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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2002
Or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
12110 SUNSET HILLS ROAD, SUITE 600, RESTON, VIRGINIA 20190
(Address of Principal Executive Offices) (Zip Code)
(703) 709-2300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $0.01 Par
Value Per Share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __ No X
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act.
Yes __ No X
As of May 9, 2003, there were 27,139,342 shares of the Registrant's
common stock outstanding, par value $0.01.
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Explanatory Note
This amendment on Form 10-Q/A (the "Amended Report") amends Items 1, 2 and
3 of Part I and Item 1 of Part II of the Quarterly Report of QuadraMed
Corporation ("QuadraMed", the "Company", "we" or "us") on Form 10-Q previously
filed for the quarter ended March 31, 2002 (the "Prior Report"). Subsequent to
the issuance of our financial statements on the Prior Report, we discovered
accounting and financial reporting errors affecting such financial statements.
Many of these errors related to revenue recognition, cost of revenue, life
insurance, capitalized software development costs, reclassification of
discontinued operations and non-recurring charges. We have determined that
these errors require the restatement of certain of our previously reported
financial statements. This amendment is filed in connection with the
restatement of our financial statements as of December 31, 2001 and 2000, and
for the years ended December 31, 2001, 2000 and 1999 in our Annual Report on
Form 10-K/A for 2001. The circumstances necessitating the restatement and
their effects on the quarters ended March 31, 2002 and 2001 are more fully
described in note 1 of the Notes to Interim Condensed Consolidated Financial
Statements.
This Amended Report also includes certain additional disclosures required
by the Staff of the Securities and Exchange Commission ("SEC"). We are also
filing with this Form 10-Q/A, as Exhibits 32.1 and 32.2, the Certifications of
Chief Executive Officer and Chief Financial Officer as required by Section 906
of the Sarbanes-Oxley Act of 2002.
Financial statement information and related disclosures included in this
amended filing reflect, where appropriate, changes as a result of the
restatement. Statements used in this Amended Report containing the words (i)
"now", "currently", "present", "to date", and words of similar import, and (ii)
"knowledge", and words of similar import, are used to refer to conditions
existing on the filing date of this Form 10-Q/A. We direct you to refer to the
other reports we file with the Securities and Exchange Commission from time to
time after the date of this report for more current information about us,
including "Risk Factors that May Impact Future Operating Results."
QUADRAMED CORPORATION
REPORT ON FORM 10-Q/A
FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Interim Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001.......................... 2
Interim Condensed Consolidated Statements of Operations for
the three months ended March 31, 2002 and 2001................ 3
Interim Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001................ 4
Notes to Interim Condensed Consolidated Financial Statements.... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 33
Item 2. Submission of Matters to Vote of Securities Holders............... 33
Item 3. Other Matters..................................................... 33
Item 4. Exhibits and Reports on Form 8-K.................................. 33
Signatures................................................................ 34
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
ASSETS 2002 2001
(Restated)
-------- --------
Current assets
Cash and cash equivalents $ 30,463 $ 29,799
Short-term investments 2,413 2,414
Accounts receivable, net of allowance for doubtful
accounts of $4,200 and $4,239, respectively 36,562 33,165
Unbilled receivables 4,473 3,825
Notes and other receivables 108 282
Prepaid expenses and other current assets 8,105 7,285
--------- ---------
Total current assets 82,124 76,770
--------- ---------
Restricted cash 4,459 4,356
Property and equipment, net of accumulated
depreciation and amortization of $13,557 and
$12,634 respectively 7,186 7,323
Capitalized software development costs, net of
accumulated amortization of $5,958 and $6,511,
respectively 6,433 6,214
Goodwill 14,721 14,721
Other intangible assets, net of accumulated
amortization of $11,297 and $10,784, respectively 8,121 8,634
Other long-term assets 6,838 7,115
--------- ---------
Total assets $ 129,882 $ 125,133
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,008 $ 893
Accrued payroll and related 4,576 6,402
Other accrued liabilities 5,672 6,245
Deferred revenue 36,978 30,721
--------- ---------
Total current liabilities 48,234 44,261
--------- ---------
Convertible subordinated debentures 73,719 73,719
Other long-term liabilities 3,089 2,932
--------- ---------
Total liabilities 125,042 120,912
Stockholders' equity
Preferred stock, $0.01 par, 5,000 shares authorized,
zero shares issued and outstanding -- --
Common stock, $0.01 par, 50,000 shares authorized,
26,929 and 26,493 shares issued and outstanding,
respectively 269 265
Additional paid-in-capital 275,475 273,320
Deferred compensation (1,301) (1,085)
Accumulated other comprehensive loss (464) (468)
Accumulated deficit (269,139) (267,811)
--------- ---------
Total stockholders' equity 4,840 4,221
--------- ---------
Total liabilities and stockholders' equity $ 129,882 $ 125,133
========= =========
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
2
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31,
----------------------------
2002 2001
(Restated) (Restated)
-------- --------
Revenue
Services $ 23,146 $ 23,404
Licenses 8,193 8,038
--------- ---------
Total revenue 31,339 31,442
--------- ---------
Cost of revenue
Cost of services 11,103 12,390
Cost of licenses 2,134 1,507
--------- ---------
Total cost of revenue 13,237 13,897
--------- ---------
Gross margin 18,102 17,545
--------- ---------
Operating expenses
General and administration 9,055 10,414
Sales and marketing 5,348 5,274
Research and development 3,568 3,722
Amortization, impairment and other operating
charges 512 1,556
Total operating expenses 18,483 20,966
--------- ---------
Loss from operations (381) (3,421)
--------- ---------
Other income (expense)
Interest expense (1,063) (1,658)
Interest income 204 574
Other income (expense), net (88) (243)
--------- ---------
Other income (expense) (947) (1,327)
--------- ---------
Loss before income taxes (1,328) (4,748)
Provision for income taxes -- (81)
--------- ---------
Net loss $ (1,328) $ (4,829)
========= =========
Loss per share
Basic and diluted $ (0.05) $ (0.19)
========= =========
Weighted average shares outstanding
Basic and diluted 26,809 25,734
========= =========
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
3
QUADRAMED CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended March 31,
----------------------------
2002 2001
(Restated) (Restated)
-------- --------
Cash flows provided by operating activities $ 468 $ 5,283
-------- --------
Cash flows from investing activities
(Increase) decrease in restricted cash (103) 485
Proceeds from sale of assets -- 24
Acquisitions of available-for-sale securities -- (141)
Proceeds from the sale of available-for-sale
securities -- 10,417
Payments for capitalized software development costs (784) --
Purchases of property and equipment (707) (563)
-------- --------
Cash (used in) provided by investing activities (1,594) 10,222
-------- --------
Cash flows from financing activities
Proceeds from exercise of common stock options 1,810 --
Repayments of debt (20) --
-------- --------
Cash provided by financing activities 1,790 --
-------- --------
Net increase in cash and cash equivalents 664 15,505
Cash and cash equivalents, beginning of period 29,799 27,368
-------- --------
Cash and cash equivalents, end of period $ 30,463 $ 42,873
======== ========
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
4
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
1. NATURE OF OPERATIONS
--------------------
QuadraMed Corporation along with all significant business divisions and
subsidiaries, (the "Company" or "QuadraMed") is dedicated to improving
healthcare delivery by providing innovative healthcare information technology
and services. From clinical to patient information management and revenue cycle
to health information management, QuadraMed delivers real-world solutions that
help healthcare professionals deliver outstanding patient care with optimum
efficiency. QuadraMed was reincorporated in Delaware in 1996, having been
originally incorporated in California in 1993. QuadraMed is managed in four
distinct business segments which are as follows: Enterprise Division, Health
Information Management Software Division, Health Information Management
Services Division and Financial Services Division.
2. BASIS OF PRESENTATION
---------------------
Unaudited Interim Results
-------------------------
The condensed consolidated financial statements at March 31, 2002 and
December 31, 2001 and for the three months ended March 31, 2002 and 2001 have
been prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP"). The interim financial information is
unaudited, but reflects all adjustments that are, in the opinion of management,
necessary for a fair presentation of QuadraMed's condensed consolidated
financial position, operating results, and cash flows for the interim periods.
The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods.
These condensed consolidated financial statements have been prepared in
accordance with the instructions for a report on Form 10-Q as required by the
SEC, and therefore, do not include all information and notes normally provided
in annual financial statements. As a result, these condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in
QuadraMed's annual report on Form 10-K/A for the fiscal year ended December 31,
2001. The results of operations for the three months ended March 31, 2002 are
not necessarily indicative of the results for the fiscal year ending December
31, 2002 or any other further periods.
Reclassifications
-----------------
Adoption of EITF No. 01-14
--------------------------
Certain reclassifications have been made to the 2001 interim condensed
consolidated financial statements to conform to the 2002 presentation.
Specifically, the March 31, 2001, financial statements have been reclassified
to comply with Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") No. 01-14, Income Statement Characterization of
Reimbursements for 'Out-of-Pocket' Expenses Incurred. As such, QuadraMed has
reclassified prior year amounts to include billable out-of-pocket reimbursable
expenses in both license and services revenues and cost of licenses and
services, respectively. The adoption of EITF No. 01-14 does not impact either
income (loss) from operations or net income (loss) but does increase revenue
and cost of revenue and reduces gross margin percentages as shown in the
following tables:
5
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
Three months ended
March 31, 2001 (Restated)
---------------------------------
Services Licenses Total
-------- -------- -----
Revenue
Restated revenue $ 23,404 $ 8,038 $ 31,442
Less impact of EITF No. 01-14 1,014 219 1,233
--------- --------- ---------
Pro-forma revenue $ 22,390 $ 7,819 $ 30,209
========= ========= =========
Cost of revenue
Restated cost of revenue $ 12,390 $ 1,507 $ 13,897
Less impact of EITF No. 01-14 1,014 219 1,233
--------- --------- ---------
Pro-forma cost of revenue $ 11,376 $ 1,288 $ 12,664
========= ========= =========
Gross margin percentage
Restated gross margin percentage 47.1% 81.3% 55.8%
Impact of EITF No. 01-14 2.1 2.2 2.3
--------- --------- ---------
Pro-forma gross margin percentage 49.2% 83.5% 58.1%
========= ========= =========
Change In Classification Of Certain Service and License Revenues And
--------------------------------------------------------------------
Related Costs
-------------
In previously reported periods, the Company's license revenue and
associated cost of license revenue included in the Statement of Operations
consisted of fees for the licensing of the Company's software products,
hardware, maintenance, hosted services, customer training and consulting
services. In these Interim Condensed Consolidated Statements of Operations,
license revenue and cost of license revenue for both 2002 and 2001 has been
reclassified to include only fees and costs, respectively associated with the
licensing of the Company's software products. The table below presents the
impact of the reclassification of licenses and services for the three month
period ended March 31, 2001 (in thousands):
Three months ended
March 31,
------------------------------
2001 2001
(Reclassified)
---- ------------
Revenue
Services $ 11,147 $ 23,404
Licenses 20,295 8,038
---------- ----------
$ 31,442 $ 31,442
========== ==========
Cost of revenue
Services $ 8,684 $ 12,390
Licenses 5,213 1,507
---------- ----------
$ 13,897 $ 13,897
========== ==========
6
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
Restatement
-----------
In 2002, management of QuadraMed discovered accounting and reporting
errors within its Quarterly Report on Form 10-Q as filed for the three months
ended March 31, 2002 and its Annual Report on Form 10-K as filed for the years
ended December 31, 2001, 2000, and 1999. These errors resulted in management
determining that the reports for these years needed to be restated. In June
2003, QuadraMed amended and restated its Annual Report on Form 10-K/A including
the years ended 2001, 2000 and 1999 and all respective quarters. The
accompanying interim condensed consolidated financial statements for the three
months ended March 31, 2002 and 2001 reflect the restated amounts. The
previously filed Quarterly Report on Form 10-Q for the three months ended March
31, 2002 and 2001 contained accounting and reporting errors which resulted in,
among other things, an overstatement of revenue and an overstatement of net
income (understatement of net loss). These errors pertained to the following:
o Improper reporting of a divested operation as a discontinued operation;
o Improper revenue recognition;
o Related cost of revenue from revenue recognition changes;
o Improper accounting for life insurance plans; and
o Various other miscellaneous items which were recorded or classified
incorrectly or whose correction required a corresponding correction in a
related account (i.e., deferral of costs to match revenue deferrals).
