 $ 13,216 $ 6,937 $ 74,965 $ 158,942
===================================================================================
-----------------------------------------------------------------------------------
Total depreciation and amortization (3) $ (501) $ (1,532) $ (270) $ (124) $ (931) $ (3,358)
===================================================================================
(1) All other includes specialty products division, discontinued operations, and non-allocated expenses.
(2) Direct margin represents segment results before interest, taxes, and corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation and capitalized software amortization
reflected in direct margin; debt offering costs as reflected in interest expense; and goodwill and acquired software
amortization which is reflected separately in the above schedule.
(4) March 31, 2001 results have been adjusted to be consistent with current period reclassification among business segments.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement updates and clarifies existing
pronouncements relating to the classification and reporting of gains and
losses from the extinguishment of debt, the treatment of sale-leaseback
transactions and also makes technical corrections to existing
pronouncements. The provisions of SFAS No. 145 are required to be applied
starting with fiscal years beginning after May 15, 2002. QuadraMed is
currently evaluating the effect that implementation of this new standard
will have on its financial condition, results of operations and cashflows.
In January 2002, the FASB issued EITF No. 01-14, Income Statement
Characterization of Reimbursements for `Out-of-Pocket' Expense Incurred.
The statement requires the inclusion of reimbursed expenses in revenue.
QuadraMed has adopted this pronouncement, effective January 1, 2002 and has
reclassified prior year condensed consolidated financial statements to be
consistent.
In July 2001, the FASB issued SFAS 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 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.
QuadraMed has adopted this pronouncement, effective January 1, 2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Introduction and Incorporation of Risk Factors
In this Quarterly Report on Form 10-Q, QuadraMed Corporation
("QuadraMed") and its management discuss and make statements regarding
their intentions, beliefs, and current expectations regarding QuadraMed's
future operations and performance. Such statements are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are often identified by words
such as "anticipates," "believes," "expects," "will," "should" and
"intends" and their negatives. QuadraMed and its management caution
prospective investors that such forward-looking statements are not
guarantees of future performance. Risks and uncertainties are inherent in
QuadraMed's future performance. Factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include, but are not limited to, those discussed under "Business Risks" in
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" in QuadraMed's Annual Report on Form 10-K for 2001
("Annual Report"). Those portions of the Annual Report are incorporated by
reference into this report. 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.
Results of Operations
Revenues
Total revenue for the first quarter 2002 of $33.2 million was $2.0
million, or 6.4% over the corresponding 2001 first quarter. QuadraMed
adopted EITF No. 01-14, "Income Characterization of Reimbursements for
Out-of-Pocket Expenses Incurred," as of January 1, 2002 with associated
reclassification of prior periods. This accounting change requires billable
reimbursed out-of-pocket expenses to be reported as both revenue and cost
of goods sold. Prior to the adoption of EITF No. 01-14, these amounts were
offset against one another within the respective expense accounts. While
there is no net income (loss) impact, combined gross margins for the
three-month ended March 31, 2002 and 2001 are reduced by 1.9 and 2.6
percentage points, respectively.
Licenses. License revenue includes license, installation,
consulting and post-contract support fees, third-party hardware and
software sales, and other revenues related to the licensing of software
products. License revenues in the first quarter of fiscal 2002 were $22.1
million, an increase of $2.3 million or 11.7% over $19.8 million in the
first quarter of fiscal 2001. The increase principally represents growth
for the Enterprise and Health Information Management Software segments of
7.0% and 36.0%, respectively. With the exception of modest,
inflation-sensitive price increases for maintenance contracts, revenue
growth was derived principally from increased software sales.
Services. Service revenues were $11.1 million in the first quarter
of fiscal 2002, a decrease of $0.3 million or 2.9% from $11.4 million in
the first quarter of fiscal 2001. The cancellation of several hospital
outsourcing contracts in the Health Information Management Services segment
in late 2000 that still contributed revenue in the first quarter of 2001
was the primary reason for the comparative decline in service revenue. This
decline was partially offset by an increase in the Financial Services
segment, which achieved a 31% growth in revenue over the same period in
2001. Early in 2001, QuadraMed terminated the CPR services line within the
Financial Services segment due to lack of profitability and concentrated on
the accounts receivable and managed care payment review services.
Operating Expenses
Cost of Licenses. Cost of licenses consists primarily of salaries,
benefits, and allocated costs related to software installations, hardware
costs, and royalties to third parties. Cost of licenses in the first
quarter of 2002 of $6.6 million represented an increase of $0.8 million, or
14%, over the 2001 level of $5.8 million principally as a result of the
increased revenue. The resultant gross margin on license revenue was 70.3%,
a slight decrease of 0.6 percentage point below the 2001 level of 70.9%.
