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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
FOR THE FISCAL YEAR ENDED December 31, 2002
Or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
12110 SUNSET HILLS ROAD, SUITE 600, RESTON, VIRGINIA 20190
(Address of Principal Executive Offices) (Zip Code)
(703) 709-2300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Per Share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __ No X
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 28, 2002 was approximately $189,735,393 (based upon the
price quoted for shares of the Registrant's common stock as reported on the
Nasdaq SmallCap Market on June 28, 2002). Shares of common stock held by each
officer, director and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes X No __
On July 31, 2003, 27,530,815 shares of the Registrant's common stock,
$0.01 par value per share, were outstanding.
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QUADRAMED CORPORATION
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 11
Item 3 Legal Proceedings................................................ 11
Item 4 Submission of Matters to a Vote of Security Holders.............. 12
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 12
Item 6 Selected Financial Data.......................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 37
Item 8 Financial Statements and Supplementary Data...................... 38
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.......................................... 38
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 38
Item 11 Executive Compensation.......................................... 40
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................... 49
Item 13 Certain Relationships and Related Transactions.................. 49
Item 14 Controls and Procedures......................................... 50
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 52
Signatures............................................................... 53
Financial Statement Schedule............................................. S-1
Index to Consolidated Financial Statements............................... F-1
Cautionary Statement on Risks Associated With Forward-Looking Statements
- ------------------------------------------------------------------------
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to risks and
uncertainties. The words "believe", "expect", "anticipate", "predict",
"intend", "plan", "estimate", "may", "will", "should", "could", and similar
expressions and their negatives are intended to identify such statements.
Forward-looking statements are not guarantees of future performance and are to
be interpreted only as of the date on which they are made. We undertake no
obligation to update or revise any forward-looking statement.
We advise investors that we discuss other risks and uncertainties that
could cause our actual results to differ from these forward-looking statements
in this Form 10-K under "Business Risks" in "Item 7. Management's Discussion
-----------------------
and Analysis of Financial Condition and Results of Operations."
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PART I
Item 1. Business
- ------ --------
Overview
- --------
QuadraMed Corporation along with all significant business divisions and
subsidiaries, (the "Company" or "QuadraMed") is dedicated to improving
healthcare delivery by providing innovative healthcare information technology
and services. From clinical to patient information management and revenue cycle
to health information management, QuadraMed delivers real-world solutions that
help healthcare professionals deliver outstanding patient care with optimum
efficiency. QuadraMed was reincorporated in Delaware in 1996, having been
originally incorporated in California in 1993. QuadraMed can be located at
www.quadramed.com. QuadraMed is managed in three distinct business segments
which are as follows: Enterprise Division, Health Information Management
Software Division and Financial Services Division.
We initiated a new branding strategy in 2001 that included the adoption of
a new trademark, "We do technology. So you can do healthcare(tm)". This
evolved in the year 2002. The strategy classified our healthcare technology
products and services into four sub-brands, corresponding to the four distinct
categories of hospital decision-makers who purchase our products:
o Affinity(r) Healthcare Information Systems, which are generally purchased
in a committee decision involving hospital boards, chief executive
officers, chief financial officers, chief medical officers, chief
information officers, and outside consultants;
o Quantim(r) Health Information Management Software, which is generally
procured by health information management professionals, chief financial
officers, chief information officers, and outside consultants; and
o Chancellor(tm) Financial Products and Services, which are generally
secured by chief financial officers and revenue officers.
We are dedicated to developing information technology and providing
consulting services that help healthcare professionals improve productivity and
deliver patient care. Management's strategy consists of:
o Increased sales activity to improve revenue growth;
o Continued expense discipline;
o Development and investment in research and development;
o Instituting key financial and operational improvements; and
o Selling non-strategic assets.
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Technology and Product Development Strategy
- -------------------------------------------
We are continuously engaged in the design and development of new products
and enhancements to our existing products. Our research and development is
guided by the following technology trends and healthcare industry needs that
affect software producers and consumers:
o The Internet and distributed computing have had and will likely continue
to have a significant impact on the way software is developed and
delivered;
o Patient safety has become a top priority for healthcare organizations and
a major factor to consider in choosing clinical information systems;
o Under the HIPAA standards, health care providers must establish procedures
and mechanisms to protect the confidentiality, integrity and availability
of electronic health systems;
o Hospital executives are under tremendous pressure to improve operational
efficiency and return on investment;
o Web-native applications with a clean Internet architecture will likely
have a significant role in the future; and
o Computing power, storage capacity, and network bandwidth have in the past
and may continue to double every 18, 12, and 6 months, respectively.
In 2002, we made significant progress on the technology plan that was
initiated in the second half of 2001. We focused on the development of new
web-native applications (designed to run in a web browser) built on n-tiered
architecture (developed in discrete layers separating the user interface from
the business rules and data storage to provide maximum platform independence)
in two product areas:
o We have extended the classical Affinity architecture to include a web-
native, service-orientated Java (J2EE) based platform. On this platform,
we delivered to the industry an innovative Clinical Workstation including
Computerized Physician Order Entry (CPOE) application to its beta site, in
the fourth quarter of 2002. The Affinity CPOE system with its unique
Intelligent Care Sets establishes a new standard in patient safety. We
also delivered Affinity Global Registration to its beta site in the fourth
quarter of 2002. Global Registration is a fully scalable, single
registration portal for one or multiple healthcare facilities. It
features shared patient registration information for both hospital and
physician practices from a secure, central database. This new application
will reduce redundancies, improve efficiency and in turn, raise patient
satisfaction. Designed with the assistance of human factors engineers and
extensive usability testing, once operational it will be able to be
deployed in a flexible manner on a variety of platforms, ranging from
traditional PC desktops to wireless handheld tablet computers and personal
digital assistants;
o In the Quantim product line, we successfully launched a full suite of
Healthcare Information Management (HIM) applications, including Inpatient
Compliance, Outpatient Compliance, APC Compliance, Facility Coding,
Physician Coding, and Correspondence Management. Quantim is designed to
provide seamless integration with a consistent look and feel using one
platform to provide an end-to end health information management solution;
and
o We completed real time interfacing between Quantim and Affinity.
Today we are the only HIS vendor offering a full suite of HIM products and
the only one offering our own coding tool. The web-native applications have
been well received by our clients. They are fully interfaced with our core
Affinity revenue cycle management system. The service-oriented architecture
also allows integration with existing web portals to make enterprise wide
information web-accessible.
We will continue to leverage and expand our web-native and service-
oriented technology platform to deliver end-to-end and real time automation
across the continuum of care.
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Description of Operating Division Products and Markets
- ------------------------------------------------------
In 2000, our operations were realigned into five distinct business
segments. With the sale of the EZ-CAP managed care software business in August
2001, and the sale of the Health Information Management Services Division in
December 2002, we are now managed in three distinct business segments. The
three segments are as follows:
o Enterprise Division, which provides acute care hospitals with Affinity
-------------------
integrated enterprise information systems to manage patient registration,
clinical, and financial information and related products;
o Health Information Management Software Division, which provides acute care
-----------------------------------------------
hospitals and physician practices with health information management
systems to manage coding, compliance, abstracting and record management
processes; and
o Financial Services Division, which identifies and collects accounts
---------------------------
receivables for hospitals and medical groups and provides other Chancellor
products and services.
Enterprise Division
- -------------------
Our Enterprise Division provides hospitals, particularly acute care
hospitals, with integrated enterprise information systems to manage patient
registration, clinical, and financial information. Our Enterprise Division
products are generally only sold only in the United States, although certain
products are also sold in Canada.
The division's primary offices are in Reston, Virginia; Irvine,
California; and Neptune, New Jersey.
Affinity is the Enterprise Division's core product. For the last five
consecutive review periods, Affinity has been selected as one of the top "Major
Acute Care" software solutions in a survey of approximately 3,500 hospital
chief information officers and department directors, as reported by KLAS
Enterprises in its Healthcare IT Top 20 report. The Affinity Pharmacy software
solution was selected as the number one pharmacy solution in 2002 by KLAS,
winning the 2002 "Best in KLAS" Award. Development of Affinity began in 1989.
It was first released in 1991 by The Compucare Company ("Compucare"), which we
acquired in 1999.
Affinity is a standards-based, integrated, healthcare information system.
It is highly scaleable and flexible and supports the business application needs
of hospitals of varying sizes, from small community facilities to large multi-
entity Integrated Delivery Networks ("IDNs"). It can be implemented on both
Microsoft NT and UNIX operating systems and supports a number of hardware
platforms, including Compaq, Hewlett Packard, IBM, and EMC. Affinity is built
on a standards-based architecture constructed in ANSI-standard programming
language and uses the Cache database with structured queried language ("SQL")
access engineered by InterSystems Corporation.
Affinity's comprehensive and integrated product suite is comprised of 70
applications divided into four major functional and infrastructure areas:
o Affinity Patient Information Management;
o Affinity Clinical Care Management;
o Affinity Patient Revenue Management; and
o Affinity Financial Management.
Affinity clients typically purchase "core" applications, such as
Registration, Medical Records, Patient Accounting, and Order Management,
Pharmacy and Patient Charting. In addition to "core" applications, clients
frequently purchase additional Affinity applications that are designed to:
o Streamline their workflow processes;
o Reduce administrative expenses;
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o Improve the speed and accuracy of billing processes; and
o Assist in clinical decision-making and documentation.
Affinity's development cycle includes one major annual release to
customers and up to four "update" releases. Content for the annual releases
typically focuses on five major categories:
o Regulatory enhancements required by federal and state mandates;
o Strategic enhancements to the breadth and depth of functionality;
o User group enhancements voted on by Affinity customers pursuant to
customer support agreements;
o Corrective maintenance to repair code; and
o Modification retrofits funded by customers.
In 2001, a prototype Affinity CPOE system, used to assist physicians in
clinical decision-making and improve patient safety, was completed. It was
successfully delivered to its beta site, Great Plains Medical Center, in
October 2002 and was generally available in March 2003. Designed with the
assistance of human factor engineers and extensive usability testing, it is
designed to be deployed in a flexible manner on a variety of platforms, ranging
from traditional PC desktops to wireless handheld tablet computers and personal
digital assistants. The Affinity CPOE, Pharmacy and Patient Charting software
solution provides a comprehensive, advanced clinical solution.
We elected to develop CPOE based on the existing Affinity system. The
successful delivery of CPOE led to the establishment of the advanced clinical
workstation environment which will now serve as the basis for future clinical
systems developed by QuadraMed, a web-native service architecture and
development platform focused on individuals and based on industry standards
such as Health Level 7, version 3.
The Affinity Pharmacy Management system provides a comprehensive solution
to help healthcare organizations manage the daily operations of their pharmacy
departments and is fundamental in addressing patient safety concerns that are
driving clinical decisions. The strategic acquisition of Pharmacy Data Systems
was completed in June of 2002 and initiatives are underway to tightly integrate
it with the Affinity Care Management solutions: ordering, dispensing,
administration and charting. Additionally, we also offer a standalone solution
for pharmacy management that includes inpatient, ambulatory, and long-term care
pharmacy settings and provides electronic medication record and prescriber
order entry tools to close the loop on medication management.
Over 2,000 Affinity applications are installed at over 500 hospitals in
the United States and Canada. Affinity health information system is currently
installed in 153 hospitals in 32 states and Canada. Hospitals generally use
committees to make major information technology purchase decisions.
Consequently, purchase decisions are often slow to be made. The average sales
cycle for Affinity is typically 12 to 18 months from initial contact to
contract execution. Affinity sales are normally generated from six major
sources:
o Requests for proposals sent directly to us by the hospital or its retained
consultant;
o Referrals and recommendations from consulting firms;
o Healthcare trade shows;
o Our sales force;
o Telemarketing; and
o Direct mail.
In addition to Affinity, our Enterprise Division also markets an
electronic document imaging and management system or "EDM", and a suite of
Master Population Index ("MPI") Software and Services (MPIspy(r), SmartID(r),
SmartMerge(r), MPI Cleanup), which enable the identification, correction, and
elimination of duplicate patient records in a facility's master population
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index. In January 2001, the division also began selling our Chancellor
Decision Support tools, which includes: Contract Management, a managed care
contract management system; Performance Measurement, a clinical and financial
outcome analysis and decision support system; and, Clinical Outcome Practice
Evaluator ("COPE"), which electronically captures, abstracts, and enters data
required for Core Measures of the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO").
The following table provides a list of the major products and services
offered by our Enterprise Division:
Affinity Patient Information Management o Patient Scheduling
o Patient Registration
o Master Population Index
o Community Master Population Index
("CMPI")
o Medical Records Abstracting
o Medical Records Control
o DRG/Case Mix
o Account Workflow
o Electronic Data Interchange
Affinity Clinical Care Management o Computerized Physician Order Entry
("CPOE")
o Clinician Access
o Order Management
o Ancillary Department Management
o Patient Charting
o Medication Charting
o Plan of Care
o Acuity/Staff Requirements
o Health Notes
o Quality Management
o Utilization Management
Affinity Pharmacy Management o PharmPro
o AmpPro
o NurPro
o pcMAR
o Prescriber Order Entry
Affinity Financial Management o General Ledger
o Accounts Payable
o Payroll Personnel
o InSight Executive Decision Support
o Performance Measurement
Affinity Patient Revenue Management o Patient Accounting
o Central Business Office
o Account Workflow
o Contract Management
o Electronic Data Interchange
Affinity Professional Services o Consulting Services
o Interface and Conversion Services
o Systems Operations Management
Services
o Query Services
o Customer Training Courses
o Professional Services
Affinity Electronic Document Management o Medical Records
o Patient Accounting
o ColdView
o Human Resources
o Workflow
Affinity MPI Integrity Management o MPIspy
o SmartMerge
o PreciseID Patient Search Algorithm
5
Chancellor Decision Support o Contract Management
o Performance Measurement
o Clinical Outcome Practice Evaluator
("COPE")
We primarily market our Enterprise Division products to acute care
hospitals. The non-federal acute care market consists of approximately 5,000
hospitals within the United States (American Hospital Association Statistics,
2001). Differentiation within this market is by locale (rural/urban) and bed
size (number of beds). Approximately 2,800 hospitals are located in urban
areas and approximately 2,200 are located in rural areas. Hospitals with fewer
than 200 beds constitute approximately 71% of the total acute care market and
account for approximately 20% of the aggregate expenditures by acute care
hospitals on information technology. Hospitals with more than 200 beds
constitute approximately 29% of the acute care hospital market and account for
approximately 80% of acute care hospital spending on information technology.
The acute care hospital market is mature and has been in the process of
consolidating over the past several years. Consequently, we believe that the
greatest sales opportunities for our Enterprise Division between now and 2005
will be in the replacement market for legacy healthcare information systems.
Given Affinity's functional flexibility and ability to interface with other
clinical systems, we believe that we have significant opportunities in the 200-
bed or larger hospital market.
From 1998 to 2000, hospital information system sales as a whole slowed due
to expenditures on 2000 remediation, industry consolidation, and generally poor
economic conditions for hospitals primarily due to reimbursement issues
associated with managed care contracts and the Balanced Budget Act of 1997. We
believe that demand for our Enterprise Division products has increased given
that government regulatory bodies and the news media continue to scrutinize
patient safety issues, which increase the need to reduce clinical error and
improve quality measures. In addition, we believe that shortages of medical
professionals, particularly in nursing, ancillary, and health information
management departments, will increase the need for hospitals and other
healthcare providers to acquire health information systems that reduce clinical
errors, increase hospital efficiencies, reduce administrative cost, and improve
the speed and accuracy of billing processes.
Health Information Management Software Division
- -----------------------------------------------
Our Health Information Management Software Division provides acute care
hospitals and physician practices with health information management systems to
manage coding, compliance, abstracting and record management processes. The
unique combination of complimentary solutions is designed to significantly
improve the business of healthcare. The Health Information Management software
solutions are designed to generate operational efficiencies, improve cash flow
and measure the cost and quality of care. Our Health Information Management
Products fall into four main areas:
o Compliance Management;
o Coding and Reimbursement Management;
o Abstracting; and
o Record Management.
Our Health Information Management Software Division products are sold in
the United States, Puerto Rico, and Canada. The main offices are in Alameda
and San Marcos, California.
Our current offering of Health Information Management software products
includes a mix of older legacy products from previous acquisitions and our new
internally developed Quantim applications that are based on an enterprise n-
tiered architecture that supports a variety of database engines, including
Microsoft SQL Server and Oracle Enterprise Edition. In 2001, we started
development on Quantim with the vision of a single, fully integrated, web-
native platform for our Health Information Management product suite that would
significantly improve the functionality of several existing health information
management product offerings in coding, compliance, abstracting, and record
management. The first products to be offered on this new platform, Quantim
Inpatient and Outpatient Compliance, were delivered to the beta site in the
fourth quarter of 2001 and became generally available for purchase in February
2002. Other Quantim modules that became generally available in 2002 include
Quantim APC Compliance, Quantim Facility Coding, Quantim Physician Coding, and
Quantim Correspondence Management.
6
Our coding software products, Quantim Facility Coding and Physician Coding
as well as the legacy products of nCoder+, nCoder+MD, WinCoder+ and Cascade
Encoder, identify ICD-9-CM and HCPCS/CPT codes to classify diagnosis and
procedure codes and facilitate the calculation of hospital and physician
service reimbursement. The encoding methodology is "knowledge-based" and
adheres to the U.S. Department of Health and Human Services Office of the
Inspector General ("OIG") recommended use of the ICD-9-CM Official Coding
Guidelines. The encoding tools include official coding protocols, integrated
OIG recommended references, and data quality edits, designed utilizing the
professional knowledge of our credentialed health information management
professionals.
We have historically sold our legacy-based coding products primarily to
hospitals with less than 200 beds, which represent 71% of the approximately
5,000 non-federal acute care hospitals. With the introduction of the new
Quantim software architecture, the scalability and web-native platform allow us
to effectively market to the entire acute care market to include large
hospitals and IDNs. We market a specialized coding product, nCoder+/PTF, for
Veterans Administration facilities. In December 2001, we established a new
marketing unit for sales to governmental agencies. In addition to facility
coding products, we also sell a third party specialized coding product for the
commercial physician market, nCoder+MD. We believe that opportunities exist in
the physician market for coding product sales. We also believe that new
opportunities for our coding products could develop with the anticipated
implementation of ICD-10. This new coding classification system is expected to
require the modification of coding, billing, and data collections systems and
the conversion of statistical information for proper clinical reporting and
claims submission. The new Quantim architecture is designed to accommodate the
ICD-10 classification system and the knowledge based approach is recommended by
the American Health Information Management Association ("AHIMA") in
facilitating a smooth transition from ICD-9 to ICD-10.
Our Compliance Management products included our legacy inpatient (IP
Facts), outpatient (OP Facts), and Ambulatory Patient Classifications
(Analyzer+) compliance modules through 2001, with the introduction of the new
compliance management products Quantim Outpatient, Quantim Inpatient and
Quantim APC Compliance in 2002. The Quantim Compliance product line is
designed to conduct automated prospective and retrospective reviews of all
inpatient and outpatient claims data (UB92). The screenings within the Quantim
Compliance Management tools include OIG and internally designed targets aimed
to provide data quality, coding accuracy, and appropriate reimbursement. In
addition to identifying claims with potential errors prior to billing, these
tools work in conjunction with an organization's coding and billing compliance
program to identify patterns in coding and physician documentation. Results of
the auditing and monitoring activities are represented in executive reports
summarizing clinical and financial results as well as detailed reports
providing information needed to target specific areas for review. We also
offer the ProFEE Compliance Suite, which is a compliance tool to screen
professional fees and services (HCFA1500), exclusively for the Veteran's
Administration facilities.
Our primary market for Quantim Compliance products is the acute care
hospital market. Market studies show that growth for the compliance market
increased from 34% in 1999 to 39% in 2001, a fast growth segment in the HIM
market. Billing practices for health care services are under close scrutiny by
the OIG as high-risk areas for Medicare fraud and abuse. CMS has recommended
increasing its efforts to maintain progress in reducing improper payments,
specifically to increase its work with providers to ensure that medical record
documentation support services provided. Hospitals must implement
comprehensive coding and compliance programs in order to minimize payer
submission errors and assure the receipt of anticipated revenues. An effective
program includes clear, defined guidelines and procedures combined with
technology solutions that enhance a hospital's system and effectively increase
revenues and reduce costs. When the Inpatient and/or Outpatient Compliance
modules are purchased with Facility Coding, the health care organization has
the flexibility to incorporate both an interactive, pre-bill and retrospective
review of the claim prior to submission for billing.
Our abstracting solutions enable healthcare facilities to accurately
collect and report patient demographic and clinical information. Our current
abstracting solutions include WinCODER+CS and the Cascade Master Systems. Both
products provide the customer the ability to calculate inpatient and outpatient
hospital reimbursements and customize data fields needed for state, federal,
and JCAHO regulatory requirements. Standard and custom reports provide the
customer the ability to generate facility-specific statistical reporting used
for benchmarking, outcomes and performance improvement, marketing, and
planning. Quantim Abstracting, currently in development, will provide
healthcare organizations the flexibility to customize abstracting workflow to
meet data collection reporting and analysis needs. Abstracting captures,
structures, and analyzes clinical and financial data utilizing standard and
customizable fields, rules and screen design. The Application Builder tool
provides the user the ability to customize workflow by creating fields and
rules and designing screen navigation. Quantim Abstracting will provide a
report library of standard reports and an ad-hoc report writer to design and
generate custom reports. When purchased with Quantim Coding and Quantim
Compliance, Quantim Abstracting will provide an integrated solution that
7
enables the user to access both the Coding and Compliance tools within a
patient encounter. Quantim Abstracting is scheduled to be beta ready in Q3
2003 and targeted for general availability in Q4 2003.
Our current record management product, MEDREC Millennium(r), automates the
record tracking and location functions, monitors record completeness, and
facilitates the release of information process within health information
management departments. This product assists healthcare facilities in properly
completing records pursuant to JCAHO, state, federal, and medical staff bylaw
requirements. Our record management solution consists of these main modules
that are sold individually or as a product suite and interface with a
facility's patient information system. The primary market for our record
management solution is acute care hospitals. The MEDREC Millennium Suite
includes distinctive features for IDNs, outpatient providers, and Veterans
Administration facilities. These tools are designed to monitor a facility's
adherence to patient privacy, disclosure, and patient bill of rights
requirements.
Prior to HIPAA legislation, the Health Information Department had sole
responsibility for facilitating disclosure of patient information. Under
HIPAA's privacy requirements, disclosures must be tracked and aggregated from
all departments in the organization, not just the Health Information
Department. The complexity of tracking disclosures throughout the
organization, as well as providing the patient a record of what has been
disclosed a minimum of 6 years, places an organization at risk. HIPAA calls
for severe civil and criminal penalties for noncompliance, including fines up
to $25,000 for multiple violations of the same standard in a calendar year and
fines up to $250,000 and/or imprisonment up to 10 years for knowing misuse of
individually identifiable health information. To provide our customers with
the tools needed to comply with the HIPAA privacy ruling effective April 2003,
Correspondence Management was added to the Quantim platform in December 2002.
Quantim Correspondence Management provides complete functionality to
facilitate a healthcare organization's compliance with the Disclosure
Management aspect of the HIPAA privacy mandate. In addition, it provides the
tools needed by HIM to automate the entire release of information workflow
process, including robust accounts receivable management.
Correspondence Management generates disclosure accounting and audit
reports, retains an on-line history of the Disclosure Accounting process and
permits tracking of the specific disclosure type all within a secure
environment. In addition, it tracks and monitors suspensions by health
oversight and law enforcement agencies. The release of information features
provide for tracking and monitoring of requests made by individuals or entities
outside of the healthcare organization.
The HIM Software Division will continue to conduct strategic planning and
development in 2003 to transition all the remaining Health Information
Management product offerings on the Quantim platform.
The following table provides a list of software products offered by our
Health Information Management Software Division:
Compliance Management o Inpatient Compliance - Quantim
Inpatient Compliance, IP Facts
o Outpatient Compliance - Quantim
Outpatient Compliance, OP Facts
o APC Compliance - Quantim APC
Compliance, Analyzer+
o VHA ProFee Compliance Suite
o Auditing Services
Coding and Reimbursement Management o Physician Coding - Quantim Physician
Coding, nCoder+MD
o Facility Coding - Quantim Facility
Coding, nCoder+, Cascade Encoder,
WinCoder Interactive
o VA Coding - nCoder+/PTF
Abstracting o WinCoder CS
o Cascade Master System
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Record Management o MEDREC Millennium Record Management
o Chart Completion
o Chart Locator
o Correspondence Management
o Enterprise Search and Reporting
o Electronic Signature
o Quantim Correspondence Management
Complysource Regulatory Compliance o Compliance Assessment and Management
Tool
Complysource HIPAA Compliance o HIPAA Assessment and Management Tool
Financial Services Division
- ---------------------------
Our Financial Services Division provides two services that identify and
collect accounts receivables for hospitals and medical groups: (i) Chancellor
Accounts Receivable Management; and (ii) Chancellor Managed Care Payment
Review.
Our Chancellor Accounts Receivable Management services provide a variety
of third-party collection services, including:
o Complete outsourcing that initially bill and collect accounts from time of
service;
o Early out programs that collect accounts of pre-designated age or amount;
o Aged accounts placement that collects aged accounts on a one-time basis;
o Resolution of accounts unable to be transferred as part of conversion to a
provider's new health information system;
o Operational assessments of hospital revenue cycles; and
o Training and education on business office operations and compliance issues
related to collection.
We also offer customization of accounts receivable services and detailed
reconciliation reports on our work. Our Financial Services Division provides
services only to customers in the United States, and its primary offices are
located in Escondido and San Diego, California.
We market our Chancellor Accounts Receivable Management services to large
or multi-hospital facilities. Historically, most of our clients for this
service have been in California. In 2000, we began to market the services in
other states and hired national sales representatives. Consequently, the
business grew throughout 2001 at a faster rate than in previous years. We
anticipate that demand for our Accounts Receivable Management services should
increase in the future as the hospital and healthcare industry continues to
emphasize faster accounts receivable collections and increasingly complex
reimbursement mechanisms.
Our Managed Care Payment Review Services audit managed care patient
accounts for appropriate payment pursuant to managed care contracts. In
providing this service, we use our own proprietary software that automates many
audit functions and permits greater reporting options.
In 2001, we ceased entering into new contracts for Capitated Payment
Review ("CPR") services. Under CPR contracts, we audited payments for
hospitals and medical groups that have accepted financial risk for Medicare
eligible health maintenance organizations ("HMO") enrollees and are paid by the
HMO on a percentage of the U.S. Centers for Medicare and Medicaid premium. The
service was only provided for healthcare providers with more than 3,000
Medicare HMO enrollees and most of the customers for this service were located
in California. The decision to end these services was made because we were
unable to achieve profitability from this service line.
9
Health Information Management Services Division
- -----------------------------------------------
Our Health Information Management Services Division was disposed of in
December 2002. Prior to the disposition, the division provided various
services, such as Health Management Consulting and Department Outsourcing
Services and Complysource Regulatory and HIPAA Compliance Services.
Health Information Management Services Division provided services only in the
United States and its main office was in Englewood, Colorado.
Effective December 31, 2002 we closed the sale of our HIM Services
Division to Precyse Solutions LLC. We received $14 million in cash (of which
$1.5 million is to be held in escrow for 18 months) and a $300,000 promissory
note with a two-year term. As a result of the sale, we recorded a fourth
quarter 2002 after-tax gain of $8.8 million.
Financial Information About Segments
- ------------------------------------
The financial statements and supplementary data, including financial
information about our operating segments, are included in this Form 10-K
beginning on page F-1.
Customers
- ---------
We primarily market to acute care hospitals and IDNs, which account for
approximately 90% of our revenues. We also sell products to specialty
hospitals and hospital associations. As of December 31, 2002, we had customers
located in all 50 states, the District of Columbia, Puerto Rico, and Canada.
In 2002, 2001, and 2000, no single customer accounted for 10% or more of our
total revenue.
Highly Competitive Market
- -------------------------
Competition for products and services in the healthcare information management
and technology industry is intense and is expected to so remain. We compete
with other healthcare information software and services providers and
healthcare consulting firms. Some principal competitors include:
o In the enterprise healthcare information systems market for the Enterprise
Division: McKesson Corporation, Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation, Cerner, and
IDX/Corporation;
o In the electronic document management products market for the Enterprise
Division: McKesson Corporation, SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation;
o In the MPI products and services market for the Enterprise Division:
Madison Technologies, Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and Medibase;
o In the decision support products market for the Enterprise Division:
Eclipsys Corporation, Healthcare Microsystems, Inc., a division of Health
Management Systems Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and MediQual Systems, Inc., a division of
Cardinal Health, Inc.;
o In the coding, data collection, and record management products market for
the Health Information Management Software Division: 3M Corporation,
SoftMed Corporation, Inc., MetaHealth, Eclipsys Corporation,
PricewaterhouseCoopers LLP, and HSS, Inc.; and
o In the Financial Services Division: Advanced Receivables Strategy, Inc.,
a division of Perot Systems Corporation, NCO Group, Inc., Outsourcing
Solutions, Inc., Health Management Systems, Inc., and Triage Consulting
Group.
10
Government Regulation and Healthcare Reform
- -------------------------------------------
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by the
U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug and
Cosmetic Act. At present, none of our software products are so regulated by
the FDA.
There is substantial state and federal regulation of the confidentiality
of patient medical records and the circumstances under which such records may
be used by, disclosed to or processed by us as a consequence of our contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of covered entities
including hospitals, physicians, or other healthcare providers, regulations
governing patient confidentiality rights are rapidly evolving. Additional
federal and state legislation governing the dissemination of medical record
information may be adopted which may have a material affect on our business.
Those laws, including HIPAA and ICD 10 implementation, may significantly affect
our future business and materially impact our product development, revenue and
working capital. During the past several years, the healthcare industry also
has been subject to increasing levels of governmental regulation of, among
other things, reimbursement rates and certain capital expenditures. We are
unable to predict what, if any, changes will occur as a result of such
regulation.
Intellectual Property
- ---------------------
We rely on a combination of copyright, trademark and trade secret law, and
nondisclosure and non-compete agreements to protect our proprietary
methodologies, computer software, and databases. We maintain the
confidentiality of proprietary technology through a policy of obtaining
employment agreements that (i) prohibit employees from disclosing or using our
confidential information, and (ii) require the disclosure and assignment to us
of new ideas, developments, discoveries or inventions related to our business.
We also initiated a new branding strategy in 2001 that included the adoption of
a new trademark, "We do technology. So you can do healthcare(tm)". We also
enter into non-disclosure agreements with business partners and customers in
the ordinary course of business. We have obtained trademark registrations in
the United States for most of our corporate and product trademarks, including
QuadraMed, Affinity, Quantim, and Complysource. We had not filed for or
obtained any patents for our proprietary technology until 2001, when we sought
a patent on our Affinity CPOE software application. We may in the future seek
patents for new products if, in our business judgment, their importance
warrants such steps and is susceptible to protection under the patent laws. We
also depend on licenses for certain technology used to develop our products
from third-party vendors.
