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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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 (I.R.S. Employer
Incorporation or organization) Identification No.)
22 Pelican Way
San Rafael, California, 94901
(Address of Principal Executive
Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 482-2100
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 __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of March 18, 2002 was approximately $233,350,000
(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.
On March 18, 2002, 27,039,375 shares of the Registrant's common
stock, $0.01 par value per share, were outstanding.
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QUADRAMED CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I......................................................................1
Item 1 Business..........................................................1
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................13
Item 4 Submission of Matters to a Vote of Security Holders..............13
PART II....................................................................14
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters...........................................14
Item 6 Selected Financial Data..........................................16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......33
Item 8 Financial Statements and Supplementary Data......................34
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................34
PART III...................................................................34
Item 10 Directors and Executive Officers of the Registrant...............34
Item 11 Executive Compensation...........................................34
Item 12 Security Ownership of Certain Beneficial Owners and
Management....................................................34
Item 13 Certain Relationships and Related Transactions...................35
PART IV....................................................................35
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................35
In this Annual Report on Form 10-K, QuadraMed Corporation
("QuadraMed") and its management discuss and make statements regarding
their intentions, beliefs, and current expectations regarding QuadraMed's
future operations and performance. Such statements are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are often identified by words
such as "anticipates," "believes," "expects," "will," "should" and
"intends" and their negatives. QuadraMed and its management caution
prospective investors that such forward-looking statements are not
guarantees of future performance. Risks and uncertainties are inherent in
QuadraMed's future performance. Factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include, but are not limited to, those discussed in "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
QuadraMed and its management make forward-looking statements based on
currently available information and assume no obligation to update these
statements due to changes in underlying factors, new information, future
developments, or otherwise.
PART I
Item 1. Business
Overview
QuadraMed is dedicated to developing information technology and
providing consulting services that help healthcare professionals deliver
outstanding patient care with optimum efficiency. In 2001, QuadraMed
reported its first year of positive net income since becoming a publicly
traded company in 1996. In management's view, these results illustrate the
effectiveness of QuadraMed's strategy over the past eighteen (18) months in
focusing on the following:
o Integrating business units from the twenty-eight (28)
acquisitions made between 1993 and 1999;
o Reducing overall expenses;
o Increasing revenues;
o Selling non-strategic assets;
o Investing in research and development; and
o Instituting key financial and operational improvements.
QuadraMed 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 QuadraMed's healthcare technology
products and services into four sub-brands, corresponding to the four
distinct categories of hospital decision-makers who purchase its 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 and
Services, which are generally procured by medical record
and health information management professionals;
o Complysource(R) Compliance Solutions, which are generally
engaged by 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.
In 2000, QuadraMed's operations were realigned into five (5)
distinct business segments. With the sale of the EZ-CAP managed care
software business in August of 2001, QuadraMed now is managed in four (4)
distinct business segments. Although not reported as a business segment,
QuadraMed also generated approximately five percent (5%) of its revenue
from specialty product lines that are not aligned with an operating
division or have been discontinued and is referenced as Other on the
Consolidated Financial Statements. The four (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 Quantim and Complysource software products that
automate and support hospital and provider health
information management departments in maintaining accurate
and timely patient treatment information and in accurately
coding for e reimbursement;
o Health Information Management Services Division, which
provides (i) Quantim Health Information Interim Management,
Management Consulting, and Department Outsourcing services;
(ii) Quantim and Complysource Coding, Compliance, 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 receivables for hospitals and medical groups and
provides other Chancellor products and services.
Technology and Product Development Strategy
QuadraMed is continuously engaged in the design and development of
new products and enhancements to its existing products. QuadraMed 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, QuadraMed focused on the development of 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. It is now scheduled for a beta
release in the fourth quarter of 2002. 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, a single, fully-integrated
web-native platform that significantly improves and
combines the functionality of several existing health
information management product offerings in coding,
compliance, and data collection was developed. The first
product to be offered on this new platform, QuadraMed
Quantim Compliance (Inpatient and Outpatient Modules), was
delivered to its beta site in the fourth quarter of 2001
and is now generally available for purchase.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of product research and development
spending.
Revenue Model
QuadraMed's revenues, excluding exceptional items, are derived
from two sources: (i) licenses; and (ii) consulting services. License
revenues include amounts received for licenses and software-related
services, such as installation and post-installation customer support fees,
third-party hardware sales, and other software-related revenue. Consulting
services revenues include amounts from outsourcing, specialized staffing,
and analytical services provided by QuadraMed's Health Information
Management Services and Financial Services Divisions.
QuadraMed's software products (enterprise systems and
specific applications) can be licensed individually or as a suite of
inter-related products. Licenses are granted for a specified term
(generally ranging from one to five years, typically with fees paid
monthly, quarterly, or annually) or in perpetuity. Revenues from
enterprise systems are recognized on the basis of percentage of
completion. Revenues from term and perpetual licenses for specific
applications are recognized upon shipment of the software if there is a
definite agreement, collection of the resulting receivable is probable, and
the fee is fixed or determinable. If there is a contractual acceptance
period, revenues are recognized on the earlier of: (i) acceptance; or (ii)
the expiration of the acceptance period. Software-related service revenue
is recognized upon completion of installation. Unbilled receivables consist
of work performed or software delivered that has not been billed pursuant
to the customer contract. Post-installation customer support is recognized
ratably over the term of the support period. Deferred revenue is revenue
received in advance from customers for future work. Costs of software
products include hardware, royalties to third parties, and installation
costs.
QuadraMed's consulting services are rendered under contracts with
healthcare providers that are billed in one of three ways: (i) hourly rates;
(ii) monthly or quarterly fixed fees; or (iii) percentage of cash collections.
For services billed by the hour or on a monthly or quarterly fixed fee, which
are generally related to the Health Information Management Services Division,
revenue is recognized at the end of each month or quarter as services are
provided and billed. Contracts for the Financial Services Division generally
provide for incentive payments based on a percentage of dollars recovered for
the provider. QuadraMed recognizes this incentive revenue either upon
invoicing or upon receipt of payment from the provider. Cost of service
revenues consist primarily of salaries, benefits, and allocated costs related
to providing such services.
Description of Operating Division Products and Markets
Enterprise Division
QuadraMed's Enterprise Division provides hospitals, particularly
acute care hospitals, with integrated enterprise information systems to
manage patient registration, clinical, and financial information. Its
products are sold only in the United States and its primary offices are in
Reston, Virginia; Irvine, California; and Neptune, New Jersey.
Affinity is the division's core product. For the last five (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. Product development on
Affinity began in 1989. It was first released in 1991 by The Compucare
Company ("Compucare"), which QuadraMed 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 forty (40) 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 five (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;
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 is now scheduled for a beta release in the fourth quarter of
2002. 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 of
2002, QuadraMed and Oracle Corporation announced a strategic healthcare
software development agreement under which QuadraMed became the first
member of the Oracle Healthcare Partner Initiative and agreed to develop
its 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. QuadraMed entered the agreement to address
the evolving needs of certain of its IDN customers.
Affinity is currently installed in 171 hospitals in 32 states.
Hospitals generally use committees to make major information technology
purchase decisions. Consequently, purchase decisions are often slow to be
made. The average sales cycle for Affinity is typically 12 to 18 months
from initial contact to contract execution. Affinity sales are normally
generated from six (6) major sources:
o Requests for proposals sent directly to QuadraMed by the
hospital or its retained consultant;
o Referrals and recommendations from consulting firms;
o Healthcare trade shows;
o QuadraMed's sales force;
o Telemarketing; and
o Direct-mail.
In addition to Affinity, QuadraMed's 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(TM), SmartMerge(R), MPI Cleanup), which enable the
identification, correction, and elimination of duplicate patient records in
a facility's master population index. In January of 2001, the division also
began selling QuadraMed's Chancellor Decision Support tools, which included
Contract Management, a contract management system, Performance Measurement,
a clinical and financial outcomes 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 QuadraMed's Enterprise Division:
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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
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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
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Affinity Financial Management o General Ledger
o Accounts Payable
o Payroll Personnel
o InSight Executive Decision Support
o Performance Measurement
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Affinity Patient Revenue Management o Patient Accounting
o Central Business Office
o Account Workflow
o Contract Management
o Electronic Data Interchange
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o Consulting Services
Affinity Professional Services o Interface and Conversion Services
o Systems Operations Management Services
o Query Services
o Customer Training Courses
o Professional Services
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Affinity Electronic Document Management o Medical Records
o Patient Accounting
o ColdView
o Human Resources
o Workflow
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o MPIspy
Affinity MPI Integrity Management o SmartMerge
o PreciseID Patient Search Algorithm
------------------------------------------------------------------------------------------------
o Contract Management
Chancellor Decision Support o Performance Measurement
o Clinical Outcome Practice Evaluator ("COPE")
------------------------------------------------------------------------------------------------
QuadraMed primarily markets its 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 28% 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 72% 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, QuadraMed believes that the greatest sales
opportunities for its 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, QuadraMed believes that it has 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 Year 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. QuadraMed believes that
demand for its 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 increases the need to reduce
clinical error and improve quality measures. In addition, QuadraMed
believes that shortages of medical professionals, particularly in nursing,
ancillary, and health information management departments, will increase the
need for hospitals and other healthcare providers to acquire health
information systems that reduce clinical errors, increase hospital
efficiencies, reduce administrative cost, and improve the speed and
accuracy of billing processes.
Health Information Management Software Division
QuadraMed's Health Information Management Software Division
provides Quantim and Complysource software products that are designed to
automate and support hospital and provider health information management
departments in maintaining accurate and timely patient treatment
information and in accurately coding for reimbursement. QuadraMed's Health
Information Management Products fall into three (3) main areas:
o Data Management;
o Compliance Management; and
o Record Management.
The division's products are sold in the United States, Puerto Rico,
and Canada. Its main offices are in Alameda and Vista, California.
QuadraMed's Quantim Health Information Management software
products are based on an enterprise n-tiered architecture that support a
variety of database engines, including Sybase SQL Anywhere, Microsoft
Access, and Oracle Enterprise Edition. In 2001, QuadraMed developed a
single, fully-integrated, web-native platform for the Quantim products that
significantly improves and combines the functionality of several existing
health information management product offerings in coding, compliance, and
data collection. The first product to be offered on this new platform,
QuadraMed Quantim Compliance (Inpatient and Outpatient modules), was
delivered to its beta site in the fourth quarter of 2001 and is now
generally available for purchase.
QuadraMed's Data Management solutions enable healthcare facilities
to accurately collect and report patient demographic and clinical
information. QuadraMed's data collection solution, WinCODER+CS, collects
patient demographic and clinical information for state, federal, and JCAHO
regulatory requirements and for facility-specific statistical reporting,
benchmarking, outcomes and performance improvement, marketing, and
planning. QuadraMed's data collection tools provide a patient database
tailored to a facility's data collection requirements. WinCODER+CS provides
a user customizable data collection and has on-line analytical processing
capability.
QuadraMed's coding software products, Quantim Facility Coding
(formerly nCoder+ and WinCoder+), identify ICD-9-CM and HCPCS/CPT codes for
accurate collection and reporting of patient clinical information. 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 Source. The
encoding tools include official coding protocols, data quality edits, and
the professional knowledge of QuadraMed's credentialed health information
management professionals. QuadraMed's grouping products address the
reimbursement methodologies utilized by inpatient and outpatient
prospective payment systems.
QuadraMed targets its facility-based coding products to hospitals
with over 100 beds, which represent approximately 68% of the approximately
5,000 non-federal acute care hospitals. QuadraMed markets a specialized
coding product, PTFMD, for Veterans Administration facilities. In December
of 2001, QuadraMed established a new marketing unit for sales to
governmental agencies. QuadraMed also has developed a specialized coding
product for the commercial physician market, nCoder+PTF. In 2002, QuadraMed
will release Quantim Physician Coding. QuadraMed believes that significant
opportunities exist in the physician market for coding product sales.
QuadraMed also believes that new opportunities for its coding products
could develop with the anticipated implementation of ICD-10. This new
coding classification system is expected to require the modification of
coding, billing, and data collections systems and the conversion of
statistical information for proper clinical reporting and claims
submission.
QuadraMed's Quantim Compliance Management products, include
inpatient (Quantim Inpatient Compliance), outpatient (Quantim Outpatient
Compliance), and ambulatory patient classifications ("APCs") (Quantim APC
Compliance). 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. The management reporting module includes boardroom-ready
reports summarizing clinical and financial results. QuadraMed also offers a
compliance tool to screen professional fees and services (HCFA1500),
Quantim ProFEE Compliance Suite. This product is currently implemented in
Veteran's Administration facilities.
QuadraMed's primary market for Quantim Compliance products is the
acute care hospital market. The market for compliance management products
is growing and certain industry reports have estimated that by 2004, 50% of
acute care facilities will implement a software compliance tool. QuadraMed
believes that the advent of the Outpatient Prospective Payment System and
APCs may also provide additional opportunities for its Quantim Outpatient
Compliance tool.
QuadraMed's 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. QuadraMed's Record
Management solution consists of four main modules that are sold
individually or as a product suite and interface with a facility's patient
information system. QuadraMed's primary market for its 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 QuadraMed's Health Information Management Software Division:
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Quantim Data Management o Physician Coding
o Facility Coding
o nCoder+PTF
o Data Collection
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Quantim Compliance Management o Inpatient Compliance
o Outpatient Compliance
o APC Compliance
o VHA ProFee Compliance Suite
o Auditing Services
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Quantim Record Management o MEDREC Millennium Record Management
o Chart Completion: Retrospective and Concurrent
o Chart Locator
o Correspondence Management
o Enterprise Search and Reporting
o Electronic Signature/Document Distribution
---------------------------------------------------------------------------------------------
Complysource Regulatory Compliance o Compliance Assessment and Management Tool
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Complysource HIPAA Compliance o HIPAA Assessment and Management Tool
---------------------------------------------------------------------------------------------
QuadraMed's Health Information Management Software Division also
markets QuadraMed's Quantim Education and Training Services, which were
part of the former EZ-CAP division. 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
QuadraMed's Health Information Management Services Division
provides services only in the United States. The division's main offices
are in Englewood, Colorado. The division provides the following services:
o Quantim Health Information Interim Management. QuadraMed
provides 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, QuadraMed provides hospitals
with qualified, experienced managers.
o Quantim Health Information Management Consulting Services.
QuadraMed provides 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 Quantim Health Information Management Department
Outsourcing Services. QuadraMed contracts 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 Quantim Coding, Compliance, and Education. QuadraMed
provides 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. QuadraMed
provides 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.
o Complysource HIPAA Compliance Services. QuadraMed provides
Health Insurance Portability and Accountability Act of 1996
("HIPAA") compliance and education services, HIPAA
assessments, and the Complysource HIPAA Assessment and
Management software solution.
Due to shortages of professionals and the need for broad-based
expertise, QuadraMed expects hospitals to continue to need consulting
services to assist in the management and execution of their health
information management strategies and responsibilities. In addition,
QuadraMed believes that continued focus on billing and reimbursement
accuracy by government payors and law enforcement agencies will increase
the demand and need for these consulting services. QuadraMed provides
services throughout the country within a regionally-based operations
structure. QuadraMed markets its Health Information Management Services in
a variety of ways, including: (i) requests for proposals sent directly to
QuadraMed; (ii) healthcare trade shows; (iii) QuadraMed's professionals;
(iv) telemarketing; and (v) direct mail to generate sales.
Financial Services Division
QuadraMed's 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. QuadraMed's Chancellor Accounts Receivable Management
services provide a variety of third party collection services, including:
o Complete outsourcing that initially bill and collect
accounts from time of service;
o Early out programs that collect accounts of pre-designated
age or amount;
o Aged accounts placement that 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.
QuadraMed also offers customization of accounts receivable services and
detailed reconciliation reports on its work. The Financial Services
Division provides services only to customers in the United States. Its
primary offices are located in Escondido and San Diego, California.
QuadraMed markets its Chancellor Accounts Receivable Management
services to large or multi-hospital facilities. Historically, most of
QuadraMed's clients for this service have been in California. In 2000,
QuadraMed 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. QuadraMed anticipates that demand for
its Accounts Receivable Management services should increase in the future
as the hospital and healthcare industry continues to experience increasing
accounts receivable volume, decreasing third party coverage, and
increasingly complex reimbursement mechanisms.
QuadraMed's Managed Care Payment Review services audit managed
care patient accounts for appropriate payment pursuant to managed care
contracts. In providing this service, QuadraMed uses its own proprietary
software that automates many audit functions and permits greater reporting
options.
In 2001, QuadraMed ceased entering into new contracts for
Capitated Payment Review ("CPR") services. Under CPR contracts, QuadraMed
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 QuadraMed was unable to
achieve profitability from this service line.
Other
Approximately five percent (5%) of QuadraMed's revenue is derived
from specialty product lines that are not aligned with an operating
division and are referenced as Other on the Consolidated Financial
Statements. Those products include the Chancellor electronic data
interchange or "EDI" Claims Processing tool, ClaimStar(TM), and the
Chancellor Decision Support products, WinPFS(TM) Productivity and
Benchmarking, which provide critical data required to assess and measure
productivity, track patient population trends, and establish benchmarks
with other healthcare facilities, and related Patient Focused Solutions
Consulting Services. 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, respectively.
Financial Information About Segments
The financial statements and supplementary data, including
financial information about QuadraMed's operating segments, are included in
this Form 10-K beginning on page F-1.
Customers
QuadraMed primarily markets to acute care hospitals and IDNs,
which account for approximately 90% of its revenues. QuadraMed also sells
products to specialty hospitals and hospital associations. As of December
31, 2001, QuadraMed and its subsidiaries had customers located in all 50
states, the District of Columbia, Puerto Rico, and Canada. QuadraMed
believes that it will maintain a high percentage of its customers for the
foreseeable future. In 2001, 2000, and 1999, no single customer accounted
for 10% or more of QuadraMed's total revenue or the revenue of any one
business division.
Highly Competitive Market
Competition for products and services in the healthcare
information management and technology industry is intense and is expected
to so remain. QuadraMed competes with other healthcare information software
and services providers and healthcare consulting firms. Some principal
competitors include:
o In the market for enterprise healthcare information systems
in the Enterprise Division: McKesson Corporation, Shared
Medical Systems, Inc., a division of Siemens, MediTech
Corporation, Eclipsys Corporation, Cerner, and
IDX/Corporation;
o In the market for electronic document management products
in the Enterprise Division: McKesson Corporation, SoftMed
Corporation Inc., FileNet, Lanvision, MedPlus, and Eclipsys
Corporation;
o In the market for MPI products and services in the
Enterprise Division: Madison Technologies, Inc., McKesson
Corporation, Shared Medical Systems, Inc., a division of
Siemens, and Medibase;
o In the market for decision support products in the
Enterprise Division: Eclipsys Corporation, Healthcare
Microsystems, Inc., a division of Health Management Systems
Inc., McKesson Corporation, Shared Medical Systems, Inc., a
division of Siemens, and MediQual Systems, Inc., a division
of Cardinal Health, Inc.;
o In the market for compliance, data, and record management
products in the Health Information Management Software
Division: 3M Corporation, SoftMed Corporation, Inc.,
MetaHealth, Eclypsis Corporation, Cascade, and HSS, Inc.;
o In the Health Information Management Services Division:
PricewaterhouseCoopers LLP, KPMG, and Ernst and Young 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.
