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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 2001
OR
[ ] Transition Report Pursuant To Section 13 Or 15(D) Of The Securities
Exchange Act Of 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
22 PELICAN WAY, SAN RAFAEL, CALIFORNIA 94901
(Address of Principal Executive Offices) (Zip Code)
(415) 482-2100
(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/A or any
amendment to this Form 10-K/A. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 18, 2002 was approximately $234,097,000 (based upon the
closing price for shares of the Registrant's common stock as reported on the
Nasdaq SmallCap Market for March 18, 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 12 b-2 of the Act) Yes [ ] No [X]
On March 18, 2002, 27,125,900 shares of the Registrant's common stock,
$0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 2002
Annual Meeting of Stockholders held on April 29, 2002 are incorporated by
reference in Part III, Items 10 to 13, of this Form 10-K/A.
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Explanatory Note
This amendment on Form 10-K/A (the "Amended Report") amends and restates
items 1, 6, 7, 8 and 14 of the Annual Report of QuadraMed Corporation
("QuadraMed", the "Company", "we" or "us") on Form 10-K previously filed for
the year ended December 31, 2001 (the "Prior Report"). Subsequent to the
issuance of our financial statements on the Prior Report, we discovered
accounting and financial reporting errors affecting such financial statements.
Many of these errors related to revenue recognition, valuation of marketable
investments, stock-based compensation and the classification of capitalized
software development costs, discontinued operations and non-recurring charges.
We have determined that these errors require the restatement of certain of our
previously reported financial statements. This amendment restates our
financial statements as of December 31, 2001 and 2000, and for the years ended
December 31, 2001, 2000 and 1999. The circumstances necessitating the
restatement and their effects are more fully described in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations of
this Amended Report.
This Amended Report also includes certain additional disclosures required
by the Staff of the Securities and Exchange Commission. We are also filing
with this Form 10-K/A, as Exhibits 99.1 and 99.2, the certifications of Chief
Executive Officer and Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
Except for the items noted above and updates to items 3 and 5 (a) of the
Prior Report to reflect subsequent events, the information provided in this
Amended Report is the same as that provided in the Prior Report. We direct you
to refer to the other reports we file with the Securities and Exchange
Commission from time to time after the date of this report for our more current
information, including "Risk Factors that May Impact Future Operating Results."
QUADRAMED CORPORATION
2001 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I..................................................................... 1
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 12
Item 3 Legal Proceedings................................................ 12
Item 4 Submission of Matters to a Vote of Security Holders.............. 13
PART II.................................................................... 13
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 13
Item 6 Selected Financial Data.......................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 41
Item 8 Financial Statements and Supplementary Data...................... 42
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 42
PART III................................................................... 42
Item 10 Directors and Executive Officers of the Registrant............... 42
Item 11 Executive Compensation........................................... 42
Item 12 Security Ownership of Certain Beneficial Owners and Management... 42
Item 13 Certain Relationships and Related Transactions................... 42
PART IV.................................................................... 43
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 43
PART I
Cautionary Statement on Risks Associated With Forward-Looking Statements
This Amended 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/A under "Business Risks" in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Item 1. Business
------ --------
Restatement of Financial Statements
-----------------------------------
The Consolidated Financial Statements included in this Form 10-K/A have
been restated, as more fully described in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Overview
--------
We were incorporated in September 1993 in California under the name
QuadraMed Corporation and reincorporated in Delaware in 1996.
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)". 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;
o Complysource(r) Software and Service Solutions, which are generally
engaged by health information management professionals, compliance and
legal officers, and outside legal counsel; 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. During 2001, management's strategy consisted of
continued expense discipline, increased sales activity to improve revenue
growth, and development and investment in our key products. In management's
view, these results illustrate the effectiveness of our strategy over the
eighteen (18) months ended December 31, 2001 in focusing on the following:
o Integrating business units from the 28 acquisitions made between 1993
and 1999;
o Reducing overall expenses;
o Reducing debt;
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o Increasing revenues;
o Selling non-strategic assets;
o Investing in research and development; and,
o Instituting key financial and operational improvements.
In 2000, our operations were realigned into 5 distinct business segments.
With the sale of the EZ-CAP managed care software business in August 2001, we
are now managed in 4 distinct business segments. Although not reported as a
business segment, approximately 4% of our revenue was generated from specialty
product lines that are not aligned with an operating division. The 4 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;
o Health Information Management Services Division, which provides (i)
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Health Information Interim Management, Management Consulting, and
Department Outsourcing services; (ii) Coding and Education services;
(iii) Complysource Regulatory Compliance services; and (iv) Complysource
HIPAA Regulatory Compliance services; and,
o Financial Services Division, which identifies and collects accounts
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receivables for hospitals and medical groups and provides other
Chancellor products and services.
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 that affect software producers and
consumers:
o Computing power, storage capacity, and network bandwidth have in the
past and may continue to double every 18, 12, and 6 months,
respectively;
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; and,
o Web-native applications with a clean Internet architecture will likely
have a significant role in the future.
In 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 In the Affinity product line, a prototype Computerized Physician Order
Entry ("CPOE") system, used to assist physicians in clinical decision-
making and improve patient safety, was completed. 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; and,
o In the Quantim product line, development was started on a single, fully-
integrated web-native platform that improves and combines the
functionality of several existing health information management product
offerings in coding, compliance, abstracting and record 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.
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Our product research and development spending during 2001 declined due to
the elimination of corporate research and development projects to shift to a
focus on specific product line development, elimination of support costs for
discontinued products, and the termination of several product development
efforts that were not critical to our core strategies.
Description of Operating Division Products and Markets
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Enterprise Division
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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 sold only in the United States, and the division's primary offices
are in Reston, Virginia; Irvine, California; and Neptune, New Jersey.
Affinity(r) is the Enterprise Division's core product. For the last 5
consecutive review periods, Affinity has been selected as the top "Major Acute
Care" software solution 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. 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. In
addition to "core" applications, clients frequently purchase additional
Affinity applications that are designed to:
o Streamline their workflow processes;
o Reduce administrative expenses;
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 5 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;
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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 will be generally available starting in the second quarter of
2003. Designed with the assistance of human factors 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. In January 2002, QuadraMed
and Oracle Corporation announced a strategic healthcare software development
agreement under which we became the first member of the Oracle Healthcare
Partner Initiative and agreed to develop our Affinity advanced clinical
applications on the Oracle Healthcare Transaction Base, a web-native service
architecture and development platform focused on individuals and based on
industry standards such as Health Level Seven, version 3. We entered the
agreement to address the evolving needs of certain of our IDN customers.
Affinity 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 6 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
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
4
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 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
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 will increase in the
short term 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
5
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 4 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, and its main offices are in Alameda
and San Marcos, California.
Our new Quantim Health Information Management software products 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 a single, fully integrated, web-native platform
for the Health Information Management product suite that would significantly
improve and combine 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.
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 providers the flexibility to customize their abstracting workflow to
meet their data collection reporting needs. When purchased with Quantim Coding
and Quantim Compliance, Quantim Abstracting will provide an integrated solution
that enables the user to access both the Coding and Compliance tools within a
patient encounter.
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 targeted our legacy-based coding products primarily to hospitals with
less than 200 beds, which represent approximately 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 significant
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
6
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 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 a compliance tool to screen professional fees and services (HCFA1500),
Quantim ProFEE Compliance Suite to all 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, one of the fastest growth segments
in the HIM industry market. We also believe that the advent of the Outpatient
Prospective Payment System and APCs may provide additional opportunities for
our Quantim Outpatient Compliance tool.
Our 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.
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
o VA Coding - nCoder+/PTF
Abstracting o WinCoder CS
o Cascade Master System
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
7
Our Health Information Management Software Division also markets our
Quantim Education and Training Services, which were part of the former EZ-CAP
business. This business provides seminars for doctors and medical
professionals in three formats: (i) direct marketing seminars that are
conducted in various locations throughout the country on various subjects, such
as billing collection, coding, and patient satisfaction; (ii) on-site education
seminars that are performed by request at hospitals and other healthcare
organizations; and, (iii) on-line education seminars that are 100% Internet
based, with particular emphasis on coding certification for health information
management professionals.
Health Information Management Services Division
-----------------------------------------------
Our Health Information Management Services Division provides the following
services:
o Health Information Interim Management. We provide both short-term and
long-term interim management for hospital health information
departments. Minimum contract terms for these services are typically
three months. Through this service, we provide hospitals with
qualified, experienced managers;
o Health Information Management Consulting Services. We provide
qualitative or quantitative health information project management and
consulting services to hospitals. Examples of services are JCAHO
accreditation review preparation, departmental reviews and assessments,
and implementation of services or systems;
o Health Information Management Department Outsourcing Services. We
contract with hospitals to outsource their entire health information
management departments. These contracts generally are multi-year and at
a fixed fee, with terms for base line performance;
o Coding, Compliance, and Education. We provide services associated with
inpatient and outpatient coding and coding compliance for hospitals,
physicians, and clinic practices, including backlog coding, coding
auditing, case-mix analysis, coding interim management, coding process
review, and coding education;
o Complysource Regulatory Compliance Services. We provide hospital-wide
compliance risk assessments and audits, compliance plan development,
Department of Justice corporate integrity agreement auditing and
validation, compliance help desk services, charge compliance reviews,
and the Complysource Compliance Assessment and Management software
solution; and,
o Complysource HIPAA Compliance Services. We provide Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") compliance and
education services, HIPAA assessments, and the Complysource HIPAA
Assessment and Management software solution.
Health Information Management Services Division provides services only in
the United States and its main offices are in Englewood, Colorado.
Due to shortages of medical record professionals and the need for broad-
based expertise, we expect hospitals to continue to need consulting services to
assist in the management and execution of their health information management
strategies and responsibilities. In addition, we believe that continued focus
on billing and reimbursement accuracy by government payers and law enforcement
agencies will increase the demand and need for these consulting services. We
provide services throughout the country within a regionally-based operations
structure and market our Health Information Management Services in a variety of
ways, including: (i) requests for proposals sent directly to us; (ii)
healthcare trade shows; (iii) our professionals; (iv) telemarketing; and, (v)
direct mail to generate sales.
On January 2, 2003, we announced the closing of the sale of our HIM
Services Division to Precyse Solutions LLC on December 31, 2002. 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 have the
opportunity to receive an additional $400,000 in cash based on the division's
2002 year-end revenues. As a result of the sale, we expect to record a fourth
quarter 2002 after-tax gain of between $8 million and $9 million.
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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(tm) 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 collect 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.
Other
-----
Historically, a small percentage of our revenue is derived from specialty
product lines that are not aligned with an operating division. Those products
include the Chancellor electronic data interchange or "EDI" Claims Processing
tool, ClaimStar(tm), and the Chancellor Decision Support products, WinPFS(tm)
Software and related Patient Focused Solutions Consulting Services, which
provide critical data required to assess patient population trends and patient
acuity, measure productivity, and establish benchmarks related to patient
safety. These products are sold only in the United States and are provided to
customers primarily out of offices in Kansas City, Missouri, and Chicago,
Illinois.
Financial Information About Segments
------------------------------------
The financial statements and supplementary data, including financial
information about our operating segments, are included in this Form 10-K/A
beginning on page F-1.
9
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, 2001, we had customers
located in all 50 states, the District of Columbia, Puerto Rico, and Canada.
We believe that we will maintain a high percentage of our customers for the
foreseeable future. In 2001, 2000, and 1999, no single customer accounted for
10% or more of our total revenue however; sales to the U. S. government
represented 10.0% of HIM Software Division revenues for the year ended December
31, 2001.
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 compliance, data, and record management products market for the
Health Information Management Software Division: 3M Corporation, SoftMed
Corporation, Inc., MetaHealth, Eclipsys Corporation, and HSS, Inc.;
o In the compliance products and services and health information
management consulting services market for the Health Information
Management Services Division: PricewaterhouseCoopers LLP, Bearing
Point, and Cap Gemini; 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.
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 its implementing regulations, 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.
10
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(r), Affinity(r), Quantim(r), and Complysource(r). 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, 2001, we had 923 employees: 226 in technical services and
support, 328 in consulting services, 107 in general and administration, 84 in
sales and marketing, and 178 in research and development.
Management
----------
The following table sets forth biographical information concerning our
Chief Executive Officer and Executive Officers and senior management, as of
March 18, 2002:
NAME, AGE, TITLE OCCUPATION AND BACKGROUND
---------------- -------------------------
Lawrence P. English, 61 o Chairman of the Board since December 2000 and Chief
Chairman of the Board and 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 to 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, 44, o Executive Vice President and Chief Operating
Chief Operating Officer Officer since December 2001. Previously, President
of the Health Information Management 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 and AMSCO
Canada, both of which are medical equipment
companies, from 1990 to 1995.
o Bachelor of Science degree in Business
Administration from the University of Phoenix.
11
Mark N. Thomas, 49 o Executive Vice President and Chief Financial
Chief Financial Officer Officer since June 2000.
o Chief Financial Officer of Lifeguard, Inc., an
independent health plan, from 1998 until joining
QuadraMed.
o Various executive management positions, including
controller, managing director and treasurer, of
Coregis Insurance Group and Industrial Indemnity
Company, insurance companies owned by Xerox
Corporation, from 1993 to 1997.
o Bachelor of Arts degree in Economics and Political
Science from Occidental College.
o Double Master of Business Administration degree in
Finance and Strategic Planning from Wharton School
of Business.
o Certificate in executive education in corporate
strategy from the University of Michigan.
Michael H. Lanza, 40 o Executive Vice President since September 2000 and
Executive Vice President Corporate Secretary since December 2000.
and Corporate Secretary o Various legal and public affairs positions at CIGNA
Corporation, the publicly owned employee benefits
company, including Vice President & Assistant
General Counsel, CIGNA International; Assistant
General Counsel, Business Practices, CIGNA
Healthcare; and Assistant General Counsel, State
Government Affairs, CIGNA Corporation, from
November 1993 to September 2000.
o Political consultant and attorney in private
practice specializing in real estate development,
finance, and work out from 1986 to 1993.
o Bachelor of Arts from the University of
Connecticut.
o Juris Doctor from the University of Connecticut
School of Law.
Dean A. Souleles, 41 o Chief Technology Officer since August 2000. Joined
Chief Technology Officer QuadraMed in February 2000.
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.
Item 2. Properties
------ ----------
We lease all our facilities and do not own any real property. As of
December 31, 2001, our executive and corporate offices were located in San
Rafael, California, in approximately 33,000 square feet of leased office space
under a lease that expires in 2009. The principal office locations related to
our 4 business segments are described in Item 1. 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
------ -----------------
As of the date of the Prior Report, we were not a party to any material
legal proceedings; however; in October 2002, a series of securities law class
action complaints were filed against us and certain of our officers and
directors in the United States District Court, California Northern District.
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
financial statements concerning our business and financial condition between
May 11, 2000 and August 11, 2002. The complaints seek unspecified monetary
damages and other relief. We intend to defend ourselves vigorously against
these allegations.
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.
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 Securities and Exchange Commission ("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. 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.
12
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.
Additionally, in the normal course of business, we are involved in
litigation relating to claims arising out of our operations. We do not believe
that the ultimate resolution of any pending proceeding at the date of the Prior
Report will have a material adverse effect on our business, financial
condition, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
No matters were submitted during the fourth quarter of 2001 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, 2000
First Quarter.................................... $10.500 $ 5.000
Second Quarter................................... 6.000 2.094
Third Quarter.................................... 2.969 1.188
Fourth Quarter................................... 1.531 0.625
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 (1)................................ 6.980 1.470
Fourth Quarter (1)............................... 3.000 1.160
(1) Beginning August 22, 2002, our common stock is traded on the Nasdaq
National Market under the symbol "QMDCE".
(b) Holdings
--------
On March 18, 2002, the closing price of our common stock was $8.63 per
share. As of that date, there were approximately 275 holders of record of
common stock (excluding beneficial owners whose shares are held in the name of
Cede & Co.), a decrease of 42 from 317 holders of record as of March 2001.
(c) Code of Ethics Disclosure
-------------------------
Pursuant to rules promulgated by the SEC pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002, we hereby disclose that we have previously adopted
(i) a Corporate Compliance Plan and (ii) a Work Rules Handbook, both of which
set forth a code of ethics to be followed by our employees, including senior
13
financial officers. The Audit Committee of the Board of Directors administers
our Corporate Compliance Plan, which provides a mechanism for confidential and
anonymous employee concerns regarding accounting and other ethical issues.
(d) 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.
(e) Recent Sales of Unregistered Securities
---------------------------------------
In June 1999, we issued 435,000 unregistered shares of our common stock in
connection with the acquisition of Linksoft Technologies, Inc. ("Linksoft").
As part of the same transaction, we assumed warrants that, if exercised,
require us to issue 6,424 shares of 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. Warrants that expire in March 2008 remain
outstanding for 1,028 shares of common stock.
In June 1999, we issued 452,807 unregistered shares of our common stock in
connection with the acquisition of Healthcare Financial Informatics ("HFI").
In May 1999, we issued 19,633 unregistered shares of our common stock in
connection with the acquisition of Millennium Consulting Services, LLC
("Millennium Consulting").
In April 1999, we issued 77,419 unregistered common shares in connection
with the acquisition of American ChartGuard Corporation.
In March 1999, we issued 660,000 unregistered shares of our common stock
in connection with the acquisition of Pro Intermed, Inc. ("Pro Intermed").
In March 1999, we issued 2,957,000 unregistered shares of our common stock
in connection with the acquisition of Compucare. As part of the same
transaction, we assumed warrants that, if exercised, require us to issue 24,563
shares of common stock. Warrants for 3,941 shares at an exercise price of
$61.73 expired in December 2000. Warrants for a total of 20,622 shares of
common stock remain outstanding, with 2,690 at an exercise price of $111.54
expiring in January 2003; 11,208 at an exercise price of $223.09 expiring in
October 2005; and 6,724 at an exercise price of $0.15 expiring in February
2006.
(f) 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, 2001.
-------------------------------------------------------------------------------
Number of Securities
Number of Securities Remaining Available
to be Issued Upon Weighted-Average for Future Issuance
Exercise of Exercise Price of Under Equity
Plan Category Outstanding Options Outstanding Options Compensation Plans
------------- ------------------- ------------------- ------------------
Approved by
stockholders* 5,746,800(1) $5.28 2,349,419(2)
-------------------------------------------------------------------------------
* We have two active equity compensation plans, the 1996 Stock Incentive
Plan, as amended, approved by stockholders June 15, 2001 (the 1996 Plan);
and the 1999 Supplemental Stock Option Plan, as amended, approved by
stockholders October 5, 2000 (the 1999 Plan).
(1) Includes 322,692 shares of our common stock originally issuable under
various benefit plans of entities acquired by us.
(2) This number excludes options outstanding and shares issued upon exercise of
options plan-to-date as of December 31, 2001. 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. On this basis, 398,639 additional
shares became available for issuance on January 1, 2002.
14
(g) Preferred Stock
---------------
We have authorized 5 million 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, 2001, we had no outstanding
preferred stock.
Item 6. Selected Financial Data
------ -----------------------
Refer to Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for an explanation of the restatement of
the financial statements as of December 31, 2001 and 2000 and for the years
ended December 31, 2001, 2000 and 1999. The selected financial data presented
below have been reclassified for all periods to reflect operations previously
reported as discontinued operations. Comparison of the selected financial data
presented below may not be indicative of the financial condition or results of
operations of the Company in the future.
Year ended December 31,
---------------------------------------------------
2001 2000 1999
(restated) (restated) (restated) 1998 (1) 1997
-------- -------- -------- -------- -------
(in thousands, except per share amounts)
Consolidated Statement of
Operations Data:
Revenue................... $132,393 $149,733 $205,953 $210,620 $140,800
Loss from operations...... (6,991) (58,774) (43,720) (12,174) (31,848)
Net income (loss)......... 9,413 (36,675) (47,388) (21,376) (37,985)
Basic net income (loss)
per share............... $ 0.37 $ (1.43) $ (1.99) $ (0.91) $ (2.34)
Diluted net income (loss)
per share............... $ 0.37 $ (1.43) $ (1.99) $ (0.91) $ (2.34)
December 31,
---------------------------------------------------
2001 2000 1999
(restated) (restated) (restated) 1998 1997
-------- -------- -------- -------- -------
(in thousands)
Consolidated Balance Sheet
Data:
Working capital........... $ 32,509 $ 46,107 $ 61,030 $ 94,963 $ 16,457
Debentures................ 73,719 115,000 115,000 115,000 --
Total assets.............. 125,133 149,286 201,759 264,733 124,022
Stockholders' equity
(deficit)............... 4,221 (7,166) 27,512 68,988 24,762
(1) As reported amounts have been reclassified to reflect operations
previously reported as discontinued operations.
