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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
Commission file number 000-29273
Quovadx, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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85-0373486 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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6400 S. Fiddler’s Green Circle,
Suite 1000,
Englewood, Colorado
(Address of principal executive offices) |
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80111
(Zip Code) |
Registrant’s telephone number, including area code:
(303) 488-2019
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share
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NASDAQ |
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 and 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 filings for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the voting and non-voting equity
held by non-affiliates of the registrant as of June 30,
2003 was $81.5 million, based on the last sale price
reported for such date on the NASDAQ National Market. This
determination is not necessarily conclusive for other purposes.
As of March 4, 2005, there were 40,548,163 shares of Common
Stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
“Part III of this Form 10-K incorporates certain
information by reference from the registrant’s definitive
proxy statement for its 2005 Annual Meeting of Stockholders,
which proxy statement will be filed with the Securities and
Exchange Commission on or before May 2, 2005.”
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained
in this Annual Report on Form 10-K (“Annual
Report”) of Quovadx, Inc. (“Quovadx,” the
“Company,” the “Registrant,” “we”
or “us”) and the information incorporated by reference
which are not historical in nature are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, discussion relative to markets for
our products and trends in revenue, gross margins and
anticipated expense levels, as well as other statements
including words such as “anticipate,”
“believe,” “plan,” “estimate,”
“expect” and “intend” and other similar
expressions. All statements regarding the Company’s
expected financial position and operating results, business
strategy, financing plans, and forecast trends relating to our
industry are forward-looking statements. These forward-looking
statements are subject to business and economic risks and
uncertainties, and our actual results of operations may differ
materially from those contained in the forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
“Risk Factors” below.
Trademarks
CLOVERLEAF, HOSTACCESS, INSURENET, ROGUE WAVE, SOURCEPRO,
STINGRAY, and WEBACCEL are registered trademarks of Quovadx,
Inc. in the United States and/or select foreign countries; and
QDX, QUOVADX, the CLOVERLEAF logo, the QUOVADX logo, and the
phrase “connected by Cloverleaf” are trademarks or
service marks of Quovadx, Inc. The absence of a trademark from
this list does not constitute a waiver of Quovadx, Inc.’s
intellectual property rights concerning that trademark. CARE
DATA EXCHANGE is a registered trademark of the California Health
Care Foundation in the United States. This document may contain
references to other companies, brand and product names. These
companies, brand and product names are used herein for
identification purposes only and may be the trademarks of their
respective owners.
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PART I
Quovadx is a global software and services firm that helps
thousands of enterprise customers worldwide develop, extend and
integrate applications based on open standards. Our software and
services offerings include an integrated suite of application
development tools and vertical enterprise applications for
companies in healthcare, financial services, software,
telecommunications, and the public sector.
Industry Background
Since the 1970s, organizations have made investments in
business-critical information technologies. In many cases they
have deployed multiple generations of technologies from
different vendors that successfully addressed fundamental
business requirements but often resulted in complex computing
environments characterized by incompatible systems that could
not be accessed across the global enterprise. These legacy
environments represented enormous investments of time and money,
but frequently limited the ability of these organizations to
grow and remain competitive.
In the 1990s, some organizations attempted to solve this problem
by replacing their heterogeneous environments with next
generation integrated systems. Despite the promise of
single-vendor solutions to offer an integrated, more accessible
computing environment, these new systems often failed to
replicate the functionality of the systems they replaced, or in
other cases, deployment was never completed.
Today, despite recognizing the limitations of legacy computing
environments, we believe organizations remain reluctant to
abandon their investments in existing systems due to the
business risks inherent in change, coupled with the significant
capital and resource expenditure required to undertake major
project initiatives. Instead, we believe organizations are
increasingly seeking technology that will:
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leverage existing investment in legacy systems, without
disrupting operations; |
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allow simultaneous access across multiple locations around the
world; |
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improve the look and feel of applications and user interfaces to
enhance productivity; |
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increase efficiency with new functionality and streamlined
business processes; and |
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provide an attractive return on investment. |
The QUOVADX™ Solution
Our product and service offerings allow our customers to:
Preserve investment in legacy systems. By using our
products, our customers can continue to use their legacy
applications, preserving existing information and data, as well
as the underlying business logic. By preserving the legacy
system, our customers maintain the same functionality, speed and
fault tolerance without exposure to the substantial risks of
installing a replacement system.
Extend access to applications through Web service and
Web-based applications. Our products allow our customers to
use their legacy applications in a standardized, consistent and
reusable format through a standard Web browser interface and to
integrate existing applications with XML data and Web services,
providing support for a service-oriented architecture (SOA).
This cost effective approach to product development facilitates
worldwide deployment of applications.
Expand efficiency and productivity via integration and
streamlined workflow. Through the use of Quovadx tools, our
customers can integrate multiple applications, automate
time-consuming manual processes, eliminate manual data entry,
reduce errors, enhance customer service, and improve the overall
efficiency of their businesses.
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The Company in 2004
In 2004, we experienced many changes at Quovadx and it has been
a year of transition for the Company. We ended 2003 making
having made two major acquisitions. In September 2003 we
completed the acquisition of CareScience Inc., a provider of
care management services to hospitals and health systems. We
acquired CareScience to extend our product and service
offerings, accelerate our market penetration in healthcare, grow
our recurring services revenue base and leverage our respective
technology, applications and domain expertise for strategic
product development. In December 2003, we completed the
acquisition of Rogue Wave Software Inc., a provider of reusable
software components and integrated software tools that
facilitate application development. We purchased Rogue Wave to
expand our presence into new markets, enhance our competitive
position with the Rogue Wave brand, grow revenues and leverage
our mutual technology assets to capitalize on opportunities in
the growing market for service-oriented applications development.
In December 2003, we were notified by the US Securities and
Exchange Commission (SEC) that it was conducting an
informal inquiry into selected transactions completed in the
third quarter of 2002. In March 2004, we discovered problems
with a major customer’s ability to pay amounts owed under
their contract and notified the SEC that we needed to restate
our financial results for the third quarter of 2003 and revise
our previously announced unaudited financial results for the
fourth quarter of 2003. Subsequently, the SEC informed us that
its informal inquiry would be expanded to include our
relationship with this customer, Infotech Network Group
(Infotech). In April 2004, we received notice from the SEC of
the formal order of investigation and subpoena.
In April 2004, our former chief executive officer and chief
financial officer were asked to resign their respective
positions and our board of directors retained the law firm of
Hogan & Hartson L.L.P. to conduct a special review of
the company’s relationship with Infotech and of the
company’s disclosures concerning Infotech. During this same
timeframe, various shareholder class-action and derivative
lawsuits were filed against the Company, certain former officers
and, in the case of certain of the lawsuits, against our
independent directors. An acting CEO and CFO were named in April
and they began to reorganize the company and deal with financial
issues.
During the second quarter of 2004, under the direction of new
management, we began an internal review of our historical
accounting policies, practices and controls in preparation for
our first quarter 2004 quarter-end closing and financial
statement preparation. Our review included an evaluation of our
policies and procedures for disclosure and internal controls,
corporate governance and other processes, in order to ensure the
quality, consistency and timeliness of our financial information
and reporting.
In May 2004, as a result of the internal review, we advised our
independent auditors, Ernst & Young LLP (E&Y) that
we had identified two distributor contracts totaling
approximately $1 million entered into during 2003 that
required further review. As a result of those discoveries and
the possibility of further review, we were unable to timely file
our Form 10-Q for the period ending March 31, 2004. We
subsequently received notice from the NASDAQ Listing
Qualifications Department that our failure to file the quarterly
report on Form 10-Q for the period March 31, 2004 with
the SEC had resulted in non-compliance under the NASDAQ rules.
As a result, the NASDAQ Stock Market initiated delisting
procedures. On May 14, 2004, based on our failure to file
the March 31, 2004 Form 10-Q with the SEC and pending
an appeal, the NASDAQ changed our trading symbol to
“QVDXE.” We had previously announced that we would
restate our 2003 financial statements. We amended and refiled
our 2003 annual report on Form 10K-A simultaneously with
our 2004 Forms 10-Q for the first and second quarters of
2004. On August 23, 2004, the Company announced that the
NASDAQ Listing Qualifications Panel confirmed that the Company
had regained compliance with its periodic reporting filing
obligations and that it had satisfied all other requirements for
continued listing on the NASDAQ National Market. NASDAQ will
continue to monitor the Company to ensure its continued
compliance with all listing requirements for the NASDAQ National
Market. The Company’s trading symbol was then changed back
to “QVDX” from “QVDXE” on August 25,
2004.
As a result of the review and investigation, we made numerous
changes to our accounting procedures. New management also
focused on cost containment, streamlining the business and
raising funds. As a result we sold the technology and services
contracts of Outlaw Technologies, Inc. (“Outlaw”), our
minority equity
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investment in Royal Health Care, LLC (“Royal”) and the
assets of our Albuquerque, New Mexico Data Center and its
Managed Care Transaction Manager (MCTM) system. The
divestiture of these assets raised cash and eliminated products
that were either not generating sufficient profit or no longer
fit our long-term strategic vision. These divestitures are
consistent with the Company’s plans to refocus its sales
effort to products that are more profitable.
In mid-2004, management initiated a new strategic planning
process for the Company, which resulted in the reorganization of
our management team, organizational structure, processes and
culture. The previous strategy which had focused on growth
through acquisitions shifted to growth through investments in
existing products and customer relationships. We challenged
ourselves to develop and articulate our vision and mission,
supported by specific goals and initiatives to achieve our
respective strategic objectives. Sales and marketing was
decentralized to be compatible with the new divisional
structure. New integrated marketing strategies were adopted to
focus on pipeline growth and enhancements of divisional brands.
Similarly, our technology strategy and research and development
(R&D) organization was realigned and streamlined as part of
the reorganization. The R&D organization, which had been
managed centrally as a shared corporate service, was realigned
to fit within each of the Company’s three divisions. This
realignment and refocus of resources was done in order to bring
R&D closer to our markets and customers and improve the
timeliness and responsiveness of our product delivery cycle.
The Company Today
At the end of 2004 the strategic reorganization plans have been
set in place. Our prior revenue recognition issues have been
identified and addressed with enhanced policies and procedures.
At the beginning of 2005, we had overcome many obstacles and
reorganized the organization to move into the future and achieve
our vision as a successful provider of customer driven
integration, analytical and messaging solutions.
Integration Solutions Division
The Integration Solutions division (“ISD”) is a
global provider of application and data integration solutions
with a proven track record of “connecting the dots” in
the disparate world of enterprise application systems. ISD has
strong technical capabilities and innovative business
perspectives in applying the “power of integration” to
the most complex customer situations.
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ISD Products and Services |
ISD solutions are based on the ability to tailor our
award-winning integration technology to create customer specific
solutions and to solve their integration needs. Our
professionals have proven expertise in solving the integration
challenges faced by healthcare, public health, and public safety
organizations.
Our offerings include the Cloverleaf Integration Suite (which
includes Cloverleaf® Integration Services, Business Process
Management Services (BPMS) and Screen Rejuvenator), the
Cash Accelerator Suite (which includes INSURENET® Direct
and INSURENET® Hub), and Identity Services, a solution set
based on products from Initiate Systems, Inc.
Cloverleaf® Integration Suite. Cloverleaf®
Integration Suite is anchored by Cloverleaf® Integration
Services (formerly
QDXtm
Platform V Integration Services). Cloverleaf Integration
Services delivers powerful application level integration using a
vast library of application integration adapters. The intuitive
development environment enables users to create interfaces on
multiple platforms and provides testing tools to unit test
development and dynamically promotes interfaces from a testing
site to the production site. Cloverleaf Integration Services
also allows users to monitor message flow through the engine in
an environment in real time through a single Web browser with
customized views of the enterprise’s business and technical
activities.
The Cloverleaf® environment is fully recoverable and can be
configured to save a copy of a message in an internal work
queue, database or file, so that no message is ever lost.
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Cloverleaf Integration Services can be extended to include:
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Data Integrator — an open database connectivity
(“ODBC”) based component that enables data level
integration with industry-leading database managements systems
such as Oracle, Sybase, Microsoft SQL Server and DB2 |
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Security Server — a user-based identification,
authentication and authorization tool that secures access to
specified modules within the integrated environment to protect
your critical data and processes |
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Secure Messenger — message encryption and user
authentication technology to ensure the privacy and
confidentially of sensitive data when shared among external
partners |
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Global Monitor — the ability to monitor message
flow, with a single Web browser, through all Cloverleaf®
engines in your integrated environment |
Screen Rejuvenator. A component of the Cloverleaf®
Integration Suite, Screen Rejuvenator supports numerous
emulations and enables developers to reengineer legacy
applications in a non-invasive manner because no changes to the
host code are required. With legacy data as the basis, Web
developers can quickly create new composite Web applications
using many interfaces including Web, WAP, Visual Basic, C++, and
Java.
Business Process Management Services — Process
Level Integration. A component of the Cloverleaf®
Integration Suite, BPMS enables process level integration that
adapts technology to meet real-world business. The patented,
built-in rules engine enables visual work flow, rules
processing, process automation management and process
monitoring, so you can dynamically modify processes to change
routing instructions based on data or exceptions and
automatically adapt to constantly changing business or
regulatory processes.
Cash Accelerator Suite — INSURENET® Hub.
Cash Accelerator INSURENET® Hub, through a single, unified
user interface, offers real-time access to more than 2,000
commercial and government payers for multiple transaction types,
which is more than any other single solution on the market.
Quovadx currently has relationships with premier payer
clearinghouses including HDX, MediFax, ProxyMed and WebMD. As a
group, these clearinghouses cover the vast majority of payers in
the United States. Quovadx manages these relationships and has
built a state-of-the-art technology infrastructure to support
the INSURENET Hub.
Cash Accelerator Suite — INSURENET®
Direct. Cash Accelerator INSURENET® Direct is a
complete electronic data interchange (“EDI”) solution
platform that allows healthcare organizations to reduce
dependence on traditional clearinghouses altogether with direct
connections to payers. Many healthcare organizations that rely
on one or a handful of traditional clearinghouses have
experienced the lack of availability of one or more strategic
payers. Cash Accelerator provides the tools you need to connect
directly to the most strategic payer partners by exchanging
Health Insurance Portability and Accountability Act of 1996
(“HIPAA”) certified and validated transactions.
INSURENET Direct links constituent systems and access points,
automating all of the connections between payers and providers.
Identity Services. Identity Services is a solution for
elimination of duplicate patient or provider records within and
across disparate databases. The Identity Services solution is
based on the
Initiatetm
Identity Hub from Initiate
Systemstm
Inc. and is used by both payer and provider organizations to
create a single enterprise view of an individual.
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ISD Markets and Customers |
The Integration Solutions division concentrates on providing
software and services to the healthcare, public safety and
public health markets to enable integration of disparate
applications and business processes to achieve strategic
advantage. Through direct customer contracts and distribution
channels, ISD provides services to over 40% of the large
Integrated Delivery Networks in the provider marketplace. Our
public sector customers represent leading counties in the area
of criminal justice, as well as leading departments of health at
the state level.
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In addition, many Healthcare Information Technology
(“HIT”) vendors rely on ISD to provide them with
the integration solutions needed to connect their applications
to those of their customers. In this way, HIT vendors are able
to concentrate their development resources on core application
functionality in lieu of the challenges of integration.
CareScience Division
The CareScience division provides care management services and
analytical solutions to hospitals and health systems, to access
and analyze information about patient care practices, physician
and facility performance, care processes, resources and
outcomes. In addition, CareScience has provided services and a
product implementation for community-wide clinical data exchange
to support Regional Health Information Organizations (RHIOs).
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CareScience Products and Services |
Care Management System. Care Management System
(“CMS”) applies analytic methods to clinical data in
order to help health care provider organizations improve their
clinical performance by assisting users in:
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improving patient throughput, |
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reducing medical errors and complications, |
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improving compliance with evidence-based medicine, and |
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improving documentation and information handling. |
The Care Management System helps health care provider
organizations take advantage of the vast data resources that
often remain trapped or underused within organizations through
an Internet-based interface which enables remote access by
medical officers, clinical analysts, physicians and health care
professionals to perform their jobs more effectively.
CareScience clients use the Care Management System to analyze
their clinical performance and, in turn, to help improve
clinical outcomes and efficiency. The Care Management System
leverages the copyrighted, statistical methodologies for risk
adjustment, developed at the University of Pennsylvania’s
School of Medicine and Wharton School of Business. This
methodology allows for greater breadth, control and
comprehensiveness of data analysis and outcome measurement.
The Care Management System supports the Core Measures dataset
requirements for the Joint Commission on Accreditation of
Healthcare Organizations (“JCAHO”) and the
Centers for Medicare & Medicaid Services (“CMS”).
CMS Core Measures is integrated with the Care Management System
and allows data abstraction for accreditation reporting. As an
approved Core Measures vendor for all five of JCAHO core measure
sets, this data abstraction, processing, validating and
reporting solution enables hospitals to meet their JCAHO and CMS
requirements.
CareScience also provides consultants to assist customers in
their application and realization of benefits. These services
include varying ranges of support, mentorship and facilitation,
from education and staffing to redesigning and/or outsourcing of
system-wide care management functions. Staff provide support of
evidence-based medicine, patient safety, process improvement,
care coordination, data analysis and both clinical and financial
accountability.
The Care Management System is typically sold pursuant to three
to five year contracts. Contract pricing is based on a
per-encounter basis with services, staffing, or outsourcing
priced on an as configured basis. Customers typically have
unlimited access to data and are supported by ongoing support
services including client management services, data validation
and management, training classes and ad-hoc services.
Care Data Exchange® Solution. The Care Data
Exchange® Solution (“CDE”) from CareScience
is a solution for RHIOs that can combine integration, indexing
and access technology with governance and implementation
facilitation and support services to enable clinical information
sharing across a community.
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The CDE infrastructure enables each participating healthcare
organization to securely deliver information to community
clinicians and partners to support safe, effective, and
cost-effective care in the community. Capabilities include:
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A patient-centric view of clinical data across the
community — essential for clinical safety and
efficient care delivery, |
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an automated copy of key medical record components, authorized
user only access and an audit trail for record viewing, |
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a highly scalable model for internal and cross-enterprise data
sharing with low marginal expansion costs, and |
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full, local control of their respective data assets for each
participating organization. |
CareScience provides consulting services to assist customers in
initial assessment of technical, clinical and governance
environments, design of the CDE architecture and solution, and
implementation, education and ongoing support of the application.
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CareScience Markets and Customers |
Our care management solutions focus on mid to large size
hospitals and healthcare organizations, which strive to assess,
manage and improve the patient care process. These organizations
use our Care Management System, and its consulting solutions, to
identify, prioritize and quantify clinical opportunities, and to
implement strategies that have a real-world impact on patient
care. From improving clinical performance and uncovering care
process efficiencies, CareScience solutions support client
efforts to deliver the “business case for quality,” a
model that builds on the fact that both payers and consumers
prefer quality and that health systems delivering quality will
benefit from both higher revenue and lower costs.
Our CDE solutions focus primarily on larger RHIOs regional
“communities”, and integrated delivery networks with
major regional market presence in their community. These
organizations have an expanded view of healthcare which includes
linking all participants in the care process through the
integration of timely, accurate and complete clinical and key
administrative data. This is a very nascent market that is prone
to ebbs and flows in its organization, structure, process and
outcomes. Within that market, we focus primarily on health
system and community clinical and operational executives who see
clinical process transformation and access to clinical data as a
strategic imperative.
Rogue Wave Software Division
The Rogue Wave Software division provides reusable software
components and integrated software tools that facilitate
application development, supporting professional developers
using the C++ programming language. In addition, the division
provides a service-oriented development framework, allowing
existing C++ applications to communicate and interoperate with
other types of software in the enterprise. Rogue Wave supports a
wide variety of customers and platforms, with primary focus in
financial services, telecommunications and independent software
vendors.
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Rogue Wave Products and Services |
Our high-performance C++ development tools for technologists
include the Lightweight Enterprise Integration Framework (LEIF),
SourcePro® C++ Suite and the Stingray® product line.
In addition, Rogue Wave provides the Host Access terminal
emulation product, allowing end users operating Windows PCs to
access legacy character-based applications.
Lightweight Enterprise Integration Framework. The Rogue
Wave® Lightweight Enterprise Integration Framework
(“LEIF”) is our newest offering, designed to
integrate C++ applications with XML data and Web services,
providing support for a service-oriented architecture
(“SOA”). The product enables C++ systems to
communicate with applications created in other languages, both
within and outside the enterprise. LEIF employs
industry-standard networking, XML and Web services technologies
to expose the functionality
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of business-critical C++ applications to other disparate
application and business processes. By easing the integration of
XML with C++ applications, LEIF allows existing high-performance
C++ applications to interoperate seamlessly with virtually any
type of software system. Our LEIF product provides a powerful
platform for developers with a need to interoperate in a
service-oriented environment.
SourcePro® C++ Suite. Rogue Wave’s
SourcePro® C++ Suite increases the productivity of the
professional developer, enabling projects to be delivered on
schedule. The software supports technology environments that
utilize multiple hardware platforms, operating systems and
databases, through tested and standardized C++ libraries that
work across various systems. SourcePro C++ handles the
intricacies of complex software development tasks like
threading, string handling and internationalization and helps
development teams build high-performance, critical enterprise
applications for a global market. Ultimately, SourcePro C++
helps reduce development and maintenance costs, accelerates
project deployment, and enables applications to grow and evolve
with changing business needs. SourcePro C++ allows developers to
achieve development productivity normally associated with
simpler, less sophisticated languages, yet enables all of the
performance advantages that the C++ programming language is
known for.
The key benefits SourcePro C++ Suite delivers include:
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Multiplatform Support. Cross-platform support allows
technologists to develop applications and deploy software
systems in a wide variety of environments with minimal
development modification. SourcePro C++ tools incorporate basic
and routine operations, allowing developers to focus on creating
the business logic in an application, rather than the low-level
details of their development environments. Currently SourcePro
supports 48 separate hardware/operating system platforms and 13
databases. |
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Support for Distributed Applications. Programmers who
develop complicated, large and distributed applications can use
the SourcePro C++ products to make their applications work in
concert, across multiple systems, interfacing seamlessly. |
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Enterprise Scalability. SourcePro C++ tools help
programmers develop flexible, modular applications that can be
easily extended and enhanced. |
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Highly Customizable. SourcePro C++ enables developers to
customize the components for their own specialized applications.
Developers can use the standard application programming
interfaces and avoid granular programming details, or can drill
down to the native code when required. |
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Tailored Application. The SourcePro C++ Suite consists of
four modules, each tailored for a specific area of C++
application development: |
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Source® Pro Core handles the low-level intricacies of the
C++ language, which enhances developer productivity. |
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Source® Pro DB provides a consistent, high-level C++
interface to work with relational databases from 13 different
vendors. |
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Source® Pro Net supplies components for building network
and Internet-enabled applications. |
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Source® Pro Analysis delivers components for solving
mathematical problems in business and research. |
Stingray®. Rogue Wave® Stingray® products
help companies create scalable, distributed graphical user
interface (GUI) applications that can be easily integrated
with enterprise systems. By providing the graphical components
required to mimic the look and feel of Microsoft®
applications, Stingray products help companies quickly create
GUIs with functionality that is consistent with the Microsoft
standard, thereby increasing end-user acceptance and use.
The Stingray products include:
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Stingray Studio is a comprehensive set of integrated components
for developing GUIs with the latest Microsoft look and feel. |
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Objective Grid is an advanced grid component that mimics many of
the features of Microsoft® Excel®, including support
for database connectivity. |
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Objective Toolkit is a broad library of drop-in components that
address areas not covered by Microsoft Foundation Classes
(“MFC”) and ActiveX libraries, which contain a
set of basic C++ building blocks for creating Windows based
applications. |
Stingray products reduce the overall development cycle by
leveraging existing application code, enabling developers to
focus on creating and updating business logic rather than the
low-level details of MFC and Active X GUI functionality. The
flexible Stingray components are easy to use, shortening
development time and making it easier to maintain and evolve GUI
applications as needs change.
HostAccess®. The HostAccess® product line
allows end users to access character-based legacy applications
through terminal emulation from a personal computer workstation,
supporting over 35 types of legacy systems. The product is
particularly strong in its emulation of character terminals used
in Unix-based legacy systems.
|
|
|
Rogue Wave Markets and Customers |
Rogue Wave concentrates on providing development tools and
components for the professional developer across a variety of
industries and vertical market segments. The largest segments
are financial services, telecommunications and Independent
Software Vendors (“ISV”). The division currently
supports over 5,500 total customers across its product lines,
including over 600 enterprise customers. In addition, Rogue Wave
maintains partnerships with several large original equipment
manufacturer (“OEM”) customers, including Intel, IBM,
Sun, and Hewlett-Packard. These vendors rely on Rogue Wave to
support its high-performance development tools on specific
hardware platforms, enabling end customers to achieve optimum
performance when using a particular OEM’s products.
Financial services customers have relied on Rogue Wave to
provide tools for mission critical systems, including numerous
Wall Street firms. Rogue Wave tools are found in systems
requiring the most demanding performance and reliability
requirements, including real-time trading systems, risk
analytics, and back-office applications.
Major telecommunications customers include well known
“Baby-Bells” and wireless providers, again with
tremendous demand for reliable high-performance software systems.
Many name brand ISVs rely on Rogue Wave products to provide
high-performance, cross-platform support, enabling their
products to run reliably in a wide variety of end-customer
environments. As the Rogue Wave tools seamlessly support
multiple platforms, ISVs can concentrate on valuable product
features, without wasting valuable development resources on
porting their wares to various environments.
Competition
The marketplace for application development tools, systems
integration and business process management software is highly
competitive. Competition, when coupled with the rapid evolution
of technology and business practices, presents us with a
challenging environment.
Competitive factors affecting us include:
|
|
|
| |
• |
Brand recognition and market awareness, |
| |
| |
• |
product and features, functionality and quality, |
| |
| |
• |
service offering levels and quality, |
| |
| |
• |
internal development operations with the Company’s customer
and prospect base, |
| |
| |
• |
ease and timeliness of implementation, |
| |
| |
• |
adequate infrastructure, |
| |
| |
• |
technical and industry-specific domain expertise, and |
8
Any one of these factors may contribute to our loss of market
share, reduced profit margins, increased operating expense or
discounted offerings.
Software tools sold by our Rogue Wave and Integration Solutions
divisions compete with other integration software and tools
companies such as SeeBeyond Technology Corporation, ILOG, Inc.,
Microsoft’s BizTalk, Orion, Sybase, Systinet, Vitria
Technology, Inc. and webMethods, Inc. Applications sold by our
CareScience division compete with products offered by vendors
such as Premier, Inc., Solucient, and MedAl. Though competition
in the application development market and the healthcare market
is strong, our software and service offerings are competitive
and our infrastructure is adequate to continue to enhance our
products. However, many of these competitors have greater
financial and organizational resources than we do.
Sales, Marketing and Strategic Alliances
Our sales are conducted through direct sales representatives,
strategic alliances, and distributors. Each division manages its
sales and marketing force. In total there are 56 sales and
marketing employees. Our sales force is divided into
product-specific markets that include technical and professional
resources and primarily cover the 48 contiguous United States,
Hawaii, Canada, Middle East, France, Germany, Italy, and the
United Kingdom. We also have distribution relationships covering
Australia, New Zealand, and Asia. Our sales in the United
Kingdom and Europe are performed by a combination of direct
sales and distributors. The sales cycle varies depending on the
size and scope of the engagement and can range from 90 to
360 days.
We focus our marketing efforts on brand awareness, educational
and collateral development supporting our product and service
offerings, creative visualization of our offerings, management
of joint marketing programs with alliance partnerships and
outreach through public relations, investor relations, and
industry-analyst relations. Our marketing activities include:
advertising, direct mail campaigns, email campaigns, tradeshows,
seminars, sponsorships, memberships, industry conferences,
contributing industry opinions and articles, annual user group
conference programs, continuing education and innovative
solution award distribution.