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 QuadraMed's software products are so
regulated.
There is substantial state and federal regulation of the
confidentiality of patient medical records and the circumstances under
which such records may be disclosed to or processed by QuadraMed as a
consequence of its contacts with various health providers, such as HIPAA.
Although compliance with these laws and regulations is presently the
principal responsibility of the hospital, physician, or other healthcare
provider, regulations governing patient confidentiality rights are rapidly
evolving. Additional legislation governing the dissemination of medical
record information also has been proposed and may be adopted at the state
level. The administrative simplification provisions of HIPAA require the
promulgation of regulations that will set standards for electronic
transactions, code sets, data security, unique identification numbers, and
privacy of individually identifiable health information, which could
materially impact QuadraMed's business. 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. QuadraMed is unable to predict what, if any,
changes will occur as a result of such regulation.
Intellectual Property
QuadraMed relies on a combination of copyright, trademark and trade
secret law, and nondisclosure and non-compete agreements to protect its
proprietary methodologies, computer software, and databases. QuadraMed
maintains the confidentiality of proprietary technology through a policy of
obtaining employment agreements that (i) prohibit employees from disclosing or
using QuadraMed's confidential information, and (ii) require the disclosure
and assignment to QuadraMed of new ideas, developments, discoveries or
inventions related to QuadraMed's business. QuadraMed also initiated a new
branding strategy in 2001 that included the adoption of a new trademark, "We
do technology. So you can do healthcare." QuadraMed also enters into
non-disclosure agreements with business partners and customers in the ordinary
course of business. QuadraMed has obtained trademark registrations in the
United States for most of its corporate and product trademarks, including
QuadraMed, Affinity, Quantim, and Complysource. QuadraMed had not filed for or
obtained any patents for its proprietary technology until 2001, when it sought
a patent on its Affinity CPOE software application. QuadraMed may in the
future seek patents for new products if, in its business judgment, their
importance warrants such steps and is susceptible to protection under the
patent laws. QuadraMed also depends on licenses for certain technology used to
develop its products from third-party vendors.
Employees
QuadraMed believes that it has a satisfactory relationship with
its employees. None of QuadraMed's employees are represented by a union or
other collective bargaining group. The following table provides information
regarding QuadraMed's active employees in the years 2001, 2000, and 1999.
For comparative purposes, the 2000 and 1999 figures have been adjusted to
reflect the divestiture of the EZ-CAP business and to approximate the 2001
organizational structure:
---------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------
Product Design/Research & Development/Quality Assurance 178 163 286
---------------------------------------------------------------------------------
Technical Services & Support 226 178 216
---------------------------------------------------------------------------------
Sales & Marketing 84 58 111
---------------------------------------------------------------------------------
Consulting Services 391 469 779
---------------------------------------------------------------------------------
Senior Management/General Administration 106 107 142
---------------------------------------------------------------------------------
TOTAL 985 975 1,534
---------------------------------------------------------------------------------
Management
The following table sets forth biographical information concerning
QuadraMed's Chief Executive Officer and Executive Officers and senior
management, as of March 18, 2001:
-----------------------------------------------------------------------------
NAME, AGE, TITLE OCCUPATION AND BACKGROUND
-----------------------------------------------------------------------------
Lawrence P. English, 61 o Chairman of the Board since December 2000
Chairman of the Board and and Chief Executive Officer since June 2000.
Chief Executive Officer o Founder and Chief Executive Officer of
Lawrence P. English, Inc., a private
turn-around management firm that
consulted 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 Chief Operating Officer since December
Chief Operating Officer 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.
-------------------------------------------------------------------------------
Mark N. Thomas, 49 o Chief Financial Officer since June 2000.
Chief Financial Officer 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
Executive Vice President and Corporate Secretary since December
and Corporate Secretary 2000.
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.
Chief Technology Officer Joined 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
QuadraMed leases all of its facilities and does not own any real
property. As of December 31, 2001, its 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 QuadraMed's four (4) business segments are
described in Item 1. QuadraMed believes that its facilities provide
sufficient space for its present needs, and that additional suitable space,
if needed, would be available on reasonable terms.
Item 3 Legal Proceedings
In the normal course of business, QuadraMed is involved in
litigation relating to claims arising out of its operations. QuadraMed does
not believe that the ultimate resolution of any pending proceeding will
have a material adverse effect on its business, financial condition, or
results of operations.
Item 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
(2 years)
(a) Market Information
On August 31, 2000, the Nasdaq SmallCap Market began to quote
QuadraMed's common stock under the symbol "QMDC". From October 16, 1996 to
August 30, 2000, QuadraMed's common stock had been quoted under the same
symbol on the Nasdaq National Market. The following table sets forth the
range of QuadraMed's 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 until March 18, 2001 $ 11.550 8.420
(b) Holdings
On March 18, 2002, the closing price of QuadraMed's common stock
was $8.63 per share. As of that date, there were approximately 8,252 holders
of record of common stock (excluding beneficial owners whose shares are
held in the name of Cede & Co.), an increase of 7,935 from 317 holders of
record in March of 2001.
(c) Dividends
QuadraMed has never declared or paid any cash dividends on shares
of its common stock. At this time, QuadraMed intends to retain all future
earnings, if any, to fund the development and growth of its business and
does not anticipate paying any cash dividends on shares of its common stock
in the foreseeable future.
(d) Recent Sales of Unregistered Securities
In June 1999, QuadraMed issued 435,000 unregistered shares of
QuadraMed common stock in connection with the acquisition of Linksoft
Technologies, Inc. ("Linksoft"). As part of the same transaction, QuadraMed
assumed warrants that, if exercised, require it 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 of 2008 remain outstanding for 1,028 shares
of common stock.
In June 1999, QuadraMed issued 452,807 unregistered shares of
QuadraMed common stock in connection with the acquisition of Healthcare
Financial Informatics ("HFI").
In May 1999, QuadraMed issued 19,633 unregistered shares of
QuadraMed common stock in connection with the acquisition of Millennium
Consulting Services, LLC ("Millennium Consulting").
In March 1999, QuadraMed issued 660,000 unregistered shares of
QuadraMed common stock in connection with the acquisition of Pro Intermed,
Inc. ("Pro Intermed").
In March 1999, QuadraMed issued 2,957,000 unregistered shares
of QuadraMed common stock in connection with the acquisition of Compucare.
As part of the same transaction, QuadraMed assumed warrants that, if
exercised, require it to issue 24,563 shares of common stock. Warrants for
3,941 shares at an exercise price of $61.73 expired in December of 2000.
Warrants for a total of 20,622 shares of common stock remain outstanding,
with 2,690 at an exercise price of $111.54 and a January of 2003
expiration; 11,208 at an exercise price of $223.09 and an October of 2005
expiration; and 6,724 at an exercise price of $0.15 and a February of 2006
expiration.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
This table provides information about QuadraMed common stock
subject to equity compensation plans as of December 31, 2001.
---------------------------------------------------------------------------------------------------------
Number of securities
remaining available
for future issuance
Plan Category Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excludes securities
outstanding options outstanding options in column)
=========================================================================================================
Approved By Stockholders* 5,746,800(1) $5.28 3,303,488(2)
---------------------------------------------------------------------------------------------------------
* QuadraMed has two active equity compensation plans, the 1996 Stock
Incentive Plan, as amended, and approved by stockholders June 15, 2001
(the 1996 Plan); and the 1999 Supplemental Stock Option Plan, as
amended, and approved by stockholders October 5, 2000 (the 1999 Plan).
(1) Includes 322,692 shares of QuadraMed common stock originally
issuable under various benefit plans of entities acquired by
QuadraMed.
(2) 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.
(f) Preferred Stock
QuadraMed has authorized 5.0 million shares of preferred stock,
par value $0.01 per share. QuadraMed's board of directors has authority to
provide for the issuance of its 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, QuadraMed had no outstanding
preferred stock.
Item 6 Selected Financial Data.
Years Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Consolidated Statement of Operations (In thousands, except per share amounts)
Data:
Revenues $129,435 $120,111 $175,461 $172,228 $140,800
Income (loss) from Operations 2,299 (78,135) (21,251) (19,890) (31,848)
Net Income (loss) 15,481 (54,836) (12,330) (21,376) (37,985)
Basis and diluted net income (loss)
per share (1) $0.60 ($2.14) ($0.49) ($0.91) ($2.34)
------------ ---------- ---------- ----------- ------------
As of December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Consolidated Balance Sheet Data: (In thousands)
Working capital $ 47,155 $ 55,772 $ 76,265 $ 83,472 $ 17,622
Debentures $ 73,719 $115,000 $115,000 $115,000 -
Total assets $130,743 $153,949 $212,238 $256,286 $103,884
Stockholders' equity $ 20,161 $ 4,321 $ 62,581 $ 68,988 $ 33,729
---------
(1) See Note 4(e) of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing net income per share.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
With the appointment of a new management team in mid-2000,
QuadraMed shifted its strategy from acquisition-based growth to focusing on
integrating its businesses and making various financial and operational
improvements. QuadraMed realigned its organization into five (5) operating
segments with zero-based operating budgets and business plans that
emphasized customer service, product enhancement, increased sales, and
operating profitability. QuadraMed reduced its cost structure by
eliminating redundant management and consolidating offices.
Although QuadraMed reported a significant Loss from Operations in
2000, the operating loss for the third and fourth quarters narrowed
substantially. This improvement reflected lower expenses, excluding
non-recurring charges, and sequential growth in fourth quarter 2000
revenue. During this quarter, QuadraMed sold its remaining interest in
ChartOne, Inc. ("ChartOne") for $26.6 million. These actions enabled
QuadraMed to end 2000 with a slight fourth quarter profit and $48.7 million
of cash and investments.
The operating strategy for 2001 consisted of continued expense
discipline, increased sales activity to improve revenue growth, and
initiation of R&D investments in new products to strengthen and expand
QuadraMed's market position by segment.
During 2001, QuadraMed successfully increased revenue in all of
its business segments except Health Information Management Services. This
growth reflected increased software sales in the Enterprise and Health
Information Management Software segment, and increased sales in the
Financial Services segment. Revenue for the Health Information Management
Services segment declined during 2001, principally as a result of the
termination of several underpriced outsourcing contracts during 2000, while
the revenue from the consulting and staffing product lines was stable. On
August 31, 2001, QuadraMed sold its EZ-CAP business, the principal
component of the Physician Services segment, to OAO Transition, LLC, and
OAO Technology Solutions, Inc ("OAO"). The EZ-CAP business was QuadraMed's
only business segment devoted to the physician group and regional HMO
market, and its divestiture enabled QuadraMed to focus its remaining
segments solely on the hospital sector. This divestiture eliminated
Physician Services as a segment for 2001 reporting purposes, and the net
earnings of EZ-CAP have been included in Discontinued Operations for 2001
and all prior periods.
As a result of sequential growth in revenue each quarter, tight
control of expenses, and elimination of non-recurring charges, QuadraMed
achieved Income from Operations in 2001 of $2.3 million, a substantial
improvement over the Loss from Operations in 2000 of $78.1 million.
Net income for 2001 was $15.5 million, an increase of $70.3
million over the net loss for 2000 of $54.8 million. This increase
reflected the improvement in income from operations and included: interest
expense on its outstanding convertible subordinated debentures issued as of
May 1, 1998, in the principal amount of $115 million ("Debentures"),
interest income earned on cash and investments, the write-down of
convertible debt held in Purkinje, Inc. ("Purkinje"), gain on the
repurchase of Debentures during 2001, and income from discontinued
operations, including the gains and losses from the sales of the EZ-CAP and
Electronic Remittance Advice ("ERA") businesses. Each of these
non-operating components of net income will be addressed in subsequent
sections of this Management Discussion and Analysis.
Summary of Critical Accounting Issues
QuadraMed's critical accounting issues have a significant impact
on the Management Discussion and Analysis:
(a) Use of Estimates
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.
QuadraMed periodically reviews and tests its estimates, including those
related to carried intangibles valuations, income taxes, and product
returns, bad debt, restructuring, pensions and other benefits, and
contingencies and litigation. Actual results may differ from these
estimates.
(b) Revenue Recognition
QuadraMed's revenues, excluding exceptional items, are derived
from two sources: (i) licenses; and (ii) consulting services. License
revenues include amounts received for licenses and software-related
services, such as installation and post-installation customer support fees,
third-party hardware sales, and other software-related revenue. Consulting
services revenues include amounts from outsourcing, specialized staffing,
and analytical services provided by QuadraMed's Health Information
Management Services and Financial Services Divisions.
QuadraMed's software products (enterprise systems and specific
applications) can be licensed individually or as a suite of interrelated
products. Licenses are granted for a specified term (generally ranging from
one to five years, typically with fees paid monthly, quarterly or annually)
or in perpetuity. Revenues from enterprise systems are recognized on
the basis of percentage of completion. Revenues from term and perpetual
licenses for specific applications are recognized upon shipment of the
software if there is a definite agreement, collection of the resulting
receivable is probable, and the fee is fixed or determinable. If there is
a contractual acceptance period, revenues are recognized on the earlier of
(i) acceptance; or (ii) the expiration of the acceptance period.
Software-related service revenue is recognized upon completion of
installation. Unbilled receivables consist of work performed or software
delivered that has not been billed pursuant to the customer contract.
Post-installation customer support is recognized ratably over the term of
the support period. Deferred revenue is revenue received in advance from
customers for future work. Costs of software products include hardware,
royalties to third parties, and installation costs.
QuadraMed applies the provisions of Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" to all transactions involving the sale of software
products and hardware transactions where the software is not incidental.
QuadraMed's consulting services are rendered under contracts with
healthcare providers that are billed in one of three ways: (i) hourly rates;
(ii) monthly or quarterly fixed fees; or (iii) percentage of cash collections.
For services billed by the hour or on a monthly or quarterly fixed fee, which
are generally related to the Health Information Management Services Division,
revenue is recognized at the end of each month or quarter as services are
provided and billed. Contracts for the Financial Services Division generally
provide for incentive payments based on a percentage of dollars recovered for
the provider. QuadraMed recognizes this additional incentive revenue either
upon invoicing or upon receipt of payment from the provider. Cost of service
revenues consists primarily of salaries, benefits and allocated costs related
to providing such services.
(c) Intangibles and Goodwill
Intangibles primarily relate to the value of the installed
customer base, proven research and development, capitalized software and
goodwill, which is the amount of purchase price in excess of the fair value
of the tangible net assets, and other identifiable intangible assets
acquired through QuadraMed's acquisitions, such as trademarks. Capitalized
amounts are amortized on a straight-line basis over a period of five to ten
years. Goodwill is reviewed quarterly for impairment and written down to
net realizable value, if necessary, in accordance with Statement of
Financial Accounting Standards ("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. QuadraMed is currently
evaluating the effect that the implementation of the new standard will have
on its financial position, results of operations, and cash flows. QuadraMed
does not expect any impairment of goodwill as a result of adopting SFAS No.
142.
(d) Capitalization and Amortization of Software Development Costs
Software development costs are capitalized upon the establishment
of technological feasibility. In accordance with SFAS No. 86, QuadraMed
establishes technological feasibility upon completion of a detail 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 is based upon 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.
(e) Income Taxes
QuadraMed accounts for income taxes pursuant to SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 provides for an asset and
liability approach to accounting for income taxes under which deferred
income taxes are provided based upon enacted tax laws and rates applicable
to the periods in which taxes become payable.
Years Ended December 31, 2001, 2000, and 1999
QuadraMed currently classifies its segments by its hospital
constituents, and analyzes revenue by product line within each segment,
with cost centers classified by primary activity to estimate expenses by
function. From 1998 to 2000, QuadraMed implemented a number of
organizational changes, completed numerous acquisitions and divestitures,
experienced a high level of employee turnover, and converted to a new
accounting system. Consequently, it is impracticable to characterize the
variance in results between 1999 and 2000, and QuadraMed believes that any
such characterizations would not enhance an understanding of its financial
condition or results of operations. As a result, this Management Discussion
and Analysis focuses principally on the comparison between 2001 and 2000.
Results of Operations
The following table sets forth, for the periods indicated, certain
items from the consolidated statement of operations of QuadraMed, expressed
as percentage of total revenues.
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Revenues
Licenses 66.2% 55.4% 63.7%
Services 33.8% 44.6% 36.3%
------ ------ ------
Total Revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating Expenses
Cost of licenses 17.6% 18.9% 12.4%
Cost of services 14.6% 29.7% 21.3%
General and administration 36.5% 39.7% 27.1%
Sales & marketing 12.2% 17.8% 12.2%
Research and development 12.2% 18.2% 13.9%
Amortization of intangibles and acquired software 5.0% 5.8% 4.3%
Write-off of acquired R&D in process 0.0% 0.0% 1.0%
Acquisition costs 0.0% 0.0% 3.9%
Impairment of intangible assets 0.0% 0.8% 6.0%
Non recurring charges 0.0% 34.1% 10.0%
---- ----- -----
Total Operating Expenses 98.1% 165.0% 112.1%
----- ------ ------
Income (Loss) from Operations 1.9% -65.0% -12.1%
---- ------ ------
Other Income (Expense)
Interest (expense) -4.5% -5.5% -4.4%
Interest income 1.8% 1.7% 2.7%
Other income (expense), net -0.5% -0.1% 0.8%
Write off of note receivable -0.1% -0.7% -0.7%
Write off of convertible promissory note -2.8% 0.0% 0.0%
----- ---- ----
Total Other (Expense), net -6.1% -4.6% -1.6%
----- ----- -----
Loss Before Income Taxes -4.2% -69.6% -13.7%
Provision for income taxes 0.0% -0.2% -0.2%
---- ----- -----
Loss from Continuing Operations -4.2% -69.8% -13.9%
----- ------ ------
Gain on redemption of bonds (net of tax) 10.0% 0.0% 0.0%
Income from discontinued operations, (net of tax) 6.3% 24.1% 6.9%
---- ----- ----
Net Income (Loss) Available to Common Shareholders 12.1% -45.7% -7.0%
===== ====== =====
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 revenues in 2001 were $85.7 million, an increase of $19.1
million or 28.7% over $66.6 million in 2000. The increase principally
represents growth for the Enterprise and Health Information Management
Software segments of 31% and 42%, respectively. With the exception of
modest, inflation-sensitive price increases for maintenance contracts,
revenue growth was derived principally from increased software sales.
Services. Service revenues were $43.7 million in 2001, a decrease
of $9.8 million or 18% from $53.5 million in 2000. The cancellation of
several hospital outsourcing contracts in the Health Information Management
Services segment was the primary reason for the decline in service revenue.
This decline was partially offset by an increase in the Financial Services
segment, which achieved a 44% growth in revenue. Early in 2001, QuadraMed
terminated the CPR services line within the Financial Services segment due
to lack of profitability and concentrated on the accounts receivable and
managed care payment review services.
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. Cost of licenses in 2001 of $22.8
million was slightly above the corresponding 2000 level of $22.7 million
despite higher revenue, reflecting expense reduction actions initiated in
2000 and continued in 2001. The resultant gross margin on license revenue
was 73.4%, an improvement of 7.5 percentage points over the 2000 level of
65.9%.
Cost of Services. Cost of services includes expenses associated
with services performed in connection with the health information
management, business office outsourcing, compliance and consulting
services, and accounts receivable management. Cost of services in 2001 of
$18.9 million were $16.6 million or 47% below the 2000 level of $35.6
million, reflecting a combination of lower revenue and the expense
reductions initiated in 2000 and continued in 2001. The gross margin earned
on services revenue in 2001 was 56.6%, 23.1 percentage points more than the
2001 level of approximately 33.5%.