Employees
- ---------
We believe that we have a satisfactory relationship with our employees,
none of whom are represented by a union or other collective bargaining group.
As of December 31, 2002, we had 939 employees: 463 in technical, consulting and
support services, 214 in general and administration, 83 in sales and marketing,
and 179 in research and development.
Item 2. Properties
- ------ ----------
We lease all our facilities and do not own any real property. As of
December 31, 2002, our executive and corporate offices were located in Reston,
Virginia, in approximately 49,000 square feet of leased office space under a
lease that expires in 2011. The principal office locations related to our
three business segments are described in Item 1. We also lease approximately
41,000 and 34,000 square feet of office space in San Marcos, California and San
Rafael, California, respectively. These leases both expire in 2009. We
believe that our facilities provide sufficient space for our present needs, and
that additional suitable space, if needed, would be available on reasonable
terms.
Item 3. Legal Proceedings
- ------ -----------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11
11, 2002. The complaints seek unspecified monetary damages and other relief.
These matters are at an early stage. No responses to the complaints have yet
been filed, and no discovery has taken place. We intend to defend ourselves
vigorously against these allegations. On December 31, 2002, the Court entered
an order consolidating all related securities class actions against the
Company.
Following our August 12, 2002 announcement that we intended to restate
prior period financial statements, the staff of the San Francisco District
Office of the SEC requested certain information and documents relating to this
matter as part of an informal, preliminary inquiry. We provided that
information, and expect to provide further information now that the restatement
is completed. On February 28, 2003, we reported that the SEC had issued a
formal non-public order of investigation concerning our accounting and
financial reporting practices for the period beginning January 1, 1998. We
intend to continue to cooperate with the SEC in the event it requests other
information. We cannot predict whether such information will be requested,
when the SEC will conclude its inquiry, or the impact or outcome thereof.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matters were submitted during the fourth quarter of 2002 to the vote of
security holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
(a) Market Information
------------------
On March 4, 2003, our common stock was delisted from the Nasdaq National
Market. From May 23, 2002 to March 3, 2003, the Nasdaq National Market quoted
our common stock under the symbol "QMDC". From August 31, 2000 to May 22,
2002, our common stock had been quoted under the same symbol on the Nasdaq
SmallCap Market. From October 16, 1996 to August 30, 2000, our common stock
had been quoted under the same symbol on the Nasdaq National Market. The
following table sets forth the range of our common stock with high and low
closing sales prices as reported on the applicable Nasdaq Market for the
indicated periods:
High Low
---- ---
Year Ended December 31, 2001
First Quarter................... $ 2.688 $ 0.750
Second Quarter.................. 4.980 1.625
Third Quarter................... 6.300 3.090
Fourth Quarter.................. 9.250 4.330
Year Ended December 31, 2002
First Quarter................... $ 11.550 $ 8.110
Second Quarter.................. 9.640 5.570
Third Quarter................... 6.980 1.470
Fourth Quarter.................. 3.000 1.160
(b) Holdings
--------
On July 31, 2003, a bid for our common stock in the "Pink Sheets" over-
the-counter market was $2.45 per share. As of that date, there were
approximately 280 holders of record of common stock (excluding beneficial
owners whose shares are held in the name of Cede & Co.).
(c) Dividends
---------
At this time, we intend to retain all future earnings, if any, to fund the
development and growth of our business and do not anticipate paying any cash
dividends on shares of our common stock in the foreseeable future.
12
(d) Recent Sales of Unregistered Securities
---------------------------------------
None.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------
This table provides information about our common stock subject to equity
compensation plans as of December 31, 2002.
Number of securities
Number of securities remaining available
Plan Category to be issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding options outstanding options compensation plans
- ------------------ -------------------- ------------------- ------------------
Approved By
Stockholders* 6,022,632(1) $ 5.36 2,465,620(2)
- -------------------------------------------------------------------------------
* We have 2 active equity compensation plans, the 1996 Stock Incentive Plan,
as amended, and approved by stockholders June 15, 2001 (the 1996 Plan);
and the 1999 Supplemental Stock Option Plan, as amended, and approved by
stockholders October 5, 2000 (the 1999 Plan).
(1) Includes options originally issuable under various benefit plans of
entities acquired by us.
(2) This number excludes options and restricted shares outstanding and shares
issued upon exercise of options plan-to-date, as of December 31, 2002. The
1996 Plan provides for automatic future increases in the number of shares
of common stock available for issuance, such that on the first trading day
of each calendar year that number is increased by an amount equal to 1.5%
of the total number of shares of common stock outstanding on the last
trading day of the immediately preceding calendar year as such, 407,473
additional shares became available for issuance on January 1, 2003.
(f) Preferred Stock
---------------
We have authorized 5,000,000 shares of preferred stock, par value $0.01
per share. Our board of directors has authority to provide for the issuance of
our shares of preferred stock in series, to establish from time to time the
number of shares to be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, without any further vote
or action by the shareholders. As of December 31, 2002, we had no outstanding
preferred stock.
13
Item 6. Selected Financial Data
------ -----------------------
The selected consolidated financial data presented below for the five
years ended December 31, 2002, is derived from our Consolidated Financial
Statements and related notes thereto. This selected consolidated financial
data should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the
Consolidated Financial Statements and related notes thereto included in Item 8
of this Form 10-K. Historical results are not necessarily indicative of future
results.
Year ended December 31,
------------------------------------------------------
(in thousands, except per
share amounts) 2002 2001 2000 1999 1998 (1)(2)
---- ---- ---- ---- ----
Consolidated Statement of
Operations Data:
Revenue $109,585 $117,046 $121,012 $199,162 $172,228
Restatement costs $ 7,463 $ -- $ -- $ -- $ --
Income (loss) from
continuing operations $(20,858) $ 11,952 $(39,354) $(52,527)
Extraordinary gain on
redemption of debentures $ -- $ 12,907 $ -- $ -- $ --
Net income (loss) $(14,362) $ 9,413 $(36,675) $(47,388) $(21,376)
Basic income (loss) per
share from continuing
operations $ (0.77) $ 0.47 $ (1.53) $ (2.20)
Basic net income (loss)
per share $ (0.53) $ 0.37 $ (1.43) $ (1.99) $ (0.91)
Diluted income (loss) per
share from continuing
operations $ (0.77) $ 0.47 $ (1.53) $ (2.20)
Diluted net income (loss)
per share $ (0.53) $ 0.37 $ (1.43) $ (1.99) $ (0.91)
- -----------------------------
(1) Revenue for 1998 does not reflect the adoption of EITF No. 01-14, Income
------
Statement Characterization of Reimbursements for 'Out-of-Pocket' Expenses
-------------------------------------------------------------------------
Incurred. Accordingly, revenue has not been increased to reflect any
--------
billable out-of-pocket reimbursable expenses. All other periods presented
reflect the adoption of this standard.
(2) Discontinued operations have not been segregated from the 1998 results as
the Company's structure was significantly different at that time. All other
periods presented reflect the classification of HIMS Services Division as a
discontinued operation.
December 31,
------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998 (1)(2)
---- ---- ---- ---- ----
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short term investments $ 26,191 $ 32,213 $ 39,664 $ 29,732 $ 89,574
Total assets $126,927 $125,133 $149,286 $ 201,759 $ 264,733
Deferred revenue $ 39,492 $ 30,721 $ 22,489 $ 7,258 $ 14,021
Working capital $ 18,137 $ 32,509 $ 46,107 $ 61,030 $ 94,963
Debentures $ 73,719 $ 73,719 $115,000 $ 115,000 $ 115,000
Stockholders' equity
(deficit) $ (7,235) $ 4,221 $ (7,166) $ 27,512 $ 68,988
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement on Risks Associated With Forward-Looking Statements
- ------------------------------------------------------------------------
You should read the following discussion in conjunction with our
Consolidated Financial Statements and related notes. This Report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that are subject to risks and uncertainties. The
words "believe", "expect", "anticipate", "predict", "intend", "plan",
"estimate", "may", "will", "should", "could", and similar expressions and their
negatives are intended to identify such statements. Forward-looking statements
are not guarantees of future performance and are to be interpreted only as of
the date on which they are made. We undertake no obligation to update or
revise any forward-looking statement. You should not place undue reliance on
these forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Report,
and in other documents we file with the SEC from time to time.
14
Critical Accounting Policies and Estimates
- ------------------------------------------
Our critical accounting policies have a considerable impact on
Management's Discussion and Analysis.
Use of Estimates
----------------
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. In preparing these financial
statements, we make estimates, assumptions, and judgments that affect the
reported amounts of assets and liabilities, contingent assets and liabilities,
revenues, and expenses. Significant estimates and assumptions have been made
regarding revenue recognition, the allowance for doubtful account, investments,
capitalized software, income taxes, restructuring, pensions and other benefits,
and contingencies and litigation and intangibles, primarily goodwill and
customer lists, resulting from our purchase business combinations. We base our
estimates, assumptions, and judgments on historical experience and on various
other assumptions believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Uncertainties inherent in these estimates include projections of future
operating results and the discount rates used to determine the net present
values of these future results and useful lives of the acquired assets as well
as technological advances. In addition, for our fixed-price contracts, we make
significant estimates within percentage-of-completion accounting, including
estimating total costs to be incurred as calculated on a labor hour basis. We
periodically review and test our estimates, specifically those related to the
valuations of intangibles including acquired software, goodwill, customer
lists, trademarks and other intangibles, and capitalized software. Actual
results may differ materially from these estimates.
Restatement
-----------
In 2002, we discovered accounting and reporting errors within our
Quarterly Report on Form 10-Q as filed for the three months ended March 31,
2002 and our Annual Report on Form 10-K as filed for the years ended December
31, 2001, 2000 and 1999. These errors resulted in us determining that the
reports for these years needed to be restated. In June 2003, we amended and
restated our 2001 Annual Report on Form 10-K/A including the years ended 2001,
2000 and 1999 and all respective quarters. This report is also being filed
simultaneously with the restatement of our Quarterly Report on Form 10-Q/A for
the three months ended March 31, 2002. The restatement process which lasted
approximately ten months, due to restating three years, new auditors and
staffing to diligently review and account for transactions, adversely affected
our revenue and business in the latter half of fiscal 2002. Additionally, the
Company spent $7.5 million in restatement fees, which included accountants',
consultants' and attorneys' fees in fiscal 2002.
Revenue Recognition
-------------------
Our revenue in the ordinary course of business is principally generated
from two sources: (i) licensing arrangements and (ii) services.
Our license revenue consists of fees for licenses of our software and
hosted services. Cost of license revenue primarily includes product, delivery
and royalty costs and facilities costs. Our services revenue consists of
maintenance, customer training and consulting services and fees for providing
management services such as accounts receivable and payment collection
outsourcing, specialized staffing, analytical services and seminars. Cost of
services consists primarily of salaries, benefits, and allocated costs related
to providing such services, labor costs for engineers performing implementation
services and technical support and training personnel.
We license our products through our direct sales force. Our license
agreements for such products do not provide for a right of return, and
historically product returns have not been significant.
We recognize revenue on our software products in accordance with Statement
of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9,
----------------------------
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
- -------------------------------------------------------------------------------
Transactions; SOP 81-1, Accounting for Performance of Construction-Type and
- ------------ ---------------------------------------------------
Certain Production-Type Contracts; and Staff Accounting Bulletin ("SAB") 101,
- ---------------------------------
Revenue Recognition in Financial Statements.
- -------------------------------------------
15
We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations by us with regard to implementation
remain; the fee is fixed and determinable; and, collectibility is probable.
Delivery is considered to have occurred when title and risk of loss have been
transferred to the customer, which generally occurs when media containing the
licensed programs is provided to a common carrier. We consider all
arrangements with payment terms extending beyond 180 days to be not fixed and
determinable, and revenue is recognized as payments become due from the
customer. If collectibility is not considered probable, revenue is recognized
when the fee is collected.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance, support and professional services, based on the relative
fair values of the elements specific to us. Our determination of fair value of
each element in multi-element arrangements is based on vendor-specific
objective evidence ("VSOE"). We limit our assessment of VSOE for each element
to either the price charged when the same element is sold separately or the
price established by management, having the relevant authority to do so, for an
element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue from hosted applications is recognized
ratably over the term of the arrangement. The proportion of revenue recognized
upon delivery may vary from quarter to quarter depending upon the relative mix
of licensing arrangements and the availability of VSOE of fair value for
undelivered elements.
Certain of our perpetual and time-based licenses include unspecified
additional products and/or payment terms that extend beyond 12 months. We
recognize revenue from perpetual and time-based licenses that include
unspecified additional software products ratably over the term of the
arrangement.
Contract accounting is utilized for services revenues from fixed-price
contracts and those requiring significant software modification, development or
customization. In such instances, the arrangement fee is accounted for in
accordance with SOP 81-1, whereby the arrangement fee is recognized, generally
using the percentage-of-completion method measured on labor input costs. If
increases in projected costs-to-complete are sufficient to create a loss
contract, the entire estimated loss is charged to operations in the period the
loss first becomes known. The complexity of the estimation process and
judgment related to the assumptions, risks and uncertainties inherent with the
application of the percentage-of-completion method of accounting affect the
amounts of revenue and related expenses reported in its consolidated financial
statements. A number of internal and external factors can affect its
estimates, including labor rates, utilization, changes to specification and
testing requirements and collectibility of unbilled receivables.
Service revenues from software maintenance and support are recognized ratably
over the maintenance term, which in most cases is one year. Service revenues
from training, consulting and other service elements are recognized as the
services are performed.
Service revenues from providing management services such as accounts
receivable and payment collection outsourcing are recognized in accordance with
SAB 101. When all criteria for revenue recognition, as noted above, have been
met, revenue is recognized upon invoicing. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Accounts Receivable and Allowance for Doubtful Accounts
-------------------------------------------------------
Accounts receivable consist primarily of amounts due us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
16
Intangible Assets
-----------------
Goodwill - In June 2001, the Financial Accounting Standards Board ("FASB")
--------
issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
--------
and Other Intangible Assets, effective for fiscal years beginning after
- ---------------------------
December 15, 2001. Under SFAS 142, goodwill and intangible assets deemed to
have indefinite lives are to be separately disclosed on the balance sheet, and
no longer amortized but subject to annual impairment tests. With the adoption
of SFAS 142, we ceased amortization of goodwill as of January 1, 2002. Prior to
this point, goodwill was amortized using the straight-line method over its
estimated useful life.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (i.e., business segments) upon adoption and at least annually
thereafter using a two-step impairment analysis. In accordance with SFAS 142,
we performed the first of the required two-step impairment tests of goodwill
and indefinite-lived assets as of January 1, 2002. In performing the first step
of this analysis, we first assigned our assets and liabilities, including
existing goodwill and other intangible assets, to our identified reporting
units to determine their carrying value. For this purpose, our reporting units
equated to our five business segments then in place. Our reporting units equate
to our business segments since this is the lowest level of QuadraMed at which
operating plans are prepared and operating profitability is measured for
assessing management performance. See note 18 for more information regarding
our business segments. Based on an analysis by an independent third party
appraiser, we then estimated the fair value of each reporting unit with
significant goodwill utilizing various valuation techniques including the
Income Approach and the Market Approach. The Income Approach provides an
estimation of the fair value of a reporting unit based on the discounted cash
flows derived from the reporting unit's estimated remaining life plus the
present value of any residual value. The Market Approach indicates the fair
value of a reporting unit based upon a comparison to publicly-traded companies
in similar lines of business. Step one of this analysis was then completed by
comparing the carrying value of each of the-analyzed reporting units to its
fair value. This comparison resulted in the fair values of the analyzed
reporting units exceeding the carrying values of the net assets. Accordingly,
no indicators of impairment existed. As a result, we did not perform step two
as described by SFAS 142.
As of January 1, 2003, we re-engaged the same independent appraiser to
review the goodwill as of this date for impairment. The result of performing
step one of this analysis resulted in the fair values of the analyzed reporting
units exceeding the carrying values of the net assets once again. Accordingly,
step two was not performed.
Capitalized Software - Software development costs are capitalized upon the
--------------------
establishment of technological feasibility. In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
- ------------------------------------------------------------------------------
Marketed, we establish technological feasibility upon completion of a detailed
- --------
program design determined on a project-by-project basis, which substantiates
that the computer software product can be produced in accordance with its
design specifications. Software development costs are capitalized based upon
an assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors, including, but not
limited to, anticipated future gross margins, estimated economic lives, and
changes in software and hardware technology. Amortization is based on the
greater of the ratio that current revenues bear to total and anticipated future
revenues for the applicable product, or the straight-line method over the
remaining estimated economic life of the product, generally five years, and is
charged to cost of licenses.
Other Intangible Assets - Other intangible assets primarily relate to
-----------------------
acquired software, trademarks and customer lists acquired in our purchase
business combinations. On January 1, 2002, we adopted the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
generally requires impairment losses to be recorded on long-lived assets
(excluding goodwill) used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The provisions of this statement
did not have a significant impact on our financial condition or operating
results.
On an annual basis, we review our intangible assets for impairment based
on estimated future undiscounted cash flows attributable to the assets in
accordance with the recently-adopted provisions of SFAS No. 144. In the event
such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets are written down to their net realizable values.
17
Amortization of other intangible assets totaled $2.5 million, $2.7 million and
$2.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
Stock Based Compensation
------------------------
SFAS 123, Accounting for Stock Based Compensation, encourages, but does
---------------------------------------
not require, companies to record compensation cost for stock based employee
compensation plans at fair value. We have chosen to continue to account for
stock based employee compensation using the intrinsic value method prescribed
in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
--------------------
Issued to Employees, and Related Interpretations. Accordingly, compensation
- ------------------------------------------------
cost for stock options granted to employees is measured as the excess, if any,
of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
--------------------
Retirement Obligations. The statement addresses financial accounting and
- ----------------------
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No.
143 are required to be applied starting with fiscal years beginning after June
15, 2002. We expect that implementation of the new standard will not have a
significant impact on our financial condition, results of operations, and cash
flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
- ---------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
- -----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. We anticipate that implementation of this new standard will not
have a significant impact on our financial condition, results of operations and
cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities, effective for exit or disposal
- -------------------------------------------
activities initiated after December 31, 2002. Under SFAS 146 a liability for
the cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under prior guidance, a liability for such costs could
be recognized at the date of commitment to an exit plan. SFAS 146 also requires
that the liability be measured and recorded at fair value. Accordingly, the
adoption of this standard may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. We will adopt the
provisions of SFAS 146 prospectively for all restructuring activities initiated
after December 31, 2002.
In November 2002, the FASB reached a consensus on Emerging Issues Task
Force ("EITF") No. 00-21, Accounting for Revenue Arrangements with Multiple
-------------------------------------------------
Deliverables. The guidance in EITF 00-21 is effective for revenue arrangements
- ------------
entered into in fiscal years beginning after June 15, 2003. This issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically,
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and, if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earning processes for revenue recognition purposes. This issue also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. We are evaluating the effect
implementation of this new guidance will have on our financial condition,
results of operations and cash flows.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
- ----------------------------------------------------------------------------
indirect Guarantees of Indebtedness of Others. FIN 45 requires that we
- ---------------------------------------------
recognize the fair value for guarantee and indemnification arrangements issued
or modified by us after December 31, 2002, if these arrangements are within the
scope of the interpretation. In addition, we must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If we determine it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by us
contain provisions that indemnify licensees of our software from damages and
costs resulting from claims alleging that our software infringes the
intellectual property rights of a third party. We have historically received
only a limited number of requests for indemnification under these provisions
and have not been required to make material payments pursuant to these
18
provisions. Accordingly, we have not recorded a liability related to these
indemnification provisions. We will be required to implement the provisions of
FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a
material impact on our financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
--------------------------
Compensation - Transition and Disclosure, effective for fiscal years ending
- ----------------------------------------
after December 15, 2002. SFAS 148 amends SFAS 123, to provide alternative
methods of transition to the voluntary fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require that disclosure of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed in tabular format within a Company's summary of significant
accounting policies. We have not yet adopted SFAS 148 and accordingly, the
accompanying financial statements reflect the required disclosures of SFAS 123.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
-------------------------
Interest Entities. FIN 46 expands upon and strengthens existing accounting
- -----------------
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Disclosure requirements apply to
any financial statements issued after January 31, 2003. We have considered the
provisions of FIN 46 and believe it will not be necessary to include in our
financial statements any assets, liabilities, or activities of the third-party
entities holding our corporate headquarters leases. We will continue to
evaluate the impact of FIN 46 on other areas of our financial statements and
disclosures.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
-----------------------------
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
- ---------------------------------------------
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149
-------------------------------------------------------------
is generally effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. We are
currently evaluating the impact of SFAS 149 on our consolidated financial
position and results of operations. We do not expect the adoption of SFAS 149
to have a material impact on our consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
----------------------
Financial Instruments with Characteristics of both Liabilities and Equity.
- -------------------------------------------------------------------------
SFAS 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We do not expect the adoption of SFAS 150 to have a
material impact on our consolidated financial position, results of operations
or cash flows.
19
Results of Operations
- ---------------------
The following table sets forth certain items from our consolidated
statement of operations, expressed as percentage of total revenue.
Year ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
Revenue
Services 70.1% 70.5% 76.4%
Licenses 29.9 29.5 23.6
------ ------ ------
Total revenue 100.0 100.0 100.0
------ ------ ------
Cost of revenue
Cost of services 32.9 29.1 45.3
Cost of licenses 8.3 7.4 5.9
------ ------ ------
Total cost of revenue 41.2 36.5 51.2
------ ------ ------
Gross margin 58.8 63.5 48.8
------ ------ ------
Operating expenses
General and administration 37.5 30.5 47.1
Sales and marketing 19.7 17.7 19.6
Research and Development 15.7 12.3 20.3
Amortization, impairment and other
operating charges 2.8 7.7 9.2
------ ------ ------
Total operating expenses 75.7 68.2 96.2
------ ------ ------
Loss from operations (16.9) (4.7) (47.4)
Other income (expense)
Interest expense (3.2) (4.1) (5.4)
Interest income 0.6 1.7 1.8
Gain on sale of assets 1.4 6.1 22.5
Other income (expense), net (0.9) 0.3 (3.4)
------ ------ ------
Other income (expense), net (2.1) 4.0 15.5
------ ------ ------
Loss from continuing operations before
income taxes and extraordinary item (19.0) (0.7) (31.9)
Provision for income taxes -- (0.1) (0.5)
------ ------ ------
Loss from continuing operations before
extraordinary item (19.0) (0.8) (32.4)
Gain on redemption of debentures -- 11.0 --
------ ------ ------
Net income (loss) from continuing
operations (19.0) 10.2 (32.4)
Income (loss) from discontinued
operations (net of income taxes) (2.1) (2.2) 2.2
Gain on disposal of discontinued operations 8.0 -- --
------ ------ ------
Net income (loss) (13.1)% 8.0% (30.2)%
====== ====== ======
20
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------
Revenue
-------
Services.
--------
Service revenue consists of consulting, maintenance, installation,
hardware, reimbursable expenses and other service revenue. Service revenue was
$76.8 million in 2002, a decrease of $5.7 million or 6.9% from $82.5 million in
2001. The decrease was primarily due to decrease in services associated with
the sale of the EZ-CAP Division in August 2001 and reduction in Financial
Services Division.
Service revenue of $82.5 million in 2001 represented a decrease of $9.9
million or 10.7% from the $92.4 million reported 2000. The decrease was
primarily due to a substantial decrease of $23.8 million due to the sale of the
ROI Division in 2000, a decrease in Health Management Services Division, slight
decrease due to the sale of EZ-CAP Service Division in August 2001, offset by
an increase in the Enterprise Division installation and services and increase
in Health Management Software Division maintenance revenue and Financial
Services Division revenue.
Licenses.
--------
License revenue consists of license and third-party software sales.
License revenue in 2002 was $32.8 million, a decrease of $1.8 million or 5.2%
from $34.6 million in 2001. The decrease in license revenue was primarily
attributable to the decrease in license associated with the sale of EZ-CAP
Division revenue offset by an increase in Health Management Software government
licenses.
License revenue of $34.6 million in 2001 showed an increase of $6.0
million or 20.8% from the $28.6 million in 2000. The increase was primarily
attributable to an increase in the Enterprise Division and Health Management
Software Division.
Cost of Revenue
---------------
Cost of Services.
----------------
Cost of services consists of salaries and related expenses associated with
services performed for customer support and consulting services as well as
third-party hardware costs. Cost of services in 2002 was $36.1 million, an
increase of $2.0 million or 5.8% from $34.1 million in 2001. The increase was
primarily due to an increase in salaries and benefits offset by a slight
decrease in third-party hardware costs. The gross margin earned on services
revenue in 2002 was 53.0%, which was 5.7 percentage points less than the 2001
level of 58.7%.
Cost of services in 2001 of $34.1 million was $20.7 million or 37.8% below
the 2000 cost of $54.8 million. Cost of services decreased primarily due to
salary and benefits expense reduction in the consulting organization.
Cost of Licenses.
----------------
Cost of licenses consists of third party royalties, amortization of
capitalized software and documentation and production costs of our software.
Cost of licenses in 2002 was $9.1 million, 5.3% above the corresponding 2001
level of $8.7 million. Gross margin on license revenue was 72.1%, a
deterioration of 2.8 percentage points from the 2001 level of 74.9%. The
absolute dollars were consistent from period to period.
Cost of licenses in 2001 of $8.7 million was up $1.6 million or 21.8% from
$7.1 million in 2000. Gross margin was consistent from period to period.
Amortization of capitalized software development costs totaled $2.4
million, $2.0 million, and $1.7 million in 2002, 2001, and 2000, respectively.
21
Operating Expenses
------------------
General and Administration.
--------------------------
General and administration expense consists of compensation and benefit
costs for executive, finance, legal, information technology, and administrative
personnel. General and administrative expenses were $41.1 million in 2002, an
increase of $5.4 million or 15.2% compared to $35.7 million in 2001. As a
percentage of total revenue, general and administration expense increased to
37.5% in 2002 from 30.5% in 2001. The increase was primarily due to an
increase in accountants', consultants' and attorneys' fees, as part of the
restatement process in the year of approximately $7.5 million, offset by other
operating costs. We anticipate that general and administration expenses will
be lower in absolute dollars in 2003 than in 2002.
General and administration expense of $35.7 million in 2001 reflected a
decrease of $21.3 million or 37.4% compared to $57.0 million in 2000. The
decrease was primarily due to severance costs and provision for bad debt
expense in the prior period. As a percentage of total revenue, general and
administration expense decreased to 30.5% in 2001, compared to 47.1% in 2000.
Sales and Marketing.
-------------------
Sales and marketing expense includes costs associated with our sales and
marketing personnel and product marketing personnel and consists primarily of
compensation and benefits, commissions and bonuses, promotional and advertising
expenses. Sales and marketing expense increased by only $841,000 in 2002 to
$21.6 million from $20.7 million in 2001. Sales and marketing expenses were
consistent from period to period. We anticipate that sales and marketing
expense will be slightly higher in absolute dollars and as a percentage of
revenue in 2003 than in 2002 due to increased promotional expenditures.
Sales and marketing expense of $20.7 million in 2001 was $3.1 million less
than the $23.8 million recorded in 2000 reflecting a decrease as a percentage
of revenue to 17.7% from 19.6% in the prior year. The decline in sales and
marketing expense was primarily due to a decrease in commission expense.
Research and Development.
------------------------
Research and development expense includes costs associated with the
development of new products, enhancements of existing products for which
technological feasibility has not been achieved, and quality assurance
activities, and primarily includes compensation and benefits expense. Research
and development expense for 2002 was $17.2 million, a 19.4% increase from 2001.
As a percentage of revenue, the increase was 3.4 percentage points to 15.7% in
2002 from 12.3% in 2001. The increase in research and development expense was
due to increased product development efforts on the Computerized Physician
Order Entry product. In addition to these expenses, we capitalized $1.8
million in development costs representing 10% of research and development
expenditures in 2002, compared to $1.8 million or 11.0% of expenditures in
2001, on products qualifying for capitalization under the definition of
technological feasibility. We anticipate that research and development
expenses will increase in absolute dollars in 2003 due to increased development
of products.
Research and development expense in 2001 was $10.2 million less than in
2000, a decline of 41.5%. As a percentage of revenue, the decrease was 8.0
percentage points to 12.3% in 2001 from 20.3% in 2000. The decline in research
and development expense was due to the elimination of corporate research and
development projects to shift our focus to specific product line development,
elimination of support costs for divested products, and the termination of
several product development efforts that were not critical to our core
strategies. In addition to these expenses, we capitalized $1.8 million in
development costs compared to $527,000 or 2.1% of expenditures in 2000.
Amortization, Impairment and Other Operating Charges.
----------------------------------------------------
Amortization, impairment and other operating charges were $3.1 million,
$9.1 million and $11.1 million in 2002, 2001 and 2000, respectively, which
primarily consists of the following items:
o Amortization of goodwill and other intangible assets, excluding
capitalized software development costs, declined to $2.5 million in 2002
from $6.2 million in 2001 and $7.8 million in 2000 as certain assets
reached the end of their amortized lives and goodwill was not amortized in
2002.
22
o During 2000, we recorded $1.2 million in charges to write-down certain
software assets primarily related to our 1998 acquisition of IMN.
o Charges of $4.7 million were incurred during the year ended December 31,
2000. The charges consisted of $3.4 million associated with separation
agreements for officers and $1.3 million for employee severance and
closure of facilities. As of December 31, 2002, there is no remaining
liability for restructuring costs.
Other Income (Expense)
---------------------
Interest Income (Expense)
------------------------
Interest expense, net of interest income, was $2.8 million, $2.7 million
and $4.4 million for 2002, 2001 and 2000, respectively. Interest expense was
principally due to our Debentures, offset by interest earned on our cash and
investments. The change from 2001 to 2002 was not significant as expected,
while the decrease in 2001 of $1.1 million compared to 2000 is attributable to
the retirement of $41.3 million of our Debentures during 2001.
On April 16, 2003, we announced that we had executed an agreement with
certain of our bondholders to refinance $61.8 million of our 2005 Debt and
issue new 2008 Debt with an interest rate of 10% and 11.3 million detachable
warrants. As a result, we will incur higher interest charges in 2003 through
2008.
Gain on Sale of Assets
----------------------
In 2002, we recorded a gain of $8.8 million on the sale of the HIM
Services Division and received $1.5 million related to an earn-out provision on
the 2001 sale of EZ-CAP. We recorded a $7.1 million initial gain on the sale
of our EZ-CAP business in 2001. Our gain of $27.2 million in 2000 resulted
primarily from the sale of the ROI division to ChartOne.
Extraordinary Item
------------------
Gain on Redemption of Bonds
---------------------------
During 2001, we repurchased approximately $41.3 million of our Debentures
on the open market for a total of $28.4 million in cash, resulting in a gain of
$12.9 million.
Discontinued Operations
-----------------------
On December 31, 2002, we announced the sale of certain assets of our HIM
Services Division to Precyse Solutions, LLC. We received $14 million in cash
(of which $1.5 million is to be held in escrow for 18 months) and a $300,000
promissory note with a two-year term. We recorded a gain of $8.8 million in
connection with the sale.