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 Amended 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
under Business Risks and elsewhere in this Amended Report, and in other
documents we file with the SEC.
Overview
--------
With the appointment of a new management team in mid-2000, we shifted our
strategy from acquisition-based growth to focusing on integrating our
businesses and making various financial and operational improvements. We
realigned our organization into 4 operating segments with zero-based operating
15
budgets and business plans that emphasized customer service, product
enhancement, increased sales, and operating profitability. Further, we reduced
our cost structure by eliminating redundant management and consolidating
offices.
Restatement of Financial Statements
-----------------------------------
On July 25, 2002, we announced that, in the process of reviewing and
finalizing our second quarter financial results, we would evaluate whether that
review would necessitate adjustments to prior periods. On August 9, 2002, we
met with the Audit Committee and our independent auditors at which time it was
determined that the restatement of the consolidated financial statements as of
and for the years ended December 31, 2001, 2000 and as of and for the quarter
ended March 31, 2002 would be required due to our discovery and analysis of
accounting and financial reporting errors related to certain revenue
recognition and other accounting practices. In October 2002, we announced that
additional errors, including the classification of discontinued operations, had
been discovered going back to 1999 and our consolidated financial statements as
of and for the year ended December 31,1999 needed to be restated.
In the course of our review of revenue recognition and prior accounting
practices, we discovered accounting and reporting errors, resulting in, among
other things, an overstatement in revenue and an overstatement in net income
(understatement of net loss) over the restated periods. Per basic share, these
errors resulted in an overstatement of net income of $0.23, overstatement of
net loss of $0.71 and understatement of net loss of $1.50 for the years ended
December 31, 2001, 2000 and 1999, respectively. The cumulative effect on
stockholders' equity over the three-year period caused a net reduction of $15.9
million. The following table summarizes the effect on stockholders' equity as
a result of the restatement:
Stockholders' Equity at December 31, 1998,
as previously reported........................................... $ 68,988
Cumulative Net Losses for 2001, 2000 and 1999,
as previously reported........................................ (51,685)
Cumulative Other Equity transactions for 2001, 2000 and 1999,
as previously reported........................................ 2,858
--------
Stockholder's Equity at December 31, 2001, as previously reported $ 20,161
Cumulative net decrease in Revenue....................... $ 40,075
Reclassifications to costs and expenses not directly
affecting Equity (1).................................. (17,549)
--------
Net decrease in revenues................................. $ 22,526 (22,526)
========
Cumulative net decrease in Costs and Expenses............ $ 17,110
Reclassifications from revenue not directly affecting
Equity (1)............................................ (17,549)
--------
Net increase in costs and expenses.................... $ (439) (439)
========
Correction of accounting for the unrealized loss on
VantageMed investment (2)............................. 4,319
Correction of accounting for restricted shares of
common stock (2)...................................... 2,717
Deferred compensation.................................... (11)
--------
Stockholders' Equity as of December 31, 2001 (restated).. $ 4,221
========
(1) See explanations under Revenue Related Adjustments for CPR, IMN,
Health+Cast and ChartOne.
(2) See explanations under Expense Related Adjustments.
16
The following tables show the affect of the reclassification of
discontinued operations, restatement adjustments, any impact of prior years'
restatement adjustments (balance sheet impact only) and the cumulative affect
of adjustments in order to reconcile certain condensed financial statement data
as previously reported to the restated amounts (in thousands):
Reclassify
As Discontinued Restatement
Reported Operations Adjustments Restated
-------- ---------- ----------- --------
For the year ended December 31,
1999:
Revenue....................... $175,461 $ 64,125 $(33,633) $205,953
Cost of revenue and operating
expenses.................... 196,712 50,733 2,228 249,673
Income (loss) from operations. (21,251) 13,392 (35,861) (43,720)
Income from discontinued
operations.................. 12,134 (12,134) -- --
Other income (expense)........ (2,758) (196) (84) (3,038)
Income taxes.................. (455) (1,062) 887 (630)
-------- -------- -------- --------
Net income (loss)............. $(12,330) $ -- $(35,058) $(47,388)
======== ======== ======== ========
For the year ended December 31,
2000:
Revenue....................... $120,111 $ 32,669 $ (3,047) $149,733
Cost of revenue and operating
expenses.................... 198,246 26,638 (16,377) 208,507
Income (loss) from operations. (78,135) 6,031 13,330 (58,774)
Gain on sale of assets........ -- 23,228 3,968 27,196
Income from discontinued
operations.................. 29,002 (29,002) -- --
Other income (expense)........ (5,503) (17) 1,040 (4,480)
Income taxes.................. (200) (240) (177) (617)
-------- -------- -------- --------
Net income (loss)............. $(54,836) $ -- $ 18,161 $(36,675)
======== ======== ======== ========
For the year ended December 31,
2001:
Revenue....................... $129,435 $ 6,353 $ (3,395) $132,393
Cost of revenue and operating
expenses.................... 127,136 4,783 7,465 139,384
Income (loss) from operations. 2,299 1,570 (10,860) (6,991)
Gain on sale of assets........ -- 6,916 172 7,088
Income from discontinued
operations.................. 8,160 (8,486) 326 --
Other income (expense)........ (7,885) -- 4,444 (3,441)
Income taxes.................. -- -- (150) (150)
Gain on redemption of
debentures.................. 12,907 -- -- 12,907
-------- -------- -------- --------
Net income (loss)............. $ 15,481 $ -- $ (6,068) $ 9,413
======== ======== ======== ========
17
Effect of
Reclassify Prior period
As Discontinued Restatement Restatement Cumulative
Reported Operations Adjustments(1) Adjustments(2) Adjustments Restated
-------- ---------- -------------- ------------- ----------- --------
As of December 31, 2000:
Cash and investments... $ 39,664 $ -- $ 906 $ (906) $ -- $ 39,664
Other current assets... 47,393 106 5,408 (7,676) (2,162) 45,231
Other long-term assets. 66,892 1,890 (18,512) 14,121 (2,501) 64,391
-------- ------ -------- -------- -------- --------
Total assets........... $153,949 $1,996 $(12,198) $ 5,539 (4,663) $149,286
======== ====== ======== ======== ======== ========
Current liabilities.... $ 31,285 $1,078 $ 22,380 $(15,955) $ 7,503 $ 38,788
Other liabilities...... 118,343 918 336 (1,933) (679) 117,664
-------- ------ -------- -------- -------- --------
Total liabilities...... 149,628 1,996 22,716 (17,888) 6,824 156,452
Stockholders' equity... 4,321 -- (34,914) 23,427 (11,487) (7,166)
-------- ------ -------- -------- -------- --------
Total liabilities and
stockholders' equity. $153,949 $1,996 $(12,198) $ 5,539 $ (4,663) $149,286
======== ====== ======== ======== ======== ========
As of December 31, 2001:
Cash and investments... $ 32,213 $ -- $ -- $ -- $ -- $ 32,213
Other current assets... 48,741 -- (2,162) (2,022) (4,184) 44,557
Other long-term assets. 49,789 -- (2,501) 1,075 (1,426) 48,363
-------- ------ -------- -------- -------- --------
Total assets........... $130,743 $ -- $ (4,663) $ (947) $ (5,610) $125,133
======== ====== ======== ======== ======== ========
Current liabilities.... $ 33,799 $ -- $ 7,503 $ 2,959 $ 10,462 $ 44,261
Other liabilities...... 76,783 -- (679) 547 (132) 76,651
-------- ------ -------- -------- -------- --------
Total liabilities...... 110,582 -- 6,824 3,506 10,330 120,912
Stockholders' equity... 20,161 -- (11,487) (4,453) (15,940) 4,221
-------- ------ -------- -------- -------- --------
Total liabilities and
stockholders' equity. $130,743 $ -- $ (4,663) $ (947) $ (5,610) $125,133
======== ====== ======== ======== ======== ========
(1) Represents restatement adjustments recorded in prior periods.
(2) Represents restatement adjustments recorded in the current period.
The restatement can be described in the following general categories:
Reclassification of Discontinued Operations:
-------------------------------------------
o We determined that the results for two divested operations were improperly
reported as discontinued operations. The years 2001, 2000 and 1999 have
been reclassified to reflect the results of those operations in continuing
operations and the gains on the sales of those operations have been reported
as other income. The balance sheet as of December 31, 2000 has been
reclassified to reflect the assets and liabilities in their respective
classifications. The assets and liabilities were previously accumulated
into a net amount and reported as a single amount. This reclassification
had no effect on stockholders' equity. As the net effect of these
operations were previously reported in the statements of operations as
discontinued operations, there is no effect on previously reported net
income (loss) or stockholders' equity.
Revenue Related Adjustments:
---------------------------
The following table summarizes the cumulative decrease in revenue as a
result of the restatement (in thousands):
2001 2000 1999 Total
---- ---- ---- -----
HIM divisions....................... $ 3,255 $ 1,437 $12,470 $17,162
Enterprise Division................. (365) (557) 3,810 2,888
Other............................... 399 564 1,513 2,476
CPR................................. (9) (190) 5,651 5,452
IMN................................. 40 (1,132) 5,189 4,097
Health+Cast......................... -- -- 5,000 5,000
ChartOne............................ 75 2,925 -- 3,000
------- ------- ------- -------
Decrease to Revenue................. $ 3,395 $ 3,047 $33,633 $40,075
======= ======= ======= =======
18
o HIM Software Division. We determined that revenue had been misstated for
---------------------
certain periods on term licenses sold in our Health Information Management
("HIM") Software Division that were partially recognized previously as
perpetual licenses. As a result, license revenue that had been recognized
upon shipment has now been deferred and will be recognized ratably over the
term of the respective licenses.
o HIM Software Division. We determined that certain HIM Software Division
---------------------
revenues recorded during Fourth Quarter 2001 required deferral after we
offered a yet to be released product that included significant new features
and functionality. Therefore, delivery of the current version of the
product is not considered to be complete until the specified product upgrade
is delivered and all other requirements for recognition of revenue under the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, Software Revenue Recognition, have been met.
o HIM Software Division and Enterprise Division. We determined that revenue
---------------------------------------------
had been misstated for certain periods on licenses for certain products with
bundled consulting and training services which are essential to the
functionality of the software and such services are generally not available
from other providers. Revenue on these contracts has been deferred and is
now being recognized under the provisions of SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
This primarily affected HIM Software and Enterprise divisions.
o Enterprise Division. We determined that hardware revenue associated with
-------------------
certain Enterprise Division contracts that was previously recognized upon
shipment should have been included in the percentage of completion
calculation under contract accounting. These revenues have been deferred
and are now being recognized in accordance with SOP 81-1.
o Other. We determined certain revenues for all divisions previously
-----
recognized should have been recognized only upon receipt of cash and certain
charges to the allowance for doubtful accounts should have been revenue
reversals. Adjustments have now been made to reflect the appropriate
treatment of each of these items.
o CPR. In 2000, we recorded a non-recurring charge of $5.1 million with
---
respect to the collectibility of certain unbilled receivables for which
revenue was previously recognized in 1999. As a result of the restatement,
$5.7 million was recorded as reduction of revenue in 1999 and the non-
recurring charge in 2000 was reversed. For all periods, revenue has been
adjusted to reflect recognition of revenue when services are performed, no
remaining obligations exist, and cash has been received.
o IMN. In 2000, we recorded a non-recurring charge of $5.1 million with
---
respect to discontinuing the Enovation product as well as negotiation
settlements with various customers. There was a term sheet agreed to in
March 2000; the agreement was finalized and cash collected on the settlement
in Second Quarter 2000. As a result of the restatement, all revenue
previously recognized in 1999 in the amount of $5.2 million was reversed,
the 2000 non-recurring charge of $5.1 million was reversed and $1.1 million
in revenue was recognized in 2000.
o Health+Cast: In 1999, we paid $11.0 million to acquire $5.0 million of
-----------
prepaid royalties and $6.0 million of acquired technology from Health+cast.
In a separate transaction in 1999, we also received $5.0 million from
Health+cast as part of a sale of IMN enterprise software. As part of the
restatement, $5.0 million was reversed from revenue in 1999 and the
remaining $6.0 million was determined to be impaired due to a lawsuit in
1999 between the two companies. We originally recognized an impairment
charge of $10.6 million in 2000; as a result of the restatement, that amount
was reversed from non-recurring charges in that year.
o ChartOne. Intercompany sales of software licenses to ChartOne in the second
--------
quarter of 2000 were incorrectly recorded as revenue. We subsequently sold
our equity interest in ChartOne. The new owners, in effect, purchased the
software license along with acquiring ChartOne. As a result, $3.0 million
was reclassified from license revenue to increase the gain on the sale of
Chart One.
19
Expense Related Adjustments:
---------------------------
The following table summarizes the increases (decreases) to operating
expenses and other income (expense) as a result of the restatement (in
thousands):
2001 2000 1999 Total
---- ---- ---- -----
Changes in cost associated with
revenue adjustments (1)............. $ -- $(23,549) $ 6,000 $(17,549)
Cost of revenue adjustments........... (337) (3,258) (3,347) (6,942)
Capitalized software development costs (903) (209) 2,845 1,733
Other operating expenses.............. 2,310 (1,792) (4,995) (4,477)
Life insurance and SERP expenses...... 1,065 706 747 2,518
Restricted shares of common stock..... 303 2,414 -- 2,717
VantageMed............................ 85 4,063 -- 4,148
Income taxes.......................... 150 417 175 742
------ -------- ------- --------
Net increase (decrease) to costs
and expenses........................ $2,673 $(21,208) $ 1,425 $(17,110)
====== ======== ======= ========
(1) See the above explanation for CPR, IMN, Health+Cast and ChartOne.
o Cost of revenue. Certain costs associated with contracts now accounted for
---------------
under percentage of completion have been deferred until recognition of the
related revenue.
o Capitalized software. We expensed certain previously capitalized software
--------------------
development costs in 1999, tracked and allocated remaining un-amortized
capitalized costs to upgrades and re-evaluated impairment based on restated
revenue by product for all years.
o Other operating expenses. Other operating expenses include corrections of
------------------------
errors related to impairments of tangible and intangible assets, accruals
for expenses and depreciation expenses.
o Life insurance and SERP. We determined that certain life insurance
-----------------------
contracts for certain of our former executives and the Supplemental
Executive Retirement Plan ("SERP") were accounted for incorrectly as of
December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999. As part of the restatement, life insurance premiums were
discounted based on a ten-year holding period as per the original plan and
revised in 2000 to four years due to a plan amendment. The discount taken
at the time of payment is recorded as an expense and the accretion of the
discount is recorded to interest income on a quarterly basis. For the SERP,
as part of the restatement, an actuarial analysis was obtained to correctly
reflect the appropriate accrued benefit obligation, additional liability and
unrecognized prior service cost. All years have been restated to properly
account for these items.
o Restricted shares. We determined that the restricted stock grants made to
-----------------
certain former executives underwent accelerated vesting at the time of the
executives' involuntary separation resulting in additional compensation
expense in the years ended December 31, 2001 and 2000.
o VantageMed. We determined that a fourth quarter 2000 impairment of the
----------
VantageMed investment characterized as temporary and recognized as a
component of comprehensive loss in equity, should have been an other-than-
temporary impairment and recorded in net loss for the period. This
adjustment did increase the net loss for 2000 but did not change total
stockholders' equity.
o Income taxes. We revised our provisions for federal and state income taxes
------------
for the restated periods.
Reclassifications:
-----------------
o In 2000, we recorded certain costs as non-recurring charges, such as
restructuring costs, impairments of tangible and intangible assets and
reserves for legal costs. Those charges have been reclassified as period
costs in their respective expense lines on the restated Consolidated
Statements of Operations. These reclassifications have had no effect on
previously reported net income (loss) or stockholders' equity.
20
o We reclassified amortization of software development costs from research and
development expenses to cost of licenses. These reclassifications have had
no effect on previously reported net income (loss) or stockholders' equity.
o Certain intangible assets that were identified as customer lists have been
reclassified from goodwill.
o Certain unbilled receivables for which revenue had been deferred were offset
against deferred revenue in 2001 and 2000.
Summary of Significant Accounting Policies
------------------------------------------
Our significant accounting policies have a considerable impact on
Management's Discussion and Analysis.
Use of Estimates
----------------
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
intangibles, primarily goodwill, 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 discount
rates used to determine net present values, useful lives of the acquired assets
as well as technological advances. We periodically review and test our
estimates, including those related to valuations of intangibles including
acquired software, income taxes, bad debt, restructuring, pensions and other
benefits, and contingencies and litigation. Actual results may differ from
these estimates.
Revenue Recognition
-------------------
Our revenue in the ordinary course of business is principally generated
from two sources: (i) licensing arrangements and (ii) consulting services.
License Revenue
---------------
Our Enterprise and Health Information Management ("HIM") Software
divisions primarily generate our software license revenue. Our license revenue
consists of fees for licenses of our software products, hardware, maintenance,
hosted services, customer training and consulting services. Cost of license
revenue primarily includes product, delivery and royalty costs, labor costs for
engineers performing implementation services and technical support and training
personnel and facilities and equipment cost.
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. 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 the Company with regard to
implementation remain; the fee is fixed and determinable; and, collectibility
is probable. We consider all arrangements with payment terms extending beyond
one year 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. 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.
21
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 allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year) and revenue
allocated to training and other service elements is recognized as the services
are performed. 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 twelve months. We
recognize revenue from perpetual and time-based licenses that include
unspecified additional software products ratably over the term of the
arrangement.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not essential, the revenue allocated to the
software services is recognized as the services are performed. If we provide
consulting services that are considered essential to the functionality of the
software products, both the software product and services revenue are
recognized in accordance with the provisions of SOP 81-1, Accounting for
--------------
Performance of Construction-Type and Certain Production-Type Contracts. Such
----------------------------------------------------------------------
contracts typically consist of implementation services and are generally on a
time and materials basis.
Services Revenue
----------------
Our Financial Services and HIM Services Divisions primarily generate our
services revenue, which consists of 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.
We recognize revenue on our services revenue in accordance with Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
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.
Intangible Assets
-----------------
Goodwill - The carrying value of goodwill is initially determined at the
--------
time of our acquisitions based upon the amount of purchase price in excess of
the fair value of the tangible net assets acquired and other identifiable
intangible assets, such as in-process research and development, trademarks and
customer lists. Capitalized amounts are amortized on a straight-line basis
over a period of five to ten years. Goodwill is reviewed quarterly for
impairment and if events or circumstances indicate that the carrying amount of
the assets may not be recoverable based upon estimated future undiscounted cash
flows, the assets are written down to net realizable value in accordance with
SFAS No. 121, Impairment of Long-Lived Assets. As of January 1, 2002, we
-------------------------------
adopted SFAS No. 142, Goodwill and Intangible Assets, which eliminates the
------------------------------
amortization of goodwill but requires annual impairment testing. In
conjunction with the adoption of SFAS No. 142 on January 1, 2002, we engaged a
valuation firm to perform an impairment test on the carrying value of goodwill
as of December 31, 2001. The valuation firm determined that there was no
impairment as of that date.
Other Intangible Assets - Other intangible assets primarily relate to
-----------------------
capitalized software development costs, acquired software, trademarks and
customer lists acquired in our purchase business combinations. Except for
capitalized software development costs, capitalized amounts are amortized on a
straight-line basis over a period of five to seven years and are reviewed
quarterly for impairment in accordance with SFAS No. 121.
Capitalized 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, which substantiates that the computer software product can be
produced in accordance with its design specifications. Capitalized software
development costs require a continuing assessment of their recoverability.
This assessment requires considerable judgment by management with respect to
various factors, including, but not limited to, anticipated future gross
margins, estimated economic lives, and changes in software and hardware
22
technology. Amortization is based on the greater of the amount computed using
(a) the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product,
generally five years, and is charged to cost of revenues.