Operating Expenses
General and Administration. General and Administration expenses
were $47.2 million in 2001, a decrease of 1% compared to $47.7 million in
2000. As a percentage of total revenues, general and administration
expenses decreased 3.2 percentage points to 36.5% in 2001, compared to
39.7% in 2000. The decrease is a result of both the lower expenses and
higher revenue. The decrease in expenses was a result of lower salary and
related expenses resulting from a lower average staffing level in 2001
compared to 2000. The decrease in salary and related expenses was partially
offset by annual salary increases and higher incentive compensation based
on QuadraMed's improved financial performance.
Sales and Marketing. Sales and Marketing expenses declined in 2001
to $15.8 million, compared to $21.4 million in 2000. As a percentage of
revenue, these expenses declined 5.6 percentage points to 12.2% in 2001
from 17.8% in 2000. The decline in expenses was due to the discontinuation
of most corporate marketing, reduced advertising and trade show
participation, and the elimination of several sales positions related to
discontinued products. The cost of Sales and Marketing, however, increased
during the second half of 2001 with the strengthening of the sales force in
each segment and higher commissions on the increased revenue.
Research and Development. Research and Development expenses in
2001 were $15.8 million, compared to $21.9 million in 2000, a decline of
27.6%. As a percentage of revenue, the decrease was 6.0 percentage points
to 12.2% in 2001 from 18.2% in 2000. The decline in expenses was due to the
elimination of corporate R&D projects and 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 QuadraMed's core strategies. In addition to these expenses,
QuadraMed capitalized $1.8 million in development costs on products
qualifying for capitalization under the definition of technological
feasibility. Included in this expense was $2.8 million in amortization of
capitalized software development expense related to products that are
currently available.
Amortization of Intangibles. Amortization of Intangibles,
consisting of goodwill and acquired software, declined to $6.5 million in
2001 from $7.0 million in 2000 as certain assets reached the end of their
amortization schedule.
Non-Recurring Charges
QuadraMed incurred no non-recurring charges during 2001.
In 2000, non-recurring charges totaled $41.0 million, primarily
associated with restructuring costs of $11.3 million, asset impairment charges
of $25.4 million, and non-case specific litigation costs of $4.3 million. The
restructuring costs included $2.5 million in severance for terminated
employees; $5.4 million associated with separation agreements for officers;
$2.9 million to dispose of excess space; and $0.5 million in other
restructuring expenses. The remaining liability for restructuring costs
totaled $3.2 million and $1.4 million at December 31, 2000 and 2001,
respectively and were included in Accrued Liabilities. QuadraMed recorded
asset impairment charges of $25.4 million in 2000, consisting of $10.6 million
write-down of assets associated with Health+Cast, $6.2 million associated with
the elimination of the EnOvation product acquired with Integrated Medical
Networks, Inc. ("IMN"), $5.5 million in receivable and other asset
write-downs, and $3.1 million from the write-down of unbilled revenue and the
carrying value of fixed assets. The non-case specific litigation accrual of
$4.3 million was established during 2000 to provide for several immaterial
legal matters. The balances in this reserve were $1.6 million and zero at
December 31, 2000 and 2001, respectively, and were included in Accrued
Liabilities.
Intangible Assets. QuadraMed recorded no charges to intangible assets
in 2001.
QuadraMed recorded a $0.9 million charge in 2000 to write-down
certain intangible assets related to the acquisition of Velox System
Corporation ("Velox"). QuadraMed recorded a $10.6 million charge in 1999 to
write-down certain tangibles assets related to the acquisitions of Healthcare
Recovery, Inc., Health Cash Management Seminars, Inc., American Medical
Network, Inc., Velox, and American Hospital Directory, Inc. made in 1997 and
1998. In addition, in 2000 QuadraMed reclassified $3.6 million of intangible
assets relating to Med Data to capitalized software, and $0.5 million of
acquisition costs from long-term assets to intangibles.
Acquired In-Process Research and Development. There were no
charges for acquired in-process research and development during 2001 or
2000.
Interest Expense.
Interest expense, net of interest income, was $3.5 million in
2001. This interest expense was principally due to the Debentures, offset
by interest earned from QuadraMed's cash and investments. The 2001 net
interest expense was $1.0 million less than the $4.5 million incurred in
2000. The decrease was attributable to the retirement of $41.3 million in
principal amount of the Debentures during 2001.
Writeoff of Convertible Promissory Note
In the third quarter of 2001, Purkinje, the issuer of a $3.6
million convertible promissory note to QuadraMed, 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. QuadraMed believes that the value
of this preferred stock was zero and, accordingly, recorded a $3.6 million
charge in the third quarter of 2001. See Note 11(d) to Consolidated
Financial Statements.
Provision for Income Taxes
Provision for income taxes was zero and $0.2 million in 2001 and
2000, respectively. The provision for income taxes was primarily due to
state and alternative minimum tax liabilities on certain of QuadraMed's
legal entities. For financial reporting purposes, a 100% valuation
allowance has been recorded against QuadraMed's deferred tax assets under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." During 2001, QuadraMed reduced its net operating loss carry forward
from $67.5 million to $48.3 million by applying positive taxable income to
this balance. See Note 25 to Consolidated Financial Statements.
Gain on Redemption of Bonds
During 2001, QuadraMed repurchased $41.3 million in Debentures on the
open market for a total of $28.4 million in cash, resulting in a gain of $12.9
million. See Note 14 to Consolidated Financial Statements.
Income from Discontinued Operations
QuadraMed recorded income from discontinued operations of $8.2
million in 2001, a decrease of $20.8 million from 2000. The 2001 figure
included the net gain on the sale of the EZ-CAP business of $6.6 million
and earnings from this business, prior to its sale on August 31, 2001, of
$1.6 million.
The 2000 figure included a net gain of $23.3 million from the sale
of ChartOne and $4.3 million and $1.4 million in earnings from EZ-CAP and
ChartOne, respectively. See Note 6 to Consolidated Financial Statements.
Liquidity And Capital Resources
At December 31, 2001, QuadraMed held $29.8 million in cash and
cash equivalents, $2.4 million in short-term investments, $4.4 million in
restricted cash, and $1.1 million in long-term investments, totaling $37.7
million. The comparable figures for 2000 were $27.4 million, $12.3 million,
$8.0 million, and $1.0 million, totaling $48.7 million.
Net cash provided by operating activities was $12.0 million in
2001 compared to $13.8 million used by operating activities in 2000. The
increase in cash flow reflected the substantial improvement in operating
earnings plus the increase in deferred revenue in response to improved
billing practices and business growth, partially offset by the uses for the
increase in prepaid expenses, lower accounts payable, and extinguishment of
other liabilities established for previous acquisitions. The accounts
receivable balance was stable from 2000 to 2001.
Net cash provided by investing activities was $17.4 million in
2001, a decrease of $12.4 million compared to $29.8 million in 2000. The
sources of the $17.4 million were principally the maturity of $12.2 million
in short-term investments reinvested in cash equivalents and the sale of
the EZ-CAP business for net proceeds of $8.7 million, offset partially by
$2.2 million in capital expenditures and $1.8 million in capitalized
research and development costs. The prior-year net cash from investing
activities was higher due principally to the $40.4 million in net proceeds
from the sale of ChartOne.
Net cash used for financing activities was $27.0 million in 2001,
compared to $0.7 million provided by financing activities in 2000. The 2001
result principally reflected $28.4 million expended for Debenture
repurchases, net of $1.8 million in cash proceeds from the exercise of
options to purchase common stock.
In May 1998, QuadraMed issued the Debentures in a principal amount
of $115 million. The Debentures mature on May 1, 2005, and bear interest at
an annual rate of 5.25%. During 2001, QuadraMed repurchased and retired
$41.3 million of the Debentures at an average price of $670 per $1,000 in
principal amount. Management has been authorized by the board of directors
to repurchase the Debentures at its discretion, subject to parameters
established by the board.
During 2001, QuadraMed used $0.8 million to repurchase 200,000
shares of its common stock on the open market at an average price of $4.05,
and has the authority to repurchase up to a total of 6 million shares.
Investment in Marketable Equity Securities of $0.6 million
represents the fair market value of QuadraMed's investment in the stock of
Vantage Med, a publicly traded healthcare technology company.
The following table summarizes financial data for contractual
obligations and other commercial commitments for the year ended December
31, 2001 (in thousands):
Payments Due by Period
---------------------------------------------------------
Less
than 1 1-3 4-5 After 5
Contractual Obligations Total year years years years
------------------------------------------------------------------------------------------------------------
Long-term debt $ 87,265 $ 3,870 $ 7,740 $ 75,654 $ -
Capital lease obligations 97 78 19 - -
Operating leases 30,110 4,792 8,066 5,861 11,391
Other long-term obligations 7,775 - - - 7,775
-----------------------------------------------------------------------
Total contractual cash
obligations $125,247 $ 8,740 $ 15,825 $ 81,515 $ 19,166
=======================================================================
Amount of Commitment Expiration
Per Period
--------------------------------------------------------
Total Less
Amounts than 1 1-3 4-5 After 5
Other Commercial Commitments Committed year years years years (1)
-----------------------------------------------------------------------------------------------------------
Standby letters of credit $ 4,356 $ 1,136 $ 100 - $ 3,120
-----------------------------------------------------------------------
Total commercial commitments $ 4,356 $ 1,136 $ 100 - $ 3,120
=======================================================================
(1) 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.
QuadraMed believes that it will have sufficient liquidity and
operating cash flows to fund its scheduled debt service and other
obligations through at least December 31, 2002.
Inflation
The majority of QuadraMed's revenue is derived from perpetual and
long-term customer contracts. The term of contracts range from one (1) to
five (5) years and the contracts generally allow price increases annually
based on external measures of inflation. QuadraMed has increased some of
its prices under these contract provisions. QuadraMed's maintenance
contract terms also allow annual price increases based on external measures
of inflation. Accordingly, inflation has not had, and QuadraMed does not
believe that it will have, a significant impact on its financial condition.
Business Risks
QuadraMed Faces 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. QuadraMed's success
depends on its ability to timely and effectively:
o offer a broad range of software products;
o enhance existing products and expand product offerings;
o respond promptly to new customer requirements and industry
standards; and
o remain compatible with popular operating systems and
develop products that are compatible with the new or
otherwise emerging operating systems.
QuadraMed's performance depends in large part upon its ability to
provide the increasing functionality required by its customers through the
timely development and successful introduction of new products and
enhancements to its existing suite of products. QuadraMed may not
successfully, or in a timely manner, develop, acquire, integrate,
introduce, or market new products or product enhancements. Product
enhancements or new products developed by QuadraMed also may not meet the
requirements of hospitals or other healthcare providers and payors or
achieve or sustain market acceptance. QuadraMed's failure to either
estimate accurately the resources and related expenses required for a
project, or to complete its contractual obligations in a manner consistent
with the project plan upon which a contract was based, could have a
material adverse effect on its business, financial condition, and results
of operations. In addition, QuadraMed's failure to meet a customer's
expectations in the performance of its services could damage its reputation
and adversely affect its ability to attract new business.
QuadraMed's Inability To Protect Its Intellectual Property Could Lead To
Unauthorized Use Of Its Products, Which Could Have An Adverse Effect On Its
Business.
QuadraMed relies on a combination of trade secret, copyright and
trademark laws, nondisclosure, non-compete, and other contractual
provisions to protect its proprietary rights. In 2001, QuadraMed filed its
first patent application covering its developed technology, the Affinity
CPOE software application. Measures taken by QuadraMed to protect its
intellectual property may not be adequate, and QuadraMed's competitors
could independently develop products and services that are substantially
equivalent or superior to QuadraMed's products and services. Any
infringement or misappropriation of its proprietary software and databases
could put QuadraMed at a competitive disadvantage in a highly competitive
market and could cause QuadraMed to lose revenues, incur substantial
litigation expense, and divert management's attention from other
operations.
QuadraMed depends on licenses from a number of third-party vendors
for certain technology used to develop and operate its 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 QuadraMed breaches
the license terms and fails to cure the breach within a specified time
period. If such licenses are terminated, QuadraMed may not be able to
continue using the technology on commercially reasonable terms or at all.
As a result, QuadraMed may have to discontinue, delay or reduce product
shipments until equivalent technology is obtained, which could have a
material adverse effect on QuadraMed's business, financial condition, and
results of operations. Most of QuadraMed's third-party licenses are
non-exclusive and competitors may obtain the same or similar technology. In
addition, if vendors choose to discontinue support of the licensed
technology, QuadraMed may not be able to modify or adapt its products.
Intellectual property litigation is increasingly common in the
software industry. The risk of an infringement claim against QuadraMed may
increase over time as the number of competitors in its industry segment
grows and the functionality of products overlaps. Third parties could
assert infringement claims against QuadraMed in the future. Regardless of
the merits, QuadraMed could incur substantial litigation expenses in
defending any such asserted claim. In the event of an unfavorable ruling on
any such claim, a license or similar agreement may not be available to
QuadraMed on reasonable terms, if at all. Infringement may also result in
significant monetary liabilities that could have a material adverse effect
on QuadraMed's business, financial condition, and results of operations.
QuadraMed may not be successful in the defense of these or similar claims.
The Nature Of QuadraMed's Products Makes Them Particularly Vulnerable To
Undetected Errors Or Bugs That Could Reduce Revenues, Market Share Or
Demand For Its Products And Services.
Products such as QuadraMed's may contain errors or failures,
especially when initially introduced or when new versions are released.
Although QuadraMed conducts extensive testing on its products, software
errors have been discovered in certain enhancements and products after
their introduction. Despite such testing by QuadraMed and by its current
and potential customers, products under development, enhancements, or
shipped products may contain errors or performance failures, resulting in,
among other things:
o loss of customers and revenues;
o delay in market acceptance;
o diversion of resources;
o damage to QuadraMed's reputation; or
o increased service and warranty costs.
Any of these consequences could have a material adverse effect on
QuadraMed's business, financial condition, and results of operations.
If QuadraMed's Products Fail To Accurately Assess, Process, Or Collect
Healthcare Claims Or Administer Managed Care Contracts, QuadraMed Could Be
Subject To Costly Litigation And Be Forced To Make Costly Changes To Its
Products.
Some of QuadraMed's products and services are used in the payment,
collection, coding, and billing of healthcare claims and the administration
of managed care contracts. If QuadraMed's employees or QuadraMed's products
fail to accurately assess, process, or collect these claims, customers
could file claims against QuadraMed. QuadraMed's insurance coverage may not
adequately cover such claims. A successful claim that is in excess of, or
is not covered by, insurance coverage could adversely affect QuadraMed's
business, financial condition, and results of operations. Even a claim
without merit could result in significant legal defense costs and could
consume management time and resources. In addition, claims could increase
QuadraMed's premium such that appropriate insurance could not be found at
commercially reasonable rates. Furthermore, if QuadraMed were found liable,
QuadraMed may have to significantly alter one or more of its products,
possibly resulting in additional unanticipated research and development
expenses.
QuadraMed May Be Required To Make Substantial Changes To Its 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
QuadraMed's software products are so regulated. In the future, the FDA
could determine that some of QuadraMed's products, because of their
predictive aspects, are clinical decision tools and subject them to
regulation. Compliance with FDA regulations could be burdensome, time
consuming, and expensive. Other new laws and regulations affecting
healthcare software development and marketing also could be enacted in the
future. If so, it is possible that QuadraMed's costs and lengths of time
for product development and marketing could increase and that other
unforeseeable consequences could arise.
Governmental Regulation Of The Confidentiality Of Patient Health
Information Could Result In QuadraMed's Customers Being Unable To Use Its
Products Without Significant Modification, Which Could Require Substantial
Expenditures By QuadraMed.
There is substantial state regulation of the confidentiality of
patient health information and the circumstances under which such
information may be disclosed to or processed by QuadraMed as a consequence
of its contacts with various health providers. Although compliance with
these laws and regulations is presently the principal responsibility of the
hospital, physician, or other healthcare provider, regulations governing
patient confidentiality rights are rapidly evolving. Additional legislation
governing the dissemination of health information also has been proposed
and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, requires the United States Department of Health and Human
Services ("HHS") to promulgate regulations that will set standards for
certain electronic health transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. HHS has
published a final regulation governing transaction and code set standards
that has a compliance date of October 16, 2002. A recent modification to
the HIPAA, however, provides covered entities with an additional year to
comply with the transaction and code set standards, e.g. to October 2003,
provided they meet certain criteria. HHS has also published a final privacy
regulation that has a compliance date of April 2003. The HIPAA privacy
regulation is complex and far reaching. Compliance will be required of
certain covered entities, including healthcare providers, health plans, and
healthcare clearinghouses. QuadraMed may be implicated by these regulations
either as a covered entity or as a business associate of a covered entity.
HIPAA and state healthcare privacy regulations could materially restrict
the ability of healthcare providers to submit information from patient
records using QuadraMed products and services or could require QuadraMed to
make substantial capital expenditures to be in compliance.
HHS has published a proposed HIPAA data security regulation. At
this time, no information is available on when HHS may issue a final
security regulation or whether the regulation will be revised prior to
final publication. At this time, it is not possible to assess the specific
implications of the security regulation on QuadraMed. The regulation may
require holders of individual protected health information, including
QuadraMed, to implement stringent security measures. Implementing such
measures may require substantial capital expenditures by QuadraMed due to
required product, service, and procedure changes.
In addition, during the past several years, the healthcare
industry has been subject to, among other things, increasing levels of
governmental regulation of reimbursement rates and certain capital
expenditures. Certain proposals to reform the healthcare system have been
and are being considered by Congress. These proposals, if enacted, could
change the operating environment for QuadraMed's clients in ways that could
have a negative impact on QuadraMed's business, financial condition, and
results of operations. QuadraMed is unable to predict what, if any, changes
will occur.
QuadraMed's Quarterly Operating Results Are Subject To Fluctuations, Which
Could Adversely Affect Its Net Income And Financial Results.
QuadraMed's quarterly operating results have varied significantly
in the past and may fluctuate in the future as a result of a
variety of factors, many of which are outside its control. Accordingly,
quarter-to-quarter comparisons of our operating results may not be a good
indication of QuadraMed's future performance. Some of the factors causing
these fluctuations include:
o Variability in demand for products and services;
o Introduction of product enhancements and new products by
QuadraMed and its competitors;
o Timing and significance of announcements concerning present
or prospective strategic alliances;
o Discontinuation of, or reduction in, the products and
services QuadraMed offers;
o Loss of customers due to consolidation in the healthcare
industry;
o Delays in product delivery requested by its customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development,
and administrative personnel necessary to support
anticipated operations;
o Costs incurred for marketing and sales promotional
activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the
healthcare industry;
o Cooperation from competitors on interfaces and
implementation when a customer chooses systems from various
vendors;
o Delays in implementation due to product readiness or to
customer induced delays in training or installation;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can
increase demand for new, updated systems;
o Federal regulations that directly affect reimbursements
received, and therefore the amount of money available for
purchasing information systems; and
o The fines and penalties a healthcare provider or system may
incur due to fraudulent billing practices.
