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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
FOR THE FISCAL YEAR ENDED December 31, 2002
Or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
12110 SUNSET HILLS ROAD, SUITE 600, RESTON, VIRGINIA 20190
(Address of Principal Executive Offices) (Zip Code)
(703) 709-2300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Per Share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __ No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 28, 2002 was approximately $189,735,393 (based upon the
price quoted for shares of the Registrant's common stock as reported on the
Nasdaq SmallCap Market on June 28, 2002). Shares of common stock held by each
officer, director and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes X No __
On July 31, 2003, 27,530,815 shares of the Registrant's common stock,
$0.01 par value per share, were outstanding.
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QUADRAMED CORPORATION
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 11
Item 3 Legal Proceedings................................................ 11
Item 4 Submission of Matters to a Vote of Security Holders.............. 12
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 12
Item 6 Selected Financial Data.......................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 37
Item 8 Financial Statements and Supplementary Data...................... 38
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.......................................... 38
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 38
Item 11 Executive Compensation.......................................... 40
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................... 49
Item 13 Certain Relationships and Related Transactions.................. 49
Item 14 Controls and Procedures......................................... 50
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 52
Signatures............................................................... 53
Financial Statement Schedule............................................. S-1
Index to Consolidated Financial Statements............................... F-1
Cautionary Statement on Risks Associated With Forward-Looking Statements
- ------------------------------------------------------------------------
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to risks and
uncertainties. The words "believe", "expect", "anticipate", "predict",
"intend", "plan", "estimate", "may", "will", "should", "could", and similar
expressions and their negatives are intended to identify such statements.
Forward-looking statements are not guarantees of future performance and are to
be interpreted only as of the date on which they are made. We undertake no
obligation to update or revise any forward-looking statement.
We advise investors that we discuss other risks and uncertainties that
could cause our actual results to differ from these forward-looking statements
in this Form 10-K under "Business Risks" in "Item 7. Management's Discussion
-----------------------
and Analysis of Financial Condition and Results of Operations."
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PART I
Item 1. Business
- ------ --------
Overview
- --------
QuadraMed Corporation along with all significant business divisions and
subsidiaries, (the "Company" or "QuadraMed") is dedicated to improving
healthcare delivery by providing innovative healthcare information technology
and services. From clinical to patient information management and revenue cycle
to health information management, QuadraMed delivers real-world solutions that
help healthcare professionals deliver outstanding patient care with optimum
efficiency. QuadraMed was reincorporated in Delaware in 1996, having been
originally incorporated in California in 1993. QuadraMed can be located at
www.quadramed.com. QuadraMed is managed in three distinct business segments
which are as follows: Enterprise Division, Health Information Management
Software Division and Financial Services Division.
We initiated a new branding strategy in 2001 that included the adoption of
a new trademark, "We do technology. So you can do healthcare(tm)". This
evolved in the year 2002. The strategy classified our healthcare technology
products and services into four sub-brands, corresponding to the four distinct
categories of hospital decision-makers who purchase our products:
o Affinity(r) Healthcare Information Systems, which are generally purchased
in a committee decision involving hospital boards, chief executive
officers, chief financial officers, chief medical officers, chief
information officers, and outside consultants;
o Quantim(r) Health Information Management Software, which is generally
procured by health information management professionals, chief financial
officers, chief information officers, and outside consultants; and
o Chancellor(tm) Financial Products and Services, which are generally
secured by chief financial officers and revenue officers.
We are dedicated to developing information technology and providing
consulting services that help healthcare professionals improve productivity and
deliver patient care. Management's strategy consists of:
o Increased sales activity to improve revenue growth;
o Continued expense discipline;
o Development and investment in research and development;
o Instituting key financial and operational improvements; and
o Selling non-strategic assets.
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Technology and Product Development Strategy
- -------------------------------------------
We are continuously engaged in the design and development of new products
and enhancements to our existing products. Our research and development is
guided by the following technology trends and healthcare industry needs that
affect software producers and consumers:
o The Internet and distributed computing have had and will likely continue
to have a significant impact on the way software is developed and
delivered;
o Patient safety has become a top priority for healthcare organizations and
a major factor to consider in choosing clinical information systems;
o Under the HIPAA standards, health care providers must establish procedures
and mechanisms to protect the confidentiality, integrity and availability
of electronic health systems;
o Hospital executives are under tremendous pressure to improve operational
efficiency and return on investment;
o Web-native applications with a clean Internet architecture will likely
have a significant role in the future; and
o Computing power, storage capacity, and network bandwidth have in the past
and may continue to double every 18, 12, and 6 months, respectively.