The Company has strategic alliances and partnerships with a
number of leading hardware and software vendors, system
integrators, software developers and distributors. These
relationships include technology licensing agreements and
cooperative marketing relationships, as well as exchange of
development plans and strategic direction. Our partners include
leading hardware and software vendors, system integrators,
software developers and distributors such as Microsoft
Corporation, Intel Corporation, Sun Microsystems, Inc., IBM
Corporation, Hewlett-Packard Company, McKesson Corporation,
Per-Se Technologies, Inc., Quadramed Corporation, and GE
Healthcare. In addition, leading software vendors use our
development tools to develop their own products. Our products
are deployed as these vendors sell their own products.
Major Customers
One customer accounted for 16% of revenue for the year ended
December 31, 2004.
Intellectual Property
We consider the core technology we own and license to be
fundamental to the success of our operations. In addition to our
proprietary technology, we license technology from various third
party vendors. We have licensed intellectual property from the
University of Pennsylvania. The University of Pennsylvania
exclusively licenses the intellectual property underlying our
online CareScience analytic processing software to us in a long
term agreement. We have licensed intellectual property from the
California Healthcare Foundation. The California Healthcare
Foundation exclusively licenses the intellectual property
underlying our online CareScience analytic processing software
to us in a long-term agreement.
Our success and ability to compete depend in part on our
proprietary technology. We seek to protect our software,
documentation and other written materials primarily through a
combination of trade secrets, trademark and copyright laws,
confidentiality procedures and contractual provisions. In
addition, we seek to
9
avoid disclosure of our trade secrets, by, among other things,
requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and
restricting access to our source code. We have been issued eight
U.S. patents, and have seven additional patents pending.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. While we
are unable to determine the extent to which piracy of our
products exists, software piracy can be expected to be a
persistent problem, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the
United States. Furthermore, third parties might independently
develop competing technologies that are substantially equivalent
or superior to our technologies. Any of these developments could
seriously harm our business.
Government Regulation
The healthcare industry, where we currently do most of our
business, is highly regulated and is subject to changing
political, regulatory and other influences. These factors affect
the purchasing practices and operation of healthcare
organizations. Federal and state legislatures and agencies
frequently consider programs to reform or revise the United
States healthcare system. Such legislation may include proposals
to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which
healthcare industry participants operate. Healthcare industry
participants may respond by reducing their investments or
postponing investment decisions, including investments in our
applications and services.
We are unable to predict future proposals with any certainty or
to predict the effect they would have on our business.
|
|
|
HIPAA Administrative Simplification |
Under the federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, Congress mandated a
package of interlocking administrative simplification rules to
establish standards and requirements for electronic transmission
and other uses and disclosures of certain health information by
healthcare providers, health plans and health care
clearinghouses. As discussed below, the regulations published
under HIPAA’s administrative simplification provisions
apply to certain of our operations as well as the operations of
many of our customers. Compliance with these rules could be
costly and could require changes in our systems. In addition,
the success of our compliance efforts may be dependent on the
success of healthcare participants in dealing with the standards.
The privacy of individually identifiable health information and
the circumstances under which this information may be used or
disclosed are subject to substantial regulation under the HIPAA
Standards for Privacy of Individually Identifiable Health
Information, as well as state health information laws and
regulations. These laws and regulations govern both the
disclosure and the use of patient health information. Although
compliance is principally the responsibility of the hospital,
physician or other healthcare provider, such laws and
regulations apply to certain of our employee benefit plans as
well as the portions of our business that process healthcare
transactions and provide technical services to participants in
the healthcare industry. Compliance with these laws and
regulations is costly and could require complex changes in our
systems and services. Additionally, the success of our
compliance efforts may be dependent on the success of healthcare
participants in dealing with the privacy laws, regulations and
standards.
|
|
|
Regulation of Transaction Services |
The HIPAA Standards for Electronic Transactions Rule establishes
electronic format standards for eight of the most common
healthcare transactions using technical standards promulgated by
recognized standards publishing organizations. These
transactions include, among others, health claim payment, health
plan enrollment, and health plan eligibility. Under these
standards, any party transmitting or receiving information
10
electronically as part of a covered transaction must send and
receive data in a single format, rather than the large number of
different data formats previously used.
The transaction standards apply to certain of our employee
benefit plans and that portion of our business involving the
processing of healthcare transactions among physicians, payers,
patients, and other healthcare industry participants. The
transaction standards also are applicable to many of our
customers and to our relationships with those customers. Changes
in the standards could require costly modifications to some of
our systems, products, and services.
Other state and federal statutes and regulations governing
transmission of healthcare information may also affect our
operations. These laws are complex and changing, and the courts
and other governmental authorities may take positions that are
inconsistent with our practices.
Effective April 20, 2005, HIPAA’s Security Standards
for the Protection of Electronic Protected Health Information
will require healthcare providers, plans and clearinghouses to
adopt measures to ensure the security of certain electronic
health information. Among other things, adequate measures must
be in place to protect against reasonably anticipated threats to
the integrity of electronic health information and uses or
disclosures of such information that are not permitted by HIPAA.
The security standards will apply to certain of our employee
benefit plans and the portions of our business that process
healthcare transactions in electronic format and provide
technical services to participants in the healthcare industry.
The security standards also are applicable to many of our
customers and to our relationships with those customers.
Compliance with the standards could be costly or require
modifications to some of our systems, products, and services.
Other state and federal laws concerning health information
security could also impact our business.
Employees
As of December 31, 2004, we had a total of 472 employees,
of whom 298 are engaged in professional services and customer
support functions, 56 in sales and marketing, 45 in management,
finance and administration and 73 in research and development.
None of our employees are represented by a labor union. We have
not experienced any work stoppages, and we consider our
relations with our employees to be good.
During 2004 we experienced several reductions in our workforce.
In January 2004 we eliminated 19 positions in the restructuring
related to the acquisition of Rogue Wave. In April 2004 44
positions were eliminated as part of a cost containment effort.
On December 31, 2004 eleven employees were transferred to
Royal Health Care Data Center, LLC in conjunction with the asset
sale of our Albuquerque, New Mexico Data Center and Managed Care
Transaction Manager system.
Our future success also depends on our continued ability to
attract, integrate, retain and motivate highly qualified sales,
technical and managerial personnel. Competition for such
qualified personnel is intense. If our executive officers and
key personnel do not remain with us in the future, we may
experience difficulty in attracting and retaining qualified
personnel.
Our principal executive and corporate offices are located in
Englewood, Colorado, where we lease approximately
25,538 square feet of office space. The lease on this
facility expires in August 2005. We are currently searching for
new corporate office space and did not renew our current lease.
We also lease 171,447 square feet of office space,
primarily for operations and research and development, in
various locations in the United States and Europe under
agreements that expire at dates ranging from March 2005 through
October 2011. As of December 31, 2004, the Company occupied
65% of the office space it leased and is currently subleasing
60,010 square feet. We believe that our current facilities will
be sufficient to meet our needs for at least the next twelve
months.
11
|
|
| Item 3. |
Legal Proceedings |
On November 14, 2001, a shareholder class action complaint
was filed in the United States District Court, Southern District
of New York. On April 19, 2002, plaintiffs filed an amended
complaint. The amended complaint asserts that the prospectus
from the Company’s February 10, 2000 initial public
offering (“IPO”) failed to disclose certain alleged
improper actions by various underwriters for the offering in the
allocation of the IPO shares. The amended complaint alleges
claims against certain underwriters, the Company and certain
officers and directors under the Securities Act of 1933 and the
Securities Exchange Act of 1934 (Bartula v. XCare.net,
Inc., et al., Case No. 01-CV-10075). Similar complaints
have been filed concerning more than 300 other IPO’s; all
of these cases have been coordinated as In re Initial Public
Offering Securities Litigation, 21 MC 92. In a negotiated
agreement, individual defendants, including all of the
individuals named in the complaint filed against the Company,
were dismissed without prejudice, subject to a tolling
agreement. Issuer and underwriter defendants in these cases
filed motions to dismiss and, on February 19, 2003, the
Court issued an opinion and order on those motions that
dismissed selected claims against certain defendants, including
the Rule 10b-5 fraud claims against the Company, leaving
only the Section 11 strict liability claims under the
Securities Act of 1933 against the Company. A committee of our
Board of Directors has approved a settlement proposal made by
the plaintiffs. On February 15, 2005, the Court issued an
order granting conditional preliminary approval of the
settlement. If the settlement is not achieved, the Company will
continue to aggressively defend the claims. We do not believe
that the outcome of this action will have a material adverse
effect on our financial position, results of operations or
liquidity; however, litigation is inherently uncertain and we
can make no assurance as to the ultimate outcome or effect.
On March 18, 2004, a purported class action complaint was
filed in the United States District Court for District of
Colorado, entitled Smith v. Quovadx, Inc.
et al, Case No. 04-M-0509, against Quovadx, Inc.,
its now-former Chief Executive Officer and its now-former Chief
Financial Officer. The complaint alleged violations of
Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, purportedly on behalf of all
persons who purchased Quovadx common stock from October 22,
2003 through March 15, 2004. The claims are based
upon allegations the Company (i) purportedly overstated its
net income and earnings per share during the class period,
(ii) purportedly recognized revenue from contracts between
the Company and Infotech Networks Group prematurely, and
(iii) purportedly lacked adequate internal controls and was
therefore unable to ascertain the financial condition of the
Company. Eight additional, nearly identical class action
complaints were filed in the same Court based on the same facts
and allegations. The actions seek damages against the defendants
in an unspecified amount. On May 17 and 18, 2004, the
Company filed motions to dismiss each of the complaints. Since
then, all but one of the actions, entitled Heller v.
Quovadx, Inc., et al., Case No. 04-M-0665 (OES) (D.
Colo.), have been dismissed. Thereafter, the plaintiff in
Heller filed a first amended complaint, which asserts the
same claims as those asserted in the original complaint, and
includes allegations regarding the Company’s accounting for
certain additional transactions. On September 8, 2004, the
Court approved the appointment of David Heller as lead
plaintiff. On September 29, 2004, the Court denied
defendants’ motions to dismiss the first amended complaint
and approved the appointment of Mr. Heller’s counsel
as lead plaintiff’s counsel. On October 14, 2004, the
Company and the other defendants filed answers to the first
amended complaint, denying allegations of wrongdoing and
asserting various affirmative defenses. On January 13,
2005, the Court approved a scheduling order that, inter
alia, requires plaintiffs to file a motion for class
certification by January 31, 2005, which they did, and fact
discovery, which has commenced, to conclude eight months after
the Court issues an order, if any, certifying a class. The class
action is still in the preliminary stages, and it is not
possible for us to quantify the extent of potential liability,
if any.
On March 22, 2004, a shareholder derivative action was
filed in the District Court of Colorado, County of Arapahoe,
entitled Marcoux v. Brown et al, against the
members of the Board of Directors and certain now-former
officers of Quovadx alleging breach of fiduciary duty and other
violations of state law. The Company is named solely as a
nominal defendant against which no recovery is sought. This
complaint generally is based on the same facts and circumstances
as alleged in the class action complaints discussed above,
alleging that the defendants misrepresented Quovadx financial
projections and that one of the defendants violated state laws
relating to insider trading. The action seeks damages in an
unspecified amount against the individual
12
defendants, disgorgement of improper profits and attorney’s
fees, among other forms of relief. On or about April 21,
2004, a second, nearly identical shareholder derivative
complaint, seeking the same relief, was filed in the United
States District Court for the District of Colorado, entitled
Thornton v. Brown et al. The plaintiffs in both
of the shareholder derivative actions are represented by the
same local counsel. On or about May 20, 2004, a third,
nearly identical shareholder derivative complaint, seeking the
same relief, was filed in the District Court of Colorado, County
of Arapahoe, entitled Jaroslawicz v. Brown,
et al. The three shareholder derivative actions are now
all pending in the Colorado state court. The Court has
consolidated the three actions into a single consolidated action
and set February 1, 2005 as the deadline for the filing of
a consolidated amended complaint, subsequently extended to
May 2, 2005. The shareholder derivative action is still in
the preliminary stages, and it is not possible for us to
quantify the extent of potential liability, if any.
On May 17, 2004, a purported class action complaint was
filed in the United States District Court for the District of
Colorado, entitled Henderson v. Quovadx, Inc.
et al, Case No. 04-M-1006 (OES), against Quovadx,
Inc., its now-former Chief Executive Officer, its now-former
Chief Financial Officer and its Board of Directors. The
complaint alleged violations of Section 11 and
Section 15 of the Securities Act of 1933, as amended,
purportedly on behalf of all former shareholders of Rogue Wave
Software, Inc. who acquired Quovadx common stock in connection
with the Company’s exchange offer effective
December 19, 2003. The claims are based upon the same
theories and allegations as asserted in the Section 10(b)
class actions described above. The Court denied plaintiff’s
motion to consolidate this Section 11 action with the
Section 10(b) cases and authorized the two competing lead
plaintiff candidates to take discovery of each other in advance
of a hearing on the appointment of lead plaintiff. On
July 14, 2004, the Company and outside director defendants
filed an answer to the complaint, denying allegations of
wrongdoing and asserting various affirmative defenses. On
September 8, 2004, the Court directed the plaintiff to
publish new notice of pendency of this action inviting potential
class members to submit motions for appointment as lead
plaintiff. Two putative class members filed competing motions
for appointment as lead plaintiff, and their motions are sub
judice. The Court stayed all discovery related to the merits
of the litigation pending the appointment of a lead plaintiff.
On October 4, 2004, the Company’s former CEO and CFO
filed an answer to the complaint, denying allegations of
wrongdoing and asserting various affirmative defenses. This
class action also is in the preliminary stages, and it is not
possible for us to quantify the extent of potential liability,
if any.
On April 12, 2004, the Company announced that the
Securities and Exchange Commission (“SEC”) had
notified the Company that it’s previously announced
informal inquiry has become a formal investigation pursuant to
an “Order Directing Private Investigation and Designating
Officers to Take Testimony.” The SEC is investigating
transactions entered into during the third quarter of 2002 and
transactions entered into during 2003 including two distributor
contracts totaling approximately $1 million and
transactions between Quovadx and Infotech Network Group. The
investigation is continuing, and the Company continues to
provide documents and information to the SEC.
On July 28, 2004, Ronald Renjilian, a former employee,
filed a Sarbanes-Oxley Whistle Blower Complaint against the
Company with the US Department of Labor Occupational Safety and
Health Administration (“OSHA”). The complaint alleges
that the Company’s April 30, 2004 termination of
Mr. Renjilian’s employment was an action taken against
Mr. Renjilian as a result of his engaging in protected
activity. The Company denied any wrongdoing. On
December 17, 2004, OSHA dismissed the claims. On
January 19, 2005, Mr. Renjilian objected to the
Secretary’s findings, and requested a hearing on the
record. On February 17, 2005, Mr. Renjilian withdrew
his appeal.
The Company is engaged from time to time in routine litigation
that arises in the ordinary course of our business.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter of 2004, no matters were submitted to
a vote of our security holders.
13
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity and Related
Stockholder Matters |
Our common stock is listed for trading on the NASDAQ National
Market under the symbol “QVDX.” On May 14, 2004,
based on our failure to file the March 31, 2004
Form 10-Q with the SEC and pending an appeal, the NASDAQ
changed our trading symbol to “QVDXE.” On
August 25, 2004 our symbol was changed back based on our
filing of all delinquent reports with the SEC. This change in
listing symbol and the other issued discussed elsewhere,
impacted the market price of our stock. The following table sets
forth, for the period indicated, the range of high and low
closing sales prices per share of our common stock, as reported
on the NASDAQ National Market.
| |
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|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
2.68 |
|
|
$ |
1.53 |
|
|
Second Quarter
|
|
|
3.40 |
|
|
|
1.88 |
|
|
Third Quarter
|
|
|
4.82 |
|
|
|
3.00 |
|
|
Fourth Quarter
|
|
|
5.36 |
|
|
|
3.79 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
6.70 |
|
|
$ |
3.11 |
|
|
Second Quarter
|
|
|
3.88 |
|
|
|
1.00 |
|
|
Third Quarter
|
|
|
2.20 |
|
|
|
1.10 |
|
|
Fourth Quarter
|
|
|
2.39 |
|
|
|
1.69 |
|
|
2005
|
|
|
|
|
|
|
|
|
|
First Quarter (January 1, 2005 to March 4, 2005)
|
|
$ |
2.92 |
|
|
$ |
2.05 |
|
On March 4, 2005, the last reported sale price of the common
stock was $2.88 per share, and the number of registered
holders of record of the common stock was approximately 614.
Because many of the Company’s shares of common stock are
held by brokers and other institutions on behalf of
stockholders, the Company is unable to estimate the total number
of stockholders represented by these non-record holders.
We have not declared or paid any cash dividends on our common
stock or other securities since January 1996 when we were an
S corporation. We currently anticipate that we will retain
all of our future earnings for use in the expansion and
operation of our business and do not anticipate paying any cash
dividends in the foreseeable future.
14
|
|
| Item 6. |
Selected Financial Data |
The consolidated statements of operations data below for the
years ended December 31, 2004, 2003 and 2002 and the
consolidated balance sheet data as of December 31, 2004 and
2003, are derived from and are qualified by reference to the
Company’s consolidated financial statements which are
included elsewhere in this Annual Report. The consolidated
statements of operations data for the years ended
December 31, 2001 and 2000 and the consolidated balance
sheet data as of December 31, 2002, 2001 and 2000 are
derived from the Company’s consolidated financial
statements, which are not included in this Annual Report, but
can be derived from other filings with the Securities and
Exchange Commission. The data below reflect the restatement of
our consolidated financial statements for the years ended
December 31, 2002 and 2003. You should read the following
selected financial data with the consolidated financial
statements and related notes and the “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” appearing elsewhere in this Form 10-K. You
should also read our quarterly reports on Form 10-Q for the
first, second and third quarters of 2004 filed previously.
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
82,801 |
|
|
$ |
64,928 |
|
|
$ |
60,623 |
|
|
$ |
46,808 |
|
|
$ |
7,883 |
|
|
Total costs and expenses
|
|
|
109,824 |
|
|
|
82,505 |
|
|
|
74,190 |
|
|
|
54,711 |
|
|
|
30,184 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,023 |
) |
|
|
(17,577 |
) |
|
|
(13,567 |
) |
|
|
(7,903 |
) |
|
|
(22,301 |
) |
|
Gain on sale of assets
|
|
|
1,535 |
|
|
|
— |
|
|
|
87 |
|
|
|
— |
|
|
|
— |
|
|
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
(93,085 |
) |
|
|
— |
|
|
|
— |
|
|
Interest income, net
|
|
|
355 |
|
|
|
694 |
|
|
|
1,035 |
|
|
|
3,101 |
|
|
|
5,027 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(25,133 |
) |
|
|
(16,883 |
) |
|
|
(105,530 |
) |
|
|
(4,802 |
) |
|
|
(17,274 |
) |
|
Income tax expense
|
|
|
133 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(25,266 |
) |
|
|
(16,883 |
) |
|
|
(105,530 |
) |
|
|
(4,802 |
) |
|
|
(17,274 |
) |
|
Income from discontinued operations
|
|
|
589 |
|
|
|
406 |
|
|
|
763 |
|
|
|
533 |
|
|
|
(43 |
) |
|
Gain on sale of discontinued operations
|
|
|
446 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(24,231 |
) |
|
$ |
(16,477 |
) |
|
$ |
(104,767 |
) |
|
$ |
(4,269 |
) |
|
$ |
(17,317 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$ |
(0.61 |
) |
|
$ |
(0.52 |
) |
|
$ |
(3.49 |
) |
|
$ |
(0.20 |
) |
|
$ |
(1.20 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and
diluted
|
|
|
39,892 |
|
|
|
31,407 |
|
|
|
29,987 |
|
|
|
21,308 |
|
|
|
14,399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
24,847 |
|
|
$ |
23,688 |
|
|
$ |
47,621 |
|
|
$ |
63,486 |
|
|
$ |
78,319 |
|
|
Working capital
|
|
|
9,161 |
|
|
|
7,747 |
|
|
|
50,210 |
|
|
|
62,659 |
|
|
|
82,759 |
|
|
Total assets
|
|
|
123,945 |
|
|
|
155,190 |
|
|
|
104,384 |
|
|
|
214,704 |
|
|
|
96,908 |
|
|
Stockholders’ equity
|
|
$ |
90,398 |
|
|
$ |
111,975 |
|
|
$ |
86,293 |
|
|
$ |
188,887 |
|
|
$ |
92,839 |
|
In reviewing the above data, you should consider the following:
|
|
|
| |
• |
Our registration statement on Form S-1 covering our initial
public offering (the “Offering”) of
5,750,000 shares of common stock (including the
underwriter’s over-allotment option of 750,000 shares
of common stock) at $18.00 per share was declared effective
on February 9, 2000. The net proceeds to |
15
|
|
|
| |
|
us from the sale of shares of our common stock in the offering
after deducting expenses of $2.1 million and underwriting
discounts and commissions of $7.2 million, were
$94.2 million. |
| |
| |
• |
In October 2000, the Company entered into a Software License and
Services Agreement (the “Agreement”) with MedUnite,
Inc. (“MedUnite”) to provide software development
services related to a pilot program. In connection with the
Agreement, the Company issued to MedUnite warrants to
purchase 1,350,000 shares of Quovadx common stock at
an exercise price of $4.06. The warrants were immediately
vested, exercisable and non-forfeitable for a period of eighteen
months from the date of grant. The fair value of the warrants
was calculated to be $3.1 million and was determined using
the Black-Scholes option pricing model utilizing a volatility
factor of 120%, risk-free interest rate of 6.0% and an expected
life of 18 months. The amounts billed and billable to
MedUnite up to the date that the first pilot was delivered
(March 2001) were reduced by the fair value attributed to the
warrants. For the year ended December 31, 2000, the Company
allocated $2.2 million of the warrant charge to billings
and amounts billable. The remaining value of the warrants of
$0.9 million was allocated to billings in the first quarter
of 2001. In 2001, MedUnite exercised all the warrants and
purchased 1,012,167 million shares of the Company’s
common stock. |
| |
| |
• |
In 2000, the Company purchased all the outstanding stock of
Advica Health Resources (“Advica”) for
70,000 shares of common stock in a transaction accounted
for as a purchase. The total purchase price of Advica was
$2.2 million. We also acquired all of the outstanding stock
of Integrated Media Inc. (“Integrated Media”) for
$2.1 million in a transaction accounted for as a purchase.
The 2000 acquisitions generated goodwill and intangible assets
totaling $3.5 million. |
| |
| |
• |
In June 2001, the Company acquired the outstanding common stock
of Confer Software, Inc., (“Confer”) by merger of a
wholly owned subsidiary of Quovadx with Confer. The purchase
price, totaling $6.6 million, included 592,453 shares
of Quovadx common stock in exchange for the outstanding shares
of Confer capital stock, the assumption of a $461,250 employee
bonus plan that was paid in cash and $1.8 million in
merger-related fees. In August 2001, the Company consummated the
acquisition of Healthcare.com Corporation
(“Healthcare.com”). The purchase price, totaling
$93.1 million, included 10,702,043 shares of Quovadx
common stock issued in exchange for all outstanding shares of
Healthcare.com capital stock and $4.5 million in
merger-related fees. In December 2001, the Company consummated
the acquisition of the Pixel Group (“Pixel”). The
purchase price, totaling $7.3 million, included
$5.0 million in cash and 201,794 shares of Quovadx
common stock in exchange for the outstanding shares of Pixel
capital stock. The aforementioned business acquisitions were
accounted for under the purchase method of accounting. The 2001
acquisitions generated goodwill and intangible assets totaling
$118.8 million. |
| |
| |
• |
In March 2002, the Company completed the sale of certain assets
of its Advica subsidiary to Royal Health Care of Long Island,
LLC, d/b/a Royal Health Care (“Royal”) for $475,000 in
cash and 4.6% of the outstanding equity in Royal. In conjunction
with the sale, Quovadx provided ASP services to Royal under a
seven year contract. |
| |
| |
• |
On March 27, 2002, the Company purchased all of the
outstanding capital stock of Outlaw Technologies, Inc.
(“Outlaw”). The purchase price, totaling
$2.7 million, included 138,575 shares of Quovadx
common stock and $1.8 million in cash and professional fees
directly related to the acquisition. Assets acquired included
$1.7 million in goodwill, $0.8 in software and
$0.7 million in other intangible assets. The transaction
was accounted for as a purchase. Outlaw’s balance sheet
included $0.3 million in current assets and
$0.6 million in liabilities upon acquisition. |
| |
| |
• |
In the third quarter of 2002, the Company performed an
assessment of the carrying value of the Company’s goodwill
recorded in connection with its various acquisitions. The
assessment was performed pursuant to SFAS 142 because of
the significant negative Company, industry and economic trends
affecting the market value of the Company’s common stock.
As a result, the Company recorded a charge of $93.1 million
to reduce goodwill during the third quarter of 2002, based on
the amount by which the carrying amount of these assets exceeded
their estimated fair value. |
16
|
|
|
| |
• |
In the third quarter of 2003, Quovadx acquired the outstanding
stock of CareScience, Inc. (“CareScience”) by merger
of a wholly owned subsidiary of Quovadx with CareScience.
CareScience, Inc. is primarily a provider of care management
services to hospitals and health systems. CareScience
stockholders received a fixed exchange rate of $1.40 cash and
0.1818 shares of Quovadx common stock for each share of
CareScience common stock they owned. The purchase price totaling
$30.1 million, included 2,415,900 shares of Quovadx
common stock and $4.7 million in cash, net of acquired
cash, in exchange for all outstanding shares of CareScience and
$2.3 million in merger-related fees. |
| |
| |
• |
In the fourth quarter of 2003, Quovadx acquired the outstanding
stock of Rogue Wave Software, Inc. (“Rogue Wave”) by
merger of a wholly owned subsidiary of Quovadx with Rogue Wave.
Rogue Wave develops, markets and supports object-oriented and
infrastructure software technology. Rogue Wave stockholders
received a fixed exchange rate of $4.09 in cash and
0.5292 shares of Quovadx common stock for each share of
Rogue Wave Common Stock they owned. The purchase price totaling
$79.1 million, included 5,656,670 million shares of
Quovadx common stock and $8.0 million in cash, net of
acquired cash, in exchange for all outstanding shares of Rogue
Wave and $3.9 million in merger-related fees. |
| |
| |
• |
In the second quarter of 2004, the Company sold its minority
equity investment in Royal Health Care, LLC (“Royal”).
Royal is a healthcare management services company in which
Quovadx owned an equity position. The sale price of
$3.1 million, paid in cash, was received on June 29,
2004. The Company recorded a $1.2 million gain on the sale
of this asset. |
| |
| |
• |
In the third quarter of 2004, we sold the Healthcare.com domain
name for a gain of $360,000. |
| |
| |
• |
In 2004, we incurred impairment charges totaling
$7.2 million. We impaired $4.8 million of our
internally developed and acquired capitalized software. Our
decision to discontinue products resulted from our new
management’s effort to refocus our resources to products
that would generate revenues in the near term and to conserve
cash. We wrote off $1.7 million of the prepayments to
Infotech for professional services, as a portion of the assets
was deemed not recoverable due to the deterioration of the
Company’s relationship with Infotech and Infotech’s
inability to provide assurances that it can deliver those
services in the future. We also impaired $0.7 million of
deferred costs related to our transaction business because the
total balance of the assets was not recoverable due to the
cancellation of certain contracts and lower than expected
revenues on other contracts. |
| |
| |
• |
On December 31, 2004 the Company sold the assets of its
Albuquerque, New Mexico Data Center and its Managed Care
Transaction Manager (“MCTM”) system. This hosting
service center and MCTM system no longer fit into the
Company’s new business strategy because they represent a
niche area of the healthcare payer segment which is not an area
of strategic growth. The assets were sold to Royal Health Care
Data Center, LLC, a subsidiary of Royal, for $1.9 million
in cash. A gain of $0.4 million was recognized on the sale.