Cost of Services. Cost of services includes expenses associated
with services performed in connection with the health information
management, business office outsourcing, compliance and consulting
services, and accounts receivable management. Cost of services in the first
quarter of fiscal 2002 of $5.4 million were $0.3 million or 4.9% below the
2001 level of $5.7 million, reflecting a combination of lower revenue and
expense reductions. The gross margin earned on services revenue in 2002 was
50.8%, 1.0 percentage point more than the 2001 level of 49.8%, reflecting a
shift in mix to Financial Services revenue, which earns higher margins than
HIM Services.
General and Administration. General and administration expenses
were $11.0 million in the three months ended March 31, 2002, a decrease of
12.5% compared to $12.6 million in 2001. As a percentage of total revenues,
general and administration expenses decreased 7.2 percentage points to
33.3% in 2002, compared to 40.5% in 2001. The decrease in expenses was
principally the result of lower salary and related expenses resulting from
a lower average staffing level and reduced professional and legal fees.
Sales and Marketing. Sales and marketing expenses increased in the
first quarter of fiscal 2002 to $4.9 million, compared to $3.6 million in
three-months ended March 31, 2001. As a percentage of revenue, these
expenses increased 3.3 percentage points to 14.8% in 2002 from 11.5% in
2001. The increase in sales and marketing was due principally to the
increase in the sales force in each segment and higher commissions on the
increased revenue.
Research and Development. Research and development expenses in the
three months ended March 31, 2002 were $3.9 million, compared to $4.0
million in the first quarter of fiscal 2001. As a percentage of revenue,
the decrease was 0.9 percentage points to 11.9% in 2002 from 12.8% in 2001.
While research and development expenses were essentially flat, the level of
research and development investments increased with the funding of
development for QuadraMed's Affinity Clinical and Quantim products. During
the quarter, QuadraMed capitalized $0.9 million in development costs
compared to zero in the first quarter 2001.
Amortization of Intangibles. Amortization of Intangibles declined
to $0.1 million in 2002 from $1.6 million in 2001 as QuadraMed adopted SFAS
No. 142, Goodwill and Other Intangible Assets, and did not amortize
goodwill during the three months ended March 31, 2002.
Interest Expense
Interest expense, net of interest income, was $0.9 million and
$1.1 million in the first quarter of fiscal 2002 and 2001, respectively.
This decline in interest expense was principally due to the decrease in
debentures outstanding resulting from repurchases/retirements made in 2001.
Provision for Income Taxes
Provision for income taxes was zero and $0.1 million in the
three-months ended March 31, 2002 and 2001, respectively. The provision for
income taxes was primarily due to state and alternative minimum tax
liabilities on certain of QuadraMed's legal entities. For financial
reporting purposes, a 100% valuation allowance has been recorded against
QuadraMed's deferred tax assets under SFAS No. 109, Accounting for Income
Taxes.
Income from Discontinued Operations
QuadraMed recorded income from discontinued operations of $1.0
million for the three months ended March 31, 2001, related to the first
quarter earnings of the EZ-CAP business that was divested on August 31,
2001.
Liquidity And Capital Resources
At March 31, 2002, QuadraMed held $30.6 million in cash and cash
equivalents, $2.4 million in short-term investments, $4.4 million in
restricted cash, and $1.1 million in long-term investments, totaling $38.5
million.
Net cash provided by operating activities was $0.8 million in the
first quarter of fiscal 2002 compared to $5.5 million in first quarter of
fiscal 2001. This decrease in cash provided by operations is driven
principally by a significant increase in incentive bonus payments to all
levels within QuadraMed and a smaller increase in deferred revenue during
the quarter compared to 2001 because of improved billing practices adopted
in 2001.
Net cash used in investing activities was $1.8 million in 2002, a
decrease of $12.0 million compared to $10.2 million provided for investing
activities in 2001. Majority of the cash provided in 2001 was primarily
related to the maturity of short-term investments, compared to zero in
2002. Additionally, $0.9 million of software development costs was
capitalized in 2002, while no capitalization costs occurred in the first
quarter 2001.
Net cash provided by financing activities was $1.8 million during
the three months ended March 31, 2002, compared to $0.2 million used in
financing activities in 2001. The 2002 result principally reflected $1.8
million in cash proceeds from the exercise of options to purchase common
stock.