The results of operation have been presented as a discontinued operation
for all periods presented. The operating results were as follows (in
thousands):
Year ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
Revenue $ 17,313 $ 19,735 $ 29,968
Income (loss) from operations of
discontinued operation $ (2,270) $ (2,539) $ 2,679
Gain on disposal 8,776 -- --
-------- -------- --------
Total income (loss) on discontinued
operations $ 6,506 $ (2,539) $ 2,679
======== ======== ========
Provision for Income Taxes
--------------------------
There was no provision for income taxes in 2002 due to a current book and
tax loss. There was a $150,000 provision for income taxes in 2001 due to state
tax liabilities on certain of our legal entities. For financial reporting
purposes, a 100% valuation allowance has been recorded against our deferred tax
assets under SFAS No. 109, Accounting for Income Taxes, as our history of
losses makes realization of the asset uncertain. We had federal net operating
loss carryforwards of approximately $76.1 million and state net operating loss
carryforwards of approximately $2.0 million as of December 31, 2002. In
addition, we had gross federal and California research and development credit
carryforwards of approximately $4.2 million and $1.8 million respectively.
Liquidity And Capital Resources
- -------------------------------
As of December 31, 2002, we had $26.2 million in cash, cash equivalents
and short-term investments, compared to $32.2 million as of December 31, 2001.
As of December 31, 2002, we had a positive working capital of $18.1 million
compared to $32.5 million as of December 31, 2001. On June 30, 2003, we had
approximately $32.0 million in cash, cash equivalents and short-term
investments.
Year ended December 31,
----------------------------------
(in thousands) 2002 2001 2000
- -------------------------------------- ---- ---- ----
Cash (used in) provided by operating
activities $ (982) $ 13,844 $(30,275)
Cash (used in) provided by investing
activities $ (6,602) $ 17,097 $ 46,132
Cash provided (used in) financing
activities $ 1,448 $(28,510) $ (18)
Cash (used in) provided by operating activities was $(982,000), $13.8
million, and $(30.3) million in 2002, 2001 and 2000, respectively. The
$982,000 of cash used by operations in 2002 arose from the $20.9 million loss
from continuing operations and $2.3 million cash used in discontinued
operations offset by non-cash expenses of $12.2 million plus $11.4 million
provided by changes in other working capital items partially offset by a non-
cash gain of $1.5 million on the sale of assets.
The $13.8 million of cash provided by operating activities in 2001 was
primarily due to net income from continuing operations of $12.0 million, $1.7
million used in discontinued operations, net non-cash related expenses of $18.3
million, and a net decrease in operating assets and liabilities of $5.3
million, partially offset by non-cash gains on the redemption of debentures of
$12.9 million and the sale of assets of $7.1 million. The $30.3 million of
cash used in operating activities in 2000 was due principally to the $39.4
million net loss from continuing operations, $3.4 million provided by
discontinued operations and $27.2 million of non-cash gains offset by $29.7
million of net non-cash expenses and a $3.2 million decrease in operating
assets and liabilities.
Net cash (used in) provided by investing activities was $(6.6) million,
$17.1 million and $46.1 million in 2002, 2001 and 2000, respectively.
Investing activities consumed $6.6 million of cash in 2002 primarily for the
acquisition of businesses ($11.9 million), the purchases of equipment ($2.6
million), and the development of software ($1.8 million). These cash outflows
were offset in part by $9.8 million received from the sale of assets. Of the
$17.1 million provided in 2001, $8.1 million came from the sale of the EZ-CAP
managed care software business, $1.3 million from the release of restricted
cash, and $12.2 million from the sale of available-for-sale securities, offset
in part by $2.7 million in equipment purchases and $1.8 million in expenditures
on capitalizable software. In 2000 the $46.1 million provided by investing
activities arose from the proceeds of $38.4 million from the sale of ROI assets
and $18.3 million from the sale of available-for-sale securities, offset by a
$7.0 million increase in restricted cash, $3.1 million in equipment purchases
and $527,000 in capitalized software costs.
Net cash provided by (used in) used in financing activities was $1.4
million, $(28.5) million and $(18,000) in 2002, 2001 and 2000, respectively.
The $1.4 million of cash generated by financing activities in 2002 arose from
$1.9 million of proceeds from the issuance of common stock offset by $455,000
of debt repayments. Financing activities in 2001 included the repurchase of
$41.3 million of our debentures at a $12.9 million gain, the purchase of
200,000 shares of treasury common stock amounting to $821,000 and $800,000 in
proceeds from the issuance of common stock. The activity in 2000 consisted of
$945,000 in repayment of debt and $927,000 from the issuance of common stock.
The Board of Directors has authorized us to repurchase the debentures at our
discretion and to repurchase up to 6 million shares of treasury stock.
24
The following table summarizes financial data for our contractual
obligations and other commercial commitments, including interest obligations,
as of December 31, 2002 (in thousands):
Payments Due by Period
---------------------------------------
Less
than 1 1-3 3-5 After 5
Contractual Obligations Total year years years years
- --------------------------- -------- --------- --------- --------- ---------
Long-term debt $ 82,749 $ 3,870 $ 78,879 $ -- $ --
Operating leases 30,440 4,981 8,334 7,245 9,880
Other long-term obligations 1,449 483 966 -- --
-------- -------- -------- -------- --------
Total contractual cash
obligations $114,638 $ 9,334 $ 88,179 $ 7,245 $ 9,880
======== ======== ======== ======== ========
Other Commercial Commitments
- ----------------------------
Standby letters of credit(1) $ 4,409 $ 1,166 $ 105 $ 2,620 $ 518
-------- -------- -------- -------- --------
Total commercial commitments $ 4,409 $ 1,166 $ 105 $ 2,620 $ 518
======== ======== ======== ======== ========
(1) The 3-5 years amount of $2.6 million is for an existing surety bond
requirement on December 31, 2002. Actual requirements may be less as work
is completed towards the underlying contract.
As of December 31, 2002, we had $73.7 million in outstanding 5.25%
Convertible Subordinated Debentures due 2005 (the "2005 Debt"), which bear
interest at 5.25% per annum. On April 16, 2003, we announced that we had
executed an agreement with certain of our bondholders to refinance our 2005
Debt. On April 17, 2003, under the terms of the refinance agreement, we issued
$71.0 million of our Senior Secured Notes due 2008 (the "2008 Debt"). The
proceeds from the issuance of the 2008 Debt were used to repurchase $61.8
million (plus $1.5 million in accrued interest) of the 2005 Debt which became
subject to repurchase by us as a result of our delisting from the Nasdaq
National Market on March 4, 2003. Accordingly, the net proceeds to us as a
result of the issuance of the 2008 Debt less the costs (including fees)
associated with the repurchase of the 2005 Debt was $7.6 million, with $11.9
million of the 2005 Debt remaining outstanding. Additionally, the repurchase
right on the 2005 Debt remaining outstanding expired on April 17, 2003. The
2008 Debt bears interest at an initial rate of 10% which will be reduced to 9%
upon the relisting of QuadraMed's common stock on the Nasdaq, including Nasdaq
SmallCap or U.S. National Market and is secured by certain intellectual
property of QuadraMed. However, we may be obligated to redeem the 2005 and
2008 debentures earlier than the maturity dates based upon certain events of
default occurring as defined within the debenture agreements. These events
include: failure to timely repay principal or interest owed on the debentures,
default under any other borrowing, and bankruptcy.
In addition, as of December 31, 2002, we had approximately $30.4 million
in minimum operating lease commitments that will be repaid through 2011.
Finally, we have a Supplemental Executive Retirement Plan that will require
total payments from 2008 through 2027 estimated at $7.8 million. We owe annual
premiums of $483,000 on the SERP through 2005 to fund this obligation.
We expect that cash provided by operating activities may fluctuate in
future periods as a result of a number of factors, including fluctuations in
our operating results, specifically the timing of when we recognize revenue,
our accounts receivable collections and the timing of other payments. In
addition, cash used in investing activities may fluctuate due to the
capitalization of our software development efforts, which are expected to
increase in 2003, and costs associated with our investments in fixed assets and
information technology. For additional discussion, see the Risk Factors
section.
We believe that we will have sufficient liquidity and capital resources to
fund our scheduled debt and other obligations through the next twelve months.
Inflation
- ---------
The majority of our revenue is derived from perpetual and long-term
customer contracts. The term of contracts range from one to five years and the
contracts generally allow for price increases annually based on external
25
measures of inflation. We have increased some of our prices under these
contract provisions. Our maintenance contract terms also allow annual price
increases based on external measures of inflation. Accordingly, inflation has
not had, and we do not believe that it will have, a significant impact on our
financial condition.
Business Risks
- --------------
Factors that have affected our results of operations in the past and are
likely to affect our results of operations in the future, include the
following:
Our Vendors, Suppliers and Customers May React Adversely to the Lack of
-----------------------------------------------------------------------
Timely SEC Filings of Our Historical Financial Statements.
- ---------------------------------------------------------
Our future success depends in large part on the support of our vendors and
suppliers, who may react adversely to the lack of timely SEC filings of our
historical financial statements. The restatement of our historical financial
statements has resulted in negative publicity about us, which may cause some of
our potential customers to defer purchases of our products. Our vendors and
suppliers may re-examine their willingness to do business with us, to develop
critical interfaces for us or to supply software and services if they lose
confidence in our ability to fulfill our commitments.
We Are Currently the Target of Securities Litigation and May Be the Target
--------------------------------------------------------------------------
of Further Actions, Which May Be Costly and Time Consuming to Defend.
- --------------------------------------------------------------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11, 2002. The complaints seek unspecified monetary damages and other relief.
The ultimate outcome of these matters cannot presently be determined and
may require significant commitment of our financial and management resources
and time, which may seriously harm our business, financial condition and
results of operations. We cannot assure you that any of the allegations
discussed above can be resolved without costly and protracted litigation, and
the outcome may have a materially adverse impact upon our financial position,
results of operations and cash flows.
In addition, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
The uncertainty of the currently pending investigation and litigation could
lead to more volatility in our stock price. We may in the future be the target
of securities class action claims similar to those described above.
We Are Subject to a Formal SEC Inquiry as a Result of the Restatement of
------------------------------------------------------------------------
Our Financial Statements.
- ------------------------
Following our August 12, 2002 announcement that it we intended to restate
prior period financial statements, the staff of the San Francisco District
Office of the SEC requested certain information concerning the anticipated
restatement as part of an informal, preliminary inquiry. We provided that
information, and expect to provide additional information now that the
restatement is completed. We intend to continue to cooperate with the SEC in
the event it requests other information. We cannot predict whether such
information will be requested, when the SEC will conclude its inquiry, or the
outcome or impact thereof.
On February 28, 2003, we reported that the SEC had issued a formal non-
public order of investigation concerning our accounting and financial reporting
practices for the period beginning January 1, 1998. We intend to continue to
cooperate with the SEC and comply with the SEC's requests for information. We
cannot predict when the SEC will conclude its inquiry, or the outcome and
impact thereof.
Our Common Stock Has Been Delisted from the Nasdaq Stock Market.
---------------------------------------------------------------
We received a notice from the Nasdaq Stock Market that we are required to
file Forms 10-Q for the quarters ended June 30, and September 30, 2002 as well
as restated financial statements for the years ended December 31, 2001, 2000
and 1999 and the quarter ended March 31, 2002. Our trading symbol as of August
26
22, 2002 was amended from "QMDC" to "QMDCE", as a result of the delinquent
filings. We requested an appeals hearing before a Nasdaq Listing
Qualifications Panel (the "Panel"). The Panel notified us on February 6, 2003,
that Nasdaq would continue to list our common shares on the Nasdaq Stock Market
until February 28, 2003, by which date we must file our Quarterly Report on
Form 10-Q for the interim periods ended June 30, 2002 and September 30, 2002
and our amended SEC filings for the years ended December 31, 2001, 2000 and
1999 and the interim period ended March 31, 2002. Further, we were required to
file timely all other annual and periodic reports with the SEC and evidence our
continued compliance with all requirements for continued listing on the Nasdaq
National Market upon the filing of these documents as well as an ability to
sustain compliance with those requirements over the long term. We were unable
to meet these requirements in a timely manner, and on March 4, 2003, our common
stock was delisted from the Nasdaq Stock Market. Although we intend to return
to compliance, we can offer no assurances that we will be relisted on the
Nasdaq Stock Market.
The delisting constitutes a "Repurchase Event" under the provisions of our
Convertible Subordinated Debentures. Upon such an event, our Debentures
provide the holders with the individual option to redeem the Debentures (see
below).
Our Debentures Have Been Partially Refinanced with Notes that Are Subject
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to New Terms.
- ------------
We issued Debentures through a public offering on May 1, 1998 that mature
on May 1, 2005 in the principal amount of $115 million (the "2005 Notes"). Our
net proceeds from the offering were $110.8 million. The 2005 Notes bear
interest at 5.25% per annum and are convertible into common stock at any time
prior to the redemption or final maturity, initially at the conversion price of
$33.25 per share (resulting in an initial conversion ratio of 30.075 shares per
$1,000 principal amount).
We are obligated to provide holders of the 2005 Notes with notice of and
the holders have the individual option to redeem the 2005 Notes should we, (i)
cease to be traded on a U.S. national securities exchange or cease to be
approved for trading on a U.S. automated over-the-counter securities market; or
(ii) experience defined Changes of Control, including a merger in which we are
not the surviving entity or our shareholders do not control 50% of the new
entity, the sale of substantially all of our assets, a liquidation, or if there
is a substantial change in the board of directors over a two-year period.
Additionally, we are obligated to redeem the 2005 Notes upon defined Events of
Default, including failure to timely repay principal or interest under the 2005
Notes, default under any other borrowing, and bankruptcy. On March 4, 2003,
our common stock was delisted from the Nasdaq Stock Market, and a repurchase
event was triggered.
On April 17, 2003, QuadraMed Corporation closed the partial refinancing of
its 2005 Notes. In conjunction with its repurchase of $61.8 million of its
outstanding 2005 Notes pursuant to its offer to repurchase such Notes
previously announced on March 19, 2003, the Company issued $71 million of its
Senior Secured Notes due 2008 (the "2008 Notes"), together with warrants to
purchase 11,303,842 shares of the Company's common stock. Investors in the
2008 Notes included certain holders of 2005 Notes as well as new investors.
Additional warrants to purchase 2,047,978 shares of the Company's common stock
will be issued to holders of the 2008 Notes if the Company does not file a
registration statement within 90 days after receiving a request from the
holders on or after the date that is 270 days after April 17, 2003, the date of
issuance of the 2008 Notes. The Company also issued warrants to purchase
282,596 shares of the Company's common stock to Philadelphia Brokerage
Corporation as consideration in connection with the transaction. The warrants
have a term of five years, have an exercise price of $0.01 per share and are
subject to certain anti-dilution provisions including dilution from any
issuance of shares in settlement of existing litigation.
The 2008 Notes bear an initial interest rate of 10%, which interest rate
is required to be reduced to 9% upon the listing of the Company's common stock
for trading on a U.S. national securities exchange or upon the common stock's
relisting on the Nasdaq National Market or the Nasdaq SmallCap Market. The
terms of the 2008 Notes provide that interest is initially payable 6% in cash
and 4% in additional notes for the first year and payable entirely in cash
thereafter. The 2008 Notes are also secured by certain intellectual property
of the Company.
Provisions in Our Certificate of Incorporation and Bylaws and Delaware Law
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Could Delay or Discourage a Takeover which Could Adversely Affect the Price of
- ------------------------------------------------------------------------------
Our Common Stock.
- ----------------
Our board of directors has the authority to issue up to 5 million shares
of preferred stock and to determine the price, rights, preferences, privileges,
and restrictions, including voting rights, of those shares without any further
27
vote or action by holders of our common stock. If preferred stock is issued,
the voting and other rights of the holders of our common stock may be subject
to, and may be adversely affected by, the rights of the holders of our
preferred stock. The issuance of preferred stock may have the effect of
delaying or preventing a change of control of the Company that could have been
at a premium price to our stockholders.
Certain provisions of our certificate of incorporation and bylaws could
discourage potential takeover attempts and make attempts to change management
by stockholders difficult. Our board of directors, which is classified into
three classes of directors serving staggered, three-year terms, has the
authority to impose various procedural and other requirements that could make
it more difficult for our stockholders to effect certain corporate actions. In
addition, our certificate of incorporation provides that directors may be
removed only by the affirmative vote of the holders of two-thirds of the shares
of our capital stock entitled to vote. Any vacancy on our board of directors
may be filled only by a vote of the majority of directors then in office.
Further, our certificate of incorporation provides that the affirmative vote of
two-thirds of the shares entitled to vote, voting together as a single class,
subject to certain exceptions, is required for certain business combination
transactions. These provisions, and certain other provisions of our
certificate of incorporation, could have the effect of delaying or preventing
(i) a tender offer for our common stock or other changes of control of the
Company that could be at a premium price, or (ii) changes in our management.
In addition, certain provisions of Delaware law could have the effect of
delaying or preventing a change in control of the Company. Section 203 of the
Delaware General Corporation Law, for example, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years from the date the person became an interested stockholder
unless certain conditions are met.
The Trading Price of Our Common Stock Has Been, and Is Expected to
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Continue to Be, Volatile.
- ------------------------
The Nasdaq SmallCap Market on which our common stock was listed, the "Pink
Sheets" over-the-counter market, where our stock currently trades, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of our common stock has been and is
likely to continue to be volatile due to such factors as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by our competitors;
o Governmental regulatory action;
o Resolution of pending or unasserted litigation, including the existing
shareholder lawsuits;
o Developments or disputes with respect to proprietary rights; and
o General trends in our industry and overall market conditions.
Movements in prices of equity securities in general may also affect the
market price of our common stock.
Future Sales of a Substantial Number of Shares of Our Common Stock Could
------------------------------------------------------------------------
Cause the Price of the Stock to Decrease or Fluctuate Substantially.
- -------------------------------------------------------------------
Our existing stockholders hold a significant number of shares of common
stock that may be sold in the future under Rule 144 of the Securities Act or
through the exercise of registration rights. Sales of a substantial number of
the aforementioned shares in the public markets or the prospect of such sales
could adversely affect or cause substantial fluctuations in the market price of
our common stock and debt securities and impair our ability to raise additional
capital through the sale of our securities.
28
Future Sales of Our Common Stock in the Public Market or Option Exercises
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and Sales Could Lower Our Stock Price.
- -------------------------------------
A substantial number of the unissued shares of our common stock are
subject to stock options and our outstanding 2005 Notes may be converted into
shares of common stock. We cannot predict the effect, if any, that future
sales of shares of common stock, or the availability of shares of common stock
for future sale, will have on the market price of our common stock. Sales of
substantial amounts of common stock, including shares issued upon the exercise
of stock options or the conversion of our outstanding 2005 Notes, or the
perception that such sales could occur, may adversely affect prevailing market
prices for our common stock.
We Face Product Development Risks Associated with Rapid Technological
---------------------------------------------------------------------
Changes.
- -------
The healthcare software market is highly fragmented and characterized by
ongoing technological developments, evolving industry standards, and rapid
changes in customer requirements. Our success depends on our ability to timely
and effectively:
o Offer a broad range of software products;
o Enhance existing products and expand product offerings;
o Respond promptly to new customer requirements and industry standards;
o Remain compatible with popular operating systems and develop products that
are compatible with the new or otherwise emerging operating systems; and
o Develop new interfaces with competing HIS vendors to fully integrate our
Quantim product suite in order to maximize features and functionality of
the new products.
Our performance depends in large part upon our ability to provide the
increasing functionality required by our customers through the timely
development and successful introduction of new products and enhancements to our
existing suite of products. We may not successfully, or in a timely manner,
develop, acquire, integrate, introduce, or market new products or product
enhancements. Product enhancements or new products developed by us also may
not meet the requirements of hospitals or other healthcare providers and payers
or achieve or sustain market acceptance. Our failure to either estimate
accurately the resources and related expenses required for a project, or to
complete our contractual obligations in a manner consistent with the project
plan upon which a contract was based, could have a material adverse effect on
our business, financial condition, and results of operations. In addition, our
failure to meet a customer's expectations in the performance of our services
could damage our reputation and adversely affect our ability to attract new
business.
Our Inability to Protect Our Intellectual Property Could Lead to
----------------------------------------------------------------
Unauthorized Use of Our Products, which Could Have an Adverse Effect on Our
- ---------------------------------------------------------------------------
Business.
- --------
We rely on a combination of trade secret, copyright and trademark laws,
nondisclosure, non-compete, and other contractual provisions to protect our
proprietary rights. In 2001, we filed our first patent application covering
our developed technology, the Affinity CPOE software application. Measures
taken by us to protect our intellectual property may not be adequate, and our
competitors could independently develop products and services that are
substantially equivalent or superior to our products and services. Any
infringement or misappropriation of our proprietary software and databases
could put us at a competitive disadvantage in a highly competitive market and
could cause us to lose revenues, incur substantial litigation expense, and
divert management's attention from other operations.
We depend on licenses from a number of third-party vendors for certain
technology used to develop and operate our products. Most of these licenses
expire within three to five years. Such licenses can be renewed only by mutual
consent and may be terminated if we breach the license terms and fail to cure
the breach within a specified time period. If such licenses are terminated, we
may not be able to continue using the technology on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay or reduce
product shipments until equivalent technology is obtained, which could have a
material adverse effect on our business, financial condition, and results of
operations. Most of our third-party licenses are non-exclusive and competitors
may obtain the same or similar technology. In addition, if vendors choose to
29
discontinue support of the licensed technology, we may not be able to modify or
adapt our products.
Intellectual property litigation is increasingly common in the software
industry. The risk of an infringement claim against us may increase over time
as the number of competitors in our industry segment grows and the
functionality of products overlaps. Third parties could assert infringement
claims against us in the future. Regardless of the merits, we could incur
substantial litigation expenses in defending any such asserted claim. In the
event of an unfavorable ruling on any such claim, a license or similar
agreement may not be available to us on reasonable terms, if at all.
Infringement may also result in significant monetary liabilities that could
have a material adverse effect on our business, financial condition, and
results of operations. We may not be successful in the defense of these or
similar claims.
The Nature of Our Products Makes Us Particularly Vulnerable to Undetected
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Errors or Bugs that Could Reduce Revenues, Market Share or Demand for Our
- -------------------------------------------------------------------------
Products and Services.
- ---------------------
Products such as those we offer may contain errors or failures, especially
when initially introduced or when new versions are released. Although we
conduct extensive testing on our products, software errors have been discovered
in certain enhancements and products after their introduction. Despite such
testing by us and by our current and potential customers, products under
development, enhancements, or shipped products may contain errors or
performance failures, resulting in, among other things:
o Loss of customers and revenue;
o Delay in market acceptance;
o Diversion of resources;
o Damage to our reputation; or
o Increased service and warranty costs.
Any of these consequences could have a material adverse effect on our
business, financial condition, and results of operations.
If Our Products Fail to Accurately Assess, Process, or Collect Healthcare
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Claims or Administer Managed Care Contracts, We Could Be Subject to Costly
- --------------------------------------------------------------------------
Litigation and Be Forced to Make Costly Changes to Our Products.
- ---------------------------------------------------------------
Some of our products and services are used in the payment, collection,
coding, and billing of healthcare claims and the administration of managed care
contracts. If our employees or products fail to accurately assess, process, or
collect these claims, customers could file claims against us. Our insurance
coverage may not be adequate to cover such claims. A successful claim that is
in excess of, or is not covered by, insurance coverage could adversely affect
our business, financial condition, and results of operations. Even a claim
without merit could result in significant legal defense costs and could consume
management time and resources. In addition, claims could increase our premiums
such that appropriate insurance could not be found at commercially reasonable
rates. Furthermore, if we were found liable, we may have to significantly
alter one or more of our products, possibly resulting in additional
unanticipated research and development expenses.
We May Be Required to Make Substantial Changes to Our Products if They
----------------------------------------------------------------------
Become Subject to FDA Regulation, which Could Require a Significant Capital
- ---------------------------------------------------------------------------
Investment.
- ----------
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by the
FDA under the Federal Food, Drug and Cosmetic Act. At present, none of our
software products are so regulated. In the future, the FDA could determine
that some of our products, because of their predictive aspects, are clinical
decision tools and subject them to regulation. Compliance with FDA regulations
could be burdensome, time consuming, and expensive. Other new laws and
regulations affecting healthcare software development and marketing also could
be enacted in the future. If so, it is possible that our costs and the length
30
of time for product development and marketing could increase and that other
unforeseeable consequences could arise.
Governmental Regulation of the Confidentiality of Patient Health
----------------------------------------------------------------
Information Could Result in Our Customers Being Unable to Use Our Products
- --------------------------------------------------------------------------
Without Significant Modification, which Could Require Us to Expend Substantial
- ------------------------------------------------------------------------------
Amounts.
- -------
There is substantial state and federal regulation of the confidentiality
of patient health information and the circumstances under which such
information may be used by, disclosed to or processed by us as a consequence of
our contacts with various health care providers. Although compliance with
these laws and regulations is presently the principal responsibility of the
hospital, physician, or other healthcare provider, regulations governing
patient confidentiality rights are dynamic and rapidly evolving. Changes may
be made which require us to change our systems and our methods which could
require significant expenditure of capital and decrease future business
prospects. Additional federal and state legislation governing the
dissemination of individually identifiable information have been proposed and
may be adopted, which may also significantly affect our business.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
is a federal law that affects the use, disclosure, transmission and storage of
individually identifiable health information. As directed by HIPAA, the United
States Department of Health and Human Services ("HHS") must promulgate
standards and implementation guidelines for certain electronic health
transactions, code sets, data security, unique identification numbers, and
privacy of individually identifiable health information. HHS has made several
regulatory proposals, which are in various stages of development.
First, HHS has published a final regulation governing transaction and
code-set standards that had a compliance date of October 16, 2002. If a
covered entity (health care providers that transmit certain covered
transactions in electronic form, health plans and health care clearinghouses)
or its agent file an extension by October 16, 2003, the covered entity would
receive an additional year to comply with the HIPAA transaction and code sets
requirements.
Second, HHS has published a final HIPAA privacy rule which has a
compliance date of April 14, 2003. The HIPAA privacy rule is complex and far
reaching. Similar to the HIPAA transaction and code sets rule, the HIPAA
privacy rule applies to covered entities. Covered entities are required to
execute a contract with any business associate that performs certain services
on the covered entity's behalf. We may be implicated by the HIPAA privacy rule
as a business associate of a covered entity. The HIPAA privacy rule and state
healthcare privacy regulations could materially restrict the ability of
healthcare providers to disclose individually identifiable health information
from patient records using our products and services or could require us to
make substantial capital expenditures to be in compliance. Accordingly, the
HIPAA Privacy Rule and state privacy laws may significantly impact our
product's use in the health care delivery system and therefore, decrease our
revenue, increase working capital requirements and decrease future business
prospects.
Third, HHS published the final HIPAA security rule with a compliance date
of April 20, 2005. The HIPAA security rule applies to the use, disclosure,
transmission, storage and destruction of electronic protected health
information by covered entities. Covered entities must implement stringent
security measures to ensure the confidentiality of the electronic protected
health information, and to protect against the unauthorized use of the
electronic protected health information. Implementing such measures will
require us to expend substantial capital due to required product, service, and
procedure changes.
Government Regulation to Adopt and Implement ICD-10-CM and ICD-10-PCS
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Medical Code Set Standards.
- --------------------------
Prominent HIM organizations are calling on the Department of Health and
Human Services (HHS) and the healthcare industry to take action to adopt and
implement ICD-10-CM and ICD-10-PCS code sets, rules, and guidelines as a
replacement for current ICD-9-CM guidelines used in our software products.
Adoption of these new code sets would require us to change our systems and our
methods which could require a significant expenditure of R & D capital and
decrease future business prospects for our current product line.
31
Government Regulation of the Health Care Delivery System May Affect Health
--------------------------------------------------------------------------
Care Providers' Discretionary Spending.
- --------------------------------------
During the past several years, the healthcare industry has been subject
to, among other things, increasing levels of governmental regulation of
reimbursement rates and certain capital expenditures. Certain proposals to
reform the healthcare system have been and are being considered by Congress.
These proposals, if enacted, could change the operating environment for our
clients in ways that could have a negative impact on our business, financial
condition, and results of operations. We are unable to predict what, if any,
changes will occur.
Changes in Procurement Practices of Hospitals Have and May Continue to
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Have a Negative Impact on Our Revenues.
- --------------------------------------
A substantial portion of our revenues has been and is expected to continue
to be derived from sales of software products and services to hospitals.
Consolidation in the healthcare industry, particularly in the hospital and
managed care markets, could decrease the number of existing or potential
purchasers of products and services and could adversely affect our business.
In addition, the decision to purchase our products often involves a committee
approval. Consequently, it is difficult for us to predict the timing or
outcome of the buying decisions of our customers or potential customers. In
addition, many healthcare providers are consolidating to create IDNs with
greater regional market power. These emerging systems could have greater
bargaining power, which may lead to decreases in prices for our products, which
could adversely affect our business, financial condition, and results of
operations.
Changes in the Healthcare Financing and Reimbursement System Could
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Adversely Affect the Amount of and Manner in which Our Customers Purchase Our
- -----------------------------------------------------------------------------
Products And Services.
- ---------------------
Changes in current healthcare financing and reimbursement systems could
result in unplanned product enhancements, delays, or cancellations of product
orders or shipments, or reduce the need for certain systems. We could also
have the endorsement of products by hospital associations or other customers
revoked. Any of these occurrences could have a material adverse effect on our
business. Alternatively, the federal government recently mandated the use of
electronic transmissions for large Medicare providers which may positively
affect our systems and product.
The healthcare industry in the United States is subject to changing
political, economic, and regulatory influences that may affect the procurement
practices and operations of healthcare organizations. The traditional hospital
delivery system is evolving as more hospital services are being provided by
niche, free standing practices and outpatient providers. The commercial value
and appeal of our products may be adversely affected if the current healthcare
financing and reimbursement system were to revert to a fee-for-service model.
In addition, many of our customers provide services under capitated service
agreements, and a reduction in the use of capitation arrangements as a result
of regulatory or market changes could have a material adverse effect on our
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other things,
reimbursement rates and capital expenditures. Proposals to reform the
healthcare system have been and are being considered by the United States
Congress. These proposals, if enacted, could change the operating environment
of our customers in ways that cannot be predicted. Healthcare organizations
may react to these proposals by curtailing or deferring investments, including
those for our products and services. In addition, the regulations promulgated
under HIPAA could lead healthcare organizations to curtail or defer investments
in non-HIPAA related features in the next several years.
Our Quarterly Operating Results Are Subject to Fluctuations, which Could
------------------------------------------------------------------------
Adversely Affect Our Financial Results and the Market Price of Our Common
- -------------------------------------------------------------------------
Stock.