Royal is a management services organization serving New York
healthcare organizations. The financial statements for the years
ended December 31, 2003, 2002, 2001 and 2000 have been
restated to reflect the presentation of the New Mexico Data
Center as a discontinued operation. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
FORWARD LOOKING STATEMENTS
All statements, trend analysis and other information contained
in this Annual Report on Form 10-K (“Annual
Report”) of Quovadx, Inc. (“Quovadx,” the
“Company,” the “Registrant,” “we”
or “us”) and the information incorporated by reference
which are not historical in nature are forward-looking
statements within the meaning of the Private-Securities
Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, discussion relative to markets for
our products and trends in revenue, gross margins and
anticipated expense levels, as well as other statements
including words such as “anticipate,”
“believe,” “plan,” “estimate,”
“expect” and “intend” and other similar
expressions. All statements regarding
17
the Company’s expected financial position and operating
results, business strategy, financing plans, and forecast trends
relating to our industry are forward-looking statements. These
forward-looking statements are subject to business and economic
risks and uncertainties, and our actual results of operations
may differ materially from those contained in the
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those discussed in “Risk Factors” below in this
Item 7.
Significant Events in 2004
During the first and second quarters of 2004 a number of key
events occurred that affected our business operations and
business prospects and required significant senior management
attention, including the restatement of previously published
financial statements. Our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”)
resigned and were replaced by Harvey A. Wagner, Acting
President & CEO, effective May 1, 2004 and Melvin
L. Keating, Acting CFO, effective April 13, 2004. After
these appointments, other management changes were made,
primarily involving terminations and promotions in financial and
sales management. On October 11, 2004, the Company
announced that its board of directors appointed Harvey A. Wagner
as President and CEO of the Company. Mr. Wagner’s role
was made permanent effective October 8, 2004. On
February 10, 2005, Mr. Keating’s role was made
permanent and he will serve as the Company’s Executive Vice
President, Chief Financial Officer and Treasurer.
Internal Review. During the second quarter of 2004, we
began an internal review of our historical accounting policies,
practices and controls in preparation for our first quarter 2004
quarter-end closing and financial statement preparation under
the new management team. As a result of this review, on
May 13, 2004 we delayed filing our first quarter 2004
Form 10-Q. Previously on March 15, 2004 we had
announced the need to restate the third quarter of 2003
financial results. Our Audit Committee retained independent
counsel to conduct a full investigation of our relationship with
Infotech Network Group (“Infotech”) and the
circumstances leading up to that restatement. Additionally,
under the direction of our board of directors and with the
advice of outside counsel and our independent registered public
accounting firm, our new management conducted an internal review
and investigation of prior periods to determine whether there
were additional revisions to be made. As a result, we amended
and refiled our 2003 annual report on Form 10-K/ A
simultaneously with filing our 2004 Forms 10-Q for the
first and second quarters of 2004.
SEC Proceedings. In December 2003, we were notified by
the US Securities and Exchange Commission (“SEC”) that
it was conducting an informal inquiry into selected transactions
completed in the third quarter of 2002. In March 2004, we
voluntarily notified the SEC that we would restate our financial
results for the unaudited third quarter of 2003; after this
notification, the SEC informed us that its informal inquiry
would be expanded to include our relationship with Infotech
Network Group and would become a formal investigation. In April
2004, we received notice from the SEC of a formal order of
investigation and subpoena. The SEC has since expanded the
investigation to include other customer relationships. This
investigation is ongoing.
NASDAQ Listing Compliance. On August 23, 2004, the
Company announced that the NASDAQ Listing Qualifications Panel
confirmed that the Company had regained compliance with its
periodic reporting filing obligations and that it had satisfied
all other requirements for continued listing on the NASDAQ
National Market. NASDAQ will continue to monitor the Company to
ensure its continued compliance with all listing requirements
for the NASDAQ National Market. The Company’s trading
symbol was changed from “QVDXE” back to
“QVDX” on August 25, 2004.
Legal Proceedings. Following our March restatement
announcement, various shareholder class-action and derivative
lawsuits have been filed against the Company, certain former
officers and, in the case of certain of the lawsuits, against
our independent directors. For a further description of the
nature and status of these legal proceedings, see
“Part I, Item 3 — Legal
Proceedings.”
Enhanced Financial Disclosure Controls. Our ongoing
internal review includes an evaluation of our policies and
procedures for disclosure and internal controls, corporate
governance and other processes, in order to ensure the quality,
consistency and timeliness of our financial information and
reporting. We continue to invest resources in upgrading our
financial reporting processes and capabilities, including hiring
additional
18
personnel, utilizing outside consultants and implementing new
review processes. We plan to continue investing significant
resources on this initiative and in preparation for additional
reporting on internal controls as required by Section 404
of the Sarbanes-Oxley Act of 2002.
Impairment charge. In 2004, we incurred impairment
charges totaling $7.2 million. We impaired
$4.8 million of our internally developed and acquired
capitalized software. Our decision to discontinue products
resulted from our new management’s effort to refocus our
resources to products that would generate revenues in the near
term and to conserve cash. We wrote off $1.7 million of the
prepayments to Infotech for professional services, as a portion
of the assets was deemed not recoverable due to the
deterioration of the Company’s relationship with Infotech
and Infotech’s inability to provide assurances that it can
deliver those services in the future. We also impaired
$0.7 million of deferred costs related to our transaction
business because the total balance of the assets was not
recoverable due to the cancellation of certain contracts and
lower than expected revenues on other contracts.
Business and Asset Dispositions In the second quarter of
2004, the Company sold its minority equity investment in Royal.
Royal is a healthcare management services company in which
Quovadx owned an equity position. The sale price of
$3.1 million, paid in cash, was received on June 29,
2004. The Company recorded a $1.2 million gain on the sale
of this asset.
In the third quarter of 2004, we sold the Healthcare.com domain
name for a gain of $360,000.
On December 31, 2004, we sold the assets of our
Albuquerque, New Mexico Data Center and its MCTM system. The
data service center and MCTM system no longer fit into our new
business strategy because they represent a niche area of the
healthcare payer segment which is not an area of strategic
growth. The assets were sold to Royal Health Care Data Center,
LLC, a subsidiary of Royal, for $1.9 million in cash. A
gain of $0.4 million was recognized on the sale. Royal is a
management services organization serving New York healthcare
organizations.
Significant Events in 2003
On September 19, 2003, Quovadx acquired the outstanding
stock of CareScience, Inc. (“CareScience”).
CareScience, Inc. is primarily a provider of care management
services to hospitals and health systems. CareScience
stockholders received a fixed exchange rate of $1.40 cash and
0.1818 shares of Quovadx common stock for each share of
CareScience common stock they owned. The total purchase price
for this acquisition was $30.1 million, including
2,415,900 shares of Quovadx common stock, cash of
$4.7 million, net of cash acquired, and $2.3 million
in merger-related costs.
On December 19, 2003, Quovadx acquired the outstanding
stock of Rogue Wave Software, Inc. (“Rogue Wave”).
Rogue Wave develops, markets and supports object-oriented and
infrastructure software technology. The acquisition, structured
as an exchange offer, resulted in Quovadx acquiring all of the
outstanding stock of Rogue Wave for $4.09 in cash and 0.5292 of
a share of Quovadx common stock for each share of Rogue Wave
Common Stock. The total purchase price for this acquisition was
$79.1 million, including 5,656,670 shares of Quovadx
common stock, exchange of stock options valued at
$3.4 million, cash of $8.0 million net of cash
acquired and $3.9 million in merger-related costs.
|
|
|
Restatement of Financial Statements for 2002 and
2003 |
On March 15, 2004, the Company announced that it was
restating its 2003 third quarter financial results to reverse
all previously recorded revenue associated with Infotech. The
Company believed at the time of the shipments that collection of
the receivable was probable due to the establishment of a credit
line by Infotech that could be used for payment. After the
shipments of software product, the Company has encountered
unanticipated delays in obtaining payment from Infotech. Based
on further analysis of Infotech’s ability to pay for the
software purchased, the accounting for the revenue recognized
was revised from an accrual to a cash basis. As a result, we
materially restated our previously announced financial results
for the third and fourth quarters of 2003 by the deletion of all
revenue and commissions that had been recorded related to
Infotech.
19
As a result of this restatement, the Company’s audit
committee retained independent counsel to conduct a full
investigation of the Infotech relationship. Additionally, the
Company, in conjunction with new management and under direction
of its board of directors, undertook a review of all historical
accounting policies and practices. As a result of this
subsequent review, additional accounting inaccuracies were
identified affecting the Company’s financial results for
the years ended December 31, 2003 and 2002. Accordingly the
Company restated its historical financial results for the years
ending December 31, 2003 and 2002. This restatement is
described in Note 2.
The financial results for the years ended December 31, 2003
and 2002 were restated in August 2004 to properly account for
transactions that were previously inaccurately reflected in the
Company’s financial results. The cumulative effect of these
restated financial statements increased the previously reported
net loss by $1.8 million for the year ended
December 31, 2003 and $0.7 million for the year ended
December 31, 2002. These inaccuracies (a) overstated
software license revenues due to the timing of delivery of
software products and the accounting for certain reseller
relationships (b) overstated professional services revenues
due to the timing of adjustments to estimates used in
determining the recognition of revenue under the percentage of
completion method and (c) understated the cost of
professional services revenue due to the capitalization of
software development costs without properly deducting the
portion of the cost related to a professional services agreement
with a customer. The restatement also decreased current assets
by $0.8 million and $0 and increased current liabilities by
$1.0 million and $0.3 million at December 31,
2003 and 2002, respectively. A summary of the restatement impact
is set forth below.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Restated) | |
|
(Restated) | |
|
Decrease in total revenue
|
|
$ |
(1,663 |
) |
|
$ |
(430 |
) |
|
Increase in net loss
|
|
|
(1,783 |
) |
|
|
(655 |
) |
|
Increase in net loss per share
|
|
$ |
(0.05 |
) |
|
$ |
(0.02 |
) |
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States which require management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. The Company
relied on significant estimates in preparing the financial
statements, allocating the purchase price of its acquisitions to
the assets and liabilities acquired, evaluating the adequacy of
the allowance for bad debt, the percentage of completion of
fixed priced professional service contracts, the recoverability
of deferred tax assets and the recoverability of capitalized
software costs. Actual results could differ from those
estimates. The Company believes that the following accounting
policies involve a higher degree of judgment and complexity.
The Company recognizes revenue in accordance with the provisions
of Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended, and
SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.”
Our license agreements generally provide either that customers
pay a license fee based on a specified number of instances of
the software on the type of software modules licensed or pay a
subscription fee for a set number of years. Customers that
purchase licenses, under a perpetual license agreement,
generally enter into renewable one-year maintenance agreements
that entitle the customer to receive unspecified updates on the
licensed software, error corrections and telephone support,
generally for a fixed fee.
The methodology the Company uses to recognize perpetual license
software license and related services revenue is dependent on
whether the Company has established vendor-specific objective
evidence (“VSOE”) of fair value for the separate
elements of a multiple-element agreement. If an agreement
includes both license
20
and service elements, the license fee is recognized on delivery
of the software if the remaining services are not essential to
the functionality of the software, the collection of the fees is
probable, the fees are fixed and determinable, an agreement is
signed and the Company has established VSOE of fair value for
the remaining services. Revenue from the related services is
recognized as the services are provided. When the related
services are essential to the functionality of the base product,
or when the Company has not established VSOE of fair value for
the remaining services, the software license fees are deferred
and the entire contract is recognized as the services are
provided. Utilizing the criteria provided in SOP 97-2, we
evaluate the vendor specific objective evidence for contracts to
determine the fair value of elements delivered in situations
where multiple element arrangements exist.
Professional services revenue represents software development,
implementation and consulting services. When derived from a
fixed price contract and collection of fees is probable, the
Company recognizes professional services revenue using the
percentage-of-completion method of accounting. When derived from
a time-and-materials contract, and the collection of fees is
probable, the Company recognizes professional services revenue
as the services are provided.
When revenue is recognized using the percentage-of-completion
basis of accounting, the Company’s management estimates the
costs to complete the services to be provided under the
contract. Because the percentage-of-completion method is an
estimation process, it has risks and uncertainties. The Company
may encounter budget and schedule overruns caused by external
factors beyond our control such as the utilization and
efficiency of our consultants and the complexity of our
customers’ IT environment. Adjustments to cost estimates
are made in the period in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded
in the period in which the current estimates of the costs to
complete the services exceed the revenue to be recognized under
the contract.
Maintenance revenue is derived from agreements for providing
unspecified software updates, error corrections and telephone
support. Maintenance revenue is recognized ratably over the
maintenance period, which is generally 12 months.
Process management and services revenue represent application
hosting, transaction processing and other services. When the
fees are fixed and determinable, and collection of the fees is
probable, revenue is recognized over the service period. When
the fees are charged on a per-transaction basis and collection
of the fees is probable, revenue is recognized as the
transactions are processed.
When collection of fees is not probable, revenue is recognized
as cash is collected. The Company does not require collateral
from its customers.
|
|
|
Allowance for Doubtful Accounts |
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of certain
customers to pay their accounts receivable balances. The Company
assesses financial condition of its customers to determine if
there is an impairment of their ability to make payments and
additional allowances may be required if the financial condition
to the Company’s customers deteriorates. A considerable
amount of judgment is required in order to determine the
realization of our receivables, including assessing the
likelihood of collection and the creditworthiness of each
customer. Bad debt expense for the years ended December 31,
2004, 2003 and 2002 was $162,000, $82,000, and $474,000,
respectively.
In connection with acquisitions, we assessed the fair value of
assets acquired and liabilities assumed. Items such as accounts
receivable, property and equipment, other intangible assets,
certain accrued liabilities, and other reserves require a high
degree of management judgment. We may used third parties to
assist us with such valuations. We received a third party
valuation of assets, including goodwill and intangible assets,
for the Rogue Wave and CareScience acquisitions in the fourth
quarter and adjusted our asset value accordingly. In connection
with our acquisitions, we are required to recognize other
intangible assets separate and apart from goodwill if such
assets arise from contractual or other legal rights or if such
assets are separable from the
21
acquired businesses. Other intangible assets include, developed
technology, customer-related assets such as order backlog, and
trade name. The Company recorded $46.7 million of goodwill
resulting from its Rogue Wave and CareScience acquisitions. At
December 31, 2004, we had intangible assets of $17.7, net
of amortization.
|
|
|
Software Development Costs |
Software development costs are required to be expensed until the
point that technological feasibility of the product is
established. Once technological feasibility is established,
development costs are capitalized until the product has reached
general availability. The establishment of technological
feasibility and continuing evaluation of the recoverability of
the capitalized software development costs requires
management’s judgment with respect to the impact of
external factors such as future revenue, estimated economic life
and changes in software and hardware technologies. Capitalized
software development costs are amortized on a straight-line
basis over an estimated life, which is generally three years.
The Company capitalizes internal and external labor costs
incurred in developing the software once technological
feasibility is attained. At December 31, 2004, the Company
had $11.3 million of capitalized software development
costs, net of amortization.
SFAS No. 142 requires that goodwill at each reporting
unit be tested annually for impairment and more frequently if
events or changes in circumstances indicate assets might be
impaired. The Company performed a transitional impairment test
upon the adoption of SFAS No. 142 on January 1,
2002 and recorded no impairment because of this test. The
Company has identified the fourth quarter as the period for its
annual impairment test. However, due to significant negative
industry and economic trends affecting the market value of the
Company’s common stock, the Company performed an interim
test of goodwill impairment in the third quarter of 2002. As a
result of this interim test, the Company recorded an impairment
charge of $93.1 million to reduce goodwill based on the
amount that the carrying value of the goodwill exceeded its fair
value. This impairment charge eliminated goodwill associated
with all previous acquisitions. In connection with the 2003
acquisition of Rogue Wave and CareScience, the Company has
recorded goodwill of approximately $34 million and
$12.7 million, respectively. These divisions each represent
reporting units. The Company performed its annual evaluation of
these reporting units during the fourth quarter of 2004, and no
impairment was indicated. However, changes in future market
conditions or assumptions used in the evaluation could result in
impairments in future periods.
The Company periodically evaluates the carrying value of other
long-lived assets, including, but not limited to, property and
equipment, software, and intangible assets, when events and
circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset is less than its
carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with
the risk involved.
Significant estimates are utilized to calculate expected future
cash flows utilized in impairment analyses. We also utilize
judgement to determine other factors within fair value analyses,
including the applicable discount rate.
22
Results of Operations
The following table sets forth financial data for the periods
indicated for the years ended December 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 (Restated) | |
|
|
|
2002 (Restated) | |
|
|
| |
|
| |
|
| |
|
2004-2003 | |
|
| |
|
2003-2002 | |
| |
|
|
|
% of Revenue | |
|
|
|
% of Revenue | |
|
Change | |
|
|
|
% of Revenue | |
|
Change | |
| |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
$ |
27,172 |
|
|
|
32.8 |
% |
|
$ |
20,270 |
|
|
|
31.2 |
% |
|
$ |
6,902 |
|
|
$ |
11,424 |
|
|
|
18.8 |
% |
|
$ |
8,846 |
|
| |
Professional services
|
|
|
14,540 |
|
|
|
17.6 |
|
|
|
17,512 |
|
|
|
27.0 |
|
|
|
(2,972 |
) |
|
|
22,459 |
|
|
|
37.1 |
|
|
|
(4,947 |
) |
| |
Recurring services(a)
|
|
|
41,089 |
|
|
|
49.6 |
|
|
|
27,146 |
|
|
|
41.8 |
|
|
|
13,943 |
|
|
|
26,740 |
|
|
|
44.1 |
|
|
|
406 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
82,801 |
|
|
|
100.0 |
|
|
|
64,928 |
|
|
|
100.0 |
|
|
|
17,873 |
|
|
|
60,623 |
|
|
|
100.0 |
|
|
|
4,305 |
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
12,506 |
|
|
|
15.1 |
|
|
|
9,850 |
|
|
|
15.2 |
|
|
|
2,656 |
|
|
|
5,457 |
|
|
|
9.0 |
|
|
|
4,393 |
|
| |
Professional services
|
|
|
14,715 |
|
|
|
17.8 |
|
|
|
14,022 |
|
|
|
21.6 |
|
|
|
693 |
|
|
|
14,969 |
|
|
|
24.7 |
|
|
|
(947 |
) |
| |
Recurring services(b)
|
|
|
18,878 |
|
|
|
22.8 |
|
|
|
16,391 |
|
|
|
25.2 |
|
|
|
2,487 |
|
|
|
17,245 |
|
|
|
28.4 |
|
|
|
(854 |
) |
| |
Asset impairment
|
|
|
7,195 |
|
|
|
8.7 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
7,195 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
53,294 |
|
|
|
64.4 |
|
|
|
40,263 |
|
|
|
62.0 |
|
|
|
13,031 |
|
|
|
37,671 |
|
|
|
62.1 |
|
|
|
2,592 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
29,507 |
|
|
|
35.6 |
|
|
|
24,665 |
|
|
|
38.0 |
|
|
|
4,842 |
|
|
|
22,952 |
|
|
|
37.9 |
|
|
|
(1,713 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
19,597 |
|
|
|
23.7 |
|
|
|
17,785 |
|
|
|
27.4 |
|
|
|
1,812 |
|
|
|
13,343 |
|
|
|
22.0 |
|
|
|
4,442 |
|
| |
General and administrative
|
|
|
19,832 |
|
|
|
24.0 |
|
|
|
12,742 |
|
|
|
19.6 |
|
|
|
7,090 |
|
|
|
13,660 |
|
|
|
22.5 |
|
|
|
(918 |
) |
| |
Research and development
|
|
|
13,383 |
|
|
|
16.2 |
|
|
|
9,995 |
|
|
|
15.4 |
|
|
|
3,388 |
|
|
|
7,209 |
|
|
|
11.9 |
|
|
|
2,786 |
|
| |
Amortization of acquired intangible assets
|
|
|
3,718 |
|
|
|
4.4 |
|
|
|
1,720 |
|
|
|
2.7 |
|
|
|
1,998 |
|
|
|
2,307 |
|
|
|
3.8 |
|
|
|
(587 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
56,530 |
|
|
|
68.3 |
|
|
|
42,242 |
|
|
|
65.1 |
|
|
|
14,288 |
|
|
|
36,519 |
|
|
|
60.2 |
|
|
|
5,723 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,023 |
) |
|
|
(32.7 |
) |
|
|
(17,577 |
) |
|
|
(27.1 |
) |
|
|
(9,446 |
) |
|
|
(13,567 |
) |
|
|
(22.3 |
) |
|
|
(4,010 |
) |
| |
Gain on sale of assets
|
|
|
1,535 |
|
|
|
1.9 |
|
|
|
— |
|
|
|
— |
|
|
|
1,535 |
|
|
|
87 |
|
|
|
0.1 |
|
|
|
(87 |
) |
| |
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(93,085 |
) |
|
|
(153.5 |
) |
|
|
93,085 |
|
| |
Interest income, net
|
|
|
355 |
|
|
|
0.4 |
|
|
|
694 |
|
|
|
1.1 |
|
|
|
(339 |
) |
|
|
1,035 |
|
|
|
1.7 |
|
|
|
(341 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(25,133 |
) |
|
|
(30.4 |
) |
|
|
(16,883 |
) |
|
|
(26.0 |
) |
|
|
(8,250 |
) |
|
|
(105,530 |
) |
|
|
(174.0 |
) |
|
|
88,647 |
|
|
Income tax expenses
|
|
|
133 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
133 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(25,266 |
) |
|
|
(30.5 |
) |
|
|
(16,883 |
) |
|
|
(26.0 |
) |
|
|
(8,383 |
) |
|
|
(105,530 |
) |
|
|
(174.0 |
) |
|
|
88,647 |
|
|
Income from and gain on sale of discontinued operations
|
|
|
1,035 |
|
|
|
1.2 |
|
|
|
406 |
|
|
|
0.6 |
|
|
|
629 |
|
|
|
763 |
|
|
|
1.2 |
|
|
|
(357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(24,231 |
) |
|
|
(29.3 |
)% |
|
$ |
(16,477 |
) |
|
|
(25.4 |
)% |
|
$ |
(7,754 |
) |
|
$ |
(104,767 |
) |
|
|
(172.8 |
)% |
|
$ |
88,290 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Revenues from discontinued operations of $5.2 million,
$5.0 million, and $2.6 million, for the years ended
December 31, 2004, 2003, and 2002, respectively, have been
reclassified to income from discontinued operations. |
|
|
|
|
(b) |
|
Cost of sales from discontinued operations of $4.6 million,
$4.6 million, and $1.8 million, for the years ended
December 31, 2004, 2003, and 2002, respectively, have been
reclassified to income from discontinued operations. |
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Total Revenue. Total revenue increased
$17.9 million, or 27%, to $82.8 million for the year
ended December 31, 2004 from $64.9 million for the
year ended December 31, 2003. The Company experienced an
increase in revenue generated from its software license segment
of $6.9 million, or 34%, to $27.2 million, primarily
due to the Company’s planned focus on software license
revenue. The acquisitions of CareScience
23
and Rogue Wave increased license revenue in 2004 by
$3.7 million and $13.1 million, respectively. The
revenue contribution from CareScience and Rogue Wave was
partially offset by slower sales by the remainder of the
Company. Revenue from the professional services segment
decreased $3.0 million, or 17%, for the year ended
December 31, 2004, due to the completion of existing
contracts. Partially offsetting this decrease was the addition
of CareScience and Rogue Wave, which added $3.4 million and
$1.1 million, respectively, of services revenue for the
year ended December 31, 2004. Revenue derived from the
recurring services increased $13.9 million, or 51%, to
$41.1 million primarily due to the acquisitions of
CareScience and Rogue Wave, which added $2.6 million and
$11.6 million, respectively, for the twelve months ended
December 31, 2004.
Cost of revenue. Cost of revenue increased
$13.0 million, or 32%, to $53.3 million for the year
ended December 31, 2004 from $40.3 million in 2003.
Cost of revenue for the software license segment increased 27%
or $2.7 million to $12.5 million for the year ended
December 31, 2004 from $9.8 million for the year ended
December 31, 2003 due to an increase in software
amortization of $0.6 million in 2004 over 2003. The
increase in software amortization was caused by the addition of
software acquired in the CareScience and Rogue Wave
acquisitions. Also, the addition of CareScience increased
software license costs by $2.3 million. Professional
services cost of revenue increased $0.7 million, or 5%. The
increase in professional services costs was primarily due to the
addition of CareScience and Rogue Wave which increased in
professional services cost of revenue by $2.6 million and
$1.1 million in 2004, offset by decreases in headcount due
to completion of several large contracts. Recurring revenue
costs increased 15% to $18.9 million. Costs related to
recurring services for Rogue Wave increased $1.2 million
and for CareScience increased $2.5 million in the year
ended December 31, 2004, offset by decreases in headcount
in other areas.
In 2004, costs of revenue increased $7.2 million due to a
non-cash charge for asset impairments incurred during the first
and fourth quarter of 2004. We impaired $4.8 million of our
internally developed and acquired capitalized software. Our
decision to discontinue products resulted from our new
management’s effort to refocus our resources to products
that would generate revenues in the near term and to conserve
cash flows. In the fourth quarter of 2003, the Company prepaid
$0.9 million to Infotech Network Group
(“Infotech”), an Indian company, for professional
services. In March 2004, the Company paid Infotech an additional
$2.1 million for professional services; $1.7 million
was written off in the first quarter of 2004 as a portion of the
assets was deemed not recoverable due to the deterioration of
the Company’s relationship with Infotech and
Infotech’s inability to provide assurances that it can
deliver those services in the future. We also impaired
$0.7 million of deferred costs related to our transaction
business because the total balance of the assets was not
recoverable due to the cancellation of certain contracts and
lower than expected revenues on other contracts.
Sales and marketing. Sales and marketing expense
increased $1.8 million, or 10%, to $19.6 million for
the year ended December 31, 2004 from $17.8 million
for the year ended December 31, 2003. The increase in sales
and marketing expenses is primarily related to CareScience and
Rogue Wave acquisitions, which added 9 and 45 employees,
respectively. Partially offsetting the increase was a reduction
in sales employee headcount from 106 to 56 full time sales and
marketing employees during 2004.
General and administrative. General and administrative
expense increased $7.1 million, or 56%, to
$19.8 million for the year ended December 31, 2004
from $12.7 million for the prior year. The increase in
general and administrative expense was primarily due to an
increase in legal and accounting expenses arising from the
restatement of 2002 and 2003 historical financial data and
ensuing litigation and from our cooperation with the SEC
investigation. We also experienced increased costs related to
Sarbanes Oxley compliance, occupancy and other costs from the
acquisitions, and other consulting costs.
Research and development. Research and development
expense increased $3.4 million, or 34%, to
$13.4 million for the year ended December 31, 2004
from $10 million for the year ended December 31, 2003.
The increase in research and development expense is mainly due
to personnel additions from the CareScience and Rogue Wave
acquisitions which increased costs by $1.4 million and
$4.3 million, respectively. Additionally, capitalized
software costs decreased $2.2 million to $1.1 million
in 2004 from $3.3 million in 2003 due to management’s
refocus of resources to products that would generate revenues in
the near term and to conserve cash flows.
24
Amortization of acquired intangibles. The amortization of
acquired intangibles results from assets purchased through our
business acquisitions. Intangible assets amortization for the
twelve months ended December 31, 2004 and 2003 was
$3.7 million and $1.7 million, respectively. The
increase is due to the addition of CareScience and Rogue Wave
intangible assets acquired in 2003 totaling $8.6 million
and $8.5 million, respectively. The CareScience intangible
assets were amortized for approximately three months in 2003 and
the Rogue Wave intangible assets were amortized for a partial
month in 2003. The appraisal for the Rogue Wave intangible
assets was completed in the third quarter of 2004.
Gain on sale of assets. In the third quarter of 2004, we
sold the Healthcare.com domain name for a gain of $360,000. In
the second quarter of 2004, we sold our minority equity
investment in Royal Health Care, LLC (“Royal”). Royal
is a healthcare management services company in which Quovadx
owned an equity position. We recorded a $1.2 million gain
on the sale of this asset.