Income Taxes
------------
We account 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 Pronouncements
--------------------------------
In July 2001, the FASB issued SFAS No. 141, Business Combinations. All
---------------------
business combinations within the scope of SFAS No. 141 are to be accounted for
under the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001. The adoption of the new
statement has not had a material effect on our financial condition, results of
operations, or cash flows.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
-----------------------------
Assets, which requires that goodwill and certain other intangible assets no
------
longer be amortized to operations, but instead be reviewed for impairment at
least once a year. The provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. As of December
31, 2001, our unamortized goodwill balance was $24.2 million, and was being
amortized over periods ranging from 7 to 10 years. As a result of SFAS No.
142, we currently estimate the elimination of goodwill amortization will result
in pre-tax expense reductions of approximately $4.0 million in the year ending
December 31, 2002. We do not expect to record an impairment charge for the
year ending December 31, 2002, however, there can be no assurance that a
significant impairment charge will not be recorded. We have not yet finalized
the financial statement impact of SFAS No. 142 for periods subsequent to
December 31, 2001.
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 August 2001, the FASB issued SFAS No. 144, Accounting for the
------------------
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 applies to all long-
-------------------------------------------
lived assets and requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for us in 2002. An independent valuation as of December 31, 2001 was
completed finding no impairment as of that date. We have not yet finalized the
financial statement impact of SFAS No, 144 for periods subsequent to December
31, 2001.
In January 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF
No. 01-14, Income Statement Characterization of Reimbursements for 'Out-of-
----------------------------------------------------------------
Pocket' Expenses Incurred. EITF No. 01-14 requires billable out-of-pocket
-------------------------
reimbursable expenses to be included in both license and service revenue and
cost of licenses and services. We do not expect that the adoption of EITF No.
01-14 will impact either our income (loss) from operations or net income
(loss), but we anticipate that it will increase revenue and cost thereby
reducing gross margin percentages.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
--------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
-----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. We anticipate that implementation of this new standard will not
have a significant impact on our financial condition, results of operations and
cash flows.
23
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities. This statement addresses
-------------------------------------------
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS No.
146 are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. We are currently
evaluating the effect that implementation of this new standard will have on our
financial condition, results of operations and cash flows.
In November 2002, the Financial Accounting Standards Board 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. 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.
24
Results of Operations
---------------------
The following table sets forth certain items from our consolidated
statement of operations, expressed as a percentage of net revenue.
Year ended December 31,
-----------------------------------
2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Revenue
Licenses................................ 68.4% 48.0% 49.1%
Services................................ 31.6 52.0 50.9
----- ----- -----
Total revenue......................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue
Cost of licenses........................ 17.8 18.0 11.2
Cost of services........................ 17.1 34.3 30.8
----- ----- -----
Total cost of revenue................. 34.9 52.3 42.0
----- ----- -----
Gross margin.......................... 65.1 47.7 58.0
----- ----- -----
Operating expenses
General and administration.............. 40.4 45.2 32.3
Sales and marketing..................... 12.4 14.6 11.2
Research and development................ 10.4 16.3 14.9
Amortization, impairment and other
operating charges..................... 7.2 10.8 20.8
----- ----- -----
Total operating expenses.............. 70.4 86.9 79.2
----- ----- -----
Loss from operations...................... (5.3) (39.2) (21.2)
----- ----- -----
Other income (expense)
Interest expense........................ (4.4) (4.4) (3.7)
Interest income......................... 1.8 1.4 2.2
Gain on sale of assets.................. 5.4 18.1 --
----- ----- -----
Other income (expense), net........... 2.8 15.1 (1.5)
----- ----- -----
Loss before income taxes and
extraordinary item...................... (2.5) (24.1) (22.7)
Provision for income taxes.............. (0.1) (0.4) (0.3)
----- ----- -----
Net loss before extraordinary item........ (2.6) (24.5) (23.0)
Gain on redemption of debentures........ 9.7 -- --
----- ----- -----
Net income (loss)......................... 7.1% (24.5)% (23.0)%
===== ===== =====
Years ended December 31, 2001, 2000 and 1999 (restated)
------------------------------------------------------
Revenues
--------
Licenses. License revenue includes license, installation, consulting and
--------
post-contract support fees, third-party hardware and software sales, and other
revenues related to the licensing of software products. License revenue in
2001 was $90.5 million, an increase of $18.7 million or 26.0% over 2000. The
increase principally represents growth for the Enterprise and Health
Information Management Software divisions of 32.7% and 33.7%, respectively
offset by a decrease of $2.5 million of license revenue related to the sale of
EZ-CAP in August 2001. With the exception of modest, inflation-sensitive price
increases for maintenance contracts, revenue growth was derived principally
from increased software sales.
License revenue in 2000 was $71.8 million, a decrease of $29.3 million or
29.0% from 1999. The decrease represents decreases for the Enterprise and HIM
Software divisions of 28.4% and 7.4%, respectively, principally from delayed
25
customer purchasing decisions, poor operational execution, and the diversion of
management's attention to integrate our numerous acquisitions.
Services. Service revenue was $41.9 million in 2001, a decrease of $36.0
--------
million or 46.2% from 2000. The decline in the Health Information Management
Services Division of 43.8% resulted from the cancellation of several hospital
outsourcing contracts and was partially offset by an increase in the Financial
Services Division, which achieved a 31.1% growth in revenue. Early in 2001, we
terminated the CPR services line within the Financial Services Division due to
lack of profitability and concentrated on the accounts receivable and managed
care payment review services.
Service revenue was $77.9 million in 2000, a 25.6% decrease from $104.8
million in 1999 primarily reflecting the disposal of ROI in May 2000.
Cost of Revenues
----------------
Cost of Licenses. Cost of licenses consists primarily of salaries,
----------------
benefits, and allocated costs related to software installations, hardware
costs, and royalties to third parties. The amortization of capitalized
software development expense related to products that are currently available
is included in costs of licenses. Cost of licenses in 2001 of $23.5 million
was 13.1% below the corresponding 2000 level despite higher revenue, reflecting
expense reduction actions initiated in 2000 and continued throughout 2001.
Gross margin on license revenue was 74.0%, an improvement of 11.6 percentage
points over the 2000 level of 62.4%.
Cost of licenses in 2000 was $27.0 million, an increase of 17.0% from
$23.1 million in 1999. As a percentage of license revenues, cost of licenses
increased to 37.6% in 2000 from 22.8% in 1999 principally as a result of a
change in the product mix. The overall increase of $3.9 million was due to
lower variable costs for 2000 being offset by significantly higher fixed costs
as compared to 1999.
Cost of Services. Cost of services includes expenses associated with
----------------
services performed for health information management, business office
outsourcing, compliance and consulting services, and accounts receivable
management. Cost of services in 2001 of $22.6 million was $28.8 million or
56.0% below the 2000 level of $51.4 million, primarily reflecting the sale of
ROI in June 2000 which represented $12.9 million of costs of services in 2000
and expense reductions initiated in 2000 and continued throughout 2001. The
gross margin earned on services revenue in 2001 was 46.0%, which was 12.0
percentage points more than the 2000 level of 34.0% reflecting a combination of
lower revenue and the expense reductions noted above.
Cost of services in 2000 was $51.4 million, or 18.9% lower than the $63.4
million in 1999. As a percentage of service revenues, cost of services
increased to 66.0% in 2000 from 60.5% in 1999. Cost of services in the
aggregate decreased $12.0 million in 2000 compared to 1999 primarily as a
result of the disposal of ROI. Cost of services as a percentage of service
revenue increased in 2000 principally due to a disproportionate decrease in
fixed costs on a significantly lower revenue base.
Operating Expenses
------------------
General and Administration. General and administration expense was $53.5
---------------------------
million in 2001, a decrease of $14.1 million or 20.8% compared to $67.6 million
in 2000. As a percentage of total revenue, general and administration expense
decreased to 40.4% in 2001, compared to 45.2% in 2000. The decrease results
primarily from the divesture of ROI in June 2000, which had $8.4 million in
general and administrative expenses in 2000, and a $5.4 million decrease in
legal expenses and charges in 2001 as a result of costly litigation during
2000. General and administrative expenses for EZ-CAP (divested August 2001)
were approximately equal at $1.3 million in each of 2001 and 2000.
General and administration expenses in 2000 were $1.1 million or 1.6% more than
the $66.6 million in 1999. As a percentage of total revenues, general and
administrative expenses were 32.3% in 1999. Excluding ROI and EZ-CAP, which
collectively contributed $18.1 million in general and administrative expenses
in 1999, these expenses increased $8.9 million year over year principally due
to the significance of legal expenses and charges in 2000, an increase of $6.1
million over 1999, and accelerated vesting of restricted shares of common stock
amounting to $1.9 million in 2000 for which there were no similar expenses in
1999.
26
Sales and Marketing. Sales and marketing expense declined in 2001 to
-------------------
$16.4 million compared to $21.9 million in 2000 reflecting a decrease as a
percentage of revenue to 12.4% in 2001 from 14.6% in 2000. The decline in
sales and marketing expense was due to tighter control of most corporate
marketing, advertising and trade show costs, and the elimination of several
sales positions related to divested products.
Sales and marketing expenses were 4.7% less in 2000 compared to the $23.0
million in 1999. As a percentage of total revenues, sales and marketing
expenses were 11.2% in 1999. The decrease in these expenses in 2000 was
primarily due to the restructuring actions taken in 2000 while the increase as
a percentage of total revenue was principally due to the decline in sales
volumes.
Research and Development. Research and development expense in 2001 was
------------------------
$13.8 million, compared to $24.4 million in 2000, a decline of 43.4%. As a
percentage of revenue, the decrease was 5.9 percentage points to 10.4% in 2001
from 16.3% 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 representing 11.5% of research
and development expenditures in 2001, compared to $534,000 or 2.1% of
expenditures in 2000, on products qualifying for capitalization under the
definition of technological feasibility.
Research and development expenses decreased in 2000 by 20.4% from $30.7
million in 1999. As a percentage of total revenues, research and development
costs increased in 2000 to 16.3% from 14.9% in 1999. The research and
development expense decrease in 2000 was principally due to the reduction in
product versions and associated maintenance requirements while the increase as
a percentage of total revenues, was primarily due to the smaller revenue base.
We capitalized $2.3 million of software development costs in 1999, which
represented 7.0% of total research and development expenditures in 1999.
Amortization of capitalized software development costs totaled $2.0
million, $1.7 million, and $910,000 in 2001, 2000, and 1999, respectively.
Amortization, Impairment and Other Operating Charges.
----------------------------------------------------
Amortization, impairment and other operating charges was $9.5 million,
$16.1 million and $43.0 million in 2001, 2000 and 1999, respectively, which
primarily consists of the following items:
o Amortization of goodwill and other intangible assets, excluding
capitalized software development costs, declined to $6.2 million in 2001
from $7.8 million in 2000 and $7.8 million in 1999 as certain assets
reached the end of their amortized lives.
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 During 1999, in accordance with SFAS No. 121, the estimated future
undiscounted cash flows from certain acquired intangible assets were not
sufficient to cover future amortization of the intangible assets and we
recorded $11.5 million to write-down these assets. This write-down
consisted of charges associated with the acquisitions of Healthcare
Recovery, Inc. in 1997, and Healthcare Cash Management Seminars, Inc.,
American Medical Network, Inc., Velox, and American Hospital Directory,
Inc. in 1998.
o In conjunction with the acquisition of Med Data during 1999, we recorded
a $l.5 million charge for acquired in-process research and development
costs as the technology had not achieved technological feasibility and
had no alternative future use. There were no charges for acquired in-
process research and development during the years 2001 or 2000.
o Non-recurring charges of $4.7 million and $7.7 million were incurred
during the years ended December 31, 2000 and 1999, respectively. The
2000 charges consisted of $3.4 million associated with separation
agreements for officers and $1.3 million for employee severance and
closure of facilities. The 1999 charges were predominately severance
for terminated employees and contractual services and were fully
utilized in 1999. As of December 31, 2001, there is no remaining
liability for restructuring costs.
27
o Additionally during 1999, we incurred $6.9 million in acquisition costs,
wrote down $4.8 million in assets associated with Health+Cast and $1.4
million in property and equipment.
o In 2001, Purkinje, the issuer of a $3.6 million convertible promissory
note payable to us, failed to make its regularly scheduled quarterly
interest payment. As part of a recapitalization plan, Purkinje
exchanged preferred stock for all of its outstanding convertible
promissory notes. We believed that the value of this preferred stock
was zero and, accordingly, we recorded a $3.6 million charge in 2001;
o In 2000, we recorded a partial, permanent impairment of $4.1 million in
marketable equity securities in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, to reflect the
decline in the market value of our investment in VantageMed Corporation.
The original cost basis was $4.7 million. In 2001, we continued to
recognize further impairment of this investment that had a recorded
value equal to its market value of $575,000 as of December 31, 2001.
There was no impairment of marketable equity securities in 1999; and
o In 2000 and 1999, we wrote off $900,000 and $1.2 million, respectively,
related to the 1997 purchase of accounts receivable from Chama, Inc.
Other Income (Expense)
----------------------
Interest Income (Expense). Interest expense, net of interest income, was
-------------------------
$3.4 million, $4.5 million and $3.0 million for 2001, 2000 and 1999,
respectively. Interest expense was principally due to our Debentures,
partially offset by interest earned on our cash and investments. 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. The lower net interest expense in
1999 reflects higher interest income on a larger portfolio of investments
offsetting the expense on our Debentures for that year.
Gain on Sale of Assets. We recorded a $7.1 million gain on the sale of
----------------------
our EZ-CAP business in 2001. Our gain of $27.2 million in 2000 resulted from
the sale of the ROI division to ChartOne.
Provision for Income Taxes
--------------------------
There was a $150,000 provision for income taxes in 2001 due to state tax
liabilities on certain of our legal entities. For the years ended December 31,
2000 and 1999, we recorded provisions for income taxes of $617,000 and
$630,000, respectively, due to taxable income slightly exceeding our net
operating loss carryforwards. For financial reporting purposes, a 100%
valuation allowance has been recorded against our deferred tax assets under
Statement of Financial Accounting Standards 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 $74 million and
state net operating loss carryforwards of approximately $1.4 million as of
December 31, 2001. In addition, we had gross federal and California research
and development credit carryforwards of approximately $3.6 million and $1.5
million respectively. During 2001 we utilized $13.6 million of our federal and
$6.0 million of our state net operating loss carryforwards to offset income.
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.
Liquidity And Capital Resources
-------------------------------
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
---- ---- ----
Cash provided by (used in) operating
activities................................. $ 13,844 $(30,275) $(38,271)
Cash provided by investing activities........ $ 17,097 $ 46,132 $ 2,682
Cash used in financing activities............ $(28,510) $ (18) $(18,412)
Cash provided by (used in) operating activities was $13.8 million, $(30.3)
million, and $(38.3) million in 2001, 2000 and 1999, respectively. The $13.8
million of cash provided by operating activities in 2001 was primarily due to
28
net income of $9.4 million, net non-cash related expenses of $17.0 million, and
a net decrease in operating assets and liabilities of $7.4 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 $36.7 million net loss
and $27.2 million of non-cash gains offset by $23.2 million of net non-cash
expenses and a $10.4 million decrease in operating assets and liabilities. In
1999 $38.3 million of cash was used in operating activities due to a loss of
$47.4 million and an increase of $28.9 million in operating assets and
liabilities partially offset by $38.0 million in net non-cash related expenses.
Net cash provided by investing activities was $17.1 million, $46.1
million, and $2.7 million in 2001, 2000 and 1999, respectively. 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. The $2.7 million provided in 1999
by investing activities came from $34.4 million of sale of available-for-sale
securities offset by purchases of marketable investments ($3.0 million), of
equipment ($6.5 million), and of technology ($6.0 million), as well as business
acquisitions ($9.0 million), and capitalizable software development costs ($2.6
million). Changes in restricted cash ($1.0 million) and notes receivable ($3.6
million) accounted for the remaining cash used in 1999.
Net cash used in financing activities was $28.5 million in 2001, $18,000
in 2000, and $18.4 million in 1999. 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. In 1999 $22.4 million of debt was repaid and $4.0 million of
proceeds was received from the issuance of common stock. Our debentures bear
interest at 5.25% per annum and mature in 2005 and were repurchased at an
average price of $670 per $1000 in principal amount. The shares of treasury
stock were purchased on the open market at an average price of $4.05. The
Board of Directors has authorized us to repurchase the debentures at our
discretion and to repurchase up to six million shares of treasury stock.
The following table summarizes financial data for our contractual
obligations and other commercial commitments, including interest obligations,
as of December 31, 2001 (in thousands):
Payments Due by Period
--------------------------------------------
Less
than 1 1-3 4-5 After 5
Total year years years years
----- ---- ----- ----- -----
Contractual Obligations
-----------------------
Long-term debt.................... $ 87,265 $ 3,870 $ 7,740 $ 75,655 $ --
Operating leases.................. 30,110 4,792 8,066 5,861 11,391
Other long-term obligations....... 7,872 78 19 -- 7,775
--------- ------- -------- -------- --------
Total contractual cash obligations $ 125,247 $ 8,740 $ 15,825 $ 81,516 $ 19,166
========= ======= ======== ======== ========
Other Commercial Commitments
----------------------------
Standby letters of credit (1)..... $ 4,356 $ -- $ 1,236 $ -- $ 3,120
--------- ------- -------- -------- --------
Total commercial commitments...... $ 4,356 $ -- $ 1,236 $ -- $ 3,120
========= ======= ======== ======== ========
(1) The after five years amount includes $2.4 million for existing surety bond
requirement at December 31, 2001. Actual requirements may be less as work
is completed towards underlying contract.
We believe that we will have sufficient liquidity and operating cash flows
to fund our scheduled debt service and other obligations through the
foreseeable future.
Inflation
---------
The majority of our revenue is derived from perpetual and long-term
customer contracts. The term of contracts range from one (1) to five (5) years
and the contracts generally allow price increases annually based on external
29
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
--------------
Our Vendors, Suppliers and Customers May React Adversely to the
---------------------------------------------------------------
Restatement 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 restatement 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 reexamine their willingness to do business with us to develop
critical interfaces and/or supply software and services if they lose confidence
in our ability to fulfill our commitments.
The success of our business depends greatly on our ability to enter into
contracts with companies and for the continuing supply of product and services.
Some of these companies, particularly large organizations, may be reluctant to
choose us or continue to use us as a vendor due to concerns over the
restatement of our historical financial statements.
The Cost of Restating Our Historical Financial Statements May Adversely
-----------------------------------------------------------------------
Affect Our Business, Operations, and Financial Condition.
--------------------------------------------------------
In connection with this restatement of our consolidated financial
statements as of December 31, 2001 and 2000, for the years ending December 31,
2001, 2000 and 1999 and as of and for the quarter ended March 31, 2002, we have
hired forensic accountants and auditors to help us bring the restatement to
completion. The restatement process is costly, time consuming and disruptive.
This may have an adverse effect on our business, financial condition, results
of operations, and results of cash flows in the future.
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.
We intend to defend ourselves vigorously against these allegations.
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 that any of the allegations discussed
above can be resolved without costly and protracted litigation, and the outcome
may have a material adverse impact on 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 an SEC Inquiry as a Result of the Restatement of Our
----------------------------------------------------------------------
Financial Statements.
--------------------
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 Securities and Exchange Commission ('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.
30
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
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 Refinanced and are Subject to New Terms.
----------------------------------------------------------------
We issued Debentures on May 1, 1998 that matured on May 1, 2005 through a
public offering in the principal amount of $115 million (the "2005 Notes").
Our net proceeds from the offering were $110.8 million. The Debentures had
interest at 5.25% per annum and were 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 were obligated to provide holders of the Debentures with notice and the
holders have the individual option to redeem the Debentures 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 Debentures upon defined Events of
Default, including failure to timely repay principal or interest under the
Debentures, 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 refinancing of its
outstanding debentures. In conjunction with its repurchase of $61.8 million of
its outstanding 5.25% Convertible Subordinated Debentures due 2005 (the "2005
Notes") pursuant to its offer to repurchase such debentures 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 5 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.
31
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
--------------------------------------------------------------------------
Could Delay or Discourage a Takeover that 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
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
------------------------------------------------------------------
Continue to Be, Volatile.
------------------------
The Nasdaq SmallCap Market on which our common stock was listed at the
time of the Prior Report, 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 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
32
could adversely affect or cause substantial fluctuations in the market price of
our common stock and Debentures and impair our ability to raise additional
capital through the sale of our securities.