QuadraMed's operating expense levels, which increase with the
addition of acquired businesses, are relatively fixed. Accordingly, if future
revenues are below expectations, QuadraMed would experience a disproportionate
adverse affect on its net income and financial results. In the event of a
revenue shortfall, QuadraMed will likely be unable to, or may elect not to,
reduce spending quickly enough to offset any such shortfall. As a result, it
is possible that QuadraMed's future revenues or operating results may fall
below the expectations of securities analysts and investors. In such a case,
the price of QuadraMed's publicly traded securities may be adversely affected.
The Variability And Length Of Our Sales Cycle For Our Products May
Exacerbate The Unpredictability And Volatility Of Our Operating Results.
QuadraMed cannot accurately forecast the timing of its customer
purchases due to the complex procurement decision processes of most
healthcare providers and payors. How and when to implement, replace, expand
or substantially modify an information system are major decisions for
customers, and such decisions require significant capital expenditures by
them. As a result, QuadraMed typically experiences sales cycles that extend
over several quarters. In addition, certain products QuadraMed acquired
with Compucare have higher average selling prices and longer sales cycles
than many of its other products. As a result, QuadraMed has only a limited
ability to forecast the timing and size of specific sales, making the
prediction of quarterly financial performance more difficult.
Changes In Procurement Practices Of Hospitals Have And May Continue To Have
A Negative Impact On QuadraMed's Revenues.
A substantial portion of QuadraMed's revenues has been and is
expected to continue to be derived from sales of software products and
services to hospitals. Consolidation in the healthcare industry,
particularly in the hospital and managed care markets, could decrease the
number of existing or potential purchasers of products and services and
could adversely affect QuadraMed's business. In addition, the decision to
purchase QuadraMed's products often involves a committee approval.
Consequently, it is difficult for QuadraMed to predict the timing or
outcome of the buying decisions of its customers or potential customers. In
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 QuadraMed's
products, which could adversely affect QuadraMed's business, financial
condition, and results of operations.
Changes In The Healthcare Financing And Reimbursement System Could
Adversely Affect The Amount Of And Manner In Which QuadraMed's Customers
Purchase Its Products And Services.
Changes in current healthcare financing and reimbursement systems
could result in unplanned product enhancements, delays, or cancellations of
product orders or shipments, or reduce the need for certain systems.
QuadraMed could also have the endorsement of products by hospital
associations or other customers revoked. Any of these occurrences could
have a material adverse effect on QuadraMed's business.
The healthcare industry in the United States is subject to
changing political, economic, and regulatory influences that may affect the
procurement practices and operations of healthcare organizations. The
commercial value and appeal of QuadraMed's products may be adversely
affected if the current healthcare financing and reimbursement system were
to revert to a fee-for-service model. In addition, many of QuadraMed's
customers provide services under capitated service agreements, and a
reduction in the use of capitation arrangements as a result of regulatory
or market changes could have a material adverse effect on QuadraMed's
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other
things, reimbursement rates and capital expenditures. Proposals to reform
the healthcare system have been and are being considered by the United
States Congress. These proposals, if enacted, could change the operating
environment of QuadraMed's customers in ways that cannot be predicted.
Healthcare organizations may react to these proposals by curtailing or
deferring investments, including those for QuadraMed's products and
services. In addition, the regulations promulgated under HIPAA could lead
healthcare organizations to curtail or defer investments in non-HIPAA
related features in the next several years.
If QuadraMed Is Unable To Compete Effectively, It Could Experience Price
Reduction, Reduced Gross Margins And Loss Of Market Share.
Competition for QuadraMed's products and services is intense and
is expected to increase. Increased competition could result in reductions
in QuadraMed's prices, gross margins, and market share and have a material
adverse affect on QuadraMed's business, financial condition, and results of
operations. QuadraMed competes with other providers of healthcare
information software and services, as well as healthcare consulting firms.
Some competitors have formed business alliances with other competitors that
may affect QuadraMed's ability to work with some potential customers. In
addition, if some of our competitors merge, a stronger competitor may
emerge. Some principal competitors include:
o In the market for enterprise healthcare information systems
in the Enterprise Division: McKesson Corporation, Inc.,
Shared Medical Systems, Inc., a division of Siemens,
MediTech Corporation, Eclipsys Corporation, Cerner, and IDX
Corporation;
o In the market for electronic document management products
in the Enterprise Division: McKesson Corporation, SoftMed
Corporation Inc., FileNet, Lanvision, MedPlus, and Eclipsys
Corporation;
o In the market for MPI products and services in the
Enterprise Division: Madison Technologies, Inc., McKesson
Corporation, Shared Medical Systems, Inc., a division of
Siemens, and Medibase;
o In the market for decision support products in the
Enterprise Division: Eclipsys Corporation, Healthcare
Microsystems, Inc., a division of Health Management Systems
Inc., McKesson Corporation, Shared Medical Systems, Inc., a
division of Siemens, and MediQual Systems, Inc., a division
of Cardinal Health, Inc.;
o In the market for compliance, data, and record management
products in the Health Information Management Software
Division: 3M Corporation, SoftMed Corporation, Inc.,
MetaHealth, Eclypsis Corporation, Cascade, and HSS, Inc.;
o In the Health Information Management Services Division:
PricewaterhouseCoopers LLP, KPMG and Ernst and Young 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 QuadraMed'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 QuadraMed's markets. Many of QuadraMed's
competitors and potential competitors have significantly greater financial,
technical, product development, marketing and other resources, and market
recognition than QuadraMed. Many of these competitors also have, or may
develop or acquire, substantial installed customer bases in the healthcare
industry. As a result of these factors, QuadraMed's competitors may be able
to respond more quickly to new or emerging technologies, changes in
customer requirements, and changes in the political, economic or regulatory
environment in the healthcare industry.
These competitors may be in a position to devote greater resources
to the development, promotion, and sale of their products than QuadraMed.
QuadraMed may not be able to compete successfully against current and
future competitors, and such competitive pressures could materially
adversely affect QuadraMed's business, financial condition, and operating
results.
QuadraMed's 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 the 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
QuadraMed's 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 QuadraMed's contracts to provide managed care services, and
the suspension or revocation of QuadraMed's licenses. QuadraMed routinely
conducts internal audits in its effort to ensure compliance with all
applicable laws and regulations. If errors, discrepancies or violations of
law are discovered in the course of these audits or otherwise, QuadraMed
may be required by law to disclose the relevant facts, once known, to the
appropriate authorities.
QuadraMed Faces Risks Associated With U.S. Government Contracting.
QuadraMed has been awarded a U.S. General Services Administration
("GSA") Schedule Contract for Federal Supply Service commercial information
technology. The willingness of government agencies to enter into future
contracts depends upon (i) QuadraMed's ability to continue supporting
existing products; (ii) maintaining ongoing relationships with third party
supplies of certain elements of QuadraMed's products; and (iii) developing
new products with third party suppliers to address new regulatory
requirements of government agencies and having these products added to
QuadraMed's GSA commercial price list. These contracts are subject to
cancellation at the convenience of the contracting government agency.
As a commercial vendor, QuadraMed 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 QuadraMed is performing could also have an adverse
impact on its 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.
QuadraMed Has Encountered Significant Challenges Integrating Acquired
Businesses, And Future Transactions May Adversely Affect Its Business,
Operations, And Financial Condition.
From 1993 to 1999, QuadraMed completed twenty-eight (28)
acquisitions. QuadraMed has encountered significant challenges integrating the
acquired businesses into its operations and in 2000 and 2001, focused in
particular on their integration. Some of the challenges QuadraMed has
encountered in integrating acquired businesses have included, and may
encounter with acquisitions in the future include:
o Interruption, disruption or delay of QuadraMed's ongoing
business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expense;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results,
resulting in QuadraMed's failure to realize anticipated
benefits;
o Write-down 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 of acquired businesses and
potential for disputes with the sellers;
o Customer dissatisfaction or performance problems related to
acquired businesses;
o Exposure to the risks of entering markets in which
QuadraMed has no direct prior experience and to risks
associated with market acceptance of acquired products and
technologies; and
o Platform and technical issues related to integrating
systems from various acquired companies.
All of these factors have had an adverse effect on QuadraMed's
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 QuadraMed's
Growth Less Accretive And Less Attractive.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141 Business Combinations. The statement addresses
financial accounting and reporting for business combinations and supercedes
Accounting Principles Board ("APB") Opinion No. 16, Business Combinations,
and SFAS Statement No. 38, Accounting for Pre-acquisition Contingencies of
Purchased Enterprises. All business combinations within the scope of this
statement 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 statement is not expected to have a
material effect on QuadraMed's existing 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 supercedes
APB Opinion No. 17, Intangible Assets. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in business combination) should be accounted
for in financial statements upon acquisition. In addition, this statement
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. QuadraMed is currently evaluating
the effect that implementation of the new standard will have on its
financial condition, results of operations, and cashflows.
Although QuadraMed believes that SFAS Nos. 141 and 142 will not
have a material adverse effect on QuadraMed's financial condition, their
existence may make certain potential acquisitions less attractive in the
future, as any amounts paid in excess of book value will have to be
amortized over a shorter period than previously permitted and could
adversely affect reported GAAP net income and earnings per share.
QuadraMed May Need To Use A Large Portion Of Its Cash Balances, Issue A
Significant Amount Of Its Common Stock Or Incur Additional Indebtedness To
Repurchase Its Outstanding Debentures.
QuadraMed, through a public offering, issued the Debentures on May
1, 1998 in the principal amount of $115 million. QuadraMed's net proceeds
from the offering were $110.8 million. The Debentures mature on May 1, 2005
and bear interest at 5.25% per annum. The Debentures are convertible into
common stock at any time prior to the redemption or final maturity,
initially at the conversion price of $33.25 per share (resulting in an
initial conversion ratio of 30.075 shares per $1,000 principal amount).
Under the terms of the indenture and related documents, QuadraMed
is obligated to redeem the Debentures before their May 1, 2005, maturity
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 50% of the new entity, the sale of
substantially all of QuadraMed's assets, a liquidation, or if there is a
substantial change in the Board of Directors over a two-year period.
In the fiscal year ending 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. As a
result of the cancellation of indebtedness, QuadraMed recognized 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. The fair values of the Debentures at December 31, 2001, and 2000
were $59.2 million and $41.1 million, respectively.
In anticipation of any repurchase or optional redemption of the
Debentures, QuadraMed may issue additional indebtedness to pay all or all
portion of the repurchase or redemption price. This indebtedness may be
issued in a greater amount than, or on terms less favorable than, the
outstanding Debentures or notes.
QuadraMed May Lose Some Or All Of Its Equity Investments In Technology
Companies If Such Companies Become Bankrupt Or Insolvent Or Do Not Succeed
In Executing Their Business Strategy Appropriately.
QuadraMed holds minority interests in companies having operations
or technology in areas within its strategic focus, some of which are
publicly traded and have highly volatile share prices. QuadraMed records an
investment impairment charge when it believes 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 current carrying
value, thereby possibly requiring an impairment charge in the future.
Provisions In QuadraMed's Certificate Of Incorporation And Bylaws And
Delaware Law Could Delay Or Discourage A Takeover Which Could Adversely
Affect The Price Of Its Common Stock.
QuadraMed's 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 QuadraMed's
common stock. If preferred stock is issued, the voting and other rights of
the holders of QuadraMed's common stock may be subject to, and may be
adversely affected by, the rights of the holders of QuadraMed's preferred
stock. The issuance of preferred stock may have the effect of delaying or
preventing a change of control of QuadraMed that could have been at a
premium price to its stockholders.
Certain provisions of QuadraMed's certificate of incorporation and
bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management difficult. QuadraMed's Board of
Directors, which is classified into three classes of directors serving
staggered, three-year terms, has the authority to impose various procedural
and other requirements that could make it more difficult for QuadraMed's
stockholders to effect certain corporate actions. In addition, QuadraMed's
certificate of incorporation provides that directors may be removed only by
the affirmative vote of the holders of two-thirds of the shares of
QuadraMed's capital stock entitled to vote. Any vacancy on QuadraMed's
board of directors may be filled only by a vote of the majority of
directors then in office. Further, QuadraMed's certificate of incorporation
provides that the affirmative vote of two-thirds of the shares entitled to
vote, voting together as a single class, subject to certain exceptions, is
required for certain business combination transactions. These provisions,
and certain other provisions of QuadraMed's certificate of incorporation,
could have the effect of delaying or preventing (i) a tender offer for
QuadraMed's common stock or other changes of control of QuadraMed that
could be at a premium price, or (ii) changes in its management.
In addition, certain provisions of Delaware law could have the
effect of delaying or preventing a change in control of QuadraMed. Section
203 of the Delaware General Corporation Law, for example, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
The Trading Price Of QuadraMed's Common Stock Has Been, And Is Expected To
Continue To Be, Volatile.
The NASDAQ SmallCap Market on which QuadraMed is listed, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of QuadraMed's common stock has
been and is likely to continue to be volatile due to such factors as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by
QuadraMed's competitors;
o Governmental regulatory action;
o Developments or disputes with respect to proprietary
rights; or
o General trends in QuadraMed's industry and overall market
conditions.
The market price of QuadraMed's common stock may also be affected
by movements in prices of equity securities in general.
Future Sales Of A Substantial Number Of Shares Of QuadraMed's Common Stock
Could Cause The Price Of The Stock To Decrease Or Fluctuate Substantially.
Existing stockholders of QuadraMed hold a significant number of
shares of common stock that may be sold in the future under Rule 144 of the
Securities Act or through the exercise of registration rights. Sales of a
substantial number of the aforementioned shares in the public markets or
the prospect of such sales could adversely affect or cause substantial
fluctuations in the market price of QuadraMed's common stock and Debentures
and impair QuadraMed's ability to raise additional capital through the sale
of its securities.
Future Sales Of QuadraMed Common Stock In The Public Market Or Option
Exercises And Sales Could Lower Its Stock Price.
A substantial number of the shares of QuadraMed's common stock are
subject to stock options and its outstanding Debentures and notes may be
converted into shares of common stock. QuadraMed 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
its common stock. Sales of substantial amounts of common stock, including
shares issued upon the exercise of stock options or the conversion of its
outstanding convertible notes or Debentures, or the perception that such
sales could occur, may adversely affect prevailing market prices for
QuadraMed's common stock.
Because No Mirror Processing Site For Its Customer Data Processing
Facilities Exists, QuadraMed's 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.
QuadraMed currently processes substantially all of its customer
data at its facilities in Neptune, New Jersey; Irving, Texas; Kansas City,
Missouri; and San Rafael, California. Although QuadraMed backs up its data
nightly and has safeguards for emergencies, such as power interruption or
breakdown in temperature controls, QuadraMed has no mirror processing site
to which processing could be transferred in the case of a catastrophic
event at either of these facilities. If a major catastrophic event occurs
at these facilities, possibly leading to an interruption of data
processing, or any other interruption or closure, QuadraMed's business,
financial condition, and results of operations could be adversely affected.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
QuadraMed's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio. It is QuadraMed's intent to
ensure the safety and preservation of its invested principal funds by
limiting default risk, market risk, and reinvestment risk. QuadraMed
invests in high-quality issuers, including money market funds, corporate
debt securities, and debt securities issued by the United States
government. QuadraMed has a policy of investing in securities with
maturities of two years or less. QuadraMed does not invest in derivative
financial or foreign investments. The table below presents fair values of
principal amounts and weighted average interest rates for QuadraMed's
investment portfolio as of December 31, 2001, (in thousands, except average
interest rates):
Aggregate Weighted Average
Fair Value Interest Rate
Cash and cash equivalents:
Cash............................................. $ 4,682
Money Market funds............................ $ 25,117 1.78%
--------
Total cash and cash equivalents...... $ 29,799
========
Short-term investments:
Corporate debt securities..................... $ 2,380 3.75%
Debt issued by the U.S. government............ 34 6.37%
--------
Total short-term investments.......... $ 2,414
========
Long-term investments:
Corporate debt securities..................... $ 575 6.09%
Debt securities issued by the U.S. government. 563 5.50%
--------
Total long-term investments........... $ 1,138
========
Outstanding Debt.
As of December 31, 2001, QuadraMed had outstanding long-term debt
of $73,719,000, consisting of its Debentures that mature as follows (in
thousands, except average interest rates):
Maturity Carrying Fair Weighted Average
Date Amount Value Interest Rate
---- ------ ----- -------------
2005 $73,719 $59,159 5.25%
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its Debentures, the bulk of QuadraMed's debt,
is fixed at 5.25%.
Foreign Currency Risk
Although QuadraMed sells its products internationally from time to
time, all such transactions are denominated in U.S. currency and there is
no foreign currency fluctuation risk associated with such sales.
Item 8 Financial Statements and Supplementary Data
The financial statements and supplementary data regarding
QuadraMed are included in this Report on Form 10-K beginning on page F-1.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information about changes in QuadraMed's independent public
accountants appears under "Changes In Independent Public Accountants" in
QuadraMed's definitive proxy statement 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 QuadraMed will file a Proxy Statement within 120 days
after the end of the fiscal year ending December 31, 2001, this Annual
Report on Form 10-K 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 QuadraMed's 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 QuadraMed's executive officers appears in Item 1 of this Annual
Report on Form 10-K 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 QuadraMed's named executive
officers appears under "Executive Compensation" under "Election of
Directors" in the Proxy Statement. Information about compensation of
QuadraMed's 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.
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.
1. Financial Statements.
The consolidated financial statements contained herein
are as listed on the Exhibit Index on page 42.
2. Financial Statement Schedule.
Reference is made to Schedule II - Valuation and
Qualifying Accounts following the signature pages hereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual Report
on Form 10-K.
(b) Reports on Form 8-K. QuadraMed filed the following reports on Form 8-K
during the last quarter of the fiscal year covered by this Annual Report
on Form 10-K: NONE
(c) Exhibits:
The exhibits listed on the accompanying Exhibits Index or
incorporated by reference are filed as part of this Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized.
Quadramed Corporation
Date: March 29, 2002
By: -s-
-------------------------------------
Lawrence P. English
Chairman of the Board
Chief Executive 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- Chairman of the Board and March 29, 2002
_______________________ Chief Executive Officer
Lawrence P. English (Principal Executive
Officer)
-s- Chief Financial Officer March 29, 2002
_______________________ (Principal Financial and
Mark N. Thomas Accounting Officer)
-s- Director March 29, 2002
_______________________
Joseph L. Feshbach
-s- Director March 29, 2002
_______________________
Albert L. Greene
-s- Director March 29, 2002
_______________________
F. Scott Gross
-s- Director March 29, 2002
_______________________
Michael J. King
-s- Director March 29, 2002
_______________________
E. A. Roskovensky
-s- Director March 29, 2002
_______________________
Cornelius T. Ryan
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, 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.
27.2 Financial Data Schedule for the Year Ended 12/31/2000.
27.3 Financial Data Schedule for the Year Ended 12/31/1999.
(1) Incorporated herein by reference from the exhibit with the same
number to our Registration Statement on Form SB-2, No.
333-5l80-LA, as filed with the Commission on June 28, 1996, as
amended by Amendment No. l, Amendment No. 2 and Amendment No. 3
thereto, as filed with the Commission on July 26, 1996, September
9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as filed with the Commission on August 14, 1997, as
amended September 4, 1997.
(3) Incorporated by reference from our Current Report on Form 8-K, as
filed with the Commission on June 11, 1998.
(4) Incorporated by reference from our Registration Statement on Form
S-3, No. 333-55775, as filed with the Commission on June 2, 1998,
as amended by Amendment No. 1 thereto, as filed with the
Commission on June 17, 1998.