Other income. Other income includes interest income on
cash, cash equivalents and short-term investment balances and
other miscellaneous income. Interest income decreased
$0.3 million to $0.4 million for the year ended
December 31, 2004 from $0.7 million for the prior year
period. The decrease in interest income is due to the decrease
in the Company’s cash and cash equivalents balance that
were used to fund operations offset by improved short term
investment returns.
Income tax expenses. A provision for income taxes has of
$133,000 been recorded for the twelve months ended
December 31, 2004. The income tax expense is a result of
net income in one of our foreign operations. We have incurred a
net operating loss for 2003. We believe that, based on the
history of losses and other factors, the weight of available
evidence indicates that it is more likely than not that we will
not be able to realize our deferred tax assets, and thus a full
valuation allowance has been recorded against such assets as of
December 31, 2004 and December 31, 2003.
Income from and gain on sale of discontinued operations.
On December 31, 2004 we sold the assets of our Albuquerque,
New Mexico Data Center and its MCTM system to Royal for
$1.9 million in cash and recognized a gain of
$0.4 million. The New Mexico operations had net income of
$0.6 million and $0.4 million for the year ended
December 31, 2004 and 2003 respectively. The increase of
$0.2 million in net income from discontinued operations was
primarily due to increases in recurring revenue in the New
Mexico facility.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Total Revenue. Total revenue increased $4.3 million,
or 7%, to $64.9 million for the year ended
December 31, 2003 from $60.6 million for the year
ended December 31, 2002. The Company experienced an
increase of $8.8 million, or 77%, in revenue generated from
its license segment to $20.3 million primarily due to the
Company’s planned focus on software license revenue. The
addition of CareScience and Rogue Wave in 2003 increased license
revenue by $1.4 million and $1.9 million,
respectively. Revenue from the professional services decreased
$4.9 million, or 22%, in the year ended December 31,
2003, due to the completion of existing contracts. Partially
offsetting this decrease was the addition of CareScience, which
added $1.8 million of services revenue in the year ended
December 31, 2003. Revenue derived from the recurring
increased $0.4 million, or 2%, to $27.1 million. The
increase is primarily due to the acquisitions of CareScience and
Rogue Wave, which added $1.0 million and $0.5 million,
respectively, for the twelve months ended December 31, 2004
and 2003, offset by lower sales by the remainder of the Company.
Cost of revenue. Cost of revenue increased
$2.6 million, or 7%, to $40.3 million for the year
ended December 31, 2003 from $37.7 million in 2002.
Cost of revenue from software license sales increased 81% or
$4.4 million to $9.9 million for the year ended
December 31, 2003 from $5.5 million for the year ended
December 31, 2002 due to an increase in software
amortization of $1.4 million in 2003 over 2002 and
increased royalty expenses of $3.2 million. The addition of
CareScience and Rogue Wave added $0.7 million and
$0.1 million, respectively, of license-related costs in
2003. Cost of revenue from professional services decreased
$0.9 million due to a decline in headcount in the
Company’s professional services group from 78 in 2002 to 66
in 2003. Offsetting this decrease was the addition of
CareScience and its services cost of revenue of
$1.0 million in 2003. Recurring revenue costs decreased 5%
to $16.4 million primarily due to decreases in head count.
25
Sales and marketing. Sales and marketing expense
increased $4.4 million, or 33%, to $17.8 million for
the year ended December 31, 2003 from $13.3 million
for the year ended December 31, 2002. Sales and marketing
expenses increased due to an increase in the size of the
Company’s sales force and marketing professionals from 62
at December 31, 2002 to 115 at December 31, 2003
resulting from an increase in the number of product offerings
and increased penetration into the software market. The
acquisition of CareScience and Rogue Wave increased the 2003
headcount by 14 and 17, respectively. Commission expense
was also higher for the twelve months ended December 31,
2003 due to an increase in software sales and changes in the
commission plan in 2003.
General and administrative. General and administrative
expense decreased $0.9 million, or 7%, to
$12.7 million for the year ended December 31, 2003
from $13.7 million for the prior year. The decrease in
general and administrative expense was primarily due to a
decline in legal expenses from $1.8 million in 2002 to
$1.2 million in 2003. Additionally, bad debt expense
decreased $392,000 from 2002 to 2003. Partially offsetting this
decrease was the addition of CareScience and Rogue Wave, which
added $0.2 million and $0.2 million, respectively, of
general and administrative costs for the year ended
December 31, 2003.
Research and development. Research and development
expense increased $2.8 million, or 39%, to $10 million
for the year ended December 31, 2003 from $7.2 million
for the year ended December 31, 2002. The increase in
research and development expense is mainly due to the
acquisitions of CareScience and Rogue Wave, which increased the
headcount from 71 at December 31, 2002 to 115 at
December 31, 2003 and added $0.9 million in research
and development costs for the year ended December 31, 2003.
The Company capitalized $3.3 million of software
development costs in 2003, an increase of $0.2 million from
2002.
Amortization of acquired intangibles. The amortization of
acquired intangibles results from assets purchased through our
business acquisitions. Intangible assets amortization for the
twelve months ended December 31, 2003 and 2002 was
$1.7 million and $2.3 million, respectively. The
decrease is due to the full amortization of an intangible asset
acquired in the Healthcare.com purchase.
Other income. Other income includes interest income on
cash, cash equivalents and short-term investment balances.
Interest income decreased $0.3 million to $0.7 million
for the year ended December 31, 2003 from $1.0 million
for the prior year period. The decrease in interest income is
due to the decrease in the Company’s cash and short-term
investments balance used to fund operations, acquisitions, and a
shift in the company’s short-term investments to
investments with shorter maturities to have funds available for
the acquisitions.
Income from discontinued operations. Income from
discontinue operations decreased $0.4 million in 2003 to
$0.4 million in 2003 from $0.8 million in 2002. The
decrease is due to an increase in recurring costs of revenue for
the MCTM business greater than the increase in the related
recurring revenue.
Income tax benefit. A provision for federal and state
income taxes has not been recorded for the twelve months ended
December 31, 2003 and 2002, as we have incurred a net
operating loss for 2003 and 2002. We believe that, based on the
history of losses and other factors, the weight of available
evidence indicates that it is more likely than not that we will
not be able to realize our deferred tax assets, and thus a full
valuation allowance has been recorded against such assets as of
December 31, 2003 and December 31, 2002.
Liquidity and Capital Resources
We expect to use our cash, cash equivalents and short-term
investments for general corporate purposes, working capital and
capital expenditures, to fund our operations and to continue
expanding our product offerings. The amounts and timing of our
actual expenditures will depend upon numerous factors, including
the status of our product development efforts, marketing and
sales activities and the amount of cash generated by our
operations. We may find it necessary or advisable to use
portions of our cash and cash equivalents for other purposes.
Pending use of our cash, cash equivalents and short-term
investments for the above purposes, we intend to invest such
funds in short-term, interest-bearing, investment-grade
securities.
Net cash used in operating activities was $4.2 million in
2004, $7.3 million in 2003, and $10.3 million in 2002.
The decrease in net cash used in operating activities in 2004
compared to 2003 is mainly due to the
26
decrease in accounts receivable resulting from improved
collection efforts, additional billing cycles and increased
revenues, offset by the decrease in accounts payable. The
decrease in net cash used in operating activities in 2003
compared to 2002 is mainly due to an increase in the accounts
payable balance from December 31, 2002 to December 31,
2003.
Net cash used in investing activities was $2.6 million in
2004, $1.7 million in 2003, and $14.5 million in 2002.
The increase in cash used in investing activities in 2004
increased primarily due to the increase in net purchases of
short term investments, offset by cash provided from the
proceeds of the sale of assets of $5.4 million, which
included the sale of the investment in Royal, the New Mexico
operations, and the Healthcare.com domain name. Net cash used in
investing activities in 2003 decreased primarily due to the
acquisitions of CareScience and Rogue Wave partially offset by
cash provided by the net sales of short-term investments. The
net cash used in investing activities in 2002 was primarily
related to net short-term securities purchases of
$7.9 million and the purchase and capitalization of
software of $3.5 million.
Net cash provided by financing activities was $1.4 million
in 2004, $1.3 million in 2003 and $1.0 million in
2002. Cash provided in 2004, 2003 and 2002 came from the
exercise of stock options and the sale of stock through our
employee stock purchase plan.
The Company’s cash and cash equivalents balances are
expected to be sufficient to meet its anticipated liquidity
needs for working capital and capital expenditures for the next
twelve months. In 2004, the Company’s normal attrition and
a reduction in its workforce decreased headcount by 156
positions as part of a focused effort to better align its total
costs of doing business with its revenue stream and preserve
cash. If additional capital resources were required for working
capital or to grow our business internally, we may seek other
financing arrangements. We cannot be assured that any financing
arrangements will be available in amounts or on terms acceptable
to us in the future.
The Company acquired its WebAccel product from CMI Corporate
Marketing, d/b/a Compuflex International (“Compuflex”)
in August 2003. An executive officer of the Company is the sole
stockholder of Compuflex. Compuflex has received, and will
continue to receive, royalty fees of $500,000 over two years
from the Company in accordance with the terms of the purchase
agreement. Through December 31, 2004, the Company had paid
Compuflex $334,000 in royalty payments.
The following table highlights, as of December 31, 2004,
our contractual obligations and commitments to make future
payments by type and period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
2006 & | |
|
2008 & | |
|
2010 & | |
| |
|
Total | |
|
2005 | |
|
2007 | |
|
2009 | |
|
Thereafter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Operating leases
|
|
$ |
11,805 |
|
|
$ |
4,589 |
|
|
$ |
3,620 |
|
|
$ |
1,887 |
|
|
$ |
1,709 |
|
|
Royalty payments
|
|
|
166 |
|
|
|
166 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
11,971 |
|
|
$ |
4,755 |
|
|
$ |
3,620 |
|
|
$ |
1,887 |
|
|
$ |
1,709 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 31, 2004, the Company had $1.9 million in
open purchase commitments.
Recently Issued Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised
2004), “Share-Based Payment,” which is a revision of
SFAS No. 123 “Accounting for Stock-Based
Compensation.” This Statement supersedes APB Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95
“Statement of Cash Flows.” SFAS No. 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair value. Pro forma disclosure and
the intrinsic value method of accounting are no longer
alternatives.
SFAS No. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after
June 15, 2005. We plan to adapt this standard starting
July 1, 2005 using a “modified prospective”
27
method in which compensation cost is recognized beginning
July 1, 2005 based on the requirements of SFAS No 123R
for all share based payments granted after that date, and for
all awards granted to employees prior to July 1, 2005 that
had not yet vested based on the requirements of
SFAS No. 123. The Company currently accounts for
share-based payments to employees using APB Opinion 25’s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. The adoption of
SFAS 123R’s fair value method will have a significant
impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption
of SFAS No. 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted
in the future and the Company has not determined which
option-pricing model we will use to value the stock options
granted. SFAS No. 123R also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in the periods after adoption. The company cannot
estimate what those amounts will be in the future because they
depend on, among other things, when employees exercise stock
options.
RISK FACTORS
The following risk factors could materially and adversely affect
our operating results and could cause actual events to differ
materially from those predicted in any forward-looking
statements related to our business.
|
|
|
We have historically incurred losses and we may not be
able to achieve or sustain profitability. |
We incurred losses for the years ended December 31, 2004,
2003, and 2002. As of December 31, 2004, we had an
accumulated deficit of $181 million. We expect to continue
to incur significant sales and marketing, research and
development and general and administrative expenses that may
exceed our revenue. As a result, we may experience losses and
negative cash flows in the future. Failure to achieve and
maintain profitability may cause our stock price to decline and
impair our business and financial prospects.
|
|
|
We face risks related to a formal investigation being
conducted by the SEC. |
We have been cooperating with the SEC with respect to a formal
order of investigation and subpoena regarding certain
transactions in 2002 and 2003. We cannot predict the outcome of
the investigation. An unfavorable outcome with respect to this
investigation could cause our stock price to decline
significantly. If the SEC finds wrongdoing on our part, a
financial or administrative penalty may be imposed which could
jeopardize our financial viability. In addition, such findings
could provide basis for additional lawsuits.
|
|
|
We face risks related to the class action and derivative
lawsuits. |
Certain former officers, independent directors and the Company
have been named defendants in various class action and
derivative lawsuits. The findings and outcome of the SEC
investigations may affect these pending lawsuits. Under Delaware
law, our charter and bylaws, we are generally obligated to
indemnify our directors and officers who are named defendants in
any of these lawsuits and advance legal fees and costs. We are
unable to estimate our liability in these matters and we may be
required to pay judgments or settlements and incur expenses in
aggregate amounts that could have a materially adverse effect on
our business, financial condition, results of operations and
cash flows.
We currently have director and officer liability insurance that
may pay a portion of the legal fees and costs incurred in
defending against claims, settlement amounts, or, damages
awarded. However, if the plaintiffs are successful, we may not
have sufficient insurance to cover the judgment or our insurers
may deny coverage.
For a further description of the nature and status of these
legal proceedings see, “Item 3 — Legal
Proceedings.”
28
|
|
|
We have experienced and may encounter ongoing significant
employee turnover that could reduce our ability to sell,
deliver, and support future commitments. |
Due to issues experienced in 2004 related to our restatements,
late SEC filings, NASDAQ delisting activities and shareholder
litigation, we have experienced and could continue to encounter
a significant increase in departures of key employees from the
Company. While having taken steps to support employee retention,
there can be no assurances that key employees will not leave the
Company for other jobs thus impairing our ability to meet
commitments and sustain revenue.
|
|
|
We may be immediately delisted from NASDAQ if we cannot
meet the more stringent criteria NASDAQ established for our
continued listing. |
We failed to timely file our first quarter 2004 Form 10-Q
with the SEC and NASDAQ. As a result, the NASDAQ Stock Market
initiated delisting procedures. On August 9, 2004, NASDAQ
informed us that we had been granted an exception to their
continued listing standards. However, our continued listing
depends on our ability to timely file all periodic reports for
reporting periods ending on or before September 30, 2005,
and we will not be able to request an automatic extension to
prolong the deadline. If we are late in making any filing during
that period, we may be delisted immediately with no right to a
hearing or appeal. Additionally, we must continue to meet all
other continued listing requirements; or failure to do so may
result in a notice of delisting to which we would be able to
request a hearing. Our continued delisting vulnerability may
result in potential loss of investor confidence, loss of analyst
coverage and depression of our stock price, which could have a
material adverse affect on our business and financial prospects.
|
|
|
Our operating results are likely to fluctuate
significantly and may fail to meet the expectations of
securities analysts and investors, causing our share price to
decline; we may lose coverage. |
Our operating results have fluctuated significantly in the past
and are likely to fluctuate in the future. Moreover, our
operating results in some quarters may not meet the expectations
of stock market analysts and investors. In that event, our stock
price would likely decline. Further declines in our stock price
may impair our business prospects and our financial condition.
As a result of our limited history of profitable operations, our
business strategy, and the evolving nature of the markets in
which we compete, we may have difficulty accurately forecasting
our revenue in any given period. In addition to the factors
discussed elsewhere in this section, a number of factors may
cause our revenue to fall short of our expectations or cause
fluctuations in our operating results, including:
|
|
|
| |
• |
delay in our introduction of new applications, services and
products offerings and enhancements of our existing solutions; |
| |
| |
• |
the capital and expense budgeting decisions of our existing and
prospective customers; |
| |
| |
• |
the amount and timing of operating costs and capital
expenditures relating to the implementation of our business
strategy; |
| |
| |
• |
increased product development and engineering expenditures
required to keep pace with technological changes; |
| |
| |
• |
overall economic conditions of the U.S. and the rest of the
world; |
| |
| |
• |
overall economic conditions in the software and information
systems, healthcare, telecommunications, financial services and
public sector; |
| |
| |
• |
the loss of one or more major customers: |
| |
| |
• |
the size, type and timing of individual license transactions; |
| |
| |
• |
the adoption of new technologies; |
| |
| |
• |
our success in expanding our direct sales force and indirect
distribution channels; |
29
|
|
|
| |
• |
our ability to position our products and solutions in the market
to drive priority and action within our prospects; |
| |
| |
• |
obsolescence of our products or the programming languages that
our products are designed to enhance; and |
| |
| |
• |
levels of international sales. |
Additionally, fluctuating results and declining stock price may
cause our analysts to withdraw their coverage, thus reducing our
exposure in the market.
|
|
|
We operate in an industry with rapidly changing technology
and, if we do not successfully modify our products to
incorporate new technologies or introduce new products, our
sales will suffer. |
The software market in which we compete is characterized by
(1) rapid technological change, (2) frequent
introductions of new products, (3) changing customer needs
and (4) evolving industry standards. To keep pace with
technological developments, evolving industry standards and
changing customer needs, we must support existing products and
develop new products. We may not be successful in developing,
marketing and releasing new products or new versions of our
products that respond to technological developments, evolving
industry standards or changing customer requirements. Further,
we may face significant competition from open source software
offerings, provided to users on a no-charge basis. We may also
experience difficulties that could delay or prevent the
successful development, introduction and sale of these
enhancements. In addition, these new products or enhancements
may not adequately meet the requirements of the marketplace and
may not achieve any significant degree of market acceptance. If
release dates of any future products or enhancements are
delayed, or if these products or enhancements fail to achieve
market acceptance when released, our business, operating results
and financial condition could be materially adversely affected.
In addition, new products or enhancements by our competitors and
open source offerings may cause customers to defer or forego
purchases of our products, which could have a material adverse
effect on our business, financial condition and results of
operations.
|
|
|
We face saturated or diminishing markets for some of our
key products. |
Our primary Enterprise Application Integration product offering
is sold primarily to the hospital market, and sub-segments of
this market are close to saturation, and therefore revenues may
decrease within this market segment. In addition, the primary
development tools sold by our Rogue Wave Software division
target the C++ programming language, which is diminishing in
usage when compared with other programming languages such as
Java. We expect that the revenues for these tools may decline
over time. In addition, our performance depends on organizations
requiring information delivery, and seeking outside vendors to
develop, manage and maintain this software for their critical
applications. Many of our potential customers have made
significant investments in internally developed systems and
would incur significant costs in switching to our products,
which may substantially inhibit the growth of our software. If
the market fails to grow, becomes saturated, or declines, our
sales will be adversely affected. In addition, a weakening
global economy or diverted focus of information technology
departments on issues related to regulatory compliance may lead
to longer sales cycle and slower sales growth.
|
|
|
We are engaged in several large software development
projects; failure to complete any one of these projects could
have adverse consequences on our services revenues and business
prospects. |
We are engaged in several large, multi-year, custom software
development projects. These projects require that we staff them
with experienced personnel. Personnel turnover could affect our
ability to staff and manage these projects. Additionally, these
types of development project require close collaboration with
the client, particularly in managing the change-order process,
and presents factors that are often outside of our control. The
length and nature of these projects expose us to the risk of not
completing the project on time or at all, the technology
solution could fail to meet client expectations, or within
budget, any of which could result in our not being paid for work
already performed or could lead to complex and expensive
litigation, any of which could materially, adversely affect our
financial and business prospects.
30
|
|
|
We have risk in sustaining professional service revenue in
our markets. |
Professional services is a very competitive market that is
highly dependent on the quality of our staff and service image.
We face much larger competitors in this market segment who have
considerably more resources to draw from than we have.
Additionally, we face smaller competitors that can be more cost
competitive in the delivery of solutions. Our vulnerability to
competition is a risk factor in this business. These issues also
impact our service image to present and prospective customers
and could cause contract delays. Consequently, professional
services revenue may continue to decline for the Company.
|
|
|
Our public stock price has fallen substantially negatively
impacting its investment desirability. |
Since the disclosure of our restatement of financial statements
and the formal investigation by the SEC, our stock price has
been trading well below the $5.00 per share minimum
threshold established by many institutional investors as
criteria for ownership. We have no assurance that the stock
price will rise to previous levels. These factors may have
contributed to reducing the trading activity in our stock and
could continue to impair the investment quality of our stock.
|
|
|
Several segments of our business rely on the effectiveness
of channel partners and third-party influencers to help achieve
revenue goals. If we fail to increase and maintain our channel
relationships, our business may suffer. |
Relationships with established channel partners are critical to
our success. These relationships include independent software
vendor (“ISV”), distributor, co-marketer and system
integrator relationships. We rely on these partners’
ability to assist us in generating increased acceptance and use
of our applications, services, and product offerings. We have
established a number of these relationships, and future plans
depend on establishing new relationships and maintaining
existing ones. The other parties to these relationships may not
view these relationships with us as significant to their own
business, and they may reassess their commitment to us or decide
to compete directly with us in the future. We generally do not
have agreements that prohibit them from competing against us
directly or from contracting with our competitors. Additionally,
we cannot guarantee that any such party will perform its
obligations as agreed or contemplated or that we would be able
to specifically enforce any agreement with it. Our failure to
establish and maintain these relationships may significantly
impair our business and financial prospects.
|
|
|
We are subjected to many risks because our business is
dependent on our intellectual property rights. |
We are exposed to infringement risks. Our intellectual
property is important to our business. We may be subject to
intellectual property infringement claims as the number of our
competitors grows and the functionality of our applications
overlaps with competitive offerings. These claims, whether or
not meritorious, could be expensive, divert our attention from
operating our company, result in costly litigation, cause
product shipment delays, or require us to enter into royalty or
licensing agreements, any of which could seriously harm our
business, financial condition and results of operations. If we
become liable to third parties for infringing on their
intellectual property rights, we would be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the applications
that contain the infringing intellectual property. We may be
unable to develop non-infringing technology or obtain a license
on commercially reasonable terms, or at all. In the event an
intellectual property claim against us was successful and we
could not obtain a license on acceptable terms, license a
substitute technology or redesign to avoid infringement, most of
our contracts would require us to refund a portion of the
software license fees, in which case our business, financial
condition and results of operations would be seriously harmed.
In addition, we may not be able to protect against
misappropriation of our intellectual property. Third parties may
infringe upon our intellectual property rights, we may not
detect this unauthorized use and we may be unable to enforce our
rights.
We rely on third parties for technology in our products.
We depend upon third-party suppliers and licensors to provide
software that is incorporated in certain of our products and the
products that we distribute. We have no control over the
scheduling and quality of work of these third-party software
suppliers and
31
licensors. Additionally, the third-party software may not
continue to be available to us on commercially reasonable terms,
or at all. Our agreements to license certain third-party
software will terminate after specified dates unless they are
renewed. In the event we were to have a dispute with a third
party regarding our rights under an agreement, the third party
may have the right to terminate our use of such software and/or
obtain damages. We expect to sell multiple products to the same
customers and problems with the third party technology in one
product may adversely affect sales of other products to the same
customer.
Certain products include so called “open source”
software. In some cases open source software imposes on us
certain requirements to license others both the open source
software as well as software that relates to, or interacts with,
or is a derivative work of open source software. These open
source license terms may be ambiguous and may result in
unanticipated obligations regarding our products, including the
obligation to make source code available. Because open source
software is generally available, it cannot be protected as a
trade secret and competitors and others would have access to
such software and the right to modify or distribute such
software. Also, in many instances where we obtain open source
software, we would not be able to determine if the provider of
such code has legal right to provide such code to the company on
the open source license terms.
Our products may be affected by unknown software defects.
Our products depend on complex software, both internally
developed and licensed from third parties. Complex software
often contains defects, particularly when first introduced or
when enhancements or new versions are released. Although we
conduct extensive testing, we may not discover software defects
that affect our new or current products or enhancements until
after they are deployed. To date, we have not experienced any
material software defects, however despite continued testing,
defects may occur in our software. These defects could cause
performance interruptions, which could damage our reputation
with existing or potential customers, increase our service
costs, cause us to lose revenue, delay market acceptance or
divert our development resources, any of which could cause our
business to suffer.
|
|
|
If security of our customer and patient information is
compromised, we could be liable for damages and our reputation
could decline. |
We retain confidential customer and patient information in our
processing centers. Therefore, it is critical that our
facilities and infrastructure remain secure and that our
facilities and infrastructure are perceived by the marketplace
to be secure. Despite the implementation of security measures,
our infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors, attacks by third parties
or similar disruptive problems. If we fail to meet our
clients’ expectations, we could be liable for damages and
our reputation could suffer. Our insurance may not protect us
from this risk.
|
|
|
If compliance with government regulation of healthcare
becomes costly and difficult for our customers, we may not be
able to grow our business. |
Participants in the healthcare industry are subject to extensive
and frequently changing regulation under numerous federal, state
and local laws. Some of these laws apply directly to our
business; many other indirectly affect the way we do business.
Our healthcare service provider, payer and plan customers are
subject to a wide variety of laws and regulations that could
affect the nature and scope of their relationships with us.
The healthcare market is highly regulated and subject to
changing political, economic and regulatory influences. These
factors affect the purchasing practices and operations of
healthcare organizations. Changes in current healthcare
financing and reimbursement systems, such as the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(MMA), as well as changes in healthcare administration and
communications requirements, such as the Health Insurance
Portability and Accountability Act of 1996 (HIPAA), may cause us
to make unplanned enhancements of software applications or
services, result in delays or cancellations of orders, or result
in the revocation of endorsement of our applications and
services by healthcare participants. The immediate and long term
effect of the laws such as MMA and HIPAA is difficult to
predict. There can be no assurances that our products and
services will adequately address the business and
32
compliance needs created by these and other enactments, or that
we will be able to take advantage of any resulting business
opportunities.
Federal and state legislatures have periodically considered
programs to reform or amend the U.S. healthcare system at
both the federal and state level. These programs may contain
proposals to increase governmental involvement in healthcare,
lower reimbursement rates or otherwise change the environment in
which healthcare market participants operate. At present, there
is renewed and increasing interest in healthcare at the federal
and state levels, including but not limited to proposing
additional privacy, security and/or transaction standards for
communicating health information; implementing national
provider, payer and/or patient identifiers; revamping the scope
or manner of coverages by state and federal health care
programs; and promoting (while likely increasing the regulation
of ) systems that enable the exchange of electronic health
information. Healthcare market participants may respond to
anticipated change in these areas by reducing their investments
or postponing investment decisions, including investments in our
applications and services. We do not know what effect these or
other proposals would have on our business. The uncertainty over
if, when, and in what form any such proposals would be
implemented could have a deleterious impact on our business as
customers may choose to wait to see the final form of any such
legislation or regulations and/or demand guarantees or other
concessions related to potential changes.
|
|
|
As we continue to build our international sales, we are
subject to increased regulation and uncertainties in the
international marketplace. |
Among other things, our core products contain strong encryption
technology that is subject to export control regulation. These
regulations prohibit us from selling in certain countries and to
certain persons. Our inadvertent failure to properly restrict
our sales could subject us and our management to fines and other
sanctions and impair our financial condition and our reputation.
Additionally, in the international marketplace we face increased
uncertainty of enforcement of contractual provisions and
enforcement of judgments in our dealings with
non-U.S. persons. Our inability to properly defend or
enforce our contract rights could materially impair our business
prospects and financial condition.
|
|
|
We may face product-related liabilities that could force
us to pay damages, which would hurt our reputation and financial
condition. |
Although both we and our customers test our applications,
services and product offerings, they may contain defects or
result in system failures. These defects or problems could
result in the loss of or delay in generating revenue, loss of
market share, failure to achieve market acceptance, diversion of
development resources, injury to our reputation or increased
insurance costs. In particular, we market software products that
are designed to assist our healthcare customers in meeting their
HIPAA compliance obligations. Failure of these products to
perform as intended could cause our customers to incur
significant fines and penalties for non-compliance, which in
turn could result in damages and claims against us. Our
contracts generally limit our liability arising from our errors;
however, these provisions may not be enforceable and may not
adequately protect us from liability. While we have general
liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to
maintain this insurance on reasonable terms in the future. In
addition, our insurance may not be sufficient to cover large
claims and our insurer could disclaim coverage on claims. If we
are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our financial condition could
be materially harmed.
|
|
|
If we do not establish and maintain our brands, our
reputation could be adversely affected. |
In order to increase our customer base, we must establish,
maintain and strengthen our brands. For us to be successful in
establishing our brands, professionals in the healthcare and
other targeted markets must perceive us as offering quality,
cost-effective communications, information and administrative
services. Our reputation and brand names could be harmed if we
experience difficulties in introducing new applications,
services and product offerings, if these applications, services
and product offerings are not accepted by customers, if we are
required to discontinue existing applications, services and
product offerings or if our products and services do not
function properly.