The following table summarizes financial data for contractual
obligations and other commercial commitments as of March 31, 2002 (in
thousands):
Payments Due by Period
------------------------------------------------------
1 year 2-3 4-5 After 5
Contractual Obligations Total or less years years years
------------------------------------------------------------------------------------------------------------
Long-term debt $ 87,264 $ 3,870 $ 7,740 $ 75,654 -
Capital lease obligations 97 78 19 - -
Operating leases 30,110 4,792 8,066 5,861 11,391
Other long-term obligations 7,775 - - - 7,775
---------------------------------------------------------------------
Total contractual cash obligations $ 125,246 $ 8,740 $15,825 $ 81,515 $ 19,166
=====================================================================
Amount of Commitment Expiration
Per Period
--------------------------------------------------------
Total
Amounts 1 year 2-3 4-5 After 5
Other Commercial Commitments Committed or less years years years
-----------------------------------------------------------------------------------------------------------
Standby letters of credit $ 4,356 $ 1,136 $ 100 - $ 3,120
---------------------------------------------------------------------
Total commercial commitments $ 4,356 $ 1,136 $ 100 - $ 3,120
=====================================================================
QuadraMed believes that it will have sufficient liquidity and
operating cash flows to fund its scheduled debt service and other
obligations for the foreseeable future.
Inflation
The majority of QuadraMed's revenue is derived from perpetual and
long-term customer contracts. The term of contracts range from one (1) to
five (5) years and the contracts generally allow price increases annually
based on external measures of inflation. QuadraMed has increased some of
its prices under these contract provisions. QuadraMed's maintenance
contract terms also allow annual price increases based on external measures
of inflation. Accordingly, inflation has not had, and QuadraMed does not
believe that it will have, a significant impact on its financial condition.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
QuadraMed's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio. It is QuadraMed's intent to
ensure the safety and preservation of its invested principal funds by
limiting default risk, market risk, and reinvestment risk. QuadraMed
invests in high-quality issuers, including money market funds, corporate
debt securities, and debt securities issued by the United States
government. QuadraMed has a policy of investing in securities with
maturities of two years or less. QuadraMed does not invest in derivative
financial or foreign investments. The table below presents fair values of
principal amounts and weighted average interest rates for QuadraMed's
investment portfolio as of March 31, 2002, (in thousands, except average
interest rates):
Aggregate Weighted Average
Fair Value Interest Rate
Cash and cash equivalents:
Cash......................................................... $ 6,834
Money Market funds........................................... $23,735 1.63 %
-------
Total cash and cash equivalents......................... $30,569
Short-term investments:
Corporate debt securities.................................... $ 2,380 1.70 %
Debt issued by the U.S. government........................... $ 33 6.44 %
-------
Total short-term investments............................ $ 2,413
Long-term investments:
Corporate debt securities.................................... $ 59 6.18 %
Debt securities issued by the U.S. government................ $ 524 5.05 %
-------
Total long-term investments............................. $ 1,120
=======
Outstanding Debt.
As of March 31, 2002, QuadraMed had outstanding long-term debt of
$73.7 million, consisting of its Debentures that mature as follows (in
thousands, except average interest rates):
Maturity Carrying Fair Weighted Average
Date Amount Value Interest Rate
---- ------ ----- -------------
2005 $73,719 $59,712 5.25%
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its Debentures, the bulk of QuadraMed's debt,
is fixed at 5.25%.
Foreign Currency Risk
Although QuadraMed sells its products internationally from time to
time, all such transactions are denominated in U.S. currency and there is
no foreign currency fluctuation risk associated with such sales.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, QuadraMed is involved in
litigation relating to claims arising out of its operations. QuadraMed does
not believe that the ultimate resolution of any pending proceeding will
have a material adverse effect on its business, financial condition, or
results of operations.
Item 6. Exhibits and Report on Form 8-K
(a) The following documents are filed as a part of this Quarterly Report
on Form 10-Q.
1. Financial Statements.
The interim consolidated financial statements contained
herein.
2. Financial Statement Schedule.
Exhibits. Reference is made to Item 14(c) of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K. QuadraMed filed the following reports on
Form 8-K during the first quarter ending March 31, 2002:
(i) Form 8-K dated April 5, 2002, reporting a change in independent
public accountants.
(c) Exhibits:
The exhibits listed on the accompanying Exhibits Index or
incorporated by reference are filed as part of this Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this form
to be signed on its behalf by the undersigned, thereunto duly authorized.