In 2002, we made significant progress on the technology plan that was
initiated in the second half of 2001. We focused on the development of new
web-native applications (designed to run in a web browser) built on n-tiered
architecture (developed in discrete layers separating the user interface from
the business rules and data storage to provide maximum platform independence)
in two product areas:
o We have extended the classical Affinity architecture to include a web-
native, service-orientated Java (J2EE) based platform. On this platform,
we delivered to the industry an innovative Clinical Workstation including
Computerized Physician Order Entry (CPOE) application to its beta site, in
the fourth quarter of 2002. The Affinity CPOE system with its unique
Intelligent Care Sets establishes a new standard in patient safety. We
also delivered Affinity Global Registration to its beta site in the fourth
quarter of 2002. Global Registration is a fully scalable, single
registration portal for one or multiple healthcare facilities. It
features shared patient registration information for both hospital and
physician practices from a secure, central database. This new application
will reduce redundancies, improve efficiency and in turn, raise patient
satisfaction. Designed with the assistance of human factors engineers and
extensive usability testing, once operational it will be able to be
deployed in a flexible manner on a variety of platforms, ranging from
traditional PC desktops to wireless handheld tablet computers and personal
digital assistants;
o In the Quantim product line, we successfully launched a full suite of
Healthcare Information Management (HIM) applications, including Inpatient
Compliance, Outpatient Compliance, APC Compliance, Facility Coding,
Physician Coding, and Correspondence Management. Quantim is designed to
provide seamless integration with a consistent look and feel using one
platform to provide an end-to end health information management solution;
and
o We completed real time interfacing between Quantim and Affinity.
Today we are the only HIS vendor offering a full suite of HIM products and
the only one offering our own coding tool. The web-native applications have
been well received by our clients. They are fully interfaced with our core
Affinity revenue cycle management system. The service-oriented architecture
also allows integration with existing web portals to make enterprise wide
information web-accessible.
We will continue to leverage and expand our web-native and service-
oriented technology platform to deliver end-to-end and real time automation
across the continuum of care.
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Description of Operating Division Products and Markets
- ------------------------------------------------------
In 2000, our operations were realigned into five distinct business
segments. With the sale of the EZ-CAP managed care software business in August
2001, and the sale of the Health Information Management Services Division in
December 2002, we are now managed in three distinct business segments. The
three segments are as follows:
o Enterprise Division, which provides acute care hospitals with Affinity
-------------------
integrated enterprise information systems to manage patient registration,
clinical, and financial information and related products;
o Health Information Management Software Division, which provides acute care
-----------------------------------------------
hospitals and physician practices with health information management
systems to manage coding, compliance, abstracting and record management
processes; and
o Financial Services Division, which identifies and collects accounts
---------------------------
receivables for hospitals and medical groups and provides other Chancellor
products and services.
Enterprise Division
- -------------------
Our Enterprise Division provides hospitals, particularly acute care
hospitals, with integrated enterprise information systems to manage patient
registration, clinical, and financial information. Our Enterprise Division
products are generally only sold only in the United States, although certain
products are also sold in Canada.
The division's primary offices are in Reston, Virginia; Irvine,
California; and Neptune, New Jersey.
Affinity is the Enterprise Division's core product. For the last five
consecutive review periods, Affinity has been selected as one of the top "Major
Acute Care" software solutions in a survey of approximately 3,500 hospital
chief information officers and department directors, as reported by KLAS
Enterprises in its Healthcare IT Top 20 report. The Affinity Pharmacy software
solution was selected as the number one pharmacy solution in 2002 by KLAS,
winning the 2002 "Best in KLAS" Award. Development of Affinity began in 1989.
It was first released in 1991 by The Compucare Company ("Compucare"), which we
acquired in 1999.