33
|
|
|
Goodwill is a major asset and is subject to an annual test
for impairment. |
Goodwill at December 31, 2004 totaled $46.7 million
which is 38% of total assets. The goodwill balance resulted from
our 2003 acquisitions. Because we have adopted Financial
Accounting Standard (SFAS) No. 142, “Goodwill and
Other Intangible Assets,” we are required to test goodwill
annually for impairment and more frequently if events or changes
in circumstances indicate assets might be impaired. Risks
described elsewhere in this section could impair the market
value of our common stock or our ability to generate cash flow
in the future, which could result in the impairment of this
asset.
|
|
|
We are in a highly competitive market. |
The markets for application development tools and for systems
integration and business process management software are highly
competitive. Competition, when coupled with the rapid evolution
of technology and business practices, presents each of our
operating divisions with a challenging environment. Our success
and ability to compete depend in part on our proprietary
technology, our brand recognition and market awareness, and the
features, functionality and quality of our products. We face
many competitive factors which could contribute to our loss of
market share, reduced profit margins, increased operating
expense or discounted offerings. Competition in the application
development market and the healthcare market is strong and many
of our competitors have greater financial and organizational
resources than we do.
|
|
| Item 7A. |
Qualitative and Quantitative Disclosures About Market
Risk |
We currently develop and market our products primarily in the
United States. As a majority of sales are currently made in
U.S. dollars, a strengthening of the dollar could make our
product less competitive in foreign markets. Our interest income
is sensitive to changes in the general level of
U.S. interest rates. Due to the short term-term nature of
our investments, we believe that there is no material interest
risk exposure. Based on the foregoing, no quantitative
disclosures have been provided.
|
|
| Item 8. |
Consolidated Financial Statements and Supplementary
Data |
For a discussion of the information required by this item, you
should refer to pages F-1 through F-30 and S-1.
|
|
| Item 9. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Controls and Procedures
Disclosure Controls. The Company’s Chief Executive
Officer and Chief Financial Officer have evaluated the
effectiveness of the company’s disclosure controls and
procedures as of December 31, 2004. This included an
evaluation of disclosure controls and procedures applicable to
the period covered by and existing through the filing of this
periodic report. The review took into account the various
changes in controls, including disclosure controls, the Company
had taken prior to September 30, 2004, as reported in the
Quarterly Report on Form 10-Q filed for those periods as
well as material weaknesses identified and described below in
Internal Control over Financial Reporting. Based on that review,
the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that the Company’s disclosure
controls and procedures are not effective to provide reasonable
assurance that information the Company is required to disclose
in its reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported accurately.
Internal Control over Financial Reporting. We are in the
process of completing our evaluation and testing of internal
control over financial reporting as required by Section 404
of the Sarbanes-Oxley Act of 2002 and Item 308(a) of
Regulation S-K. In this Annual Report on Form 10-K, we
have not published our annual report on internal control over
financial reporting (Internal Control Report). We expect to
complete
34
our evaluation for the year ended December 31, 2004, and
publish our Internal Control Report, prior to April 30,
2005. Based on testing completed to date, utilizing criteria
established in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria), we
and our registered public accounting firm, Ernst &Young
LLP (our “independent auditors”), have identified a
number of deficiencies in the Company’s internal control
over financial reporting. A number of these deficiencies
individually or in the aggregate have been reported to the audit
committee as constituting a “material weakness,”
meaning that in those areas our internal controls either
individually or in the aggregate are not sufficient to prevent
or allow us to detect a material misstatement of our financial
statements in every instance. These material weaknesses are
described below.
There were no changes to any reported financial results that
have been released by the Company as a result of these
identified deficiencies. We are developing a plan to remedy the
identified deficiencies and this plan will be discussed in the
Company’s Internal Control Report. However, we expect that
we will be unable to conclude in our Internal Control Report
that the Company’s internal control over financial
reporting was effective as of December 31, 2004. As a
result, we expect that our independent auditors will issue an
adverse opinion on the effectiveness of our internal control
over financial reporting in the amendment to this Annual Report
on Form 10-K, which we intend to file with our Internal
Control Report on or before April 30, 2005.
The following summarizes all material weaknesses that we or our
independent auditors have identified to date and reported to our
audit committee. Since our internal control evaluation is not
completed, our final conclusions and findings as published in
our Internal Control Report may differ from these preliminary
findings and potentially could include additional material
weaknesses.
|
|
|
| |
• |
Revenue Recognition. We have concluded that the controls
over the recording and analysis of revenue in multiple element
transactions, are not effective, and are indicative of a
material weakness in software revenue accounting control for one
of the company’s products. Many of our products are sold in
bundled packages and we have established policies and pricing
based on the fair value of each element. Our independent
auditors identified revenue recognition issues on a relatively
new bundled product that includes a term license; resulting in
an audit adjustment that was material to the financial
statements. This revenue will be deferred and recognized over
the term of the agreement. |
| |
| |
• |
Accrued Liabilities. As a result of errors identified by
our independent auditors in accrued compensation balances, we
have concluded that controls over the recording of accrued
liabilities are not effective and are indicative of a material
weakness. We were significantly over-accrued in two areas,
medical claims and vacation liability, and under-accrued in two
areas, payroll taxes and 401(k) matching funds. Our accruals for
health insurance benefits contain elements that must be
estimated and the historical-trend information we used to
estimate these elements of the accrual resulted in over-accrual
of these accounts. The calculation of the accrual for vacations
included a mathematical error resulting in an over-accrual. The
underaccruals were caused by errors in estimating accruals in
401(k) matching and employer-related payroll tax
liabilities. The effect of these accrual errors required an
audit adjustment to accruals that was material to the financial
statements. |
| |
| |
• |
Asset Impairment. Our valuation analysis of capitalized
software did not identify an asset impairment for software that
will not generate future revenue, and was indicative of a
material weakness in control over the accounting for asset
impairment. This resulted in an audit adjustment to capitalized
software that was material to the financial statements. |
None of these identified weaknesses has affected previously
published financial statements.
Changes in Controls
Based on earlier findings of material weakness in disclosure and
internal controls in our 2002 and 2003 financial statements, we
have taken many steps to strengthen our disclosure controls and
our internal control over financial reporting, accounting
functions and revenue recognition as described below and in
prior filings with the SEC. In connection with the testing
performed to date by us and our independent auditors, material
weaknesses still exist, which indicate that we need to take
additional steps to remediate these situations. We
35
expect to address the remaining actions required to remediate
our existing weaknesses in our Internal Control Report. As
discussed below, we have been and continue to be engaged in
efforts to improve our internal controls and procedures and we
expect that these efforts in the first half of 2005 will address
the deficiencies.
The measures taken in 2004 prior to September 30, 2004,
include the following:
|
|
|
| |
• |
We hired a new President and Chief Executive Officer and a new
Chief Financial Officer who have expertise in financial controls
and reporting, to improve the overall quality and level of
experience in our finance and accounting organization. |
| |
| |
• |
We enhanced our disclosure committee and increased the
committee’s authority. |
| |
| |
• |
We implemented a Code of Business Conduct and Ethics. |
| |
| |
• |
We implemented, communicated and trained employees on a formal
whistle blower reporting system through a third party provider
to enable employees to identify potential concerns or ethical
issues on an anonymous basis. |
| |
| |
• |
We made improvements to our shipping procedures to provide more
detailed information regarding product shipments and we have
consolidated our shipping function to one location. |
| |
| |
• |
We improved our procedures for verifying the creditworthiness of
prospective customers. |
| |
| |
• |
We made changes to procedures for estimating fees and have
established revenue recognition on our services work. |
| |
| |
• |
We initiated additional training of our sales organizations
regarding revenue recognition rules and improved communication. |
| |
| |
• |
We formed a multidisciplinary price book committee that controls
new product introductions and determines legal and accounting
requirements for all products; implementation of processes to
improve communication among our various functional groups during
the transaction approval and contract negotiation phases. |
Since September 30, 2004, management has taken additional
steps to strengthen internal controls. In connection with the
company’s efforts to comply in 2004 with the requirements
of Section 404(a) of the Sarbanes-Oxley Act, a consulting
firm was retained to assist with the analysis and testing and to
identify areas where internal controls need to be enhanced. In
response to their findings, and the preliminary findings of our
independent auditors, prior to December 31, 2004 we made
additional changes in internal controls and procedures.
Additional changes made prior to December 31, 2004, include
the following:
|
|
|
| |
• |
We have formalized and enhanced our revenue recognition
guidelines and processes. |
| |
| |
• |
We have formalized the documentation of the financial review
process. |
| |
| |
• |
We have implemented additional internal controls surrounding the
credit management function. |
| |
| |
• |
We have separated duties in accounting, financial reporting and
information technology functions to improve checks and balances. |
| |
| |
• |
We have enhanced and clarified accounting, financial reporting
and information technology policies and procedures. |
| |
| |
• |
We have implemented processes to monitor adherence to the
accounting policies. |
| |
| |
• |
We have formalized and/or improved internal control surrounding
access to accounting systems and eliminated certain automatic
approvals in the accounting systems. |
As described above, we are still identifying deficiencies and
formulating our plans for remedying those deficiencies, and will
report the results of those activities in our Internal Control
Report. We plan to take additional steps to strengthen our
internal controls, including improved communication, additional
training, improved operating controls, augmenting our finance
staff, and enhanced reporting processes. We and our
36
independent auditors have communicated to our audit committee
the material weaknesses identified to date in our internal
control over financial reporting. Management, with the oversight
of our audit committee, is committed to effective remediation of
known material weakness and significant deficiencies as quickly
as possible.
Except for the improvements described above, there have been no
other changes in our internal control over financial reporting
during the year ended December 31, 2004 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Appearing as exhibits to this report are the certifications of
our chief executive officer and chief financial officer required
in accordance with Section 302 of the Sarbanes-Oxley Act of
2002. The disclosures set forth in this Item 9A contain
information concerning the evaluation of our disclosure controls
and procedures, and changes in internal control over financial
reporting, referred to in the certifications. This Item 9A
should be read in conjunction with the certifications for a more
complete understanding of the topics presented.
|
|
| Item 9B. |
Other Information |
None
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item concerning the
Company’s directors is incorporated by reference to the
information set forth in the sections entitled “Information
About Nominees and Other Directors,” “Director’s
Compensation,” and “Section 16(a) Beneficial
Ownership Compliance” in our Proxy Statement for the 2005
Annual Meeting of Stockholders (“2005 Proxy
Statement”) to be filed with the Commission within
120 days after then end of the Company’s fiscal year
ended December 31, 2004.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our
directors, officers and employees and a Code of Ethics that
applies to our Senior Financial Officers. We publicize both of
these Codes of Ethics by posting them on our website,
http://www.quovadx.com. Our Codes of Ethics are also
included as Exhibits 14.1 and 14.2 to this Annual Report on
Form 10-K. We will disclose on our website any waivers of,
or amendments to either Code of Ethics.
|
|
| Item 11. |
Executive Compensation |
The information required by this item regarding executive
compensation is incorporated by reference to the information set
forth in the section entitled “Executive Compensation”
in our 2005 Proxy Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this item regarding security
ownership of certain beneficial owners and management and
regarding the securities authorized for issuance under our
equity compensation plans is incorporated by reference to the
information set forth in the section entitled “Security
Ownership of Certain Beneficial Holders and Management” and
“Securities Authorized for Issuance Under Equity
Compensation Plans” in our 2005 Proxy Statement.
|
|
| Item 13. |
Certain Relationships and Related Transaction |
The information required by this item regarding security
ownership of certain relationships and related transactions is
incorporated by reference to the information set forth in the
section entitled “Certain Relationships and Related
Transactions” in our 2005 Proxy Statement.
37
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by
reference to the information under the heading “Fees Paid
to Ernst & Young LLP” in our 2005 Proxy Statement.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this
Annual Report on Form 10-K:
|
|
| |
1. Consolidated Financial Statements |
The following consolidated financial statements of Quovadx, Inc.
are filed as part of this report:
| |
|
|
|
|
| |
|
Page | |
| |
|
Number | |
| |
|
| |
|
Index to Consolidated Financial Statements
|
|
|
F-1 |
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
|
Consolidated Balance Sheets
|
|
|
F-3 |
|
|
Consolidated Statements of Operations
|
|
|
F-4 |
|
|
Consolidated Statements of Changes in Stockholders’ Equity
|
|
|
F-5 |
|
|
Consolidated Statements of Cash Flows
|
|
|
F-6 |
|
|
Notes to the Consolidated Financial Statements
|
|
|
F-7 |
|
|
|
| |
2. Consolidated Financial Statement Schedules. The
following consolidated financial statement schedule of the
Company for each of the years ended December 31, 2004, 2003
and 2002, is filed as part of this Annual Report on
Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and the related notes
thereto, of the Company. |
| |
|
|
|
|
| |
|
Page | |
| |
|
Number | |
| |
|
| |
|
Schedule II Valuation and Qualifying Accounts
|
|
|
S-1 |
|
Schedules other than the one listed above have been omitted
since they are either not required, not applicable, or the
information is included elsewhere in this Annual Report on
Form 10-K.
|
|
| |
3. Exhibits. The following exhibits are filed as
part of, or incorporated by reference into, this Annual Report
on Form 10-K: |
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
| |
|
|
| |
2 |
.1 |
|
Agreement and Plan of Merger, dated as of August 13, 2003,
by and among CareScience, Inc., the Registrant and Carlton
Acquisition Corporation (incorporated by reference to Annex A to
the Prospectus filed by the Registrant under Rule 424(b)(3)
on September 18, 2003). |
| |
2 |
.2 |
|
Agreement and Plan of Merger, dated as of November 3, 2003,
by and among Rogue Wave Software, Inc., the Registrant and Chess
Acquisition Corporation (incorporated by reference to Annex A to
the Prospectus filed by the Registrant under Rule 424(b)(3)
on December 16, 2003). |
| |
3 |
.1 |
|
Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Quarterly
Report on Form 10-Q of the Registrant for the quarter ended
March 31, 2003, filed on May 13, 2003). |
| |
3 |
.2 |
|
Bylaws of the Registrant (incorporated by reference to
Exhibit 3.3 to the Registration Statement on Form S-1
of the Registrant, filed on November 2, 1999, Registration
No. 333-90165). |
| |
4 |
.1 |
|
Specimen stock certificate representing shares of Common Stock
of the Registrant (incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K of the Registrant, filed
on October 16, 2001). |
38
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description of Document |
| | |
|
|
| |
4 |
.2 |
|
Preferred Stock Rights Agreement, dated as of July 24,
2000, between the Registrant and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, including the Certificate of
Designation, the form of Rights Certificate and the Summary of
Rights attached thereto as Exhibits A, B, and C,
respectively (incorporated by reference to Exhibit 1 to the
Registration Statement on Form 8-A of the Registrant, filed
on July 28, 2000). |
| |
10 |
.1* |
|
Amended and Restated 1997 Stock Plan and related agreements. |
| |
10 |
.2* |
|
Amended and Restated 1999 Employee Stock Purchase Plan and
related agreements (incorporated by reference to
Exhibit 10.2. the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended September 30, 2003, filed
on November 3, 2003). |
| |
10 |
.3* |
|
Amended and Restated 1999 Director Option Plan and related
agreements (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-8 of the Registrant, filed
on May 16, 2002, Registration No. 333-88408). |
| |
10 |
.4* |
|
Amended and Restated 2000 Nonstatutory Stock Option Plan and
related agreements (incorporated by reference to
Exhibit 4.9 to the Registration Statement on Form S-8
of the Registrant, filed on April 1, 2003, Registration
No. 333-104184). |
| |
10 |
.5* |
|
Quovadx, Inc. Executive Management 2005 Annual Bonus Incentive
Plan (incorporated by reference to Exhibit 99.2 to the
Current Report of the Registrant, filed on February 16,
2005). |
| |
10 |
.6* |
|
Healthcare.com Corporation Stock Option Plan (incorporated by
reference to Exhibit 4.1 to the Post-Effective Amendment
No. 1 to Form S-4 on Form S-8 Registration
Statement of the Registrant, filed on August 16, 2001,
Registration No. 333-64282). |
| |
10 |
.7* |
|
Healthcare.com Corporation Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the
Post-Effective Amendment No. 1 to Form S-4 on
Form S-8 Registration Statement of the Registrant, filed on
August 16, 2001, Registration No. 333-64282). |
| |
10 |
.8* |
|
Healthcare.com Corporation Non-employee Director Stock Option
Plan (incorporated by reference to Exhibit 4.3 to the
Post-Effective Amendment No. 1 to Form S-4 on
Form S-8 Registration Statement of the Registrant, filed on
August 16, 2001, Registration No. 333-64282). |
| |
10 |
.9* |
|
Rogue Wave Software, Inc. 1996 Equity Incentive Plan
(incorporated by reference to Exhibit 4.1 to the
Post-Effective Amendment No. 1 to Form S-4 on
Form S-8 Registration Statement of the Registrant, filed on
January 8, 2004, Registration No. 333-110388). |
| |
10 |
.10* |
|
Rogue Wave Software, Inc. 1997 Equity Incentive Plan
(incorporated by reference to Exhibit 4.2 to the
Post-Effective Amendment No. 1 to Form S-4 on
Form S-8 Registration Statement of the Registrant, filed on
January 8, 2004, Registration No. 333-110388). |
| |
10 |
.11* |
|
Amended and Restated Employment Agreement, dated as of
April 11, 2003, by and between CareScience, Inc. and Ronald
A. Paulus (filed on April 25, 2003, as Exhibit 10.2 to
Amendment No. 1 to the Annual Report on Form 10-K/ A
of CareScience, Inc. for the fiscal year ended December 31,
2002, Commission File No. 0-30859, and incorporated by
reference to Exhibit 10.11 to the Annual Report on
Form 10-K of the Registrant for the year ended
December 31, 2003, filed on March 18, 2004). |
| |
10 |
.12* |
|
Amended and Restated Employment Agreement, dated as of
April 11, 2003, by and between CareScience, Inc. and Thomas
Zajac (filed on April 25, 2003, as Exhibit 10.4 to
Amendment No. 1 to the Annual Report on Form 10-K/ A
of CareScience, Inc. for the fiscal year ended December 31,
2002, Commission Filed No. 0-30859, and incorporated by
reference to Exhibit 10.29 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
September 30, 2004, filed on November 17, 2004). |
| |
10 |
.13* |
|
Consulting Agreement, dated as of April 1, 2003, between
the Registrant and Compuflex International, Inc. (incorporated
by reference to Exhibit 10.21 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
March 31, 2004, filed as of August 16, 2004). |
| |
10 |
.14* |
|
Employment Agreement, dated as of August 25, 2003, by and
between the Registrant and Cory Isaacson (incorporated by
reference to Exhibit 10.12 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
March 31, 2004, filed on August 16, 2004). |
39
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description of Document |
| | |
|
|
| |
10 |
.15* |
|
Amendment No. 1 to the Employment Agreement, dated as of
August 25, 2003, by and between the Registrant and Cory
Isaacson, which amendment was dated March 17, 2004
(incorporated by reference to Exhibit 10.13 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended March 31, 2004, filed on August 16,
2004). |
| |
10 |
.16* |
|
Asset Purchase Agreement, dated as of August 25, 2003, by
and between CMI Corporate Marketing, Inc. (d/b/a Compuflex
International) and the Registrant (incorporated by reference to
Exhibit 10.14 to the Quarterly Report on Form 10-Q of
the Registrant for the quarter ended March 31, 2004, filed
on August 16, 2004). |
| |
10 |
.17* |
|
Severance Agreement, dated as of April 11, 2004, by and
between the Registrant and Lorine R. Sweeney (incorporated by
reference to Exhibit 10.17 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
June 30, 2004, filed on August 16, 2004). |
| |
10 |
.18* |
|
Severance Agreement, dated as of April 11, 2004, by and
between the Registrant and Gary T. Scherping (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
June 30, 2004, filed on August 16, 2004). |
| |
10 |
.19* |
|
Employment Agreement, dated as of April 7, 2004 by and
between the Registrant and Melvin L. Keating (incorporated by
reference to Exhibit 10.15 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
June 30, 2004, filed on August 16, 2004). |
| |
10 |
.20* |
|
Employment Agreement, dated as of February 10, 2005, by and
between the Registrant and Melvin L. Keating (incorporated by
reference to Exhibit 99.1 to the Current Report on
Form 8-K of the Registrant, filed on February 11,
2005). |
| |
10 |
.21* |
|
Employment Agreement, dated as of April 9, 2004 by and
between the Registrant and Harvey A. Wagner (incorporated by
reference to Exhibit 10.16 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended
June 30, 2004, filed on August 16, 2004). |
| |
10 |
.22* |
|
Employment Agreement, dated as of October 8, 2004, by and
between the Registrant and Harvey A. Wagner (incorporated by
reference to Exhibit 99.1 to the Current Report on
Form 8-K of the Registrant, filed on October 12, 2004). |
| |
10 |
.23* |
|
Form of Executive Employment Agreement (incorporated by
reference to Exhibit 99.1 to the Current Report on
Form 8-K of the Registrant, filed on February 16,
2005). |
| |
10 |
.24 |
|
Office Lease Agreement, dated as of November 8, 1999, by
and between Mountain States Mutual Casualty Company and the
Registrant (incorporated by reference to Amendment 1 to the
Registration Statement on Form S-1 of the Registrant, filed
on December 17, 1999, Registration No. 333-90165). |
| |
10 |
.25 |
|
Amendment to Office Lease Agreement, dated as of
November 8, 1999, by and between Mountain States Casualty
Company and the Registrant, which amendment was dated as of
November 22, 2004. |
| |
10 |
.26 |
|
Estoppel Agreement, dated as of December 31, 2004, by and
among Mountain States Mutual Casualty Company, the Registrant,
Royal Health Care Data Center LLC and Royal Health Care of Long
Island LLC d/b/a Royal Health Care. |
| |
10 |
.27 |
|
Sublease, dated as of August 24, 2001, by and between Echo
Bay Management Corp. and the Registrant (incorporated by
reference to Exhibit 12.1 to the Annual Report on
Form 10-K of the Registrant for the year ended
December 31, 2001, filed on March 26, 2002). |
| |
10 |
.28 |
|
Form of Indemnification Agreement entered into by the Registrant
with each of its directors and executive officers (incorporated
by reference to Exhibit 11.1 to the Annual Report on
Form 10-K of the Registrant for the year ended
December 31, 2001, filed on March 26, 2002). |
| |
10 |
.29 |
|
Restated License Agreement, dated as of April 1, 1995, by
and between the Trustees of the University of Pennsylvania and
Care Management Science Corporation (filed on March 14,
2000, as Exhibit 10.3 to the Registration Statement on
Form S-1 of CareScience, Inc., Registration
No. 333-32376 and incorporated by reference to
Exhibit 10.15 to the Annual Report on Form 10-K of the
Registrant for the year ended December 31, 2003, filed on
March 18, 2004). |
40
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description of Document |
| | |
|
|
| |
10 |
.30 |
|
License Agreement, dated as of October 2, 2000, by and
between California HealthCare Foundation and CareScience, Inc.
(filed on March 26, 2002, as Exhibit 10.14 to the
Annual Report on Form 10-K of CareScience, Inc. for the
year ended December 31, 2001, Commission File
No. 0-30859, and incorporated by reference to
Exhibit 10.24 to the Quarterly Report on Form 10-Q of
the Registrant for the quarter ended September 30, 2004). |
| |
10 |
.31 |
|
License Agreement, dated as of July 30, 2001, by and
between 3550 University City Science Center Associates as
licensor and CareScience, Inc., as licensee, for the license to
use a portion of a building for a data center (incorporated by
reference to Exhibit 10.16 to the Annual Report on
Form 10-K of the Registrant for the year ended
December 31, 2003, filed on March 18, 2004). |
| |
10 |
.32 |
|
Licensor’s Consent to Assignment of License between
CareScience, Inc. and the Registrant, dated as of
September 18, 2003, by 3550 University City Science Center
Associates as licensor (incorporated by reference to
Exhibit 10.17 to the Annual Report on Form 10-K of the
Registrant for the year ended December 31, 2003, filed on
March 18, 2004). |
| |
10 |
.33 |
|
Equity Buy-Back Agreement, dated as of June 29, 2004, by
and between the Registrant and Royal Health Care of Long Island
LLC (d/b/a Royal Health Care, LLC) (incorporated by reference to
Exhibit 10.25 to the Quarterly Report on Form 10-Q of
the Registrant for the quarter ended June 30, 2004, filed
on August 16, 2004). |
| |
10 |
.34 |
|
Asset Purchase Agreement, dated as of December 31, 2004, by
and between the Registrant and Royal Health Care Data Center LLC
(incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K of the Registrant, filed on
January 3, 2005). |
| |
14 |
.1 |
|
Quovadx, Inc. Code of Business Conduct and Ethics. |
| |
14 |
.2 |
|
Quovadx, Inc. Code of Ethics for Senior Financial Officers. |
| |
21 |
|
|
Subsidiaries of the Registrant. |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
| |
31 |
.1 |
|
Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended. |
| |
31 |
.2 |
|
Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended. |
| |
32 |
.1** |
|
Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(b) and Rule 15d-14(b),
promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. §1350. |
| |
32 |
.2** |
|
Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(b) and Rule 15d-14(b),
promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. §1350. |
|
|
|
| |
* |
Identifies exhibit that consists of or includes a management
contract or compensatory plan or arrangement. |
|
|
| ** |
This certification is furnished to, but not filed, with the
Commission. This certification shall not be deemed to be
incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to
the extent that the Registrant specifically incorporates it by
reference. |
(b) Index to Exhibits. The exhibits listed on the
accompanying index to exhibits are filed as exhibits to this
Annual Report on Form 10-K.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the
City of Englewood, State of Colorado, on this 9th day of March,
2005.
|
|
| |
|
| |
Harvey A. Wagner |
| |
President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Harvey A.
Wagner and Melvin L. Keating, and each of them, as his true and
lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them or their or
his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Harvey A. Wagner
Harvey
A. Wagner |
|
Director, and President and Chief Executive Officer
(Principal Executive Officer) |
|
March 9, 2005 |
| |
/s/ Melvin L. Keating
Melvin
L. Keating |
|
Executive Vice President, Chief Financial Officer and
Treasurer
(Principal Financial Officer) |
|
March 9, 2005 |
| |
/s/ Juan C. Perez
Juan
C. Perez |
|
Vice President and Controller
(Principal Accounting Officer) |
|
March 9, 2005 |
| |
/s/ Jeffrey M. Krauss
Jeffrey
M. Krauss |
|
Chairman of the Board |
|
March 9, 2005 |
| |
/s/ Fred L. Brown
Fred
L. Brown |
|
Director |
|
March 9, 2005 |
| |
/s/ J. Andrew Cowherd
J.
Andrew Cowherd |
|
Director |
|
March 9, 2005 |
42
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ James B. Hoover
James
B. Hoover |
|
Director |
|
March 9, 2005 |
| |
/s/ Charles J.
Roesslein
Charles
J. Roesslein |
|
Director |
|
March 9, 2005 |
| |
/s/ James A. Gilbert
James
A. Gilbert |
|
Director |
|
March 9, 2005 |
43
QUOVADX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Quovadx, Inc.