- -----
Our quarterly operating results have varied significantly in the past and
may fluctuate in the future as a result of a variety of factors, many of which
are outside our control. Accordingly, quarter-to-quarter comparisons of our
operating results may not be indicative of our future performance. Some of the
factors causing these fluctuations include:
o Variability in demand for products and services;
o Introduction of product enhancements and new products by us and our
competitors;
o Timing and significance of announcements concerning present or prospective
strategic alliances;
o Discontinuation of, or reduction in, the products and services we offer;
32
o Loss of customers due to consolidation in the healthcare industry;
o Delays in product delivery requested by our customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development, and
administrative personnel necessary to support anticipated operations;
o Costs incurred for marketing and sales promotional activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the healthcare industry;
o Cooperation from competitors on interfaces and implementation when a
customer chooses a QuadraMed software application to use with various
vendors;
o Delays in implementation due to product readiness, customer induced delays
in training or installation, and third party interface development delays;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can increase demand
for new, updated systems;
o Federal regulations that directly affect reimbursements received, and
therefore the amount of money available for purchasing information
systems;
o The fines and penalties a healthcare provider or system may incur due to
fraudulent billing practices; and
o Increases in third party royalty fees associated with embedded products in
QuadraMed software applications.
Our operating expense levels, which increase with the addition of acquired
businesses, are relatively fixed. Accordingly, if future revenues were below
expectations, we would experience a disproportionate adverse affect on our net
income and financial results. In the event of a revenue shortfall, we will
likely be unable to, or may elect not to, reduce spending quickly enough to
offset any such shortfall. As a result, it is possible that our future
revenues or operating results may fall below the expectations of securities
analysts and investors. In such a case, the price of our publicly traded
securities may be adversely affected.
The Variability and Length of Our Sales Cycle for Our Products May
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Exacerbate the Unpredictability and Volatility of Our Operating Results.
- -----------------------------------------------------------------------
We cannot accurately forecast the timing of customer purchases due to the
complex procurement decision processes of most healthcare providers and payers.
How and when to implement, replace, expand or substantially modify an
information system are major decisions for customers, and such decisions
require significant capital expenditures by them. As a result, we typically
experience sales cycles that extend over several quarters. In addition,
certain products we acquired with Compucare have higher average selling prices
and longer sales cycles than many of our other products. As a result, we have
only a limited ability to forecast the timing and size of specific sales,
making the prediction of quarterly financial performance more difficult.
If We Are Unable to Compete Effectively, We Could Experience Price
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Reduction, Reduced Gross Margins and Loss of Market Share.
- ---------------------------------------------------------
Competition for our products and services is intense and is expected to
increase. Increased competition could result in reductions in our prices,
gross margins, and market share and have a material adverse effect on our
business, financial condition, and results of operations. We compete with
other providers of healthcare information software and services, as well as
healthcare consulting firms. Some competitors have formed business alliances
33
with other competitors that may affect our ability to work with some potential
customers. In addition, if some of our competitors merge, a stronger
competitor may emerge. Some principal competitors include:
o In the market for enterprise healthcare information systems in the
Enterprise Division: McKesson Corporation, Inc., Shared Medical Systems,
Inc., a division of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and, IDX Corporation;
o In the market for electronic document management products in the
Enterprise Division: McKesson Corporation, SoftMed Corporation Inc.,
FileNet, Lanvision, MedPlus, and, Eclipsys Corporation;
o In the market for MPI products and services in the Enterprise Division:
Madison Technologies, Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and, Medibase;
o In the market for decision support products in the Enterprise Division:
Eclipsys Corporation, Healthcare Microsystems, Inc., a division of Health
Management Systems Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and, MediQual Systems, Inc., a division of
Cardinal Health, Inc.;
o In the market for coding, compliance, data, and record management products
in the Health Information Management Software Division: 3M Corporation,
SoftMed Corporation, Inc., MetaHealth, Eclipsys Corporation,
PricewaterhouseCoopers LLP and, HSS, Inc.;
o In the Financial Services Division: Advanced Receivables Strategy, Inc.,
a division of Perot Systems Corporation, NCO Group, Inc., Outsourcing
Solutions, Inc., Health Management Systems, Inc., and Triage Consulting
Group.
Current and prospective customers also evaluate our products' capabilities
against the merits of their existing information systems and expertise. Major
software information systems companies, including those specializing in the
healthcare industry, that do not presently offer competing products may enter
our markets. Many of our competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources, and market recognition than we have. Many of these
competitors also have, or may develop or acquire, substantial installed
customer bases in the healthcare industry. As a result of these factors, our
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the political,
economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion, and sale of their products than we can. We may not be
able to compete successfully against current and future competitors, and such
competitive pressures could materially adversely affect our business, financial
condition, and operating results.
Our Services Face Review and Scrutiny from the Department of Health and
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Human Services, the Department of Justice and Other Law Enforcement Agencies.
- ----------------------------------------------------------------------------
As a result of rising health care costs, federal and state governments
have placed an increased emphasis on detecting and eliminating fraud and abuse
in Medicare, Medicaid, and other health care programs. Numerous laws and
regulations now exist to prevent fraudulent or abusive billing, to protect
patients' privacy rights, and to ensure patients' access to health care.
Violation of the laws or regulations governing our operations could result in
the imposition of civil or criminal penalties, including temporary or permanent
exclusion from participation in government health care programs such as
Medicare and Medicaid, the cancellation of our contracts to provide managed
care services, and the suspension or revocation of our licenses. We routinely
conduct internal audits in our effort to ensure compliance with all applicable
laws and regulations. If errors, discrepancies or violations of laws are
discovered in the course of these audits or otherwise, we may be required by
law to disclose the relevant facts, once known, to the appropriate authorities.
34
We Face Risks Associated with U.S. Government Contracting.
---------------------------------------------------------
We have been awarded a U.S. General Services Administration ("GSA")
Schedule Contract for Federal Supply Service of commercial information
technology. The willingness of government agencies to enter into future
contracts depends upon (i) our ability to continue supporting existing
products; (ii) maintaining ongoing relationships with third party suppliers of
certain elements of our products; and (iii) developing new products with third
party suppliers to address new regulatory requirements of government agencies
and having these products added to our GSA commercial price list. These
contracts are subject to cancellation at the convenience of the contracting
government agency.
As a commercial vendor, we must file a quarterly sales report with the GSA
and remit a 1% "Industrial Funding Fee" based on the sales value of the
contract. Reductions or delays in federal funds available for projects we are
performing could also have an adverse impact on our government business.
Contracts involving time and material fees are also subject to the risks of
disallowance of costs upon audit, changes in government procurement policies,
required competitive bidding for products not identified on the GSA commercial
product price list, and, with respect to contracts involving prime contractors
or government-designated subcontractors, the inability of those parties to
perform under their contracts.
We Have Encountered Significant Challenges Integrating Acquired
---------------------------------------------------------------
Businesses, and Future Transactions May Adversely Affect Our Business,
- ---------------------------------------------------------------------
Operations, and Financial Condition.
From 1993 to 1999, we completed 28 acquisitions encountering significant
challenges integrating the acquired businesses into our operations and, in
years 2000 and 2002 focused in particular on their integration. Some of the
challenges we have encountered, and may encounter with acquisitions in the
future, in integrating acquired businesses have included:
o Interruption, disruption or delay of our ongoing business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expenses;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results, resulting in
our failure to realize anticipated benefits;
o Write-down or reclassification of acquired assets;
o Failure to retain key acquired personnel and difficulty and expense of
training those retained;
o Increases in stock compensation expense and increased compensation expense
resulting from newly hired employees;
o Assumption of liabilities and potential for disputes with the sellers of
acquired businesses;
o Customer dissatisfaction or performance problems related to acquired
businesses;
o Exposure to the risks of entering markets in which we have no direct prior
experience and to risks associated with market acceptance of acquired
products and technologies; and
o Platform and technical issues related to integrating systems from various
acquired companies.
All of these factors have had an adverse effect on our business, financial
condition, and results of operations in the past, and could have an adverse
effect in the future.
35
New Accounting Standards May Make Acquisitions Necessary for Our Growth
-----------------------------------------------------------------------
Less Accretive and Less Attractive.
- ----------------------------------
In June 2001, the FASB issued SFAS No. 141, Business Combinations. The
---------------------
statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations, and SFAS
---------------------
No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises.
---------------------------------------------------------------------
From 1993-1999, we completed 28 acquisitions, certain of which were accounted
for using the pooling-of-interests methodology, which is no longer acceptable
under SFAS 141. Effective June 2001, prospective business combinations are
required to be accounted for using purchase accounting. As a result, any
amounts paid in excess of fair value of the assets acquired are capitalized and
recorded as intangible assets or goodwill whose amortization or impairment may
reduce future earnings. Accordingly, future business combinations may be less
attractive as our reported generally accepted accounting principles ("GAAP")
operating results are likely to be negatively impacted.
We May Suffer Losses Due to the Investment Performance of Variable Life
-----------------------------------------------------------------------
Insurance Policies That Are Tied to the Performance of Equity Markets That May
- ------------------------------------------------------------------------------
Lead to Delays in Repayments of Premiums Pursuant to Certain Split-Dollar Life
- ------------------------------------------------------------------------------
Insurance Agreements or Result in Increased Supplemental Executive Retirement
- -----------------------------------------------------------------------------
Plan (SERP) Expenses in Future Periods.
- --------------------------------------
We have an investment interest in three variable life insurance policies.
Each of the variable life insurance policies provides for the investment of the
cash value portion of policies into various sub-accounts that are similar in
nature to mutual funds. Two policies are issued pursuant to split-dollar
agreements with the former executives, and trusts established for their benefit
make the investment decisions on these policies. The third policy is a
corporate-owned policy that we contributed to a grantor or "rabbi" trust
established to make contributions to satisfy our obligations under the SERP and
two other subsequently terminated benefit plans. We make the investment
decisions only on this policy. The performance of the variable life insurance
policies for cash value and premium amounts will vary depending on the
performance of the selected underlying sub-accounts. Pursuant to FTB 85-4 and
FTB 97-14, we report the amounts that could be realized under these variable
life insurance contracts as an asset valued as of the balance sheet date and
treat the change in cash surrender value during the reported period as an
adjustment of premiums paid in determining the expense or income to be
recognized. The reduced value of the variable life insurance policies and
future adverse changes in the condition of equity markets or poor operating
results of underlying policy sub-accounts could result in (i) the delayed
repayment of advanced premiums in the case of the split-dollar policies, and/or
(ii) increased SERP expenses in future periods.
A Significant Amount of Our Assets Are Comprised of Goodwill, Capitalized
-------------------------------------------------------------------------
Software, Customer Lists and Other Intangible Items Subject to Impairment and
- -----------------------------------------------------------------------------
Adjustment That Could Possibly Negatively Impact Our Results of Operations and
- ------------------------------------------------------------------------------
Stockholders' Equity.
- --------------------
A significant amount of our assets are comprised of capitalized software
and intangible assets, such as the value of the installed customer base, core
technology, capitalized software, goodwill, and other identifiable intangible
assets acquired through our acquisitions, such as trademarks.
Pursuant to SFAS No. 142, we must test goodwill, capitalized software and
other intangible assets beyond their economic life for impairment at least
annually, and adjust them when impaired to the appropriate net realizable
value. We engaged a valuation firm to perform an impairment test on the
carrying value of our goodwill and intangibles as of December 31, 2002 and
2001. The valuation firm determined that there was no impairment as of these
dates. In addition, our internally-developed software has been capitalized
assuming our earnings from these product developments exceeds the costs
incurred to develop them. If it is determined that these assets have been
impaired and our future operating results will not support the existing
carrying value of the capitalized software, we will be required to adjust the
carrying value of the capitalized software to net realizable value.
We, however, cannot predict that all of our intangible assets will
continue to remain unimpaired. Our future operating results and stockholders'
equity could possibly decrease with any future impairment and write-down of
goodwill, customer lists, or other such intangibles.
36
No Mirror Processing Site for Our Customer Data Processing Facilities
---------------------------------------------------------------------
Exists; Our Business, Financial Condition, and Results of Operations Could Be
- -----------------------------------------------------------------------------
Adversely Affected if These Facilities Were Subject to a Closure from a
- -----------------------------------------------------------------------
Catastrophic Event or Otherwise.
- -------------------------------
We currently process substantially all of our customer data at our
facilities in Neptune, New Jersey; Irving, Texas; Kansas City, Missouri; and
San Rafael, California. Although we back up our data nightly and have
safeguards for emergencies, such as power interruption or breakdown in
temperature controls, we have no mirror processing site to which processing
could be transferred in the case of a catastrophic event at any of these
facilities. If a major catastrophic event occurs at these facilities possibly
leading to an interruption of data processing, or any other interruption or
closure, our business, financial condition, and results of operations could be
adversely affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
In addition to the market risks discussed herein, refer to our discussion
of business risks in Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations, above.
- -----------------------------------
Interest Rate Risk
------------------
Our exposure to market risk for changes in interest rates primarily
relates to our investment portfolio. It is our intent to ensure the safety and
preservation of our invested principal funds by limiting default risk, market
risk, and reinvestment risk. We invest in high-quality issuers, including
money market funds, corporate debt securities, and debt securities issued by
the United States government. We have a policy of investing in securities with
maturities of two years or less. We do not invest in derivative financial or
foreign investments.
The table that follows presents fair values of principal amounts and
weighted average interest rates for our investment portfolio as of December 31,
(in thousands, except average interest rates).
Aggregate Weighted Average Interest
Fair Value Rate
----------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cash and cash equivalents
Cash $ 12,896 $ 4,682
Money Market funds 10,767 25,117 1.10% 1.78%
-------- --------
Total cash and cash equivalents $ 23,663 $ 29,799
======== ========
Short-term investments
Corporate debt securities $ 2,528 $ 2,380 1.68% 3.75%
Debt issued by the U.S.
government -- 34 6.37%
-------- --------
Total short-term investments $ 2,528 $ 2,414
======== ========
Long-term investments
Corporate debt securities $ 529 $ 575 5.57% 6.09%
Debt issued by the U.S.
government 768 562 4.70% 5.50%
-------- --------
Total long-term investments $ 1,297 $ 1,137
======== ========
On December 31, 2002 our long-term debt consists solely of our Debentures
totaling $73.7 million, at a fixed interest rate of 5.25% maturing in 2005. On
April 17, 2003, we refinanced our Debentures due 2005 and issued $71.0 million
of Senior Secured Notes due 2008 with an initial interest rate of 10%. Refer
to the discussion in note 22 of the Notes to the Financial Statements.
Performance of Equity Markets
-----------------------------
The performance of equity markets can have an effect on our operations, and
recent declines in equity markets, if sustained, will have an adverse effect on
us related to certain variable life insurance policies in which we have an
investment interest.
Foreign Currency Risk
---------------------
Although we sell our products internationally from time to time, all such
transactions are denominated in U.S. Dollars, and there is no foreign currency
fluctuation risk associated with such sales.
37
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The financial statements and supplementary data regarding us are included
in this Report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure
--------------------
With the approval of the Audit Committee, QuadraMed has changed its
independent public accountants twice in the past three fiscal years. Pisenti &
Brinker, LLP ("P&B") served as QuadraMed's independent public accountants for
fiscal years 2000 and 2001. On April 5, 2002 the Audit Committee appointed, and
the Board of Directors approved, PricewaterhouseCoopers LLP ("PwC") to act as
QuadraMed's independent public accountants for the fiscal year ended December
31, 2002. On April 28, 2003 QuadraMed dismissed PwC as its independent public
accountants following a decision by the Audit Committee and on May 5, 2003 a
Form 8-K was filed with the SEC. On May 5, 2003 BDO Seidman, LLP ("BDO") was
appointed as QuadraMed's independent public accountants for the fiscal year
ended December 31, 2002.
There were no disagreements between QuadraMed and its independent public
accountants on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
NAME, AGE, TITLE OCCUPATION AND BACKGROUND
---------------- -------------------------
Lawrence P. English, 62 o Chairman of the Board since December 2000 and
Chairman of the Board and Chief Executive Officer since June 2000.
Chief Executive Officer o Founder and Chief Executive Officer of
Lawrence P. English, Inc., a private turn-around
management firm that consulted with companies
such as Amedex Insurance Company and Paracelsus
Healthcare Corporation, from January 1999 to June
2000.
o Chairman of the Board and Chief Executive Officer
of Aesthetics Medical Management, Inc., a
physician practice management company for plastic
surgeons, from July 1997 to January 1999.
o President of CIGNA Healthcare, one of the largest
HMO providers in the United States, from March
1992 until August 1996.
o Director of Curative Healthcare Corporation since
May 2000.
o Director of Clarent Hospital Corporation,
formerly Paracelsus Healthcare Corporation, since
May 1999. Non-Executive Chairman of the Board
since February 2000.
o Bachelor of Arts degree from Rutgers University.
o Master of Business Administration from George
Washington University.
o Graduate of Harvard Business School's Advanced
Management Program.
Michael S. Wilstead, 45 o President since March 2003 and Chief Operating
President and Chief Officer since December 2001. Previously,
Operating Officer President of the Health Information Management
Service and Software Divisions and the former EZ-
CAP Division. Joined QuadraMed in July 1998 as
Vice President of Sales.
o Group President at STERIS Corporation, an
infection control and surgical support products
company, from 1995 to 1998.
o Various positions at AMSCO International, a
medical equipment company, from 1990 to 1995.
o Bachelor of Science degree in Business
Administration from the University of Phoenix.
Charles J. Stahl, 56 o Executive Vice President and Chief Financial
Executive Vice President Officer since April 2003.
and Chief Financial Officer o Certified Public Accountant.
o Partner with Deloitte & Touche LLP from 1978 to
2001 with various roles and responsibilities
including Managing Partner of the Valuation and
Realty Consulting Group, National Director of
Financial Consulting and audit partner in the
technology industry.
38
Dean A. Souleles, 41 o Executive Vice President, Enterprise Division,
Executive Vice President, since September 2002.
Enterprise Division o Chief Technology Officer beginning August 2000.
Joined QuadraMed in February 2000 as Vice
President of Development.
o Chief Technology Officer and Director of Research
and Development for Chase Credit Systems, Inc., a
software and technical services firm serving the
mortgage credit reporting industry, from March
1997 to February 2000.
o Technology consultant to Forest Lawn Mortuary
from January to June 1997.
o Chief Technology Officer, SureNet Corporation, an
Internet service provider, from October 1995 to
December 1996.
o Consultant to NASA's Jet Propulsion Laboratory as
principal engineer and system architect on
various space, civil and defense programs from
March 1986 to October 1995.
Joseph L. Feshbach, 49 o Chairman of the Board and Chief Executive Officer
of Curative Health Services, Inc. (Nasdaq: CURE),
a disease management company focused on chronic
wound care and specialty pharmacy, since October
2000. Directory since February 2000.
o Private investor since 1998.
o General Partner of Feshbach Brothers, a money
management and stock brokerage firm, from 1985 to
1998.
o Director of Accordant Health Services
Corporation, a private specialty disease
management company.
William K. Jurika, 63 o Private investor since 2001.
o Co-founder of JMK Investment Partners, LLC, an
investment company.
o Chief Executive Officer and then Chairman of the
Board until 2001 of Jurika & Voyles, Inc., an
investment management firm that Mr. Jurika
founded in 1976.
o Bachelor of Science degree in Marketing from the
University of Denver.
Albert L. Greene, 53 o Chief Executive Officer, Queen of Angels
Hollywood Presbyterian Medical Center since
January 2002.
o Chairman of the Board and Chief Executive Officer
of HealthCentral.com, an online consumer health
information and products service company, from
September 1998 to February 2001.
o Chief Executive Officer of Sutter Health East
Bay, a healthcare delivery system and the parent
company of Alta Bates Health System, from June
1996 to September 1998.
o President and Chief Executive Officer of Alta
Bates Medical Center, a 527-bed acute care
hospital located in Berkeley, California, from
May 1990 to March 1998.
o President and Chief Executive Officer of Alta
Bates Health System, the parent company of Alta
Bates Medical Center, from January 1996 to March
1998.
o Director of Sierra Health Services, a health and
worker insurance company, since April 2000.
o Masters of Hospital Administration from the
University of Michigan.
o Diplomat of the American College of Healthcare
Executives and a member of the American Hospital
Association.
o Past chair of the California Healthcare
Association.
F. Scott Gross, 57 o Private investor since January of 2002.
o Founder, President, and Chief Executive Officer
of Primus Management, Inc., a health services
management company formerly known as Alpha
Hospital Management Inc., from 1989 to December
2001.
o Director of Fountain View, Inc., a nursing home
chain, since 1999.
o Bachelor of Science degree in Biology from
California State University, Northridge.
o Masters Degree in Public Administration
(Healthcare Management Option) from the
University of Southern California.
Michael J. King, 64 o Chairman and Chief Executive Officer of
HealthScribe, Inc., a computerized medical
transcription company, since May 1999.
o Chairman of the Board of Directors and Chief
Executive Officer of The Compucare Company, a
healthcare information systems company acquired
by QuadraMed in March 1999, from 1996 to 1999.
o Director of Osprey Systems, an e-business
consulting services firm, since 1999.
o Degree in Mechanical Engineering from the
University of Sheffield.
o Master of Business Administration equivalent in
Management Studies from the University of
Hatfield.
39
Robert W. Miller, 62 o Adjunct Professor of Law, Emory University School
of Law
o Director and Audit Committee Chairman of Magellan
Health Services, Inc.
o A.B. in History from the University of Georgia
o LL.B. from the Yale Law School
Cornelius T. Ryan, 71 o Founding General Partner of Oxford Partners LP, a
Delaware limited partnership, since 1981 and of
Oxford Bioscience Partners, LP, since 1991.
Oxford is a venture capital firm specializing in
life sciences, currently managing over $800
million in committed capital.
o Bachelor of Commerce in Economics from the
University of Ottawa.
o Master of Business Administration from the
Wharton School of Business, University of
Pennsylvania.
In November 2002, the Company announced its intention to move its
corporate headquarters, including its accounting and finance resources, to its
facility in Reston, Virginia. Such a move has not yet occurred, and no date
has been set to complete it nor will such a date be set until the Company is
confident that the transition can be made without disrupting its control,
reporting and disclosure capabilities. The Company does not anticipate that the
transition will take place prior to the filing of its 2003 Form 10-K.
Nevertheless the Company believes it is in its long term best interests to
consolidate its headquarters in Reston. Charles J. Stahl, the Company's
current Chief Financial Officer, has indicated that he does not intend to
relocate to Reston. Given Mr. Stahl's position, the Company will employ John
Wright as an Executive Vice President. Mr. Wright will join the Company later
this year. It is the Company's intention that Mr. Wright will succeed Mr. Stahl
as CFO, concurrent with the Company's move to Reston. In the interim, Mr.
Wright will, among other things, work with Mr. Stahl to ensure the stability of
the Company's accounting and finance resources and the development of a smooth
transition plan. Mr. Wright, 55, is a Certified Public Accountant and spent
most of his career as a partner with Ernst & Young. He has been serving as a
consultant to the Audit Committee of the Board since January of 2003 to the
Company since July of 2003.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
QuadraMed's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of QuadraMed's equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership
of QuadraMed's equity securities. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish QuadraMed with copies of
all Section 16(a) reports their file. Based solely on its review of the copies
of such forms received by it, or written representation from certain reporting
persons that no Forms 5 were required for those persons, QuadraMed believes
that all reporting requirements under Section 16(a) for the fiscal year ended
December 31, 2002, were met in a timely manner by its directors, executive
officers, and greater than ten percent (10%) beneficial owners.
Item 11. Executive Compensation
- ------- ----------------------
The following tables show, for the last three fiscal years, compensation
information for QuadraMed's Chief Executive Officer and the next four most
highly compensated executives. Other tables that follow provide more detail
about the specific type of compensation. Each of these officers is referred to
as a "named executive officer".
40
Annual Compensation Long Term Compensation
------------------------------------- --------------------------------------
Other Restricted Securities 401(k)
Name and Principle Fiscal Salary Bonus Compensation Stock Awards Underlying Compensation
Position Year ($)(1) ($)(2) ($) ($)( 3) Options(#) ($)(4)
- ----------------------- ---- ---- ---- --- ----- --------- ----
Lawrence P. English (5) 2002 407,500 250,000 -- -- 110,000 4,000
CHAIRMAN OF THE BOARD 2001 400,000 200,000 -- 360,000 -- 46,886 (6)
AND CHIEF EXECUTIVE 2000 222,820 -- -- -- 1,000,000 708
OFFICER
Michael S. Wilstead 2002 285,000 113,125 -- 62,090 40,000 4,000
PRESIDENT AND CHIEF 2001 237,083 111,625 -- 367,000 100,000 3,400
OPERATING OFFICER 2000 226,250 50,000 -- -- 126,700 --
Mark N. Thomas (7) 2002 285,000 111,250 -- 285,840 40,000 4,000
CHIEF FINANCIAL OFFICER 2001 250,000 278,500 -- 180,000 -- 3,400
2000 135,416 -- 2,987 (8) -- 350,000
Michael H. Lanza (9) 2002 215,000 61,875 2,200 (13) -- 21,675 4,000
EXECUTIVE VICE PRESIDENT 2001 221,250 108,975 109,180 (10) 180,000 -- 8,300(11)
2000 61,250 -- -- -- 200,000 1,650
Dean A. Souleles (12) 2002 202,500 87,500 111,045 (14) -- 55,000 4,000
EXECUTIVE VICE PRESIDENT 2001 180,000 63,250 -- 180,000 -- 3,400
2000 142,119 -- -- -- 100,000 1,650
- -----------------------------------
(1) If approved by the Compensation Committee, selected executive officers may
elect to apply from $10,000 to $50,000 of their annual base salary to a
special option grant under the Salary Investment Option Grant Program of
Article Three of the 1996 Stock Incentive Plan (1996 Plan). There were no
executive officers selected for the program by the Compensation Committee
in 2001. In 2002 Mike Lanza opted to have $10,000 salary deferred to
purchase common stock. He received 1,675 shares at the strike price of
$2.983 for a total compensation of $225,000. When approved, the features
of the special option are:
Exercise Price One-third (1/3) of the fair market value QuadraMed's
common stock, as determined by the closing price reported
on The Nasdaq Stock market on date selected by
Compensation Committee, no later than January 31 (FMV).
No. Of Shares Amount of salary elected under the Program divided by
two-thirds (2/3) of the FMV, rounded down to the next
whole share.
Vesting Equal monthly installments over 12 months.
Immediate vesting upon the named executive officer's
death or disability.
Immediate vesting upon the occurrence of a Corporate
Transaction or a Change of Control.
Term 10 years.
(2) Bonus payments in each year were made pursuant to the preceding year's
Incentive Plan.
(3) The amounts shown represent the dollar value of QuadraMed common stock on
the date the restricted stock was granted. All grants of restricted stock
("Restricted Shares") were made under either the 1996 Stock Incentive Plan
or the 1999 Stock Incentive Plan. The Restricted Shares cliff vest on the
third anniversary of the grant, and are subject to forfeiture if
employment terminates before becoming fully vested and non-forfeitable.
Summary of All Outstanding Grants of Restricted Shares to name executive
officers:
o On June 8, 2001, Mr. English received a grant of 150,000 Restricted
Shares; and Messrs. Wilstead, Thomas, Lanza and Souleles each received
grants of 75,000 Restricted Shares.
o On December 13, 2001, Mr. Wilstead received a grant of 25,000 Restricted
Shares.
o On January 2, 2002, Mr. Thomas received a grant of 25,000 Restricted
Shares on February 19, 2002, Mr. Wilstead and Mr. Thomas each received a
grant of 7,000 Restricted Shares.
o As of December 31, 2002, the aggregate number of all Restricted Shares
held by each named executive officer and the dollar values of the
Restricted Shares (equal to the product of the number of Restricted
Shares multiplied by $2.62, the closing price reported by the Nasdaq
Stock Market on December 31, 2002) were as follows: Mr. English, 150,000
shares ($393,000); Mr. Wilstead 107,000 shares ($280,340); Mr. Thomas
107,000 shares ($280,340); Mr. Lanza 75,000 shares ($196,500); and Mr.
Souleles 75,000 shares ($196,500).
(4) Unless otherwise noted, amount shown is QuadraMed's annual contribution on
behalf of the named executive officer to the QuadraMed 401(k) Plan and
gain on options.
(5) Mr. English was appointed QuadraMed's Chief Executive Officer effective
June 12, 2000 and elected Chairman of the Board effective December 31,
2000.
(6) Include QuadraMed's annual contribution of $6,410 on behalf of Mr. English
to QuadraMed's 401(k) Plan, $35,801 attributable to the net increase in
Mr. English's state income tax solely related to pre-employment gross
adjusted income, and payment of professional fees of $4,675 associated
with preparation of Mr. English's personal tax returns. Although provided
in his employment agreement, Mr. English did not lease an automobile.
(7) Mr. Thomas was appointed Chief Financial Officer on June 9, 2000 and was
involuntarily terminated on December 31, 2002.
(8) Mr. Thomas, pursuant to his employment agreement, was reimbursed for
unvested 401(k) account funds from his previous employer's 401(k) plan.
(9) Mr. Lanza was appointed Executive Vice President on September 18, 2000.
(10) Mr. Lanza, pursuant to his employment agreement, was paid from a phantom
stock account created to replace options from his previous employer.
(11) Includes QuadraMed's annual contribution of $3,400 on behalf of Mr. Lanza
to QuadraMed's 401(k) Plan, and payment of $4,900 in relocation costs.
(12) Mr. Souleles joined QuadraMed in February of 2000 and was appointed Chief
Technology Officer on August 16, 2000. He continued in that capacity until
November 1, 2002 when he became Executive Vice President of the Enterprise
Division.
(13) Includes relocation income on behalf of Mr. Lanza.
(14) Represents amount of gain from exercise of options on behalf of Mr.
Souleles.
Option Grants In Last Fiscal Year
- ---------------------------------
This table shows stock options granted to named executive officers during
the 2002 fiscal year. No stock appreciation rights were granted during the
2002 fiscal year to the named executive officers. Stock options may be granted
to executive officers only under the 1996 Stock Incentive Plan.
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation For
Individual Grants Option Term($)(3)
--------------------------------------------- -------------------
% Of Total
Number of Options
Securities Granted to
Underlying Employees Exercise of
Options In Fiscal Base Price Expiration
Name Granted (1) 2001 ($/Sh) (2) Date 5% 10%
- ------------------- ----------- ---- ---------- ---- ---- ---
Lawrence P. English 110,000 6.8% $ 8.87 02/19/12 $613,612 $1,555,015
Michael S. Wilstead 40,000 2.5% 8.87 02/19/12 223,132 565,460
Mark N. Thomas 40,000 2.5% 8.87 02/19/12 223,132 565,460
Michael H. Lanza 20,000 1.2% 8.87 02/19/12 111,566 282,730
1,675 0.1% 2.98 01/02/12 3,139 7,955
Dean A. Souleles 30,000 1.9% 8.87 02/19/12 167,349 424,095
25,000 1.5% 2.67 11/05/12 41,979 106,382
- ----------------------------
(1) The option has a maximum term of ten years, subject to earlier
cancellation upon termination of the named executive officer's service
with QuadraMed. Twenty-five percent (25%) of the option shares vest on
the first year anniversary of the date of grant and the balance vests in
equal monthly installments over the next three years of service. In the
event of an acquisition of QuadraMed by merger or asset sale, the vesting
will accelerate and the option shares will become fully exercisable unless
assumed by the successor corporation.