Affinity is a standards-based, integrated, healthcare information system.
It is highly scaleable and flexible and supports the business application needs
of hospitals of varying sizes, from small community facilities to large multi-
entity Integrated Delivery Networks ("IDNs"). It can be implemented on both
Microsoft NT and UNIX operating systems and supports a number of hardware
platforms, including Compaq, Hewlett Packard, IBM, and EMC. Affinity is built
on a standards-based architecture constructed in ANSI-standard programming
language and uses the Cache database with structured queried language ("SQL")
access engineered by InterSystems Corporation.
Affinity's comprehensive and integrated product suite is comprised of 70
applications divided into four major functional and infrastructure areas:
o Affinity Patient Information Management;
o Affinity Clinical Care Management;
o Affinity Patient Revenue Management; and
o Affinity Financial Management.
Affinity clients typically purchase "core" applications, such as
Registration, Medical Records, Patient Accounting, and Order Management,
Pharmacy and Patient Charting. In addition to "core" applications, clients
frequently purchase additional Affinity applications that are designed to:
o Streamline their workflow processes;
o Reduce administrative expenses;
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o Improve the speed and accuracy of billing processes; and
o Assist in clinical decision-making and documentation.
Affinity's development cycle includes one major annual release to
customers and up to four "update" releases. Content for the annual releases
typically focuses on five major categories:
o Regulatory enhancements required by federal and state mandates;
o Strategic enhancements to the breadth and depth of functionality;
o User group enhancements voted on by Affinity customers pursuant to
customer support agreements;
o Corrective maintenance to repair code; and
o Modification retrofits funded by customers.
In 2001, a prototype Affinity CPOE system, used to assist physicians in
clinical decision-making and improve patient safety, was completed. It was
successfully delivered to its beta site, Great Plains Medical Center, in
October 2002 and was generally available in March 2003. Designed with the
assistance of human factor engineers and extensive usability testing, it is
designed to be deployed in a flexible manner on a variety of platforms, ranging
from traditional PC desktops to wireless handheld tablet computers and personal
digital assistants. The Affinity CPOE, Pharmacy and Patient Charting software
solution provides a comprehensive, advanced clinical solution.
We elected to develop CPOE based on the existing Affinity system. The
successful delivery of CPOE led to the establishment of the advanced clinical
workstation environment which will now serve as the basis for future clinical
systems developed by QuadraMed, a web-native service architecture and
development platform focused on individuals and based on industry standards
such as Health Level 7, version 3.
The Affinity Pharmacy Management system provides a comprehensive solution
to help healthcare organizations manage the daily operations of their pharmacy
departments and is fundamental in addressing patient safety concerns that are
driving clinical decisions. The strategic acquisition of Pharmacy Data Systems
was completed in June of 2002 and initiatives are underway to tightly integrate
it with the Affinity Care Management solutions: ordering, dispensing,
administration and charting. Additionally, we also offer a standalone solution
for pharmacy management that includes inpatient, ambulatory, and long-term care
pharmacy settings and provides electronic medication record and prescriber
order entry tools to close the loop on medication management.
Over 2,000 Affinity applications are installed at over 500 hospitals in
the United States and Canada. Affinity health information system is currently
installed in 153 hospitals in 32 states and Canada. Hospitals generally use
committees to make major information technology purchase decisions.
Consequently, purchase decisions are often slow to be made. The average sales
cycle for Affinity is typically 12 to 18 months from initial contact to
contract execution. Affinity sales are normally generated from six major
sources:
o Requests for proposals sent directly to us by the hospital or its retained
consultant;
o Referrals and recommendations from consulting firms;
o Healthcare trade shows;
o Our sales force;
o Telemarketing; and
o Direct mail.
In addition to Affinity, our Enterprise Division also markets an
electronic document imaging and management system or "EDM", and a suite of
Master Population Index ("MPI") Software and Services (MPIspy(r), SmartID(r),
SmartMerge(r), MPI Cleanup), which enable the identification, correction, and
elimination of duplicate patient records in a facility's master population
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index. In January 2001, the division also began selling our Chancellor
Decision Support tools, which includes: Contract Management, a managed care
contract management system; Performance Measurement, a clinical and financial
outcome analysis and decision support system; and, Clinical Outcome Practice
Evaluator ("COPE"), which electronically captures, abstracts, and enters data
required for Core Measures of the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO").