(5) Incorporated by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, as filed with the Commission on August 14, 1998, as amended
on August 24, 1988.
(6) Incorporated herein by reference from our Current Report on Form
8-K/A filed with the Commission on March 22, 1999.
(7) Incorporated herein by reference from our Registration Statement
on Form S-3, No. 333-80617, as filed with the Commission on June
14, 1999, as amended by Amendment No. l thereto, as filed with the
Commission on August 4, 1999.
(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.
QUADRAMED CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Additions
Beginning of Costs and Charged to Other End of
Description Year Expenses Accounts Deductions Year
----------- ---- -------- -------- ---------- ----
Year ended December 31, 1999
Allowance for doubtful accounts...... $ 4,728 $ 3,816 $ - $ (4,414) $ 4,130
Year ended December 31, 2000
Allowance for doubtful accounts...... $ 4,130 $ 1,335 $ - $ (3,061) $ 2,404
Year ended December 31, 2001
Allowance for doubtful accounts...... $ 2,404 $ 720 $ 2,050 $ (1,786) $ 3,388
REPORTS OF INDEPENDENT ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS
QUADRAMED CORPORATION
Page
Report of Independent Public Accountants..................................................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000..............................................F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999...............F-4
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income (Loss) for the years ended December 31, 2001, 2000, and 1999.................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999...............F-6
Notes to Consolidated Financial Statements................................................................F-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheets of
QuadraMed Corporation (a Delaware corporation) and its subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and comprehensive income
(loss), and cash flows for the years then ended. These financial
statements are the responsibility of QuadraMed's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. The consolidated financial statements of
QuadraMed Corporation for the year ended December 31, 1999 were audited
by other auditors whose report, dated February 24, 2000, expressed an
unqualified opinion on those statements.
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 the
years then ended 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 a part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ Pisenti & Brinker, LLP
---------------------------
PISENTI & BRINKER LLP
Petaluma, California
March 11, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------
2001 2000
ASSETS
---------- -----------
Current Assets
Cash and cash equivalents $ 29,799 $ 27,368
Short-term investments 2,414 12,296
Accounts receivable, net of allowance for uncollectible accounts of $3,388
and $2,404, respectively 37,454 36,879
Unbilled receivables 7,906 7,995
Notes and other receivables 282 689
Prepaid expenses and other current assets 3,099 1,830
---------- -----------
Total current assets 80,954 87,057
---------- -----------
Restricted cash 4,356 7,995
Long-term investments 1,138 1,019
Long-term notes receivable - 3,600
Property, Plant & Equipment, net of accumulated depreciation and amortization
of $22,093 and $18,531, respectively 6,857 8,301
Capitalized software development, net of accumulated
amortization of $7,976 and $5,212, respectively 7,564 8,849
Acquired software, net of accumulated amortization of $4,341
and $3,441, respectively 480 1,380
Intangibles, net of accumulated amortization of $22,789 and $17,174, respectively 22,225 27,840
Investment in marketable equity securities, net of valuation allowance
of $4,125 and $4,062, respectively 575 638
Other long-term assets 6,594 7,270
---------- -----------
Total Assets $ 130,743 $ 153,949
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of capital lease obligations $ 72 $ 323
Accounts payable 796 615
Accrued payroll and related 6,630 7,223
Accrued interest 645 1,006
Other accrued liabilities 6,523 10,340
Deferred revenue 19,133 11,778
---------- -----------
Total current liabilities 33,799 31,285
---------- -----------
Capital lease obligations, less current portion 19 128
Other long-term liabilities 3,045 -
Convertible subordinated debentures 73,719 115,000
Net liabilities of discontinued operations - 3,215
---------- -----------
Total Liabilities 110,582 149,628
---------- -----------
Stockholders' Equity
Common stock, $0.01 par, 50,000 shares authorized, 26,493 and 25,755 shares
issued and outstanding, respectively 201 191
Treasury stock (821) -
Additional paid-in-capital 271,494 268,485
Deferred compensation (1,074) -
Unrecognized pension costs (706) -
Accumulated other comprehensive loss (4,087) (4,028)
Accumulated deficit (244,846) (260,327)
---------- -----------
Total stockholders' equity 20,161 4,321
---------- -----------
Total Liabilities and Stockholders' Equity $130,743 $153,949
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the years ended December 31,
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Revenues
Licenses $ 85,716 $ 66,598 $ 111,749
Services
43,719 53,513 63,712
--------------------------------------------------
Total revenues 129,435 120,111 175,461
--------------------------------------------------
Operating Expenses
Cost of licenses 22,783 22,743 21,822
Cost of services 18,947 35,613 37,435
General and administration 47,243 47,736 47,463
Sales and marketing 15,805 21,366 21,338
Research and development 15,843 21,872 24,367
Amortization of intangibles and acquired software 6,515 6,995 7,523
Write-off of acquired research and development in process -- -- 1,722
Acquisition costs -- -- 6,898
Impairment of intangible assets -- 927 10,592
Non-recurring charges -- 40,994 17,552
--------------------------------------------------
Total operating expenses 127,136 198,246 196,712
--------------------------------------------------
Income (Loss) from Operations 2,299 (78,135) (21,251)
--------------------------------------------------
Other Income (expense)
Interest expense (5,836) (6,621) (7,669)
Interest income 2,292 2,081 4,766
Other income (expense), net (613) (63) 1,345
Write-off of purchased accounts receivable (128) (900) (1,200)
Write-off of convertible promissory note (3,600) -- --
--------------------------------------------------
Total other expense, net (7,885) (5,503) (2,758)
--------------------------------------------------
Loss Before Income Taxes (5,586) (83,638) (24,009)
Provision for Income Taxes -- (200) (455)
--------------------------------------------------
Loss from Continuing Operations (5,586) (83,838) (24,464)
--------------------------------------------------
Gain on redemption of bonds (net of income taxes) 12,907 -- --
Income from discontinued operations (net of income taxes) 8,160 29,002 12,134
--------------------------------------------------
Net Income (Loss) Available to Common Stockholders $ 15,481 $ (54,836) $ (12,330)
==================================================
Earnings Per Common Share
Basic and Diluted
Continuing Operations $ (0.22) $ (3.27) $ (0.98)
Gain on redemption of bonds (net of income taxes) 0.50 -- --
Discontinued operations (net of income taxes) 0.32 0.49
---------------------------------- ---------------
Total $ 0.60 $ (2.14) $ (0.49)
================================== ===============
Weighted Average Shares Outstanding
Basic 25,852 25,617 24,979
Diluted 25,852 25,617 24,979
The accompanying notes are an integral part of these consolidated financial statements.
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amount)
Common Stock Additional Unrecognized
--------------- Paid to Deferred Pension Treasury
Shares Amount Capital Compensation Costs Stock
--------------------------------------------------------
Balance at December 31, 1998 24,442 $ 178 $266,068 $(3,940) $ - $ -
============================= --------------------------------------------------------
Issuance of common stock in
connection with acquisitions
accounted for as a
purchase...... 97 1 634 - - -
Issuance of common stock through
Employee Stock Purchase
Plan 91 1 1,039 - - -
Amortization of restricted shares
of common stock................... - - - 955 - -
Cancellation of restricted shares
common stock...................... - - (582) 466 - -
Issuance of common stock for
legal settlement.................. 70 - 346 - - -
Exercise of warrants to purchase
common stock...................... 360 4 1,330 - - -
Exercise of common stock
options 259 3 1,588 - - -
Compensation related to accelerated
vesting of common stock
options - - 268 - - -
Net unrealized loss on available-
for-sale securities...... - - - - - -
Net loss................... - - - - - -
---------------------------------------------------------
Balance at December 31, 1999 25,319 $ 187 $270,691 $(2,519) $ - $ -
--------------------------------------------------------
Issuance of common stock through
Employee Stock Purchase
Plan... 58 - 488 - - -
Release of restricted shares - - (2,712) 1,859
Cancellation of restricted
shares... - - (499) 324 - -
Amortization of restricted
shares... - - - 336 - -
Issuance of common
stock for legal expenses 79 1 79 - - -
Exercise of common stock
options.. 299 3 438 - - -
Net unrealized loss on available-
for-sale securities..... - - - - - -
Net loss................... - - - - - -
--------------------------------------------------------
Balance at December 31, 2000 25,755 $191 $ 268,485 $ - $ - $ -
--------------------------------------------------------
Issuance of restricted shares of
common stock..................... 475 5 1,262 (1,267) - -
Amortization of restricted shares
of common stock........ - - - 215 - -
Issuance of common stock options
to non-employees and
consultants............... - - 63 (63) - -
Amortization of common stock
options of non-employees
and consultants........... - - - 41 - -
Exercise of common stock of
non-employees and
consultants.. 60 1 105 - - -
Compensation related to
issuance
of common stock.................. 187 2 887 - - -
Exercise of common stock
options . 216 2 692 - - -
Purchase of treasury stock......... (200) - - - - (821)
Unrecognized pension
costs........ - - - - (706) -
Net unrealized loss on
available-for-sale
securities................. - - - - - -
Net lncome................. - - - - - -
----------------------------------------------------------
Balance at December 31, 2001 26,493 $201 $271,494 $(1,074) $ (706) $(821)
==========================================================
Accumulated
Other Total Comprehensive
Comprehensive Accumulated Stockholders' (Loss)
Loss Deficit Equity Income
---------------------------------------------------------
Balance at December 31, 1998 $(157) $(193,161) $68,988 $ (19,613)
============================= ---------------------------------------------------------
Issuance of common stock in
connection with acquisitions
accounted for as a
purchase...... - - 635
Issuance of common stock through
Employee Stock Purchase
Plan - - 1,040
Amortization of restricted shares
of common stock................... - - 955
Cancellation of restricted shares
common stock...................... - - (116)
Issuance of common stock for
legal settlement.................. - - 346
Exercise of warrants to purchase
common stock...................... - - 1,334
Exercise of common stock
options - - 1,591
Compensation related to accelerated
vesting of common stock
options - - 268
Net unrealized loss on available-
for-sale securities...... (130) - (130) (130)
Net loss................... - (12,330) (12,330) (12,330)
--------------------------------------------------------
Balance at December 31, 1999 $ (287) $ (205,491) $62,581 $(12,460)
---------------------------------------------------------
Issuance of common stock through
Employee Stock Purchase
Plan... - - 488
Release of restricted shares - - (853)
Cancellation of restricted
shares... - - (175)
Amortization of restricted
shares... - - 336
Issuance of common
stock for legal expenses - - 80
Exercise of common stock
options.. - - 441
Net unrealized loss on available-
for-sale securities..... (3,741) - (3,741) (3,741)
Net loss................... - (54,836) (54,836) (54,836)
---------------------------------------------------------
Balance at December 31, 2000 $(4,028) $(260,327) $4,321 $(58,577)
---------------------------------------------------------
Issuance of restricted shares of
common stock..................... - - -
Amortization of restricted shares
of common stock........ - - 215
Issuance of common stock options
to non-employees and
consultants............... - - -
Amortization of common stock
options of non-employees
and consultants........... - - 41
Exercise of common stock of
non-employees and
consultants.. - - 106
Compensation related to
issuance
of common stock.................. - - 889
Exercise of common stock
options . - - 694
Purchase of treasury stock......... - - (821)
Unrecognized pension
costs........ - - (706) (706)
Net unrealized loss on
available-for-sale
securities................. (59) - (59) (59)
Net lncome................. - 15,481 15,481 15,481
-------------------------------------------------------
Balance at December 31, 2001 $(4,087) $(244,846) $20,161 $ 14,716
=======================================================
The accompanying notes are an integral part of these
consolidated financial statements.
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
-------------------------------------
2001 2000 1999
------------ ------------ ----------
Cash Flows from Operating Activities
Net Income (loss) $ 15,481 $ (54,836) $(12,330)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 13,382 13,890 13,066
Amortization of deferred compensation 256 -- 1,107
Salaries related to issuance of common stock, cancellation of restricted shares
and forfeiture of common stock options -- (377) --
Write-off of long term investments 689 -- --
Write-off of acquired software -- 5,600 --
Write-off of purchased accounts receivable 128 900 1,200
Write-off of convertible promissory note 3,600 -- --
Write-off of property and equipment -- 1,833 --
Write-off of capitalized software -- 1,473 --
Write-off of in-process research and development -- -- 1,722
Impairment of intangible assets -- 927 10,592
Realized gain on investments (45) (61) (28)
Gain on redemption of bonds (12,907) -- --
Gain on the sale of division/software business, net of applicable tax (6,590) (23,228) --
Noncash settlement of litigation -- -- 346
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net (486) 23,633 (22,794)
Prepaid expenses and other (1,580) 16,556 (9,346)
Accounts payable and accrued liabilities (2,315) (4,578) (12,213)
Net liabilities from discontinued operations (4,885) (905) (4,742)
Deferred revenue 7,307 5,418 (7,556)
------------ ------------ ---------
Cash provided by (used in) operating activities 12,035 (13,755) (40,976)
------------ ------------ ---------
Cash Flows from Investing Activities
Cash paid for the acquisition of other companies, net of cash acquired -- -- (7,150)
Proceeds from the sale of division, net of tax 8,655 40,408 --
Purchased technology -- -- (6,000)
Maturity (purchase) of available-for-sale securities, net 12,190 (33) 33,343
Additions to equipment (2,168) (2,879) (6,494)
Purchase of treasury stock (821) -- --
Change in restricted cash 1,259 (6,960) (1,000)
Purchase of marketable investments -- -- (3,000)
Proceeds from sale of equipment 25 -- --
Issuance of notes receivable and other -- -- (2,215)
Capitalization of computer software development costs (1,761) (765) (3,373)
------------ ------------ ---------
Cash provided by investing activities 17,379 29,771 4,111
------------ ------------ ---------
Cash Flows from Financing Activities
Payments of principal on capital lease obligations (360) (193) (436)
Borrowings (repayments) under notes and loans payable (28,374) (7) (21,941)
Issuance of common stock through Employee Stock Purchase Plan -- 488 1,040
Proceeds from exercise of common stock options to purchase common stock 1,751 441 2,924
------------ ------------ ---------
Cash (used in) provided by financing activities (26,983) 729 (18,413)
------------ ------------ ---------
Net increase (decrease) in cash and cash equivalents 2,431 16,745 (55,278)
Cash and Cash Equivalents, beginning of period 27,368 10,623 65,901
------------ ------------ ---------
Cash and Cash Equivalents, end of period $ 29,799 $ 27,368 $ 10,623
============ ============ =========
The accompanying notes are an integral part of these
consolidated financial statements.
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 Noncash Investing and Financing Transactions
Conversion of notes payable and accrued interest to contributed capital $ -- $ -- $ 500
Release of restricted shares of common stock -- (1,859) --
Issuance of restricted shares of common stock 1,267 (324) (466)
Issuance of common stock in payment of legal expenses -- 80 346
Issuance of common stock in connection with other acquisitions -- -- 635
Issuance of common stock options to non-employees and consultants 63 -- --
Release of restricted cash into short term investments 2,380 -- --
The accompanying notes are an integral part of these
consolidated financial statements.
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. QUADRAMED CORPORATION
QuadraMed Corporation ("QuadraMed") provides information technology and
consulting services designed to assist healthcare professionals deliver patient
care with optimum efficiency. QuadraMed has four main product lines: Affinity(R)
Healthcare Information System, Quantim(R) Health Information Management Software
and Services, Complysource(R) Compliance Solutions, and Chancellor(TM) Financial
Products and Services. QuadraMed was reincorporated in Delaware in 1996, having
been originally incorporated in 1993 in California. Since August 31, 2000, its
stock has been publicly traded under the symbol "QMDC" on the Nasdaq SmallCap
Market. From October 16, 1996 to August 30, 2000, QuadraMed's stock was traded
under the same symbol on the Nasdaq National Market.
2. BASIS OF PRESENTATION
(a) 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 U.S.; and (ii) the rules and regulations of the U.S. Securities
and Exchange Commission ("SEC"). All significant intercompany accounts and
transactions between QuadraMed and its subsidiaries are eliminated in
consolidation.
(b) Adjustments
These financial statements reflect all adjustments that QuadraMed
believes are necessary for a fair presentation of its results of operations and
financial condition. All adjustments are of a normal recurring nature.
(c) Discontinued Operations
Results of QuadraMed's Release Of Information ("ROI") Division and
EZ-CAP software business ("EZ-CAP") are reported as discontinued operations
because QuadraMed's control of these businesses was transferred in May, 2000,
and August, 2001, respectively. Unless otherwise indicated, amounts in these
statements exclude the effects of all discontinued operations.
(d) Reclassification
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 restated to be
consistent with the current classification of cost of licenses, cost of
services, general and administration, sales and marketing, research and
development, marketable investments, and discontinued operations.
(e) Segments
As a result of 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 five percent (5%) 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 presentation.
The 2000 reorganization was undertaken to more closely align products
targeted to shared markets, to more accurately measure financial performance by
product/division, and to establish greater management accountability. To this
end, QuadraMed further refined its operating segments during the 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.
3. SUMMARY OF CRITICAL ACCOUNTING ISSUES
QuadraMed's critical accounting issues are as follows:
(a) 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. QuadraMed
periodically reviews and tests its estimates, including those related to carried
intangibles valuations, income taxes, product returns, bad debt, restructuring,
pensions and other benefits, and contingencies and litigation. Actual results
may differ from these estimates.
(b) Revenue Recognition
QuadraMed's revenues, excluding exceptional items, are derived from two
sources: (i) licenses; and (ii) consulting services. License revenues include
amounts received for licenses and software-related services, such as
installation and post-installation customer support fees, third-party hardware
sales, and other software-related revenue. Consulting services revenues include
amounts from outsourcing, specialized staffing, and analytical services provided
by QuadraMed's Health Information Management Services and Financial Services
Divisions.
QuadraMed's software products (enterprise systems and specific
applications) can be licensed individually or as a suite of interrelated
products. Licenses are granted for a specified term (generally ranging from one
to five years, typically with fees paid monthly, quarterly or annually) or in
perpetuity. Revenues from enterprise systems are recognized on the basis of
percentage of completion. Revenues from term and perpetual licenses for specific
applications are recognized upon shipment of the software if there is a definite
agreement, collection of the resulting receivable is probable, and the fee is
fixed or determinable. If there is a contractual acceptance period, revenues are
recognized on the earlier of (i) acceptance; or (ii) the expiration of the
acceptance period. Software-related service revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered that has not been billed pursuant to the customer contract.
Post-installation customer support is recognized ratably over the term of the
support period. Deferred revenue is revenue received in advance from customers
for future work. Costs of software products include hardware, royalties to third
parties, and installation costs.
QuadraMed applies the provisions of Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" to all transactions involving the sale of software products and
hardware transactions where the software is not incidental.
QuadraMed's consulting services are rendered under contracts with
healthcare providers that are billed in one of three ways: (i) hourly rates;
(ii) monthly or quarterly fixed fees; or (iii) percentage of cash collections.
For services billed by the hour or on a monthly or quarterly fixed fee, which
are generally related to the Health Information Management Services division,
revenue is recognized at the end of each month or quarter as services are
provided and billed. The Financial Services Management contracts generally
provide for incentive payments based on a percentage of dollars recovered for
the provider. QuadraMed recognizes this additional incentive revenue either upon
invoicing or upon receipt of payment from the provider. Cost of service revenues
consists primarily of salaries, benefits, and allocated costs related to
providing such services.