(2) The exercise price is equal to the fair market value of QuadraMed common
stock, as determined by the closing price reported on The Nasdaq Stock
Market on the date of grant.
(3) There can be no assurance provided to the named executive officer or any
other holder of QuadraMed's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% and
10% compounded annual rates or at any other defined level. Unless the
market price of QuadraMed common stock appreciates over the option term,
no value will be realized from the option granted to the named executive
officer.
41
Aggregated Option Exercises In 2002 And Year-End Option Values
- --------------------------------------------------------------
This table provides information about stock options exercised by named
executive officers, and shows the value of unexercised stock options held by
each named executive officer as of December 31, 2002.
Number of Securities Value of Unexercised In the
Underlying Unexercised Money Options At Fiscal
Options at Fiscal Year End Year End ($) (2)
(#)
-------------------------- -------------------------
Shares
Acquired
On Value
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- --------- ----------- ----------- ------------- ----------- -------------
Lawrence P. English -- $ -- 625,000 485,000 $1,637,500 $ 982,500
Michael S. Wilstead -- -- 220,521 181,479 201,957 125,543
Mark N. Thomas -- -- 130,417 179,583 341,693 365,707
Michael H. Lanza -- -- 114,035 107,640 294,750 87,503
Dean A. Souleles 15,000 111,045 34,583 95,417 90,607 171,390
- --------------------------
(1) Calculated by subtracting the exercise price from the sale price, and
multiplying the value realized per share by the number of shares acquired
upon exercise.
(2) Calculated by subtracting the option exercise price from the closing
price of QuadraMed common stock on December 31, 2002, as reported on The
Nasdaq Stock Market, and multiplying the difference by the applicable
number of exercisable or unexercisable option shares.
42
Director Compensation
- ---------------------
QuadraMed executive officers do not receive additional compensation for
service as a director.
Compensation for non-employee directors in 2002 is shown in the following
table:
COMPENSATION 2002
- ------------ ----
Annual Retainer Fee(1) $15,000
Annual Option Grant(2) 6,000 shares
Board Meeting Attendance $ 1,500 in person
$ 1,000 by telephone
Committee Meeting Attendance $ 1,500 in person
$ 1,000 by telephone
Expenses Reasonable
Option Grant Upon First Election(3) 20,000 shares
Option Grant Upon Election as Committee Chairman (4) 20,000 shares
- ---------------------------------
(1) Non-employee directors may elect to participate in the Director Fee Option
Grant Program under QuadraMed's 1996 Stock Incentive Plan. In 2002, there
were no elections to participate in the program. This program allows non-
employee directors to apply all or a percentage of their annual retainer
fee otherwise payable in cash to a special option grant. The terms of the
special option grant are:
Exercise Price: - One-third (1/3) of the fair market value of
common stock, as determined by the closing price
reported on The Nasdaq Stock Market, on the first
trading day of January (FMV).
No. of Option
Shares: - Equal to the amount of annual retainer fee elected
divided by two-thirds (2/3) of the FMV, rounded down
to the next whole share.
Vesting: - Fifty percent (50%) on completion of six (6) months
of Board service.
- Remaining fifty-percent (50%) in six (6) equal
monthly installments thereafter.
- Immediate vesting upon director's death or
disability.
- Immediate vesting upon the occurrence of a Corporate
Transaction or Change of Control (each as defined in
QuadraMed's 1996 Stock Incentive Plan) while the
director is a Board member.
Term: - Ten (10) years.
(2) The terms of the automatic annual stock option are:
Exercise Price: - Equal to the fair market value of QuadraMed common
stock, as determined by the closing price reported on
The Nasdaq Stock Market, on the date of election.
Vesting: - Equal monthly installments over 12 months.
- Death or disability.
- Change of Control.
Term: - Ten (10) years.
(3) The terms of the stock option granted upon first election to the Board
are:
Exercise Price: - Equal to the fair market value of QuadraMed common
stock, as determined by the closing price reported on
The Nasdaq Stock Market, on the date of each annual
meeting of stockholders.
Vesting: - One-third (1/3) vests on the first anniversary of the
grant.
- Remaining two-thirds (2/3) vests in equal monthly
installments over the following twenty-four (24)
months.
- Immediate vesting upon an director's death or
disability.
- Immediate vesting upon the occurrence of a Corporate
Transaction or a Change of Control.
Term: - Ten (10) years.
(4) The terms of the stock option granted upon election as a committee
chairperson are:
Exercise Price: - Equal to the fair market value of QuadraMed common
stock, as determined by the closing price reported on
The Nasdaq Stock Market, on the date of election.
Vesting: - One-third (1/3) vests on the first anniversary of the
grant; and
- Remaining two-thirds (2/3) vests in equal monthly
installments over the following twenty-four (24)
months.
- Immediate vesting upon a director's death or
disability.
- Immediate vesting upon the occurrence of a Corporate
Transaction or a Change of Control.
Term: - Ten (10) years.
43
Employment Agreements And Termination And Change Of Control Provisions
- ----------------------------------------------------------------------
QuadraMed has employment agreements with its Chairman and CEO, Lawrence P.
English, and the other named executive officers, Michael S. Wilstead, Mark N.
Thomas, Michael H. Lanza, and Dean A. Souleles. All of these agreements are
"at will" and have similar terms and conditions as set forth in the following
table:
Term o Two years, automatically renewed unless three month's
prior notice.(1)
o One year, automatically renewed for terms of one year
unless one month's prior notice.(2)
CEO English's o Annual base rate of salary determined by the Compensation
Compensation Committee.
o Discretionary bonus target of up to 50% of annual base
rate of salary determined by the Compensation Committee.
o Enhanced cash bonus of 50% of target annual bonus to be
paid on December 31, 2003 if QuadraMed exceeds the cash
flow goals determined by the Board for 2001, 2002, and
2003 or the three year aggregate total, only if the
executive remains employed by QuadraMed.
o Additional discretionary bonuses determined by the
Compensation Committee based on achievement of specified
goals established by the Board.
o Amounts equal to the net increase in state income tax
attributable to becoming a California resident solely as
related to pre-employment gross adjusted income, as
determined by QuadraMed's independent accountants.
Other Executive o Annual base rate of salary determined by the Compensation
Officer Committee.
Compensation o Discretionary bonus target of up to 50% of annual base
rate of salary determined by the Compensation Committee.
o Enhanced cash bonus of 50% of target annual bonus to be
paid on December 31, 2003, if QuadraMed exceeds the cash
flow goals determined by the Board for 2001, 2002, and
2003 or the three year aggregate total, only if the
executive remains employed by QuadraMed.
o Additional discretionary bonuses determined by the
Compensation Committee based on achievement of specified
goals established by the Board.
o Amounts paid in consideration of lost compensation and
other benefits from previous employers as a consequence of
joining QuadraMed.(3)(4)
Benefits o Participation in group life, medical, and dental
insurance. o Accidental death and dismemberment plan.
o Other employee benefits, including 401(k) plan, profit
sharing, stock purchase and option plans.
- --------------------------
(1) Provided in Mr. English's agreement, dated and effective June 12, 2000,
and amended September 20, 2001; in Mr. Thomas' agreement, dated May 12,
2000, and effective June 9, 2000, and amended September 20, 2001; and in
Mr. Wilstead's agreement, dated and effective April 1, 1999, and amended
September 20, 2001.
(1) Provided in Mr. Lanza's agreement, dated and effective September 18,
2000, and amended September 19, 2001; and in Mr. Souleles' agreement,
dated and effective August 16, 2000, and amended September 12, 2001.
(2) Mr. Thomas, pursuant to his agreement, was paid $22,987 for unvested
401(k) funds from his previous employer.
(4) Mr. Lanza, pursuant to his agreement, received an unfunded and unsecured
phantom stock account of 95,293 QuadraMed shares with an initial value of
$1.50 for unvested options from his previous employer. Mr. Lanza is to
be paid, based on the closing price of QuadraMed's two business days
prior, the value of the following number of phantom shares on the
following dates: 43,672 on February 25, 2001; 29,306 on February 26,
2002; and 22,315 on February 23, 2003. Appropriate adjustments are to be
made to the phantom stock account if there is a stock split,
reclassification, or similar occurrence.
44
(Continued)
Vacation o Four weeks.
Options o Issued pursuant to QuadraMed's 1996 Stock Incentive
Plan.(5)
Expenses o Customary, ordinary, and necessary business expenses.
o Relocation. (6)(7)
o Preparation of personal tax returns.(8)
o Automobile lease.(9)
Termination for o Acts of fraud, embezzlement, or misappropriation of
Cause proprietary information, trade secrets, or confidential
information.
o Failure to adhere to QuadraMed policies.
o Failure to devote full working time and effort to
performance of duties.(10)
Change of Control o Merger or acquisition in which QuadraMed is not the
surviving entity.
o Stockholder approved sale, transfer, or disposition of all
or substantially all of QuadraMed's assets.
o Transfer of substantially all of QuadraMed's assets
pursuant to a partnership or joint venture in which
QuadraMed's interest is less than 50%.
o Reverse merger in which QuadraMed is the surviving entity
but in which more than 50% of QuadraMed's shares are
transferred.
o Change in ownership such that one person or entity becomes
beneficial owner of more than 50% of QuadraMed's shares.
o Majority of the Board is replaced in a 12-month period by
Directors not endorsed by the majority of the existing
Board.
Involuntary o Termination not for cause.
Termination o Involuntary discharge or dismissal.
o Failure to renew employment agreement.
o Material reduction in responsibilities.
CEO English's o Two times then current annual base salary.
Severance on o Acceleration of unvested options so that at least 250,000
Involuntary shares will be vested and exercisable as of the date
Termination of termination.
Other Than o Gross up payment if any severance payment is subject
in Connection to excise tax under Section 4999 of Internal Revenue Code.
with a Change o Severance conditioned on complete and unconditional
of Control release.
(5) Pursuant to their respective agreements, Mr. English was granted an option
to purchase 1,000,000 shares; Mr. Thomas was granted an option to purchase
200,000 shares; Mr. Lanza was granted an option to purchase 200,000
shares; and Mr. Souleles was granted an option to purchase 80,000 shares.
(6) Mr. English, pursuant to his agreement, was entitled to reasonable
relocation costs.
(7) Mr. Lanza, pursuant to his agreement, was entitled to reasonable
relocation costs up to $65,000.
(8) Mr. English, pursuant to his agreement, is entitled to reimbursement for
expenses associated with the preparation of his personal tax returns.
(9) Mr. English, pursuant to his agreement, is entitled to reimbursement of up
to $750 per month for an automobile lease. Mr. English, however, did not
seek reimbursement for this expense in 2001.
(10) Mr. English, pursuant to his agreement, is permitted to serve as a member
of up to three outside boards of directors.
45
(Continued)
CEO English's o Two times then current annual base salary and annual
target bonus. o Gross up payment if any severance payment is subject to
Severance on excise tax under Section 4999 of Internal Revenue Code.
Change of Control o To extent not assumed by the acquiring company,
Or acceleration of all unvested options, which terminate
Involuntary pursuant to the terms of the grant.
Termination Within o Acceleration of unvested options and restricted stock.
24 Months of a o In lieu of other severance, Mr. English may voluntarily
Change of Control terminate his employment, contingent on continued
employment for a minimum of 60 days, whereupon one-half of
unvested options shall accelerate and, together with all
vested options, remain exercisable for the full term of
the option.
Other Executive o One times then current annual base salary.(11)
Officer Severance o One year of life, health, and disability plan coverage.
On Involuntary o Acceleration of unvested options, restricted stock, and
Termination Other phantom stock.
Than in Connection o Gross up payment if any severance payment is subject to
With a Change of excise tax under Section 4999 of Internal Revenue Code.
Control o Severance conditioned on complete and unconditional
release.
Other Executive o One times then current annual base salary and annual
Officer Severance target bonus.
On Change of o Two years of life, health, and disability plan coverage.
Control Or o To extent not assumed by the acquiring company,
Involuntary acceleration of all unvested options.
Termination o Gross up payment if any severance payment is subject
within 24 months to excise tax under Section 4999 of Internal Revenue Code.
of a Change of
Control
(11) Mr. Thomas pursuant to his agreement is also entitled to a bonus
payment equal to forty percent (40%) of his then current annual base
salary.
Compensation Committee Interlocks And Insider Participation
- -----------------------------------------------------------
Messrs. Ryan and Grass were directors and members of the Compensation Committee
during the last fiscal year. None of the members of the Compensation Committee
has ever been an officer or employee of QuadraMed Corporation or any of its
subsidiaries.
46
Compensation Committee Report On Executive Compensation
- -------------------------------------------------------
QuadraMed's Compensation Committee establishes general executive
compensation policies and reviews and determines the salaries, bonuses, and
discretionary option grants awarded to QuadraMed's executives, including the
Chief Executive Officer.
The Compensation Committee retained an independent compensation consulting
firm in 2002 to provide advice on executive compensation matters and provide it
with the following:
o Comparative executive compensation information, including salary, bonus,
and option data for companies similar to QuadraMed and that compete with
QuadraMed for executive talent.
o Specific recommendations to maintain QuadraMed's executive compensation at
levels competitive with the marketplace.
The following table summarizes the key policies, factors, and other
compensation information that the Compensation Committee used in determining
2002 executive compensation, including that of the Chief Executive Officer:
Policies o Provide competitive compensation to attract and retain
highly-skilled executives.
o Align and tie executive personal performance to
QuadraMed's financial performance through the use of
variable and long-term incentive awards.
Executive o Annual base salary, tied to the Compensation Committee's
Compensation evaluation of personal executive performance
Elements and the competitive marketplace for comparable executives.
o Variable incentive awards, tied to achievement of
QuadraMed's financial goals set at the beginning of the
fiscal year and evaluation of personal executive
contribution.
o Long-term equity-based incentive awards, tied to aligning
the interests of executive officers with stockholders'
interests.
2001 Factors o Contribution margin targets set by the Board.
o Improvement of management processes.
o Development of long-term corporate business, research
and development, and financial strategies.
o Improved communication with customers, the investment
community, and the Board.
With regard to the compensation of the Chief Executive Officer, the
Compensation Committee evaluated QuadraMed's contribution margins and Mr.
English's performance on a variety of matters, including improvement of
management processes, reduction in expenses, strengthening of the management
team, increase in revenues, development of long-term corporate business and
financial strategies, and improved communication with customers, the investment
community, and the Board.
Pursuant to Section 162(m) of the Internal Revenue Code, QuadraMed is not
allowed a tax deduction for non-performance based compensation paid to an
executive officer in excess of $1 million in any fiscal year. Non-performance
based compensation paid to a QuadraMed executive officer in 2002 did not exceed
this limitation and it is unlikely that this limitation will be exceeded in the
foreseeable future. Consequently, the Compensation Committee has decided not to
take any action to limit or restructure the elements of cash compensation
payable to QuadraMed's executive officers. This decision will be reconsidered,
however, should the non-performance based compensation of any executive officer
ever approach the $1 million level.
The Board did not modify or reject any Compensation Committee action or
recommendation regarding executive compensation for the 2002 fiscal year.
Compensation Committee:
Cornelius T. Ryan, Chairman
F. Scott Gross
47
Performance Graph
- -----------------
The following chart, produced by Research Data Group, depicts QuadraMed's
performance for the period beginning on December 31, 1997, and ending December
31, 2002, as measured by total stockholder return on the common stock compared
with the total return of the Nasdaq Stock Market (U.S.) Index and the Nasdaq
Computer and Data Processing Index. Upon request, QuadraMed will furnish
stockholders a list of the component companies of such indexes.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)
AMONG QUADRAMED CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
[GRAPHIC DEPICTING COMPARATIVE CUMULATIVE TOTAL RETURN SHOWN HERE]
(1) $100 invested on 12/31/97 in stock or index-including reinvestment of
dividends.
Fiscal year ending December 31.
Data points used to develop cumulative total return comparison:
12/97 12/98 12/99 12/00 12/01 12/02
----- ----- ----- ----- ----- -----
QuadraMed Corporation 100.00 74.55 31.71 2.96 30.73 9.53
Nasdaq Stock Market (U.S.) 100.00 140.99 261.49 157.77 125.23 86.58
Nasdaq Computer & Data Processing 100.00 178.39 392.44 180.62 145.45 100.30
Notwithstanding anything to the contrary set forth in any of QuadraMed's
previous filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934 that might incorporate future filings made by QuadraMed under those
statutes, the preceding Report of the Compensation Committee of the Board of
Directors on Executive Compensation and QuadraMed's Stock Performance Graph
will not be incorporated by reference into any of those prior filings, nor will
such report or graph be incorporated by reference into any future filings made
by QuadraMed under those statutes.
48
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The following table shows how much QuadraMed common stock is directly and
beneficially owned by:
o Each nominee for director, QuadraMed's Chief Executive Officer, and the
next four most highly compensated executive officers other than the Chief
Executive Officer;
o The nominees for director, the Chief Executive Officer, and all QuadraMed
executive officers as a group;
o The total number of shares and percent of ownership for each named officer
includes shares of QuadraMed common stock that he has the right to acquire on
or before September 18, 2003, which are deemed to be outstanding, but not
deemed to be outstanding for the purposes of computing the number of shares
beneficially owned and percent of outstanding common stock of any other named
person; and
o The beneficial ownership percentages have been calculated based on
27,530,502 shares of common stock outstanding on July 20, 2003.
Number of Right to
Name Shares Owned Acquire Total %
- -------------------------- ------------ ------- ----- --
Lawrence P. English (1)(2) 100,000 809,792 909,792 3.3
Joseph L. Feshbach (1) 20,000 49,732 69,732 *
Albert L. Greene (1) -- 45,500 45,500 *
F. Scott Gross (1) -- 52,565 52,565 *
William K. Jurika (1) 3,806,040 -- 3,806,040 13.8
Michael J. King (1) -- 198,817 198,817 *
Robert W. Miller (1) -- -- -- *
E.A. Roskovensky (1) 2,900 44,070 46,970 *
Cornelius T. Ryan (1) 5,000 74,681 79,681 *
Dean A. Souleles (2) -- 59,375 59,375 *
Charles J. Stahl (2) -- 37,500 37,500 *
Michael S. Wilstead (2) 2,500 273,333 275,833 1.0
--------- --------- --------- -----
All directors and executive
officers as a group (12) 3,933,540 1,601,295 5,534,835 20.1
========= ========= ========= ====
(1) Directors
(2) Executive officers
* Less than 1%
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Lawrence P. English, QuadraMed's Chairman and Chief Executive Officer, is
a director of Curative Health Services, Inc., and serves as Chairman of its
Executive Committee and as a member of its Audit Committee. Joseph L.
Feshbach, a QuadraMed director, is the Chairman of the Board of Curative Health
Services, Inc.
Joseph L. Feshbach, elected to QuadraMed's Board in August 2001, provided
consulting and advisory services to QuadraMed related to the development of
financial and merger and acquisition strategies from April to August 2001. For
these services, Mr. Feshbach was paid $25,000 and received an option to
purchase 20,000 shares of the Company's common stock at an exercise price of
$2.42, which vested fully on July 31, 2001. Mr. Feshbach exercised this option
on December 6, 2001 at a trade price of $8.30 and was attributed with $117,600
in income as a result of the exercise.
Michael J. King, a QuadraMed director, is a former officer of QuadraMed
and was President of Compucare, acquired by QuadraMed in 1999. He is the Chief
Executive Officer of Healthscribe, Inc. ("Healthscribe"), a provider of
transcription services. Prior to Mr. King's appointment as Healthscribe's CEO,
49
QuadraMed entered into a subcontract with Healthscribe for transcription
services at a healthcare facility managed by QuadraMed. At the end of March
2001, this subcontract was terminated and the healthcare facility managed by
QuadraMed contracted directly with Healthscribe for services. In the years
ended December 31, 2001 and 2000, QuadraMed paid Healthscribe a total of
$300,000 and $1.3 million, respectively.
Item 14. Controls and Procedures
- ------- -----------------------
Our Chief Executive Officer and Chief Financial Officer, with the
participation of our management evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13(a)-14(c), and 15(d), which became
effective August 29, 2002) as of a date (the "Evaluation Date") within 90 days
prior to the filing date of this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the controls and
other procedures they designed to ensure that information required to be
disclosed in the reports we file or submit under the Act are accumulated and
communicated to them as appropriate to allow timely decisions regarding
required disclosures, were effective.
Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our Internal Controls as of the Evaluation Date and concluded
that our current practices and procedures, albeit not as mature or as formal as
management intends them to be in the future, are appropriate under the
circumstances. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems no evaluation of controls can provide absolute assurance that all
control issues within a company have been detected. No significant changes
were made to our internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation.
In addition, our Chief Executive Officer and Chief Financial Officer and
Audit Committee are aware of conditions that are considered to be reportable
conditions in internal controls under standards established by the American
Institute of Certified Public Accountants. These reportable conditions allowed
errors to go undetected in some of our 2002 internal financial statements and
in our previously issued consolidated financial statements reported in our 2001
10-K and March 31, 2002 10-Q. The 2001 10-K/A was filed in June 2003 and the
March 31, 2002 10Q/A was filed in August 2003 to correct these errors in our
previously issued consolidated financial statement.
The aforementioned weaknesses our internal controls pertain to the
following areas:
o Revenue recognition, billings, collections and allowances;
o Formal policies and procedures for significant transactions;
o Timely analysis and reconciliation of general ledger accounts; and
o Depth of technical accounting knowledge and training.
We have implemented certain new procedures and corrective actions that
address the cited weaknesses. These corrective actions included:
o We engaged Deloitte & Touche LLP (D&T) to perform forensic analysis of the
Company's accounting records and reported results for the years 2000
through 2002. D&T's forensic analysis also covered years 1999 and prior
to the extent any items originating in earlier years impact 2000, 2001 or
2002;
o We engaged a team of accounting consultants, most of whom are CPAs with
technology industry experience, to lead the restatement effort of the
financial statements for 1999, 2000 and 2001 and the first quarter of
2002. D&T transitioned detailed work and reconciliations to this group of
professionals. These professionals filled in gaps in the financial
organization where temporary vacancy occurred. They reviewed all material
business transactions including revenue contracts, acquisitions &
dispositions of businesses, impairment of assets, accrued and actual
expenses, stockholders' equity transactions and accounting and financial
reporting thereof for 1999, 2000 and 2001 and the first quarter of 2002;
o We retained Charles Stahl, formerly an audit partner with Deloitte &
Touche, LLP, as a full-time consultant and then hired him as Executive
Vice President and Chief Financial Officer to lead the final phase of the
restatement effort and the strengthening of our internal controls; and
50
o Our Audit Committee has engaged a financial expert to advise them and
strengthen the Audit Committee's role in corporate governance.
We and the Chief Financial Officer have built a complete permanent finance
department to replace the one that was based, in part, on consultants.
51
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as a part of this Annual Report on Form
10-K:
1. Financial Statements.
The consolidated financial statements incorporated herein begin on page
F-1.
2. Financial Statement Schedule.
Reference is made to Schedule II - Valuation and Qualifying Accounts on
page S-1.
3. Exhibits. Reference is made to Item 15(c) of this Annual Report on Form
10-K.
(b) Reports filed on Form 8-K during the last quarter of the year covered by
this Annual Report on Form 10-K:
1. Form 8-K dated October 16, 2002, providing an update of the Company's
ongoing restatement activities.
2. Form 8-K dated October 22, 2002, describing an extension granted by
Nasdaq until December 16, 2002 for the Company to complete its
restatement activities.
3. Form 8-K dated December 10, 2002, providing an update of the Company's
ongoing restatement activities.
4. Form 8-K dated December 10, 2002, describing an extension request made
to Nasdaq for the company to complete its restatement activities.
5. Form 8-K dated December 13, 2002, describing the asset sales agreement
signed with Precyse Solutions, LLC on December 9, 2002.
(c) Exhibits.
The exhibits listed on the accompanying Exhibit Index or incorporated by
reference are filed as part of this Annual Report on Form 10-K.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUADRAMED CORPORATION
Date: August 15, 2003
By: /s/ Lawrence P. English
---------------------------------
Lawrence P. English
Chairman of the Board
Chief Executive Officer
Date: August 15, 2003
By: /s/ Charles J. Stahl
---------------------------------
Charles J. Stahl
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the date indicated:
Signatures Title Date
---------- ----- ----
/s/ Lawrence P. English Chairman of the Board and Chief August 15, 2003
- --------------------------- Executive Officer (Principal
Lawrence P. English Executive Officer)
/s/ Charles J. Stahl Chief Financial Officer August 15, 2003
- --------------------------- (Principal Financial and
Charles J. Stahl Accounting Officer)
/s/ Joseph L. Feshbach Director August 15, 2003
- ---------------------------
Joseph L. Feshbach
/s/ Albert L. Greene Director August 15, 2003
- ---------------------------
Albert L. Greene
/s/ F. Scott Gross Director August 15, 2003
- ---------------------------
F. Scott Gross
/s/ William Jurika Director August 15, 2003
- ---------------------------
William Jurika
/s/ Michael J. King Director August 15, 2003
- ---------------------------
Michael J. King
/s/ Robert W. Miller Director August 15, 2003
- ---------------------------
Robert W. Miller
/s/ Cornelius T. Ryan Director August 15, 2003
- ---------------------------
Cornelius T. Ryan
53
EXHIBIT INDEX
-------------
2.1 Securities Purchase Agreement dated September 28, 2000, by and between
QuadraMed Corporation, QuadraMed Operating Corporation, and investors
whose names and addresses are set forth on Schedule I thereto. (13)
2.1 Securities Purchase Agreement dated as of May 5, 2000, by and among
QuadraMed Corporation, QuadraMed Operating Corporation, Certain Investors
and ChartOne, Inc. (9)
2.2 Asset Contribution Agreement dated as of May 3, 2000, by and among
QuadraMed Corporation, QuadraMed Operating Corporation and ChartOne, Inc.
2.3 Asset Purchase Agreement, by and among, QuadraMed Corporation, QuadraMed
Operating Corporation, OAO Technology Solutions, Inc., and OAO
Transaction, LLP, dated as of August 16, 2001. (15)
3.4 Amended and Restated Bylaws of QuadraMed. (1)
3.5 Third Amended and Restated Certificate of Incorporation of QuadraMed. (5)
3.6 Amended and Restated Certificate of Incorporation of QuadraMed, amended
January 28, 2002.
4.1 Reference is made to Exhibits 3.4 and 3.5. (1) (5)
4.2 Form of Common Stock certificate. (1)
4.3 Securities Purchase Agreement, dated as of April 17, 2003, among
QuadraMed Corporation and certain investors listed on the signature pages
attached thereto.*
4.24 Form of Note.*
4.25 Warrant Agreement dated as of April 17, 2003, by and between QuadraMed
Corporation and The Bank of New York, as warrant agent.*
4.26 Indenture, date as of April 17, 2003, between QuadraMed Corporation and
the Bank of New York, as trustee.*
4.27 Registration Rights Agreement, dated as of April 17, 2003, among
QuadraMed, the investors listed on the signature pages thereto, and
Philadelphia Brokerage Corporation.*
4.28 Security Agreement, dated as of April 17, 2003, made by QuadraMed
Corporation in favor of The Bank of New York, as collateral agent.*
4.11 Form of Warrant to Purchase Common Stock. (1)
4.12 Registration Rights Agreement dated December 5, 1996, by and between
QuadraMed and the investors listed on Schedule A thereto. (2)
4.14 Registration Rights Agreement, dated as of June 5, 1998, by and among
QuadraMed Corporation and the stockholders of Pyramid Health Group, Inc.
named therein. (3)
4.15 Subordinated Indenture, dated as of May 1, 1998, between QuadraMed and
The Bank of New York. (4)
4.16 Officers' Certificate delivered pursuant to Sections 2.3 and 11.5 of the
Subordinated Indenture. (4)
4.17 Registration Rights Agreement dated April 27, 1998, by and among
QuadraMed and the Initial Purchasers named therein. (4)
4.18 Form of Global Debenture. (4)
4.19 Form of Certificated Debenture. (4)
4.21 Registration Rights Agreement dated December 23, 1998, by and between
QuadraMed and the shareholders listed therein. (7)
4.22 Registration Rights Agreement, dated as of March 3, 1999, by and among
QuadraMed Corporation and the stockholders of The Compucare Company named
therein. (6)
10.1 1996 Stock Incentive Plan of QuadraMed. (l)
10.2 1996 Employee Stock Purchase Plan of QuadraMed. (1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan. (1)
10.4 Form of Indemnification Agreement between QuadraMed and its directors and
executive officers. (1)
10.5 1999 Supplemental Stock Option Plan for QuadraMed. (14)
10.64 Separation Agreement dated June 12, 2000, between James D. Durham and
QuadraMed. (11)
10.65 Separation Agreement dated June 12, 2000, between John V. Cracchiolo and
QuadraMed. (11)
10.66 Employment Agreement dated June 12, 2000, between Lawrence P. English and
QuadraMed. (11)
10.67 Employment Agreement dated May 12, 2000, between Mark Thomas and
QuadraMed. (11)
10.67 Employment Agreement dated August 16, 2000, between Dean Souleles and
QuadraMed.
10.68 Employment Agreement dated September 18, 2000, between Michael H. Lanza
and QuadraMed. (12)
10.69 Employment Agreement dated January 7, 2001, between Peter van der Grinten
and QuadraMed.
23.1 Consent of BDO Seidman, LLP, Independent Public Accountants.
23.2 Consent of Pisenti & Brinker, LLP, Independent Public Accountants.
24.1 Power of Attorney (set forth in the signature page hereto).
31.1 Chief Executive Officer Certification.
31.2 Chief Financial Officer Certification.
32.1 Chairman and Chief Executive Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section
1350, Chapter 63 of title 18, United States Code).
32.2 Chief Financial Officer Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of title 18, United States Code).
- -------------------------------
(1) Incorporated herein by reference from the exhibit with the same number to
our Registration Statement on Form SB-2, No. 333-5l80-LA, as filed with
the Commission on June 28, 1996, as amended by Amendment No. l, Amendment
No. 2 and Amendment No. 3 thereto, as filed with the Commission on July
26, 1996, September 9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, as
filed with the Commission on August 14, 1997, as amended September 4,
1997.
(3) Incorporated by reference from our Current Report on Form 8-K, as filed
with the Commission on June 11, 1998.
54
(4) Incorporated by reference from our Registration Statement on Form S-3,
No. 333-55775, as filed with the Commission on June 2, 1998, as amended
by Amendment No. 1 thereto, as filed with the Commission on June 17,
1998.
(5) Incorporated by reference from the exhibit with the same number to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
filed with the Commission on August 14, 1998, as amended on August 24,
1988.
(6) Incorporated herein by reference from our Current Report on Form 8-K
filed with the Commission on March 22, 1999.
(7) Incorporated herein by reference from our Registration Statement on Form
S-3, No. 333-80617, as filed with the Commission on June 14, 1999, as
amended by Amendment No. l thereto, as filed with the Commission on
August 4, 1999.