We have audited the accompanying consolidated balance sheets of
Quovadx, Inc. (the “Company”) as of December 31,
2004 and 2003, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2004 and
2003, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
Denver, Colorado
March 9, 2005
F-2
QUOVADX, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
and per share amounts) | |
| |
|
|
|
(Restated) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
18,822 |
|
|
$ |
23,688 |
|
| |
Short-term investments
|
|
|
6,025 |
|
|
|
— |
|
| |
Accounts receivable, net of allowance of $1,067 and $2,765,
respectively
|
|
|
14,068 |
|
|
|
17,593 |
|
| |
Unbilled accounts receivable
|
|
|
1,195 |
|
|
|
3,465 |
|
| |
Other current assets
|
|
|
2,598 |
|
|
|
4,143 |
|
| |
Assets of discontinued operations
|
|
|
— |
|
|
|
1,758 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
42,708 |
|
|
|
50,647 |
|
|
Property and equipment, net
|
|
|
4,182 |
|
|
|
5,661 |
|
|
Software, net
|
|
|
11,333 |
|
|
|
28,876 |
|
|
Other intangible assets, net
|
|
|
17,713 |
|
|
|
17,735 |
|
|
Goodwill
|
|
|
46,724 |
|
|
|
48,015 |
|
|
Restricted cash
|
|
|
578 |
|
|
|
— |
|
|
Other assets
|
|
|
707 |
|
|
|
4,256 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
123,945 |
|
|
$ |
155,190 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
3,523 |
|
|
$ |
7,953 |
|
| |
Accrued liabilities
|
|
|
10,097 |
|
|
|
15,881 |
|
| |
Unearned revenue
|
|
|
19,927 |
|
|
|
19,066 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
33,547 |
|
|
|
42,900 |
|
|
Deferred revenue
|
|
|
— |
|
|
|
315 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
33,547 |
|
|
|
43,215 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding
|
|
$ |
— |
|
|
$ |
— |
|
|
Common stock, $0.01 par value; 100,000,000 shares
authorized; 40,618,535 and 38,938,134 shares issued and
outstanding, respectively
|
|
|
406 |
|
|
|
389 |
|
|
Additional paid-in capital
|
|
|
270,737 |
|
|
|
269,011 |
|
|
Unearned compensation
|
|
|
(214 |
) |
|
|
(385 |
) |
|
Accumulated other comprehensive income
|
|
|
871 |
|
|
|
131 |
|
|
Accumulated deficit
|
|
|
(181,402 |
) |
|
|
(157,171 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
90,398 |
|
|
|
111,975 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
123,945 |
|
|
$ |
155,190 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
QUOVADX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
$ |
27,172 |
|
|
$ |
20,270 |
|
|
$ |
11,424 |
|
| |
Professional services
|
|
|
14,540 |
|
|
|
17,512 |
|
|
|
22,459 |
|
| |
Recurring services
|
|
|
41,089 |
|
|
|
27,146 |
|
|
|
26,740 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
82,801 |
|
|
|
64,928 |
|
|
|
60,623 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
12,506 |
|
|
|
9,850 |
|
|
|
5,457 |
|
| |
Professional services
|
|
|
14,715 |
|
|
|
14,022 |
|
|
|
14,969 |
|
| |
Recurring services
|
|
|
18,878 |
|
|
|
16,391 |
|
|
|
17,245 |
|
| |
Asset impairment
|
|
|
7,195 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
53,294 |
|
|
|
40,263 |
|
|
|
37,671 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
29,507 |
|
|
|
24,665 |
|
|
|
22,952 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
19,597 |
|
|
|
17,785 |
|
|
|
13,343 |
|
| |
General and administrative
|
|
|
19,832 |
|
|
|
12,742 |
|
|
|
13,660 |
|
| |
Research and development
|
|
|
13,383 |
|
|
|
9,995 |
|
|
|
7,209 |
|
| |
Amortization of acquired intangible assets
|
|
|
3,718 |
|
|
|
1,720 |
|
|
|
2,307 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
56,530 |
|
|
|
42,242 |
|
|
|
36,519 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,023 |
) |
|
|
(17,577 |
) |
|
|
(13,567 |
) |
|
Gain on sale of assets
|
|
|
1,535 |
|
|
|
— |
|
|
|
87 |
|
|
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
(93,085 |
) |
|
Interest income, net
|
|
|
355 |
|
|
|
694 |
|
|
|
1,035 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(25,133 |
) |
|
|
(16,883 |
) |
|
|
(105,530 |
) |
|
Income tax expense
|
|
|
133 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(25,266 |
) |
|
|
(16,883 |
) |
|
|
(105,530 |
) |
|
Discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from discontinued operations
|
|
|
589 |
|
|
|
406 |
|
|
|
763 |
|
| |
Gain on sale of discontinued operations
|
|
|
446 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(24,231 |
) |
|
$ |
(16,477 |
) |
|
$ |
(104,767 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per common share —
basic and diluted
|
|
$ |
(0.63 |
) |
|
$ |
(0.54 |
) |
|
$ |
(3.52 |
) |
|
Income from and gain on sale of discontinued operations per
common share — basic and diluted
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$ |
(0.61 |
) |
|
$ |
(0.52 |
) |
|
$ |
(3.49 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and
diluted
|
|
|
39,892 |
|
|
|
31,407 |
|
|
|
29,987 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
QUOVADX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
Additional | |
|
Unearned | |
|
Accumulated Other | |
|
Accumulated | |
|
|
| |
|
Shares | |
|
Amount | |
|
Paid-in Capital | |
|
Compensation | |
|
Comprehensive Income | |
|
Deficit | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at January 1, 2002
|
|
|
29,688 |
|
|
$ |
297 |
|
|
$ |
224,748 |
|
|
$ |
(231 |
) |
|
$ |
— |
|
|
$ |
(35,927 |
) |
|
$ |
188,887 |
|
|
Net loss and comprehensive loss (Restated)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(104,767 |
) |
|
|
(104,767 |
) |
|
Shares issued for acquisitions
|
|
|
139 |
|
|
|
1 |
|
|
|
919 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
920 |
|
|
Stock option exercises and issuances under employee stock
purchase plan
|
|
|
349 |
|
|
|
4 |
|
|
|
1,018 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,022 |
|
|
Stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 (Restated)
|
|
|
30,176 |
|
|
|
302 |
|
|
|
226,685 |
|
|
|
— |
|
|
|
— |
|
|
|
(140,694 |
) |
|
|
86,293 |
|
|
Net loss (Restated)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,477 |
) |
|
|
(16,477 |
) |
|
Currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
131 |
|
|
|
— |
|
|
|
131 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,346 |
) |
|
Shares issued for acquisitions
|
|
|
8,072 |
|
|
|
81 |
|
|
|
41,014 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
41,095 |
|
|
Stock option exercises and issuances under employee stock
purchase plan
|
|
|
690 |
|
|
|
6 |
|
|
|
1,312 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,318 |
|
|
Deferred compensation from options exchanged in acquisition
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(385 |
) |
|
|
— |
|
|
|
— |
|
|
|
(385 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 (Restated)
|
|
|
38,938 |
|
|
|
389 |
|
|
|
269,011 |
|
|
|
(385 |
) |
|
|
131 |
|
|
|
(157,171 |
) |
|
|
111,975 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24,231 |
) |
|
|
(24,231 |
) |
|
Currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
740 |
|
|
|
— |
|
|
|
740 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,491 |
) |
|
Stock option exercises and issuances under employee stock
purchase plan
|
|
|
1,586 |
|
|
|
16 |
|
|
|
1,428 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,444 |
|
|
Deferred compensation from options exchanged in acquisition
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
|
|
365 |
|
|
|
— |
|
|
|
— |
|
|
|
470 |
|
|
Deferred compensation from restricted stock awards
|
|
|
95 |
|
|
|
1 |
|
|
|
193 |
|
|
|
(194 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
40,619 |
|
|
$ |
406 |
|
|
$ |
270,737 |
|
|
$ |
(214 |
) |
|
$ |
871 |
|
|
$ |
(181,402 |
) |
|
$ |
90,398 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
QUOVADX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(24,231 |
) |
|
$ |
(16,477 |
) |
|
$ |
(104,767 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
11,108 |
|
|
|
9,715 |
|
|
|
8,673 |
|
| |
Amortization of acquired intangible assets
|
|
|
3,332 |
|
|
|
1,720 |
|
|
|
2,307 |
|
| |
Amortization of deferred compensation
|
|
|
470 |
|
|
|
— |
|
|
|
— |
|
| |
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
93,085 |
|
| |
Asset impairments
|
|
|
7,529 |
|
|
|
— |
|
|
|
— |
|
| |
Gain on sale of assets
|
|
|
(1,981 |
) |
|
|
— |
|
|
|
(87 |
) |
| |
Provision for losses on accounts receivable
|
|
|
162 |
|
|
|
82 |
|
|
|
474 |
|
| |
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
| |
Change in assets and liabilities (net of assets and liabilities
acquired)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
3,986 |
|
|
|
(559 |
) |
|
|
(4,456 |
) |
| |
|
Unbilled accounts receivable
|
|
|
2,270 |
|
|
|
1,128 |
|
|
|
2,245 |
|
| |
|
Other assets
|
|
|
2,063 |
|
|
|
618 |
|
|
|
204 |
|
| |
|
Accounts payable
|
|
|
(4,430 |
) |
|
|
5,525 |
|
|
|
(477 |
) |
| |
|
Accrued liabilities
|
|
|
(5,139 |
) |
|
|
(6,046 |
) |
|
|
(6,445 |
) |
| |
|
Deferred and unearned revenue
|
|
|
711 |
|
|
|
(2,981 |
) |
|
|
(1,285 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash used in operating activities
|
|
|
(4,150 |
) |
|
|
(7,275 |
) |
|
|
(10,298 |
) |
| |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,010 |
) |
|
|
(1,971 |
) |
|
|
(1,457 |
) |
|
Purchased and capitalized software
|
|
|
(1,087 |
) |
|
|
(3,557 |
) |
|
|
(3,508 |
) |
|
Business acquisitions, net of cash acquired
|
|
|
— |
|
|
|
(12,585 |
) |
|
|
(1,633 |
) |
|
Proceeds from sale of assets
|
|
|
5,476 |
|
|
|
— |
|
|
|
— |
|
|
Purchase of short-term investments
|
|
|
(6,025 |
) |
|
|
(33,720 |
) |
|
|
(63,805 |
) |
|
Sale of short-term investments
|
|
|
— |
|
|
|
50,097 |
|
|
|
55,884 |
|
|
Other investing activities
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,646 |
) |
|
|
(1,736 |
) |
|
|
(14,510 |
) |
| |
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1,444 |
|
|
|
1,318 |
|
|
|
1,022 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by financing activities
|
|
|
1,444 |
|
|
|
1,318 |
|
|
|
1,022 |
|
| |
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
|
|
486 |
|
|
|
137 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,866 |
) |
|
|
(7,556 |
) |
|
|
(23,786 |
) |
|
Cash and cash equivalents at beginning of period
|
|
|
23,688 |
|
|
|
31,244 |
|
|
|
55,030 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
18,822 |
|
|
$ |
23,688 |
|
|
$ |
31,244 |
|
| |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in business acquisitions
|
|
$ |
— |
|
|
$ |
41,095 |
|
|
$ |
920 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three years ended December 31, 2004, 2003, and
2002
|
|
| 1. |
Organization and Summary of Significant Accounting
Policies |
Quovadx is a global software and services firm that helps
enterprise customers worldwide develop, extend and integrate
applications based on open standards. Our software and services
offerings include an integrated suite of application development
tools and vertical enterprise applications for companies in
healthcare, financial services, software, telecommunications,
and the public sector.
The Company is incorporated under the laws of the State of
Delaware. The consolidated financial statements include the
accounts of Quovadx and its wholly-owned subsidiaries, Rogue
Wave Software, Inc. (“Rogue Wave”), CareScience, Inc.
(“CareScience”), Outlaw Technologies, Inc.
(“Outlaw”), Pixel Group (“Pixel”),
Healthcare.com Corporation (“Healthcare.com”), Confer
Software, Inc. (“Confer”), Integrated Media, Inc.
(“Integrated Media”) and Advica Health Resources, Inc.
(“Advica”). All material intercompany amounts and
transactions have been eliminated.
|
|
|
Restatement of Financial Statements for 2003 and
2002 |
On March 15, 2004, the Company announced that it was
restating its 2003 third quarter financial results to reverse
all previously recorded revenue associated with Infotech Network
Group (“Infotech”). As a result of this restatement,
the Audit Committee retained independent counsel to conduct a
full investigation of the Infotech relationship. Additionally,
the Company, in conjunction with new management and under
direction of the Board of Directors, undertook a review of all
historical accounting policies and practices. As a result of
this subsequent review, additional accounting inaccuracies were
identified affecting the Company’s financial results for
the years ended December 31, 2003 and 2002. Accordingly the
Company restated its historical financial results for the years
ending December 31, 2003 and 2002. The restated financial
statements were filed with the SEC on Form 10K/A in August
2004. This restatement is described in Note 2.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company recognizes revenue in accordance with the provisions
of Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended, and
SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.”
License agreements generally provide that customers pay a
license fee based on a specified number of instances of the
software and the type of software modules licensed. Customers
that purchase licenses generally enter into renewable one-year
maintenance agreements that entitle the customer to receive
unspecified updates on the software licensed, error corrections,
and telephone support, generally for a fixed fee.
The methodology the Company uses to recognize software license
and related services revenue is dependent on whether the Company
has established vendor-specific objective evidence
(“VSOE”) of fair value for the separate elements of a
multiple-element agreement. If an agreement includes both
license and
F-7
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
service elements, the license fee is recognized on delivery of
the software if the remaining services are not essential to the
functionality of the software, the collection of the fees is
probable, the fees are fixed and determinable, an agreement is
signed and the Company has established VSOE of fair value for
the remaining services. Revenue from the related services is
recognized as the services are provided. When the related
services are essential to the functionality of the base product
or when the Company has not established VSOE of fair value for
the remaining services, the software license fees are deferred
and the entire contract is recognized as the services are
provided.
Professional services revenue represents software development,
implementation and consulting services. When derived from a
fixed price contract, and collection of fees is probable, the
Company recognizes professional services revenue using the
percentage-of-completion method of accounting. When derived from
a time-and-materials contract, and the collection of fees is
probable, the Company recognizes professional services revenue
as the services are provided.
When revenue is recognized using the percentage-of-completion
basis of accounting, the Company’s management estimates the
costs to complete the services to be provided under the contract
and recognizes revenue from the percentage of costs incurred to
date in comparison to the total cost of the project. The Company
may encounter budget and schedule overruns caused by increased
material, labor, or overhead costs. Adjustments to cost
estimates are made in the period in which the facts requiring
such revisions become known. Estimated losses, if any, are
recorded in the period in which the current estimates of the
costs to complete the services exceed the revenue to be
recognized under the contract.
Maintenance, a component of recurring revenue, is derived from
agreements for providing unspecified software updates, error
corrections, and telephone support. Maintenance revenue is
recognized ratably over the maintenance period, which is
generally twelve months.
Process management and services, a component of recurring
revenue, represent application hosting, transaction processing
and other services. When the fees are fixed and determinable,
and collection of the fees is probable, revenue is recognized
over the service period. When the fees are charged on a
per-transaction basis and collection of the fees is probable,
revenue is recognized as the transactions are processed.
When collection of fees is not probable, revenue is recognized
as cash is collected. The Company does not require collateral
from its customers. The Company has a history of extending
payment terms with customers not to exceed 60 days.
|
|
|
Cash, Cash Equivalents and Short-Term Investments |
All liquid investments with original maturities of three months
or less when purchased are considered cash equivalents.
Short-term investments consist of corporate debt securities
classified as “held to maturity” with maturities less
than twelve months.
|
|
|
Fair Value of Financial Instruments |
The Company’s financial instruments include cash,
short-term investments, accounts receivable, accounts payable
and accrued liabilities. The carrying amounts of financial
instruments approximate fair value due to their short maturities.
|
|
|
Unbilled Accounts Receivable |
Unbilled accounts receivable arise as revenue is recognized for
time and costs incurred on time-and-material contracts, and for
revenue that is recognized on fixed price contracts under the
percentage-of-completion method of accounting.
F-8
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Allowance for Doubtful Accounts |
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of certain
customers to pay their accounts receivable balances. The Company
assesses the financial condition of its customers to determine
if there is an impairment of their ability to make payments and
additional allowances may be required if the financial condition
of the Company’s customers deteriorates. The Company does
not require collateral from its customers. Bad debt expense for
the years ended December 31, 2004, 2003 and 2002 was
$162,000, $82,000, and $474,000, respectively.
The Company issues warranties to customers for product
performance in accordance with specifications that are short
term in nature, generally 90 days or less. ASP service
agreements provide warranty-like coverage for the duration of
the service relationship. The Company’s obligations under
these warranties have not been significant and are generally
covered under customer maintenance agreements. The Company also
indemnifies customers against patent infringement claims. As of
December 31, 2004 and 2003, there were no liabilities
recorded in the financial statements related to indemnifications
or warranties.
The Company had the following customers, which accounted for
greater than 10% of revenue in any of the years ended
December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| Customer |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
A
|
|
|
16 |
% |
|
|
20 |
% |
|
|
22 |
% |
|
B
|
|
|
— |
|
|
|
— |
|
|
|
11 |
% |
There were no customers that accounted for greater than 10% of
accounts receivable at December 31, 2004 or
December 31, 2003.
Property and equipment are recorded at cost and depreciated
using the straight-line method over the estimated useful lives
of the assets, ranging from two to five years. Internally used
software, whether purchased or developed is capitalized and
amortized over an estimated useful life of three to five years.
Equipment under capital lease arrangements as well as leasehold
improvements are amortized over the shorter of their useful
lives or the terms of the leases. Depreciation expense totaled
$3.5 million, $2.8 million and $3.2 million for
the years ended December 31, 2004, 2003,and 2002,
respectively.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Property and Equipment
|
|
|
|
|
|
|
|
|
| |
Furniture, fixtures and equipment
|
|
$ |
5,275 |
|
|
$ |
6,377 |
|
| |
Computer hardware
|
|
|
21,763 |
|
|
|
20,529 |
|
| |
Computer software
|
|
|
10,370 |
|
|
|
10,446 |
|
| |
|
|
|
|
|
|
| |
|
|
37,408 |
|
|
|
37,352 |
|
| |
Less accumulated depreciation and amortization
|
|
|
(33,226 |
) |
|
|
(31,691 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
4,182 |
|
|
$ |
5,661 |
|
| |
|
|
|
|
|
|
F-9
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Capitalized Software Costs |
Capitalized software costs consist of purchased software,
capitalized software development costs, and software acquired
through acquisitions. Purchased software is used with the
Company’s existing software as well as held for resale
under exclusive license arrangements and is amortized ratably
over a three-year estimated useful life. In accordance with FASB
Statement No. 86 “Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,”
software development costs are required to be expensed until the
point that technological feasibility of the product is
established which the Company has determined to be when a
detailed program design is complete. Once technological
feasibility is established, such costs are capitalized until
general availability of the product. The establishment of
technological feasibility and continuing evaluation of the
recoverability of the capitalized software development costs
requires management’s judgment with respect to the impact
of external factors such as future revenue, estimated economic
life and changes in software and hardware technologies.
Capitalized software development costs are amortized on a
straight-line basis over an estimated life, which is generally
three years. Capitalized software acquired through business
combinations is amortized on a straight line basis over an
estimated useful life which is generally three to five years.
The Company capitalized $1.1 million, $3.6 million
(restated) and $3.5 million (restated) of
software development costs in 2004, 2003 and 2002, respectively.
The Company wrote down $4.8 million of capitalized software
in 2004. Software amortization expense, a component of cost of
sales, for the years ended December 31, 2004, 2003 and 2002
was $7.6 million, $6.9 million (restated) and
$5.5 million, respectively.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
(Restated) | |
| |
|
(In thousands) | |
|
Capitalized Software
|
|
|
|
|
|
|
|
|
| |
Software acquired through acquisitions
|
|
$ |
25,130 |
|
|
$ |
31,361 |
|
| |
Purchased software
|
|
|
2,052 |
|
|
|
3,046 |
|
| |
Software development costs
|
|
|
8,590 |
|
|
|
8,752 |
|
| |
|
|
|
|
|
|
| |
|
|
35,772 |
|
|
|
43,159 |
|
| |
Accumulated Amortization
|
|
|
(24,439 |
) |
|
|
(14,283 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
11,333 |
|
|
$ |
28,876 |
|
| |
|
|
|
|
|
|
The Company has adopted Financial Accounting Standard
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets.” In accordance with
SFAS No. 142, the Company did not record amortization
expense related to goodwill.
SFAS No. 142 requires that goodwill be tested annually
for impairment and more frequently if events or changes in
circumstances indicate assets might be impaired. The Company
performed a transitional impairment test upon the adoption of
SFAS No. 142 on January 1, 2002 and recorded no
impairment because of this test. The Company has identified the
fourth quarter as the period for its annual impairment test.
However, due to significant negative industry and economic
trends affecting the market value of the Company’s common
stock, the Company performed an interim test of goodwill
impairment in the third quarter of 2002. As a result of this
interim test, the Company recorded an impairment charge of
$93.1 million to reduce goodwill based on the amount that
the carrying value of the goodwill exceeded its fair value. This
F-10
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
impairment charge eliminated goodwill associated with all
previous acquisitions and related to each of the Company’s
reportable segments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Integration | |
|
Rogue | |
|
|
| |
|
Solutions | |
|
Wave | |
|
CareScience | |
| |
|
| |
|
| |
|
| |
|
Balance at January 1, 2002
|
|
$ |
92,202 |
|
|
|
|
|
|
|
|
|
|
Adjustment to Confer and Pixel goodwill based on valuation
|
|
|
883 |
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
(93,085 |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Acquisition of CareScience (Note 2)
|
|
|
|
|
|
$ |
— |
|
|
$ |
13,318 |
|
|
Acquisition of Rogue Wave (Note 2)
|
|
|
|
|
|
|
34,697 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
|
34,697 |
|
|
|
13,318 |
|
|
Reconciliation of opening balances
|
|
|
|
|
|
|
(2,926 |
) |
|
|
(219 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Valuation adjustment
|
|
|
|
|
|
|
1,603 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Acquisition expenses
|
|
|
|
|
|
|
— |
|
|
|
(357 |
) |
|
Leases restructuring
|
|
|
|
|
|
|
608 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$ |
33,982 |
|
|
$ |
12,742 |
|
| |
|
|
|
|
|
|
|
|
|
Goodwill resulting from the acquisitions of CareScience and
Rogue Wave has been adjusted during 2004. Reconciliations of the
opening balances for all assets and liabilities resulted in
adjustments of $1.3 million to the Rogue Wave goodwill and
$0.2 million to the CareScience goodwill. Acquisition
expenses relating to CareScience were less than anticipated
resulting in an adjustment to goodwill of $0.4 million.
Charges for the impairment of a lease in the Netherlands
resulted in an increase of $0.6 million in goodwill related
to the Rogue Wave acquisition.
|
|
|
Acquired Intangible Assets |
Intangible assets recognized in the Company’s acquisitions
are being amortized over their estimated lives ranging from
three to eight years. Amortization expense related to intangible
assets was $3.3 million, $1.7 million, and
$2.3 million for the years ended December 31, 2004,
2003 and 2002, respectively. Amortization expense in 2004
includes impairments of $341,000. The Company expects
amortization expense to be $3.8 million for the years 2005
through 2007, $3.7 million for 2008, and $1.7 million
for 2009.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Intangible Assets
|
|
|
|
|
|
|
|
|
| |
Customer Base
|
|
$ |
22,496 |
|
|
$ |
19,367 |
|
| |
Trade name
|
|
|
559 |
|
|
|
1,041 |
|
| |
Other
|
|
|
2,178 |
|
|
|
2,295 |
|
| |
|
|
|
|
|
|
| |
|
|
25,233 |
|
|
|
22,703 |
|
| |
Accumulated Amortization
|
|
|
(7,520 |
) |
|
|
(4,968 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
17,713 |
|
|
$ |
17,735 |
|
| |
|
|
|
|
|
|
|
|
|
Long-Lived Assets and Impairments |
The Company periodically evaluates the carrying value of
long-lived assets, including, but not limited to, property and
equipment, software, and intangible assets when events and
circumstances warrant such a review.
F-11
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flows from such asset is
less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
The Company wrote down $4.4 million of capitalized software
in the first quarter and $0.4 million in the fourth quarter
of 2004 due to a decision to discontinue products that resulted
from management’s effort to refocus the Company’s
resources to products that will generate revenues in the near
term and conserve cash flows.
In the fourth quarter of 2003, the Company prepaid
$0.9 million to Infotech Network Group
(“Infotech”) for professional services. In March 2004,
the Company paid Infotech an additional $2.1 million
prepayment under an outsourcing agreement. Payments totaling
$1.7 million were written off in the first quarter of 2004
because a portion of the asset was deemed not recoverable due to
Infotech’s inability to provide assurances that it could
deliver services in the future. The Company expensed
$1.4 million of the prepaid services to cost of sales and
research and development for the year ended December 31,
2004. As of December 31, 2004, the Company had utilized
$1.4 million in prepaid services from Infotech.
The Company also wrote down $0.7 million of deferred costs
related to its transaction business. The deferred costs were
written down to their expected realizable value because the
total balance of the asset was not recoverable due to the
cancellation of certain contracts and lower than expected
revenues on other contracts. As of December 31, 2004, the
Company had remaining deferred costs related to its transactions
business totaling $0.4 million.
Other current and long-term assets include deferred costs, a
note receivable from a customer, and prepaid expenses. Deferred
costs include direct labor incurred related to implementation
activities on certain contracts where the revenue will be
recognized on a straight-line basis over the term of the
contract. The costs, which totaled $0.4 million and
$2.6 million at December 31, 2004 and 2003,
respectively, are expected to be amortized to expense over the
contract periods of five to seven years. In the first quarter of
2004, the Company wrote off $0.7 million in deferred costs
that were determined to be unrecoverable based on the related
contracts. The note receivable, which had a balance of $0.8 and
$1.9 million at December 31, 2004 and 2003,
respectively, is due to be paid in monthly installments through
early 2006. Interest income will be recognized once all
principal has been paid. At December 31, 2003, other assets
also included a minority equity investment in another company
which had a balance of $2.0 million. This investment was
accounted for on a cost basis as the Company does not have
significant influence or control over the investee. The
investment was sold in June 2004. See Note 4 —
Business/ Asset Dispositions for more information.
As of December 31, 2004, the Company had restricted cash of
$578,000. Restricted cash primarily represents investments that
support letters of credit related to an operating lease. There
was no restricted cash at December 31, 2003.
Research and development expense includes costs incurred by the
Company to develop and enhance the Company’s software until
the point that technological feasibility is reached. Research
and development costs are charged to expense as incurred.
The Company expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 2004, 2003 and
2002 was $520,000, $348,000 and $312,000, respectively.
F-12
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred income taxes are recognized because of temporary timing
differences between when certain income or expense items are
recognized in the financial statements versus when these items
are recognized for tax purposes based on enacted tax laws and
statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. A valuation
allowance is then established to reduce the net deferred tax
asset to the level at which it is more likely than not that any
tax benefits will be realized. Income tax expense includes
(i) income taxes currently payable; (ii) income taxes
deferred because of temporary timing differences between the
time that certain income or expense items are recognized in the
financial statements versus when these items are recognized for
tax purposes; and (iii) any increase or decrease in the
valuation allowance for deferred tax assets.
|
|
|
Stock Option Compensation |
At December 31, 2004, the Company had four stock option
plans and an employee stock purchase plan, which are described
in Note 6. The Company has elected to account for
stock-based compensation arrangements using the intrinsic value
method under the provisions of Accounting Principles Board
Opinion No. 25 (“APB 25”), “Accounting
for Stock Issued to Employees.” Under this method, stock
compensation is recognized to the extent that the exercise price
is less than the market price for the underlying stock on the
date of grant. The following table illustrates the effect on net
loss and net loss per share if the Company had applied the fair
value recognition provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation,” to
stock-based employee compensation.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share data) | |
| |
|
|
|
(Restated) | |
|
(Restated) | |
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(24,231 |
) |
|
$ |
(16,477 |
) |
|
$ |
(104,767 |
) |
| |
Plus: stock based compensation recognized under intrinsic value
method
|
|
|
470 |
|
|
|
— |
|
|
|
231 |
|
| |
Less: stock based compensation under fair value method
|
|
|
(1,664 |
) |
|
|
(4,728 |
) |
|
|
(8,760 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma net loss
|
|
$ |
(25,425 |
) |
|
$ |
(21,205 |
) |
|
$ |
(113,296 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(0.61 |
) |
|
$ |
(0.52 |
) |
|
$ |
(3.49 |
) |
| |
Pro forma
|
|
|
(0.64 |
) |
|
|
(0.68 |
) |
|
|
(3.78 |
) |
The stock based compensation under the fair value method for the
year ended December 31, 2004 includes recoveries based on
options forfeited when six executives left the Company. The
adjustment to the pro forma net loss under the fair value method
for these forfeited options totaled $3.1 million.