Future Sales of Our Common Stock in the Public Market or Option Exercises
-------------------------------------------------------------------------
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 Debentures and 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
convertible notes or Debentures, 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 our integrated product offerings;
o Respond promptly to new customer requirements and industry standards;
and,
o Remain compatible with popular operating systems and develop products
that are compatible with the new or otherwise emerging operating
systems;
o Develop new interfaces with competing HIS vendors to fully integrate our
Quantim product suite in order to maximize features and functionality of
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 the Company 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
33
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
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
-------------------------------------------------------------------------
Errors or Bugs that Could Reduce Revenues, Market Share or Demand for Our
-------------------------------------------------------------------------
Products and Services.
---------------------
Products such as those offered by us 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
-------------------------------------------------------------------------
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
of time for product development and marketing could increase and that other
unforeseeable consequences could arise.
34
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 filed 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 of the Health Care Delivery System May Affect Health
--------------------------------------------------------------------------
Care Provider's 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
----------------------------------------------------------------------
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
35
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
------------------------------------------------------------------
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 and 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;
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;
36
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; and,
o The fines and penalties a healthcare provider or system may incur due to
fraudulent billing practices;
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 the Sales Cycle for Our Products May
------------------------------------------------------------------
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
------------------------------------------------------------------
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 affect 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
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.;
37
o In the market for compliance, data, and record management products in
the Health Information Management Software Division: 3M Corporation,
SoftMed Corporation, Inc., MetaHealth, Eclypsis Corporation, and, HSS,
Inc.;
o In the Health Information Management Services Division:
PricewaterhouseCoopers LLP, Bearing Point and Cap Gemini for compliance
products and services and health information management consulting
services; 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.
Current and prospective customers also evaluate our product's 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 resources than us for financial, technical, product
development, marketing and other resources, and greater 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
-----------------------------------------------------------------------
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 an 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.
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.
38
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 twenty-eight (28) acquisitions
encountering significant challenges integrating the acquired businesses into
our operations, and in years 2000 and 2001 focused in particular on their
integration. Some of the challenges we encountered, and may encounter 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.
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.
All business combinations within the scope of SFAS No. 141 are to be accounted
for using the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001. The adoption of the new
standard has not had a material effect on our financial condition, results of
operations, or cash flows.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in business combination) should be accounted for in financial statements upon
acquisition. In addition, this statement addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. As of December 31, 2001, our unamortized goodwill balance was $24.2
million, and was being amortized over periods ranging from 7 to 10 years. As a
result of SFAS No. 142, we currently estimate the elimination of goodwill
amortization will result in pre-tax savings of approximately $4.0 million in
year ending December 31, 2002. We do not expect to record an impairment charge
for the year ending December 31, 2002, however, there can be no assurance that
a significant impairment charge will not be recorded. We have not yet
finalized the financial statement impact of SFAS No. 142 for periods subsequent
to December 31, 2001.
Although we believe that SFAS Nos. 141 and 142 will not have a material
adverse effect on our financial condition, such new standards may make certain
potential acquisitions less attractive in the future because any amounts paid
39
in excess of book value will have to be amortized over a shorter period than
previously permitted, which could adversely effect reported GAAP operating
results.
We May Lose Some or All of Our Equity Investment in a Technology Company
------------------------------------------------------------------------
if Such Company Becomes Bankrupt or Insolvent or Does Not Succeed in Executing
------------------------------------------------------------------------------
Their Business Strategies Appropriately.
---------------------------------------
We hold a minority interest in a publicly traded company having operations
or technology in areas within our strategic focus, which has a highly volatile
share price. We record an investment impairment charge when we believe an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
carrying value, thereby possibly requiring an impairment charge in the future.
As of December 31, 2001, the fair market value of our only such holding,
VantageMed, was $575,000.
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 FASB
Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, 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
-----------------------------------------------------------------------------
Write-Off That Could Possibly Decrease Our Results of Operations and
--------------------------------------------------------------------
Stockholders' Equity.
--------------------
A significant amount of our assets are comprised of intangibles, 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 and other intangible
assets for impairment at least annually, and write them off when impaired.
Previously, goodwill was amortized. We engaged a valuation firm to perform an
impairment test on the carrying value of goodwill as of January 1, 2002. The
valuation firm determined that there was no impairment as of that date. We,
however, cannot predict that all of our intangible assets will continue to
remain unimpaired. Our stockholders' equity could possibly decrease with any
future impairment and write-off of goodwill, customer lists, or other such
intangibles.
Intangibles such as software development costs, are capitalized upon the
establishment of technological feasibility. In accordance with SFAS No. 86, we
establish technological feasibility upon completion of a detailed program
design, which substantiates that the computer software product can be produced
in accordance with our design specifications. Capitalized software development
costs require a continuing assessment of their recoverability. This assessment
requires considerable judgment by our 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. If
it is determined that capitalized software costs are no longer technologically
recoverable, we may be required to write off such balances, which could have a
material adverse affect on our operating results.
40
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
------------------
The Company's 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
Fair Value Interest Rate
--------------------- --------------------
2001 2000 2001 2000
Cash and cash equivalents:
Cash.............................. $ 4,682 $ 3,697 1.78% 6.42%
Money Market funds................ 25,117 23,671
-------- --------
Total cash and cash equivalents $ 29,799 $ 27,368
======== ========
Short-term investments:
Corporate debt securities......... $ 2,380 $ 7,302 3.75% 5.74%
Debt issued by the U.S. government 34 4,994 6.37% 5.33%
-------- --------
Total short-term investments.... $ 2,414 $ 12,296
======== ========
Long-term investments:
Corporate debt securities......... $ 575 $ 500 6.09% 6.63%
Debt issued by the U.S. government 562 519 5.50% 5.90%
-------- --------
Total long-term investments $ 1,137 $ 1,019
======== ========
As our long-term debt consists solely of our Debentures totaling $73.7
million at December 31, 2001, at a fixed interest rate of 5.25% maturing in
2005, we are not exposed to material debt related interest rate risk.
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.
41
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements and supplementary data regarding us are included
in this Report on Form 10-K/A beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
Information about changes in our independent public accountants appears
under "Changes In Independent Public Accountants" in our definitive proxy
statement filed April 5, 2002 pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended ("Proxy Statement"). Those portions of the
Proxy Statement are incorporated by reference into this report.
PART III
Because we filed a Proxy Statement within 120 days after the end of the
year ended December 31, 2001, this Amended Report omits certain information
required by Part III and incorporates by reference certain information included
in the Proxy Statement.
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
Information regarding our directors appears under "Election of Directors"
in the Proxy Statement. That portion of the Proxy Statement is incorporated by
reference into this report. Information regarding our executive officers
appears in Item 1 of this Annual Report on Form 10-K/A under "Management."
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Information about compliance with Section 16(a) of the Securities Exchange
Act of 1934 appears under "Section 16(a) Beneficial Ownership Reporting
Compliance" under "Election of Directors" in the Proxy Statement. That portion
of the Proxy Statement is incorporated by reference into this report.
Item 11. Executive Compensation
--------------------------------
Information about compensation of our named executive officers appears
under "Executive Compensation" under "Election of Directors" in the Proxy
Statement. Information about compensation of our directors appears under
"Director Compensation" under "Election of Directors" in the Proxy Statement.
Those portions of the Proxy Statement are incorporated by reference into this
report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
Information about security ownership of certain beneficial owners and
management appears under "Security Ownership of Directors and Executive
Officers" under "Election of Directors" in the Proxy Statement. That portion
of the Proxy Statement is incorporated by reference into this report.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
Information about certain relationships and related transactions appears
under "Certain Relationships and Related Transactions" under "Election of
Directors" in the Proxy Statement. That portion of the Proxy Statement is
incorporated by reference into this report.
Nitin T. Mehta, a former officer of QuadraMed, was the CEO of Pyramid
Health Group ("Pyramid"), acquired by us in 1998. Concurrent with the Pyramid
acquisition, we entered into a non-exclusive financial advisory agreement
regarding corporate acquisitions, sales, mergers, consolidation and other
business combinations with Mehta & Company, Inc. ("Mehta & Company"), an
investment banking firm in which Mr. Mehta had an ownership interest. We paid
Mehta & Company fees totaling $5.3 million in the year ended December 31, 1999.
Mehta & Company has not provided any services to us since 1999 and no
subsequent fees have been paid.
42
PART IV
Item 14. 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/A:
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 14(c) of this Annual Report on Form
--------
10-K/A.
(b) Reports on Form 8-K. We filed the following reports on Form 8-K during the
-------------------
last quarter of the year covered by this Annual Report on Form 10-K/A:
NONE
(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/A.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
QUADRAMED CORPORATION
Date: June 6, 2003
By: /s/ Lawrence P. English
----------------------------------
Lawrence P. English
Chairman of the Board
Chief Executive Officer
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 June 6, 2003
--------------------------- Executive Officer (Principal
Lawrence P. English Executive Officer)
/s/ Charles J. Stahl Chief Financial Officer June 6, 2003
--------------------------- (Principal Financial and
Charles J. Stahl Accounting Officer)
/s/ Joseph L. Feshbach Director June 6, 2003
---------------------------
Joseph L. Feshbach
/s/ Albert L. Greene Director June 6, 2003
---------------------------
Albert L. Greene
/s/ F. Scott Gross Director June 6, 2003
---------------------------
F. Scott Gross
/s/ Michael J. King Director June 6, 2003
---------------------------
Michael J. King
Director June 6, 2003
---------------------------
Robert W. Miller
/s/ Cornelius T. Ryan Director June 6, 2003
---------------------------
Cornelius T. Ryan
44
CERTIFICATIONS
CEO Certification
I, Lawrence P. English, certify that:
1. I have reviewed this annual report on Form 10-K/A of QuadraMed Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this annual report; and,
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: June 6, 2003 /s/ Lawrence P. English
----------------------------------
Lawrence P. English
Chairman of the Board
Chief Executive Officer
CFO Certification
I, Charles J. Stahl, certify that:
1. I have reviewed this annual report on Form 10-K/A of QuadraMed Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this annual report; and,
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: June 6, 2003 /s/ Charles J. Stahl
-----------------------------------
Charles J. Stahl
Chief Financial Officer
45
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)
4.11 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 Pisenti & Brinker LLP, Independent Public Accountants.
24.1 Power of Attorney (set forth in the signature page hereto).
27.1 Financial Data Schedule for the Year Ended 12/31/2001. (16)
27.2 Financial Data Schedule for the Year Ended 12/31/2000. (16)
27.3 Financial Data Schedule for the Year Ended 12/31/1999. (16)
99.1 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).
99.2 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.
46
(3) Incorporated by reference from our Current Report on Form 8-K, as filed
with the Commission on June 11, 1998.
(4) Incorporated by reference from our Registration Statement on Form S-3,
No. 333-55775, as filed with the Commission on June 2, 1998, as amended
by Amendment No. 1 thereto, as filed with the Commission on June 17,
1998.
(5) Incorporated by reference from the exhibit with the same number to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
filed with the Commission on August 14, 1998, as amended on August 24,
1988.
(6) Incorporated herein by reference from our Current Report on Form 8-K/A
filed with the Commission on March 22, 1999.
(7) Incorporated herein by reference from our Registration Statement on Form
S-3, No. 333-80617, as filed with the Commission on June 14, 1999, as
amended by Amendment No. l thereto, as filed with the Commission on
August 4, 1999.
(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.
(16) Incorporated herein by reference from the exhibit with the same number
to our Annual Report on Form 10-K filed with the Commission on March 29,
2002.
47
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, 1999:
Allowance for doubtful accounts
(as reported*)................. $ 5,738 $ 3,816 -- $(4,496) $ 5,058
Allowance for doubtful accounts
(restated)..................... $ 5,738 $ 4,168 -- $(7,237) $ 2,669
Year ended December 31, 2000:
Allowance for doubtful accounts
(as reported*)................. $ 5,058 $ 3,413 -- $(6,067) $ 2,404
Allowance for doubtful accounts
(restated)..................... $ 2,669 $ 7,234 -- $(6,437) $ 3,466
Year ended December 31, 2001:
Allowance for doubtful accounts
(as reported*)................. $ 2,404 $ 720 $ 2,050 $(1,786) $ 3,388
Allowance for doubtful accounts
(restated)..................... $ 3,466 $ 2,090 -- $(1,317) $ 4,239
* As reported amounts have been reclassified to reflect operations previously
reported as discontinued operations.
S-1
QUADRAMED CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) and
Comprehensive Income (Loss)........................................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
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 (the "Company") and its subsidiaries as of December 31, 2001 and
2000, 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 three-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 financial position of QuadraMed
Corporation and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-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 14(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.
As described in Note 2 to the consolidated financial statements, the Company's
consolidated balance sheets as of December 31, 2001, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2001 have been restated. The consolidated
financial statements for the year 1999 were audited by other independent
auditors who have ceased operations.
/s/ Pisenti & Brinker LLP
--------------------------
PISENTI & BRINKER LLP
Petaluma, California
March 28, 2003 (May 15, 2003 as to the first paragraph of Note 25)
F-2
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2001 2000
ASSETS (Restated) (Restated)
-------- --------
Current assets
Cash and cash equivalents $ 29,799 $ 27,368
Short-term investments 2,414 12,296
Accounts receivable, net of allowance for
doubtful accounts of $4,239 and $3,466,
respectively 33,165 31,502
Unbilled receivables 3,825 7,006
Notes and other receivables 282 690
Prepaid expenses and other current assets 7,285 6,033
--------- ---------
Total current assets 76,770 84,895
--------- ---------
Restricted cash 4,356 7,995
Property and equipment, net of accumulated
depreciation and amortization of $12,634 and
$20,436, respectively 7,323 8,275
Goodwill, net of accumulated amortization
of $15,118 and $11,704, respectively 14,721 19,158
Other intangible assets, net of accumulated
amortization of $17,295 and $13,254, respectively 14,848 17,967
Other long-term assets 7,115 10,996
--------- ---------
Total assets $ 125,133 $ 149,286
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 893 $ 1,213
Accrued payroll and related 6,402 8,161
Other accrued liabilities 6,245 6,925
Deferred revenue 30,721 22,489
--------- ---------
Total current liabilities 44,261 38,788
--------- ---------
Convertible subordinated debentures 73,719 115,000
Other long-term liabilities 2,932 2,664
--------- ---------
Total liabilities 120,912 156,452
--------- ---------
Commitments and contingencies (Notes 23, 24 and 25)
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,
26,493 and 25,755 shares issued and outstanding,
respectively 201 191
Additional paid-in-capital 273,384 271,197
Deferred compensation (1,085) --
Accumulated other comprehensive loss (468) (1,330)
Accumulated deficit (267,811) (277,224)
--------- ---------
Total stockholders' equity (deficit) 4,221 (7,166)
--------- ---------
Total liabilities and stockholders'
equity (deficit) $ 125,133 $ 149,286
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
--------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Revenue
Licenses $ 90,508 $ 71,826 $101,172
Services 41,885 77,907 104,781
-------- -------- --------
Total revenue 132,393 149,733 205,953
-------- -------- --------
Cost of Revenue
Cost of licenses 23,494 27,024 23,090
Cost of services 22,632 51,412 63,375
-------- -------- --------
Total cost of revenue 46,126 78,436 86,465
-------- -------- --------
Gross margin 86,267 71,297 119,488
-------- -------- --------
Operating Expenses
General and administration 53,539 67,632 66,576
Sales and marketing 16,414 21,922 22,998
Research and development 13,823 24,435 30,683
Amortization, impairment and other
operating charges 9,482 16,082 42,951
-------- -------- --------
Total operating expenses 93,258 130,071 163,208
-------- -------- --------
Loss from Operations (6,991) (58,774) (43,720)
Other income (expense)
Interest expense (5,835) (6,619) (7,671)
Interest income 2,394 2,139 4,633
Gain on sale of assets 7,088 27,196 --
-------- -------- --------
Other income (expense), net 3,647 22,716 (3,038)
-------- -------- --------
Loss before income taxes and extraordinary item (3,344) (36,058) (46,758)
Provision for income taxes (150) (617) (630)
-------- -------- --------
Loss before extraordinary item (3,494) (36,675) (47,388)
-------- -------- --------
Gain on redemption of debentures 12,907 -- --
-------- -------- --------
Net income (loss) $ 9,413 $(36,675) $(47,388)
======== ======== ========
Income (loss) per share
Basic before extraordinary item $ (0.14) $ (1.43) $ (1.99)
Extraordinary item 0.50 -- --
-------- -------- --------
Basic after extraordinary item $ 0.37 $ (1.43) $ (1.99)
======== ======== ========
Diluted before extraordinary item $ (0.14) $ (1.43) $ (1.99)
Extraordinary item 0.50 -- --
-------- -------- --------
Diluted after extraordinary item $ 0.37 $ (1.43) $ (1.99)
======== ======== ========
Weighted Average Shares Outstanding
Basic 25,566 25,623 23,860
======== ======== ========
Diluted 25,566 25,623 23,860
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Additional Other Total Other
Common Stock Paid-in Deferred Comprehensive Accumulated Stockholders' Comprehensive
------------- Capital Compensation Income (Loss) Deficit Equity(Deficit) Income (Loss)
Shares Amount (Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
------ ------ -------- -------- -------- -------- -------- --------
December 31, 1998 24,442 $178 $266,068 $(3,940) $ (157) $(193,161) $ 68,988 $(19,613)
Issuance of common stock
in connection with
purchase business
combinations 97 1 634 -- -- -- 635
Issuance of common stock
through Employee Stock
Purchase Plan 91 1 1,039 -- -- -- 1,040
Amortization of restricted
shares of common stock -- -- -- 828 -- -- 828
Cancellation of restricted
shares of common stock -- -- (582) 582 -- -- --
Issuance of common stock
for legal settlement 70 -- 346 -- -- -- 346
Exercise of warrants to
purchase common stock 360 4 1,330 -- -- -- 1,334
Exercise of common stock
options 259 3 1,588 -- -- -- 1,591
Compensation for
accelerated vesting of
options -- -- 268 -- -- -- 268
Net unrealized loss on
available-for-sale
securities -- -- -- -- (130) -- (130) (130)
Net loss (restated) -- -- -- -- -- (47,388) (47,388) (47,388)
------ ---- -------- ------- ------ --------- -------- --------
December 31, 1999
(restated) 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
(restated) -- -- -- 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 (restated) -- -- -- -- (1,364) -- (1,364) (1,364)
Net unrealized gain on
available-for-sale
securities (restated) -- -- -- -- 321 -- 321 321
Net loss (restated) -- -- -- -- -- (36,675) (36,675) (36,675)
------ ---- -------- ------- ------ --------- -------- --------
December 31, 2000
(restated) 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)
Reduction in unrecognized
pension costs (restated) -- -- -- -- 834 -- 834 834
Net unrealized gain on
available-for-sale
securities -- -- -- -- 28 -- 28 28
Net income (restated) -- -- -- -- -- 9,413 9,413 9,413
------ ---- -------- ------- ------ --------- -------- --------
December 31, 2001
(restated) 26,493 $201 $273,384 $(1,085) $ (468) $(267,811) $ 4,221 $ 10,275
====== ==== ======== ======= ====== ========= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Cash flows from operating activities
Net income (loss) $ 9,413 $(36,675) $(47,388)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,420 15,726 16,059
Write-off of assets 3,813 5,522 10,071
Impairments of intangible assets -- 1,308 11,523
Gain on redemption of convertible
subordinated debentures (12,907) -- --
Gain on sale of assets (7,088) (27,196) --
Non-cash settlement of litigation -- 79 346
Other 763 542 9
Changes in assets and liabilities:
Accounts receivable, net (1,663) 18,368 (18,593)
Prepaid expenses and other 1,105 7,624 (9,035)
Accounts payable and accrued liabilities (820) (12,858) (11,978)
Deferred revenue 8,808 (2,715) 10,715
-------- -------- --------
Cash provided by (used in) operating
activities 13,844 (30,275) (38,271)
-------- -------- --------
Cash flows from investing activities
Decrease (increase) in restricted cash 1,259 (6,959) (1,036)
Sales of available-for-sale securities, net 12,219 18,278 34,375
Sale of assets 8,124 38,449 --
Purchase of marketable investment -- -- (3,000)
Purchases of equipment (2,743) (3,109) (6,454)
Purchase of technology -- -- (6,000)
Acquisitions of businesses -- -- (9,020)
Issuance of notes receivable -- -- (3,600)
Capitalized software development costs (1,762) (527) (2,583)
-------- -------- --------
Cash provided by investing activities 17,097 46,132 2,682
-------- -------- --------
Cash flows from financing activities
Repayments of debt (28,489) (945) (22,376)
Purchase of treasury shares (821) -- --
Proceeds from issuance of common stock 800 927 3,964
-------- -------- --------
Cash used in financing activities (28,510) (18) (18,412)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 2,431 15,839 (54,001)
Cash and cash equivalents, beginning of period 27,368 11,529 65,530
-------- -------- --------
Cash and cash equivalents, end of period $ 29,799 $ 27,368 $ 11,529
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid for interest $ 5,690 $ 6,072 $ 6,315
Cash paid for taxes 394 418 1,659
Supplemental Disclosure of Non-Cash Investing
and Financing Transactions
Issuances (cancellations) of restricted
common stock $ 1,267 $ (498) $ (582)
Issuance of common stock in connection with
purchase business combinations -- -- 635
Issuance of common stock options to
non-employees and consultants 64 -- --
Release of restricted cash into short-term
investments 2,380 -- --
Issuance of note payable in connection with
purchase business combinations -- -- 500
Liabilities assumed in connection with
purchase business combinations -- -- 1,700
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. NATURE OF OPERATIONS
--------------------
QuadraMed Corporation (the "Company" or "QuadraMed") provides information
technology and consulting services designed to assist healthcare professionals
deliver patient care with optimum efficiency. QuadraMed has four main product
lines: Affinity(r) Healthcare Information System, Quantim(r) Health Information
Management Software and Services, Complysource(r) Compliance Solutions, and
Chancellor(tm) Financial Products and Services. QuadraMed was reincorporated
in Delaware in 1996, having been originally incorporated in California in 1993.