The tables below summarize the effects of the restatement as of and for
the quarters ended March 31, 2002 and 2001. As reported amounts include
reclassifications to reflect current period presentation.
Interim Condensed Consolidated Statement of Operations Data (in thousands,
except per share amounts):
Three months ended March 31,
------------------------------------------------
2002 2002 2001 2001
(As Reported) (Restated) (As Reported) (Restated)
----------- -------- ----------- --------
Revenue (1) $ 33,159 $ 31,339 $ 31,166 $ 31,442
Gross margin (1) $ 21,156 $ 18,102 $ 19,692 $ 17,545
Income (loss) from operations $ 1,151 $ (381) $ (2,122) $ (3,421)
Net income (loss) $ 291 $ (1,328) $ (2,932) $ (4,829)
Basic net income (loss) per
share $ 0.01 $ (0.05) $ (0.11) $ (0.19)
Diluted net income (loss)
per share $ 0.01 $ (0.05) $ (0.11) $ (0.19)
Comprehensive income (loss) $ 258 $ (1,325) $ (2,985) $ (4,749)
(1) Restated revenue and gross margin for the three months ended March 31, 2001
includes $2.9 million in revenue and $811,000 in cost of revenues, from a
product line that was sold and previously reported as discontinued
operations.
7
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
Interim Condensed Consolidated Balance Sheet Data (in thousands):
As of March 31,
------------------------------
2002 2002
(As Reported) (Restated)
----------- --------
Total current assets $ 86,345 $ 82,124
Total assets $ 135,945 $ 129,882
Deferred revenue $ 24,594 $ 36,978
Total current liabilities $ 36,714 $ 48,234
Total liabilities $ 113,580 $ 125,042
Total stockholders' equity $ 22,365 $ 4,840
Total liabilities and stockholders' equity $ 135,945 $ 129,882
3. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, Accounting for Asset Retirement Obligations. The statement
-------------------------------------------
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The provisions of SFAS No. 143 are required to be applied
starting with fiscal years beginning after June 15, 2002. QuadraMed expects
that implementation of the new standard will not have a significant impact on
its financial condition, results of operations, and cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
---------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
-----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. QuadraMed anticipates that implementation of this new standard
will not have a significant impact on its financial condition, results of
operations and cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities, effective for exit or disposal
-------------------------------------------
activities initiated after December 31, 2002. Under SFAS 146 a liability for
the cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under prior guidance, a liability for such costs could
be recognized at the date of commitment to an exit plan. SFAS 146 also requires
that the liability be measured and recorded at fair value. Accordingly, the
adoption of this standard may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. QuadraMed will adopt the
provisions of SFAS 146 prospectively for all restructuring activities initiated
after December 31, 2002.
In November 2002, the FASB reached a consensus on EITF No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The guidance
--------------------------------------------------------------
in EITF 00-21 is effective for revenue arrangements entered into in fiscal
years beginning after June 15, 2003. This issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. Specifically, EITF 00-21 addresses how
to determine whether an arrangement involving multiple deliverables contains
more than one earnings process and, if it does, how to divide the arrangement
into separate units of accounting consistent with the identified earning
processes for revenue recognition purposes. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The Company is evaluating the effect
of this issue on its financial statements.
8
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
--------------------------
Disclosure Requirements for Guarantees, including indirect Guarantees of
------------------------------------------------------------------------
Indebtedness of Others. FIN 45 requires that QuadraMed recognizes the fair
----------------------
value for guarantee and indemnification arrangements issued or modified by
QuadraMed after December 31, 2002, if these arrangements are within the scope
of the interpretation. In addition, QuadraMed must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If QuadraMed determines it is probable that a
loss has occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by
QuadraMed contain provisions that indemnify licensees of QuadraMed's software
from damages and costs resulting from claims alleging that QuadraMed's software
infringes the intellectual property rights of a third party. QuadraMed has
historically received only a limited number of requests for indemnification
under these provisions and has not been required to make material payments
pursuant to these provisions. Accordingly, QuadraMed has not recorded a
liability related to these indemnification provisions. QuadraMed will be
required to implement the provisions of FIN 45 as of January 1, 2003 and does
not believe that FIN 45 will have a material impact on its financial position,
results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
--------------------------
Compensation - Transition and Disclosure, effective for fiscal years ending
----------------------------------------
after December 15, 2002. SFAS 148 amends SFAS 123, to provide alternative
methods of transition to the voluntary fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require that disclosure of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed in tabular format within a Company's summary of significant
accounting policies. The disclosure provisions of SFAS 148 are effective for
fiscal years ending after December 5, 2002 and have been incorporated into
these financial statements and accompanying footnotes.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
-----------------------------
Assets, effective for fiscal years beginning after December 15, 2001. Under
------
SFAS 142, goodwill and intangible assets deemed to have indefinite lives are to
be separately disclosed on the balance sheet, and no longer amortized but
subject to annual impairment tests. With the adoption of SFAS 142, QuadraMed
ceased amortization of goodwill as of January 1, 2002. Prior to this point,
goodwill was amortized using the straight-line method over its estimated useful
life.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (i.e., business segments) upon adoption and at least annually
thereafter using a two-step impairment analysis. In accordance with SFAS 142,
QuadraMed performed the first of the required two-step impairment tests of
goodwill and indefinite-lived assets as of January 1, 2002. In performing the
first step of this analysis, QuadraMed first assigned its assets and
liabilities, including existing goodwill and other intangible assets, to its
identified reporting units to determine their carrying value. For this purpose,
QuadraMed's reporting units equated to its five business segments then in
place. QuadraMed's reporting units equate to its business segments since this
is the lowest level of QuadraMed at which operating plans are prepared and
operating profitability is measured for assessing management performance. See
note 7 for more information regarding QuadraMed's business segments. Based on
an analysis by an independent third party appraiser, QuadraMed then estimated
the fair value of each reporting unit with significant goodwill utilizing
various valuation techniques including the Income Approach and the Market
Approach. The Income Approach provides an estimation of the fair value of a
reporting unit based on the discounted cash flows derived from the reporting
unit's estimated remaining life plus the present value of any residual value.
The Market Approach indicates the fair value of a reporting unit based upon a
comparison to publicly-traded companies in similar lines of business. Step one
of this analysis was then completed by comparing the carrying value of each
the-analyzed reporting units to its fair value. This comparison resulted in the
fair values of the analyzed reporting units exceeding the carrying values of
the net assets. In addition, the independent third party appraiser performed a
cursory review of the three unappraised reporting units utilizing the Income
Approach to estimate the total market value for QuadraMed Corporation as a
whole. The result was an estimated value for the Company that was less than
the market capitalization as of January 1, 2002. Accordingly, no indicators of
impairment existed. As a result, QuadraMed did not perform step two as
described by SFAS 142.
9
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
The following schedule shows the Company's reported net loss for the
period prior to the adoption of SFAS No. 142 as adjusted to add back goodwill
amortization as if SFAS No. 142 had been adopted during this period (in
thousands, except for per share data):
Three months ended March 31,
----------------------------
2002 2001
(Restated) (Restated)
-------- --------
Net loss $ (1,328) $ (4,829)
Add back: Goodwill amortization -- 964
-------- --------
Pro-forma net loss $ (1,328) $ (3,865)
======== ========
Basic and diluted loss per share:
Loss per share $ (0.05) $ (0.19)
Goodwill amortization -- 0.04
-------- --------
Pro-forma loss per share $ (0.05) $ (0.15)
======== ========
Except for capitalized software development costs, other intangible assets
are amortized on a straight-line basis over a period of five to ten years.
Capitalized software development costs are amortized on a straight-line basis
generally over a period of five years. These assets are reviewed annually for
impairment and written down to net realizable value, if necessary, in
accordance with SFAS No. 144, Impairment of Long-Lived Assets.
Amortization of intangible assets for the three months ended March 31,
2002 and 2001 was $1.0 million and $2.1 million (including goodwill
amortization of $964,000), respectively. There were no impairment charges
recorded during the three months ended March 31, 2002 and 2001.
5. NET LOSS PER SHARE
------------------
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period less restricted
shares of common stock. Diluted net loss per share is computed by dividing
income by the sum of the weighted average number of common shares, as adjusted
for restricted shares, and common equivalent shares outstanding during the
period. Common equivalent shares consist of shares issuable upon the exercise
of stock options and warrants (using the treasury stock method) and 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 net losses for each of the three-month periods
ended March 31, 2002 and 2001, no common equivalent shares were included in the
net loss per share calculation because they were anti-dilutive.
6. COMPREHENSIVE LOSS
------------------
The components of comprehensive loss for the three months ended March 31,
2002 and 2001 are as follows (in thousands):
Three months ended March 31,
----------------------------
2002 2001
(Restated) (Restated)
-------- --------
Net loss $ (1,328) $ (4,829)
Unrealized gain (loss) on available-for-sale
securities, net of taxes (48) 23
Amortization of unrecognized pension costs,
net of taxes 51 57
-------- --------
Comprehensive loss $ (1,325) $ (4,749)
======== ========
10
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
7. SEGMENT REPORTING
-----------------
QuadraMed aligns its operations into four business segments for management
reporting purposes. These segments are based on product functionality and
shared target markets. This alignment allows management to more accurately
measure financial performance by product/division and to establish greater
management accountability. QuadraMed's business segments are (i) the
Enterprise Division, (ii) the Health Information Management Software Division,
(iii) the Health Information Management Services Division, and (iv) the
Financial Services Division. QuadraMed reports the Enterprise Division, the
Health Information Management Software Division, the Health Information
Management Services Division, and the Financial Services Division as reportable
segments in accordance with SFAS No. 131, Disclosures about Segments of an
--------------------------------
Enterprise and Related Information. The accounting policies of the operating
----------------------------------
segments are the same as those described in the summary of significant
accounting policies described in the Notes to the Financial Statements
contained in QuadraMed's 2001 Restated and Amended Annual Report on Form 10-
K/A. The financial results for these operating segments for prior periods have
been reclassified on an estimated basis to conform to the current period
presentation.
Results of operations for these business segments are provided to
QuadraMed's Chief Operating Decision Maker (CODM), who is the Chairman of the
Board and Chief Executive Officer.
Summary financial data by business segment as reported to the CODM in
presented below for the three months ended March 31, 2002 and 2001 (in
thousands):
Three months ended March 31, 2002
(Restated)
-------------------------------------------------------------
HIM HIM Financial Consolidated
Description Enterprise Software Services Services Other (1) Total
----------------- ---------- -------- -------- -------- --------- -----
Total revenues $15,714 $ 7,213 $ 4,159 $ 3,340 $ 913 $ 31,339
Gross margin(2) $10,225 $ 4,833 $ 782 $ 2,048 $ 214 $ 18,102
Interest income
(expense), net $ (221) $ (224) $ (62) $ (38) $ (314) $ (859)
Segment assets $33,052 $33,902 $ 9,394 $ 5,690 $47,844 $129,882
Total depreciation
and amortization(3) $ 308 $ 807 $ 33 $ 121 $ 882 $ 2,151
(1) Other includes specialty products, non-allocated expenses for bad debt,
legal costs, restructuring charges and divested product lines.
(2) Gross margin represents segment results before interest, amortization of
intangibles, taxes, and corporate overhead allocations.
(3) Total depreciation and amortization is comprised of equipment depreciation
and capitalized software amortization reflected in gross margin, debt-
offering costs as reflected in interest expense, and amortization of other
intangibles, excluding capitalized software development costs, which are
reflected separately in the above schedule.