(c) Intangibles and Goodwill
Intangibles primarily relate to the value of the installed customer
base, proven research and development, capitalized software and goodwill, which
is the amount of purchase price in excess of the fair value of the tangible net
assets, and other identifiable intangible assets acquired through QuadraMed's
acquisitions, such as trademarks. Capitalized amounts are amortized on a
straight-line basis over a period of five to ten years. Goodwill is reviewed
quarterly for impairment and written down to net realizable value, if necessary,
in accordance with Statement of Financial Accounting Standards ("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. QuadraMed is currently
evaluating the effect that the implementation of the new standard will have on
its financial position, results of operations, and cash flows. QuadraMed does
not expect any impairment of goodwill as a result of adopting SFAS No. 142.
(d) Capitalization and Amortization of Software Development Costs
Software development costs are capitalized upon the establishment of
technological feasibility. In accordance with SFAS No. 86, QuadraMed establishes
technological feasibility upon completion of a detail 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 is based upon 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.
(e) Income Taxes
QuadraMed accounts for income taxes pursuant to SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable.
4. SUMMARY OF GENERAL ACCOUNTING PRINCIPLES
(a) Fair Value of Financial Assets
QuadraMed states all financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and securities, at their
fair values.
(b) 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.
(c) Investments
QuadraMed considers its holdings of short-term and long-term
securities, consisting primarily of fixed income securities, to be
available-for-sale securities. The difference between cost and amortized cost
(cost adjusted for amortization of premiums and accretion of discounts that are
recognized as adjustments to interest income) and fair value (representing
unrealized holdings gains or losses) are recorded, until realized, as a separate
component of stockholders' equity. Gains and losses on the sale of debt
securities are determined on a specific identification basis. Realized gains and
losses are included in other income (expense) in the accompanying consolidated
statement of operations.
(d) Property, Plant and Equipment
Property, plant, and equipment are stated at cost and depreciated using
the straight-line method over their estimated useful lives, which are generally
from three to five years. Leasehold improvements are amortized over the shorter
of their useful lives or term of the lease. Maintenance and repairs are expensed
as incurred. QuadraMed performs reviews for the impairment of property and
equipment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
(e) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the sum of the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares
consist of shares issuable upon the exercise of stock options (using the
treasury stock method) and convertible subordinated debentures (using the
as-converted method). Common equivalent shares are excluded from the diluted
computation only if their effect is anti-dilutive. As QuadraMed recorded a net
loss from continuing operations for 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. The diluted weighted average common
shares include common equivalent shares for the quarter ending December 31,
2001, as QuadraMed posted positive earnings for that quarter.
(f) Comprehensive Income (Loss)
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income, which was adopted by QuadraMed in the
first quarter of 1998. SFAS No. 130 requires companies to report a new,
additional measure of income on the income statement or to create a new
financial statement that has the new measure of income on it.
The components of comprehensive income (loss) for the twelve-month
periods ended December 31, 2001, 2000, and 1999, are as follows (in thousands):
Twelve Months Ended
December 31,
----------------------------------------
2001 2000 1999
----------------------------------------
Net income (loss) $ 15,481 $(54,836) $(12,330)
Unrealized loss on available for sale securities (59) (3,741) (130)
Unrecognized pension costs (706) - -
----------------------------------------
Other comprehensive income (loss) before income taxes 14,716 (58,577) (12,460)
----------------------------------------
Income tax expense related to items of
other comprehensive income (loss) - - -
----------------------------------------
Other comprehensive income (loss), net of income taxes $ 14,716 $(58,577) $ 12,460)
========================================
5. STOCK REPURCHASE PROGRAM
In June 2001, QuadraMed's board of directors approved a stock
repurchase program. Under the program, 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 $820,703,
and were recorded as treasury stock.
6. DISCONTINUED OPERATIONS
On August 16, 2001, QuadraMed and its wholly-owned subsidiary,
QuadraMed Operating Corporation, entered into an asset purchase agreement for
the sale of certain assets and related products used to conduct the EZ-CAP
managed care software business to OAO Transition, LLC, a Delaware limited
liability company ("OAO Transition"), and OAO Technology Solutions, Inc., a
Delaware corporation (individually and collectively "OAO"). The asset purchase
transaction closed on August 31, 2001, for an aggregate purchase price of
approximately $9.0 million, and the opportunity for QuadraMed to receive up to
$5.0 million in additional payments based on EZ-CAP's revenue growth and
customer retention as part of OAO over the 18 months following closing. Pursuant
to the purchase method of accounting, the purchase price was allocated to the
net assets acquired, including developed technology, intangible assets, and
liabilities assumed, based on their fair value. QuadraMed received net proceeds
from the sale of $8.6 million, and recorded a gain after applicable taxes of
$6.9 million. Income associated with the EZ-CAP discontinued operations for the
twelve-month periods ending December 31, 2001, 2000 and 1999, was $1.6 million,
$4.3 million, and $7.0 million, respectively.
On March 31, 2001, QuadraMed sold its discontinued Electronic
Remittance Advice product line. QuadraMed recorded proceeds from the sale of
$24,000, and a loss after applicable taxes of $327,000. There was no material
income associated with the results of discontinued operations for this line
during any of the twelve-month periods ending December 31, 2001, 2000, and 1999.
Pursuant to an Asset Contribution Agreement, dated May 3, 2000,
QuadraMed transferred and assigned the assets and liabilities of ROI Division to
a newly created, wholly-owned subsidiary, ChartOne, Inc. ("ChartOne"). 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 Warburg, Pincus Equity Partners, L.P.,
and certain of its affiliates, and Prudential Securities Group, Inc. (together
"the Warburg Group") for $25.2 million in cash. On October 19, 2000, QuadraMed
sold its remaining 57% interest in ChartOne, represented by 2.13 million shares
of series B Preferred Stock, 1.2 million shares of Series C Preferred Stock and
1 share of Common Stock, to the Warburg Group for $26.6 million in cash,
pursuant to a Securities Purchase Agreement dated September 28, 2000. QuadraMed
recorded a gain of $23.3 million (net of income tax expense of $1.0 million) for
the year ended December 31, 2000, from these two transactions.
In March of 1999, QuadraMed acquired The Compucare Company
("Compucare") and assumed the net liabilities of discontinued operations from
Compucare's previous sale of two wholly-owned subsidiaries, Antrim Corporation
and Health Systems Integration, Inc. ("HSII").
Condensed and summarized balance sheet data for the discontinued
operations of EZ-CAP, ROI, and the two Compucare subsidiaries, Antrim and HSII,
is as follows (in thousands):
For the Years Ended December 31,
------------------------------------------------------
2001 2000 1999
------------------------------------------------------
Assets:
Current assets
Other current assets $ - $ 311 $ 311
------------------------------------------------------
Total current assets 311 311
Property and equipment, net - 273 532
Other and intangible assets, net - 1,617 1,786
------------------------------------------------------
Total assets - $ 2,201 $ 2,629
======================================================
Liabilities:
Current liabilities - 5,416 5,748
Non-current liabilities - - 1,000
------------------------------------------------------
Total liabilities - 5,416 6,748
------------------------------------------------------
Net liabilities of discontinued operations $ - $ 3,215 $ 4,119
======================================================
During 2001, QuadraMed's liability from discontinued operations
decreased from $3.2 million to zero at December 31, 2001. This liability was
extinguished as follows: $1.7 million through settlement of underlying lease and
legal obligations; ($0.6) million through the consummation of the sale of both
the ERA and EZ Cap product lines; $1.0 million in write downs of underlying
assets and liabilities; and the reclassification of $1.1 million to QuadraMed's
reserve for doubtful accounts assumed through its previous acquisitions.
Results of QuadraMed's ROI and EZ-CAP software business have been
included in discontinued operations for all periods, as required by Accounting
Practice Board-30. For the years ended December 31, 2001, 2000 and 1999, results
from discontinued operations, net of income taxes, were $8.2 million, $29.0
million, and $12.1 million, respectively, as set forth below (in thousands):
Year Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ -----------
Revenues $ 6,353 $ 32,670 $ 64,124
Costs and expenses 4,784 26,656 50,928
------------ ------------ -----------
Gain from discontinued
operations before income taxes 1,569 6,014 13,196
Provision for income taxes - (240) (1,062)
Gain on sale of division (net of tax) 6,591 23,228 -
------------ ------------ -----------
Income from discontinued operations $ 8,160 $ 29,002 $ 12,134
============ ============ ===========
Discontinued operations have been segregated in the Consolidated
Statements of Cash Flows and, therefore, noncash items of income and expense
from discontinued operations are included in the change in net liabilities of
discontinued operations.
7. INTANGIBLES
No impairment charges related to intangibles were incurred during the
year ending December 31, 2001. During 2000, QuadraMed recorded a $0.9 million
charge for the write-down of certain intangible assets determined to be impaired
in accordance with SFAS No. 121. In addition, QuadraMed reclassified $3.6
million of intangible assets relating to Med Data Systems, Inc. ("Med Data") to
capitalized software, and $0.7 million of acquisition costs from long-term
assets to intangibles. During 1999, QuadraMed recorded a $10.6 million charge
for the write-down of certain intangible assets primarily related to the
acquisitions of Healthcare Recovery, Inc, in 1997, Healthcare Cash Management
Seminars, Inc., American Medical Network, Inc., Velox, and American Hospital
Directory, Inc. in 1998. In accordance with SFAS No. 121, projected cash flows
from these product lines were not sufficient to cover future amortization of the
intangible assets and the assets were therefore written down.
Amortization of intangibles was $5.6 million, $5.8 million, and $6.5
million for the years ended December 31, 2001, 2000 and 1999, respectively.
These amortization amounts represent only goodwill in each respective year.
As discussed in Note 28, for 2002, QuadraMed is adopting recently
issued SFAS No. 141, Business Combinations and SFAS No. 142.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2001, 2000, and 1999
is summarized as follows (in thousands):
Years Ended December 31,
-----------------------------------------------
2001 2000 1999
-----------------------------------------------
Computer equipment $ 10,988 $ 10,340 $ 19,318
Office equipment and other 6,375 6,135 6,035
Purchased software 9,198 8,159 7,689
Leasehold improvements 2,389 2,198 2,022
-----------------------------------------------
Total cost $ 28,950 $ 26,832 $ 35,064
Less: Accumulated depreciation and amortization (22,093) (18,531) (23,757)
-----------------------------------------------
Net book value $ 6,857 $ 8,301 $ 11,307
===============================================
Depreciation expense was $3.6 million, $4.1 million, and $4.2 million
for the years ended 2001, 2000, and 1999, respectively.
9. COMPUTER SOFTWARE
(a) Software Development Costs
For the years ended December 31, 2001, 2000 and 1999, QuadraMed
capitalized software development costs of $1.8 million, $0.8 million, and $3.4
million, respectively.
There was no write-down of capitalized software assets for the year
ended December 31, 2001. During 2000, QuadraMed recorded a $1.5 million charge
to write-down certain capitalized software assets related to the acquisition of
Integrated Medical Networks, Inc. ("IMN"). In addition, in connection with its
acquisition of Med Data, QuadraMed reclassified $3.6 million of intangible
assets to capitalized software.
Amortization of capitalized software development costs was $2.8
million, $2.1 million, and $0.7 million for the years ended December 31, 2001,
2000, and 1999, 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 expense as incurred. Such expenditures, excluding capitalization and
amortization of development costs, amounted to $14.8 million, $20.6 million, and
$27.1 million in 2001, 2000, and 1999, respectively.
(b) Acquired Software
Amortization of acquired software was $0.9 million, $1.2 million, and
$1.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.
In May 2000, as part of the ROI sale, QuadraMed disposed of $6.0
million of acquired software. QuadraMed purchased this software in March 1999 to
license the source code of a chart tracking software product. The amount was
recorded in the balance sheet as acquired software on the date of acquisition.
(c) In-Process Research and Development
No in-process research and development ("IPR&D") charges were incurred
during the years ended December 31, 2001 and 2000. During the year ended
December 31, 1999, charges of $1.7 million were allocated for in-process
research and development costs in conjunction with the purchase of Med Data.
IPR&D expense in the 1999 consolidated statement of operations
represents the value assigned to research and development projects in a purchase
business combination. These projects were commenced but not completed at the
date of acquisition, for which technological feasibility had not been
established and which had no alternative future use in research and development
activities or otherwise. 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, amounts assigned to in-process research and development meeting the
above criteria must be charged to expense at the date of consummation of the
purchase business combination.
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased technology into commercially viable products, estimating
the resulting net cash flows from each project, excluding the cash flows related
to the portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to develop
that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. In each case, the selection of
the applicable discount rate was based on consideration of QuadraMed's weighted
average costs of capital, as well as other factors including the useful life of
each technology, profitability levels of each technology, the uncertainty of
technology advances that were known at the time, and the stage of completion of
each technology.
10. NON-RECURRING CHARGES
During the year ended December 31, 2001, QuadraMed recorded no
non-recurring charges.
Non-recurring charges totaled $41.0 million in 2000, primarily
associated with the following categories:
(a) Restructure costs -- $11.3 million
QuadraMed's restructuring costs included: $2.5 million in severance for
terminated employees; $5.4 million associated with officers' separation
agreements; $2.9 million to downsize and close excess facilities, and $0.5
million in other restructuring expenses. At December 31, 2000, the remaining
liability for restructuring costs totaled $3.2 million and was included in
"accrued liabilities." At December 31, 2001, the remaining liability was $1.4
million.
(b) Asset valuations & write-downs -- $25.4 million
QuadraMed recorded charges of a $10.6 million for write-down of assets
associated with transactions with Health+Cast LLP ("Health+Cast"), $6.2 million
in charges associated with the sunsetting of the EnOvation product acquired from
IMN, and $5.5 million in receivable and other asset write-downs. In addition,
there was a $3.1 million charge, primarily from the elimination of $2.9 million
in unbilled revenue from the managed care payment review and capitated payment
review businesses.
(c) Non-case specific litigation costs -- $4.3 million
An accrual of $4.3 million for non-case specific litigation fees,
costs, and expenses was set up during 2000. As of December 31, 2000, the balance
in this reserve was $1.6 million and is included in "accrued liabilities." As of
December 31, 2001, the balance was zero.
Non-recurring charges totaled $29.4 million in 1999, primarily
associated with severance payments and future rent and lease obligations
associated with the closing of several duplicative operating facilities and
certain integration costs related to prior acquisitions.
The following table sets forth QuadraMed's restructuring and non-case
specific litigation reserves and the activity against these reserves during 2001
and 2000 (in thousands):
Balance at Balance at Balance at
December 31, Reserve Payments December 31, Reserve Payments December 31,
Description 1999 Change (1) 2000 Change (1) 2001
---------------------------------------------------------------------------------------------------------------------------
Restructure/Other...... $ 1,467 $ 3,857 $ (2,118) $ 3,206 $ (436) $ (1,333) $ 1,437
Non-Case Specific legal... - 4,331 (2,715) 1,616 1,204 (2,820) -
---------------------------------------------------------------------------------------------------------------------------
Total reserves........... $ 1,467 $ 8,188 $ (4,833) $ 4,822 $ 768 $ (4,153) $ 1,437
===========================================================================================================================
(1) Termination benefits included in restructure/other payments during 2001 and 2000 were $1,333 and $677, respectively.
11. CASH AND INVESTMENTS
(a) 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 $34.8 million at December 31, 2001.
During the year ending December 31, 2001, $12.2 million in short-term
investments matured and are reflected as cash and cash equivalents on the
current balance sheet.
(b) Restricted Cash
Restricted cash is included in non-current assets and consists
primarily of funds deposited in connection with lease agreements, insurance
escrow deposits, and amounts for a surety bond for the State of New Jersey in
connection with the State Data Collection product line. This restricted cash
balance is in the form of stand-by letters of credit.
As collateral for stand-by letters of credit, QuadraMed had restricted
cash balances of $4.4 million and $8.0 million, at December 31, 2001 and 2000,
respectively.
During 2001, $2.4 million of restricted cash was released and then
invested in short-term investments.
As of December 31, 2000, the amount in escrow relating to the amended
guarantee discussed in Note 13 was $1.6 million, and is reflected on the balance
sheet as restricted cash. In April of 2001, QuadraMed and Health+Cast settled
their legal dispute and Health+Cast paid QuadraMed certain sums and cancelled
QuadraMed's warrants. In October of 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, the related restricted cash
balance related to this transaction was zero.
(c) Marketable Investments in Other Companies
In 1997, QuadraMed made an investment in VantageMed Corporation
("VantageMed"), a company that develops and sells software to physician groups.
In February 2000, VantageMed began to trade its shares publicly and QuadraMed
began accounting for the investment as a marketable equity security. As of
December 31, 2001, the fair value of the VantageMed investment was $575,448 and
QuadraMed owned 6.9% of VantageMed's outstanding common stock. Prior to February
2000, the VantageMed investment had been recorded as a non-marketable
investment. 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 loan.
(d) 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 terms and conditions of a convertible secured promissory note
("Purkinje Note"), which was amended on June 7, 2001. In the third quarter of
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. In the third quarter of
2001, QuadraMed believed that the value of the Purkinje Note and the Purkinje
Class A preferred stock was zero and, therefore, recorded a $3.6 million charge
to write down the entire investment. There have been no material changes that
have altered QuadraMed's opinion as to the valuation of Purkinje Class A
preferred stock.
At December 31, 2001 and 2000, unrealized holding losses were $4.1
million and $4.0 million, respectively. The cost or amortized cost, aggregate
fair value, and gross unrealized holding gains and losses by major security type
were as follows:
As of December 31, 2001:
(in thousands)
Unrealized
Cost or Gain (Loss) on
Amortized Aggregate Available-for-Sale
Cost Fair Value Securities
Short-term: ---- ---------- ----------
Debt securities issued by The United States Government............. $ 34 $ 34 $ -
Other short-term investments....................................... 2,380 2,380 -
-------- -------- ---------
$2,414 $2,414 $ -
======== ======== =========
Long-term:
Debt securities issued by The United States Government............ $ 531 $ 562 $ 31
Corporate debt securities......................................... 569 576 7
-------- -------- ---------
$1,100 $1,138 $ 38
======== ======== =========
Marketable Equity Investment:
VantageMed Corporation............................................. $4,700 $ 575 $(4,125)
======== ======== ---------
Total Unrealized Loss............................... $(4,087)
=========
As of December 31, 2000:
(in thousands)
Unrealized
Cost or Gain (Loss) on
Amortized Aggregate Available-for-Sale
Cost Fair Value Securities
Short-term: ---- ---------- ----------
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:
Debt securities issued by The United States Government............ $ 463 $ 519 $ 56
Corporate debt securities......................................... 478 500 22
-------- -------- ---------
$ 941 $ 1,019 $ 78
======== ======== =========
Marketable Equity Investment:
VantageMed Corporation............................................ $ 4,700 $ 638 $ (4,062)
======== ======== =========
Total Unrealized Loss.............................. $ (4,028)
==========
Proceeds from the sale of available-for-sale securities were $12.8
million, $10.2 million, and $21.1 million during 2001, 2000, and 1999,
respectively. Gross realized gains were $45.2 thousand, $61.0 thousand, and
$28.4 thousand during 2001, 2000, and 1999, respectively.