For the years ended December 31, 2004, 2003 and 2002, the
fair value of each option on the date of grant was determined
using the Black-Scholes valuation model. The following
assumptions were used for grants in 2004, 2003 and 2002:
risk-free rates corresponding to government securities with
original maturities similar to the expected option lives of 4.7%
for 2004, 3.9% for 2003 and 3.0% for 2002; expected dividend
yield of 0% for all periods; volatility factor of 106% for 2004,
120% for 2003 and 118% for 2002; and expected lives of
5.0 years for 2004, 5.0 years for 2003 and
5.0 years for 2002.
F-13
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Net Loss Per Common Share |
Net loss per common share (“EPS”) is calculated in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 128, “Earnings per Share.”
Under the provisions of SFAS No. 128, basic EPS is
computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if
stock options were exercised, resulting in the issuance of
common stock that would share in the loss of the Company.
Potential dilution of the stock options exercisable into common
stock is computed using the treasury stock method based on the
average fair market value of the stock. In periods where the
Company has a net loss, the effect of common stock equivalents
is excluded from the computation of diluted EPS since their
inclusion would be anti-dilutive. Diluted EPS for the periods
presented is computed by dividing the net loss by the weighted
average number of common shares outstanding for the period. In
2004, 2003 and 2002, 317,268, 1,397,558, and 508,109 options and
warrants to purchase common stock were excluded from the
calculation because their inclusion would be anti-dilutive.
SFAS No. 130, “Reporting Comprehensive
Income” establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive
income (loss) includes all changes in equity during a period
from non-owner sources. During the years ended December 31,
2003 and 2004, comprehensive loss included the change in foreign
currency translation. During year ended December 31, 2002,
the Company did not have any significant transactions that are
required to be reported as adjustments to determine
comprehensive income (loss).
|
|
|
Foreign Currency Translations |
The assets and liabilities of our foreign operations are
translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average exchange rates
for the period. The resulting translation adjustment is recorded
as a component of other comprehensive income (loss). Foreign
currency gains and losses on transactions are recorded in the
results of operations and historically have not been material.
Certain prior year information has been reclassified to conform
to the current year presentation. Revenue and cost of revenue
from the New Mexico Data Center have been reclassified to
discontinued operations in 2003 and 2002 and their net assets
have been reclassified to assets of discontinued operations at
December 31, 2003 so that the financial statements are
comparable.
Also in December 2004 the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,” which is a
revision of SFAS No. 123 “Accounting for
Stock-Based Compensation.” This Statement supersedes APB
Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95
“Statement of Cash Flows.” SFAS No. 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair value. Pro forma disclosure and
the intrinsic value method of accounting are no longer
alternatives.
SFAS No. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after
June 15, 2005. We plan to adapt this standard starting
July 1, 2005 using a “modified prospective”
method in which compensation cost is recognized beginning
July 1, 2005 based on the requirements of SFAS No 123R
for all share based payments granted after that date, and for
all awards granted to employees
F-14
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
prior to July 1, 2005 that had not yet vested. The Company
currently accounts for share-based payments to employees using
APB Opinion 25’s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options based on the requirements of SFAS No. 123. The
adoption of SFAS 123R’s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS No. 123R cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future and the Company has
not determined which option-pricing model we will use to value
the stock options granted. SFAS No. 123R also requires
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in the periods after
adoption. The company cannot estimate what those amounts will be
in the future because they depend on, among other things, when
employees exercise stock options.
|
|
| 2. |
Restatement of Financial Statements |
The financial results for the years ended December 31, 2003
and 2002 were restated in August 2004 to properly account for
transactions that were previously inaccurately reflected in the
Company’s financial results. The cumulative effect of these
restated financial statements increased the previously reported
net loss by $1.8 million for the year ended
December 31, 2003 and $0.7 million for the year ended
December 31, 2002. These inaccuracies (a) overstated
software license revenues due to the timing of delivery of
software products and the accounting for certain reseller
relationships (b) overstated professional services revenues
due to the timing of adjustments to estimates used in
determining the recognition of revenue under the percentage of
completion method and (c) understated the cost of
professional services revenue due to the capitalization of
software development costs without properly deducting the
portion of the cost related to a professional services agreement
with a customer. The restatement also decreased current assets
by $0.8 million and $0 and increased current liabilities by
$1.0 million and $0.3 million at December 31,
2003 and 2002, respectively. A summary of the restatement impact
is set forth below.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Restated) | |
|
(Restated) | |
| |
|
(In thousands except | |
| |
|
per share amounts) | |
|
Decrease in total revenue
|
|
$ |
(1,663 |
) |
|
$ |
(430 |
) |
|
Increase in net loss
|
|
|
(1,783 |
) |
|
|
(655 |
) |
|
Increase in net loss per share
|
|
$ |
(0.05 |
) |
|
$ |
(0.02 |
) |
On December 19, 2003, Quovadx consummated the acquisition
of Rogue Wave Software, Inc. (“Rogue Wave”). In the
acquisition, structured as an exchange offer, Quovadx acquired
all of the outstanding stock of Rogue Wave for $4.09 in cash and
0.5292 of a share of Quovadx common stock for each share of
Rogue Wave Common Stock. The total purchase price for this
acquisition was $79.1 million, including
5,656,670 shares of Quovadx common stock, cash of
$8.0 million, net of cash acquired, and $3.9 million
in merger-related costs including transaction fees. The Company
retained an independent appraiser to assist with assigning the
fair values to the identifiable intangibles acquired from Rogue
Wave. Based on the appraisal, we have recorded goodwill,
software and identifiable intangible assets acquired at
$34.0 million, $5.2 million and $8.5 million,
respectively.
On September 19, 2003, Quovadx consummated the acquisition
of CareScience, Inc. CareScience stockholders received a fixed
exchange rate of $1.40 cash and 0.1818 shares of
Quovadx’s common stock for
F-15
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
each share of CareScience common stock they owned. The purchase
price, totaling $30.1 million, included
2,415,900 shares of Quovadx common stock issued in exchange
for all outstanding shares of CareScience capital stock, cash of
$4.7 million (net of cash acquired) and $2.3 million
in merger-related costs (including transaction fees and stock
option payout). The Company retained an independent appraiser to
assist with assigning fair values to the identifiable
intangibles acquired from CareScience. Based on this appraisal,
we have recorded goodwill, software and customer base intangible
assets at $12.7 million, $0.8 million and
$8.6 million, respectively.
Operating results for Rogue Wave and CareScience after the date
of acquisition are included in the consolidated financial
statements. The restated unaudited pro forma results of
operations as though the Rogue Wave and CareScience acquisitions
had been completed as of January 1, 2002 are as follows (in
thousands except for per share amounts):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(Restated) | |
|
(Restated) | |
|
Revenue
|
|
$ |
102,335 |
|
|
$ |
113,073 |
|
|
Net loss
|
|
|
(27,122 |
) |
|
|
(121,617 |
) |
|
Net loss per share
|
|
$ |
(0.70 |
) |
|
$ |
(3.20 |
) |
The unaudited pro forma results above do not include any
anticipated cost savings or other effects of the integration of
acquired entities into the Company and are not necessarily
indicative of the results which would have occurred if the
acquisitions had been in effect on the date indicated, or which
may result in the future.
Acquisition-Related Restructuring
The Company recorded significant acquisition-related
restructuring charges in connection with a headcount reduction
of CareScience employees and the abandonment of certain leased
facilities from the CareScience acquisition. The lease
abandonment cost was estimated to include remaining lease
liabilities offset by an estimate of sublease income. The lease
abandonment costs are being amortized over the term of the lease
which expires in the fourth quarter of 2010. These restructuring
charges are included in accrued liabilities on the accompanying
balance sheet.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accrual at | |
|
|
|
Accrual at | |
| |
|
Accrued at | |
|
Paid in | |
|
December 31, | |
|
Paid in | |
|
December 31, | |
| |
|
Acquisition | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Employee Severance
|
|
$ |
256 |
|
|
$ |
(256 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Lease abandonment costs
|
|
|
1,905 |
|
|
|
(60 |
) |
|
|
1,845 |
|
|
|
(263 |
) |
|
|
1,582 |
|
|
Less: Sublease income
|
|
|
(301 |
) |
|
|
— |
|
|
|
(301 |
) |
|
|
— |
|
|
|
(301 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,860 |
|
|
$ |
(316 |
) |
|
$ |
1,544 |
|
|
$ |
(263 |
) |
|
$ |
1,281 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2003, due to the acquisition, the
company initiated a headcount reduction of Rogue Wave employees.
As a result, we recorded a preliminary estimate of severance
costs of $677,000 comprised of salary and employee-related
expenses. At December 31, 2003, the balance of the accrual
was $427,000 and at December 31, 2004 the entire amount had
been paid out, bringing the severance accrual to $0.
|
|
| 4. |
Business/ Asset Dispositions |
In the second quarter of 2004, the Company sold its minority
equity investment in Royal Health Care, LLC (“Royal”).
Royal is a healthcare management services company in which
Quovadx owned an equity
F-16
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
position. The sale price of $3.1 million, paid in cash, was
received on June 29, 2004. The Company recorded a
$1.2 million gain on the sale of this asset.
Additionally in the second quarter, we sold technology and
service contracts of Outlaw Technologies, Inc.
(“Outlaw”) to a related party. Outlaw was acquired by
the Company in March 2002 for $2.7 million, consisting of
$1.8 million in cash and 138,575 shares of Quovadx
stock. The Outlaw assets were sold to the former owner of Outlaw
who is presently an employee of Quovadx for $0.2 million in
cash and assumed liabilities. The Company had recorded an
impairment charge on assets held for sale of $0.7 million
in the first quarter of 2004; as a result, this transaction had
no financial impact in second quarter 2004. Management deemed
these assets did not fit into ongoing strategic plans.
In the third quarter of 2004, we sold the Healthcare.com domain
name for $360,000.
On December 31, 2004, we sold the assets of our
Albuquerque, New Mexico Data Center and our Managed Care
Transaction Manager (“MCTM”) system. This hosting
service center and MCTM system no longer fit into our new
business strategy because they represent a niche area of the
healthcare payer segment which is not an area of strategic
growth. The assets were sold to Royal Health Care Data Center,
LLC, a subsidiary of Royal, for $1.9 million in cash before
transaction related expenses of $139,000. A gain of
$0.4 million was recognized on the sale. As part of this
transaction, Royal signed software license and maintenance
agreements for other of our software products and we received
$300,000 in software license revenue. We will continue to
provide support for facilities and telecommunications management
to Royal and Royal will provide hosting services and co-location
services for our corporate Web infrastructure and servers. Royal
is a management services organization serving New York
healthcare organizations. A director of the Company is on
Royal’s board of directors.
The assets sold had net book values at December 31, 2004
and 2003 as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net book value of assets sold:
|
|
|
|
|
|
|
|
|
| |
Furniture, leasehold improvements and equipment
|
|
$ |
322 |
|
|
$ |
630 |
|
| |
Deferred costs
|
|
|
993 |
|
|
|
1,128 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
1,315 |
|
|
$ |
1,758 |
|
| |
|
|
|
|
|
|
The financial statements as of December 31, 2003 and for
the years ended December 31, 2003 and 2002 have been
restated to reflect the presentation of the New Mexico Data
Center as a discontinued operation. The following is the
summarized results of operations for the New Mexico Data Center
in the years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Recurring services revenues
|
|
$ |
5,164 |
|
|
$ |
5,004 |
|
|
$ |
2,605 |
|
|
Cost of recurring services revenue
|
|
|
4,575 |
|
|
|
4,598 |
|
|
|
1,842 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$ |
589 |
|
|
$ |
406 |
|
|
$ |
763 |
|
| |
|
|
|
|
|
|
|
|
|
F-17
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 5. |
Balance Sheet Components |
Certain balance sheet components are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Other Current Assets
|
|
|
|
|
|
|
|
|
| |
Prepaid maintenance and support
|
|
$ |
999 |
|
|
$ |
1,215 |
|
| |
Note receivable
|
|
|
784 |
|
|
|
1,010 |
|
| |
Deferred costs
|
|
|
316 |
|
|
|
669 |
|
| |
Other
|
|
|
499 |
|
|
|
1,249 |
|
| |
|
|
|
|
|
|
| |
|
$ |
2,598 |
|
|
$ |
4,143 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
| |
Accrued compensation
|
|
$ |
3,309 |
|
|
$ |
3,402 |
|
| |
Accrued rent
|
|
|
1,614 |
|
|
|
2,274 |
|
| |
Accrued audit fees
|
|
|
683 |
|
|
|
244 |
|
| |
Accrued legal fees
|
|
|
497 |
|
|
|
168 |
|
| |
Option liability payout
|
|
|
345 |
|
|
|
1,399 |
|
| |
Accrued professional fees
|
|
|
100 |
|
|
|
450 |
|
| |
Accrued acquisition expenses
|
|
|
— |
|
|
|
3,121 |
|
| |
Other
|
|
|
3,549 |
|
|
|
4,823 |
|
| |
|
|
|
|
|
|
| |
|
$ |
10,097 |
|
|
$ |
15,881 |
|
| |
|
|
|
|
|
|
|
|
| 6. |
Stockholders’ Equity and Benefit Plans |
In connection with the acquisition of Healthcare.com, the
Company converted warrants to purchase 395,000 shares
of Healthcare.com common stock to warrants to
purchase 148,000 shares of the Company’s stock.
At December 31, 2003, 116,000 warrants remained
outstanding. Of the warrants outstanding at December 31,
2003, 98,000 may have been exercised any time on or before
March 13, 2004 at an exercise price of $11.23 per
share and 18,000 may have been exercised any time on or before
December 31, 2004 at an exercise price of $8.51 per
share. As of December 31, 2004 there are no outstanding
warrants. The fair value of Healthcare.com warrants was
calculated to be $0.8 million using the Black-Scholes
option pricing model and included in the purchase price.
During 1997, the Company adopted a stock option plan (the
“1997 Plan”) that provided for the grant of up to
2,200,000 stock options to directors, key employees, and
consultants. The 1997 Plan has a term of ten years, unless
terminated by the board of directors. From 2000 to 2003, the
Company added 4,668,414 shares to the 1997 Plan. In March
2004, 1,224,000 shares were added to the 1997 Plan. The
total number of shares authorized under the 1997 Plan was
8,092,414 at December 31, 2004. As of December 31,
2004, there were 4,159,920 options available for issuance. The
1997 Plan provides for the granting of incentive stock options
to employees or nonqualified options to employees, directors,
and consultants. Stock options are granted with an exercise
price not less than fair market value of the common stock on the
date of the grant, as determined by the board of directors. The
options generally expire ten years after the date of grant.
Options granted under the
F-18
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
1997 Plan vest over a four year vesting period beginning on the
date of grant. In December 2004, the Board of Directors approved
an amendment to the 1997 Plan to allow other types of stock
awards to be granted. At the same time they granted restricted
stock awards to the non-employee board members totaling
95,000 shares with a fair value of $194,000. The restricted
stock awards vest quarterly at the end of each three-month
period beginning three months from the date of grant, subject to
the member’s continued service as a director through each
vesting date. Compensation expense for these restricted stock
awards was deferred and will be recognized as expense as the
awards vest.
The Company’s board of directors adopted a
1999 Director Option Plan in October 1999 (the
“Director Plan”) and authorized 250,000 shares
under the Director Plan. The Director Plan was approved by the
Company’s Stockholders in January 2000, and became
effective upon completion of our Initial Public Offering. From
2000 to 2003, the Company added 564,083 shares to the
Director Plan. In March 2004, 200,000 shares were added to
the Director Plan. The total number of shares authorized under
the Director Plan was 1,014,083 at December 31, 2004. The
Director Plan has a term of ten years, unless terminated by our
board of directors. Options granted under the Director Plan vest
over a one year vesting period beginning on the date of grant.
Members of the board of directors who are not employees of
Quovadx are eligible to participate in the Director Plan. The
Director Plan provides for an automatic initial grant of an
option to purchase 25,000 shares of common stock (the
“Initial Grant”) upon the later of the effective date
of the Director Plan or the date a person first becomes a
non-employee director. After the initial grant, a non-employee
director will automatically be granted options to
purchase 10,000 shares of common stock each year on
the date of our annual shareholder’s meeting.
In September 2000, the board of directors of the Company adopted
the 2000 Nonstatutory Stock Option Plan (the “NSO
Plan”) and authorized 600,000 shares under the NSO
Plan. Under the NSO Plan, the board of directors may issue
options to non-executive employees of the Company. The NSO Plan
has a term of ten years, unless terminated by our board of
directors. Options granted under the NSO Plan vest ratably at
25% per year, beginning on the date of grant. No options
will be issued under the NSO Plan to directors or executive
officers of the Company. From 2000 to 2003, the Company added
2,600,000 shares to the NSO Plan. No shares were added in
2004. The total number of shares authorized under the 1997 Plan
was 3,200,000 at December 31, 2004.
In connection with the acquisition of Rogue Wave, the Company
assumed the Stock Option Plans of Rogue Wave and each
outstanding option to purchase shares of Rogue Wave common stock
under the Rogue Wave stock option plans. Each Rogue Wave stock
option assumed by the Company was exercisable for that number of
whole shares of Rogue Wave common stock multiplied by the
exchange ratio of 0.5292 and the per share exercise price for
the Rogue Wave stock options was equal to the quotient
determined by dividing the exercise price per share by the
exchange ratio. The fair value of the vested stock options
assumed was $3.4 million and was calculated using the
Black-Scholes valuation model. The unvested stock options
assumed in the Rogue Wave acquisition yielded $385,000 of
deferred compensation expense. The fair value of each option was
determined using the Black-Scholes valuation model and unearned
stock compensation will be amortized to expense on a
straight-line basis over the vesting period of the stock options.
The weighted-average fair value of options at grant date was
$1.99, $2.37, and $5.18 in 2004, 2003, and 2002, respectively.
F-19
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Total stock options outstanding and exercisable under the option
plans as of December 31, 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number | |
|
Weighted) | |
|
Weighted | |
|
Number | |
|
Weighted | |
| Range of Exercise Prices |
|
of Shares | |
|
Average | |
|
Average | |
|
of Shares | |
|
Average | |
| |
|
| |
|
Remaining | |
|
Exercise | |
|
| |
|
Exercise | |
| |
|
|
|
Contractual | |
|
Price | |
|
|
|
Price | |
| |
|
|
|
Life (Years | |
|
| |
|
|
|
| |
| |
|
|
|
| |
|
|
|
|
|
|
| $ |
0.25 |
|
|
|
— |
|
|
$ |
1.12 |
|
|
|
|
|
1,507,047 |
|
|
|
9.3 |
|
|
$ |
1.03 |
|
|
|
356,331 |
|
|
$ |
0.73 |
|
| |
1.14 |
|
|
|
— |
|
|
|
2.05 |
|
|
|
|
|
1,030,234 |
|
|
|
9.6 |
|
|
|
1.83 |
|
|
|
279,784 |
|
|
|
1.80 |
|
| |
2.29 |
|
|
|
— |
|
|
|
2.61 |
|
|
|
|
|
417,469 |
|
|
|
8.0 |
|
|
|
2.53 |
|
|
|
284,458 |
|
|
|
2.51 |
|
| |
2.67 |
|
|
|
— |
|
|
|
4.90 |
|
|
|
|
|
297,497 |
|
|
|
6.7 |
|
|
|
2.94 |
|
|
|
250,737 |
|
|
|
2.87 |
|
| |
5.00 |
|
|
|
— |
|
|
|
5.94 |
|
|
|
|
|
405,175 |
|
|
|
7.5 |
|
|
|
5.32 |
|
|
|
235,714 |
|
|
|
5.50 |
|
| |
6.02 |
|
|
|
— |
|
|
|
7.03 |
|
|
|
|
|
774,423 |
|
|
|
8.1 |
|
|
|
6.17 |
|
|
|
293,758 |
|
|
|
6.27 |
|
| |
7.17 |
|
|
|
— |
|
|
|
8.53 |
|
|
|
|
|
242,775 |
|
|
|
6.6 |
|
|
|
8.32 |
|
|
|
200,846 |
|
|
|
8.28 |
|
| |
8.70 |
|
|
|
— |
|
|
|
10.20 |
|
|
|
|
|
571,611 |
|
|
|
5.9 |
|
|
|
9.94 |
|
|
|
507,256 |
|
|
|
9.95 |
|
| |
10.30 |
|
|
|
— |
|
|
|
12.83 |
|
|
|
|
|
378,973 |
|
|
|
5.9 |
|
|
|
11.97 |
|
|
|
324,830 |
|
|
|
11.94 |
|
| |
13.10 |
|
|
|
— |
|
|
|
24.41 |
|
|
|
|
|
60,939 |
|
|
|
4.5 |
|
|
|
14.24 |
|
|
|
60,939 |
|
|
|
14.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
0.25 |
|
|
|
— |
|
|
$ |
24.41 |
|
|
|
|
|
5,686,143 |
|
|
|
8.1 |
|
|
$ |
4.47 |
|
|
|
2,794,653 |
|
|
$ |
6.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity of the Plans are summarized in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Weighted Average | |
|
Options | |
|
Weighted Average | |
| |
|
Shares | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
Options outstanding, January 1, 2002
|
|
|
5,907,808 |
|
|
$ |
7.55 |
|
|
|
4,896,516 |
|
|
$ |
7.24 |
|
| |
Options granted
|
|
|
1,718,096 |
|
|
|
4.60 |
|
|
|
|
|
|
|
|
|
| |
Less: options exercised
|
|
|
(151,622 |
) |
|
|
1.98 |
|
|
|
|
|
|
|
|
|
| |
Less: options forfeited
|
|
|
(1,007,171 |
) |
|
|
8.70 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2002
|
|
|
6,467,111 |
|
|
|
6.72 |
|
|
|
2,928,651 |
|
|
|
6.36 |
|
| |
Converted Rogue Wave options
|
|
|
620,658 |
|
|
|
7.38 |
|
|
|
|
|
|
|
|
|
| |
Options granted
|
|
|
786,033 |
|
|
|
2.63 |
|
|
|
|
|
|
|
|
|
| |
Less: options exercised
|
|
|
(140,404 |
) |
|
|
2.54 |
|
|
|
|
|
|
|
|
|
| |
Less: options forfeited
|
|
|
(649,935 |
) |
|
|
7.14 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2003
|
|
|
7,083,463 |
|
|
|
6.95 |
|
|
|
4,650,309 |
|
|
|
7.15 |
|
| |
Options granted
|
|
|
3,653,625 |
|
|
|
2.65 |
|
|
|
|
|
|
|
|
|
| |
Less: options exercised
|
|
|
(1,082,429 |
) |
|
|
0.58 |
|
|
|
|
|
|
|
|
|
| |
Less: options forfeited
|
|
|
(3,968,516 |
) |
|
|
6.94 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004
|
|
|
5,686,143 |
|
|
$ |
4.47 |
|
|
|
2,794,653 |
|
|
$ |
6.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
In October 1999, the board of directors adopted an employee
stock purchase plan (the “ESPP”) subject to
shareholder approval, which became effective immediately on the
effective date of the IPO. A total of 500,000 shares of
common stock were initially reserved for issuance under the
ESPP. From 2000 to 2003, the Company added 1,328,165 shares
to the ESPP. In March 2004, 500,000 shares were added to
the ESPP. The total number of shares authorized under the EPPP
was 2,328,165 at December 31, 2004. The ESPP permits
eligible employees to purchase common stock totaling up to 20%
of an employee’s compensation through payroll deductions.
The ESPP for U.S. employees is intended to qualify under
Section 423 of the Internal Revenue Service Code and
contains consecutive overlapping twelve-month offering periods.
Each offering period includes two six-month purchase periods.
The price of common stock to be purchased will be 85% of the
lower of the fair market value of the common stock either at the
beginning of the offering period or at the
F-20
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
end of that purchase period. The Company issued
264,355 shares at $2.01 per share in April 2004 and
238,411 shares at $1.49 per share in October 2004. The
Company issued 319,308 shares at $1.31 per share in
May 2003 and 230,157 shares at $2.37 per share in
October 2003. The Company issued 72,372 shares at
$6.37 per share in May 2002 and 125,157 shares at
$1.32 per share in October 2002.
The Company has adopted an employee savings and retirement plan
(the “401(k) Plan”) covering substantially all of the
Company’s employees. Pursuant to the 401(k) Plan, eligible
employees may elect to reduce their current compensation by up
to the statutory prescribed limit and have the amount of such
reduction contributed to the 401(k) Plan. The Company may
contribute to the 401(k) Plan on behalf of eligible employees.
The Company had not contributed to the 401(k) Plan prior to the
acquisition of Healthcare.com on August 13, 2001. In
connection with the acquisition of Healthcare.com, the Company
assumed the 401(k) plan of Healthcare.com and made contributions
totaling $169,000. Healthcare.com 401(k) plan matched 50% of the
first 6% contributed by each employee. The Healthcare.com 401(k)
plan was merged into Company’s plan in 2002. In 2002, the
Company amended its 401(k) plan to match 50% of the first 6%
contributed by employees. The Company contributed $824,000,
$650,000 and $649,000 to its employee’s 401(k) accounts in
2004, 2003 and 2002, respectively. Company contributions vest
over a two-year period.
In 2000, the Quovadx board of directors declared a dividend
right of one right to purchase one one-thousandth share of
Quovadx Series A participating preferred stock for each
outstanding share of Quovadx common stock at an exercise price
of $60.00 per right, subject to adjustment, to the holders
of record at that time. The rights are exercisable in the event
of a person or group purchasing 15% or more of Quovadx
outstanding common stock. Each holder of a right is entitled,
upon exercise, to receive Quovadx common stock having a value
equal to two times the exercise price. Quovadx may redeem the
rights at a price of $0.001 per right. The rights expire in
August 2010.
In 2003, the Company established a line of credit with a
commercial bank that allowed the Company to borrow cash, or
issue letters of credit, up to a maximum of $4.0 million on
a secured basis at the bank’s prime rate of interest. On
May 28, 2004 the Company terminated the line of credit.
The sources of income (loss) before income taxes for continuing
operations, are as follows for the years ended December 31
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Domestic
|
|
$ |
(25,175 |
) |
|
$ |
(16,590 |
) |
|
$ |
(105,347 |
) |
|
Foreign
|
|
|
42 |
|
|
|
(293 |
) |
|
|
(183 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(25,133 |
) |
|
$ |
(16,883 |
) |
|
$ |
(105,530 |
) |
| |
|
|
|
|
|
|
|
|
|
The provision for income taxes includes (i) income taxes
currently payable; (ii) income taxes deferred because of
temporary differences between when certain income or expense
items are recognized in the financial statements versus when
these items are recognized for tax purposes and; (iii) any
increase or decrease in the valuation allowance for deferred
income tax assets. The tax expense for 2004 relates entirely to
current tax expense in the United Kingdom.