11
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
Three months ended March 31, 2001 (4)
(Restated)
-------------------------------------------------------------
HIM HIM Financial Consolidated
Description Enterprise Software Services Services Other (1) Total
----------------- ---------- -------- -------- -------- --------- -----
Total revenues $14,122 $ 4,864 $ 5,521 $ 3,001 $ 3,934 $31,442
Gross margin (2) $ 8,177 $ 3,231 $ 1,673 $ 1,924 $ 2,540 $17,545
Interest income
(expense), net $ (200) $ (252) $ (86) $ (49) $ (497) $(1,084)
Segment assets $28,472 $35,874 $ 12,279 $ 7,033 $70,494 $154,152
Total depreciation
and amortization (3) $ 660 $ 1,506 $ 354 $ 184 $ 458 $ 3,162
----------------------------
(1) Other includes specialty products, non-allocated expenses for bad debt,
legal costs, restructuring charges and divested product lines.
(2) Gross 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 gross margin, and
goodwill and amortization of other intangibles, excluding capitalized
software development costs, which are reflected separately in the above
schedule.
(4) March 31, 2001 results have been reclassified to be consistent with current
period business segment presentation.
8. MAJOR CUSTOMERS
---------------
In the three months ended March 31, 2002 and 2001, no single customer
accounted for more than 10% of total revenues however, in the three months
ended March 31, 2002, sales to the U. S. government accounted for 15.5% of HIM
Software Division revenues.
9. SUBSEQUENT EVENTS
-----------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against QuadraMed and certain of its officers and directors. The plaintiffs in
these actions allege, among other things, violations of the Securities Exchange
Act of 1934 due to issuing a series of allegedly false and misleading
statements concerning its business and financial condition between May 11, 2000
and August 11, 2002. The complaints seek unspecified monetary damages and
other relief. These matters are at an early stage. No responses to the
complaints have yet been filed, and no discovery has taken place. QuadraMed
intends to defend itself vigorously against these allegations. On December 31,
2002, the Court entered an order consolidating all related securities class
actions against the Company.
On December 31, 2002, QuadraMed announced the closing of the sale of its
HIM Services Division to Precyse Solutions, LLC. QuadraMed received $14
million in cash (of which $1.5 million is to be held in escrow for 18 months)
and a $300,000 promissory note with a two-year term. As a result of the sale,
QuadraMed recorded a fourth quarter 2002 after-tax gain of $8.8 million.
On February 28, 2003, QuadraMed reported that the SEC has issued a formal
non-public order of investigation concerning QuadraMed's accounting and
financial reporting practices for the period beginning January 1, 1998.
QuadraMed intends to continue to cooperate with the SEC and has complied with
the SEC's requests for information. QuadraMed cannot predict when the SEC will
conclude its inquiry, or the outcome and impact thereof.
On March 4, 2003, QuadraMed's common stock was delisted from the Nasdaq
National Market. The delisting constitutes a "Repurchase Event" under the
provisions of the QuadraMed's Convertible Subordinated Debentures. Upon such
12
QUADRAMED CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002
an event, the Subordinated Indenture grants to each debenture holder the right,
at the holder's option, to require QuadraMed to repurchase all or any of the
holder's debentures. On April 16, 2003, QuadraMed announced that it had
executed an agreement with certain of its bondholders to refinance its
outstanding 5.25% Convertible Subordinated Debentures due 2005 (the "2005
Debt"). On April 17, 2003, under the terms of the refinance agreement,
QuadraMed issued $71.0 million of its Senior Secured Notes due 2008 (the "2008
Debt"). The proceeds from the issuance of the 2008 Debt were used to
repurchase $61.8 million (plus $1.5 million in accrued interest) of the 2005
Debt which became subject to repurchase by QuadraMed as a result of its
delisting from the Nasdaq National Market on March 4, 2003. Accordingly, the
net proceeds to QuadraMed as a result of the issuance of the 2008 Debt less the
costs (including fees) associated with the repurchase of the 2005 Debt was $7.6
million, with $11.9 million of the 2005 Debt remaining outstanding.
Additionally, the repurchase right on the 2005 Debt remaining outstanding
expired on April 17, 2003. The 2008 Debt bears interest at an initial rate of
10% which will be reduced to 9% upon the relisting of QuadraMed's common stock
on the Nasdaq, including Nasdaq SmallCap or U.S. National Market and is secured
by certain intellectual property of QuadraMed. As part of the transaction,
QuadraMed also issued 11,303,842 detachable warrants with the 2008 Debt. The
warrants have a term of five years, have an exercise price of $0.01 per share
and are subject to certain anti-dilution provisions including dilution from the
issuance of shares in settlement of existing litigation. The 2008 Debt contains
certain events of default. These events include: failure to timely repay
principal or interest owed on the debentures, default under any other
borrowing, and bankruptcy.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement on Risks Associated With Forward-Looking Statements
------------------------------------------------------------------------
You should read the following discussion in conjunction with our Interim
Condensed Consolidated Financial Statements and related Notes. This Report
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that are subject to risks and
uncertainties. The words "believe", "expect", "anticipate", "predict",
"intend", "plan", "estimate", "may", "will", "should", "could", and similar
expressions and their negatives are intended to identify such statements.
Forward-looking statements are not guarantees of future performance and are to
be interpreted only as of the date on which they are made. We undertake no
obligation to update or revise any forward-looking statement. You should not
place undue reliance on these forward-looking statement. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us described below
and elsewhere in this Report, and in other documents we file with the SEC from
time to time.
Restatement
-----------
In 2002, we discovered accounting and reporting errors within our
Quarterly Report on Form 10-Q as filed for the three months ended March 31,
2002 and our Annual Report on Form 10-K as filed for the years ended December
31, 2001, 2000, and 1999. These errors resulted in us determining that the
reports for these years needed to be restated. In June 2003, we amended and
restated our Annual Report on Form 10-K/A including the years ended 2001, 2000
and 1999 and all respective quarters. The accompanying interim condensed
consolidated financial statements for the three months ended March 31, 2002 and
2001 reflect the restated amounts. The previously filed Quarterly Report on
Form 10-Q for the three months ended March 31, 2002 and 2001 contained
accounting and reporting errors which resulted in, among other things, an
overstatement of revenue and an overstatement of net income (understatement of
net loss). These errors pertained to the following:
o Improper reporting of a divested operation as a discontinued operation;
o Improper revenue recognition;
o Related cost of revenue from revenue recognition changes;
o Improper accounting for life insurance plans; and
o Various other miscellaneous items which were recorded or classified
incorrectly or whose correction required a corresponding correction in a
related account (i.e., deferral of costs to match revenue deferrals).
14
The tables below summarize the effects of the restatement as of and for
the quarters ended March 31, 2002 and 2001. As reported amounts include
reclassifications to reflect current period presentation.
Interim Condensed Consolidated Statement of Operations Data (in thousands,
except per share amounts):
Three months ended March 31,
------------------------------------------------
2002 2002 2001 2001
(As Reported) (Restated) (As Reported) (Restated)
----------- -------- ----------- --------
Revenue (1) $ 33,159 $ 31,339 $ 31,166 $ 31,442
Gross margin (1) $ 21,156 $ 18,102 $ 19,692 $ 17,545
Income (loss) from operations $ 1,151 $ (381) $ (2,122) $ (3,421)
Net income (loss) $ 291 $ (1,328) $ (2,932) $ (4,829)
Basic net income (loss)
per share $ 0.01 $ (0.05) $ (0.11) $ (0.19)
Diluted net income (loss)
per share $ 0.01 $ (0.05) $ (0.11) $ (0.19)
Comprehensive income (loss) $ 258 $ (1,325) $ (2,985) $ (4,749)
(1) Restated amounts for the three months ended March 31, 2001 includes $2.9
million and $811,000 in revenue and cost of revenue, respectively, from a
product line that was sold and previously reported as discontinued
operations.
Interim Condensed Consolidated Balance Sheet Data (in thousands):
As of March 31,
------------------------------
2002 2002
(As Reported) (Restated)
----------- --------
Total current assets $ 86,345 $ 82,124
Total assets $ 135,945 $ 129,882
Deferred revenue $ 24,594 $ 36,978
Total current liabilities $ 36,714 $ 48,234
Total liabilities $ 113,580 $ 125,042
Total stockholders' equity $ 22,365 $ 4,840
Total liabilities and stockholders' equity $ 135,945 $ 129,882
Significant Accounting Policies and Estimates
------------------------------------------
Our significant accounting policies have a considerable impact on
Management's Discussion and Analysis.
Principles of Consolidation
---------------------------
These consolidated financial statements, which include our accounts and
all our significant business divisions and subsidiaries, have been prepared in
conformity with (i) GAAP; and (ii) the rules and regulations of the SEC. All
significant intercompany accounts and transactions between us and our
subsidiaries are eliminated in consolidation
Use of Estimates
----------------
We make estimates, assumptions, and judgments that affect the reported
amounts of assets and liabilities, contingent assets and liabilities, revenues,
and expenses. Significant estimates and assumptions have been made regarding
revenue recognition, the allowance for doubtful account, investments,
capitalized software, income taxes, restructuring, pensions and other benefits,
and contingencies and litigation and intangibles, primarily goodwill and
customer lists, resulting from our purchase business combinations. We base our
estimates, assumptions, and judgments on historical experience and on various
other assumptions believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Uncertainties inherent in these estimates include projections of future
operating results and the discount rates used to determine the net present
values of these future results and useful lives of the acquired assets as well
as technological advances. In addition, for our fixed-price contracts, we make
significant estimates within percentage-of-completion accounting, including
estimating total costs to be incurred as calculated on a labor hour basis. We
periodically review and test our estimates, specifically those related to the
valuations of intangibles including acquired software, goodwill, customer
lists, trademarks and other intangibles, and capitalized software. Actual
results may differ materially from these estimates.
Revenue Recognition
-------------------
Our revenue in the ordinary course of business is principally generated
from two sources: (i) licensing arrangements and (ii) services.
15
Our license revenue consists of fees for licenses of our software and
hosted services. Cost of license revenue primarily includes product, delivery
and royalty costs and facilities costs. Our services revenue consists of
maintenance, customer training and consulting services and fees for providing
management services such as accounts receivable and payment collection
outsourcing, specialized staffing, analytical services and seminars. Cost of
services consists primarily of salaries, benefits, and allocated costs related
to providing such services, labor costs for engineers performing implementation
services and technical support and training personnel.
We license our products through our direct sales force. Our license
agreements for such products do not provide for a right of return, and
historically product returns have not been significant.
We recognize revenue on our software products in accordance with Statement
of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9,
----------------------------
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
-----------------------------------------------------
Transactions; SOP 81-1, Accounting for Performance of Construction-Type and
------------ ---------------------------------------------------
Certain Production-Type Contracts; and Staff Accounting Bulletin ("SAB") 101,
---------------------------------
Revenue Recognition in Financial Statements.
-------------------------------------------
We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations by us with regard to implementation
remain; the fee is fixed and determinable; and, collectibility is probable.
Delivery is considered to have occurred when title and risk of loss have been
transferred to the customer, which generally occurs when media containing the
licensed programs is provided to a common carrier. We consider all
arrangements with payment terms extending beyond 180 days to be not fixed and
determinable, and revenue is recognized as payments become due from the
customer. If collectibility is not considered probable, revenue is recognized
when the fee is collected.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance, support and professional services, based on the relative
fair values of the elements specific to us. Our determination of fair value of
each element in multi-element arrangements is based on vendor-specific
objective evidence ("VSOE"). We limit our its assessment of VSOE for each
element to either the price charged when the same element is sold separately or
the price established by management, having the relevant authority to do so,
for an element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue from hosted applications is recognized
ratably over the term of the arrangement. The proportion of revenue recognized
upon delivery may vary from quarter to quarter depending upon the relative mix
of licensing arrangements and the availability of VSOE of fair value for
undelivered elements.
Certain of our perpetual and time-based licenses include unspecified
additional products and/or payment terms that extend beyond 12 months. We
recognize revenue from perpetual and time-based licenses that include
unspecified additional software products ratably over the term of the
arrangement.