12. PURCHASED ACCOUNTS RECEIVABLES
QuadraMed purchased certain accounts receivables 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 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 ending December 31, 2001. In
the fiscal years ending December 31, 2000 and 1999, QuadraMed wrote off $0.9
million and $1.2 million, respectively, in connection with these accounts
receivable.
13. 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.
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 of 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 of
2000 and pursuant to that certain Asset Contribution Agreement dated as of 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 that certain
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 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 of 2001, QuadraMed and Health+Cast settled their legal dispute
and Health+Cast paid QuadraMed certain sums and cancelled QuadraMed's warrants.
In October of 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, zero was reflected on the balance sheet as restricted cash
for this obligation.
14. CONVERTIBLE SUBORDINATED DEBENTURES
QuadraMed, through a public offering, issued convertible subordinated
debentures in the principal amount of $115 million, including the underwriters'
over-allotment option, on May 1, 1998 ("Debentures"). QuadraMed's net proceeds
from the offering were $110.8 million. The Debentures mature on May 1, 2005 and
bear interest at 5.25% per annum. The Debentures are convertible into common
stock at any time prior to the redemption or final maturity, initially at the
conversion price of $33.25 per share (resulting in an initial conversion ratio
of 30.075 shares per $1,000 principal amount).
Under the terms of the indenture and related documents, QuadraMed is
obligated to redeem the Debentures earlier than their May 1, 2005 maturity 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 there is a substantial change in the board
of directors over a two-year period.
In the fiscal year ending 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. As a result of the
cancellation of indebtedness, QuadraMed recognized 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. The fair values of the
Debentures at December 31, 2001 and 2000 were $59.2 million and $41.1 million,
respectively.
15. STAND-BY LETTERS OF CREDIT
During the years ended December 31, 2001, 2000, and 1999, QuadraMed
opened $0.5 million, $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 $0.5 million, $5.0 million, and $1.0 million certificates
of deposits recorded in the balance sheet at December 31, 2001, 2000, and 1999,
as restricted cash. In 2001, the $5.0 million letter-of-credit was reduced to
$2.6 million, of which, $2.4 million was released from restricted cash and
invested in short-term investments.
16. CAPITAL AND OPERATING 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
capital and operating leases at December 31, 2001 are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
2002.......................................... $ 78 $ 4,792
2003.......................................... 19 4,450
2004.......................................... -- 3,616
2005.......................................... -- 3,055
2006.......................................... -- 2,806
Thereafter.................................... -- 11,391
Total minimum payments....... 97 $ 30,110
=========
Interest on capital lease obligations at
a rate of 8.5%................................ (6)
-------
Net minimum principal payments................ 91
Current maturities............................ (72)
-------
Long term lease liability $ 19
=======
Rental expense was $5.2 million, $6.3 million, and $7.3 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
At December 31, 2001 and 2000, the gross book value of equipment leased
under non-cancelable capital leases totaled $0.9 million. As of December 31,
2001, and 2000, related accumulated depreciation totaled $0.8 million.
17 WARRANTS
In connection with the acquisition of Linksoft Technologies, Inc.
("Linksoft") in June 1999, QuadraMed assumed warrants to purchase 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 of 2008 remain outstanding for 1,028 shares of common
stock.
In connection with the acquisition of Compucare in March 1999,
QuadraMed assumed warrants to purchase 24,563 shares of common stock. Warrants
for 3,941 shares at an exercise price of $61.73 expired in December of 2000.
Warrants for a total of 20,622 shares of common stock remain outstanding, with
2,690 at an exercise price of $111.54 and a January of 2003 expiration; 11,208
at an exercise price of $223.09 and an October of 2005 expiration; and 6,724 at
an exercise price of $0.15 and a February of 2006 expiration.
In connection with a 1996 bridge loan agreement, QuadraMed issued
warrants to purchase an aggregate of 957,376 shares of common stock at a
purchase price of $3.75 per share. As the value of the warrants at the date of
issuance was nominal, no value had been assigned to the warrants for accounting
purposes. The warrants were partially exercised and 240,960 shares of common
stock were issued in 1997 and 430,705 shares of common stock were issued in
1998. The warrants for the remaining 285,711 shares expired on January 31, 2001.
In December 1995, QuadraMed issued a warrant expiring in December of
2005 to Trigon Resources Corporation ("Trigon") to purchase up to 355,600 shares
of common stock at $3.75 per share. The warrant was issued to Trigon, a Nevada
corporation controlled by James D. Durham, then QuadraMed's Chairman and Chief
Executive Officer, pursuant to that certain Employment Agreement dated March 1,
1994 with Mr. Durham. In October of 2001, QuadraMed and Mr. Durham agreed to
assign the warrant to QuadraMed for $192,710, which is the sum of the difference
between $3.75 and the five day trading average closing price for QuadraMed's
stock for the week beginning October 29, 2001 for all the underlying shares.
Following the transaction, QuadraMed cancelled the warrant.
QuadraMed issued warrants in 1995 and 1996 to James D. Durham, then
QuadraMed's Chairman and Chief Executive Officer, to purchase up to 355,600
shares of 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. QuadraMed recorded compensation expense of $336,000 for
the year ended December 31, 1997 as a result of the vesting of the warrants. The
warrants were exercised in full during 1999.
In October of 1995, QuadraMed entered into a joint development
arrangement with another software company pursuant to which QuadraMed issued a
warrant to purchase 28,560 shares of common stock at a purchase price of $5.25
per share. The warrant was partially exercised for 18,984 shares of common stock
during 1997. The warrants for the remaining 9,576 shares of common stock expired
on June 25, 2001.
18. 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 Heath 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 Option 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 board, be
granted options; (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 be issued shares of common stock either through the
immediate purchase of such shares or as a bonus for services rendered QuadraMed;
(iv) the automatic option grant program under which eligible non-employee board
members automatically receive option grants at periodic intervals to purchase
shares of common stock; and (v) the director fee option program under which
non-employee board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.
The exercise price per share for an incentive stock option cannot be
less than the fair market value on the date of grant. The exercise price per
share for a nonqualified stock option cannot be less than 85% of the fair market
value on the date of grant. Option grants under the Incentive Plan generally
expire 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, a total of 6,452,714 shares of common
stock have been authorized by QuadraMed's stockholders for grant under the
Incentive Plan. As of December 31, 2000 and 1999, a total of 3,567,661 and
3,067,661 shares of common stock were authorized, respectively, by QuadraMed's
stockholders for grant under the Incentive Plan. The Incentive Plan provides
that the share reserve automatically increases each year by an amount equal to
1.5% of the outstanding shares on the last trading day of the immediately
preceding calendar year.
1999 Supplemental Stock Option Plan
In 1999, QuadraMed's board of directors approved QuadraMed's 1999
Supplemental Stock Option Plan (the "1999 Supplemental Plan"). The 1999
Supplemental Plan permits non-statutory option grants to be made to employees,
independent consultants, and advisors who are not QuadraMed officers, directors,
or Section 16 insiders. The 1999 Supplemental Plan is administered by the board
of directors or its Compensation Committee and terminates in March 2009. The
exercise price of all options granted under the 1999 Supplemental Plan may not
be less than 100% of fair market value on the date of the grant. Options vest on
a schedule determined by the board of directors or the Compensation Committee
with a maximum option term of ten years. As of December 31, 2001, 2,314,732
shares were available for grant. As of December 31, 2000, 2,420,946 shares were
available for grant. As of December 31, 1999, 149,200 shares were available for
grant under the 1999 Supplemental Plan.
QuadraMed accounts for its employee stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Under this principle, compensation expense of $215,000, $0, and
$268,000 was recognized during 2001, 2000, and 1999, respectively. Employee
compensation expense recognized in 2001 was related to the issuance of 475,000
restricted shares issued during the year. Compensation expense of $268,000 was
recognized during the year ended December 31, 1999, primarily related to the
acceleration of vesting terms for certain outstanding stock options. For
non-employee stock based awards, QuadraMed uses SFAS No. 123, Accounting for
Stock-Based Compensation, and recognized compensation expense of $40,000 for
2001 and zero for 2000 and 1999, respectively.
In accordance with SFAS 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 at the grant dates for the awards calculated in
accordance with the method prescribed by SFAS No. 123, QuadraMed's net income
(loss) and net income (loss) per share would have been the pro forma amounts
indicated below (in thousands, except per share amounts):
Year Ended December 31,
--------------------------------------------
2001 2000 (1) 1999
---- -------- ----
Net income/(loss) available to common stockholders As reported $ 15,481 $ (54,836) $ (12,330)
Pro forma $ 12,961 $ (54,836) $ (18,652)
Basic and diluted net income/(loss) per share As reported $ 0.60 $ (2.14) $ (0.49)
Pro forma $ 0.50 $ (2.14) $ (0.75)
(1) Since option exercise prices were in excess of fair market value at
December 31, 2000, no additional compensation cost would have resulted
using the method prescribed by SFAS No. 123. Pro forma net loss available
to common stockholders is therefore, equal to net loss reported in the
Consolidated Statement of Operations.
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 for the years ended December 31:
Year Ended December 31,
---------------------------------------------
2001 2000 1999
---- ---- ----
Expected dividend yield.......................... 0.0% 0.0% 0.0%
Expected stock price volatility.................. 109.6% 107.1% 91.7%
Risk-free interest rate.......................... 4.12% 6.51% 6.49%
Expected life of options......................... 5.0 years 5.0 years 5.0 years
The weighted average fair value of options granted during 2001, 2000,
and 1999 was $3.50, $2.11 and $8.12 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.............................................................. (261) 6.27
Canceled............................................................... (504) 13.70
------------- -----------
Balance, December 31, 1999............................................. 5,389 $ 12.23
------------- -----------
Granted................................................................ 3,447 2.11
Exercised.............................................................. (299) 12.65
Canceled............................................................... (2,823) 13.11
------------- -----------
Balance, December 31, 2000............................................. 5,714 $ 5.62
------------- -----------
Granted................................................................ 986 3.50
Exercised.............................................................. (276) 3.56
Canceled............................................................... (677) 8.69
------------- -----------
Balance, December 31, 2001............................................. 5,747 5.10
============= ===========
The following table summarizes information about stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Number Weighted Weighted Weighted
Outstanding Average Average Number Average
Range of as of Remaining Exercise Exercisable as Exercise
Exercise Prices 12/31/01 Contractual Life Price of 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 six-month purchase periods. In fiscal years ended December
31, 1999 and 1998, QuadraMed issued 90,927 and 37,310 shares of common stock,
for an aggregate purchase price of $1.0 million and $0.5 million, respectively.
No compensation expense was recorded in connection with the Purchase Plan.
19. 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 of 2001,
provided consulting and advisory services to QuadraMed related to the
development of financial and merger and acquisition strategies from April to
August of 2001. For these services, Mr. Feshbach was paid $25,000 and he
received an option to purchase 20,000 shares of QuadraMed stock, with an
exercise price of $2.42, that vested fully on July 31, 2001. Mr. Feshbach
exercised this option on December 6, 2001 at a trade price of $8.30 and held all
20,000 shares as of March 1, 2002. He 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., a provider of transcription services.
Prior to Mr. King's appointment as Healthscribe's CEO, QuadraMed entered into a
subcontract for transcription services at a healthcare facility managed by
QuadraMed. During 2001, QuadraMed paid Healthscribe, Inc. a total of $0.3
million for transcription services. At the end of March 2001, this subcontract
was terminated and the healthcare facility managed by QuadraMed contracted
directly with Healthscribe for services. In 2000 and 1999, QuadraMed paid
Healthscribe a total of $1.3 million and $0.4 million, respectively.
20. EMPLOYEE BENEFIT PLANS
(a) 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. In 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 ending
December 31, 2001, 2000, and 1999, QuadraMed made discretionary contributions of
$0.9 million, $1.0 million and $0.9 million, respectively.
In 1999, QuadraMed merged into the Plan the 401(k) Savings Plan of
Compucare, acquired in 1999.
(b) 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, in 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. None of QuadraMed's current executive officers, including the
Chief Executive Officer, have been selected to participate in the SERP. James D.
Durham, QuadraMed's former Chairman of the Board and Chief Executive Officer, is
the only individual who has 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. Vesting
in 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.
SUPPLEMENTAL RETIREMENT PLAN BENEFIT
With Years Of Service Indicated
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.
-------------------------------------------- -------------- ----------- ------------- --------------
HIGHEST ANNUAL COMPENSATION 0-6 YEARS 7 YEARS 10 YEARS 13+ YEARS
-------------------------------------------- -------------- ----------- ------------- --------------
$500,000................................ $0 $175,000 $250,000 $325,000
-------------------------------------------- -------------- ----------- ------------- --------------
$600,000................................ $0 $210,000 $300,000 $390,000
-------------------------------------------- -------------- ----------- ------------- --------------
$700,000................................ $0 $245,000 $350,000 $455,000
-------------------------------------------- -------------- ----------- ------------- --------------
$800,000................................ $0 $280,000 $400,000 $520,000
-------------------------------------------- -------------- ----------- ------------- --------------
$900,000................................ $0 $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.
QuadraMed and Mr. Durham entered into a Separation Agreement as of
June 12, 2000 ("Separation Agreement") by which, among other things, Mr.
Durham (i) immediately resigned his position as Chief Executive Officer, (ii)
agreed to resign as Chairman of the Board by December 31, 2000, (iii) remained
on the board indefinitely, and (iv) continued as a part-time employee of
QuadraMed until December 31, 2003. Pursuant to the Separation Agreement,
QuadraMed and Mr. Durham agreed that Mr. Durham's 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. The
Separation Agreement further provided that should QuadraMed shareholders not
re-elect Mr. Durham as a Director that Mr. Durham's SERP benefit would
immediately vest but not be accelerated. On July 31, 2001, QuadraMed and Mr.
Durham amended the Separation Agreement ("Separation Amendment"). Pursuant to
the Separation Amendment, QuadraMed and Mr. Durham agreed to Mr. Durham's
resignation as a director, his continued part-time employment though December
31, 2003, his full vesting in the SERP, and that his resignation as a Director
was not an involuntary termination for purposes of the SERP. QuadraMed also
agreed in the Separation Agreement to a schedule of payments to the Rabbi
Trust established for purposes of satisfying QuadraMed's liability under the
SERP.
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.
In accordance with SFAS No. 87, QuadraMed has recognized an expense
of $1.6 million and $0.4 million in years ended December 31, 2001 and 2000,
respectively. The liability for this plan at December 31, 2001 was $2.7
million, of which $0.7 million is reflected as unrecognized pension cost in
the equity section.
The SERP had an accumulated benefit obligation in excess of plan
assets and accrued pension liabilities, such that an additional minimum
liability and equity reduction component had to be recorded as follows (in
thousands):
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------------------------------------
Amounts recognized in the balance sheet(s):
Assets
------------------------------------------
Plan assets
$ - $ - $ -
==========================================
Liabilities
Accrued pension liability
2,038 429 -
Additional minimum pension liability
706 - -
------------------------------------------
Total benefit obligation (1) $ 2,744 $ 429 $ -
==========================================
------------------------------------------
Unrecognized pension costs (2) $ 706 $ - $ -
==========================================
Costs recognized during the year:
Amortization of prior service costs $ 1,149 $ - $ -
Service costs 402 401 -
Interest costs 58 28 -
------------------------------------------
Total costs recognized in net income $ 1,609 $ 429 $ -
==========================================
Discount rate used in computing ending obligation(s) 7.00% N/A N/A
------------------------------------------
(1) Pursuant to the separation agreement, dated 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) Unrecognized pension costs are reflected as a reduction to both
stockholders' equity and comprehensive income.
21. ACQUISITIONS AND DIVESTITURES
(a) Acquisitions
In July 1999, QuadraMed acquired the assets of Med Data for $5.0
million in cash and accounted for the transaction pursuant to the purchase
method of accounting.
In June 1999, QuadraMed acquired LinkSoft by exchanging 435,000
unregistered shares of QuadraMed common stock with a Fair Market Value of
approximately $4.285 million for all outstanding LinkSoft capital stock. This
transaction was accounted for as a pooling of interests.
In June 1999, QuadraMed acquired Healthcare Financial Informatics
("HFI") by exchanging 452,807 unregistered shares of QuadraMed common stock with
an aggregate Fair Market Value of $5 million for all outstanding HFI capital
stock. This acquisition was accounted for as a pooling of interests.
In May 1999, QuadraMed acquired the assets of Millennium Consulting
Services, LLC ("Millennium Consulting") for $750,000, including $562,500 in cash
and 19,633 unregistered shares of QMDC common stock having an aggregate Fair
Market Value of $187,500, and accounted for the transaction pursuant to the
purchase method of accounting.
In March 1999, QuadraMed acquired Pro Intermed, Inc. ("Pro Intermed")
by exchanging 660,000 unregistered shares of QuadraMed common stock with an
aggregate Fair Market Value of $5.94 million for all outstanding Pro Intermed
capital stock. This acquisition was accounted for as a pooling of interests.
In March 1999, QuadraMed acquired Compucare by exchanging 2.96 million
unregistered shares of QuadraMed common stock for all outstanding Compucare
capital stock. The acquisition was accounted for as a pooling of interests. Upon
closing of the acquisition, the assets and liabilities of Compucare were
recorded at net book value and primarily consisted of accounts receivable, fixed
assets, accounts payable, accrued liabilities, and deferred revenue.
A reconciliation of the current consolidated statement of operations
with previously reported separate information for entities with which QuadraMed
has pooled is presented below, (in thousands):
Year Ended December 31,
----------------------------------------------
2001 2000 1999
----------------------------------------------
Revenues:
QuadraMed..................... $ 129,435 $ 120,111 $ 160,649
Compucare..................... -- -- 9,280
Linksoft...................... -- -- 1,009
HFI........................... -- -- 2,066
ProInterMed................... -- -- 2,457
----------------------------------------------
Consolidated................ $ 129,435 120,111 175,461
==============================================
Net Income (Loss):
QuadraMed..................... $ 15,481 (54,836) (11,771)
Compucare..................... -- -- (286)
Linksoft...................... -- -- (438)
HFI........................... -- -- 1,279
ProInterMed................... -- -- (1,114)
----------------------------------------------
Consolidated................ $ 15,481 (54,836) (12,330)
==============================================
Results of operations for all acquired companies which have been
accounted for using purchase accounting have been included for the periods
subsequent to the closing date of each transaction.
(b) Divestitures
On August 16, 2001, QuadraMed and its wholly-owned subsidiary,
QuadraMed Operating Corporation, entered into an asset purchase agreement for
the sale of certain assets and related products used to conduct the EZ-CAP
managed care software business to OAO. The asset purchase transaction closed on
August 31, 2001, for an aggregate purchase price of approximately $9.0 million,
and the opportunity for QuadraMed to receive up to $5.0 million in additional
payments based on EZ-CAP's revenue growth and customer retention as part of OAO
over the 18 months following closing. Pursuant to the purchase method of
accounting, the purchase price was allocated to the net assets acquired,
including developed technology, intangible assets, and liabilities assumed,
based on their fair value. QuadraMed received net proceeds from the sale of $8.6
million, and recorded a gain after applicable taxes of $6.9 million. Income
associated with the EZ-CAP discontinued operations for the twelve-month periods
ending December 31, 2001, 2000, and 1999, was $1.6 million, $4.3 million, and
$7.0 million, respectively.