F-21
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of the expected income tax expense (benefit)
(based on the U.S. Federal statutory rate of 35%) to the
actual income tax expense (benefit) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31 | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Expected federal income tax benefit at blended rate of 35%
|
|
$ |
(8,799 |
) |
|
$ |
(5,426 |
) |
|
$ |
(35,440 |
) |
|
Effect of state taxes (net of federal benefit)
|
|
|
(665 |
) |
|
|
(436 |
) |
|
|
(285 |
) |
|
Change in valuation allowance
|
|
|
9,249 |
|
|
|
5,811 |
|
|
|
4,029 |
|
|
Unearned compensation
|
|
|
|
|
|
|
— |
|
|
|
81 |
|
|
Goodwill expense
|
|
|
|
|
|
|
— |
|
|
|
31,565 |
|
|
Foreign tax rate differential
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
Other permanent items
|
|
|
237 |
|
|
|
51 |
|
|
|
50 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
$ |
133 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the net deferred tax asset at
December 31, 2003 are presented below:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Deferred revenue
|
|
$ |
— |
|
|
$ |
4,873 |
|
| |
Allowance for doubtful accounts
|
|
|
536 |
|
|
|
884 |
|
| |
Investment impairment
|
|
|
195 |
|
|
|
195 |
|
| |
Employee benefits
|
|
|
525 |
|
|
|
533 |
|
| |
Accrued liabilities
|
|
|
632 |
|
|
|
239 |
|
| |
Tax credits
|
|
|
2,795 |
|
|
|
2,371 |
|
| |
Other temporary items
|
|
|
3 |
|
|
|
459 |
|
| |
Foreign net operating loss carryforwards
|
|
|
1,388 |
|
|
|
1,447 |
|
| |
Federal net operating loss carryforwards
|
|
|
59,486 |
|
|
|
47,427 |
|
| |
|
|
|
|
|
|
| |
|
|
65,560 |
|
|
|
58,428 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Fixed asset sale, depreciation & other
|
|
|
(297 |
) |
|
|
416 |
|
| |
Amortization & other
|
|
|
(6,094 |
) |
|
|
(10,440 |
) |
| |
|
|
|
|
|
|
| |
|
|
(6,391 |
) |
|
|
(10,024 |
) |
|
Less:
|
|
|
|
|
|
|
|
|
| |
Valuation allowance
|
|
|
(59,169 |
) |
|
|
(48,404 |
) |
| |
Net deferred tax assets/(liabilities)
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
Under SFAS No. 109, deferred tax assets and liabilities are
recognized due to differences between recognition of certain
income or expense items in the financial statements and when
these items are recognized for tax purposes. A valuation
allowance is established against deferred tax assets which are
not “more likely than not” to be realized. At
December 31, 2004 and 2003 the Company has determined that
it is not “more likely than not” it will realize the
deferred tax assets prior to their expiration. Therefore a full
valuation allowance has been recorded against the net deferred
tax asset. A reduction in this allowance and the
F-22
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recognition of a deferred tax asset depends on having sufficient
evidence that the company will generate taxable income within
the carryback and carryforward periods. Sources of taxable
income that may allow recognition of a net tax asset include
(i) taxable income in the current year or prior years that
is available through carryback; (ii) future taxable income
that will result from the reversal of existing taxable temporary
differences; and (iii) future taxable income generated by
future operations.
The valuation allowance for deferred income tax assets at
December 31, 2004 and 2003 was $59.1 million and
$48.4 million respectively. Approximately
$35.1 million of deferred tax assets relate to acquired
entities. The ordering rules for utilization of deferred tax
assets are first to offset against goodwill, then against
identifiable intangibles resulting from purchase accounting
adjustments and then finally against expense arising from
operations. At December 31, 2004, $19.9 million of
valuation allowance related to acquired deferred tax assets
would reverse against goodwill or identifiable intangibles.
Additionally, approximately $10.8 million of
December 31, 2004 net operating loss deferred tax
asset relates to the exercise of stock options and warrants
which would reverse against additional paid-in capital rather
than be recognized as an income tax benefit.
The Internal Revenue Code of 1986, as amended, contains
provisions that may limit the federal tax net operating loss
(“NOL”) and tax credits available for use in any given
year upon the occurrence of certain events, including
significant changes in ownership interest. A change in ownership
of a company of greater than 50% within a three-year period may
result in an annual limitation on the company’s ability to
utilize its NOL credit carryforwards from tax periods prior to
the ownership change. Management believes the Company’s NOL
and tax credit carryforwards as of December 31, 2004 are
subject to such limitations. These limitations could cause some
of these carryforward items to expire unused.
Deferred taxes includes research tax credits which are based on
research expenditures as recorded for management reporting
purposes. As of December 31, 2004 the Company has
U.S. tax credits of approximately $2.8 million that
will expire beginning in 2009 through 2024. A determination of
qualified research expenditures eligible for the credit has not
been made, therefore the possibility exists that the amount of
Research credits may be reduced upon examination.
As of December 31, 2004 the Company has U.S. net
operating losses of approximately $153.8 million that will
expire beginning in 2008 through 2024. As of December 31,
2004 the Company had approximately $4.0 million of foreign
net operating losses, the majority of which may be carried
forward indefinitely and a portion in France which may be
carried forward for five years.
Deferred taxes have not been provided on any excess book basis
in the shares of certain foreign subsidiaries because these
basis differences are not expected to reverse in the foreseeable
future. These basis differences result from unremitted earnings
of the foreign subsidiaries and could reverse through a sale of
the subsidiaries, the receipt of dividends from the
subsidiaries, or other events. It is the company’s intent
to permanently reinvest all foreign earnings.
F-23
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 9. |
Commitments and Contingencies |
The Company leases equipment and office space under various
long-term non-cancelable operating leases that expire at various
dates before October 11, 2011. The following is a schedule
by year of future minimum lease payments under operating leases,
at December 31, 2004 (in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
4,589 |
|
|
2006
|
|
|
2,211 |
|
|
2007
|
|
|
1,409 |
|
|
2008
|
|
|
1,041 |
|
|
2009
|
|
|
846 |
|
|
Thereafter
|
|
|
1,709 |
|
| |
|
|
|
| |
|
$ |
11,805 |
|
| |
|
|
|
Total rent expense for the years ended December 31, 2004,
2003 and 2002 was $4,370,000, $2,859,000 and $3,865,000,
respectively.
On November 14, 2001, a shareholder class action complaint
was filed in the United States District Court, Southern District
of New York. On April 19, 2002, plaintiffs filed an amended
complaint. The amended complaint asserts that the prospectus
from the Company’s February 10, 2000 initial public
offering (“IPO”) failed to disclose certain alleged
improper actions by various underwriters for the offering in the
allocation of the IPO shares. The amended complaint alleges
claims against certain underwriters, the Company and certain
officers and directors under the Securities Act of 1933 and the
Securities Exchange Act of 1934 (Bartula v. XCare.net,
Inc., et al., Case No. 01-CV-10075). Similar complaints
have been filed concerning more than 300 other IPO’s; all
of these cases have been coordinated as In re Initial Public
Offering Securities Litigation, 21 MC 92. In a negotiated
agreement, individual defendants, including all of the
individuals named in the complaint filed against the Company,
were dismissed without prejudice, subject to a tolling
agreement. Issuer and underwriter defendants in these cases
filed motions to dismiss and, on February 19, 2003, the
Court issued an opinion and order on those motions that
dismissed selected claims against certain defendants, including
the Rule 10b-5 fraud claims against the Company, leaving
only the Section 11 strict liability claims under the
Securities Act of 1933 against the Company. A committee of our
Board of Directors has approved a settlement proposal made by
the plaintiffs On February 15, 2005, the Court issued an
order granting conditional preliminary approval of the
settlement. If the settlement is not achieved, the Company will
continue to aggressively defend the claims. We do not believe
that the outcome of this action will have a material adverse
effect on our financial position, results of operations or
liquidity; however, litigation is inherently uncertain and we
can make no assurance as to the ultimate outcome or effect.
On March 18, 2004, a purported class action complaint was
filed in the United States District Court for District of
Colorado, entitled Smith v. Quovadx, Inc.
et al, Case No. 04-M-0509, against Quovadx, Inc.,
its now-former Chief Executive Officer and its now-former Chief
Financial Officer. The complaint alleged violations of
Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, purportedly on behalf of all
persons who purchased Quovadx common stock from October 22,
2003 through March 15, 2004. The claims are based
upon allegations the Company (i) purportedly overstated its
net income and earnings per share during the class period,
(ii) purportedly recognized revenue from contracts between
the Company and Infotech Networks Group prematurely, and
(iii) purportedly lacked adequate internal controls and was
therefore unable to ascertain the financial condition of the
Company. Eight
F-24
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
additional, nearly identical class action complaints were filed
in the same Court based on the same facts and allegations. The
actions seek damages against the defendants in an unspecified
amount. On May 17 and 18, 2004, the Company filed motions
to dismiss each of the complaints. Since then, all but one of
the actions, entitled Heller v. Quovadx, Inc.,
et al., Case No. 04-M-0665 (OES) (D. Colo.), have been
dismissed. Thereafter, the plaintiff in Heller filed a
first amended complaint, which asserts the same claims as those
asserted in the original complaint, and includes allegations
regarding the Company’s accounting for certain additional
transactions. On September 8, 2004, the Court approved the
appointment of David Heller as lead plaintiff. On
September 29, 2004, the Court denied defendants’
motions to dismiss the first amended complaint and approved the
appointment of Mr. Heller’s counsel as lead
plaintiff’s counsel. On October 14, 2004, the Company
and the other defendants filed answers to the first amended
complaint, denying allegations of wrongdoing and asserting
various affirmative defenses. On January 13, 2005, the
Court approved a scheduling order that, inter alia,
requires plaintiffs to file a motion for class certification by
January 31, 2005, which they did, and fact discovery, which
has commenced, to conclude eight months after the Court issues
an order, if any, certifying a class. The class action is still
in the preliminary stages, and it is not possible for us to
quantify the extent of potential liability, if any.
On March 22, 2004, a shareholder derivative action was
filed in the District Court of Colorado, County of Arapahoe,
entitled Marcoux v. Brown et al, against the
members of the Board of Directors and certain now-former
officers of Quovadx alleging breach of fiduciary duty and other
violations of state law. The Company is named solely as a
nominal defendant against which no recovery is sought. This
complaint generally is based on the same facts and circumstances
as alleged in the class action complaints discussed above,
alleging that the defendants misrepresented Quovadx financial
projections and that one of the defendants violated state laws
relating to insider trading. The action seeks damages in an
unspecified amount against the individual defendants,
disgorgement of improper profits and attorney’s fees, among
other forms of relief. On or about April 21, 2004, a
second, nearly identical shareholder derivative complaint,
seeking the same relief, was filed in the United States District
Court for the District of Colorado, entitled Thornton v.
Brown et al. The plaintiffs in both of the shareholder
derivative actions are represented by the same local counsel. On
or about May 20, 2004, a third, nearly identical
shareholder derivative complaint, seeking the same relief, was
filed in the District Court of Colorado, County of Arapahoe,
entitled Jaroslawicz v. Brown, et al. The three
shareholder derivative actions are now all pending in the
Colorado state court. The Court has consolidated the three
actions into a single consolidated action and set
February 1, 2005 as the deadline for the filing of a
consolidated amended complaint, subsequently extended to
May 2, 2005. The shareholder derivative action is still in
the preliminary stages, and it is not possible for us to
quantify the extent of potential liability, if any.
On May 17, 2004, a purported class action complaint was
filed in the United States District Court for the District of
Colorado, entitled Henderson v. Quovadx, Inc.
et al, Case No. 04-M-1006 (OES), against Quovadx,
Inc., its now-former Chief Executive Officer, its now-former
Chief Financial Officer and its Board of Directors. The
complaint alleged violations of Section 11 and
Section 15 of the Securities Act of 1933, as amended,
purportedly on behalf of all former shareholders of Rogue Wave
Software, Inc. who acquired Quovadx common stock in connection
with the Company’s exchange offer effective
December 19, 2003. The claims are based upon the same
theories and allegations as asserted in the Section 10(b)
class actions described above. The Court denied plaintiff’s
motion to consolidate this Section 11 action with the
Section 10(b) cases and authorized the two competing lead
plaintiff candidates to take discovery of each other in advance
of a hearing on the appointment of lead plaintiff. On
July 14, 2004, the Company and outside director defendants
filed an answer to the complaint, denying allegations of
wrongdoing and asserting various affirmative defenses. On
September 8, 2004, the Court directed the plaintiff to
publish new notice of pendency of this action inviting potential
class members to submit motions for appointment as lead
plaintiff. Two putative class members filed competing motions
for appointment as lead plaintiff, and their motions are sub
judice. The Court stayed all discovery related to the merits
of the litigation pending the appointment of a lead plaintiff.
On October 4, 2004, the Company’s former CEO and CFO
filed an answer to the complaint, denying
F-25
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
allegations of wrongdoing and asserting various affirmative
defenses. This class action also is in the preliminary stages,
and it is not possible for us to quantify the extent of
potential liability, if any.
On April 12, 2004, the Company announced that the
Securities and Exchange Commission (“SEC”) had
notified the Company that it’s previously announced
informal inquiry has become a formal investigation pursuant to
an “Order Directing Private Investigation and Designating
Officers to Take Testimony.” The SEC is investigating
transactions entered into during the third quarter of 2002 and
transactions entered into during 2003 including two distributor
contracts totaling approximately $1 million and
transactions between Quovadx and Infotech Network Group. The
investigation is continuing, and the Company continues to
provide documents and information to the SEC.
On July 28, 2004, Ronald Renjilian, a former employee,
filed a Sarbanes-Oxley Whistle Blower Complaint against the
Company with the US Department of Labor Occupational Safety and
Health Administration (“OSHA”). The complaint alleges
that the Company’s April 30, 2004 termination of
Mr. Renjilian’s employment was an action taken against
Mr. Renjilian as a result of his engaging in protected
activity. The Company denied any wrongdoing. On
December 17, 2004, OSHA dismissed the claims. On
January 19, 2005, Mr. Renjilian objected to the
Secretary’s findings, and requested a hearing on the
record. On February 17, 2005, Mr. Renjilian withdrew
his appeal.
The Company is engaged from time to time in routine litigation
that arises in the ordinary course of our business.
|
|
| 10. |
Related Party Transactions |
The Corporate Secretary of the Company during 2004 is a partner
of a law firm which performs legal services for the Company. The
accompanying financial statements include expenses related to
this law firm of $2.8 million for the twelve months ended
December 31, 2004. At December 31, 2004 the
outstanding payable balance to the law firm totaled $518,000.
In 2004 the Company sold technology and service contracts of
Outlaw Technologies for $245,000 to the former owner of Outlaw
who is presently an employee of Quovadx.
A director of the Company is on the board of directors of Royal
Health Care. In 2004 we sold our minority equity investment in
Royal for $3.1 million and sold the assets of the
Albuquerque, New Mexico Data Center to Royal for
$1.9 million.
The Company acquired its WebAccel product from CMI Corporate
Marketing, d/b/a Compuflex International (“Compuflex”)
in August, 2003. An executive officer of the Company is the sole
stockholder of Compuflex. Compuflex has received, and will
continue to receive, royalty fees of $500,000 over two years
from the Company in accordance with the terms of the purchase
agreement. Through December 31, 2004, the Company had paid
Compuflex $334,000 in royalty payments and the remaining
payments totaling $166,000 will be completed in 2005.
Segment information has been prepared in accordance with FASB
SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information.” The Company
defines operating segments as components of an enterprise for
which discrete financial information is available and is
reviewed regularly by the chief operating decision-maker or
decision-making group, to evaluate performance and make
operating decisions. Accounting policies of the segments are the
same as those described in the summary of significant accounting
policies.
In 2003 and 2004 the Company reported three segments: software
license, professional services, and recurring revenue. The chief
operating decision-making group reviewed the revenue and margin
by the nature
F-26
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of the services provided and reviewed the overall results of the
Company. The software license segment includes revenue from
software license sales and software subscriptions. The
professional services segment includes revenue generated from
software implementation, development, and integration. The
recurring services segment includes revenue generated from ASP
outsourcing, hosting, software maintenance, transactions, and
other recurring services. This information for the years ended
December 31, 2004, 2003 and 2002 is reflected in the
Consolidated Statements of Operations.
The Company has reorganized and the operations consist of three
divisions, the Rogue Wave Software division, which provides
reusable software components and services that facilitate
application development, the Integration Solutions division,
which offers vertically specific solutions to improve processes
and leverage existing technology systems and the CareScience
division, which provides care management services and analytical
solutions to hospitals and health systems. Each division has its
own product and services line that is generally marketed to
different industries. Each division has a Division President
whose responsibilities include financial management of the
division.
Segment information based on the three divisions for the years
ended December 31, 2004, 2003 and 2002 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Rogue | |
|
|
|
|
| |
|
Integration | |
|
|
|
Wave | |
|
|
|
|
| |
|
Solutions | |
|
CareScience | |
|
Software | |
|
|
|
|
| |
|
Division | |
|
Division | |
|
Division | |
|
Other Operations | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
40,736 |
|
|
$ |
13,910 |
|
|
$ |
28,155 |
|
|
$ |
— |
|
|
$ |
82,801 |
|
|
Operating expenses
|
|
|
51,818 |
|
|
|
15,159 |
|
|
|
20,581 |
|
|
|
20,509 |
|
|
|
108,067 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$ |
(11,082 |
) |
|
$ |
(1,249 |
) |
|
$ |
7,574 |
|
|
$ |
(20,509 |
) |
|
$ |
(25,266 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
58,340 |
|
|
$ |
4,213 |
(a) |
|
$ |
2,375 |
(a) |
|
$ |
— |
|
|
$ |
64,928 |
|
|
Operating expenses
|
|
|
63,725 |
|
|
|
4,291 |
|
|
|
1,053 |
|
|
|
12,742 |
|
|
|
81,811 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$ |
(5,385 |
) |
|
$ |
(78 |
) |
|
$ |
1,322 |
|
|
$ |
(12,742 |
) |
|
$ |
(16,883 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
60,623 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
60,623 |
|
|
Operating expenses
|
|
|
60,617 |
|
|
|
— |
|
|
|
— |
|
|
|
105,536 |
|
|
|
166,153 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(105,536 |
) |
|
$ |
(105,530 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
CareScience and Rogue Wave Software were acquired in September
2003 and December 2003, respectively. |
A breakout of assets and capital expenditures for all segments
is not prepared or provided to the chief operating decision
maker. Revenue from our foreign operations for the years ended
December 31, 2004 and 2003 was $10.3 million and
$3.8 million, respectively. Long term assets of our foreign
operations were $0.9 million and $0.5 million at
December 31, 2004 and 2003, respectively.
|
|
| 12. |
Quarterly Results (Unaudited) |
This information has been derived from unaudited consolidated
financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting
only of normal recurring adjustments, considered necessary for a
fair
F-27
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
presentation of this information. These unaudited quarterly
results should be read in conjunction with the audited financial
statements and notes thereto. Operating results are expected to
vary significantly from quarter to quarter and are not
necessarily indicative of results for any future period. Data
relating to the results of operations for the each quarter of
the years ended December 31, 2004 and 2003 follows (in
thousands except per share amounts):
Data relating to the results of operations as restated for each
quarter of the years ended December 31, 2004 and 2003
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except for per share amounts) | |
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue(a)
|
|
$ |
22,294 |
|
|
$ |
20,276 |
|
|
$ |
19,749 |
|
|
$ |
20,482 |
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of revenue(b)
|
|
|
13,498 |
|
|
|
11,685 |
|
|
|
11,387 |
|
|
|
9,529 |
|
| |
Asset impairment
|
|
|
6,765 |
|
|
|
— |
|
|
|
— |
|
|
|
430 |
|
| |
Sales and marketing
|
|
|
6,534 |
|
|
|
4,830 |
|
|
|
4,177 |
|
|
|
4,056 |
|
| |
General and administrative
|
|
|
3,693 |
|
|
|
6,738 |
|
|
|
4,456 |
|
|
|
4,945 |
|
| |
Research and development
|
|
|
3,683 |
|
|
|
3,657 |
|
|
|
3,096 |
|
|
|
2,947 |
|
| |
Amortization of acquired intangibles
|
|
|
1,182 |
|
|
|
755 |
|
|
|
770 |
|
|
|
1,011 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
35,355 |
|
|
|
27,665 |
|
|
|
23,886 |
|
|
|
22,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,061 |
) |
|
|
(7,389 |
) |
|
|
(4,137 |
) |
|
|
(2,436 |
) |
|
Gain on sales of assets
|
|
|
— |
|
|
|
1,175 |
|
|
|
360 |
|
|
|
— |
|
|
Interest Income, net
|
|
|
118 |
|
|
|
127 |
|
|
|
50 |
|
|
|
60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(12,943 |
) |
|
|
(6,087 |
) |
|
|
(3,727 |
) |
|
|
(2,376 |
) |
|
Income tax expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
133 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(12,943 |
) |
|
|
(6,087 |
) |
|
|
(3,727 |
) |
|
|
(2,509 |
) |
| |
Income from discontinued operations
|
|
|
161 |
|
|
|
197 |
|
|
|
113 |
|
|
|
118 |
|
| |
Gain on sale of discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
446 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(12,782 |
) |
|
$ |
(5,890 |
) |
|
$ |
(3,614 |
) |
|
$ |
(1,945 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before discontinued operations per common
share — basic and diluted
|
|
$ |
(0.33 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.06 |
) |
|
Income from and gain on sale of discontinued operations per
common share — basic and diluted
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$ |
(0.33 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Revenues from discontinued operations of $1,372,000, $1,302,000,
$1,238,000 and $1,252,000 for the three months ended
March 31, 2004, June 30, 2004, September 30, 2004
and December 31, 2004, respectively, have been reclassified
to income from discontinued operations. |
|
|
|
|
(b) |
|
Cost of revenue from discontinued operations of $1,211,000,
$1,105,000, $1,125,000 and $1,134,000 for the three months ended
March 31, 2004, June 30, 2004, September 30, 2004
and December 31, 2004, respectively, have been reclassified
to income from discontinued operations. |
|
|
|
Restatement of 2003 Financial Results |
The results for the third quarter of 2003 were restated in March
2004 from the financial results reported in the Company’s
Form 10-Q filed in November 2003. These revisions concern
shipments to Infotech Group
F-28
QUOVADX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(“Infotech”), an Indian company, in the third quarter
of 2003. The Company believed at the time of the shipments that
collection of the receivable was probable due to the
establishment of a credit line by Infotech that could be used
for payment. After the shipments of software product, however,
the Company has encountered unanticipated delays in obtaining
payment. Based on further analysis of Infotech’s ability to
pay for the software purchased, the accounting for the revenue
recognized has been revised from an accrual to a cash basis. As
a result, the Company has materially restated its previously
reported financial results for the third quarter of 2003 by
deleting all of the revenue and commissions, $4.7 million
and $0.4 million, respectively, that had been recorded
related to Infotech. The results for the quarters reflected
above have also been restated due to the accounting inaccuracies
described in Note 2.
The results for the quarters reflected below were also restated
in August 2004 due to the accounting inaccuracies described in
Note 2.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except for per share amounts) | |
|
STATEMENT OF OPERATIONS-RESTATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue(c)
|
|
$ |
16,211 |
|
|
$ |
17,328 |
|
|
$ |
13,140 |
|
|
$ |
18,249 |
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of revenue(d)
|
|
|
9,687 |
|
|
|
9,302 |
|
|
|
9,275 |
|
|
|
11,999 |
|
| |
Sales and marketing
|
|
|
3,842 |
|
|
|
4,052 |
|
|
|
4,260 |
|
|
|
5,631 |
|
| |
General and administrative
|
|
|
3,030 |
|
|
|
3,146 |
|
|
|
3,001 |
|
|
|
3,565 |
|
| |
Research and development
|
|
|
2,247 |
|
|
|
2,246 |
|
|
|
2,669 |
|
|
|
2,833 |
|
| |
Amortization of acquired intangibles
|
|
|
457 |
|
|
|
307 |
|
|
|
307 |
|
|
|
649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
19,263 |
|
|
|
19,053 |
|
|
|
19,512 |
|
|
|
24,677 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,052 |
) |
|
|
(1,725 |
) |
|
|
(6,372 |
) |
|
|
(6,428 |
) |
|
Interest Income, net
|
|
|
189 |
|
|
|
207 |
|
|
|
89 |
|
|
|
209 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before discontinued operations
|
|
|
(2,863 |
) |
|
|
(1,518 |
) |
|
|
(6,283 |
) |
|
|
(6,219 |
) |
| |
Income from discontinued operations
|
|
|
137 |
|
|
|
88 |
|
|
|
85 |
|
|
|
96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,726 |
) |
|
$ |
(1,430 |
) |
|
$ |
(6,198 |
) |
|
$ |
(6,123 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before discontinued operations per common
share — basic and diluted
|
|
$ |
(0.09 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
Income from and gain on sale of discontinued operations per
common share — basic and diluted
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
$ |
0.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$ |
(0.09 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (c) |
Revenues from discontinued operations of $1,322,000, $1,257,000,
$1,227,000 and $1,198,000 for the three months ended
March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003, respectively, have been reclassified
to income from discontinued operations. |
|
|
|
|
(d) |
|
Cost of sales from discontinued operations of $1,185,000,
$1,169,000, $1,142,000 and $1,102,000 for the three months ended
March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003, respectively, have been reclassified
to income from discontinued operations. |
F-29
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
|
|
|
|
|
|
|
|
Balance at | |
| Allowance for Doubtful Accounts |
|
Beginning | |
|
Charged to | |
|
|
|
Reduction in Sales | |
|
|
|
End of | |
| and Sales Returns |
|
of Period | |
|
Expense | |
|
Deduction | |
|
Return Allowance | |
|
Transfers | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
2004
|
|
$ |
2,765 |
|
|
$ |
162 |
|
|
$ |
(1,555 |
)(a) |
|
$ |
(305 |
)(b) |
|
$ |
— |
|
|
$ |
1,067 |
|
|
2003
|
|
|
2,370 |
|
|
|
82 |
|
|
|
(919 |
)(a) |
|
|
|
|
|
|
1,232 |
(c) |
|
|
2,765 |
|
|
2002
|
|
|
1,932 |
|
|
|
474 |
|
|
|
(36 |
)(a) |
|
|
|
|
|
|
— |
|
|
|
2,370 |
|
|
|
| (a) |
Represents credit losses written off during the period, less
collection of amounts previously written off. |
|
|
|
|
(b) |
|
Reduction in Rogue Wave sales allowance that is no longer needed
as an adjustment to good will. |
| |
|
(c) |
|
Transfer of allowance balances from business acquisitions. |
S-1
INDEX TO EXHIBITS
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
| |
|
|
| |
10 |
.1* |
|
Amended and Restated 1997 Stock Plan and related agreements. |
| |
10 |
.25 |
|
Amendment to Office Lease Agreement, dated as of
November 8, 1999, by and between Mountain States Casualty
Company and the Registrant, which amendment was dated as of
November 22, 2004. |
| |
10 |
.26 |
|
Estoppel Agreement, dated as of December 31, 2004, by and
among Mountain States Mutual Casualty Company, the Registrant,
Royal Health Care Data Center LLC and Royal Health Care of Long
Island LLC d/b/a Royal Health Care. |
| |
14 |
.1 |
|
Quovadx, Inc. Code of Business Conduct and Ethics. |
| |
14 |
.2 |
|
Quovadx, Inc. Code of Ethics for Senior Financial Officers. |
| |
21 |
|
|
Subsidiaries of the Registrant. |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
| |
31 |
.1 |
|
Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended. |
| |
31 |
.2 |
|
Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended. |
| |
32 |
.1** |
|
Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(b) and Rule 15d-14(b),
promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. §1350. |
| |
32 |
.2** |
|
Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(b) and Rule 15d-14(b),
promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. §1350. |
|
|
|
| |
* |
Identifies exhibit that consists of or includes a management
contract or compensatory plan or arrangement. |
|
|
| ** |
This certification is furnished to, but not filed, with the
Commission. This certification shall not be deemed to be
incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to
the extent that the Registrant specifically incorporates it by
reference. |