Quadramed corporation
Date: May 14, 2002 By: /s/ Lawrence P. English
-------------------------------------
Lawrence P. English
Chairman and Chief Executive Officer
By: /s/ Mark N. Thomas
------------------------------------
Mark N. Thomas
Chief Financial Officer and Chief
Accounting Officer
EXHIBIT INDEX
2.1 Securities Purchase Agreement dated as of May 5, 2000, by and
among QuadraMed Corporation, QuadraMed Operating Corporation,
Certain Investors and ChartOne, Inc. (6)
2.2.1 Asset Contribution Agreement dated as of May 3, 2000, by and among
QuadraMed Corporation, QuadraMed Operating Corporation and
ChartOne, Inc. (6)
2.2.2 Asset Purchase Agreement, by and among, QuadraMed Corporation,
QuadraMed Operating Corporation, OAO Technology Solutions, Inc.,
and OAO Transaction, LLP, dated as of August 16, 2001. (11)
3.4 Amended and Restated Bylaws of QuadraMed. (1)
3.5 Third Amended and Restated Certificate of Incorporation of
QuadraMed. (3)
3.6 Amended and Restated Certificate of Incorporation of QuadraMed,
amended January 28, 2002.
4.1 Reference is made to Exhibits 3.4 and 3.5. (1) (3)
4.2 Form of Common Stock certificate. (1)
4.11 Form of Warrant to Purchase Common Stock. (1)
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. (2)
4.17 Registration Rights Agreement dated April 27, 1998, by and among
QuadraMed and the Initial Purchasers named therein. (2)
4.18 Form of Global Debenture. (2)
4.19 Form of Certificated Debenture. (2)
4.21 Registration Rights Agreement dated December 23, 1998, by and
between QuadraMed and the shareholders listed therein. (5)
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. (4)
10.2 1996 Employee Stock Purchase Plan of QuadraMed. (1)
10.3 1996 Stock Incentive Plan of QuadraMed. (l)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan. (1)
10.4 Form of Indemnification Agreement between QuadraMed and its
directors and executive officers. (1)
10.4 Amendment of Separation Agreement effective as of July 31, 2001
between James D. Durham and QuadraMed. (12)
10.5 1999 Supplemental Stock Option Plan for QuadraMed. (14)
10.5 Amendment of Employment Agreement dated September 20, 2001 between
Lawrence P. English and QuadraMed. (13)
10.6 Amendment of Employment Agreement dated September 20, 2001 between
Michael H. Lanza and QuadraMed. (13)
10.64 Separation Agreement dated June 12, 2000, between James D. Durham
and QuadraMed. (7)
10.65 Separation Agreement dated June 12, 2000, between John V.
Cracchiolo and QuadraMed. (7)
10.66 Employment Agreement dated June 12, 2000, between Lawrence P.
English and QuadraMed. (7)
10.67 Employment Agreement dated May 12, 2000, between Mark Thomas and
QuadraMed. (7)
10.67 Employment Agreement dated August 16, 2000, between Dean Souleles
and QuadraMed. (9)
10.68 Employment Agreement dated September 18, 2000, between Michael H.
Lanza and QuadraMed. (8)
10.7 Amendment of Employment Agreement dated September 20, 2001 between
Dean Souleles and QuadraMed. (13)
10.8 Amendment of Employment Agreement dated September 20, 2001 between
Mark N. Thomas and QuadraMed. (13)
10.9 Amendment of Employment Agreement dated September 20, 2001 between
Michael S. Wilstead and QuadraMed. (13)
(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 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.
(3) 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.
(4) Incorporated herein by reference from our Current Report on Form
8-K/A filed with the Commission on March 22, 1999.
(5) 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.
(6) Incorporated herein by reference from exhibit with the same number
to our Current Report on Form 8-K filed with the Commission on
June 22, 2000.
(7) 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, 2000, as filed with the Commission on August 14, 2000.
(8) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, as filed with the Commission on November 15,
2000.
(9) Incorporated herein by reference from the exhibit with the same
number to our Current Report on Form 8-K filed with the Commission
on November 6, 2000.
(10) Incorporated herein by reference from our annual report on Form
10-K, as filed with the Commission on March 30, 2000, as amended
by May 1, 2000.
(11) Incorporated herein by reference from our Current Report on Form
8-K, as filed with the Commission on August 21, 2001.
(12) Incorporated herein by reference from the exhibit with same number
to our Quarterly Report on Form 10-Q as filed with the Commission
on August 14, 2001.
(13) Incorporated herein by reference from the exhibit with same number
to our Quarterly Report on Form 10-Q as filed with the Commission
on November 14, 2001.