The Company sells its products through its own sales force and in addition
derives revenues from software and maintenance agreements.
2. BASIS OF PRESENTATION
---------------------
Restatement of Financial Statements
-----------------------------------
On July 25, 2002, QuadraMed announced that, in the process of reviewing
and finalizing its second quarter financial results, the Company would evaluate
whether that review would necessitate adjustments to prior periods. On August
9, 2002, management met with the Audit Committee and our independent auditors
at which time it was determined that the restatement of the consolidated
financial statements as of and for the years ended December 31, 2001, 2000 and
as of and for the quarter ended March 31, 2002 would be required, due to
management's discovery and analysis of accounting and financial reporting
errors related to certain revenue recognition and other accounting practices.
In October 2002, management announced that additional errors, including the
classification of discontinued operations, had been discovered going back to
1999 and its consolidated financial statements as of and for the year ended
December 31, 1999 needed to be restated.
In the course of management's review of revenue recognition and prior
accounting practices, QuadraMed discovered accounting and reporting errors,
resulting in, among other things, an overstatement in revenue and an
overstatement in net income (understatement of net loss) over the restated
periods. Per basic share, these errors resulted in an overstatement of net
income of $0.23, overstatement of net loss of $0.71 and understatement of net
loss of $1.50 for the years ended December 31, 2001, 2000 and 1999,
respectively. The cumulative effect on stockholders' equity over the three-
year period caused a net reduction of $15.9 million. The following table
summarizes the effect on stockholders' equity as a result of the restatement:
Stockholders' equity at December 31, 1998,
as previously reported $ 68,988
Cumulative net losses for 2001, 2000 and 1999, as
previously reported (51,685)
Cumulative other equity transactions for 2001, 2000
and 1999, as previously reported 2,858
--------
Stockholder's equity at December 31, 2001, as
previously reported 20,161
Cumulative net decrease in revenue $ 40,075
Reclassifications to costs and expenses not directly
affecting Equity (1) (17,549)
--------
Net decrease in revenues $ 22,526 (22,526)
========
Cumulative net decrease in costs and expenses $ 17,110
Reclassifications from revenue not directly affecting
Equity (1) (17,549)
--------
Net increase in costs and expenses $ (439) (439)
========
Correction of accounting for the unrealized loss on
VantageMed investment (2) 4,319
Correction of accounting for restricted shares of
common stock (2) 2,717
Deferred compensation (11)
--------
Stockholders' Equity as of December 31, 2001 (restated) $ 4,221
========
(1) See explanations under Revenue Related Adjustments for CPR, IMN,
Health+Cast and ChartOne.
(2) See explanations under Expense Related Adjustments.
F-7
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The following tables show the affect of the reclassification of
discontinued operations, restatement adjustments, any impact of prior years'
restatement adjustments (balance sheet impact only) and the cumulative affect
of adjustments in order to reconcile certain condensed financial statement data
as previously reported to the restated amounts (in thousands):
Reclassify
As Discontinued Restatement
Reported Operations Adjustments Restated
-------- ---------- ----------- --------
For the year ended December 31,
1999:
Revenue $175,461 $ 64,125 $(33,633) $205,953
Cost of revenue and operating
expenses 196,712 50,733 2,228 249,673
Income (loss) from operations (21,251) 13,392 (35,861) (43,720)
Income from discontinued
operations 12,134 (12,134) -- --
Other income (expense) (2,758) (196) (84) (3,038)
Income taxes (455) (1,062) 887 (630)
-------- -------- -------- --------
Net income (loss) $(12,330) $ -- $(35,058) $(47,388)
======== ======== ======== ========
For the year ended December 31,
2000:
Revenue $120,111 $ 32,669 $ (3,047) $149,733
Cost of revenue and operating
expenses 198,246 26,638 (16,377) 208,507
Income (loss) from operations (78,135) 6,031 13,330 (58,774)
Gain on sale of assets -- 23,228 3,968 27,196
Income from discontinued
operations 29,002 (29,002) -- --
Other income (expense) (5,503) (17) 1,040 (4,480)
Income taxes (200) (240) (177) (617)
-------- -------- -------- --------
Net income (loss) $(54,836) $ -- $ 18,161 $(36,675)
======== ======== ======== ========
For the year ended December 31,
2001:
Revenue $129,435 $ 6,353 $ (3,395) $132,393
Cost of revenue and operating
expenses 127,136 4,783 7,465 139,384
Income (loss) from operations 2,299 1,570 (10,860) (6,991)
Gain on sale of assets -- 6,916 172 7,088
Income from discontinued
operations 8,160 (8,486) 326 --
Other income (expense) (7,885) -- 4,444 (3,441)
Income taxes -- -- (150) (150)
Gain on redemption of
debentures 12,907 -- -- 12,907
-------- -------- -------- --------
Net income (loss) $ 15,481 $ -- $ (6,068) $ 9,413
======== ======== ======== ========
F-8
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Effect of
Reclassify Prior Period
As Discontinued Restatement Restatement Cumulative
Reported Operations Adjustments (1) Adjustments (2) Adjustments Restated
-------- ---------- --------------- --------------- ----------- --------
As of December 31, 2000:
Cash and investments $ 39,664 $ -- $ 906 $ (906) $ -- $ 39,664
Other current assets 47,393 106 5,408 (7,676) (2,162) 45,231
Other long-term assets 66,892 1,890 (18,512) 14,121 (2,501) 64,391
--------- --------- ---------- --------- -------- ---------
Total assets $ 153,949 $ 1,996 $ (12,198) $ 5,539 $ (4,663) $ 149,286
========= ========= ========== ========= ======== =========
Current liabilities $ 31,285 $ 1,078 $ 22,380 $ (15,955) $ 7,503 $ 38,788
Other liabilities 118,343 918 336 (1,933) (679) 117,664
--------- --------- ---------- --------- -------- ---------
Total liabilities 149,628 1,996 22,716 (17,888) 6,824 156,452
Stockholders' equity
(deficit) 4,321 -- (34,914) 23,427 (11,487) (7,166)
--------- --------- ---------- --------- -------- ---------
Total liabilities and
stockholders' equity
(deficit) $ 153,949 $ 1,996 $ (12,198) $ 5,539 $ (4,663) $ 149,286
========= ========= ========== ========= ======== =========
As of December 31, 2001:
Cash and investments $ 32,213 $ -- $ -- $ -- $ -- $ 32,213
Other current assets 48,741 -- (2,162) (2,022) (4,184) 44,557
Other long-term assets 49,789 -- (2,501) 1,075 (1,426) 48,363
--------- --------- ---------- --------- -------- ---------
Total assets $ 130,743 $ -- $ (4,663) $ (947) $ (5,610) $ 125,133
========= ========= ========== ========= ======== =========
Current liabilities $ 33,799 $ -- $ 7,503 $ 2,959 $ 10,462 $ 44,261
Other liabilities 76,783 -- (679) 547 (132) 76,651
--------- --------- ---------- --------- -------- ---------
Total liabilities 110,582 -- 6,824 3,506 10,330 120,912
Stockholders' equity 20,161 -- (11,487) (4,453) (15,940) 4,221
--------- --------- ---------- --------- -------- ---------
Total liabilities and
stockholders' equity $ 130,743 $ -- $ (4,663) $ (947) $ (5,610) $ 125,133
========= ========= ========== ========= ======== =========
(1) Represents restatement adjustments recorded in prior periods.
(2) Represents restatement adjustments recorded in the current period.
The restatement can be described in the following general categories:
Reclassification of Discontinued Operations:
-------------------------------------------
o QuadraMed determined that the results for two divested operations were
improperly reported as discontinued operations. The fiscal years 2001,
2000 and 1999 have been reclassified to reflect the results of those
operations in continuing operations and the gains on the sales of those
operations have been reported as other income. The balance sheet as of
December 31, 2000 has been reclassified to reflect the assets and
liabilities in their respective classifications. The assets and
liabilities were previously accumulated into a net amount and reported
as a single amount. This reclassification had no effect on
stockholders' equity. As the net effect of these operations were
previously reported in the statements of operations as discontinued
operations, there is no effect on previously reported net income (loss)
or stockholders' equity.
F-9
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Revenue Related Adjustments:
---------------------------
The following table summarizes the cumulative decrease in revenue as a
result of the restatement (in thousands):
2001 2000 1999 Total
---- ---- ---- -----
HIM divisions $ 3,255 $ 1,437 $ 12,470 $ 17,162
Enterprise Division (365) (557) 3,810 2,888
Other 399 564 1,513 2,476
CPR (9) (190) 5,651 5,452
IMN 40 (1,132) 5,189 4,097
Health+Cast -- -- 5,000 5,000
ChartOne 75 2,925 -- 3,000
------- ------- -------- --------
Decrease to Revenue $ 3,395 $ 3,047 $ 33,633 $ 40,075
======= ======= ======== ========
o HIM Software Division. QuadraMed determined that revenue had been
---------------------
misstated for certain periods on term licenses sold in its Health
Information Management ("HIM") Software Division that were partially
recognized previously as perpetual licenses. As a result, license
revenue that had been recognized upon shipment has now been deferred and
will be recognized ratably over the term of the respective licenses.
o HIM Software Division. QuadraMed determined that certain HIM Software
---------------------
Division revenues recorded during Fourth Quarter 2001 required deferral
after the Company offered a yet to be released product that included
significant new features and functionality. Therefore, delivery of the
current version of the product is not considered to be complete until
the specified product upgrade is delivered and all other requirements
for recognition of revenue under the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
Software Revenue Recognition, have been met.
o HIM Software Division and Enterprise Division. QuadraMed determined
---------------------------------------------
that revenue had been misstated for certain periods on licenses for
certain products with bundled consulting and training services which are
essential to the functionality of the software and such services are
generally not available from other providers. Revenue on these
contracts has been deferred and is now being recognized under the
provisions of SOP 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts. This primarily affected HIM
Software and Enterprise divisions.
o Enterprise Division. The Company determined that hardware revenue
-------------------
associated with certain Enterprise Division contracts that was
previously recognized upon shipment should have been included in the
percentage of completion calculation under contract accounting. These
revenues have been deferred and are now being recognized in accordance
with SOP 81-1.
o Other. QuadraMed determined certain revenues for all divisions
-----
previously recognized should have been recognized only upon receipt of
cash and certain charges to the allowance for doubtful accounts should
have been revenue reversals. Adjustments have now been made to reflect
the appropriate treatment of each of these items.
o CPR. In 2000, the Company recorded a non-recurring charge of $5.1
---
million with respect to the collectibility of certain unbilled
receivables for which revenue was previously recognized in 1999. As a
result of the restatement, $5.7 million was recorded as reduction of
revenue in 1999 and the non-recurring charge in 2000 was reversed. For
all periods, revenue has been adjusted to reflect recognition of revenue
when services are performed, no remaining obligations exist, and cash
has been received.
o IMN. In 2000, QuadraMed recorded a non-recurring charge of $5.1 million
---
with respect to discontinuing the Enovation product as well as
negotiation settlements with various customers. There was a term sheet
agreed to in March 2000; the agreement was finalized and cash collected
on the settlement in Second Quarter 2000. As a result of the
restatement, all revenue previously recognized in 1999 in the amount of
$5.2 million was reversed, the 2000 non-recurring charge of $5.1 million
was reversed and $1.1 million in revenue was recognized in 2000.
F-10
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
o Health+Cast. In 1999, QuadraMed paid $11.0 million to acquire $5.0
-----------
million of prepaid royalties and $6.0 million of acquired technology
from Health+Cast. In a separate transaction in 1999, the Company also
received $5.0 million from Health+Cast as part of a sale of IMN
enterprise software. As part of the restatement, $5.0 million was
reversed from revenue in 1999 and the remaining $6.0 million was
determined to be impaired due to a lawsuit in 1999 between the two
companies. The Company originally recognized an impairment charge of
$10.6 million in 2000; as a result of the restatement, that amount was
reversed from non-recurring charges in that year.
o ChartOne. Intercompany sales of software licenses to ChartOne in the
--------
second quarter of 2000 were incorrectly recorded as revenue. The
Company subsequently sold its equity interest in ChartOne. The new
owners, in effect, purchased the software license along with acquiring
ChartOne. As a result, $3.0 million was reclassified from license
revenue to increase the gain on the sale of Chart One.
Expense Related Adjustments:
---------------------------
The following table summarizes the increases (decreases) to operating
expenses and other income (expense) as a result of the restatement (in
thousands):
2001 2000 1999 Total
---- ---- ---- -----
Changes in cost associated with
revenue adjustments (1) $ -- $(23,549) $ 6,000 $(17,549)
Cost of revenue adjustments (337) (3,258) (3,347) (6,942)
Capitalized software development
costs (903) (209) 2,845 1,733
Other operating expenses 2,310 (1,792) (4,995) (4,477)
Life insurance and SERP expenses 1,065 706 747 2,518
Restricted shares of common stock 303 2,414 -- 2,717
VantageMed 85 4,063 -- 4,148
Income taxes 150 417 175 742
------- -------- ------- --------
Net increase (decrease) to costs
and expenses $ 2,673 $(21,208) $ 1,425 $(17,110)
======= ======== ======= ========
(1) See the above explanation for CPR, IMN, Health+Cast and ChartOne.
o Cost of revenue. Certain costs associated with contracts accounted for
---------------
under percentage of completion have been deferred until recognition of
the related revenue.
o Capitalized software. QuadraMed expensed certain previously capitalized
--------------------
software development costs in 1999, tracked and allocated remaining un-
amortized capitalized costs to upgrades and re-evaluated impairment
based on restated revenue by product for all years.
o Other operating expenses. Other operating expenses include corrections
------------------------
of errors related to impairments of tangible and intangible assets,
accruals for expenses and depreciation expenses.
o Life insurance and SERP. The Company determined that certain life
-----------------------
insurance contracts for certain former executives of the company and the
Supplemental Executive Retirement Plan ("SERP") were accounted for
incorrectly as of December 31, 2001 and 2000 and for the years ended
December 31, 2001, 2000 and 1999. As part of the restatement, life
insurance premiums were discounted based on a ten-year holding period as
per the original plan and revised in 2000 to four years due to a plan
amendment. The discount taken at the time of payment is recorded as an
expense and the accretion of the discount is recorded to interest income
on a quarterly basis. For the SERP, as part of the restatement, an
actuarial analysis was obtained to correctly reflect the appropriate
accrued benefit obligation, additional liability and unrecognized prior
service cost. All years have been restated to properly account for
these items.
o Restricted shares. QuadraMed determined that the restricted stock
-----------------
grants made to certain former executives underwent accelerated vesting
at the time of the executives' involuntary separation resulting in
additional compensation expense in the years ended December 31, 2001 and
2000.
o VantageMed. QuadraMed determined that a fourth quarter 2000 impairment
----------
of the VantageMed investment characterized as temporary and recognized
as a component of comprehensive loss in equity, should have been an
other-than-temporary impairment and recorded in net loss for the period.
This adjustment did increase the net loss for 2000 but did not change
total stockholders' equity.
o Income taxes. QuadraMed revised its provisions for federal and state
------------
income taxes for the restated periods.
F-11
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Reclassifications:
-----------------
o In 2000, QuadraMed recorded certain costs as non-recurring charges, such
as restructuring costs, impairments of tangible and intangible assets
and reserves for legal costs. Those charges have been reclassified as
period costs in their respective expense lines on the restated
Consolidated Statements of Operations. These reclassifications have had
no effect on previously reported net income (loss) or stockholders'
equity.
o The Company reclassified amortization of software development costs from
research and development expenses to cost of licenses. These
reclassifications have had no effect on previously reported net income
(loss) or stockholders' equity.
o Certain intangible assets that were identified as customer lists have
been reclassified from goodwill.
o Certain unbilled receivables for which revenue had been deferred were
offset against deferred revenue in 2001 and 2000.
F-12
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The tables that follow present the financial statements as previously
reported and as restated for the years ended December 31, 2001, 2000 and 1999
and as of December 31, 2001 and 2000. As reported amounts include
reclassifications to reflect current period presentation.