(8) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
as filed with the Commission on May 17, 1999.
(9) Incorporated herein by reference from exhibit with the same number to our
Current Report on Form 8-K filed with the Commission on June 22, 2000.
(10) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as
filed with the Commission on August 16, 1999.
(11) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as
filed with the Commission on August 14, 2000.
(12) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, as filed with the Commission on November 15, 2000.
(13) Incorporated herein by reference from the exhibit with the same number to
our Current Report on Form 8-K filed with the Commission on November 6,
2000.
(14) Incorporated herein by reference from our annual report on Form 10-K, as
filed with the Commission on March 30, 2000, as amended by May 1, 2000.
(15) Incorporated herein by reference from our Current Report on Form 8-K, as
filed with the Commission on August 21, 2001.
* Incorporated by reference from our Current Report on Form 8-K filed with
the Commission on April 30, 2003
55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of QuadraMed Corporation:
The audit referred to in our report dated August 1, 2003, relating to the
consolidated financial statements of QuadraMed Corporation, which is contained
in Item 15 of this Form 10-K, included the audit of the financial statement
schedule listed in the index at Item 15.(a)2. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, the financial statement schedule as of and for the year
ended December 31, 2002, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
San Jose, California
August 1, 2003
S-1
QUADRAMED CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions Additions
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
Description Year Expenses Accounts Deductions Year
- --------------------------------- ---- -------- -------- ---------- ----
Year ended December 31, 2000:
Allowance for doubtful accounts $ 2,669 $ 7,234 -- $ (6,437) $ 3,466
Year ended December 31, 2001:
Allowance for doubtful accounts $ 3,466 $ 2,090 -- $ (1,317) $ 4,239
Year ended December 31, 2002:
Allowance for doubtful accounts $ 4,239 $ 1,403 -- $ (1,296) $ 4,346
S-2
QUADRAMED CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants............................... F-2
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) and
Comprehensive Income (Loss)........................................... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheet of QuadraMed
Corporation (a Delaware corporation) and its subsidiaries as of December 31,
2002, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and comprehensive income (loss), and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation and its subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, in fiscal
2002 the Company changed its method for accounting for reimbursable out of
pocket expenses to conform with Emerging Issues Task Force Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for Out of Pocket
Expenses Incurred.
As discussed in note 3 to the consolidated financial statements, in fiscal
2002 the Company changed its method for accounting for goodwill and other
intangible assets to conform to Statement of Financial Standards No. 142,
Goodwill and Other Intangible Assets.
/s/ BDO Seidman, LLP
------------------------------
BDO Seidman, LLP
San Jose, California
August 1, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of QuadraMed
Corporation and its subsidiaries (the "Company") as of December 31, 2001, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and comprehensive income (loss), and cash flows for each of
the years in the two-year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the Company's financial position as
of December 31, 2001, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Pisenti & Brinker LLP
--------------------------------
PISENTI & BRINKER LLP
Petaluma, California
March 28, 2003 (May 15, 2003 as to the first paragraph of note 25)
F-3
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
---------------------------
ASSETS 2002 2001
---- ----
Current assets
Cash and cash equivalents $ 23,663 $ 29,799
Short-term investments 2,528 2,414
Accounts receivable, net of allowance for
doubtful accounts of $4,346 and $4,239,
respectively 31,612 33,165
Unbilled receivables 3,475 3,825
Notes and other receivables 4,416 282
Prepaid expenses and other current assets 8,972 7,285
--------- ---------
Total current assets 74,666 76,770
--------- ---------
Restricted cash 5,849 4,356
Property and equipment, net of accumulated
depreciation and amortization of $16,170 and
$12,634, respectively 6,019 7,323
Capitalized software development costs, net of
accumulated amortization of $7,776 and $6,511
respectively 5,670 6,214
Goodwill 18,445 14,721
Other intangible assets, net of accumulated
amortization of $13,316 and $10,784, respectively 9,275 8,634
Other long-term assets 7,003 7,115
--------- ---------
Total assets $ 126,927 $ 125,133
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 3,586 $ 893
Accrued payroll and related 6,942 6,402
Other accrued liabilities 6,509 6,245
Deferred revenue 39,492 30,721
--------- ---------
Total current liabilities 56,529 44,261
--------- ---------
Convertible subordinated debentures 73,719 73,719
Other long-term liabilities 3,914 2,932
--------- ---------
Total liabilities 134,162 120,912
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $0.01 par, 5,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par, 50,000 shares authorized,
26,965 and 26,493 shares issued and outstanding,
respectively 205 201
Additional paid-in-capital 275,631 273,384
Deferred compensation (588) (1,085)
Accumulated other comprehensive loss (310) (468)
Accumulated deficit (282,173) (267,811)
--------- ---------
Total stockholders' equity (deficit) (7,235) 4,221
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 126,927 $ 125,133
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Revenue
Services $ 76,804 $ 82,477 $ 92,399
Licenses 32,781 34,569 28,613
-------- -------- --------
Total revenue 109,585 117,046 121,012
-------- -------- --------
Cost of revenue
Cost of services 36,098 34,104 54,846
Cost of licenses 9,130 8,673 7,118
-------- -------- --------
Total cost of revenue 45,228 42,777 61,964
-------- -------- --------
Gross margin 64,357 74,269 59,048
-------- -------- --------
Operating expenses
General and administration 41,149 35,707 57,036
Sales and marketing 21,551 20,710 23,767
Research and development 17,154 14,371 24,573
Amortization, impairment and other
operating charges 3,108 9,069 11,137
-------- -------- --------
Total operating expenses 82,962 79,857 116,513
-------- -------- --------
Loss from operations (18,605) (5,588) (57,465)
-------- -------- --------
Other income (expense)
Interest expense (3,461) (4,741) (6,504)
Interest income 696 2,034 2,139
Gain on sale of assets 1,500 7,088 27,196
Other income (expense), net (988) 402 (4,103)
-------- -------- --------
Other income (expense) (2,253) 4,783 18,728
-------- -------- --------
Loss from continuing operations before income
taxes and extraordinary item (20,858) (805) (38,737)
Provision for income taxes -- (150) (617)
-------- -------- --------
Loss from continuing operations before
extraordinary item (20,858) (955) (39,354)
Gain on redemption of debentures -- 12,907 --
-------- -------- --------
Income (loss) from continuing operations (20,858) 11,952 (39,354)
Income (loss) from discontinued operations
(net of income taxes) (2,280) (2,539) 2,679
Gain on disposal of discontinued operations 8,776 -- --
-------- -------- --------
Net income (loss) $(14,362) $ 9,413 $(36,675)
======== ======== ========
Income (loss) per share
Basic
Continuing before extraordinary item and
discontinued operations $ (0.77) $ (0.03) $ (1.53)
Extraordinary item -- 0.50 --
-------- -------- --------
Continuing operations (0.77) 0.47 (1.53)
Discontinued operations 0.24 (0.10) 0.10
-------- -------- --------
Net $ (0.53) $ 0.37 $ (1.43)
======== ======== ========
Diluted
Continuing before extraordinary item and
discontinued operations $ (0.77) $ (0.03) $ (1.53)
Extraordinary item -- 0.50 --
-------- -------- --------
Continuing operations (0.77) 0.47 (1.53)
Discontinued operations 0.24 (0.10) 0.10
-------- -------- --------
Net $ (0.53) $ 0.37 $ (1.43)
======== ======== ========
Weighted average shares outstanding
Basic 26,915 25,566 25,623
======== ======== ========
Diluted 26,915 25,566 25,623
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Additional Other Total Other
Paid-in Deferred Comprehensive Accumulated Stockholders' Comprehensive
Common Stock Capital Compensation Income (Loss) Deficit Equity(Deficit) Income (Loss)
-------------
Shares Amount
--------------- ------- ------------ ------------- ------- --------------- -------------
December 31, 1999 25,319 $ 187 $ 270,691 $ (2,530) $ (287) $ (240,549) $ 27,512 $ (47,518)
Issuance of common stock through
Employee Stock Purchase Plan 58 -- 488 -- -- -- 488
Amortization of restricted shares
of common stock -- -- -- 154 -- -- 154
Accelerated vesting of restricted
shares -- -- -- 1,878 -- -- 1,878
Cancellation of restricted shares -- -- (498) 498 -- -- --
Issuance of common stock for
legal expenses 79 1 78 -- -- -- 79
Exercise of common stock options 299 3 438 -- -- -- 441
Unrecognized pension costs -- -- -- -- (1,364) -- (1,364) (1,364)
Net unrealized gain on
available-for-sale securities -- -- -- -- 321 -- 321 321
Net loss -- -- -- -- -- (36,675) (36,675) (36,675)
------ ----- -------- -------- -------- ---------- -------- ---------
December 31, 2000 25,755 191 271,197 -- (1,330) (277,224) (7,166) (37,718)
Issuance of restricted shares of
common stock 475 5 1,262 (1,267) -- -- --
Amortization of restricted
shares of common stock -- -- -- 205 -- -- 205
Issuance of common stock options
to non-employees and consultants -- -- 64 (64) -- -- --
Amortization of common stock
options of non-employees and
consultants -- -- -- 41 -- -- 41
Exercise of common stock of
non-employees and consultants 60 1 105 -- -- -- 106
Compensation related to issuance
of common stock 187 2 887 -- -- -- 889
Exercise of common stock options 216 2 691 -- -- -- 693
Purchase of treasury stock (200) -- (822) -- -- -- (822)
Unrecognized pension costs -- -- -- -- 834 -- 834 834
Net unrealized gain on
available-for-sale securities -- -- -- -- 28 -- 28 28
Net income -- -- -- -- -- 9,413 9,413 9,413
------ ----- -------- -------- -------- ---------- -------- ---------
December 31, 2001 26,493 201 273,384 (1,085) (468) (267,811) 4,221 10,275
Issuance of restricted shares of
common stock 39 -- 348 (348) -- -- --
Amortization of restricted shares
of common stock -- -- -- 812 -- -- 812
Amortization of common stock
options of non-employees and
consultants -- -- -- 33 -- -- 33
Exercise of common stock options 433 4 1,899 -- -- -- 1,903
Unrecognized pension costs -- -- -- -- 137 -- 137 137
Net unrealized gain on
available-for-sale securities -- -- -- -- 21 -- 21 21
Net loss -- -- -- -- -- (14,362) (14,362) (14,362)
------ ----- -------- -------- -------- ---------- -------- ---------
December 31, 2002 26,965 $ 205 $275,631 $ (588) $ (310) $ (282,173) $ (7,235) $ (14,204)
====== ===== ======== ======== ======== ========== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income (loss) from continuing operations $(20,858) $ 11,952 $(39,354)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 9,890 11,580 14,783
Provisions for bad debts 1,403 2,090 7,234
Write-off of assets 939 3,813 5,522
Impairments of intangible assets -- -- 1,308
Gain on redemption debentures -- (12,907) --
Gain on sale of assets (1,500) (7,088) (27,196)
Non-cash settlement of litigation -- -- 79
Other 28 771 776
Changes in assets and liabilities:
Accounts receivable 1,002 (3,753) 11,134
Prepaid expenses and other (1,434) 1,105 7,624
Accounts payable and accrued liabilities 3,784 (820) (12,858)
Deferred revenue 8,039 8,808 (2,715)
-------- -------- --------
Cash provided by (used in) continuing
operations 1,293 15,551 (33,663)
Cash (used in) provided by discontinued
operations (2,275) (1,707) 3,388
-------- -------- --------
Cash (used in) provided by operating
activities (982) 13,844 (30,275)
-------- -------- --------
Cash flows from investing activities
Increase (decrease) in restricted cash (38) 1,259 (6,959)
Sales of available-for-sale securities, net 10 12,219 18,278
Sale of assets 9,800 8,124 38,449
Acquisitions of businesses, net of cash
acquired (11,930) -- --
Purchases of equipment (2,607) (2,743) (3,109)
Capitalized software development costs (1,837) (1,762) (527)
-------- -------- --------
Cash (used in) provided by investing
activities (6,602) 17,097 46,132
-------- -------- --------
Cash flows from financing activities
Repayments of debt (455) (28,489) (945)
Purchase of treasury shares -- (821) --
Proceeds from issuance of common stock 1,903 800 927
-------- -------- --------
Cash provided by (used in) financing
activities 1,448 (28,510) (18)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (6,136) 2,431 15,839
Cash and cash equivalents, beginning of period 29,799 27,368 11,529
-------- -------- --------
Cash and cash equivalents, end of period $ 23,663 $ 29,799 $ 27,368
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 3,874 $ 5,690 $ 6,072
Cash paid for taxes 207 394 418
Supplemental disclosure of non-cash investing
and financing transactions
Issuances (cancellations) of restricted
common stock $ 348 $ -- $ (498)
Issuances of common stock options to
non-employees and consultants -- 1,267 --
Release of restricted cash into
short-term investments -- 2,380 --
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
1. NATURE OF OPERATIONS
--------------------
QuadraMed Corporation along with all significant business divisions and
subsidiaries, (the "Company" or "QuadraMed") is dedicated to improving
healthcare delivery by providing innovative healthcare information technology
and services. From clinical to patient information management and revenue cycle
to health information management, QuadraMed delivers real-world solutions that
help healthcare professionals deliver outstanding patient care with optimum
efficiency. QuadraMed was reincorporated in Delaware in 1996, having been
originally incorporated in California in 1993. QuadraMed is managed in three
distinct business segments which are as follows: Enterprise Division, Health
Information Management Software Division and Financial Services Division.
2. QUADRAMED CORPORATION AND BASIS OF PRESENTATION
-----------------------------------------------
Principles of Consolidation
---------------------------
These consolidated financial statements, which include the accounts of
QuadraMed and all significant business divisions and subsidiaries, have been
prepared in conformity with (i) accounting principles generally accepted
("GAAP") in the United States; and (ii) the rules and regulations of the U.S.
Securities and Exchange Commission ("SEC"). All significant intercompany
accounts and transactions between QuadraMed and its subsidiaries are eliminated
in consolidation.
Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
We make estimates, assumptions, and judgments that affect the reported
amounts of assets and liabilities, contingent assets and liabilities, revenues,
and expenses. Significant estimates and assumptions have been made regarding
revenue recognition, the allowance for doubtful account, investments,
capitalized software, income taxes, restructuring, pensions and other benefits,
and contingencies and litigation and intangibles, primarily goodwill and
customer lists, resulting from our purchase business combinations. We base our
estimates, assumptions, and judgments on historical experience and on various
other assumptions believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Uncertainties inherent in these estimates include projections of future
operating results and the discount rates used to determine the net present
values of these future results and useful lives of the acquired assets as well
as technological advances. In addition, for our fixed-price contracts, we make
significant estimates within percentage-of-completion accounting, including
estimating total costs to be incurred as calculated on a labor hour basis. We
periodically review and test our estimates, specifically those related to the
valuations of intangibles including acquired software, goodwill, customer
lists, trademarks and other intangibles, and capitalized software. Actual
results may differ materially from these estimates.
Reclassifications
-----------------
Adoption of EITF No. 01-14
--------------------------
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform to the 2002 presentation. Specifically, the
2001 and 2000 financial statements have been reclassified to comply with
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force
("EITF") No. 01-14, Income Statement Characterization of Reimbursements for
-------------------------------------------------------
'Out-of-Pocket' Expenses Incurred. As such, QuadraMed has reclassified prior
- ---------------------------------
year amounts to include billable out-of-pocket reimbursable expenses in both
license and service revenues and cost of licenses and services, respectively.
The adoption of EITF No. 01-14 does not impact either income (loss) from
operations or net income (loss) but does increase revenue and cost of revenues
and reduces gross margin percentages as shown in the following tables:
F-8
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Year ended Year ended
December 31, 2001 December 31, 2000
--------------------------- ---------------------------
Services Licenses Total Services Licenses Total
-------- -------- ----- -------- -------- -----
Revenue
Reported revenue $82,477 $34,569 $117,046 $92,399 $28,613 $121,012
Less impact of EITF
No. 01-14 3,454 933 4,387 3,144 993 4,137
------- ------- -------- ------- ------- --------
Pro-forma revenue $79,023 $33,636 $112,659 $89,255 $27,620 $116,875
======= ======= ======== ======= ======= ========
Cost of revenue
Reported cost of
revenue $34,104 $ 8,673 $ 42,777 $54,846 $ 7,118 $ 61,964
Less impact of EITF
No. 01-14 3,454 933 4,387 3,144 993 4,137
------- ------- -------- ------- ------- --------
Pro-forma cost of
revenue $30,650 $ 7,740 $ 38,390 $51,702 $ 6,125 $ 57,827
======= ======= ======== ======= ======= ========
Gross margin percentage
Reported gross margin
percentage 58.7% 74.9% 63.5% 40.6% 75.1% 48.8%
Impact of EITF
No. 01-14 2.5 2.1 2.4 1.5 2.7 1.7
------- ------- -------- ------- ------- --------
Pro-forma gross margin
percentage 61.2% 77.0% 65.9% 42.1% 77.8% 50.5%
======= ======= ======== ======= ======= ========
Change in Classification of Certain Service and License Revenue and Related
- ---------------------------------------------------------------------------
Costs
- -----
In previously reported periods, the Company's license revenue and
associated cost of license revenue included in the Statement of Operations
consisted of fees for the licensing of the Company's software products,
hardware, maintenance, hosted services, customer training and consulting
services. In the accompanying Consolidated Statements of Operations, license
revenue and cost of license revenue for both 2001 and 2000 have been
reclassified to include only fees and costs, respectively associated with the
licensing of the Company's software products. The table below presents the
impact of the reclassification of licenses and services for the years ended
December 31, 2001 and 2000 (in thousands):
Year ended Year ended
December 31, December 31,
------------------------- --------------------------
2001 2001 2000 2000
(Reclassified) (Reclassified)
---- ------------ ---- -------------
Revenue
Services $ 26,772 $ 82,477 $ 49,665 $ 92,399
Licenses 90,274 34,569 71,347 28,613
-------- -------- -------- --------
$117,046 $117,046 $121,012 $121,012
======== ======== ======== ========
Cost of revenue
Services $ 19,295 $ 34,104 $ 34,943 $ 54,846
Licenses 23,482 8,673 27,021 7,118
-------- -------- -------- --------
$ 42,777 $ 42,777 $ 61,964 $ 61,964
======== ======== ======== ========
Restatement
-----------
In 2002, management of QuadraMed discovered accounting and reporting
errors within its Quarterly Report on Form 10-Q as filed for the three months
ended March 31, 2002 and its Annual Report on Form 10-K as filed for the years
ended December 31, 2001, 2000 and 1999. These errors resulted in management
determining that the reports for these years needed to be restated. In June
2003, QuadraMed amended and restated its 2001 Annual Report on Form
10-K/A. This report is also being filed simultaneously with the restatement of
our Quarterly Report on Form 10-Q/A for the three months ended March 31, 2002.
F-9
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Revenue Recognition - QuadraMed's revenue in the ordinary course of
-------------------
business is principally generated from two sources: (i) licensing arrangements
and (ii) services.
The Company's license revenue consists of fees for licenses of the
Company's software and hosted services. Cost of license revenue primarily
includes product, delivery and royalty costs and facilities costs. The
Company's services revenue consists of maintenance, customer training and
consulting services and fees for providing management services such as accounts
receivable and payment collection outsourcing, specialized staffing, analytical
services and seminars. Cost of services consists primarily of salaries,
benefits, and allocated costs related to providing such services, labor costs
for engineers performing implementation services and technical support and
training personnel.
QuadraMed licenses its products through its direct sales force. The
Company's license agreements for such products do not provide for a right of
return, and historically product returns have not been significant.
QuadraMed recognizes revenue on its software products in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by
-------------------------------------------
SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
- -------------------------------------------------------------------------------
to Certain Transactions; SOP 81-1, Accounting for Performance of Construction-
- ------------------------ -------------------------------------------
Type and Certain production-Type Contracts; and Staff Accounting Bulletin
- -------------------------------------------
("SAB") 101, Revenue Recognition in Financial Statements.
-------------------------------------------
QuadraMed recognizes revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations by the Company with regard to
implementation remain; the fee is fixed and determinable; and, collectibility
is probable. Delivery is considered to have occurred when title and risk of
loss have been transferred to the customer, which generally occurs when media
containing the licensed programs is provided to a common carrier. The Company
considers all arrangements with payment terms extending beyond 180 days to be
not fixed and determinable, and revenue is recognized as payments become due
from the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance, support and professional services, based on the relative
fair values of the elements specific to the Company. QuadraMed's determination
of fair value of each element in multi-element arrangements is based on vendor-
specific objective evidence ("VSOE"). The Company limits its assessment of
VSOE for each element to either the price charged when the same element is sold
separately or the price established by management, having the relevant
authority to do so, for an element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue from hosted applications is recognized
ratably over the term of the arrangement. The proportion of revenue recognized
upon delivery may vary from quarter to quarter depending upon the relative mix
of licensing arrangements and the availability of VSOE of fair value for
undelivered elements.
Certain of the Company's perpetual and time-based licenses include
unspecified additional products. QuadraMed recognizes revenue from perpetual
and time-based licenses that include unspecified additional software products
ratably over the term of the arrangement.
Contract accounting is utilized for services revenues from fixed-price
contracts and those requiring significant software modification, development or
customization. In such instances, the arrangement fee is accounted for in
accordance with SOP 81-1, whereby the arrangement fee is recognized, generally
using the percentage-of-completion method measured on labor input costs. If
increases in projected costs-to-complete are sufficient to create a loss
contract, the entire estimated loss is charged to operations in the period the
loss first becomes known. The complexity of the estimation process and
judgment related to the assumptions, risks and uncertainties inherent with the
application of the percentage-of-completion method of accounting affect the
amounts of revenue and related expenses reported in its consolidated financial
F-10
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
statements. A number of internal and external factors can affect its
estimates, including labor rates, utilization, changes to specification and
testing requirements and collectibility of unbilled receivables.
Service revenues from software maintenance and support are recognized ratably
over the maintenance term, which in most cases is one year. Service revenues
from training, consulting and other service elements are recognized as the
services are performed.
Service revenues from providing management services such as accounts
receivable and payment collection outsourcing are recognized in accordance with
SAB 101. When all criteria for revenue recognition, as noted above, have been
met, revenue is recognized upon invoicing. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
-------------------------
liquid investments that are comprised principally of taxable, short-term
certificates of deposit, money market instruments and commercial paper with
original maturities of three months or less at the time of purchase and demand
deposits with financial institutions. These instruments carry insignificant
interest rate risk because of their short-term maturities. Cash equivalents are
stated at amounts that approximate fair value based on quoted market prices.
Investments - QuadraMed considers its holdings of short-term and long-term
-----------
securities, consisting primarily of fixed income securities, to be available-
for-sale securities. The difference between cost or amortized cost (cost
adjusted for amortization of premiums and accretion of discounts that are
recognized as adjustments to interest income) and fair value, representing
unrealized holdings gains or losses, net of the related tax effect, if any, is
recorded, until realized, as a separate component of stockholders' equity.
Gains and losses on the sale of debt securities are determined on a specific
identification basis. Realized gains and losses are included in other income
(expense) in the accompanying consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts - Accounts
-------------------------------------------------------
receivable consist primarily of amounts due to the Company from its normal
business activities. The Company maintains an allowance for doubtful accounts
to reflect the expected non-collection of accounts receivable based on past
collection history and specific risks identified within the portfolio. If the
financial condition of QuadraMed's customers were to deteriorate resulting in
an impairment of their ability to make payments, or if payments from customers
are significantly delayed, additional allowances might be required.
Concentration of Credit Risk - Accounts receivable subject QuadraMed to
----------------------------
its highest potential concentration of credit risk. QuadraMed reserves for
credit losses and does not require collateral on its trade accounts receivable.
In addition, QuadraMed maintains cash, cash equivalent and investment balances
in accounts at various domestic banks and one brokerage firm. QuadraMed is
insured by the Federal Deposit Insurance Corporation for up to $100,000 at each
bank. Balances maintained at the brokerage firm are not insured.
Goodwill - In June 2001, the FASB issued Statement of Financial Accounting
--------
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective for
------------------------------------
fiscal years beginning after December 15, 2001. Under SFAS 142, goodwill and
intangible assets deemed to have indefinite lives are to be separately
disclosed on the balance sheet, and no longer amortized but subject to annual
impairment tests. With the adoption of SFAS 142, QuadraMed ceased amortization
of goodwill as of January 1, 2002. Prior to this point, goodwill was amortized
using the straight-line method over its estimated useful life.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (i.e., business segments) upon adoption and at least annually
thereafter using a two-step impairment analysis. In accordance with SFAS 142,
QuadraMed performed the first of the required two-step impairment tests of
goodwill and indefinite-lived assets as of January 1, 2002. In performing the
first step of this analysis, QuadraMed first assigned its assets and
liabilities, including existing goodwill and other intangible assets, to its
identified reporting units to determine their carrying value. For this purpose,
QuadraMed's reporting units equated to its five business segments then in
place. QuadraMed's reporting units equate to its business segments since this
is the lowest level of QuadraMed at which operating plans are prepared and
operating profitability is measured for assessing management performance. See
note 18 for more information regarding QuadraMed's business segments. Based on
an analysis by an independent third party appraiser, QuadraMed then estimated
the fair value of each reporting unit with significant goodwill utilizing
various valuation techniques including the Income Approach and the Market
Approach. The Income Approach provides an estimation of the fair value of a
F-11
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
reporting unit based on the discounted cash flows derived from the reporting
unit's estimated remaining life plus the present value of any residual value.
The Market Approach indicates the fair value of a reporting unit based upon a
comparison to publicly-traded companies in similar lines of business. Step one
of this analysis was then completed by comparing the carrying value of each
the-analyzed reporting units to its fair value. This comparison resulted in the
fair values of the analyzed reporting units exceeding the carrying values of
the net assets. Accordingly, no indicators of impairment existed. As a result,
QuadraMed did not perform step two as described by SFAS 142.
As of January 1, 2003, QuadraMed re-engaged the same independent appraiser
to review the goodwill as of this date for impairment. The result of
performing step one of this analysis resulted in the fair values of the
analyzed reporting units exceeding the carrying values of the net assets once
again. Accordingly, step two was not performed.
The following schedule shows the Company's reported net income (loss) for
periods prior to the adoption of SFAS No. 142 as adjusted to add back goodwill
amortization as if SFAS No. 142 had been adopted during the periods (in
thousands, except per share data):
Year ended December 31,
---------------------------
2001 2000
---- -----
Loss before extraordinary item $ (955) $ (39,354)
Add back: goodwill amortization 3,415 3,851
--------- ---------
Adjusted income (loss) before extraordinary item $ 2,460 $ (35,503)
========= =========
Reported net income (loss) $ 9,413 $ (36,675)
Add back: goodwill amortization 3,415 3,851
--------- ---------
Adjusted net income (loss) $ 12,828 $ (32,824)
========= =========
Basic and diluted income (loss) per share before
extraordinary item:
Reported income (loss) before extraordinary item $ (0.03) $ (1.53)
Goodwill 0.13 0.15
--------- ---------
Adjusted basic and diluted income (loss) per share
before extraordinary item $ 0.10 $ (1.38)
========= =========
Basic and diluted net income (loss) per share:
Reported net income (loss) $ 0.37 $ (1.43)
Goodwill 0.13 0.15
--------- ---------
Adjusted basic and diluted net income (loss) per
share $ 0.50 $ (1.28)
========= =========
Capitalized Software - Software development costs are capitalized upon the
--------------------
establishment of technological feasibility. In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
- -------------------------------------------------------------------------------
Marketed, QuadraMed establishes technological feasibility upon completion of a
- --------
detailed program design as specified by SFAS 86 and determined on a project-by-
project basis, which substantiates that the computer software product can be
produced in accordance with its design specifications. Software development
costs are capitalized based upon an assessment of their recoverability. This
assessment requires considerable judgment by management with respect to various
factors, including, but not limited to, anticipated future gross margins,
estimated economic lives, and changes in software and hardware technology.
Upon the general release of the product to customers, development costs for
that product are amortized over the greater of the ratio that current revenues
bear to total and anticipated future revenues for the applicable product or the
straight-line method, generally five years. These amounts are charged to cost
of licenses.
F-12
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Other Intangible Assets - Other intangible assets primarily relate to
-----------------------
acquired software, trademarks and customer lists acquired in QuadraMed's
purchase business combinations. On January 1, 2002, QuadraMed adopted the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-
--------------------------------------------------
Lived Assets, which generally requires impairment losses to be recorded on
- ------------
long-lived assets (excluding goodwill) used in operations, such as property,
equipment and improvements, and intangible assets, when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets. The
provisions of this statement did not have a significant impact on QuadraMed's
financial condition or operating results.
On an annual basis, QuadraMed reviews its intangible assets for impairment
based on estimated future undiscounted cash flows attributable to the assets in
accordance with the recently-adopted provisions of SFAS No. 144. In the event
such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets are written down to their net realizable values.
Amortization of other intangible assets totaled $2.5 million, $2.7 million and
$2.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
Other intangible assets consist of the following (in thousands):
December 31, 2002
-----------------------------------------------
Accumulated
Gross Amortization Net
----- ------------ ---
Customer lists $ 13,602 $ (7,223) $ 6,379
Acquired software 6,621 (5,059) 1,562
Other (1) 2,368 (1,034) 1,334
--------- --------- ---------
Total $ 22,591 $ (13,316) $ 9,275
========= ========= =========
- -----------------------------
(1) Other consists primarily of trade names and existing and core technology.
Segments - In 2000, QuadraMed's operations were realigned into five
--------
distinct business segments. With the sale of the EZ-CAP managed care software
business in August 2001, and the sale of the Health Information Management
Services Division in December 2002, QuadraMed is now managed in three distinct
business segments. The segment results reflected in the consolidated financial
statements have been restated to reflect the 2002 reorganization for both
current and prior year data.
The 2000 realignment was undertaken to more closely arrange products
targeted at shared markets, more accurately measure financial performance by
product/division, and establish greater management accountability. To this
end, QuadraMed further refined its operating segments during the first half of
2001 and again in the third quarter of 2001 to reflect the sale of the material
components previously included in the Physician Services segment.
Property and Equipment, net - Property and equipment are stated at cost
---------------------------
and depreciated using the straight-line method over their estimated useful
lives, which are generally three years for computer equipment and purchased
software and five years for office furnishings and equipment. Leasehold
improvements are amortized over the shorter of the term of the lease or the
useful life (generally 10 years). Maintenance and repair costs are expensed as
incurred. QuadraMed reviews property and equipment for potential impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Stock Based Compensation - SFAS 123, Accounting for Stock Based
------------------------ --------------------------
Compensation, encourages, but does not require, companies to record
- ------------
compensation cost for stock based employee compensation plans at fair value.