The following table provides a list of the major products and services
offered by our Enterprise Division:
Affinity Patient Information Management o Patient Scheduling
o Patient Registration
o Master Population Index
o Community Master Population Index
("CMPI")
o Medical Records Abstracting
o Medical Records Control
o DRG/Case Mix
o Account Workflow
o Electronic Data Interchange
Affinity Clinical Care Management o Computerized Physician Order Entry
("CPOE")
o Clinician Access
o Order Management
o Ancillary Department Management
o Patient Charting
o Medication Charting
o Plan of Care
o Acuity/Staff Requirements
o Health Notes
o Quality Management
o Utilization Management
Affinity Pharmacy Management o PharmPro
o AmpPro
o NurPro
o pcMAR
o Prescriber Order Entry
Affinity Financial Management o General Ledger
o Accounts Payable
o Payroll Personnel
o InSight Executive Decision Support
o Performance Measurement
Affinity Patient Revenue Management o Patient Accounting
o Central Business Office
o Account Workflow
o Contract Management
o Electronic Data Interchange
Affinity Professional Services o Consulting Services
o Interface and Conversion Services
o Systems Operations Management
Services
o Query Services
o Customer Training Courses
o Professional Services
Affinity Electronic Document Management o Medical Records
o Patient Accounting
o ColdView
o Human Resources
o Workflow
Affinity MPI Integrity Management o MPIspy
o SmartMerge
o PreciseID Patient Search Algorithm
5
Chancellor Decision Support o Contract Management
o Performance Measurement
o Clinical Outcome Practice Evaluator
("COPE")
We primarily market our Enterprise Division products to acute care
hospitals. The non-federal acute care market consists of approximately 5,000
hospitals within the United States (American Hospital Association Statistics,
2001). Differentiation within this market is by locale (rural/urban) and bed
size (number of beds). Approximately 2,800 hospitals are located in urban
areas and approximately 2,200 are located in rural areas. Hospitals with fewer
than 200 beds constitute approximately 71% of the total acute care market and
account for approximately 20% of the aggregate expenditures by acute care
hospitals on information technology. Hospitals with more than 200 beds
constitute approximately 29% of the acute care hospital market and account for
approximately 80% of acute care hospital spending on information technology.
The acute care hospital market is mature and has been in the process of
consolidating over the past several years. Consequently, we believe that the
greatest sales opportunities for our Enterprise Division between now and 2005
will be in the replacement market for legacy healthcare information systems.
Given Affinity's functional flexibility and ability to interface with other
clinical systems, we believe that we have significant opportunities in the 200-
bed or larger hospital market.
From 1998 to 2000, hospital information system sales as a whole slowed due
to expenditures on 2000 remediation, industry consolidation, and generally poor
economic conditions for hospitals primarily due to reimbursement issues
associated with managed care contracts and the Balanced Budget Act of 1997. We
believe that demand for our Enterprise Division products has increased given
that government regulatory bodies and the news media continue to scrutinize
patient safety issues, which increase the need to reduce clinical error and
improve quality measures. In addition, we believe that shortages of medical
professionals, particularly in nursing, ancillary, and health information
management departments, will increase the need for hospitals and other
healthcare providers to acquire health information systems that reduce clinical
errors, increase hospital efficiencies, reduce administrative cost, and improve
the speed and accuracy of billing processes.
Health Information Management Software Division
- -----------------------------------------------
Our Health Information Management Software Division provides acute care
hospitals and physician practices with health information management systems to
manage coding, compliance, abstracting and record management processes. The
unique combination of complimentary solutions is designed to significantly
improve the business of healthcare. The Health Information Management software
solutions are designed to generate operational efficiencies, improve cash flow
and measure the cost and quality of care. Our Health Information Management
Products fall into four main areas:
o Compliance Management;
o Coding and Reimbursement Management;
o Abstracting; and
o Record Management.
Our Health Information Management Software Division products are sold in
the United States, Puerto Rico, and Canada. The main offices are in Alameda
and San Marcos, California.