On March 31, 2001, QuadraMed sold its discontinued Electronic
Remittance Advice product line. QuadraMed recorded proceeds from the sale of
$24,000, and a loss after applicable taxes of $327,000. There was no material
income associated with the results of discontinued operations for this line
during the twelve-month period ending December 31, 2001, 2000, and 1999.
Pursuant to an Asset Contribution Agreement, dated May 3, 2000,
QuadraMed transferred and assigned the assets and liabilities of its ROI
Division to ChartOne. Pursuant to the terms of a Securities Purchase Agreement
dated May 5, 2000, on June 7, 2000, ChartOne sold 2.52 million shares of its
Series A Preferred Stock, representing a 43% equity interest to the Warburg
Group for $25.2 million in cash. On October 19, 2000, QuadraMed sold its
remaining 57% interest in ChartOne, represented by 2.13 million shares of series
B Preferred Stock, 1.2 million shares of Series C Preferred Stock and 1 share of
Common Stock, to the Warburg Group for $26.6 million in cash, pursuant to a
Securities Purchase Agreement dated September 28, 2000. QuadraMed recorded a
gain of $23.3 million (net of income tax expense of $1.0 million) for the year
ended December 31, 2000, from these two transactions.
22. MAJOR CUSTOMERS
In the years ended December 31, 2001, 2000, and 1999, no single
customer accounted for more than 10% of total revenue.
23. CONCENTRATION OF CREDIT RISK
Accounts receivable subject QuadraMed to its highest potential
concentration of credit risk. QuadraMed reserves for credit losses. QuadraMed
does not require collateral on trade accounts receivables.
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.
25. INCOME TAXES
QuadraMed accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. SFAS No. 109 provides
for an asset and liability approach to accounting for income taxes under which
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. 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. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
The significant components of the provision for income taxes are as
follows (in thousands):
2001 2000 1999
---- ---- ----
Current:
Federal....................................................... $ - $ 1,208 $ 800
State......................................................... - 200 717
-------- --------- ---------
Total current..................................... - 1,408 1,517
Deferred:
Federal....................................................... 4,721 (3,543) (1,958)
State......................................................... 724 (746) (345)
-------- --------- ---------
Total deferred.................................... 5,445 (4,289) (2,303)
Change in valuation allowance, net of the effect of
acquisitions............................................... (5,445) 4,289 2,303
-------- --------- ---------
$ - $ 1,408 $ 1,517
======== ========= =========
The components of the net deferred tax asset are as follows (in
thousands):
Year Ended December 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
Deferred tax assets:
Research and development credits............................... $ 2,967 $ 2,415 $ 1,182
Net operating loss carryforwards............................... 16,447 17,302 15,740
Accruals and reserves.......................................... 4,952 7,525 5,361
Write-off of acquired research and development in process...... - 1,783 1,976
-------- --------- ---------
24,366 29,025 24,259
-------- --------- ---------
Deferred tax liabilities:
Depreciation................................................... 608 675 1,142
Intangible assets.............................................. 2,093 1,396 452
Franchise taxes................................................ 156 - -
-------- --------- ---------
2,857 2,071 1,594
Net deferred tax asset before allowance............................ 21,509 26,954 22,665
Valuation allowance................................................ (21,509) (26,954) (22,665)
-------- --------- ---------
Net deferred tax asset........................................ $ - $ - $ -
======== ========= =========
A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset
including QuadraMed's history of losses. During 2001 QuadraMed reduced its
valuation allowance on the deferred tax assets to reduce the total to an amount
that management believes will ultimately be realized. Realization of deferred
tax assets is dependent on sufficient future taxable income during the period
that deductible temporary differences and carryforwards are expected to be
available to reduce taxable income.
Reconciliation of the provision for income taxes computed at the
statutory rate to the effective tax rate is as follows:
2001 2000 1999
---- ---- ----
Federal income tax rate......................................... 34 % (34) % (34) %
Change in valuation allowance................................... (33) 8 21
Acquisition costs............................................... - 24 24
Other taxes and credits......................................... (1) 5 3
Effective tax rate.............................................. - % 3 % 14 %
==== ==== ====
The approximate federal net operating loss carryforwards (in thousands)
available to offset future taxable income as of December 31, 2001 expire as
follows:
Tax Year NOL Carryforward
-------- ----------------
2011 $ 16,300
2017 3,900
2018 2,700
2019 300
2020 25,100
--------
$ 48,300
========
As of December 31, 2001, QuadraMed did not have any net operating loss
carryforward related to its state income tax liabilities. During 2001, QuadraMed
reduced its net operating loss carryforward from $67.5 million to $48.3 million
by applying positive taxable income to this balance.
The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and research and development credit carryforwards to be used in
any given year upon the occurrence of certain events, including a significant
change in ownership interest.
26. SEGMENT REPORTING
In 2000, QuadraMed realigned its operations into five business
segments, consisting of the Company's Enterprise Division, Health Information
Management Software Division, Health Information Management Services Division,
Financial Services Division, and its former Physician Services (EZ-CAP)
Division, the bulk of which was sold during the third quarter of 2001. Although
not reported as a business segment, QuadraMed also generated approximately five
percent (5%) of its revenue from specialty product lines that have been
discontinued or are not aligned with an operating division, which is referenced
as Other.
This reorganization was undertaken to more closely align products
targeted to shared markets, to more accurately measure financial performance by
product/division, and to establish greater management accountability. To this
end, QuadraMed further refined its operating segments during the 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. The segment
results reflected in the following exhibits have been restated to reflect this
realignment for both current and prior year data. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. QuadraMed evaluates financial performance by segment as
summarized in the subsequent table. The financial results for these operating
segments for prior years have been restated on an estimated basis to conform to
the current presentation.
The Enterprise Division offers QuadraMed's Affinity enterprise-wide
information system products. With its full suite of applications, Affinity is
designed to address a wide range of financial, patient, and clinical management
needs of single- or multi-facility hospitals. Principally targeting acute care
hospitals across the United States, the Affinity solution incorporates a
patient-centered database designed to enable users to track each patient
throughout the continuum of care. The system integrates financial information
such as patient accounting and DRG/case mix with clinical data such as medical
charting and plan of care to automate federal and state reporting, scheduling,
registration, and medical records information. The Electronic Document
Management solution is designed to allow users to create secure electronic
patient folders that combine both computerized and scanned documents. The Master
Population Index and Performance Measurement products, 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 the 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 five percent of its revenue from Specialty Products that are
included in Other. Patient Focused Solutions ("PFS") provides productivity and
staffing information principally for hospital nursing staff. Electronic Data
Interchange ("EDI") interfaces with the hospital information system to download
claims data automatically on a daily basis. Claims are edited onsite and
formatted to payer-specific requirements.
Summary financial data by business segment follows for the years ended December
31, 2001 and 2000 (in thousands):
For the Year Ended December 31, 2001
HIM HIM Financial All Other Consolidated
Description Enterprise Software Services Services (1) Total
----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 60,871 $ 29,226 $ 16,845 $ 16,709 $ 5,784 $ 129,435
===================================================================================
Direct margin (2) 14,205 10,244 4,257 7,840 (28,287) 8,259
Corporate shared expenses (2,726) (2,084) (884) (442) 6,136 -
-----------------------------------------------------------------------------------
Contribution margin 11,479 8,160 3,373 7,398 (22,151) 8,259
Interest income 907 372 360 257 396 2,292
Interest expense (2,302) (1,082) (1,094) (765) (593) (5,836)
-----------------------------------------------------------------------------------
Interest income (expense), net (1,395) (710) (734) (508) (197) (3,544)
-----------------------------------------------------------------------------------
Goodwill & other amortization - (4,702) (827) (298) (689) (6,516)
Corporate overhead & other expense (8,266) (3,879) (3,881) (2,642) 14,883 (3,785)
Gain on redemption bonds - - - - 12,907 12,907
Income from discontinued operations - - - - 8,160 8,160
-----------------------------------------------------------------------------------
Segment earnings (loss) $ 1,818 $ (1,131) $ (2,069) $ 3,950 $ 12,913 $ 15,481
===================================================================================
-----------------------------------------------------------------------------------
Segment assets $27,952 $ 33,088 $ 10,288 $ 7,785 $ 51,630 $ 130,743
===================================================================================
-----------------------------------------------------------------------------------
Total depreciation and amortization (3) $(1,856) $ (6,223) $ (1,064) $ (533) $ (3,706) $ (13,382)
===================================================================================
(1) All Other includes Specialty Products Division, Discontinued Operations,
non-allocated expenses for bad debt reserve, and non-case specific legal
charges.
(2) Direct 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 acquired
software amortization which is reflected separately in the above schedule.
For the Year Ended December 31, 2000
(restated) (4)
HIM HIM Financial All Other Consolidated
Description Enterprise Software Services Services (1) Total
----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Total revenues $ 46,294 $ 21,982 $ 28,909 $ 11,562 $ 11,363 $ 120,110
===================================================================================
Direct margin (2) 11,168 3,162 1,943 1,166 (46,428) (28,990)
Corporate shared expenses (4,364) (3,609) (968) (697) 9,638 -
-----------------------------------------------------------------------------------
Contribution margin 6,804 (448) 975 469 (36,790) (28,990)
-----------------------------------------------------------------------------------
Interest income 823 337 327 233 361 2,081
Interest expense (2,611) (1,227) (1,241) (868) (674) (6,621)
-----------------------------------------------------------------------------------
Interest income (expense), net (1,788) (890) (914) (635) (313) (4,540)
-----------------------------------------------------------------------------------
Goodwill & other amortization - (3,881) (841) (307) (1,965) (6,994)
Corporate overhead & other expense (9,777) (4,628) (4,404) (5,964) (18,542) (43,314)
Income from discontinued operations - - - - 29,002 29,002
-----------------------------------------------------------------------------------
Segment earnings (loss) $ (4,761) $ (9,846) $ (5,184) $ (6,437) $ (28,609) $ (54,836)
===================================================================================
-----------------------------------------------------------------------------------
Segment assets $ 25,773 $ 35,250 $ 12,836 $ 7,194 $ 72,897 $ 153,949
===================================================================================
-----------------------------------------------------------------------------------
Total depreciation and amortization (3) $ (1,926) $ (6,458) $ (553) $ (1,104) $ (3,849) $ (13,890)
===================================================================================
(1) All Other includes Specialty Products Division, Discontinued Operations,
non-allocated expenses for bad debt reserve, non-case specific legal
charges, and non-recurring charges.
(2) Direct margin represents segment results before interest, taxes, and
corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation
and capitalized software amortization reflected in direct margin; debt
offering costs as reflected in interest expense; and goodwill and acquired
software amortization which is reflected separately in the above schedule.
(4) December 31, 2000 results have been restated to be consistent with current
period reclassification among business segments as well as cost Accounting
methodologies employed in 2001.
27. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, and accounting and reporting provisions of APB Opinion
No. 30. The provisions of SFAS No. 144 are required to be applied starting with
fiscal years beginning after December 15, 2001. QuadraMed is currently
evaluating the effect that implementation of the new standard will have on its
financial condition, results of operations, and cashflows.
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 is currently evaluating the effect that implementation of the
new standard will have on its financial condition, results of operations, and
cashflows.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
A Replacement of SFAS No. 125. SFAS No. 140 is effective for transfers occurring
after March 31, 2001, and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
SFAS No. 140 has no significant effect on QuadraMed's accounting or disclosures
for the types of transactions within the scope of the new standard.
QuadraMed adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133 effective January 1, 2001. Because of QuadraMed's limited use
of derivative instruments, QuadraMed has elected not to account for its
derivative instruments as hedges. Accordingly, upon adoption, the fair values of
derivative instruments will be recorded as assets or liabilities on the balance
sheet, and changes in fair values of these instruments beyond normal sales and
purchases will be reflected in current income. QuadraMed may elect to apply
hedge accounting, which has different financial statement effects, to possible
future transactions involving derivative instruments, if significant. Such an
election would reduce earnings volatility that might otherwise result if changes
in fair values were recognized in current income. The adoption of SFAS No. 133
and SFAS No. 138 did not have a significant impact on QuadraMed's results of
operations or financial condition.
28. ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 2001, the FASB issued SFAS No. 141, Business Combinations. The
statement addresses financial accounting and reporting for business combinations
and supercedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations within the scope of this
Statement 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 statement is not expected to have a material effect on
QuadraMed's 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 supercedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
business combination) should be accounted for in financial statements upon
acquisition. In addition, this statement addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. QuadraMed is currently evaluating the effect that implementation of the
new standard will have on its financial condition, results of operations, and
cashflows.
QUADRAMED CORPORATION
Page
----
Unaudited Quarterly Results of Operations/Supplementary Financial Information for 2001..................... G-2
Unaudited Quarterly Results of Operations/Supplementary Financial Information for 2000..................... G-3
QuadraMed Corporation
Unaudited Quarterly Consolidated Financial Data
------------------------------------------------------------------------------------------------------------------------
Quarter
-----------------------------------------------------
(thousands of dollars, except per share amounts) First Second Third Fourth TOTAL
------------------------------------------------------------------------------------------------------------------------
2001
Revenues
Licenses $ 19,566 $ 20,833 $ 21,703 $ 23,614 $ 85,716
Services 10,366 10,636 11,435 11,282 43,719
------------------------------------------------------------------
Total Revenues 29,932 31,469 33,138 34,896 129,435
------------------------------------------------------------------
Operating and Other Expenses
Cost of licenses 5,543 5,577 4,992 6,671 22,783
Cost of services 4,698 4,924 4,612 4,713 18,947
General and administrative 12,609 12,028 11,649 10,957 47,243
Sales and marketing 3,591 3,823 3,802 4,589 15,805
Research and development 3,986 3,787 3,821 4,249 15,843
Amortization of Intangibles 1,628 1,630 1,628 1,629 6,515
Impairment of intangible assets - - - - -
Non-recurring charges - - - - -
------------------------------------------------------------------
Total Operating Expenses 32,055 31,769 30,504 32,808 127,136
------------------------------------------------------------------
Income (loss) from operations (2,123) (300) 2,634 2,088 2,299
------------------------------------------------------------------
Interest (expense) (1,657) (1,627) (1,494) (1,058) (5,836)
Interest income 551 1,154 343 244 2,292
Other income (expense), net (628) (111) 41 85 (613)
Write off of purchased accounts receivable - - - (128) (128)
Write off of convertible promissory note - - (3,600) - (3,600)
------------------------------------------------------------------
Total other (expense), net (1,734) (584) (4,710) (857) (7,885)
------------------------------------------------------------------
Income (Loss) Before Income Taxes (3,857) (884) (2,076) 1,231 (5,586)
Provision for income taxes (81) (24) - 105 -
------------------------------------------------------------------
Income (Loss) from Continuing Operations (3,938) (908) (2,076) 1,336 (5,586)
Gain on redemption of bonds (net of tax) - 2,402 10,505 - 12,907
Income from discontinued operations (net of tax) 1,006 167 6,982 5 8,160
------------------------------------------------------------------
Net income (loss) $ (2,932) $ 1,661 $ 15,411 $ 1,341 $ 15,481
==================================================================
Earnings per common share
Basic
Continuing Operations $ (0.15) $ (0.04) $ (0.08) $ 0.05 $ (0.22)
Gain on redemption of bonds (net of tax) - 0.09 0.41 - 0.50
Discontinued operations (net of tax) 0.04 0.01 0.27 - 0.32
------------------------------------------------------------------
Total $ (0.11) $ 0.06 $ 0.60 $ 0.05 $ 0.60
------------------------------------------------------------------
Diluted
Continuing Operations $ (0.15) $ (0.04) $ (0.08) $ 0.05 $ (0.22)
Gain on redemption of bonds (net of tax) - 0.09 0.41 - 0.50
Discontinued operations (net of tax) 0.04 0.01 0.27 - 0.32
------------------------------------------------------------------
Total $ (0.11) $ 0.06 $ 0.60 $ 0.05 $ 0.60
------------------------------------------------------------------
Stock Prices
High $ 2.69 $ 4.98 $ 6.30 $ 9.25 $ 9.25
Low $ 0.75 $ 1.63 $ 3.09 $ 4.33 $ 0.75
------------------------------------------------------------------------------------------------------------------------
QuadraMed Corporation
Unaudited Quarterly Consolidated Financial Data
----------------------------------------------------------------------------------------------------------------------------
Quarter
---------------------------------------------------------
(thousands of dollars, except per share amounts) First Second Third Fourth TOTAL
----------------------------------------------------------------------------------------------------------------------------
2000
Revenues
Licenses $ 15,755 $ 20,872 $ 14,473 $ 15,498 $ 66,598
Services 15,005 13,424 12,006 13,078 53,513
----------------------------------------------------------------------
Total Revenues 30,760 34,296 26,479 28,576 120,111
----------------------------------------------------------------------
Operating and Other Expenses
Cost of licenses 6,413 5,074 5,482 5,774 22,743
Cost of services 10,008 10,739 8,791 6,075 35,613
General and administrative 14,308 9,816 10,953 12,659 47,736
Sales and marketing 6,011 6,506 5,033 3,816 21,366
Research and development 5,500 6,114 6,092 4,166 21,872
Amortization of Intangibles 2,132 1,388 1,738 1,737 6,995
Impairment of intangible assets 927 - - - 927
Non-recurring charges 11,155 16,265 13,633 (59) 40,994
----------------------------------------------------------------------
Total operating expenses 56,454 55,902 51,722 34,168 198,246
----------------------------------------------------------------------
Income (loss) from operations (25,694) (21,606) (25,243) (5,592) (78,135)
----------------------------------------------------------------------
Interest (expense) (1,652) (1,658) (1,658) (1,653) (6,621)
Interest income 448 503 738 392 2,081
Other income (expense), net (60) (19) 5 11 (63)
Write off of purchased accounts receivable (900) - - - (900)
Write off of convertible promissory note - - - - -
----------------------------------------------------------------------
Total other (expense), net (2,164) (1,174) (915) (1,250) (5,503)
----------------------------------------------------------------------
Income (Loss) Before Income Taxes (27,858) (22,780) (26,158) (6,842) (83,638)
Provision for income taxes 243 (403) - (40) (200)
----------------------------------------------------------------------
Income (Loss) from Continuing Operations (27,615) (23,183) (26,158) (6,882) (83,838)
----------------------------------------------------------------------
Gain on redemption of bonds (net of tax) - - - - -
Income from discontinued operations,
(net of tax) 2,086 19,098 780 7,038 29,002
----------------------------------------------------------------------
Net income (loss) $ (25,529) $ (4,085) $ (25,378) $ 156 $(54,836)
======================================================================
Earnings per common share
Basic
Continuing Operations $ (1.09) $ (0.90) $ (1.02) $(0.26) $ (3.27)
Discontinued operations (net of tax) 0.09 0.74 0.03 0.27 1.13
----------------------------------------------------------------------
Total $ (1.00) $ (0.16) $ (0.99) $0.01 $ (2.14)
----------------------------------------------------------------------
Earnings per common share
Diluted
Continuing Operations $ (1.09) $(0.90) $ (1.02) $(0.26) $ (3.27)
Discontinued operations (net of tax) 0.09 0.74 0.03 0.27 1.13
----------------------------------------------------------------------
Total $ (1.00) $ (0.16) $ (0.99) $0.01 $ (2.14)
----------------------------------------------------------------------
Stock Prices
High $ 10.50 $ 6.00 $ 2.97 $ 1.53 $ 10.50
Low $ 5.00 $ 2.09 $ 1.19 $ 0.63 $ 0.63