QuadraMed has chosen to continue to account for stock based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
------------------------------
Employees, and Related Interpretations. Accordingly, compensation cost for
- --------------------------------------
stock options granted to employees is measured as the excess, if any, of the
quoted market price of QuadraMed's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
F-13
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
QuadraMed has determined pro-forma information regarding net income and
earnings per share as if we had accounted for employee stock options under the
fair value method as required by SFAS No. 123. The fair value of these stock-
based awards to employees was estimated using the Black-Scholes option pricing
model. Please see below for assumptions used in the Black-Scholes option
pricing model. Had compensation cost for the Company's stock option plan and
employee stock purchase plan been determined consistent with SFAS No. 123, the
Company's reported net income (loss) and net earnings (loss) per share would
have been changed to the amounts indicated below (in thousands except per share
data):
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Net loss as reported $(14,362) $ 9,413 $(36,675)
Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effects 812 205 2,032
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (5,936) (2,986) (2,661)
-------- -------- --------
Pro forma net loss $(19,486) $ 6,632 $(37,304)
======== ======== ========
Earnings per share:
Basic - as reported $ (0.53) $ 0.37 $ (1.43)
Basic - pro forma $ (0.72) $ 0.26 $ (1.46)
Diluted - as reported $ (0.53) $ 0.37 $ (1.43)
Diluted - pro forma $ (0.72) $ 0.26 $ (1.46)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Expected dividend yield -- -- --
Expected stock price volatility 112.04% 109.60% 107.10%
Risk-free interest rate 2.74% 4.12% 6.51%
Expected life of options 5 years 5 years 5 years
Net Loss Per Share - Basic loss per share is determined using the weighted
------------------
average number of common shares outstanding during the period. Diluted loss
per share is determined using the weighted average number of common shares and
common equivalent shares outstanding during the period. Common equivalent
shares consist of shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and conversion of the subordinated
debentures (using the as-converted method). Common equivalent shares are
excluded from the diluted computation only if their effect is anti-dilutive.
As QuadraMed recorded a net loss for each of the years ended December 31,
2002, 2001 and 2000, before extraordinary items, no common equivalent shares
are included in the diluted weighted average common shares for those periods.
If the Company had reported net income, the calculation of diluted
earnings per share would have included an additional 1,255,000, 957,000 and
23,000 common stock equivalent shares not included for basic earnings per share
for the years ended December 31, 2002, 2001 and 2000, respectively.
Comprehensive Income (Loss) - Comprehensive income (loss) includes net
--------------------------
earnings (loss) and other changes to stockholders' equity not reflected in net
income (loss). The components of comprehensive income (loss) are as follows
(in thousands):
F-14
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Net Income (Loss) $(14,362) $ 9,413 $(36,675)
-------- -------- --------
Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-for-sale
securities, net of tax effect 21 28 321
Change in unrecognized pension costs, net of
tax effect 137 834 (1,364)
-------- -------- --------
Other comprehensive income (loss) 158 862 (1,043)
-------- -------- --------
Comprehensive income (loss) $(14,204) $ 10,275 $(37,718)
======== ======== ========
Accumulated other comprehensive loss at December 31, 2002, 2001 and 2000,
consists primarily of $137,000, $834,000 and $1.4 million of unrecognized
pension costs, respectively.
Income Taxes - QuadraMed accounts for income taxes using the liability
------------
method pursuant to SFAS No. 109, Accounting for Income Taxes. Under this
method, deferred tax assets and liabilities are determined based on the
expected future tax consequences of temporary differences between the carrying
amounts of assets and liabilities for financial and income tax reporting
purposes.
Recent Accounting Standards - In June 2001, the FASB issued SFAS No. 143,
---------------------------
Accounting for Asset Retirement Obligations. The statement addresses financial
- -------------------------------------------
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
provisions of SFAS No. 143 are required to be applied starting with fiscal
years beginning after June 15, 2002. QuadraMed expects that implementation of
the new standard will not have a significant impact on its financial condition,
results of operations, and cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
- ---------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
- -----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. QuadraMed anticipates that implementation of this new standard
will not have a significant impact on its financial condition, results of
operations and cash flows however in connection with adopting this standard the
Company will reclassify in the 2001 financial statements the extraordinary gain
on the redemption of the debentures to other income.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities, effective for exit or disposal
- -------------------------------------------
activities initiated after December 31, 2002. Under SFAS 146 a liability for
the cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under prior guidance, a liability for such costs could
be recognized at the date of commitment to an exit plan. SFAS 146 also requires
that the liability be measured and recorded at fair value. Accordingly, the
adoption of this standard may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. QuadraMed will adopt the
provisions of SFAS 146 prospectively for all restructuring activities initiated
after December 31, 2002.
In November 2002, the FASB reached a consensus on EITF No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The guidance
in EITF 00-21 is effective for revenue arrangements entered into in fiscal
years beginning after June 15, 2003. This issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. Specifically, EITF 00-21 addresses how
to determine whether an arrangement involving multiple deliverables contains
more than one earnings process and, if it does, how to divide the arrangement
into separate units of accounting consistent with the identified earning
processes for revenue recognition purposes. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The Company is evaluating the effect
of this issue on its financial statements.
F-15
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
- ----------------------------------------------------------------------------
indirect Guarantees of Indebtedness of Others. FIN 45 requires that QuadraMed
- ---------------------------------------------
recognizes the fair value for guarantee and indemnification arrangements issued
or modified by QuadraMed after December 31, 2002, if these arrangements are
within the scope of the interpretation. In addition, QuadraMed must continue to
monitor the conditions that are subject to the guarantees and indemnifications,
as required under previously existing generally accepted accounting principles,
in order to identify if a loss has occurred. If QuadraMed determines it is
probable that a loss has occurred then any such estimable loss would be
recognized under those guarantees and indemnifications. Some of the software
licenses granted by QuadraMed contain provisions that indemnify licensees of
QuadraMed's software from damages and costs resulting from claims alleging that
QuadraMed's software infringes the intellectual property rights of a third
party. QuadraMed has historically received only a limited number of requests
for indemnification under these provisions and has not been required to make
material payments pursuant to these provisions. Accordingly, QuadraMed has not
recorded a liability related to these indemnification provisions. QuadraMed
will be required to implement the provisions of FIN 45 as of January 1, 2003
and does not believe that FIN 45 will have a material impact on its financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
--------------------------
Compensation - Transition and Disclosure. SFAS 148 amends SFAS 123, to provide
- ----------------------------------------
alternative methods of transition to the voluntary fair value method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require that disclosure of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed in tabular format within a Company's summary of
significant accounting policies. The disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002 and have been
incorporated into these financial statements and accompanying footnotes.
4. ACQUISITIONS AND DIVESTITURES
-----------------------------
Acquisitions
------------
Acquisition of Outstanding Shares of Pharmacy Data Systems, Inc.
---------------------------------------------------------------
On June 11, 2002, QuadraMed acquired all of the outstanding shares of
Pharmacy Data Systems, Inc. ("PDS"), a leader in advanced pharmacy, nursing,
and physician information systems, for $10.7 million, assumed liabilities of
$1,237,000 and acquisition costs of $262,000. The consolidated financial
statements include the results of operations of PDS since June 11, 2002. In
connection with this acquisition, QuadraMed recorded an in-process research and
development charge of $400,000.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
Assets:
Current assets $ 856
Property and equipment 100
Goodwill 7,893
Other intangible assets (including in-process
research and development) 3,350
---------
12,199
Liabilities:
Current liabilities (including acquisition costs) 1,499
---------
Net purchase price $ 10,700
=========
Other intangible assets of $3.4 million include in-process research and
development, acquired technology, maintenance and other agreements and
trademarks. Capitalized intangible assets are subject to amortization periods
of one to five years. PDS is included within the Enterprise Segment of
QuadraMed.
F-16
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Acquisition of the Assets of Cascade Health Information Software, Inc.
---------------------------------------------------------------------
On May 31, 2002, QuadraMed acquired the assets of Cascade Health
Information Software, Inc., ("Cascade") a leading provider of software for the
coding and abstracting of patient medical records, which was a subsidiary of
Transcend Services, Inc., for $935,000, assumed liabilities of $346,000 and
acquisition costs of $33,000. The purchase price was allocated $882,000 to
goodwill, $222,000 to intangible assets (including maintenance agreements and
existing technology), and $210,000 to tangible net assets. Cascade is included
within the HIMS Software Segment of QuadraMed.
Pro forma results of operations for these business acquisitions have not
been presented because the effects were not material to the consolidated
financial statements on either an individual or aggregate basis.
Divestitures
------------
Sale of the Assets of HIMS Services Division
--------------------------------------------
On December 9, 2002, QuadraMed entered into an asset purchase agreement
for the sale of certain assets used to conduct the HIMS Services division. On
December 31, 2002, QuadraMed announced the closing of the sale of its HIM
Services Division to Precyse Solutions, LLC. QuadraMed received $14 million in
cash ($2.8 million of which was outstanding as of December 31, 2002 and paid in
January 2003) and a $300,000 promissory note with a two-year term. ($1.5
million of the total sale price is to be held in escrow for 18 months.)
QuadraMed recorded a gain of $8.8 million in connection with the sale. Total
assets sold as part of the sale included net fixed assets of approximately
$163,000 and net goodwill of approximately $5.1 million.
The results of operation have been presented as a discontinued operation
for all periods presented. The operating results were as follows (in
thousands):
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Revenue $ 17,313 $ 19,735 $ 32,857
Income (loss) from operations of discontinued
operation $ (2,280) $ (2,539) $ 2,679
Gain (loss) on disposal 8,776 -- --
-------- -------- --------
Total income (loss) on discontinued
operations $ 6,496 $ (2,539) $ 2,679
======== ======== ========
Sale of EZ-CAP Assets
---------------------
On August 16, 2001, QuadraMed and its wholly-owned subsidiary, QuadraMed
Operating Corporation, entered into an asset purchase agreement for the sale of
certain assets and related products used to conduct the EZ-CAP managed care
software business to OAO Transition, LLC, a Delaware limited liability company
("OAO Transition"), and OAO Technology Solutions, Inc., a Delaware corporation
(individually and collectively "OAO"). The transaction closed on August 31,
2001. QuadraMed received net proceeds from the sale of $8.1 million and
recorded a gain of $7.1 million during 2001. In addition, as part of the
agreement, QuadraMed received $1.5 million in payments based on EZ-CAP's
revenue growth and customer retention following the close of the transaction
which was recorded as an additional gain on sale in October 2002. Income
associated with the EZ-CAP operations for 2001 was $1.6 million.
F-17
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Sale of Electronic Remittance Advice Product Line
-------------------------------------------------
On March 31, 2001, QuadraMed sold its Electronic Remittance Advice product
line. The Company recorded proceeds from the sale of $24,000, and a loss after
applicable taxes of $57,000.
Sale of the Assets and Liabilities of ROI Division
--------------------------------------------------
Pursuant to an Asset Contribution Agreement, dated May 3, 2000, QuadraMed
transferred and assigned the assets and liabilities of its ROI Division to
ChartOne. Under this agreement, QuadraMed transferred $13.9 million of assets
(including $2.7 million of cash) and the guarantee of Health+Cast's $12.5
million line of credit to ChartOne and received $3.0 million in cash from sales
of software licenses, which has been classified as a gain on the sale of
ChartOne. Subsequently, pursuant to the terms of a Securities Purchase
Agreement dated May 5, 2000, on June 7, 2000, ChartOne sold 2.52 million shares
of its Series A Preferred Stock, representing a 43% equity interest to the
Warburg Group for $25.2 million in cash ($12.7 million in cash and $12.5
million of other consideration). On October 19, 2000, QuadraMed sold its
remaining 57% interest in ChartOne, represented by 2.13 million shares of
series B Preferred Stock, 1.2 million shares of Series C Preferred Stock and 1
share of Common Stock, to the Warburg Group for $26.6 million in cash, pursuant
to a Securities Purchase Agreement dated September 28, 2000. QuadraMed
recorded a gain of $27.2 million for the year ended December 31, 2000 related
to the ROI sale.
5. CASH AND INVESTMENTS
--------------------
Cash - QuadraMed maintains cash balances in accounts at various domestic
----
banks and one brokerage firm. QuadraMed is insured by the Federal Deposit
Insurance Corporation for up to $100,000 at each bank. Balances maintained at
the brokerage firm are not insured. Cash and cash equivalents in excess of
insured limits were approximately $22.9 million as of December 31, 2002.
Marketable Investments in Other Companies - From 1997 to 1999, QuadraMed
-----------------------------------------
made a series of investments, totaling $4.7 million, in VantageMed Corporation
("VantageMed"), a company that develops and sells software to physician groups.
As of December 31, 2000, the fair market value of this investment (based upon
its publicly-traded stock) was $637,000 and, accordingly, QuadraMed recorded an
other-than-temporary impairment of $4.1 million (in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities) in the
----------------------------------------------------------------
year 2000. As of December 31, 2002 and 2001, the fair value of the VantageMed
investment was zero and $575,000, respectively. QuadraMed recorded impairment
charges of $551,000 and $86,000 during 2002 and 2001, respectively to adjust
the investment to its fair value.
Restricted Cash - Restricted cash reflects amounts to be restricted
---------------
greater than 12 months and accordingly is included in non-current assets.
Restricted cash consists primarily of funds deposited in connection with lease
agreements, contract guarantees and funds escrowed in connection with the sale
of HIM Services. These balances were $518,000, $3.9 million and $1.5 million,
respectively, at December 31, 2002, and $737,000, $3.6 million and zero at
December 31, 2001.
Non-Marketable Investments in Other Companies - In January 1999, QuadraMed
---------------------------------------------
loaned $3.6 million to Purkinje, Inc. ("Purkinje"), a company that develops and
sells software to physician groups, pursuant to the terms and conditions of a
convertible secured promissory note ("Purkinje Note"), which was amended on
June 7, 2001. In Third Quarter 2001, Purkinje was unable to meet its
obligations under the Purkinje Note and suspended interest payments. At that
time and at Purkinje's request as full and final payment of all principal,
interest, and related sums payable under the Purkinje Note, QuadraMed converted
the amounts evidenced by the Purkinje Note to 5,677,560 shares of Purkinje
Class A preferred shares. QuadraMed determined that the estimated fair value
of the Purkinje Class A preferred stock was zero and recorded an impairment
charge of $3.6 million in Third Quarter 2001. There have been no material
changes in QuadraMed's opinion of the valuation of Purkinje Class A preferred
stock and it remains at a recorded value of zero as of December 31, 2002.
F-18
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Unrealized Gains (Losses) on Available-for-Sale Securities - Cost or
----------------------------------------------------------
amortized cost, aggregate fair value, and unrealized gains (losses) by major
security type are as shown in the following tables:
Unrealized
Gain (Loss)
on
Available-
Cost or Aggregate Fair for-Sale
Amortized Cost Value Securities
-------------- ----- ----------
As of December 31, 2002 (in thousands):
Short-term investments:
Other short-term investments $ 2,528 $ 2,528 $ --
========= ======== ========
Long-term investments:
Debt securities issued by the United
States Government $ 706 $ 768 $ 62
Corporate debt securities 508 529 21
--------- -------- --------
$ 1,214 $ 1,297 $ 83
========= ======== ========
VantageMed Corporation, marketable
equity security $ -- $ -- $ --
========= ======== ========
Total unrealized gain $ 83
========
As of December 31, 2001 (in thousands):
Short-term investments:
Debt securities issued by the United
States Government $ 34 $ 34 --
Other short-term investments 2,380 2,380 $ --
--------- -------- --------
$ 2,414 $ 2,414 $ --
========= ======== ========
Long-term investments:
Debt securities issued by the United
States Government $ 531 $ 562 $ 31
Corporate debt securities 568 575 7
--------- -------- --------
$ 1,099 $ 1,137 $ 38
========= ======== ========
VantageMed Corporation, marketable
equity security $ 551 $ 575 $ 24
========= ======== ========
Total unrealized gain $ 62
========
Proceeds from the sale of available-for-sale securities were $376,000,
$12.2 million and $18.3 million during the years ended December 31, 2002, 2001
and 2000, respectively. Net realized gains (losses) were $14,000, $(14,000),
and $(61,000) during the years ended December 31, 2002, 2001 and 2000,
respectively.
Variable Life Insurance Policies - QuadraMed has an investment interest in
--------------------------------
3 variable life insurance policies. Each of the variable life insurance
policies provides for the investment of the cash value portion into various
sub-accounts that are similar in nature to mutual funds. 2 policies are issued
pursuant to split-dollar agreements with the former executives, and trusts
established for their benefit make the investment decisions on these policies.
The third policy is a corporate-owned policy that QuadraMed contributed to a
grantor or "rabbi" trust established to make contributions to satisfy its
obligations under the Supplemental Executive Retirement Plan (SERP) and 2 other
subsequently terminated benefit plans (see note 16, Employee Benefit Plans, for
further explanation of these plans). QuadraMed makes the investment decisions
on this policy only. The performance of the variable life insurance policies
for cash value and premium amounts will vary depending on the performance of
the selected underlying sub-accounts. Pursuant to FASB Technical Bulletin No.
85-4, Accounting for Purchases of Life Insurance, QuadraMed reports the amounts
that could be realized under these variable life insurance contracts as an
asset valued as of the statement of financial position date and treats the
change in cash surrender value during the reported period as an adjustment of
premiums paid in determining the expense or income to be recognized.
F-19
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
A reduction in the cash surrender value of the variable life insurance
policies, future adverse changes in the condition of equity markets or poor
operating results of the underlying policy sub-accounts could have an effect on
QuadraMed's results of operations. The cash surrender values of the Split-
dollar Life policies and the SERP Policy as of December 31, 2002 were each $1.8
million and $1.6 million, respectively, and at December 31, 2001, were each
$1.7 million.
6. PROPERTY AND EQUIPMENT, NET
---------------------------
Property and Equipment, net consisted of the following (in thousands):
December 31,
---------------------------
2002 2001
---- ----
Computer equipment $ 10,507 $ 9,273
Office furnishings and equipment 3,806 4,957
Purchased software 4,922 4,654
Leasehold improvements 2,954 1,073
--------- ---------
Total cost 22,189 19,957
Less: Accumulated depreciation and
amortization (16,170) (12,634)
--------- ---------
Net book value $ 6,019 $ 7,323
========= =========
Depreciation expense was $3.9 million, $3.5 million, and $4.6 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
Capitalized Software Development Costs - For the years ended December 31,
2002, 2001 and 2000, QuadraMed capitalized software development costs of $1.8
million, $1.8 million and $527,000, respectively. Operating costs for research
activities prior to the establishment of technological feasibility and for
product upgrades to improve product performance or to respond to updated
regulations and business requirements are charged to research and development
expense as incurred. Such expenditures, excluding capitalized amounts were
$17.1 million, $14.4 million and $24.6 million in the years ended December 31,
2002, 2001 and 2000, respectively.
During 2000, QuadraMed recorded a $1.2 million charge to write-down
certain capitalized software assets primarily related to its 1998 acquisition
of Integrated Medical Networks, Inc. Amortization of capitalized software
development costs charged to cost of licenses was $2.4 million, $2.0 million
and $1.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
8. LEASE OBLIGATIONS
-----------------
QuadraMed leases its headquarters and all other facilities and certain
equipment under operating leases, some of which contain renewal and purchase
options, and a nominal portion of its equipment under capital lease
arrangements. Future minimum payments under operating leases with an initial
term of more than one year at December 31, 2002 are as follows (in thousands):
F-20
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Operating
Leases
------
2003 $ 4,981
2004 4,392
2005 3,942
2006 3,616
2007 3,629
Thereafter 9,880
--------
Total minimum lease payments $ 30,440
========
Rental expense was $6.6 million, $6.0 million, and $7.6 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
9. CONVERTIBLE SUBORDINATED DEBENTURES
-----------------------------------
On May 1, 1998, QuadraMed issued convertible subordinated debentures
through a public offering in the principal amount of $115 million, including
the underwriters' over-allotment option (the "Debentures"). QuadraMed's net
proceeds from the offering were $110.8 million. The Debentures mature on May
1, 2005 and bear interest at 5.25% per annum. The Debentures are convertible
into common stock at any time prior to the redemption or final maturity,
initially at the conversion price of $33.25 per share (resulting in an initial
conversion ratio of 30.075 shares per $1,000 principal amount).
Under the terms of the indenture and related documents, QuadraMed is
obligated to redeem the Debentures earlier than the May 1, 2005 maturity date
upon defined Events of Default, including failure to timely repay principal or
interest under the Debentures, default under any other borrowing, and
bankruptcy. Further, QuadraMed is obligated to provide holders of the
Debentures with notice and the holders have the individual option to redeem the
Debentures should QuadraMed (i) cease to be traded on a U.S. national
securities exchange or cease to be approved for trading on a U.S. automated
over-the-counter securities market or (ii) experience defined Changes of
Control, including a merger in which QuadraMed is not the surviving entity or
its shareholders do not control at least 50% of the new entity, the sale of
substantially all of QuadraMed's assets, a liquidation, or a substantial change
in the board of directors over a two-year period.
In the year ended December 31, 2001, QuadraMed redeemed and cancelled
$41.3 million in principal amount of the Debentures at prices ranging between
$530.00 and $697.50 per $1,000 of principal amount resulting in an
extraordinary gain of $12.9 million after applicable taxes. As of December 31,
2002 and 2001, the outstanding principal amount of the Debentures was $73.7
million with a fair value of $63.3 million and $59.2 million at December 31,
2002 and 2001, respectively. Additionally, as of December 31, 2002, the
unamortized debt issuance costs were approximately $900,000.
On April 16, 2003, QuadraMed announced that it had executed an agreement
with certain of its bondholders to refinance $61.8 million of its 2005 Debt.
See Footnote 22, Subsequent Events for further details.
-----------------
10. STAND-BY LETTERS OF CREDIT
--------------------------
During the year ended December 31, 2001 QuadraMed opened $500,000 of
stand-by letters of credit under bank financing agreements. No stand-by
letters of credit were opened in 2002. QuadraMed paid a 1% annual fee to renew
its existing stand-by letters of credit and secured all of the stand-by letters
of credit with certificates of deposit totaling $4.4 million recorded in the
balance sheet as restricted cash at December 31, 2002 and 2001.
11. STOCK REPURCHASE PROGRAM
------------------------
In June 2001, QuadraMed's board of directors approved a stock repurchase
program under which QuadraMed was authorized to repurchase up to 6,000,000
shares of its common stock. QuadraMed intends to buy back its common stock at
times when its market value presents opportunities to do so. The repurchase
program is intended as a means to partially mitigate the dilutive impact of
stock options and to provide an alternative investment for QuadraMed's excess
F-21
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
cash. The extent to which QuadraMed repurchases shares and the timing of such
purchases will depend upon market conditions and other corporate
considerations. As of December 31, 2001, 200,000 shares of QuadraMed common
stock had been repurchased under the program. The shares were repurchased at
an average price of $4.05 and a total purchase price, including acquisition
costs, of $822,000 and were recorded as treasury stock. There were no stock
repurchases in 2002.
12. WARRANTS
--------
In connection with the acquisition of Linksoft Technologies, Inc.
("Linksoft") in June 1999, QuadraMed assumed warrants for the purchase of 6,424
shares of the Company's common stock at an exercise price of $0.03 per share.
In 1999, the warrants were partially exercised and 5,396 shares of common stock
were issued. At December 31, 2002, warrants that expire in March 2008 remain
outstanding for 1,028 shares of common stock.
In connection with the acquisition of Compucare in March 1999, QuadraMed
assumed warrants for the purchase of 24,563 shares of the Company's common
stock. Warrants for 3,941 shares at an exercise price of $61.73 expired in
December 2000. At December 31, 2002, warrants for a total of 20,622 shares of
common stock remain outstanding with at an exercise price of $111.54 expiring
January 2003; 2,690 at an exercise price of $223.09 expiring October 2005; and
6,724 at an exercise price of $0.15 expiring February 2006.
In December 1995, QuadraMed issued a warrant expiring in December 2005 to
Trigon Resources Corporation ("Trigon") for the purchase of up to 134,574
shares of the Company's common stock at $3.75 per share pursuant to an
Employment Agreement dated March 1, 1994 with James D. Durham, then QuadraMed's
Chairman and Chief Executive Officer. Trigon is a Nevada corporation
controlled by Mr. Durham. In October 2001, QuadraMed repurchased the warrant
for $193,000 at which time the warrant was cancelled. The repurchase price was
based on the sum of the difference between $3.75 and the 5-day trading average
close price for QuadraMed's common stock for the week beginning October 29,
2001.
13. RESTRICTED STOCK GRANTS
-----------------------
During the years ended December 31, 2002 and 2001, QuadraMed issued an
aggregate of 39,000 and 475,000 shares, respectively of its common stock as
restricted stock under QuadraMed's 1996 Stock Plan. The grants were made to
certain senior executives for no consideration. All of the restricted shares
fully vest after a three-year period. QuadraMed has recorded the difference
between fair market value of the restricted shares on the date the restricted
stock purchase rights were granted, and the exercise price of such shares of
the shares on that date as deferred compensation within the Stockholders'
Equity (Deficit) section of the Consolidated Balance Sheet. In accordance with
the provisions of SFAS 123, QuadraMed amortizes this amount, pro rata over the
related vesting term as it expects the shares to vest. Any changes in the
expected or actual outcome of the grants are considered to be changes in
estimate and are accordingly, recognized in the period the change becomes
known. In 2000, 30,000 restricted shares were cancelled upon the termination
of a senior executive and a $498,000 adjustment to deferred compensation was
recorded. In December 2002, a senior executive of QuadraMed was terminated
with an effective date of January 1, 2003. In accordance with the provisions
of his employment agreement, 57,000 unvested shares immediately vested upon his
termination. Accordingly, QuadraMed recognized the remaining $277,000
associated with the accelerated vesting in 2002 as the vesting was a known
event. Compensation expense associated with the grants of restricted stock
totaling $812,000, $205,000, and $154,000 was recognized during the years ended
December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002,
514,000 restricted shares remained subject to vesting.
14. STOCK INCENTIVE AND PURCHASE PLANS
----------------------------------
Stock Incentive Plans
- ---------------------
QuadraMed has two main stock option plans: the 1996 Stock Incentive Plan
and the 1999 Supplemental Stock Option Plan. In addition, QuadraMed adopted
and amended the Compucare 1997 Stock Compensation Plan (the "Compucare Plan")
and the Pyramid Heath Group, Inc. 1997 Employee and Consultant Stock Option
Plan (the "Pyramid Plan") in connection with its acquisition of these entities.
QuadraMed has made limited grants under the adopted plans. The terms and
conditions of the options granted under the amended Compucare and Pyramid Plans
are substantially similar to the terms and conditions of options granted under
the 1996 Stock Incentive Plan.
F-22
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
1996 Stock Incentive Plan
-------------------------
Under QuadraMed's 1996 Stock Incentive Plan, (the "Incentive Plan"), the
board of directors may grant incentive and nonqualified stock options to
employees, directors, and consultants. The Incentive Plan is divided into the
following 5 separate equity programs: (i) the discretionary option grant
program under which eligible persons may, at the discretion of the plan
administrator, be granted options to purchase share of common stock; (ii) the
salary investment option grant program under which eligible employees may elect
to have a portion of their base salary invested each year in special option
grants; (iii) the stock issuance program under which eligible persons may, at
the discretion of the plan administrator, be issued shares of common stock
directly, either through the immediate purchase of such shares or as a bonus
for services rendered to QuadraMed; (iv) the automatic option grant program
under which eligible non-employee board members shall automatically receive
option grants at periodic intervals to purchase shares of common stock; and,
(v) the director fee option program under which non-employee board members may
elect to have all or any portion of their annual retainer fee otherwise payable
in cash applied to a special option grant.
The exercise price per share for an incentive stock option cannot be less
than the fair market value on the date of grant. The exercise price per share
for a nonqualified stock option cannot be less than 85% of the fair market
value on the date of grant. Option grants under the Incentive Plan generally
expire 10 years from the date of grant and generally vest over a four-year
period. Options granted under the Incentive Plan are exercisable subject to
the vesting schedule. As of December 31, 2002, QuadraMed's stockholders had
authorized a total of 7,022,687 shares of common stock for grant under the
Incentive Plan. The Incentive Plan provides that the share reserve
automatically increases each year by an amount equal to 1.5% of the outstanding
shares on the last trading day of the immediately preceding calendar year.
1999 Supplemental Stock Option Plan
-----------------------------------
In 1999, QuadraMed's board of directors approved QuadraMed's 1999
Supplemental Stock Option Plan (the "1999 Supplemental Plan"). The 1999
Supplemental Plan permits non-statutory option grants to be made to employees,
independent consultants, and advisors who are not QuadraMed officers,
directors, or Section 16 insiders. The 1999 Supplemental Plan is administered
by the board of directors or its Compensation Committee and terminates in March
2009. The exercise price of all options granted under the 1999 Supplemental
Plan may not be less than 100% of fair market value on the date of the grant.
Options vest on a schedule determined by the board of directors or the
Compensation Committee with a maximum option term of 10 years. As of December
31, 2001, QuadraMed's stockholders had authorized a total of 4,000,000 shares
of common stock, respectively, for grant under the 1999 Supplemental Plan.
For non-employee stock-based awards, QuadraMed uses SFAS No. 123,
Accounting for Stock-Based Compensation, and recognized compensation expense of
$33,000, $41,000 and zero in the years ended December 31, 2002, 2001 and 2000,
respectively.
In accordance with SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models. These models
require subjective assumptions, including future stock price volatility and
expected time to exercise. QuadraMed's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur.
F-23
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
The weighted average fair value of options and restricted shares granted
during 2002, 2001 and 2000 were $6.97, $1.17 and $1.44 per share, respectively.
Option activity under the option plans is as follows (in thousands, except per
share amounts):
Options Outstanding
----------------------
Weighted
Average
Number of Exercise
Shares Price
------ -----
Balance, December 31, 1999 5,389 $ 12.23
Granted 3,447 2.11
Exercised (299) 4.41
Cancelled (2,823) 13.11
------- -------
Balance, December 31, 2000 5,714 $ 5.62
Granted 986 3.50
Exercised (276) 3.56
Cancelled (677) 8.69
------- -------
Balance, December 31, 2001 5,747 $ 5.28
Granted 1,462 7.91
Exercised (433) 4.39
Cancelled (753) 5.74
------- -------
Balance, December 31, 2002 6,023 $ 5.36
======= =======
The following table summarizes information about stock options and
restricted shares outstanding as of December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices as of 12/31/02 Life (in years) Price as of 12/31/02 Price
- --------------- ------------- -------------- ------ ------------- ------
$ 0.81 - $ 2.50 2,666,492 7.16 $ 2.04 1,713,763 $ 2.04
$ 2.59 - $ 6.99 670,412 6.59 4.72 401,552 4.65
$ 7.00 - $ 9.13 2,079,577 7.58 8.46 981,007 8.29
$ 9.63 - $11.50 320,275 4.10 11.39 315,275 11.41
$12.00 - $16.63 187,244 2.40 15.90 187,244 15.90
$17.97 - $21.04 25,341 3.19 19.58 25,341 19.58
$22.38 - $24.38 53,291 5.26 23.23 53,291 23.23
$27.00 - $30.13 20,000 5.56 28.56 20,000 28.58
--------- ---- ------- --------- ------
$ 0.81 - $30.13 6,022,632 6.89 $ 5.36 3,697,473 $ 6.05
========= =========
Employee Stock Purchase Plan
QuadraMed's 2002 Employee Stock Purchase Plan (the "2002 Purchase Plan")
was adopted by the Board of Directors in January 2002. A total of 333,450
shares of common stock are reserved for issuance under the 2002 Purchase Plan,
pursuant to which eligible employees are able to contribute up to 10% of their
compensation for the purchase of QuadraMed common stock at a purchase price of
85% of the lower of the fair market value of the shares on the first or last
day of the six-month purchase period.