Consolidated Statement of Operations Data (in thousands, except per share
amounts):
Year ended December 31,
------------------------------------------------------------------------
2001 2000 1999
------------------------ ---------------------- -----------------------
(As Reported) (Restated) (As Reported)(Restated) (As Reported) (Restated)
----------- -------- ----------- -------- ----------- --------
Revenue
Licenses $ 85,716 $ 90,508 $ 66,598 $ 71,826 $111,749 $101,172
Services 43,719 41,885 53,513 77,907 63,712 104,781
-------- -------- -------- -------- -------- --------
Total revenue 129,435 132,393 120,111 149,733 175,461 205,953
-------- -------- -------- -------- -------- --------
Cost of revenue
Cost of licenses 22,783 23,494 22,743 27,024 21,822 23,090
Cost of services 18,947 22,632 35,613 51,412 37,435 63,375
-------- -------- -------- -------- -------- --------
Total cost of revenue 41,730 46,126 58,356 78,436 59,257 86,465
-------- -------- -------- -------- -------- --------
Gross margin 87,705 86,267 61,755 71,297 116,204 119,488
-------- -------- -------- -------- -------- --------
Operating expenses
General and administration 47,243 53,539 47,736 67,632 47,463 66,576
Sales and marketing 15,805 16,414 21,366 21,922 21,338 22,998
Research and development 15,843 13,823 21,872 24,435 24,367 30,683
Amortization, impairment
and other operating
charges 6,515 9,482 48,916 16,082 44,287 42,951
-------- -------- -------- -------- -------- --------
Total operating expenses 85,406 93,258 139,890 130,071 137,455 163,208
-------- -------- -------- -------- -------- --------
Income (Loss) from operations 2,299 (6,991) (78,135) (58,774) (21,251) (43,720)
-------- -------- -------- -------- -------- --------
Other Income (Expense)
Interest expense (5,836) (5,835) (6,621) (6,619) (7,669) (7,671)
Interest income 2,292 2,394 2,081 2,139 4,766 4,633
Gain on sale of assets -- 7,088 -- 27,196 -- --
Other income (expense) (4,341) -- (963) -- 145 --
-------- -------- -------- -------- -------- --------
Other income (expense), net (7,885) 3,647 (5,503) 22,716 (2,758) (3,038)
-------- -------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item (5,586) (3,344) (83,638) (36,058) (24,009) (46,758)
Provision for income taxes -- (150) (200) (617) (455) (630)
-------- -------- -------- -------- -------- --------
Loss from continuing
operations (5,586) -- (83,838) -- (24,464) --
Gain on redemption of
debentures, net of tax 12,907 -- -- -- -- --
Income from discontinued
operations, net of tax 8,160 -- 29,002 -- 12,134 --
-------- -------- -------- -------- -------- --------
Income (Loss) before
extraordinary item 15,481 (3,494) (54,836) (36,675) (12,330) (47,388)
-------- -------- -------- -------- -------- --------
Gain on redemption of
debentures, net of tax -- 12,907 -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 15,481 $ 9,413 $(54,836) $(36,675) $(12,330) $(47,388)
======== ======== ======== ======== ======== ========
F-13
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Consolidated Balance Sheet Data (in thousands):
December 31,
-----------------------------------------------
2001 2000
----------------------- -----------------------
(As Reported)(Restated) (As Reported)(Restated)
----------- -------- ----------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 29,799 $ 29,799 $ 27,368 $ 27,368
Short-term investments 2,414 2,414 12,296 12,296
Accounts receivable, net of
allowance for doubtful
accounts of $3,388, $4,239,
$2,404 and $3,466,
respectively 37,454 33,165 36,879 31,502
Unbilled receivables 7,906 3,825 7,995 7,006
Notes and other receivables 282 282 689 690
Prepaid expenses and other
current assets 3,099 7,285 1,830 6,033
-------- -------- -------- --------
Total current assets 80,954 76,770 87,057 84,895
-------- -------- -------- --------
Restricted cash 4,356 4,356 7,995 7,995
Property and equipment, net of
accumulated depreciation and
amortization of $22,093, $12,634,
$18,531 and $20,436, respectively 6,857 7,323 8,301 8,275
Goodwill, net of accumulated
amortization of $22,789,
$15,118, $17,174 and $11,704,
respectively 22,225 14,721 27,840 19,158
Other intangible assets, net of
accumulated amortization of
$12,317, $17,295, $8,653 and
$13,254, respectively 8,044 14,848 10,229 17,967
Other long-term assets 8,307 7,115 12,527 10,996
-------- -------- -------- --------
Total Assets $130,743 $125,133 $153,949 $149,286
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 796 $ 893 $ 615 $ 1,213
Accrued payroll and related 6,630 6,402 7,223 8,161
Other accrued liabilities 7,240 6,245 11,669 6,925
Deferred revenue 19,133 30,721 11,778 22,489
-------- -------- -------- --------
Total current liabilities 33,799 44,261 31,285 38,788
-------- -------- -------- --------
Convertible subordinated debentures 73,719 73,719 115,000 115,000
Other long-term liabilities 3,064 2,932 3,343 2,664
-------- -------- -------- --------
Total liabilities 110,582 120,912 149,628 156,452
Commitments and contingencies
(Notes 23, 24 and 25)
Stockholders' equity (deficit)
Common stock 201 201 191 191
Additional paid-in-capital 270,673 273,384 268,485 271,197
Deferred compensation (1,074) (1,085) -- --
Accumulated other comprehensive
loss (4,793) (468) (4,028) (1,330)
Accumulated deficit (244,846) (267,811) (260,327) (277,224)
-------- -------- -------- --------
Total stockholders' equity
(deficit) 20,161 4,221 4,321 (7,166)
-------- -------- -------- --------
Total liabilities and
stockholders' equity (deficit) $130,743 $125,133 $153,949 $149,286
======== ======== ======== ========
F-14
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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) generally accepted accounting principles
("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
-------------------------------------------------------
In preparing these financial statements, QuadraMed must 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 intangibles,
primarily goodwill, resulting from QuadraMed's acquisitions. QuadraMed bases
its 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 discount rates used
to determine net present values, useful lives of the acquired assets as well as
technological advances. QuadraMed periodically reviews and tests its
estimates, including those related to valuations of carried intangibles, income
taxes, bad debt, restructuring, pensions, other benefits, contingencies and
litigation. Actual results may differ from these estimates.
Reclassifications
-----------------
Certain reclassifications have been made to the 2000 and 1999 consolidated
financial statements to conform to the 2001 presentation. Specifically, prior
year financial statements have been reclassified to be consistent with the
current presentation including cost of licenses, cost of services, general and
administration, sales and marketing, research and development, and marketable
investments.
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) consulting services.
License Revenue
---------------
QuadraMed's Enterprise and Health Information Management ("HIM") Software
divisions primarily generate the Company's software license revenue. The
Company's license revenue consists of fees for licenses of the Company's
software products, maintenance, hosted services, customer training and
consulting services. Cost of license revenue primarily includes product,
delivery and royalty costs, labor costs for engineers performing implementation
services and technical support and training personnel and facilities and
equipment cost.
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. The Company also adopted Staff Accounting Bulletin
-----------------------
("SAB") 101, Revenue Recognition in Financial Statements, in First Quarter
-------------------------------------------
2001. The adoption of SAB 101 did not have a significant impact on the
Company's consolidated 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. The Company considers all
arrangements with payment terms extending beyond one year 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-
F-15
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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 allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year) and revenue
allocated to training and other service elements is recognized as the services
are performed. 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 and/or payment terms that extend beyond twelve
months. QuadraMed recognizes revenue from perpetual and time-based licenses
that include unspecified additional software products ratably over the term of
the arrangement.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not essential, the revenue associated with
the software services is recognized as the services are performed. If the
Company provides consulting services that are considered essential to the
functionality of the software products, both the software product revenue and
services revenue are recognized in accordance with the provisions of SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Such contracts typically consist of implementation services and are
generally on a time and materials basis.
Services Revenue
----------------
QuadraMed's Financial Services and HIM Services Divisions primarily
generate the Company's services revenue. The Company's services revenue
consists of 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.
The Company recognizes revenue on its services revenue 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 - QuadraMed treats all certificates of deposit
-------------------------
and money market accounts and commercial paper with maturities of three months
or less as cash equivalents.
Investments - QuadraMed considers its holdings of short-term and long-term
-----------
securities, consisting primarily of fixed income securities, to be available-
for-sale securities. Securities are recorded at fair value. 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, 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.
Intangible Assets -
-----------------
Goodwill - The carrying value of goodwill is initially determined at the
--------
time of QuadraMed's acquisitions based upon the amount of purchase price in
excess of the fair value of the tangible net assets acquired and other
identifiable intangible assets, such as in-process research and development,
trademarks and customer lists. Capitalized amounts are amortized on a
straight-line basis over a period of five to ten years. Goodwill is reviewed
quarterly for impairment and if events or circumstances indicate that the
F-16
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
carrying amount of the assets may not be recoverable based upon estimated
future undiscounted cash flows, the assets are written down to net realizable
value in accordance with SFAS No. 121, Impairment of Long-Lived Assets. As of
-------------------------------
January 1, 2002, QuadraMed has adopted SFAS No. 142, Goodwill and Intangible
-----------------------
Assets, which eliminates the amortization of goodwill but requires annual
------
impairment testing. In conjunction with the adoption of SFAS No. 142 on
January 1, 2002, QuadraMed engaged a valuation firm to perform an impairment
test on the carrying value of goodwill as of December 31, 2001. The valuation
firm determined that there was no impairment as of that date.
Other Intangible Assets - Other intangible assets primarily relates to
-----------------------
capitalized software development costs, acquired software, trademarks and
customer lists acquired in QuadraMed's purchase business combinations. Except
for capitalized software development costs, capitalized amounts are amortized
on a straight-line basis over a period of five to seven years and are reviewed
quarterly for impairment in accordance with SFAS No. 121, Impairment of Long-
------------------
Lived Assets.
------------
Capitalized 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, which substantiates that the computer software product
can be produced in accordance with its design specifications. Capitalized
software development costs require a continuing assessment of their
recoverability. This assessment requires considerable judgment by QuadraMed
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 of capitalized software development costs is based on the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product, generally five years, and is charged to
cost of revenues.
Segments - After an internal reorganization in 2000, QuadraMed receives
--------
management information regarding its operations and financial performance from
four (4) business segments, consisting of the Enterprise Division, Health
Information Management Software Division, Health Information Management
Services Division, and Financial Services Division. Although not reported as a
business segment, QuadraMed also generated approximately four percent (4%) of
its revenue in 2001 from specialty product lines that have been discontinued or
are not aligned with an operating division, which is referenced as Other. The
segment results reflected in the consolidated financial statements have been
restated to reflect the 2000 reorganization for both current and prior year
data. The financial results for these operating segments for 1999 have been
restated on an estimated basis to conform to the current year presentation.
The 2000 reorganization was undertaken to more closely align 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 the potential for impairment of property and
equipment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When assets are sold or
retired, the cost and accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is included in results of
operations.
Net Loss Per Share - Basic loss per share is determined using the weighted
------------------
average number of common shares outstanding during the period less restricted
shares of common stock. 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.
F-17
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
As QuadraMed recorded a net loss for each of the years ended December 31,
2001, 2000 and 1999, 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 957,000, 23,000 and
589,000 common equivalent shares not included for basic earnings per share for
the years ended December 31, 2001, 2000 and 1999, respectively.
Comprehensive Income (Loss) - QuadraMed reports comprehensive income or
--------------------------
loss in accordance with SFAS No. 130, Reporting Comprehensive Income. The
------------------------------
components of comprehensive income (loss) are as follows (in thousands):
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Net Income (Loss) $ 9,413 $(36,675) $(47,388)
------- -------- --------
Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-
for-sale securities 28 321 (130)
Change in unrecognized pension costs 834 (1,364) --
Other comprehensive income (loss) before
income taxes 862 (1,043) (130)
Income tax expense related to items of
other comprehensive income (loss) -- -- --
------- -------- --------
862 (1,043) (130)
------- -------- --------
Comprehensive income (loss) $10,275 $(37,718) $(47,518)
======= ======== ========
Accumulated other comprehensive loss at December 31, 2001 and 2000,
consists primarily of $830,000 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 July 2001, the FASB issued SFAS No. 141,
---------------------------
Business Combinations, which requires that all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. Use of the
pooling-of-interests method is no longer permitted. The adoption of this
standard did not have an impact on the Company's consolidated financial
statements during 2001, as the Company did not enter into any business
combinations during that period.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
-----------------------------
Assets, which requires that goodwill and certain other intangible assets no
------
longer be amortized to operations, but instead be reviewed for impairment at
least once a year. SFAS No. 142 became effective for the Company at the
beginning of fiscal year 2002. An independent valuation of goodwill as of
January 1, 2002 was completed finding no impairment as of that date. The
Company has adopted SFAS No. 142 for periods subsequent to December 31, 2001.
We do not expect the implementation of this new standard to have a significant
impact on the Company's financial condition, results of operations and cash
flows.
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 anticipates that implementation of this new standard will
not have a significant impact on its financial condition, results of operations
and cash flows.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
------------------
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 applies to all long-
-------------------------------------------
lived assets and requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
F-18
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for QuadraMed in fiscal year 2002. An independent valuation as of
December 31, 2001 was completed finding no impairment as of that date. The
Company has not yet finalized the financial statement impact of SFAS No, 144
for periods subsequent to December 31, 2001.
In January 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF
No. 01-14, Income Statement Characterization of Reimbursements for 'Out-of-
Pocket' Expenses Incurred. EITF No. 01-14 requires billable out-of-pocket
reimbursable expenses to be included in both license and service revenue and
cost of licenses and services. QuadraMed does not expect that the adoption of
EITF No. 01-14 will impact either income (loss) from operations or net income
(loss), but will increase revenue and cost thereby reducing gross margin
percentages.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
--------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
-----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. QuadraMed anticipates that implementation of this new standard
will not have a significant impact on its 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. This statement addresses
-------------------------------------------
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS No.
146 are effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. QuadraMed is currently evaluating the
effect that implementation of this new standard will have on its financial
condition, results of operations and cash flows.
In November 2002, the Financial Accounting Standards Board 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.
4. ACQUISITIONS AND DIVESTITURES
-----------------------------
Acquisitions
------------
Purchase Business Combinations
------------------------------
In July 1999, QuadraMed acquired the service contracts of Record
Processing Management ("RPM"), a service business where hospital records
departments are outsourced, for $2.5 million payable in cash, $2.0 million upon
close of the transaction and $500,000 on January 1, 2000.
In July 1999, QuadraMed acquired the assets of Med Data, a developer of a
chart management software product to be integrated into QuadraMed's HIM
Software product line, for $5.5 million in cash and $1.7 million in liabilities
assumed.
F-19
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
In May 1999, QuadraMed acquired the assets of Millennium Consulting
Services, LLC ("Millennium Consulting") for total consideration of $1,022,000,
including $792,000 in cash and 19,633 unregistered shares of QuadraMed common
stock having an aggregate fair market value of $230,000.
In April 1999, QuadraMed acquired the assets of American ChartGuard
Corporation for total consideration of $713,000, consisting of $308,000 of cash
and 77,419 unregistered shares of QuadraMed common stock having an aggregate
fair market value of $405,000.
In April 1999, QuadraMed acquired the assets of Superior Archives for
total cash consideration of $400,000.
QuadraMed's Consolidated Statements of Operations include the operating
results of each business from the date of acquisition however, pro forma
results of operations have not been presented because the effects of these
acquisitions were not material on either an individual or aggregate basis.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the dates of acquisition (in thousands):
Med Millenium Superior American
Assets: Data RPM Consulting Archives ChartGuard
------ ---- --- ---------- -------- ----------
Current assets $ 587 $ - $ - $ - $ 30
Goodwill 5,151 2,510 1,022 400 683
------- ------- ------- ------- -------
5,738 2,510 1,022 400 713
Liabilities:
Current liabilities (1,700) -- -- -- --
------- ------- ------- ------- -------
4,038 2,510 1,022 400 713
Write off IPR&D 1,472 -- -- -- --
------- ------- ------- ------- -------
Net purchase price $ 5,510 $ 2,510 $ 1,022 $ 400 $ 713
======= ======= ======= ======= =======
In-process research and development ("IPR&D") charges represented the
value assigned to research and development projects that were commenced by Med
Data but not completed at the date of acquisition. Technological feasibility
of these projects was not established and no alternative future use to the
Company was identified therefore, in accordance with SFAS No. 2, Accounting for
--------------
Research and Development Costs, as interpreted by FASB Interpretation No. 4,
------------------------------
Application of FASB Statement No. 2 to Business Combinations Accounted for by
-----------------------------------------------------------------------------
the Purchase Method, these projects were charged to expense at the date of
-------------------
consummation of the Med Data purchase.
Pooling-of-Interests Combinations
---------------------------------
The following transactions were accounted for as pooling-of-interests
wherein QuadraMed acquired each entity in a stock-for-stock merger and
transactions costs were charged as operating expenses upon close of the
transaction:
o In June 1999, QuadraMed acquired LinkSoft issuing 435,000 unregistered
shares of its common stock with a fair market value of $4.2 million and
recording approximately $450,000 in transaction costs;
o In June 1999, QuadraMed acquired Healthcare Financial Informatics
("HFI") issuing 452,807 unregistered shares of its common stock with an
aggregate fair market value of $4.4 million and recording $600,000 in
transaction costs;
o In March 1999, QuadraMed acquired Pro Intermed, Inc. ("Pro Intermed")
issuing 660,000 unregistered shares of its common stock with an
aggregate fair market value of $5.9 million and recording $1.3 million
in transaction costs; and,
o In March 1999, QuadraMed acquired Compucare issuing 2,957,000
unregistered shares of its common stock with an aggregate fair market
value of $47.1 million and recording $5.6 million in transaction costs.
F-20
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The table below shows revenue and net income of QuadraMed for the year
ended December 31, 1999 (restated) and the 1999 revenue and net income of the
merged entities prior to the mergers. There were no mergers in 2000 or 2001:
Net Income Earnings
Revenue (Loss) (Loss)
(in thousands) (in thousands) Per Share
------------ ------------ ---------
QuadraMed (restated) $192,477 $ (49,502) $ (2.07)
Compucare (restated) 10,218 1,280 0.05
Linksoft 1,009 (438) (0.02)
HFI (restated) -- (414) (0.02)
Pro InterMed (restated) 2,249 1,686 0.07
-------- --------- ---------
Consolidated (restated) $205,953 $ (47,388) $ (1.99)
======== ========= =========
Divestitures
------------
On August 16, 2001, QuadraMed and its wholly owned subsidiary, QuadraMed
Operating Corporation, entered into an agreement for the sale of certain assets
and related products used to conduct the EZ-CAP managed care software business
to OAO. The transaction closed on August 31, 2001. As part of the agreement,
QuadraMed is entitled to receive up to $5.0 million in additional payments
based on EZ-CAP's revenue growth and customer retention as part of OAO over the
18 months following the close of the transaction. QuadraMed received net
proceeds from the sale of $8.1 million, and recorded a gain of $7.1 million.
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.
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 (see Note 23) and, in addition, received
$3.0 million in cash from sales of software licenses which has been
reclassified to gain on the sale of ChartOne as part of the restatement
adjustments (see Note 2.) 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 ($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. As part of the
sale, QuadraMed incurred transaction costs of approximately $1.2 million.
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 several 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 $29.1 million as of December 31, 2001. During 2001,
$12.2 million in short-term investments matured and were held as cash and cash
equivalents as of December 31, 2001.
Marketable Investments in Other Companies - From 1997 to 1999, QuadraMed
-----------------------------------------
made a series of investments in VantageMed Corporation ("VantageMed"), a
company that develops and sells software to physician groups. As of December
31, 1999, the fair value of the investment was $4.7 million and QuadraMed owned
12.1% of VantageMed's outstanding stock as a consequence of its original equity
investment, an additional $3 million equity contribution in 1999, and the
conversion to equity in 1999 of a fully advanced $500,000 revolving line of
credit. Prior to February 2000, the VantageMed investment had been recorded as
a non-marketable investment. In February 2000, VantageMed began to trade its
shares publicly and QuadraMed began accounting for the investment as a
marketable equity security. 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, 2001 and 2000, the fair value of the VantageMed investment was
$575,000 and $636,000, respectively.
F-21
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Restricted Cash - Restricted cash is included in non-current assets and
---------------
consists primarily of funds deposited in connection with lease agreements and
contract guarantees of $737,000 and $3.6 million, respectively, at December 31,
2001. At December 31, 2000, the restricted cash related to contract guarantees
was $6.0 million, $2.4 million of which was released during 2001 and
subsequently invested in short-term investments.
Also in restricted cash as of December 31, 2000, was $1.6 million in
escrow relating to a guarantee of interest payments on a line of credit with
Health+Cast. In 2001, QuadraMed and Health+Cast settled a legal dispute, the
line of credit was satisfied, the escrow account reduced to a zero balance, and
QuadraMed's obligation under the guarantee terminated (see Note 21 for further
explanation). There is no restricted cash related to this transaction as of
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, 2001.
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)
Cost or on Available-
Amortized Aggregate for-Sale
As of December 31, 2001 (in thousands): Cost Fair Value Securities
-------------------------------------- ---- ---------- ----------
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
=======
F-22
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Unrealized
Gain (Loss)
Cost or on Available-
Amortized Aggregate for-Sale
As of December 31, 2000 (in thousands): Cost Fair Value Securities
-------------------------------------- ---- ---------- ----------
Short-term investment:
Debt securities issued by the United
States Government $ 4,997 $ 4,994 $ (3)
Corporate debt securities 7,343 7,302 (41)
------- ------- -------
$12,340 $12,296 $ (44)
======= ======= =======
Long-term investment:
Debt securities issued by the United
States Government $ 463 $ 519 $ 56
Corporate debt securities 478 500 22
------- ------- -------
$ 941 $ 1,019 $ 78
======= ======= =======
VantageMed Corporation, marketable
equity security $ 636 $ 636 $ --
======= ======= =======
Total unrealized gain $ 34
=======
Proceeds from the sale of available-for-sale securities were $12.2
million, $18.3 million and $34.4 million during the years ended December 31,
2001, 2000 and 1999, respectively. Net realized gains (losses) were $(14,000),
$(61,000), and $28,000 during the years ended December 31, 2001, 2000 and 1999,
respectively.
Variable Life Insurance Policies - QuadraMed has 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 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. These policies are recorded to approximate the amount that would be
realized upon surrender. 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 two other subsequently terminated benefit plans (see
Note 17, 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 policy 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 this
---------
variable life insurance contract 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.
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 net present value of the Split-dollar
Life policies and the cash surrender value of Deferred Compensation Policy as
of December 31, 2001 were each $1.7 million and at December 31, 2000, $1.4
million and $1.5 million, respectively.