Contract accounting is utilized for services revenues from fixed-price
contracts and those requiring significant software modification, development or
customization. In such instances, the arrangement fee is accounted for in
accordance with SOP 81-1, whereby the arrangement fee is recognized, generally
using the percentage-of-completion method measured on labor input costs. If
increases in projected costs-to-complete are sufficient to create a loss
contract, the entire estimated loss is charged to operations in the period the
loss first becomes known. The complexity of the estimation process and
judgment related to the assumptions, risks and uncertainties inherent with the
application of the percentage-of-completion method of accounting affect the
amounts of revenue and related expenses reported in its consolidated financial
statements. A number of internal and external factors can affect its
estimates, including labor rates, utilization, changes to specification and
testing requirements and collectibility of unbilled receivables.
Service revenues from software maintenance and support are recognized
ratably over the maintenance term, which in most cases is one year. Service
revenues from training, consulting and other service elements are recognized as
the services are performed.
16
Service revenues from providing management services such as accounts
receivable and payment collection outsourcing are recognized in accordance with
SAB 101. When all criteria for revenue recognition, as noted above, have been
met, revenue is recognized upon invoicing. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Accounts Receivable and Allowance for Doubtful Accounts
-------------------------------------------------------
Accounts receivable consist primarily of amounts due us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
Intangible Assets
-----------------
Goodwill. In June 2001, the FASB issued Accounting SFAS No. 142, Goodwill
--------
and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under SFAS 142, goodwill and intangible assets deemed to
have indefinite lives are to be separately disclosed on the balance sheet, and
no longer amortized but subject to annual impairment tests. With the adoption
of SFAS 142, we ceased amortization of goodwill as of January 1, 2002. Prior to
this point, goodwill was amortized using the straight-line method over its
estimated useful life.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (i.e., business segments) upon adoption and at least annually
thereafter using a two-step impairment analysis. In accordance with SFAS 142,
we performed the first of the required two-step impairment tests of goodwill
and indefinite-lived assets as of January 1, 2002. In performing the first step
of this analysis, we first assigned our assets and liabilities, including
existing goodwill and other intangible assets, to our identified reporting
units to determine their carrying value. For this purpose, our reporting units
equated to our five business segments then in place. Our reporting units equate
to our business segments since this is the lowest level of QuadraMed at which
operating plans are prepared and operating profitability is measured for
assessing management performance. See note 18 for more information regarding
our business segments. Based on an analysis by an independent third party
appraiser, we then estimated the fair value of each reporting unit with
significant goodwill utilizing various valuation techniques including the
Income Approach and the Market Approach. The Income Approach provides an
estimation of the fair value of a reporting unit based on the discounted cash
flows derived from the reporting unit's estimated remaining life plus the
present value of any residual value. The Market Approach indicates the fair
value of a reporting unit based upon a comparison to publicly-traded companies
in similar lines of business. Step one of this analysis was then completed by
comparing the carrying value of each the-analyzed reporting units to its fair
value. This comparison resulted in the fair values of the analyzed reporting
units exceeding the carrying values of the net assets. In addition, the
independent third party appraiser performed a cursory review of the three
unappraised reporting units utilizing the Income Approach to estimate the total
market value for QuadraMed Corporation as a whole. The result was an estimated
value for the Company that was less than the market capitalization as of
January 1, 2002. Accordingly, no indicators of impairment existed. As a
result, we did not perform step two as described by SFAS 142.
Capitalized Software. Software development costs are capitalized upon the
--------------------
establishment of technological feasibility. In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
------------------------------------------------------------------------------
Marketed, we establish technological feasibility upon completion of a detailed
--------
program design determined on a project-by-project basis, which substantiates
that the computer software product can be produced in accordance with its
design specifications. Software development costs are capitalized based upon
an assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors, including, but not
limited to, anticipated future gross margins, estimated economic lives, and
changes in software and hardware technology. Amortization is based on the
greater of the ratio that current revenues bear to total and anticipated future
revenues for the applicable product, or the straight-line method over the
remaining estimated economic life of the product, generally five years, and is
charged to cost of licenses.
Other Intangible Assets. Other intangible assets primarily relate to
-----------------------
acquired software, trademarks and customer lists acquired in our purchase
business combinations. On January 1, 2002, we adopted the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
generally requires impairment losses to be recorded on long-lived assets
(excluding goodwill) used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The provisions of this statement
did not have a significant impact on our financial condition or operating
results.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
--------------------
Retirement Obligations. The statement addresses financial accounting and
----------------------
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No.
143 are required to be applied starting with fiscal years beginning after June
15, 2002. We expect that implementation of the new standard will not have a
significant impact on our financial condition, results of operations, and cash
flows.
17
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
---------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
-----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. We anticipate that implementation of this new standard will not
have a significant impact on our financial condition, results of operations and
cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities, effective for exit or disposal
-------------------------------------------
activities initiated after December 31, 2002. Under SFAS 146 a liability for
the cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under prior guidance, a liability for such costs could
be recognized at the date of commitment to an exit plan. SFAS 146 also requires
that the liability be measured and recorded at fair value. Accordingly, the
adoption of this standard may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. We will adopt the
provisions of SFAS 146 prospectively for all restructuring activities initiated
after December 31, 2002.
In November 2002, the FASB reached a consensus on Emerging Issues Task
Force ("EITF") No. 00-21, Accounting for Revenue Arrangements with Multiple
-------------------------------------------------
Deliverables. The guidance in EITF 00-21 is effective for revenue arrangements
------------
entered into in fiscal years beginning after June 15, 2003. This issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically,
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and, if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earning processes for revenue recognition purposes. This issue also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. We are evaluating the effect
implementation of this new guidance will have on our financial condition,
results of operations and cash flows.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
--------------------------
Disclosure Requirements for Guarantees, including indirect Guarantees of
------------------------------------------------------------------------
Indebtedness of Others. FIN 45 requires that we recognize the fair value for
----------------------
guarantee and indemnification arrangements issued or modified by us after
December 31, 2002, if these arrangements are within the scope of the
interpretation. In addition, we must continue to monitor the conditions that
are subject to the guarantees and indemnifications, as required under
previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If we determine it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by us
contain provisions that indemnify licensees of our software from damages and
costs resulting from claims alleging that our software infringes the
intellectual property rights of a third party. We have historically received
only a limited number of requests for indemnification under these provisions
and have not been required to make material payments pursuant to these
provisions. Accordingly, we have not recorded a liability related to these
indemnification provisions. We will be required to implement the provisions of
FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a
material impact on our financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
--------------------------
Compensation - Transition and Disclosure, effective for fiscal years ending
----------------------------------------
after December 15, 2002. SFAS 148 amends SFAS 123, to provide alternative
methods of transition to the voluntary fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require that disclosure of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed in tabular format within a Company's summary of significant
accounting policies. We have not yet adopted SFAS 148 and accordingly, the
accompanying financial statements reflect the required disclosures of SFAS 123.
Results of Operations
---------------------
Revenue
-------
Revenue for the three months ended March 31, 2002 was $31.3 million, a
decrease of $103,000 or less than 1% from $31.4 million in the corresponding
period of 2001. Excluding the EZ-CAP revenues of $2.6 million in First Quarter
2001, there was growth of $2.5 million or 8.7%.
18
Services. Service revenue consists of consulting, maintenance,
--------
installation, hardware, reimbursable expenses and other service revenue.
Service revenue was $23.1 million in the three months ended March 31, 2002, a
small decrease of $258,000, or 1.1% from $23.4 million for the corresponding
period of 2001. The decrease was primarily due to a decrease in services
associated with the sale of the EZ-CAP Division in August 2001.
Licenses. License revenue consists of license and third-party software
--------
sales. License revenue in the three months ended March 31, 2002 was $8.2
million, an increase of $155,000 or 1.9% from $8.0 million in the corresponding
period of 2001.
Cost of Revenue
---------------
Cost of Services. Cost of services consists of salaries and related
----------------
expenses associated with services performed for customer support and consulting
services as well as third-party hardware costs. Cost of services for the
quarter ended March 31, 2002 of $11.1 million was $1.3 million, or 10.4%, less
than the $12.4 million in the corresponding period of 2001. The gross margin
earned on services revenue in 2002 increased however to 52.0%, compared to
47.1% in the same quarter of 2001.
Cost of Licenses. Cost of licenses consists of third party royalties,
----------------
amortization of capitalized software and documentation and production costs of
our software. Cost of licenses in the three months ended March 31, 2002 was
$2.1 million, a 74.0% gross margin on licenses, compared to $1.5 million and
81.3% gross margin on licenses, for the same period of 2001. The quarter ended
March 31, 2001 included revenue and associated expenses from the EZ-CAP product
line.
Operating Expenses
------------------
General and Administration. General and administration expense consists
--------------------------
of compensation and benefit costs for executive, finance, legal, information
technology, and administrative personnel. General and administration expense
was $9.1 million in the first quarter of 2002, a decrease of $1.3 million
compared to $10.4 million in the corresponding period of 2001. As a percentage
of revenue, general and administration expense decreased 4.2 percentage points
to 28.9% in the first quarter of 2002, compared to 33.1% in the prior period.
The decrease in general and administration expense was principally the result
of lower salary and related expenses resulting from a lower average staffing
level and reduced professional, legal and contract services fees. The 2001
figure also includes $491,000 of costs related to EZ-CAP.
Sales and Marketing. Sales and marketing expense includes costs
-------------------
associated with our sales and marketing personnel and product marketing
personnel and consists primarily of compensation and benefits, commissions and
bonuses, promotional and advertising expenses. Sales and marketing expense
increased $74,000 in the first quarter of 2002 to $5.3 million, compared to the
same period of 2001 that includes $242,000 for EZ-CAP. As a percentage of
revenue, sales and marketing expenses increased to 17.1% in the first quarter
of 2002 from 16.8% in the same period of 2001 due principally to an increase in
the sales activity in anticipation of increased revenue.
Research and Development. Research and development expense includes costs
------------------------
associated with the development of new products, enhancements of existing
products for which technological feasibility has not been achieved, and quality
assurance activities, and primarily includes compensation and benefits expense.
Research and development costs in the three months ended March 31, 2002 were
$3.6 million, compared to $3.7 million in the same period in 2001. As a
percentage of revenue, research and development costs were 11.4% in the first
quarter of 2002 compared to 11.8% in the corresponding period of 2001. While
research and development costs decreased, the level of research and development
investments actually increased with the funding of development for our Affinity
Clinical and Quantim products. During the first three months of 2002, we
capitalized $700,000 in software development costs on products qualifying for
capitalization under the definition of technological feasibility compared to
none in the same period of 2001.
Amortization, impairment and other operating charges. Amortization,
----------------------------------------------------
impairment and other operating charges declined to $512,000 in the first
quarter of 2002 from $1.6 million in the same period of 2001. The decrease
primarily reflects our January 1, 2002 adoption of SFAS 142, which eliminates
the amortization of goodwill but requires annual impairment testing. As a
result, after December 31, 2001, we no longer amortize goodwill but continue to
amortize other intangible assets. The first three months of 2001 included
$964,000 of goodwill amortization. We recorded no impairment of goodwill in
either of the quarterly periods ended March 31, 2002 and 2001.
19
Other Income (Expense)
---------------------
Interest Expense, Net of interest income, was $859,000 and $1.1 million in
---------------------
the three-month periods ended March 31, 2002 and 2001, respectively. The
decline in interest expense principally resulted from the redemption of $41.3
million of our convertible subordinated debentures in 2001, partially offset by
lower interest income.
Income Taxes
------------
Provision for Income Taxes. There was no provision for income taxes for
--------------------------
the three-month period ended March 31, 2002 compared to $81,000 provided for
the three months ended March 31, 2001, which resulted from state and
alternative minimum tax liabilities on certain of our legal entities. For
financial reporting purposes, a 100% valuation allowance has been recorded
against our deferred tax assets under SFAS No. 109.