F-24
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
15. RELATED PARTY TRANSACTIONS
--------------------------
Lawrence P. English, QuadraMed's Chairman and Chief Executive Officer, is
a director of Curative Health Services, Inc., and serves as Chairman of its
Executive Committee and as a member of its Audit Committee.
Joseph L. Feshbach, a QuadraMed director, is the Chairman of the Board of
Curative Health Services, Inc.
Joseph L. Feshbach, elected to QuadraMed's Board in August 2001, provided
consulting and advisory services to QuadraMed related to the development of
financial and merger and acquisition strategies from April to August 2001. For
these services, Mr. Feshbach was paid $25,000 and received an option to
purchase 20,000 shares of the Company's common stock at an exercise price of
$2.42, which vested fully on July 31, 2001. Mr. Feshbach exercised this option
on December 6, 2001 at a trade price of $8.30 and was attributed with $117,600
in income as a result of the exercise.
Michael J. King, a QuadraMed director, is a former officer of QuadraMed
and was President of Compucare, acquired by QuadraMed in 1999. He is the Chief
Executive Officer of Healthscribe, Inc. ("Healthscribe"), a provider of
transcription services. Prior to Mr. King's appointment as Healthscribe's CEO,
QuadraMed entered into a subcontract with Healthscribe for transcription
services at a healthcare facility managed by QuadraMed. At the end of March
2001, this subcontract was terminated and the healthcare facility managed by
QuadraMed contracted directly with Healthscribe for services. In the years
ended December 31, 2001, 2000 and 1999, QuadraMed paid Healthscribe a total of
$300,000,$1.3 million and $400,000, respectively.
16. EMPLOYEE BENEFIT PLANS
----------------------
401(k) Savings Plan
-------------------
QuadraMed maintains a 401(k) Savings Plan (the "Plan"). All eligible
QuadraMed employees may participate in the Plan and elect to contribute up to
15% of pre-tax compensation to the Plan. Employee contributions are 100%
vested at all times. At its discretion, QuadraMed may match employee
contributions to the Plan. Presently, QuadraMed matches up to 50% of the first
4% of employee contributions. The vesting of such contributions is based on
the employee's years of service, becoming 100% vested after 4 years. For the
years ended December 31, 2002, 2001 and 2000, QuadraMed made discretionary
contributions of approximately $800,000, $900,000 and $1.0 million,
respectively.
Deferred Compensation Plan
--------------------------
In January 2000, QuadraMed adopted a deferred compensation plan (the
"DCP") to provide specified benefits to, and help retain, a select group of
management and highly compensated employees and directors who contribute
materially to QuadraMed's continued growth, development and future business
success. The DCP was unfunded for tax purposes and for purposes of Title I of
ERISA. The Compensation Committee was responsible, at its sole discretion, for
the selection of employees and directors to participate in the DCP, and several
employees were so selected. In February 2001, QuadraMed terminated the DCP
pursuant to its terms effective January 1, 2001, returned any deferrals made
for 2001, and made payments pursuant to the DCP for any deferrals made in 2000
from cash. For the years ended December 31, 2002, 2001 and 2000, QuadraMed
made no discretionary contributions to the DCP.
Stock Exchange Deferred Compensation Plan
-----------------------------------------
In January 2000, QuadraMed adopted a Stock Exchange Deferred Compensation
Plan (the "SEDCP") to provide specified benefits to, and help retain, a select
group of management and highly compensated employees who contribute materially
to QuadraMed's continued growth, development and future business. The SEDCP
was unfunded for tax purposes and for purposes of Title I of ERISA. The
Compensation Committee was responsible, at its sole discretion, to select the
employees to participate in the SEDCP. QuadraMed terminated the SEDCP pursuant
to its terms in July 2001. For the year ended December 31, 2000, QuadraMed
recorded compensation expense related to the SEDCP in the amount of $2.4
million. There were no expenses related to the SEDCP in 2001.
Supplemental Executive Retirement Plan (the "SERP")
--------------------------------------------------
QuadraMed adopted a Supplemental Executive Retirement Plan (the "SERP")
effective January 1, 2000. The SERP is unfunded for purposes of the Internal
Revenue Code and Title I of ERISA. In January 2000, the Compensation Committee
selected James D. Durham, then QuadraMed's Chairman and Chief Executive
Officer, and John A. Cracchiolo, then QuadraMed's Chief Operating Officer, for
participation in the SERP.
F-25
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
The SERP provides a 20-year retirement benefit that commences at age 60
and is paid in monthly installments equal to the product of 0.05 multiplied by
the participant's highest annual compensation in their last 10 years of
employment with QuadraMed multiplied by the number of full years of service
that a participant has had with QuadraMed (not to exceed 13) divided by 12.
The SERP benefit is cliff-vested at 7 years required of plan participation with
QuadraMed. In the event of a change in control, a participant's death,
disability, retirement or involuntary termination of employment, other than a
termination of employment for cause, a participant becomes immediately vested
in their SERP benefit. If the participant is involuntarily terminated, the
SERP benefit is a lump sum equal to the actuarial equivalent of the SERP
benefit using 13 years of service.
On June 12, 2000, QuadraMed executed separation agreements with Mr. Durham
and Mr. Cracchiolo, thereby terminating their full-time employment. As part of
his agreement, Durham remained a Director and a part-time employee, which
ensured that he would continue to vest in the SERP. Pursuant to his separation
agreement, Mr. Cracchiolo agreed to forfeit all of his rights under the SERP.
As a result, Mr. Durham is the only participant in the SERP.
On July 31, 2001, QuadraMed and Mr. Durham amended his separation
agreement ("Durham Separation Amendment"). Pursuant to the Durham Separation
Amendment, QuadraMed and Durham agreed to (i) Durham's resignation as a
Director, (ii) Durham's continued part-time employment through December 31,
2003, (iii) Durham's full vesting in the SERP benefit. Under SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
- -------------------------------------------------------------------------
Pension Plans and for Termination Benefits, this amendment is a curtailment of
- ------------------------------------------
the SERP requiring recognition of half of the remaining unamortized prior
service costs, a charge of $616,000.
In accordance with SFAS No. 87, Employers' Accounting for Pensions, SFAS
-----------------------------------
No. 88 and SFAS No. 130, QuadraMed recognized the following expenses for the
SERP using an assumed discount rate of 6.75% and 7.0% for 2002 and 2001,
respectively (in thousands):
Year ended December 31,
---------------------------
2002 2001
---- ----
Net Periodic Benefit Cost
Service cost $ 325 $ 310
Interest cost 170 146
Amortization of prior service cost 205 218
-------- --------
700 674
Curtailment of SERP -- 616
Other Comprehensive Income 69 --
-------- --------
$ 769 $ 1,290
======== ========
F-26
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
As of the measurement date, December 31, the status of the SERP using an
assumed discount rate of 6.75% and 7.0% for 2002 and 2001, respectively, was as
follows (in thousands):
December 31,
---------------------------
2002 2001
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 2,443 $ 1,987
Service cost 325 310
Interest cost 170 146
Actuarial losses 69 --
-------- --------
Benefit obligation at end of year 3,007 2,443
Change in plan assets (1) -- --
-------- --------
Funded status (3,007) (2,443)
Unrecognized prior service cost 325 530
Unrecognized net actuarial loss 69 --
-------- --------
Accrued benefit obligation (2,613) (1,913)
Unfunded accumulated benefit obligation (3,007) (2,443)
-------- --------
Additional liability (2) (394) (530)
Intangible asset (3) 325 530
-------- --------
Impact on accumulated deficit 69 --
-------- --------
Benefit liability (4) $ (3,007) $ (2,443)
======== ========
(1) Pursuant to the Durham Separation Agreement of July 12, 2000 between
QuadraMed and Mr. Durham, QuadraMed was not obligated to a specific
contribution schedule, but agreed in good faith to fund the SERP when it
had the ability to do so.
(2) Represents the unfunded accumulated benefit obligation less accrued benefit
cost.
(3) Represents the lesser of the additional liability and the unrecognized
prior service.
(4) Represents accrued benefit cost plus the additional liability.
As of December 31, 2001, Mr. Durham had 8 years of service for purposes of
calculating the SERP benefit. At the termination of Mr. Durham's part-time
employment pursuant to the Separation Agreement and the Separation Amendment on
December 31, 2003, Mr. Durham will have 10 years of service. Mr. Durham's
highest annual compensation was and is expected to remain $777,492.
Accordingly, the estimated annual SERP benefit for Mr. Durham totals $388,746
(.05 x $777,492 x 10). Mr. Durham will turn 60 in 2008 and will receive
benefits under the SERP until 2027. The total payout of Mr. Durham's SERP
benefit over the 20-year period is estimated to be $7.8 million.
QuadraMed Grantor or "Rabbi" Trust
----------------------------------
In January 2000, contemporaneously with the establishment of the DCP,
SEDCP, and the SERP (collectively, "Plans"), QuadraMed entered into a Grantor
Trust Agreement with Wachovia Bank, NA ("Wachovia"), as trustee, establishing a
grantor or "rabbi" trust ("Rabbi Trust") into which QuadraMed could make
contributions to satisfy its obligations under the Plans ("Rabbi Trust
Agreement").
Pursuant to the Rabbi Trust Agreement, QuadraMed is required to make
contributions to the Rabbi Trust in an amount equal to not less than 100%, but
not more than 120%, of the amount necessary to pay all benefits due under the
Plans on the date that a threatened change in control occurs. In the event a
change in control does not occur within six months of the threatened change in
control, QuadraMed has the right to recover such funds. Upon a change in
control, QuadraMed is obligated to make an irrevocable contribution to the
trust in an amount equal to not less than 100%, but not more than 120%, of the
amount necessary to pay all benefits due under the Plans on the date the change
in control occurs. QuadraMed is also obligated to fund a $125,000 expense
reserve for the trustee upon a threatened change in control or a change in
control. A "threatened change in control" is defined to include any pending
offer for QuadraMed's outstanding shares of common stock, any pending offer to
acquire QuadraMed by merger, or any pending action or plan to effect a change
in control.
In conjunction with the establishment of the Plans in January 2000,
QuadraMed purchased a corporate variable life insurance policy from the
Travelers Insurance Company ("Travelers Policy") insuring the lives of 73
F-27
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
employees. Although the Company intended to use the Travelers Policy to fund
the obligations under the Plans, it was not immediately assigned to the Rabbi
Trust. The face amount of the Travelers Policy is $44.6 million and its
maximum annual premiums are $2.0 million. At the time the Travelers Policy was
issued, a calculation was performed that indicated the cash surrender value of
Travelers Policy would be sufficient to satisfy the DCP and SEDCP benefits
assuming QuadraMed mirrored its investment allocations with those of the
participants. QuadraMed accounted for the DCP and SEDCP as defined benefit
pension plans pursuant to SFAS No. 87, Employers' Accounting for Pensions.
When QuadraMed terminated the DCP and SEDCP pursuant to their terms in February
and July 2000, respectively, QuadraMed did not surrender the Travelers Policy.
At the time, QuadraMed considered it more capital efficient to pay the benefits
under the terminated DCP and SEDCP from cash rather than to surrender the tax-
advantaged Travelers Policy. In July 2001, as part of the Durham Separation
Amendment, QuadraMed agreed to contribute 5 annual payments of approximately
$483,000 during the period from 2001 to 2005 ("Payments") to the Rabbi Trust.
In addition, QuadraMed assigned the Travelers Policy to the Rabbi Trust as a
funding mechanism for Mr. Durham's SERP benefit. At the time the Travelers
Policy was contributed to the Rabbi Trust, a calculation was performed that
indicated that the cash surrender value of the Travelers Policy plus the
Payments would be sufficient to satisfy Mr. Durham's SERP benefits, assuming a
7% investment return.
Split-Dollar Life Insurance Policies
------------------------------------
In November of 1998, QuadraMed entered into split-dollar insurance
agreements with:
Mr. Durham and E.A. Roskovensky1, Trustee, for the James Dean Durham
Irrevocable Trust ("Durham Trust") dated October 24, 1996 ("Durham Split-Dollar
Agreement"); and,
Mr. Cracchiolo, Mr. Cracchiolo's spouse, and Vincent Cracchiolo, Trustee
for the Cracchiolo Irrevocable Family Trust ("Cracchiolo Trust") dated
September 14, 1998 ("Cracchiolo Split-Dollar Agreement").
The Durham Split-Dollar Agreement and the Cracchiolo Split-Dollar
Agreement are referred to collectively as the "Split-Dollar Agreements".
The purpose of the Split-Dollar Agreements was to assist Mr. Durham and
Mr. Cracchiolo with their personal life insurance programs and ensure that
their estates would have sufficient liquidity upon their deaths to avoid an
estate tax induced liquidation of their QuadraMed holdings that could
potentially destabilize the market for QuadraMed common shares. For the three
months prior to the execution of the Split-Dollar Agreements, the average
closing price of QuadraMed's common shares was $23.04.
Pursuant to the Durham Split-Dollar Agreement, (i) the Durham Trust
purchased a variable life insurance policy from the John Hancock Variable Life
Insurance Company ("John Hancock") in the amount of $10.0 million that covered
Mr. Durham's life ("Durham Policy"); (ii) QuadraMed agreed to make to 5 annual
premium payments of $519,066 from 1998 to 2002 to John Hancock, subject to
repayment from the Durham Policy upon Mr. Durham's death or pursuant to the
expected return of the policy in policy years 11 to 15; (iii) the Durham Trust
collaterally assigned the Durham Policy to QuadraMed as security for the
premiums to be paid by QuadraMed; (iv) Mr. Durham agreed to reimburse QuadraMed
for the economic benefit attributable to the life insurance provided to the
Durham Trust under the Durham Split-Dollar Agreement, which defined it to be
the product of (a) the lower of (i) the P.S. 58 term life rates published by
the government of the United States or (ii) John Hancock's one-year term
insurance rate available for all standard risks; and (b) the excess of (i) the
total death benefit then payable under the Durham Policy over (ii) the
aggregate premiums paid by QuadraMed.
The terms and arrangements under the Cracchiolo Split-Dollar Agreement are
the same as under the Durham Split-Dollar Agreement except that the amount of
the death benefit under the John Hancock variable life insurance policy
covering Mr. Cracchiolo and Mr. Cracchiolo's spouse is $2.5 million
("Cracchiolo Policy") and the amount of each of the 5 annual premium payments
agreed to be advanced by QuadraMed from 1998 to 2002 is $33,244.
In 2002, QuadraMed made the final premium payment for both policies and is
not obligated to fund any additional amounts.
- -----------------------------
1 Mr. Roskovensky was subsequently elected to the QuadraMed Board of Directors
on April 26, 1999.
F-28
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
As the owners of the John Hancock policies, the Durham Trust and the
Cracchiolo Trust each direct the investment of the cash value portion of their
respective John Hancock policies into various sub-accounts that are similar in
nature to mutual funds. QuadraMed has no ability to direct the selection of
sub-accounts. Thus, the performance of the Durham Policy and the Cracchiolo
Policy for cash value and premium amounts will each vary depending on the
performance of the underlying sub-accounts respectively selected by the Durham
Trust and the Cracchiolo Trust.
17. MAJOR CUSTOMERS
---------------
In the years ended December 31, 2002, 2001 and 2000, no single customer
accounted for more than 10% of total revenues however, in 2002 sales to the U.
S. government accounted for 21% of HIM Software Division revenues.
18. SEGMENT REPORTING
-----------------
QuadraMed aligns its operations into three business segments for
management reporting purposes. These segments are based on product
functionality and shared target markets. This alignment allows management to
more accurately measure financial performance by product/division and to
establish greater management accountability. QuadraMed's business segments are
(i) the Enterprise Division, (ii) the Health Information Management Software
Division, and (iii) the Financial Services Division. The operations and assets
of these segments are primarily located in the United States. QuadraMed reports
the Enterprise Division, the Health Information Management Software Division,
and the Financial Services Division as reportable segments in accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies described in
footnotes 2 and 3. The financial results for these operating segments for
prior periods have been reclassified to conform to the current period
presentation.
Results of operations for these business segments are provided to
QuadraMed's Chief Operating Decision Maker (CODM), which is the Chairman of the
Board and Chief Executive Officer.
F-29
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Summary financial data by business segment as reported to the CODM is
presented below for the years ended December 31, 2002, 2001 and 2000 (in
thousands):
Year ended December 31, 2002
---------------------------------------------------
HIM Financial Consolidated
Description Enterprise Software Services Other (1) Total
- -------------------------- ---------- -------- -------- --------- -----
Total revenue $ 63,313 $ 30,988 $ 10,857 $ 4,427 $ 109,585
Gross margin (2) $ 40,798 $ 18,474 $ 4,662 $ 423 $ 64,357
Interest expense, net $ 1,528 $ 725 $ 504 $ 8 $ 2,765
Segment assets $ 41,834 $ 38,099 $ 5,332 $ 41,662 $ 126,927
Total depreciation and
amortization expense (3) $ 2,105 $ 3,715 $ 600 $ 3,408 $ 9,828
(1) Other includes specialty products, non-allocated expenses for bad debt,
legal costs and divested product lines, as well as the assets associated
with the discontinued Health Information Management Services Division.
(2) Gross margin represents segment results before interest, amortization of
goodwill, taxes, and corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation
and capitalized software amortization reflected in gross margin, debt-
offering costs as reflected in interest expense, and amortization of other
intangibles, excluding capitalized software development costs, which are
reflected separately in the above schedule.
Year ended December 31, 2001
---------------------------------------------------
HIM Financial Consolidated
Description Enterprise Software Services Other (1) Total
- -------------------------- ---------- -------- -------- --------- -----
Total revenue $ 61,780 $ 27,677 $ 15,459 $ 12,130 $ 117,046
Gross margin (2) $ 36,953 $ 19,209 $ 10,618 $ 7,489 $ 74,269
Interest expense, net $ 1,395 $ 710 $ 508 $ 94 $ 2,707
Segment assets $ 30,758 $ 36,919 $ 6,103 $ 51,353 $ 125,133
Total depreciation and
amortization expense (3) $ 1,904 $ 5,839 $ 523 $ 3,520 $ 11,786
(1) Other includes specialty products, non-allocated expenses for bad debt,
legal costs, restructuring charges and divested product lines including
$6.4 million in revenue and $1.6 million in net income for EZ Cap, as well
as the assets associated with the discontinued Health Information
Management Services Division.
(2) Gross margin represents segment results before interest, amortization of
goodwill, taxes and corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation
and capitalized software amortization reflected in gross margin, debt-
offering costs as reflected in interest expense, and goodwill and
amortization of other intangibles, excluding capitalized software
development costs, which are reflected separately in the above schedule.
F-30
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
Year ended December 31, 2000
---------------------------------------------------
HIM Financial Consolidated
Description Enterprise Software Services Other (1) Total
- -------------------------- ---------- -------- -------- --------- -----
Total revenue $ 46,565 $ 20,779 $ 11,813 $ 41,855 $ 121,012
Gross margin (2) $ 31,462 $ 14,709 $ 4,026 $ 8,851 $ 59,048
Interest expense, net $ 2,270 $ 1,165 $ 844 $ 86 $ 4,365
Segment assets $ 29,336 $ 36,000 $ 7,393 $ 76,557 $ 149,286
Total depreciation and
amortization expense (3) $ 1,235 $ 5,340 $ 1,065 $ 6,103 $ 13,743
(1) Other includes specialty products, non-allocated expenses for bad debt,
legal costs, restructuring charges and divested product lines including
$32.7 million in revenue and $5.8 million in net income for EZ Cap and
ROI, as well as the assets associated with the discontinued Health
Information Management Services Division.
(2) Gross margin represents segment results before interest, amortization of
goodwill, taxes and corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation
and capitalized software amortization reflected in gross margin, debt-
offering costs as reflected in interest expense, and goodwill and
amortization of other intangibles, excluding capitalized software
development costs, which are reflected separately in the above schedule.
19. OTHER OPERATING CHARGES
-----------------------
Restructuring charges of $7.1 million were incurred during the year ended
December 31, 2000. The charges consisted of $5.8 million associated with
separation agreements for officers and $1.3 million for employee severance and
closure of facilities. As of December 31, 2002, there is no remaining
liability for restructuring costs.
20. INCOME TAXES
------------
QuadraMed accounts for income taxes pursuant to SFAS No. 109, Accounting
for Income Taxes, which provides for an asset and liability approach to
accounting for income taxes. Deferred tax assets and liabilities represent the
future tax consequences of the differences between the financial statement
carrying amounts of assets and liabilities versus the tax bases of assets and
liabilities. Under this method, deferred tax assets are recognized for
deductible temporary differences, and operating loss and tax credit
carryforwards. Deferred liabilities are recognized for taxable temporary
differences. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The impact of tax rate
changes on deferred tax assets and liabilities is recognized in the year that
the change is enacted.
F-31
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Current:
Federal $ -- $ -- $ 617
State -- 150 --
-------- -------- --------
Total current -- 150 617
-------- -------- --------
Deferred:
Federal 2,518 (2,004) 9,881
State 2,315 187 1,183
-------- -------- --------
Total deferred 4,833 (1,817) 11,064
-------- -------- --------
Change in valuation allowance, net of the
effect of acquisitions (4,833) 1,817 (11,064)
-------- -------- --------
Provision for income taxes $ -- $ 150 $ 617
======== ======== ========
The tax effects of the temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Deferred tax assets:
Research and development credits $ 5,988 $ 5,109 $ 4,104
Net operating loss carryforwards 26,073 25,294 30,622
Deferred revenue 9,934 6,611 4,235
Intangible assets 9,707 9,683 10,070
Other 6,574 7,101 5,782
-------- -------- --------
58,276 53,798 54,813
-------- -------- --------
Deferred tax liabilities:
Other intangible assets (2,468) (2,785) (2,785)
Depreciation (880) (1,218) (116)
-------- -------- --------
(3,348) (3,703) (2,901)
-------- -------- --------
Net deferred tax asset before allowance 54,928 50,095 51,912
Valuation allowance (54,928) (50,095) (51,912)
-------- -------- --------
Net deferred tax assets $ -- $ -- $ --
======== ======== ========
Realization of deferred tax assets is primarily dependent on future
taxable income, the amount and timing of which is uncertain given QuadraMed's
history of losses. Therefore a valuation allowance has been recorded for the
entire deferred tax asset. The valuation allowance is adjusted on a periodic
basis to reflect management's estimate of the realizable value of the net
deferred assets.
F-32
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
The reconciliation of the tax provision (benefit) computed at the
statutory rate to the effective tax rate is as follows:
Year ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Federal income tax rate (34.0)% 34.0% (34.0)%
Change in valuation allowance 25.7 (23.6) 28.0
Permanent tax differences 8.3 (10.5) 6.0
Other -- 1.7 1.7
-------- -------- --------
Effective tax rate 0.0% 1.6% 1.7%
======== ======== =======
As of December 31, 2002, the Company had federal net operating loss
carryforwards of approximately $76.1 million and state net operating loss
carryforwards of approximately $2.0 million. In addition, the Company has
gross federal and California research and development credit carryforwards of
approximately $4.2 million and $1.8 million respectively. The federal net
operating loss carryforwards and research and development credits will expire
from 2011 through 2020.
The Tax Reform Act of 1986 contains provisions that may limit the amount
of NOL and research and development credit carryforwards that may be used in
any given year if certain events, including a significant change in ownership,
occur. If there should be a subsequent "ownership change" of the Company, as
defined, the ability to utilize its carryforwards could be restricted.
21. LITIGATION
----------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against QuadraMed and certain of its officers and directors. The plaintiffs in
these actions allege, among other things, violations of the Securities Exchange
Act of 1934 due to issuing a series of allegedly false and misleading
statements concerning its business and financial condition between May 11, 2000
and August 11, 2002. The complaints seek unspecified monetary damages and
other relief. These matters are at an early stage. No responses to the
complaints have yet been filed, and no discovery has taken place. QuadraMed
intends to defend itself vigorously against these allegations. However, the
ultimate outcome of these matters cannot presently be determined.
22. SUBSEQUENT EVENTS
-----------------
On February 28, 2003, QuadraMed reported that the SEC has issued a formal
non-public order of investigation concerning QuadraMed's accounting and
financial reporting practices for the period beginning January 1, 1998.
QuadraMed intends to continue to cooperate with the SEC and has complied with
the SEC's requests for information. QuadraMed cannot predict when the SEC will
conclude its inquiry, or the outcome and impact thereof.
On March 4, 2003, QuadraMed's common stock was delisted from the Nasdaq
National Market. The delisting constitutes a "Repurchase Event" under the
provisions of the QuadraMed's Convertible Subordinated Debentures. Upon such
an event, the Subordinated Indenture grants to each debenture holder the right,
at the holder's option, to require QuadraMed to repurchase all or any of the
holder's debentures. On April 16, 2003, QuadraMed announced that it had
executed an agreement with certain of its bondholders to refinance its
outstanding 5.25% Convertible Subordinated Debentures due 2005 (the "2005
Debt"). On April 17, 2003, under the terms of the refinance agreement,
QuadraMed issued $71.0 million of its Senior Secured Notes due 2008 (the "2008
Debt"). The proceeds from the issuance of the 2008 Debt were used to
repurchase $61.8 million (plus $1.5 million in accrued interest) of the 2005
Debt which became subject to repurchase by the Company as a result of its
delisting from the NASDAQ National Market on March 4, 2003. Accordingly, the
net proceeds to QuadraMed as a result of the issuance of the 2008 Debt less the
costs (including fees) associated with the repurchase of the 2005 Debt was $7.6
million, with $11.9 million of the 2005 Debt remaining outstanding.
Additionally, the repurchase right on the 2005 Debt remaining outstanding
expired on April 17, 2003. The 2008 Debt bears interest at an initial rate of
10% which will be reduced to 9% upon the relisting of QuadraMed's common stock
on the Nasdaq, including Nasdaq SmallCap or U.S. National Market and is secured
by certain intellectual property of QuadraMed. As part of the transaction,
F-33
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002
QuadraMed also issued 11,303,842 detachable warrants with the 2008 Debt. The
warrants have a term of five years, have an exercise price of $.01 per share
and are subject to certain anti-dilution provisions including dilution from the
issuance of shares in settlement of existing litigation. The 2008 Debt contains
certain events of default. These events include: failure to timely repay
principal or interest owed on the debentures, default under any other
borrowing, and bankruptcy.
UNAUDITED QUARTERLY/SUPPLEMENTARY FINANCIAL INFORMATION
Unaudited Quarterly Results of Operations/Supplementary Financial
Information for 2002................................................. F-35
Unaudited Quarterly Results of Operations/Supplementary Financial
Information for 2001................................................. F-36
F-34
QuadraMed Corporation
Unaudited Quarterly Consolidated
Financial Data
Quarter
-------------------------------------------------------
(thousands of dollars, except
per share amounts) First Second Third Fourth Total
----- ------ ----- ------ -----
2002
- ----
Revenue $ 27,180 $ 26,301 $ 25,591 $ 30,513 $ 109,585
========= ========= ======== ======== =========
Gross margin $ 17,320 $ 15,831 $ 13,220 $ 17,986 $ 64,357
========= ========= ======== ======== =========
Loss from continuing operations $ (624) $ (2,415) $(11,216) $ (6,603) $ (20,858)
========= ========= ======== ======== =========
Net income (loss) $ (1,328) $ (2,999) $(11,456) $ 1,421 $ (14,362)
========= ========= ======== ======== =========
Earnings (loss) per share
Basic
Continuing operations $ (0.02) $ (0.09) $ (0.42) $ (0.25) $ (0.77)
Total $ (0.05) $ (0.11) $ (0.43) $ 0.05 $ (0.53)
Diluted
Continuing operations $ (0.02) $ (0.09) $ (0.42) $ (0.24) $ (0.77)
Total $ (0.05) $ (0.11) $ (0.43) $ 0.05 $ (0.53)
Weighted average shares outstanding
Basic 26,809 26,941 26,950 26,960 26,915
========= ========= ======== ======== =========
Diluted 26,809 26,941 26,950 27,259 26,915
========= ========= ======== ======== =========
1. QuadraMed's gross margin in the above table, for all quarters presented, has
been conformed to the presentation for the year ended December 31, 2002.
Specifically, the Company's gross margin reflects the reclassification of
certain expenses related to its customer support from operating expenses to
cost of services. In addition, QuadraMed has adopted EITF 01-14, which
requires reimbursable expenses to be included within revenues and cost of
revenues, but has no gross margin effect. In addition, QuadraMed reclassed
certain items that had previously been included within licenses and costs of
licenses to services and cost of services, respectively. These
reclassifications did not impact previously reported operating income, net
income or earnings per share data.
2. For the quarter ended September 30, 2002, income (loss) from continuing
operations before extraordinary item includes restatement fees of
QuadraMed's 2001 financial statements and reduced gross margin resulting
from lower sales volume.
3. For the quarter ended December 31, 2002, net income (loss) reflects an $8.8
million gain from the sale of the HIM Services Division and an earn-out
provision on the EZ-CAP sale.
F-35
QuadraMed Corporation
Unaudited Quarterly Consolidated
Financial Data
Quarter
-------------------------------------------------------
(thousands of dollars, except
per share amounts) First Second Third Fourth Total
----- ------ ----- ------ -----
2001
- ----
Revenue $ 25,921 $ 29,207 $ 29,755 $ 32,163 $ 117,046
========= ========= ======== ======== =========
Gross margin $ 15,872 $ 17,421 $ 19,928 $ 21,048 $ 74,269
========= ========= ======== ======== =========
Loss from continuing operations $ (4,434) $ (991) $ 2,748 $ 1,722 $ (955)
========= ========= ======== ======== =========
Extraordinary gain on redemption of
debentures $ -- $ 2,402 $ 10,505 $ -- $ 12,907
========= ========= ======== ======== =========
Net income (loss) $ (4,829) $ 1,214 $ 12,311 $ 717 $ 9,413
========= ========= ======== ======== =========
Earnings (loss) per share
Basic
Continuing operations $ (0.17) $ (0.03) $ 0.11 $ 0.07 $ (0.04)
Total $ (0.19) $ 0.05 $ 0.48 $ 0.03 $ 0.37
Diluted
Continuing operations $ (0.17) $ (0.03) $ 0.10 $ 0.06 $ (0.04)
Total $ (0.19) $ 0.05 $ 0.46 $ 0.03 $ 0.37
Weighted average shares outstanding
Basic 25,734 25,543 25,403 25,584 25,566
========= ========= ======== ======== =========
Diluted 25,734 25,543 27,057 27,408 25,566
========= ========= ======== ======== =========