6. PURCHASED ACCOUNTS RECEIVABLE
-----------------------------
QuadraMed purchased certain accounts receivable in 1997 from Chama, Inc.
("Chama"), a hospital holding company then managed by Arcadian Management
Services, Inc. ("Arcadian"), a hospital management company for which QuadraMed
had agreed to develop a centralized outsourced business office and of which
John Austin, then a QuadraMed director, was CEO. At the time of purchase,
QuadraMed filed a security interest in the receivables. In October of 1998,
Chama, together with several other hospitals, filed for reorganization under
Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware. Pursuant
to an order of the Bankruptcy Court in February 1999, Chama was ordered to
deposit all proceeds of the QuadraMed receivables in a segregated, interest-
bearing account pending further court order. Subsequently, Chama filed an
action challenging QuadraMed's claim to the segregated account. In October
2001, QuadraMed and Chama reached a settlement approved by the Bankruptcy
F-23
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Court, whereby QuadraMed received approximately $102,000 from the segregated
account in full satisfaction for all outstanding claims. Consequently,
QuadraMed wrote off the remaining receivable balance of $128,000 in the fiscal
year ended December 31, 2001. In the fiscal years ended December 31, 2000 and
1999, QuadraMed wrote off $0.9 million and $1.2 million, respectively, in
connection with these accounts receivable.
7. PROPERTY AND EQUIPMENT
----------------------
Property and Equipment, net consisted of the following (in thousands):
December 31,
----------------------
2001 2000
(Restated) (Restated)
-------- --------
Computer equipment $ 9,273 $ 18,170
Office furnishings and equipment 4,957 4,703
Purchased software 4,654 5,011
Leasehold improvements 1,073 827
-------- --------
Total cost 19,957 28,711
Less: Accumulated depreciation and amortization (12,634) (20,436)
-------- --------
Net book value $ 7,323 $ 8,275
======== ========
Depreciation expense was $3.5 million, $4.6 million, and $5.6 million for
the years ended December 31, 2001, 2000 and 1999, respectively. In Fourth
Quarter 1999, QuadraMed wrote-off $1.4 million representing the net book value
of certain property and equipment.
8. GOODWILL
--------
Goodwill is determined at the time of QuadraMed's acquisitions based upon
the amount of purchase price in excess of the fair value of the tangible net
assets acquired and other identifiable intangible assets, such as trademarks
and customer lists. The purchase price for acquisitions involving an exchange
of common stock is determined based on the stock prices at the time acquisition
agreement is executed and announced. Goodwill is reviewed on an individual
acquisition, market, or product basis whenever events or changes in
circumstances indicate that such assets are impaired or the estimated useful
lives are no longer appropriate. On a quarterly basis, QuadraMed reviews its
goodwill for impairment based on estimated future undiscounted cash flows
attributable to the assets in accordance with SFAS No. 121, Impairment of Long-
-------------------
Lived Assets. In the event such cash flows are not expected to be sufficient
------------
to recover the recorded value of the goodwill, the goodwill is written down to
its net realizable value.
No impairment charges related to goodwill were recorded during the years
ended December 31, 2001 and 2000. During 1999, in accordance with SFAS No.
121, the estimated future undiscounted cash flows from certain acquired product
lines were not sufficient to cover future amortization of the associated
goodwill related to these product lines and accordingly, QuadraMed recorded
$11.5 million as an other operating charge for goodwill impairment. This
charge related to goodwill recorded from the acquisition of Healthcare
Recovery, Inc. in 1997, and Healthcare Cash Management Seminars, Inc., American
Medical Network, Inc., Velox Systems Corp., and American Hospital Hospital
Directory, Inc. in 1998.
Goodwill amortization expense was $3.5 million, $3.9 million, and $5.1
million for the years ended December 31, 2001, 2000 and 1999, respectively.
As discussed in Note 3, on July 1, 2001, QuadraMed adopted SFAS No. 141,
Business Combinations, which requires the purchase method of accounting on all
business combinations. On January 1, 2002, QuadraMed adopted SFAS No. 142,
Goodwill and Other Intangible Assets, which eliminates the amortization of
goodwill but requires annual impairment testing, and SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No.
121 and Accounting Principles Board ('APB") Opinion No. 30.
F-24
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
9. OTHER INTANGIBLE ASSETS
-----------------------
Other intangible assets consist primarily of capitalized software
development costs, acquired software, trademarks and customer lists separately
identifiable at the time of QuadraMed's acquisitions. Intangible assets are
reviewed on an individual acquisition, market, or product basis whenever events
or changes in circumstances indicate that such assets are impaired or the
estimated useful lives are no longer appropriate. On a quarterly basis,
QuadraMed reviews its intangible assets for impairment based on estimated
future undiscounted cash flows attributable to the assets in accordance with
SFAS No. 121, Impairment of Long-Lived Assets. 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.
Capitalized Software Development Costs - For the years ended December 31,
2001, 2000 and 1999, QuadraMed capitalized software development costs of $1.8
million, $527,000, and $2.6 million, 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
$14.5 million, $22.9 million, and $29.2 million in the years ended December 31,
2001, 2000 and 1999, 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 $2.0 million, $1.7 million
and $967,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
In 1999, QuadraMed recorded a $6.0 million charge to write-down technology
associated with Health+Cast.
Amortization of other intangible assets totaled $2.7 million, $2.8
million, and $2.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
10. LEASE OBLIGATIONS
-----------------
QuadraMed leases its headquarters and all other facilities under operating
leases and a nominal portion of its equipment under capital lease arrangements.
The minimum future lease payments required under QuadraMed's operating leases
at December 31, 2001 are as follows (in thousands):
Operating
Leases
------
2002 $ 4,792
2003 4,450
2004 3,616
2005 3,055
2006 2,806
Thereafter 11,391
--------
Total minimum lease payments $ 30,110
========
Rental expense was $6.0 million, $7.6 million, and $8.0 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
11. 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,
F-25
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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,
2001, the outstanding principal amount of the Debentures was $73.7 million with
a fair value of $59.2 million and $41.1 million at December 31, 2001 and 2000,
respectively.
12. STAND-BY LETTERS OF CREDIT
--------------------------
During the years ended December 31, 2001, 2000 and 1999, QuadraMed opened
$500,000, $6.0 million, and $1.0 million, respectively, of stand-by letters of
credit under bank financing agreements. QuadraMed paid a 1% annual fee to
renew the stand-by letters of credit and secured all of the stand-by letters of
credit with certificates of deposit totaling $500,000, $6.0 million, and $1.0
million, recorded in the balance sheet as restricted cash at December 31, 2001,
2000 and 1999, respectively. In 2001, the $5.0 million letter of credit was
reduced to $2.6 million, concurrent with the release of $2.4 million from
restricted cash that was subsequently invested in short-term investments.
13. 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 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 $821,000 and were recorded as treasury stock.
14. WARRANTS
--------
In connection with the acquisition of Linksoft Technologies, Inc.
("Linksoft") in June 1999, QuadraMed issued 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, 2001, 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
issued 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, 2001, warrants for a total of 20,622 shares of
common stock remain outstanding with 2,690 at an exercise price of $111.54
expiring January 2003; 11,208 at an exercise price of $223.09 expiring October
2005; and 6,724 at an exercise price of $0.15 expiring February 2006.
In connection with a 1996 bridge loan agreement, QuadraMed issued warrants
for the purchase of an aggregate 957,376 shares of the Company's common stock
at a purchase price of $3.75 per share. The warrants were partially exercised
and a total of 671,665 shares of common stock were issued in 1997 to 1998. The
warrants for the remaining 285,711 shares expired on January 31, 2001.
F-26
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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 five-day trading
average close price of $5.18 for QuadraMed's common stock for the week
beginning October 29, 2001.
QuadraMed issued warrants in 1995 and 1996 to James D. Durham, then
QuadraMed's Chairman and Chief Executive Officer, for the purchase of up to
355,600 shares of the Company's common stock at $3.75 per share. In connection
with the 1996 warrant, QuadraMed recorded deferred compensation for $381,000,
representing the intrinsic value of the warrant at the date of issuance, which
would be amortized over the vesting period. The Company recorded compensation
expense of $336,000 in 1997 as a result of the vesting of warrants. The
warrants were exercised in full during 1999.
In October 1995, QuadraMed entered into a joint development arrangement
with another software company pursuant to which QuadraMed issued a warrant for
the purchase of 28,560 shares of the Company's common stock at $5.25 per share.
The warrant was partially exercised in 1997 and the remainder, representing
9,576 shares of common stock, expired on June 25, 2001.
15. 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 amended
and restated the Compucare 1997 Stock Compensation Plan (the "Compucare Plan")
and the Pyramid Health Group, Inc. 1997 Employee and Consultant Stock Option
Plan (the "Pyramid Plan") and has made limited grants under these plans. The
terms and conditions of the options granted under the amended and restated
Compucare and Pyramid Plans are substantially similar to the terms and
conditions of options granted under the 1996 Stock Incentive Plan.
1996 Stock Incentive Plan
-------------------------
Under QuadraMed's 1996 Stock Incentive Plan, which is the successor plan
to the 1994 Stock Incentive Plan, (collectively, 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 five 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 shares 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. Option grants under the
Incentive Plan generally expire ten 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, 2001,
QuadraMed's stockholders had authorized a total of 5,118,951 shares of common
stock under the Incentive Plan, all of which had been granted. 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.
F-27
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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 ten years. As of December
31, 2001, QuadraMed's stockholders had authorized a total of 4,000,000 shares
of common stock under the 1999 Supplemental Plan, of which 2,349,419 shares
were available for grant.
QuadraMed accounts for its employee stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25, Accounting for Stock Issued
---------------------------
to Employees, and its related interpretations. Under this principle,
------------
compensation expense of $205,000, $154,000, and $827,000 was recognized during
the years ended December 31, 2001, 2000 and 1999, respectively. Employee
compensation expense recognized in 2001 was related to the issuance of 475,000
restricted shares; while that recognized in 1999 primarily related to the
acceleration of vesting terms for certain restricted shares then outstanding.
For non-employee stock-based awards, QuadraMed uses SFAS No. 123, Accounting
----------
for Stock-Based Compensation, and recognized compensation expense of $41,000 in
----------------------------
2001 and zero in the years ended December 31, 2000 and 1999.
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.
Had compensation cost for QuadraMed's option plans been determined based
on the fair value of the underlying shares at the grant dates for the awards
calculated in accordance with the method prescribed by SFAS No. 123,
QuadraMed's pro forma net income (loss) and net income (loss) per share would
have been as follows (in thousands, except per share amounts):
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Net income (loss) As restated $ 9,413 $(36,675) $(47,388)
Pro forma $ 6,362 $(37,304) $(61,019)
Basic net income (loss) per share As restated $ 0.37 $ (1.43) $ (1.99)
Pro forma $ 0.25 $ (1.46) $ (2.56)
Diluted net income (loss) per
share As restated $ 0.37 $ (1.43) $ (1.99)
Pro forma $ 0.25 $ (1.46) $ (2.56)
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,
---------------------------------
(in thousands) 2001 2000 1999
-------- -------- --------
Expected dividend yield -- -- --
Expected stock price volatility 109.60% 107.10% 91.70%
Risk-free interest rate 4.12% 6.51% 6.49%
Expected life of options 5 years 5 years 5 years
F-28
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The weighted average fair value of options granted during 2001, 2000 and
1999 were $1.17, $1.44 and $5.04 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, 1998 3,595 $14.75
Granted 2,559 8.12
Exercised (259) 6.27
Cancelled (506) 13.70
------ ------
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
====== ======
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Life Exercise as of Exercise
Exercise Prices 12/31/01 (in years) Price 12/31/01 Price
--------------- -------- -------- ----- -------- -----
$ 0.69 - $ 6.99 3,697,567 7.95 $ 2.38 1,483,122 $ 2.47
$ 7.00 - $ 9.13 1,392,259 7.42 8.21 995,808 8.44
$ 9.63 - $11.50 315,275 4.89 11.41 315,275 11.41
$12.00 - $16.63 187,611 6.53 15.89 182,807 15.88
$17.97 - $21.04 27,228 4.06 19.51 27,099 19.51
$22.38 - $24.38 106,860 6.16 22.81 104,091 22.80
$27.00 - $30.13 20,000 6.56 28.56 16,875 28.58
--------- ---------
$ 0.69 - $30.13 5,746,800 7.55 $ 5.28 3,125,077 $ 7.03
========= =========
Employee Stock Purchase Plan
----------------------------
QuadraMed's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in June 1996 and terminated in January 2000.
A total of 200,000 shares of common stock were reserved for issuance under the
Purchase Plan, pursuant to which eligible employees were 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. In the years ended
December 31, 2000 and 1999, QuadraMed issued 58,164 and 90,927 shares of common
stock, for an aggregate purchase price of $488,000 and $1.0 million,
respectively. No compensation expense was recorded in connection with the
Purchase Plan.
F-29
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
16. 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
Compensation 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.
Nitin T. Mehta, a former officer of QuadraMed, was the CEO of Pyramid
Health Group ("Pyramid"), acquired by QuadraMed in 1998. Concurrent with the
Pyramid acquisition, QuadraMed entered into a non-exclusive financial advisory
agreement regarding corporate acquisitions, sales, mergers, consolidation and
other business combinations with Mehta & Company, Inc. ("Mehta & Company"), an
investment banking firm in which Mr. Mehta had an ownership interest.
QuadraMed paid Mehta & Company fees totaling $5.3 million in the year ended
December 31, 1999. Mehta & Company has not provided any services to QuadraMed
since 1999 and no subsequent fees have been paid.
17. 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, 2001, 2000 and 1999, QuadraMed made discretionary
contributions of $900,000, $1.0 million and $1.0 million, respectively.
In 1999, QuadraMed merged into the Plan the 401(k) Savings Plan of
Compucare, acquired during 1999.
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, 2001 and 2000, QuadraMed made no
discretionary contributions to the DCP.
F-30
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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 years ended December 31, 2001 and 2000,
QuadraMed recorded compensation expense related to the SEDCP in the amount of
$650,000 and $1.8 million, respectively.
Supplemental Executive Retirement Plan (the "SERP")
--------------------------------------------------
QuadraMed adopted a Supplemental Executive Retirement Plan (the "SERP")
effective January 1, 2000. The Compensation Committee of the board of
directors is responsible, at its sole discretion, to select the employees to
participate in the SERP, which 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. None of QuadraMed's current executive officers,
including the Chief Executive Officer, have been selected to participate in the
SERP.
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 ten 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 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.
The SERP distinguishes between years of plan participation and years of
service. A SERP participant must have 7 years of plan participation to be
eligible for the SERP benefit. The following table shows the estimated annual
payments payable at normal retirement to a SERP participant. The benefits
shown in the table are not subject to offset for Social Security or other
benefits.
SERP Benefit with Years of Service Indicated
Highest Annual Compensation 0-6 Years 7 Years 10 Years 13+ Years
--------------------------- --------- --------- --------- ---------
$500,000 $ -- $175,000 $250,000 $325,000
$600,000 $ -- $210,000 $300,000 $390,000
$700,000 $ -- $245,000 $350,000 $455,000
$800,000 $ -- $280,000 $400,000 $520,000
$900,000 $ -- $315,000 $450,000 $585,000
For purposes of the SERP, "highest annual compensation" means a
participant's highest annual compensation including salary and bonuses, during
the participant's last ten years of employment. The "salary" and "bonuses"
used to determine a participant's "highest annual compensation" are the same as
the salary and bonuses disclosed in the "Salary" and "Bonuses" column of the
Summary of Compensation Table as found in the Company's Definitive Proxy
Statement.
On June 12, 2000, QuadraMed executed separation agreements with Mr. Durham
("Durham Separation Agreement") and Mr. Cracchiolo ("Cracchiolo Separation
Agreement"), thereby terminating their employment. Pursuant to the Durham
Separation Agreement, Mr. Durham agreed that his separation was an involuntary
separation for purposes of his employment agreement dated January 1, 1999 but
was not an involuntary termination for purposes of the SERP, which would
continue to vest as long as he was a Director. In addition, the Durham
Separation Agreement provided that Mr. Durham would continue as a part-time
F-31
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
employee of QuadraMed until December 31, 2003; and that he would immediately
vest in his SERP benefit should QuadraMed shareholders not re-elect him as a
Director, provided that the SERP benefit would not be accelerated. Pursuant to
the Cracchiolo 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 the Durham 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 provided that his
resignation as a Director was not an involuntary termination for purposes of
accelerating 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 7.0% (in thousands):
Year ended December 31,
-----------------------
2001 2000
---- ----
Net Periodic Benefit Cost
Service cost $ 310 $ 284
Interest cost 146 111
Amortization of prior service cost 218 228
------- -------
674 623
Curtailment of SERP 616 --
Other Comprehensive Income -- --
------- -------
$ 1,290 $ 623
======= =======
As of the measurement date, December 31, the status of the SERP using an
assumed discount rate of 7.0% was as follows (in thousands):
December 31,
-----------------------
2001 2000
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 1,987 $ 1,592
Service cost 310 284
Interest cost 146 111
-------- --------
Benefit obligation at end of year 2,443 1,987
Change in plan assets (1) -- --
-------- --------
Funded status (2,443) (1,987)
Unrecognized prior service cost 530 1,364
-------- --------
Accrued benefit obligation (1,913) (623)
Unfunded accumulated benefit obligation (2,443) (1,987)
-------- --------
Additional liability (2) (530) (1,364)
Intangible asset (3) 530 1,364
-------- --------
Impact on accumulated deficit $ -- $ --
======== ========
Benefit liability (4) $ (2,443) $ (1,987)
======== ========
(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.
F-32
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
As of December 31, 2001, Mr. Durham had eight (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 ten (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
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. When QuadraMed terminated the DCP and SEDCP pursuant to their
terms in February and July 2001, 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 five (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").
----------------------------------
1 Mr. Roskovensky was subsequently elected to the QuadraMed Board of Directors
on April 26, 1999.
F-33
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
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 five
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 five annual premium
payments agreed to be advanced by QuadraMed from 1998 to 2002 is $33,244.
QuadraMed was obligated to continue to make the remaining annual premium
payments to John Hancock for the Durham Policy and the Cracchiolo Policy under
the Split-Dollar Agreements pursuant to the Durham Separation Agreement and the
Cracchiolo Separation Agreement, respectively.
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.
18. MAJOR CUSTOMERS
---------------
In the years ended December 31, 2001, 2000 and 1999, no single customer
accounted for more than 10% of total revenues however, in 2001 sales to the U.
S. government accounted for 10.0% of HIM Software Division revenues.
19. 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.
20. SEGMENT REPORTING
-----------------
In 2000, QuadraMed realigned its operations into five (5) distinct
business segments. With the sale of the EZ-CAP managed care software business
in August 2001, QuadraMed is now managed in four (4) distinct business
segments. Although not reported as a business segment, a portion of the
Company's revenue was generated from specialty product lines that are not
aligned with an operating division.
F-34
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The reorganization undertaken during 2000 more closely aligned products
targeted to shared markets, helped to more accurately measure financial
performance by product/division, and established greater management
accountability. 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 material components previously included in the former Physician Services
segment including EZ-Cap. The segment results reflected in the following
tables have been reclassified to reflect this realignment for both current and
prior year data. The accounting policies of the operating segments are the
same as those described in Note 3. Summary of Significant Accounting Policies.
------------------------------------------
QuadraMed evaluates financial performance by segment as summarized in the
subsequent table. The financial results for these operating segments for prior
years have been reclassified on an estimated basis to conform to the current
year presentation.
The Enterprise Division offers QuadraMed's Affinity enterprise-wide
information system products. With its full suite of applications, Affinity is
designed to address a wide range of financial, patient, and clinical management
needs of single- or multi-facility hospitals. Principally targeting acute care
hospitals across the United States, the Affinity solution incorporates a
patient-centered database designed to enable users to track each patient
throughout the continuum of care. The system integrates financial information
such as patient accounting and DRG/case mix with clinical data such as medical
charting and plan of care to automate federal and state reporting, scheduling,
registration, and medical records information. The Electronic Document
Management solution is designed to allow users to create secure electronic
patient folders that combine both computerized and scanned documents. The
Master Population Index and Performance Measurement products, previously part
of the Health Information Management Software Division, were transferred to the
Enterprise Division in the first half of 2001.