Liquidity And Capital Resources
-------------------------------
The following section discusses the effects of changes in our balance
sheets, cash flows, and commitments on our liquidity and capital resources.
Balance Sheet and Cash Flows
----------------------------
Cash and cash equivalents were $30.5 million as of March 31, 2002 and
$29.8 million as of December 31, 2001, an increase of $664,000 or 2.2% during
the period. Cash flows provided by operating activities were $468,000 for the
three months ended March 31, 2002. These amounts primarily resulted from a net
loss of $1.3 million for the three months ended March 31, 2002, offset by $2.5
million in non-cash charges, and a net increase of $717,000 in working capital
(excluding the change in cash and cash equivalents). Cash outflows for
investing activities of $1.6 million primarily reflected $784,000 and $707,000
of capitalized software and fixed asset expenditures. In addition, we issued
$1.8 million in common stock as a result of option exercises.
We expect that cash provided by operating activities may fluctuate in
future periods as a result of a number of factors, including fluctuations in
our operating results, specifically the timing of when we recognize revenue,
our accounts receivable collections, and the timing of other payments. In
addition, cash used in investing activities may fluctuate due to the
capitalization of our software development efforts and costs associated with
our investments in fixed assets and information technology. For additional
discussion, see the Risk Factors section.
------------
Commitments
-----------
As of March 31, 2002, we had $73.7 million in outstanding 5.25%
Convertible Subordinated Debentures due 2005 (the "2005 Debt"), which bear
interest at 5.25% per annum. On April 16, 2003, we announced that we had
executed an agreement with certain of our bondholders to refinance our 2005
Debt. On April 17, 2003, under the terms of the refinance agreement, we issued
$71.0 million of our Senior Secured Notes due 2008 (the "2008 Debt"). The
proceeds from the issuance of the 2008 Debt were used to repurchase $61.8
million (plus $1.5 million in accrued interest) of the 2005 Debt which became
subject to repurchase by us as a result of our delisting from the Nasdaq
National Market on March 4, 2003. Accordingly, the net proceeds to us as a
result of the issuance of the 2008 Debt less the costs (including fees)
associated with the repurchase of the 2005 Debt was $7.6 million, with $11.9
million of the 2005 Debt remaining outstanding. Additionally, the repurchase
right on the 2005 Debt remaining outstanding expired on April 17, 2003. The
2008 Debt bears interest at an initial rate of 10% which will be reduced to 9%
upon the relisting of QuadraMed's common stock on the Nasdaq Smallcap or
National Market and is secured by certain intellectual property of QuadraMed.
However, we may be obligated to redeem the 2005 and 2008 debentures earlier
than the maturity dates based upon certain events of default occurring as
defined within the debenture agreements. These events include, failure to
timely repay principal or interest owed on the debentures, default under any
other borrowing, and bankruptcy.
In addition, as of March 31, 2002, we had approximately $36.0 million in
minimum operating lease commitments that will be repaid through 2011. Finally,
we have a Supplemental Executive Retirement Plan ("SERP") that will require
total payments from 2008 through 2027 estimated at $7.8 million. We owe annual
premiums of $483,000 on the SERP through 2005 to fund our obligations.
We expect that cash provided by operating activities may fluctuate in
future periods as a result of a number of factors, including fluctuations in
our operating results, specifically the timing of when we recognize revenue,
our accounts receivable collections and the timing of other payments. In
addition, cash used in investing activities may fluctuate due to the
capitalization of our software development efforts, which are expected to
increase in 2003, and costs associated with our investments in fixed assets and
information technology. For additional discussion, see the Risk Factors
section.
20
We believe that we will have sufficient liquidity and capital resources to
fund our scheduled debt and other obligations through the next twelve months.
Risk Factors That May Impact Future Operating Results
-----------------------------------------------------
Factors that have affected our results of operations in the past and are
likely to affect our results of operations in the future, include the
following:
Our Vendors, Suppliers and Customers May React Adversely to the Lack of
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Timely SEC Filings of Our Historical Financial Statements.
---------------------------------------------------------
Our future success depends in large part on the support of our vendors and
suppliers, who may react adversely to the lack of timely SEC filings of our
historical financial statements. The restatement of our historical financial
statements has resulted in negative publicity about us, which may cause some of
our potential customers to defer purchases of our products. Our vendors and
suppliers may re-examine their willingness to do business with us, to develop
critical interfaces for us or to supply software and services if they lose
confidence in our ability to fulfill our commitments.
We Are Currently the Target of Securities Litigation and May Be the Target
--------------------------------------------------------------------------
of Further Actions, Which May Be Costly and Time Consuming to Defend.
--------------------------------------------------------------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11, 2002. The complaints seek unspecified monetary damages and other relief.
The ultimate outcome of these matters cannot presently be determined and
may require significant commitment of our financial and management resources
and time, which may seriously harm our business, financial condition and
results of operations. We cannot assure you that any of the allegations
discussed above can be resolved without costly and protracted litigation, and
the outcome may have a materially adverse impact upon our financial position,
results of operations and cash flows.
In addition, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
The uncertainty of the currently pending investigation and litigation could
lead to more volatility in our stock price. We may in the future be the target
of securities class action claims similar to those described above.
We Are Subject to a Formal SEC Inquiry as a Result of the Restatement of
------------------------------------------------------------------------
Our Financial Statements.
------------------------
Following our August 12, 2002 announcement that it we intended to restate
prior period financial statements, the staff of the San Francisco District
Office of the SEC requested certain information concerning the anticipated
restatement as part of an informal, preliminary inquiry. We provided that
information, and expect to provide additional information now that the
restatement is completed. We intend to continue to cooperate with the SEC in
the event it requests other information. We cannot predict whether such
information will be requested, when the SEC will conclude its inquiry, or the
outcome or impact thereof.
On February 28, 2003, we reported that the SEC had issued a formal non-
public order of investigation concerning our accounting and financial reporting
practices for the period beginning January 1, 1998. We intend to continue to
cooperate with the SEC and comply with the SEC's requests for information. We
cannot predict when the SEC will conclude its inquiry, or the outcome and
impact thereof.
Our Common Stock Has Been Delisted from the Nasdaq Stock Market.
---------------------------------------------------------------
We received a notice from the Nasdaq Stock Market that we are required to
file Forms 10-Q for the quarters ended June 30, and September 30, 2002 as well
as restated financial statements for the years ended December 31, 2001, 2000
and 1999 and the quarter ended March 31, 2002. Our trading symbol as of August
22, 2002 was amended from "QMDC" to "QMDCE", as a result of the delinquent
21
filings. We requested an appeals hearing before a Nasdaq Listing
Qualifications Panel (the "Panel"). The Panel notified us on February 6, 2003,
that Nasdaq would continue to list our common shares on the Nasdaq Stock Market
until February 28, 2003, by which date we must file our Quarterly Report on
Form 10-Q for the interim periods ended June 30, 2002 and September 30, 2002
and our amended SEC filings for the years ended December 31, 2001, 2000 and
1999 and the interim period ended March 31, 2002. Further, we were required to
file timely all other annual and periodic reports with the SEC and evidence our
continued compliance with all requirements for continued listing on the Nasdaq
National Market upon the filing of these documents as well as an ability to
sustain compliance with those requirements over the long term. We were unable
to meet these requirements in a timely manner, and on March 4, 2003, our common
stock was delisted from the Nasdaq Stock Market. Although we intend to return
to compliance, we can offer no assurances that we will be relisted on the
Nasdaq Stock Market.
The delisting constitutes a "Repurchase Event" under the provisions of our
Convertible Subordinated Debentures. Upon such an event, our Debentures
provide the holders with the individual option to redeem the Debentures (see
below).
Our Debentures Have Been Partially Refinanced with Notes that Are Subject
-------------------------------------------------------------------------
to New Terms.
------------
We issued Debentures through a public offering on May 1, 1998 that mature
on May 1, 2005 in the principal amount of $115 million (the "2005 Notes"). Our
net proceeds from the offering were $110.8 million. The 2005 Notes bear
interest at 5.25% per annum and are convertible into common stock at any time
prior to the redemption or final maturity, initially at the conversion price of
$33.25 per share (resulting in an initial conversion ratio of 30.075 shares per
$1,000 principal amount).
We are obligated to provide holders of the 2005 Notes with notice of and
the holders have the individual option to redeem the 2005 Notes should we, (i)
cease to be traded on a U.S. national securities exchange or cease to be
approved for trading on a U.S. automated over-the-counter securities market; or
(ii) experience defined Changes of Control, including a merger in which we are
not the surviving entity or our shareholders do not control 50% of the new
entity, the sale of substantially all of our assets, a liquidation, or if there
is a substantial change in the board of directors over a two-year period.
Additionally, we are obligated to redeem the 2005 Notes upon defined Events of
Default, including failure to timely repay principal or interest under the 2005
Notes, default under any other borrowing, and bankruptcy. On March 4, 2003,
our common stock was delisted from the Nasdaq Stock Market, and a repurchase
event was triggered.
On April 17, 2003, QuadraMed Corporation closed the partial refinancing of
its 2005 Notes. In conjunction with its repurchase of $61.8 million of its
outstanding 2005 Notes pursuant to its offer to repurchase such Notes
previously announced on March 19, 2003, the Company issued $71 million of its
Senior Secured Notes due 2008 (the "2008 Notes"), together with warrants to
purchase 11,303,842 shares of the Company's common stock. Investors in the
2008 Notes included certain holders of 2005 Notes as well as new investors.
Additional warrants to purchase 2,047,978 shares of the Company's common stock
will be issued to holders of the 2008 Notes if the Company does not file a
registration statement within 90 days after receiving a request from the
holders on or after the date that is 270 days after April 17, 2003, the date of
issuance of the 2008 Notes. The Company also issued warrants to purchase
282,596 shares of the Company's common stock to Philadelphia Brokerage
Corporation as consideration in connection with the transaction. The warrants
have a term of five years, have an exercise price of $0.01 per share and are
subject to certain anti-dilution provisions including dilution from any
issuance of shares in settlement of existing litigation.
The 2008 Notes bear an initial interest rate of 10%, which interest rate
is required to be reduced to 9% upon the listing of the Company's common stock
for trading on a U.S. national securities exchange or upon the common stock's
relisting on the Nasdaq National Market or the Nasdaq SmallCap Market. The
terms of the 2008 Notes provide that interest is initially payable 6% in cash
and 4% in additional notes for the first year and payable entirely in cash
thereafter. The 2008 Notes are also secured by certain intellectual property
of the Company.
Provisions in Our Certificate of Incorporation and Bylaws and Delaware Law
--------------------------------------------------------------------------
Could Delay or Discourage a Takeover which Could Adversely Affect the Price of
------------------------------------------------------------------------------
Our Common Stock.
----------------
Our board of directors has the authority to issue up to 5 million shares of
preferred stock and to determine the price, rights, preferences, privileges,
and restrictions, including voting rights, of those shares without any further
22
vote or action by holders of our common stock. If preferred stock is issued,
the voting and other rights of the holders of our common stock may be subject
to, and may be adversely affected by, the rights of the holders of our
preferred stock. The issuance of preferred stock may have the effect of
delaying or preventing a change of control of the Company that could have been
at a premium price to our stockholders.
Certain provisions of our certificate of incorporation and bylaws could
discourage potential takeover attempts and make attempts to change management
by stockholders difficult. Our board of directors, which is classified into
three classes of directors serving staggered, three-year terms, has the
authority to impose various procedural and other requirements that could make
it more difficult for our stockholders to effect certain corporate actions. In
addition, our certificate of incorporation provides that directors may be
removed only by the affirmative vote of the holders of two-thirds of the shares
of our capital stock entitled to vote. Any vacancy on our board of directors
may be filled only by a vote of the majority of directors then in office.