The Health Information Management Software Division provides QuadraMed's
Quantim health information management software products, encompassing a suite
of compliance, encoding and grouping, medical record management, and patient
database applications that are designed to enable a hospital to accurately
track medical records for internal and external purposes. Additionally, the
division offers Complysource Compliance Solutions that are designed to support
hospitals in managing the complexities of evolving federal requirements and in
submitting accurate billing and clinical data. The coding and grouping
products aim to protect the integrity of a healthcare organization's clinical
data and improve accuracy and coding compliance for ICD-9, CPT, and HCPCS
codes. The medical record management product is designed to locate and reserve
charts, and authenticate and distribute transcribed medical records. In the
first half of 2001, the nCoder+MD product, previously included in the former
EZ-CAP business, was transferred to this division, and the Master Population
Index and Performance Measurement product lines, previously included in this
division, were transferred to the Enterprise Division. Effective in Third
Quarter 2001, the Health Information Management Software Division's services
include education services, seminars and training for healthcare organizations.
The Health Information Management Services Division offers Quantim and
Complysource Services, which are designed to provide healthcare information
management departments with experienced, qualified, and if necessary,
credentialed professionals to perform information technology, coding, auditing,
accounting, compliance, and medical record services. The division also
provides experienced executives for interim assignments in financial and
management positions. These services are offered to acute care facilities, as
well as, to large physician, clinic, and ambulatory practices.
The Financial Services Division provides QuadraMed's Chancellor Financial
Products resources to healthcare providers to reduce accounts receivable
backlogs and accelerate cash flow. The division conducts analyses of patient
accounts to identify outstanding or underpaid third-party payments, to re-bill,
and to follow-up on third-party claims.
Although not reported as a business segment, QuadraMed also derives
approximately four percent (4%) of its revenue from specialty products that are
included in Other. Patient Focused Solutions ("PFS") provides productivity and
staffing information principally for hospital nursing staff. Electronic Data
Interchange ("EDI") interfaces with the hospital information system to download
claims data automatically on a daily basis. Claims are edited onsite and
formatted to payer-specific requirements.
F-35
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Summary financial data by business segment follows (in thousands):
Year ended December 31, 2001
(Restated)
-------------------------------------------------------------
HIM HIM Financial Consolidated
Description Enterprise Software Services Services Other (1) Total
----------- ---------- -------- -------- -------- -------- -----
Total revenue $60,531 $27,508 $16,833 $15,462 $12,059 $ 132,393
Gross margin (2) $42,318 $21,105 $ 4,563 $10,647 $ 7,634 $ 86,267
Interest expense,
net $ 827 $ 986 $ 274 $ 168 $ 1,186 $ 3,441
Segment assets $30,067 $35,846 $ 9,963 $ 6,103 $43,154 $ 125,133
Total depreciation
and amortization
expense (3) $ 1,874 $ 5,830 $ 532 $ 1,063 $ 3,311 $ 12,610
(1) Other includes specialty products, non-allocated expenses for bad debt
reserve, legal charges and divested product lines including $6.4 million in
revenue and $1.6 million in net income for EZ Cap.
(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 direct margin; debt-
offering costs as reflected in interest expense; and goodwill and
amortization of other intangibles, excluding capitalized software
development costs.
Year ended December 31, 2000
(Restated)(4)
-------------------------------------------------------------
HIM HIM Financial Consolidated
Description Enterprise Software Services Services Other (1) Total
----------- ---------- -------- -------- -------- -------- -----
Total revenue $45,625 $20,577 $29,968 $11,795 $41,768 $ 149,733
Gross margin (2) $32,577 $15,698 $ 5,804 $ 4,025 $13,193 $ 71,297
Interest expense,
net $ 848 $ 1,080 $ 409 $ 222 $ 1,921 $ 4,480
Segment assets $28,246 $36,000 $13,617 $ 7,393 $64,030 $ 149,286
Total depreciation
and amortization
expense (3) $ 1,235 $ 5,340 $ 391 $ 1,065 $ 6,103 $ 14,134
(1) Other includes specialty products, non-allocated expenses for bad debt
reserve, legal charges, restructuring charges and divested product lines
including $32.7 million in revenue and $5.8 million in net income for EZ
Cap and ROI.
(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 direct margin; debt-
offering costs as reflected in interest expense; and goodwill and
amortization of other intangibles, excluding capitalized software
development costs.
(4) December 31, 2000 results have been reclassified to be consistent with
current year business segment presentation.
F-36
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
Year ended December 31, 1999
(Restated)(4)
-------------------------------------------------------------
HIM HIM Financial Consolidated
Description Enterprise Software Services Services Other (1) Total
----------- ---------- -------- -------- -------- -------- -----
Total revenue $63,709 $22,229 $35,635 $ 9,882 $ 74,498 $ 205,953
Gross margin (2) $51,769 $18,147 $10,516 $ 3,456 $ 35,600 $ 119,488
Interest expense,
net $ 470 $ 594 $ 256 $ 112 $ 1,606 $ 3,038
Segment assets $31,215 $39,466 $17,034 $ 7,426 $106,618 $ 201,759
Total depreciation
and amortization
expense (3) $ 1,834 $ 4,732 $ 352 $ 1,077 $ 7,029 $ 15,024
(1) Other includes specialty products, non-allocated expenses for bad debt
reserve, legal charges, restructuring charges and divested product lines
including $64.1 million in revenue and $12.1 million in net income for EZ
Cap and ROI.
(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 direct margin; debt-
offering costs as reflected in interest expense; and goodwill and
amortization of other intangibles, excluding capitalized software
development costs.
(4) December 31, 1999 results have been reclassified to be consistent with
current year business segment presentation.
21. OTHER OPERATING CHARGES
-----------------------
Non-recurring charges of $4.7 million and $7.7 million were incurred
during the years ended December 31, 2000 and 1999, respectively. The 2000
charges consisted of $3.4 million associated with separation agreements for
officers and $1.3 million for employee severance and closure of facilities.
The 1999 charges were predominately severance for terminated employees and
contractual services and were fully utilized in 1999. As of December 31, 2001,
there is no remaining liability.
Additionally during 1999, QuadraMed incurred $6.9 million in acquisition
costs (see also Note 4), wrote down $6.0 million in assets associated with
Health+Cast and $2.9 million in other intangible assets (see also Note 9).
There were no other operating charges in the year ended December 31, 2001.
22. 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-37
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Current:
Federal $ -- $ 617 $ 487
State 150 -- 143
------- ------- -------
Total current 150 617 630
------- ------- -------
Deferred:
Federal (2,004) 9,881 17,480
State 187 1,183 3,005
------- ------- -------
Total deferred (1,817) 11,064 20,485
------- ------- -------
Change in valuation allowance, net of
the effect of acquisitions 1,817 (11,064) (20,485)
------- ------- -------
Provision for income taxes $ 150 $ 617 $ 630
======= ======= =======
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,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Deferred tax assets:
Research and development credits $ 5,109 $ 4,104 $ 2,277
Net operating loss carryforwards 25,294 30,622 21,256
Deferred revenue 6,611 4,235 7,220
Intangible assets 9,683 10,070 8,909
Other 7,101 5,782 4,173
------- ------- -------
53,798 54,813 43,835
------- ------- -------
Deferred tax liabilities:
Other intangible assets (2,485) (2,785) (2,527)
Depreciation (1,218) (116) (460)
------- ------- -------
(3,703) (2,901) (2,987)
------- ------- -------
Net deferred tax asset before allowance 50,095 51,912 40,848
Valuation allowance (50,095) (51,912) (40,848)
------- ------- -------
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-38
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
The reconciliation of the tax provision (benefit) computed at the
statutory rate to the effective tax rate is as follows:
Year ended December 31,
---------------------------------
(in thousands) 2001 2000 1999
(Restated) (Restated) (Restated)
-------- -------- --------
Federal income tax rate 34.0% (34.0)% (34.0)%
Change in valuation allowance (23.6) 28.0 21.2
Permanent tax differences (10.5) 6.0 13.0
Other 1.7 1.7 1.1
------ ------ ------
Effective tax rate 1.6% 1.7% 1.3%
====== ====== ======
As of December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $74 million and state net operating loss
carryforwards of approximately $1.4 million. In addition, the Company has
gross federal and California research and development credit carryforwards of
approximately $3.6 million and $1.5 million respectively. The federal net
operating loss carryforwards and research and development credits will expire
from 2011 through 2020. In 2001, QuadraMed utilized $13.6 million of its
federal and $6.0 million of its state NOL carryforwards.
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.
23. CONTINGENT LIABILITIES
----------------------
In 1998, QuadraMed entered into several agreements with Health+Cast, a
healthcare software company, for the purpose of integrating Health+Cast's
products into software of QuadraMed's now divested ROI Division. At the time,
certain officers and shareholders of Health+Cast were also officers and
shareholders of the Company. Contemporaneously, QuadraMed guaranteed
Health+Cast's bank line of credit up to $12.5 million, which bore interest at a
rate of 8.5% and matured in October 2001, and was required to maintain a
minimum cash balance of $50 million in an account with the lender. As
consideration for the guarantee, Health+Cast granted QuadraMed 2.5 million
optional warrants and approximately 1.11 million mandatory warrants at
different prices. By October 1999, the planned product integration was not
successful and QuadraMed initiated legal action against Health+Cast, which made
a cross-claim against QuadraMed. The line of credit, however, remained
current. As part of the ROI Division divestiture in June 2000 and pursuant to
an Asset Contribution Agreement dated May 3, 2000 between QuadraMed and
ChartOne, ChartOne, assumed most of the assets and liabilities of the ROI
Division. With regard to the guarantee of Health+Cast's line of credit
guarantee and with the lender's consent pursuant to the Asset Contribution
Agreement dated May 3, 2000, ChartOne assumed guarantee liability for the
principal and QuadraMed assumed liability for the interest under the line of
credit. Simultaneously, QuadraMed, ChartOne and Health+Cast entered into a
reimbursement agreement under which QuadraMed assumed all rights, including
subrogation rights, against Health+Cast for any amounts that ChartOne should
ever pay to the lender under ChartOne's guarantee. As a condition for the
exchange of guarantors, the lender required QuadraMed to secure the interest
payment guarantee with a $2.0 million escrow deposit account, which was to be
reduced with each interest payment. As of December 31, 2000, the amount in
escrow was $1.6 million and was reflected on the balance sheet as restricted
cash. In April 2001, QuadraMed and Health+Cast settled their legal dispute and
Health+Cast paid QuadraMed certain sums and cancelled QuadraMed's warrants. In
October 2001, the line of credit was satisfied, the escrow account reduced to a
zero balance, and QuadraMed's obligation under the guarantee terminated. As of
December 31, 2001, there was no restricted cash for this obligation.
24. LITIGATION
----------
From time to time in the normal course of its business, QuadraMed may be
involved in litigation relating to its operations. As of December 31, 2001,
QuadraMed was not a party to any legal proceedings that, if decided adversely,
would, individually or in the aggregate, have a material adverse effect on
QuadraMed's business, financial condition or results of operations. An accrual
F-39
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
of $3.7 million for litigation fees, costs, and expenses was established during
2000. As of December 31, 2001 and 2000, the balance in this reserve was zero
and $1.6 million, respectively and is included in accrued liabilities. All
material litigation items had been resolved by December 31, 2001.
25. SUBSEQUENT EVENTS
-----------------
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 $7.7 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 Smallcap or
National Market and is secured by certain intellectual property of QuadraMed.
As part of the transaction, 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 $0.01 per share and are subject to certain anti-dilution
provisions including dilution from the issuance of shares in settlement of
existing litigation.
On February 28, 2003, QuadraMed announced that it would not meet NASDAQ's
deadline of February 28, 2003 for filing its quarterly reports on Form 10-Q for
the interim periods ended June 30, 2002 and September 30, 2002 and its amended
SEC filings for the year ended December 31, 2001 and the interim period ended
March 31, 2002. On March 4, 2003, QuadraMed announced that it had received
notice the Company's common stock would be delisted from the Nasdaq National
Market as of the start of trading on Tuesday, March 4, 2003. The delisting
constitutes a "Repurchase Event" under the provisions of the Company'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 the Company to repurchase all or any of the holder's debentures. A
Special Committee of independent Directors of the Company and its advisors,
Deloitte & Touche LLP and Jefferies & Company, are making progress in their
efforts to find a new investor or a buyer for the Company and in managing
negotiations with the bondholders. The Company believes that it can
restructure the debt without it having a material impact on the Company.
On February 28, 2003, the Company reported that the SEC has issued a
formal non-public order of investigation concerning the Company's accounting
and financial reporting practices for the period beginning January 1, 1998.
The Company intends to continue to cooperate with the SEC and is in the process
of complying with the SEC's requests for information. The Company cannot
predict when the SEC will conclude its inquiry, or the outcome and impact
thereof.
On January 2, 2003, QuadraMed announced the closing of the sale of its HIM
Services Division to Precyse Solutions LLC on December 31, 2002. The Company
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. QuadraMed has
the opportunity to receive an additional $400,000 in cash based on the
division's 2002 year-end revenues. As a result of the sale, QuadraMed will
record a fourth quarter 2002 after-tax gain of between $8 million and $9
million.
On November 5, 2002, QuadraMed announced that it would relocate its
headquarters to existing facilities in Reston, Virginia from San Rafael,
California.
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
F-40
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2001
intends to defend itself vigorously against these allegations. However, the
ultimate outcome of these matters cannot presently be determined.
Following the Company's August 12, 2002 announcement that it 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. The
Company provided that information, and expects to provide additional
information now that the restatement is completed. The Company intends to
continue to cooperate with the SEC in the event it requests other information.
The Company cannot predict whether such information will be requested, when the
SEC will conclude its inquiry, or the outcome and impact thereof.
QuadraMed received a notice from the Nasdaq Stock Market that it was
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. The Company's
trading symbol as of August 22, 2002 was amended from "QMDC" to "QMDCE," as a
result of the delinquent filings. QuadraMed requested an appeals hearing
before a Nasdaq Listing Qualifications Panel ("the Panel"). The Panel notified
the Company on February 6, 2003, that Nasdaq would continue to list its common
shares on the Nasdaq Stock Market until February 28, 2003, by which date it had
to file its Quarterly Report on Form 10-Q for the interim periods ended June
30, 2002 and September 30, 2002 and its amended SEC filings for the year ended
December 31, 2001 and the interim period ended March 31, 2002. The Company was
also required to evidence its continued compliance with all requirements for
continued listing on the Nasdaq National Market upon the filing of those
documents as well as an ability to sustain compliance with those requirements
over the long term.
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. In connection with this
acquisition, QuadraMed recorded an in-process research and development charge
of $400,000 in Second Quarter 2002.
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 $1.3 million.
26. UNAUDITED QUARTERLY FINANCIAL INFORMATION
-----------------------------------------
Page
----
Unaudited Quarterly Consolidated Financial Data for 2001 F-42
Unaudited Quarterly Consolidated Financial Data for 2000 F-43
F-41
QuadraMed Corporation
Unaudited Quarterly Consolidated Financial Data (restated)
-------------------------------------------------------------------------------------------------------------
Quarter
--------------------------------------------------------
(thousands of dollars, except per share amounts) First Second Third Fourth Total
----- ------ ----- ------ -----
2001
----
Net revenue (as reported) $29,932 $31,469 $33,138 $34,896 $129,435
Net effect of restatement adjustments (1) 277 1,809 263 609 2,958
------- ------- ------- ------- --------
Net revenue (restated) $30,209 $33,278 $33,401 $35,505 $132,393
======= ======= ======= ======= ========
Gross margin (as reported) $19,691 $20,968 $23,534 $23,512 $ 87,705
Net effect of restatement adjustments (1) (144) (106) (1,343) 155 (1,438)
------- ------- ------- ------- --------
Gross margin (restated) $19,547 $20,862 $22,191 $23,667 $ 86,267
======= ======= ======= ======= ========
Net income (loss) (as reported) (2) $(2,932) $ 1,661 $15,411 $ 1,341 $ 15,481
Net effect of restatement adjustments (1) (1,897) (447) (3,100) (624) (6,068)
------- ------- ------- ------- --------
Net income (loss) (restated) (2) $(4,829) $ 1,214 $12,311 $ 717 $ 9,413
======= ======= ======= ======= ========
Earnings (loss) per common share
Basic
Net income (loss) (as reported) $ (0.11) $ 0.06 $ 0.60 $ 0.05 $ 0.60
Net effect of restatement adjustments (1) (0.07) (0.02) (0.12) (0.02) (0.24)
------- ------- ------- ------- --------
Net income (loss) (restated) $ (0.19) $ 0.05 $ 0.48 $ 0.03 $ 0.37
======= ======= ======= ======= ========
Diluted
Net income (loss) (as reported) $ (0.11) $ 0.06 $ 0.60 $ 0.05 $ 0.60
Net effect of restatement adjustments (1) (0.07) (0.02) (0.11) (0.02) (0.24)
------- ------- ------- ------- --------
Net income (loss) (restated) $ (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
Stock prices
High $ 2.69 $ 4.98 $ 6.30 $ 9.25 $ 9.25
Low $ 0.75 $ 1.63 $ 3.09 $ 4.33 $ 0.75
(1) See explanation of restatement in Note 2. of Notes to Consolidated
Financial Statements.
(2) As reported in the explanation of restatement in Note 2 of Notes to
Consolidated Financial Statements, discontinued operations were reported in
error and should have been reported as operating expenses. As such, the
previously reported Loss from Continuing Operations is not presented. Net
income (loss) included $2.4 million and $10.5 million gains on redemption
of bonds (net of tax) in Second and Third Quarters 2001, respectively, and
a $3.6 million charge to write-off convertible promissory note in Third
Quarter 2001.
F-42
QuadraMed Corporation
Unaudited Quarterly Consolidated Financial Data (restated)
-------------------------------------------------------------------------------------------------------------
Quarter
--------------------------------------------------------
(thousands of dollars, except per share amounts) First Second Third Fourth Total
----- ------ ----- ------ -----
2000
----
Net revenue (as reported) $ 30,760 $ 34,296 $ 26,479 $28,576 $120,111
Net effect of restatement adjustments (1) 15,491 10,715 1,006 2,410 29,622
-------- -------- -------- ------- --------
Net revenue (restated) $ 46,251 $ 45,011 $ 27,485 $30,986 $149,733
======== ======== ======== ======= ========
Gross margin (as reported) $ 14,339 $18,483 $ 12,206 $16,727 $ 61,755
Net effect of restatement adjustments (1) 6,175 2,068 (115) 1,414 9,542
-------- -------- -------- ------- --------
Gross margin (restated) $ 20,514 $20,551 $ 12,091 $18,141 $ 71,297
======== ======== ======== ======= ========
Net income (loss) (as reported) (2) $(25,529) $ (4,085) $(25,378) $ 156 $(54,836)
Net effect of restatement adjustments (1) 2,796 6,344 9,011 10 18,161
-------- -------- -------- ------- --------
Net loss (restated) (2) $(22,733) $ 2,259 $(16,367) $ 166 $(36,675)
======== ======== ======== ======= ========
Earnings (loss) per common share
Basic and diluted
Net income (loss) (as reported) $ (1.00) $ (0.16) $ (0.99) $ 0.01 $ (2.14)
Net effect of restatement adjustments (1) 0.11 0.25 0.35 -- 0.71
-------- -------- -------- ------- --------
Net loss (restated) $ (0.89) $ 0.09 $ (0.64) $ 0.01 $ (1.43)
-------- -------- -------- ------- --------
Weighted Average Shares Outstanding
Basic 25,434 25,550 25,753 25,754 25,623
Diluted 25,434 25,550 25,753 25,754 25,623
Stock Prices
High $ 10.50 $ 6.00 $ 2.97 $ 1.53 $ 10.50
Low $ 5.00 $ 2.09 $ 1.19 $ 0.63 $ 0.63
(1) See explanation of restatement in Note 2. of Notes to Consolidated
Financial Statements.
(2) As reported in the explanation of restatement in Note 2 of Notes to
Consolidated Financial Statements, discontinued operations were reported in
error and should have been reported as operating expenses. As such, the
previously reported Loss from Continuing Operations is not presented. Net
income (loss) included restructuring and other operating charges for $12.1
million, $16.3 million and $13.6 million in First, Second and Third
Quarters 2000, respectively.
F-43