Further, our certificate of incorporation provides that the affirmative vote of
two-thirds of the shares entitled to vote, voting together as a single class,
subject to certain exceptions, is required for certain business combination
transactions. These provisions, and certain other provisions of our
certificate of incorporation, could have the effect of delaying or preventing
(i) a tender offer for our common stock or other changes of control of the
Company that could be at a premium price, or (ii) changes in our management.
In addition, certain provisions of Delaware law could have the effect of
delaying or preventing a change in control of the Company. Section 203 of the
Delaware General Corporation Law, for example, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years from the date the person became an interested stockholder
unless certain conditions are met.
The Trading Price of Our Common Stock Has Been, and Is Expected to
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Continue to Be, Volatile.
------------------------
The Nasdaq SmallCap Market on which our common stock was listed, the "Pink
Sheets" over-the-counter market, where our stock currently trades, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of our common stock has been and is
likely to continue to be volatile due to such factors as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by our competitors;
o Governmental regulatory action;
o Resolution of pending or unasserted litigation, including the existing
shareholder lawsuits;
o Developments or disputes with respect to proprietary rights; and
o General trends in our industry and overall market conditions.
Movements in prices of equity securities in general may also affect the
market price of our common stock.
Future Sales of a Substantial Number of Shares of Our Common Stock Could
------------------------------------------------------------------------
Cause the Price of the Stock to Decrease or Fluctuate Substantially.
-------------------------------------------------------------------
Our existing stockholders hold a significant number of shares of common
stock that may be sold in the future under Rule 144 of the Securities Act or
through the exercise of registration rights. Sales of a substantial number of
the aforementioned shares in the public markets or the prospect of such sales
could adversely affect or cause substantial fluctuations in the market price of
our common stock and debt securities and impair our ability to raise additional
capital through the sale of our securities.
Future Sales of Our Common Stock in the Public Market or Option Exercises
-------------------------------------------------------------------------
and Sales Could Lower Our Stock Price.
-------------------------------------
A substantial number of the unissued shares of our common stock are
subject to stock options and our outstanding 2005 Notes may be converted into
shares of common stock. We cannot predict the effect, if any, that future
23
sales of shares of common stock, or the availability of shares of common stock
for future sale, will have on the market price of our common stock. Sales of
substantial amounts of common stock, including shares issued upon the exercise
of stock options or the conversion of our outstanding 2005 Notes, or the
perception that such sales could occur, may adversely affect prevailing market
prices for our common stock.
We Face Product Development Risks Associated with Rapid Technological
---------------------------------------------------------------------
Changes.
-------
The healthcare software market is highly fragmented and characterized by
ongoing technological developments, evolving industry standards, and rapid
changes in customer requirements. Our success depends on our ability to timely
and effectively:
o Offer a broad range of software products;
o Enhance existing products and expand product offerings;
o Respond promptly to new customer requirements and industry standards;
o Remain compatible with popular operating systems and develop products that
are compatible with the new or otherwise emerging operating systems; and
o Develop new interfaces with competing HIS vendors to fully integrate our
Quantim product suite in order to maximize features and functionality of
the new products.
Our performance depends in large part upon our ability to provide the
increasing functionality required by our customers through the timely
development and successful introduction of new products and enhancements to our
existing suite of products. We may not successfully, or in a timely manner,
develop, acquire, integrate, introduce, or market new products or product
enhancements. Product enhancements or new products developed by us also may
not meet the requirements of hospitals or other healthcare providers and payers
or achieve or sustain market acceptance. Our failure to either estimate
accurately the resources and related expenses required for a project, or to
complete our contractual obligations in a manner consistent with the project
plan upon which a contract was based, could have a material adverse effect on
our business, financial condition, and results of operations. In addition, our
failure to meet a customer's expectations in the performance of our services
could damage our reputation and adversely affect our ability to attract new
business.
Our Inability to Protect Our Intellectual Property Could Lead to
----------------------------------------------------------------
Unauthorized Use of Our Products, which Could Have an Adverse Effect on Our
---------------------------------------------------------------------------
Business.
--------
We rely on a combination of trade secret, copyright and trademark laws,
nondisclosure, non-compete, and other contractual provisions to protect our
proprietary rights. In 2001, we filed our first patent application covering
our developed technology, the Affinity CPOE software application. Measures
taken by us to protect our intellectual property may not be adequate, and our
competitors could independently develop products and services that are
substantially equivalent or superior to our products and services. Any
infringement or misappropriation of our proprietary software and databases
could put us at a competitive disadvantage in a highly competitive market and
could cause us to lose revenues, incur substantial litigation expense, and
divert management's attention from other operations.
We depend on licenses from a number of third-party vendors for certain
technology used to develop and operate our products. Most of these licenses
expire within three to five years. Such licenses can be renewed only by mutual
consent and may be terminated if we breach the license terms and fail to cure
the breach within a specified time period. If such licenses are terminated, we
may not be able to continue using the technology on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay or reduce
product shipments until equivalent technology is obtained, which could have a
material adverse effect on our business, financial condition, and results of
operations. Most of our third-party licenses are non-exclusive and competitors
may obtain the same or similar technology. In addition, if vendors choose to
discontinue support of the licensed technology, we may not be able to modify or
adapt our products.
24
Intellectual property litigation is increasingly common in the software
industry. The risk of an infringement claim against us may increase over time
as the number of competitors in our industry segment grows and the
functionality of products overlaps. Third parties could assert infringement
claims against us in the future. Regardless of the merits, we could incur
substantial litigation expenses in defending any such asserted claim. In the
event of an unfavorable ruling on any such claim, a license or similar
agreement may not be available to us on reasonable terms, if at all.
Infringement may also result in significant monetary liabilities that could
have a material adverse effect on our business, financial condition, and
results of operations. We may not be successful in the defense of these or
similar claims.
The Nature of Our Products Makes Us Particularly Vulnerable to Undetected
-------------------------------------------------------------------------
Errors or Bugs that Could Reduce Revenues, Market Share or Demand for Our
-------------------------------------------------------------------------
Products and Services.
---------------------
Products such as those we offer may contain errors or failures, especially
when initially introduced or when new versions are released. Although we
conduct extensive testing on our products, software errors have been discovered
in certain enhancements and products after their introduction. Despite such
testing by us and by our current and potential customers, products under
development, enhancements, or shipped products may contain errors or
performance failures, resulting in, among other things:
o Loss of customers and revenue;
o Delay in market acceptance;
o Diversion of resources;
o Damage to our reputation; or
o Increased service and warranty costs.
Any of these consequences could have a material adverse effect on our
business, financial condition, and results of operations.
If Our Products Fail to Accurately Assess, Process, or Collect Healthcare
-------------------------------------------------------------------------
Claims or Administer Managed Care Contracts, We Could Be Subject to Costly
--------------------------------------------------------------------------
Litigation and Be Forced to Make Costly Changes to Our Products.
---------------------------------------------------------------
Some of our products and services are used in the payment, collection,
coding, and billing of healthcare claims and the administration of managed care
contracts. If our employees or products fail to accurately assess, process, or
collect these claims, customers could file claims against us. Our insurance
coverage may not be adequate to cover such claims. A successful claim that is
in excess of, or is not covered by, insurance coverage could adversely affect
our business, financial condition, and results of operations. Even a claim
without merit could result in significant legal defense costs and could consume
management time and resources. In addition, claims could increase our premiums
such that appropriate insurance could not be found at commercially reasonable
rates. Furthermore, if we were found liable, we may have to significantly
alter one or more of our products, possibly resulting in additional
unanticipated research and development expenses.
We May Be Required to Make Substantial Changes to Our Products if They
----------------------------------------------------------------------
Become Subject to FDA Regulation, which Could Require a Significant Capital
---------------------------------------------------------------------------
Investment.
----------
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by the
FDA under the Federal Food, Drug and Cosmetic Act. At present, none of our
software products are so regulated. In the future, the FDA could determine
that some of our products, because of their predictive aspects, are clinical
decision tools and subject them to regulation. Compliance with FDA regulations
could be burdensome, time consuming, and expensive. Other new laws and
regulations affecting healthcare software development and marketing also could
be enacted in the future. If so, it is possible that our costs and the length
of time for product development and marketing could increase and that other
unforeseeable consequences could arise.
25
Governmental Regulation of the Confidentiality of Patient Health
----------------------------------------------------------------
Information Could Result in Our Customers Being Unable to Use Our Products
--------------------------------------------------------------------------
Without Significant Modification, which Could Require Us to Expend Substantial
------------------------------------------------------------------------------
Amounts.
-------
There is substantial state and federal regulation of the confidentiality
of patient health information and the circumstances under which such
information may be used by, disclosed to or processed by us as a consequence of
our contacts with various health care providers. Although compliance with
these laws and regulations is presently the principal responsibility of the
hospital, physician, or other healthcare provider, regulations governing
patient confidentiality rights are dynamic and rapidly evolving. Changes may
be made which require us to change our systems and our methods which could
require significant expenditure of capital and decrease future business
prospects. Additional federal and state legislation governing the
dissemination of individually identifiable information have been proposed and
may be adopted, which may also significantly affect our business.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
is a federal law that affects the use, disclosure, transmission and storage of
individually identifiable health information. As directed by HIPAA, the United
States Department of Health and Human Services ("HHS") must promulgate
standards and implementation guidelines for certain electronic health
transactions, code sets, data security, unique identification numbers, and
privacy of individually identifiable health information. HHS has made several
regulatory proposals, which are in various stages of development.
First, HHS has published a final regulation governing transaction and
code-set standards that had a compliance date of October 16, 2002. If a
covered entity (health care providers that transmit certain covered
transactions in electronic form, health plans and health care clearinghouses)
or its agent file an extension by October 16, 2003, the covered entity would
receive an additional year to comply with the HIPAA transaction and code sets
requirements.
Second, HHS has published a final HIPAA privacy rule which has a
compliance date of April 14, 2003. The HIPAA privacy rule is complex and far
reaching. Similar to the HIPAA transaction and code sets rule, the HIPAA
privacy rule applies to covered entities. Covered entities are required to
execute a contract with any business associate that performs certain services
on the covered entity's behalf. We may be implicated by the HIPAA privacy rule
as a business associate of a covered entity. The HIPAA privacy rule and state
healthcare privacy regulations could materially restrict the ability of
healthcare providers to disclose individually identifiable health information
from patient records using our products and services or could require us to
make substantial capital expenditures to be in compliance. Accordingly, the
HIPAA Privacy Rule and state privacy laws may significantly impact our
product's use in the health care delivery system and therefore, decrease our
revenue, increase working capital requirements and decrease future business
prospects.
Third, HHS published the final HIPAA security rule with a compliance date
of April 20, 2005. The HIPAA security rule applies to the use, disclosure,
transmission, storage and destruction of electronic protected health
information by covered entities. Covered entities must implement stringent
security measures to ensure the confidentiality of the electronic protected
health information, and to protect against the unauthorized use of the
electronic protected health information. Implementing such measures will
require us to expend substantial capital due to required product, service, and
procedure changes.
Government Regulation to Adopt and Implement ICD-10-CM and ICD-10-PCS
---------------------------------------------------------------------
Medical Code Set Standards.
--------------------------
Prominent HIM organizations are calling on the Department of Health and
Human Services (HHS) and the healthcare industry to take action to adopt and
implement ICD-10-CM and ICD-10-PCS code sets, rules, and guidelines as a
replacement for current ICD-9-CM guidelines used in our software products.
Adoption of these new code sets would require us to change our systems and our
methods which could require a significant expenditure of R & D capital and
decrease future business prospects for our current product line.
Government Regulation of the Health Care Delivery System May Affect Health
--------------------------------------------------------------------------
Care Providers' Discretionary Spending.
--------------------------------------
During the past several years, the healthcare industry has been subject
to, among other things, increasing levels of governmental regulation of
reimbursement rates and certain capital expenditures. Certain proposals to
reform the healthcare system have been and are being considered by Congress.
These proposals, if enacted, could change the operating environment for our
26
clients in ways that could have a negative impact on our business, financial
condition, and results of operations. We are unable to predict what, if any,
changes will occur.
Changes in Procurement Practices of Hospitals Have and May Continue to
----------------------------------------------------------------------
Have a Negative Impact on Our Revenues.
--------------------------------------
A substantial portion of our revenues has been and is expected to continue
to be derived from sales of software products and services to hospitals.
Consolidation in the healthcare industry, particularly in the hospital and
managed care markets, could decrease the number of existing or potential
purchasers of products and services and could adversely affect our business.
In addition, the decision to purchase our products often involves a committee
approval. Consequently, it is difficult for us to predict the timing or
outcome of the buying decisions of our customers or potential customers. In
addition, many healthcare providers are consolidating to create IDNs with
greater regional market power. These emerging systems could have greater
bargaining power, which may lead to decreases in prices for our products, which
could adversely affect our business, financial condition, and results of
operations.
Changes in the Healthcare Financing and Reimbursement System Could
------------------------------------------------------------------
Adversely Affect the Amount of and Manner in which Our Customers Purchase Our
-----------------------------------------------------------------------------
Products And Services.
---------------------
Changes in current healthcare financing and reimbursement systems could
result in unplanned product enhancements, delays, or cancellations of product
orders or shipments, or reduce the need for certain systems. We could also
have the endorsement of products by hospital associations or other customers
revoked. Any of these occurrences could have a material adverse effect on our
business. Alternatively, the federal government recently mandated the use of
electronic transmissions for large Medicare providers which may positively
affect our systems and product.
The healthcare industry in the United States is subject to changing
political, economic, and regulatory influences that may affect the procurement
practices and operations of healthcare organizations. The traditional hospital
delivery system is evolving as more hospital services are being provided by
niche, free standing practices and outpatient providers. The commercial value
and appeal of our products may be adversely affected if the current healthcare
financing and reimbursement system were to revert to a fee-for-service model.
In addition, many of our customers provide services under capitated service
agreements, and a reduction in the use of capitation arrangements as a result
of regulatory or market changes could have a material adverse effect on our
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other things,
reimbursement rates and capital expenditures. Proposals to reform the
healthcare system have been and are being considered by the United States
Congress. These proposals, if enacted, could change the operating environment
of our customers in ways that cannot be predicted. Healthcare organizations
may react to these proposals by curtailing or deferring investments, including
those for our products and services. In addition, the regulations promulgated
under HIPAA could lead healthcare organizations to curtail or defer investments
in non-HIPAA related features in the next several years.
Our Quarterly Operating Results Are Subject to Fluctuations, which Could
------------------------------------------------------------------------
Adversely Affect Our Financial Results and the Market Price of Our Common
-------------------------------------------------------------------------
Stock.
-----
Our quarterly operating results have varied significantly in the past and
may fluctuate in the future as a result of a variety of factors, many of which
are outside our control. Accordingly, quarter-to-quarter comparisons of our
operating results may not be indicative of our future performance. Some of the
factors causing these fluctuations include:
o Variability in demand for products and services;
o Introduction of product enhancements and new products by us and our
competitors;
o Timing and significance of announcements concerning present or prospective
strategic alliances;
o Discontinuation of, or reduction in, the products and services we offer;
o Loss of customers due to consolidation in the healthcare industry;
27
o Delays in product delivery requested by our customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development, and
administrative personnel necessary to support anticipated operations;
o Costs incurred for marketing and sales promotional activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the healthcare industry;
o Cooperation from competitors on interfaces and implementation when a
customer chooses a QuadraMed software application to use with various
vendors;
o Delays in implementation due to product readiness, customer induced delays
in training or installation, and third party interface development delays;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can increase demand
for new, updated systems;
o Federal regulations that directly affect reimbursements received, and
therefore the amount of money available for purchasing information
systems;
o The fines and penalties a healthcare provider or system may incur due to
fraudulent billing practices; and
o Increases in third party royalty fees associated with embedded products in
QuadraMed software applications.
Our operating expense levels, which increase with the addition of acquired
businesses, are relatively fixed. Accordingly, if future revenues were below
expectations, we would experience a disproportionate adverse affect on our net
income and financial results. In the event of a revenue shortfall, we will
likely be unable to, or may elect not to, reduce spending quickly enough to
offset any such shortfall. As a result, it is possible that our future
revenues or operating results may fall below the expectations of securities
analysts and investors. In such a case, the price of our publicly traded
securities may be adversely affected.
The Variability and Length of Our Sales Cycle for Our Products May
------------------------------------------------------------------
Exacerbate the Unpredictability and Volatility of Our Operating Results.
-----------------------------------------------------------------------
We cannot accurately forecast the timing of customer purchases due to the
complex procurement decision processes of most healthcare providers and payers.
How and when to implement, replace, expand or substantially modify an
information system are major decisions for customers, and such decisions
require significant capital expenditures by them. As a result, we typically
experience sales cycles that extend over several quarters. In addition,
certain products we acquired with Compucare have higher average selling prices
and longer sales cycles than many of our other products. As a result, we have
only a limited ability to forecast the timing and size of specific sales,
making the prediction of quarterly financial performance more difficult.
If We Are Unable to Compete Effectively, We Could Experience Price
------------------------------------------------------------------
Reduction, Reduced Gross Margins and Loss of Market Share.
---------------------------------------------------------
Competition for our products and services is intense and is expected to
increase. Increased competition could result in reductions in our prices,
gross margins, and market share and have a material adverse effect on our
business, financial condition, and results of operations. We compete with
other providers of healthcare information software and services, as well as
healthcare consulting firms. Some competitors have formed business alliances
with other competitors that may affect our ability to work with some potential
customers. In addition, if some of our competitors merge, a stronger
competitor may emerge. Some principal competitors include:
28
o In the market for enterprise healthcare information systems in the
Enterprise Division: McKesson Corporation, Inc., Shared Medical Systems,
Inc., a division of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and, IDX Corporation;
o In the market for electronic document management products in the
Enterprise Division: McKesson Corporation, SoftMed Corporation Inc.,
FileNet, Lanvision, MedPlus, and, Eclipsys Corporation;
o In the market for MPI products and services in the Enterprise Division:
Madison Technologies, Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and, Medibase;
o In the market for decision support products in the Enterprise Division:
Eclipsys Corporation, Healthcare Microsystems, Inc., a division of Health
Management Systems Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and, MediQual Systems, Inc., a division of
Cardinal Health, Inc.;
o In the market for coding, compliance, data, and record management products
in the Health Information Management Software Division: 3M Corporation,
SoftMed Corporation, Inc., MetaHealth, Eclipsys Corporation,
PricewaterhouseCoopers LLP and, HSS, Inc.;
o In the Health Information Management Services Division:
PricewaterhouseCoopers LLP, Bearing Point and Cap Gemini for compliance
products and services and health information management consulting
services; and
o In the Financial Services Division: Advanced Receivables Strategy, Inc.,
a division of Perot Systems Corporation, NCO Group, Inc., Outsourcing
Solutions, Inc., Health Management Systems, Inc., and Triage Consulting
Group.
Current and prospective customers also evaluate our products' capabilities
against the merits of their existing information systems and expertise. Major
software information systems companies, including those specializing in the
healthcare industry, that do not presently offer competing products may enter
our markets. Many of our competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources, and market recognition than we have. Many of these
competitors also have, or may develop or acquire, substantial installed
customer bases in the healthcare industry. As a result of these factors, our
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the political,
economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion, and sale of their products than we can. We may not be
able to compete successfully against current and future competitors, and such
competitive pressures could materially adversely affect our business, financial
condition, and operating results.
Our Services Face Review and Scrutiny from the Department of Health and
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Human Services, the Department of Justice and Other Law Enforcement Agencies.
----------------------------------------------------------------------------
As a result of rising health care costs, federal and state governments
have placed an increased emphasis on detecting and eliminating fraud and abuse
in Medicare, Medicaid, and other health care programs. Numerous laws and
regulations now exist to prevent fraudulent or abusive billing, to protect
patients' privacy rights, and to ensure patients' access to health care.
Violation of the laws or regulations governing our operations could result in
the imposition of civil or criminal penalties, including temporary or permanent
exclusion from participation in government health care programs such as
Medicare and Medicaid, the cancellation of our contracts to provide managed
care services, and the suspension or revocation of our licenses. We routinely
conduct internal audits in our effort to ensure compliance with all applicable
laws and regulations. If errors, discrepancies or violations of laws are
discovered in the course of these audits or otherwise, we may be required by
law to disclose the relevant facts, once known, to the appropriate authorities.
29
We Face Risks Associated with U.S. Government Contracting.
---------------------------------------------------------
We have been awarded a U.S. General Services Administration ("GSA")
Schedule Contract for Federal Supply Service of commercial information
technology. The willingness of government agencies to enter into future
contracts depends upon (i) our ability to continue supporting existing
products; (ii) maintaining ongoing relationships with third party suppliers of
certain elements of our products; and (iii) developing new products with third
party suppliers to address new regulatory requirements of government agencies
and having these products added to our GSA commercial price list. These
contracts are subject to cancellation at the convenience of the contracting
government agency.
As a commercial vendor, we must file a quarterly sales report with the GSA
and remit a 1% "Industrial Funding Fee" based on the sales value of the
contract. Reductions or delays in federal funds available for projects we are
performing could also have an adverse impact on our government business.
Contracts involving time and material fees are also subject to the risks of
disallowance of costs upon audit, changes in government procurement policies,
required competitive bidding for products not identified on the GSA commercial
product price list, and, with respect to contracts involving prime contractors
or government-designated subcontractors, the inability of those parties to
perform under their contracts.
We Have Encountered Significant Challenges Integrating Acquired
---------------------------------------------------------------
Businesses, and Future Transactions May Adversely Affect Our Business,
---------------------------------------------------------------------
Operations, and Financial Condition.
-----------------------------------
From 1993 to 1999, we completed 28 acquisitions encountering significant
challenges integrating the acquired businesses into our operations and, in
years 2000 and 2002 focused in particular on their integration. Some of the
challenges we have encountered, and may encounter with acquisitions in the
future, in integrating acquired businesses have included:
o Interruption, disruption or delay of our ongoing business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expenses;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results, resulting in
our failure to realize anticipated benefits;
o Write-down or reclassification of acquired assets;
o Failure to retain key acquired personnel and difficulty and expense of
training those retained;
o Increases in stock compensation expense and increased compensation expense
resulting from newly hired employees;
o Assumption of liabilities and potential for disputes with the sellers of
acquired businesses;
o Customer dissatisfaction or performance problems related to acquired
businesses;
o Exposure to the risks of entering markets in which we have no direct prior
experience and to risks associated with market acceptance of acquired
products and technologies; and
o Platform and technical issues related to integrating systems from various
acquired companies.
All of these factors have had an adverse effect on our business, financial
condition, and results of operations in the past, and could have an adverse
effect in the future.
30
New Accounting Standards May Make Acquisitions Necessary for Our Growth
-----------------------------------------------------------------------
Less Accretive and Less Attractive.
----------------------------------
In June 2001, the FASB issued SFAS No. 141, Business Combinations. The
statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations, and SFAS
No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises.
From 1993-1999, we completed 28 acquisitions, certain of which were accounted
for using the pooling-of-interests methodology, which is no longer acceptable
under SFAS 141. Effective June 2001, prospective business combinations are
required to be accounted for using purchase accounting. As a result, any
amounts paid in excess of fair value of the assets acquired are capitalized and
recorded as intangible assets or goodwill whose amortization or impairment may
reduce future earnings. Accordingly, future business combinations may be less
attractive as our reported generally accepted accounting principles ("GAAP")
operating results are likely to be negatively impacted.
We May Suffer Losses Due to the Investment Performance of Variable Life
-----------------------------------------------------------------------
Insurance Policies That Are Tied to the Performance of Equity Markets That May
------------------------------------------------------------------------------
Lead to Delays in Repayments of Premiums Pursuant to Certain Split-Dollar Life
------------------------------------------------------------------------------
Insurance Agreements or Result in Increased Supplemental Executive Retirement
-----------------------------------------------------------------------------
Plan (SERP) Expenses in Future Periods.
--------------------------------------
We have an investment interest in three variable life insurance policies.
Each of the variable life insurance policies provides for the investment of the
cash value portion of policies into various sub-accounts that are similar in
nature to mutual funds. Two policies are issued pursuant to split-dollar
agreements with the former executives, and trusts established for their benefit
make the investment decisions on these policies. The third policy is a
corporate-owned policy that we contributed to a grantor or "rabbi" trust
established to make contributions to satisfy our obligations under the SERP and
two other subsequently terminated benefit plans. We make the investment
decisions only on this policy. The performance of the variable life insurance
policies for cash value and premium amounts will vary depending on the
performance of the selected underlying sub-accounts. Pursuant to FTB 85-4 and
FTB 97-14, we report the amounts that could be realized under these variable
life insurance contracts as an asset valued as of the balance sheet date and
treat the change in cash surrender value during the reported period as an
adjustment of premiums paid in determining the expense or income to be
recognized. The reduced value of the variable life insurance policies and
future adverse changes in the condition of equity markets or poor operating
results of underlying policy sub-accounts could result in (i) the delayed
repayment of advanced premiums in the case of the split-dollar policies, and/or
(ii) increased SERP expenses in future periods.
A Significant Amount of Our Assets Are Comprised of Goodwill, Capitalized
-------------------------------------------------------------------------
Software, Customer Lists and Other Intangible Items Subject to Impairment and
-----------------------------------------------------------------------------
Adjustment That Could Possibly Negatively Impact Our Results of Operations and
------------------------------------------------------------------------------
Stockholders' Equity.
--------------------
A significant amount of our assets are comprised of capitalized software
and intangible assets, such as the value of the installed customer base, core
technology, capitalized software, goodwill, and other identifiable intangible
assets acquired through our acquisitions, such as trademarks.
Pursuant to SFAS No. 142, we must test goodwill, capitalized software and
other intangible assets beyond their economic life for impairment at least
annually, and adjust them when impaired to the appropriate net realizable
value. We engaged a valuation firm to perform an impairment test on the
carrying value of our goodwill and intangibles as of December 31, 2002 and
2001. The valuation firm determined that there was no impairment as of these
dates. In addition, our internally-developed software has been capitalized
assuming our earnings from these product developments exceeds the costs
incurred to develop them. If it is determined that these assets have been
impaired and our future operating results will not support the existing
carrying value of the capitalized software, we will be required to adjust the
carrying value of the capitalized software to net realizable value.
We, however, cannot predict that all of our intangible assets will
continue to remain unimpaired. Our future operating results and stockholders'
equity could possibly decrease with any future impairment and write-down of
goodwill, customer lists, or other such intangibles.
31
No Mirror Processing Site for Our Customer Data Processing Facilities
---------------------------------------------------------------------
Exists; Our Business, Financial Condition, and Results of Operations Could Be
-----------------------------------------------------------------------------
Adversely Affected if These Facilities Were Subject to a Closure from a
-----------------------------------------------------------------------
Catastrophic Event or Otherwise.
-------------------------------
We currently process substantially all of our customer data at our
facilities in Neptune, New Jersey; Irving, Texas; Kansas City, Missouri; and
San Rafael, California. Although we back up our data nightly and have
safeguards for emergencies, such as power interruption or breakdown in
temperature controls, we have no mirror processing site to which processing
could be transferred in the case of a catastrophic event at any of these
facilities. If a major catastrophic event occurs at these facilities possibly
leading to an interruption of data processing, or any other interruption or
closure, our business, financial condition, and results of operations could be
adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------ ----------------------------------------------------------
Interest Rate Risk
------------------
Our exposure to market risk for changes in interest rates primarily
relates to our investment portfolio. It is our intent to ensure the safety and
preservation of our invested principal funds by limiting default risk, market
risk, and reinvestment risk. We invest in high-quality issuers, including
money market funds, corporate debt securities, and debt securities issued by
the United States government. We have a policy of investing in securities with
maturities of two years or less. We do not invest in derivative financial or
foreign investments.
The table below presents fair values of principal amounts and weighted
average interest rates for our investment portfolio as of March 31, 2002, (in
thousands, except average interest rates):
Aggregate Weighted Average
Fair Value Interest Rate
---------- -------------
Cash and cash equivalents:
Cash $ 6,730
Money Market funds 23,733 1.10 %
--------
Total cash and cash equivalents $ 30,463
========
Short-term investments:
Corporate debt securities $ 2,380 1.68 %
Debt issued by the U.S. government 33 6.44 %
--------
Total short-term investments $ 2,413
========
Long-term investments:
Corporate debt securities $ 596 5.57 %
Debt issued by the U.S. government 524 4.70 %
--------
Total long-term investments $ 1,120
========
As our long-term debt consists solely of our Debentures totaling $73.7
million at March 31, 2002, at a fixed interest rate of 5.25% maturing in 2005.
Performance of Equity Markets
-----------------------------
The performance of equity markets can have an effect on our operations,
and recent declines in equity markets, if sustained, will have an adverse
effect on us related to certain variable life insurance policies in which we
have an investment interest.
Foreign Currency Risk
---------------------
Although we sell our products internationally from time to time, all such
transactions are denominated in U.S. Dollars and, as such, there is no foreign
currency fluctuation risk associated with these sales.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------ -----------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11, 2002. The complaints seek unspecified monetary damages and other relief.
These matters are at an early stage. No responses to the complaints have yet
been filed, and no discovery has taken place. We intend to defend ourselves
vigorously against these allegations. On December 31, 2002, the Court entered
an order consolidating all related securities class actions against the
Company.
Following our August 12, 2002 announcement that we intended to restate
prior period financial statements, the staff of the San Francisco District
Office of the SEC requested certain information and documents relating to this
matter as part of an informal, preliminary inquiry. We provided that
information, and expect to provide further information now that the restatement
is completed. On February 28, 2003, we reported that the SEC had issued a
formal non-public order of investigation concerning our accounting and
financial reporting practices for the period beginning January 1, 1998. We
intend to continue to cooperate with the SEC in the event it requests other
information. We cannot predict whether such information will be requested,
when the SEC will conclude its inquiry, or the impact or outcome thereof.
Item 2. Submission of Matters to Vote of Securities Holders
------ ---------------------------------------------------
None.
Item 3. Other Matters
------ -------------
None.
Item 4. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) The following documents are filed as a part of this Quarterly Report on
Form 10-Q/A.
(i) Financial Statements.
The interim consolidated financial statements contained herein.
(b) Reports on Form 8-K. We filed the following reports on Form 8-K during
the quarter for which this report is filed:
(i) Form 8-K dated April 5, 2002, reporting a change in independent
public accountants.
(c) Exhibits:
The exhibits listed on the accompanying Exhibits Index or incorporated
by reference are filed as part of this Quarterly Report on Form 10-Q/A.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this form to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUADRAMED CORPORATION
Date: August 15, 2003 By: /s/ Lawrence P. English
----------------------------------
Lawrence P. English
Chairman of the Board
Chief Executive Officer
Date: August 15, 2003 By: /s/ Charles J. Stahl
----------------------------------
Charles J. Stahl
Chief Financial Officer
34
EXHIBIT INDEX
2.1 Securities Purchase Agreement dated as of May 5, 2000, by and among
QuadraMed Corporation, QuadraMed Operating Corporation, Certain Investors
and ChartOne, Inc. (6)
2.2 Asset Contribution Agreement dated as of May 3, 2000, by and among
QuadraMed Corporation, QuadraMed Operating Corporation and ChartOne, Inc.
(6)
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. (11)
3.4 Amended and Restated Bylaws of QuadraMed. (1)
3.5 Third Amended and Restated Certificate of Incorporation of QuadraMed. (3)
3.6 Amended and Restated Certificate of Incorporation of QuadraMed amended
January 28, 2002.
4.1 Reference is made to Exhibits 3.4 and 3.5. (1) (3)
4.2 Form of Common Stock certificate. (1)
4.11 Form of Warrant to Purchase Common Stock. (1)
4.15 Subordinated Indenture, dated as of May 1, 1998, between QuadraMed and
The Bank of New York. (4)
4.16 Officers' Certificate delivered pursuant to Sections 2.3 and 11.5 of the
Subordinated Indenture. (2)
4.17 Registration Rights Agreement dated April 27, 1998, by and among
QuadraMed and the Initial Purchasers named therein. (2)
4.18 Form of Global Debenture. (2)
4.19 Form of Certificated Debenture. (2)
4.21 Registration Rights Agreement dated December 23, 1998, by and between
QuadraMed and the shareholders listed therein. (5)
4.22 Registration Rights Agreement, dated as of March 3, 1999, by and among
QuadraMed Corporation and the stockholders of The Compucare Company named
therein. (4)
10.1 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)
10.4 Amendment of Separation Agreement effective as of July 31, 2001 between
James D. Durham and QuadraMed. (12)
10.5 1999 Supplemental Stock Option Plan for QuadraMed. (14)
10.5 Amendment of Employment Agreement dated September 20, 2001 between
Lawrence P. English and QuadraMed. (13)
10.6 Amendment of Employment Agreement dated September 20, 2001 between
Michael H. Lanza and QuadraMed. (13)
10.7 Amendment of Employment Agreement dated September 20, 2001 between Dean
Souleles and QuadraMed. (13)
10.8 Amendment of Employment Agreement dated September 20, 2001 between Mark
N. Thomas and QuadraMed. (13)
10.9 Amendment of Employment Agreement dated September 20, 2001 between
Michael S. Wilstead and QuadraMed. (13)
10.64 Separation Agreement dated June 12, 2000, between James D. Durham and
QuadraMed. (7)
10.65 Separation Agreement dated June 12, 2000, between John V. Cracchiolo and
QuadraMed. (7)
10.66 Employment Agreement dated June 12, 2000, between Lawrence P. English and
QuadraMed. (7)
10.67 Employment Agreement dated May 12, 2000, between Mark Thomas and
QuadraMed. (7)
10.67 Employment Agreement dated August 16, 2000, between Dean Souleles and
QuadraMed. (9)
10.68 Employment Agreement dated September 18, 2000, between Michael H. Lanza
and QuadraMed. (8)
31.1 Certification of the Chairman of the Board and Chief Executive Officer
under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chairman of the Board and Chief Executive Officer
under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
---------------------------
(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.
35
(2) Incorporated by reference from our Registration Statement on Form S-3, No.
333-55775, as filed with the Commission on June 2, 1998, as amended by
Amendment No. 1 thereto, as filed with the Commission on June 17, 1998.
(3) Incorporated by reference from the exhibit with the same number to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as filed
with the Commission on August 14, 1998, as amended on August 24, 1988.
(4) Incorporated herein by reference from our Current Report on Form 8-K/A
filed with the Commission on March 22, 1999.
(5) Incorporated herein by reference from our Registration Statement on Form S-
3, No. 333-80617, as filed with the Commission on June 14, 1999, as amended
by Amendment No. l thereto, as filed with the Commission on August 4, 1999.
(6) Incorporated herein by reference from exhibit with the same number to our
Current Report on Form 8-K filed with the Commission on June 22, 2000.
(7) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as
filed with the Commission on August 14, 2000.
(8) Incorporated herein by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
as filed with the Commission on November 15, 2000.
(9) Incorporated herein by reference from the exhibit with the same number to
our Current Report on Form 8-K filed with the Commission on November 6,
2000.
(10) Incorporated herein by reference from our annual report on Form 10-K, as
filed with the Commission on March 30, 2000, as amended by May 1, 2000.
(11) Incorporated herein by reference from our Current Report on Form 8-K, as
filed with the Commission on August 21, 2001.
(12) Incorporated herein by reference from the exhibit with same number to our
Quarterly Report on Form 10-Q as filed with the Commission on August 14,
2001.
(13) Incorporated herein by reference from the exhibit with same number to our
Quarterly Report on Form 10-Q as filed with the Commission on November 14,
2001.
36