Our current offering of Health Information Management software products
includes a mix of older legacy products from previous acquisitions and our new
internally developed Quantim applications that are based on an enterprise n-
tiered architecture that supports a variety of database engines, including
Microsoft SQL Server and Oracle Enterprise Edition. In 2001, we started
development on Quantim with the vision of a single, fully integrated, web-
native platform for our Health Information Management product suite that would
significantly improve the functionality of several existing health information
management product offerings in coding, compliance, abstracting, and record
management. The first products to be offered on this new platform, Quantim
Inpatient and Outpatient Compliance, were delivered to the beta site in the
fourth quarter of 2001 and became generally available for purchase in February
2002. Other Quantim modules that became generally available in 2002 include
Quantim APC Compliance, Quantim Facility Coding, Quantim Physician Coding, and
Quantim Correspondence Management.
6
Our coding software products, Quantim Facility Coding and Physician Coding
as well as the legacy products of nCoder+, nCoder+MD, WinCoder+ and Cascade
Encoder, identify ICD-9-CM and HCPCS/CPT codes to classify diagnosis and
procedure codes and facilitate the calculation of hospital and physician
service reimbursement. The encoding methodology is "knowledge-based" and
adheres to the U.S. Department of Health and Human Services Office of the
Inspector General ("OIG") recommended use of the ICD-9-CM Official Coding
Guidelines. The encoding tools include official coding protocols, integrated
OIG recommended references, and data quality edits, designed utilizing the
professional knowledge of our credentialed health information management
professionals.
We have historically sold our legacy-based coding products primarily to
hospitals with less than 200 beds, which represent 71% of the approximately
5,000 non-federal acute care hospitals. With the introduction of the new
Quantim software architecture, the scalability and web-native platform allow us
to effectively market to the entire acute care market to include large
hospitals and IDNs. We market a specialized coding product, nCoder+/PTF, for
Veterans Administration facilities. In December 2001, we established a new
marketing unit for sales to governmental agencies. In addition to facility
coding products, we also sell a third party specialized coding product for the
commercial physician market, nCoder+MD. We believe that opportunities exist in
the physician market for coding product sales. We also believe that new
opportunities for our coding products could develop with the anticipated
implementation of ICD-10. This new coding classification system is expected to
require the modification of coding, billing, and data collections systems and
the conversion of statistical information for proper clinical reporting and
claims submission. The new Quantim architecture is designed to accommodate the
ICD-10 classification system and the knowledge based approach is recommended by
the American Health Information Management Association ("AHIMA") in
facilitating a smooth transition from ICD-9 to ICD-10.
Our Compliance Management products included our legacy inpatient (IP
Facts), outpatient (OP Facts), and Ambulatory Patient Classifications
(Analyzer+) compliance modules through 2001, with the introduction of the new
compliance management products Quantim Outpatient, Quantim Inpatient and
Quantim APC Compliance in 2002. The Quantim Compliance product line is
designed to conduct automated prospective and retrospective reviews of all
inpatient and outpatient claims data (UB92). The screenings within the Quantim
Compliance Management tools include OIG and internally designed targets aimed
to provide data quality, coding accuracy, and appropriate reimbursement. In
addition to identifying claims with potential errors prior to billing, these
tools work in conjunction with an organization's coding and billing compliance
program to identify patterns in coding and physician documentation. Results of
the auditing and monitoring activities are represented in executive reports
summarizing clinical and financial results as well as detailed reports
providing information needed to target specific areas for review. We also
offer the ProFEE Compliance Suite, which is a compliance tool to screen
professional fees and services (HCFA1500), exclusively for the Veteran's
Administration facilities.
Our primary market for Quantim Compliance products is the acute care
hospital market. Market studies show that growth for the compliance market
increased from 34% in 1999 to 39% in 2001, a fast growth segment in the HIM
market. Billing practices for health care services are under close scrutiny by
the OIG as high-risk areas for Medicare fraud and abuse. CMS has recommended
increasing its efforts to maintain progress in reducing improper payments,
specifically to increase its work with providers to ensure that medical record
documentation support services provided. Hospitals must implement
comprehensive coding and compliance programs in order to minimize payer
submission errors and assure the receipt of anticipated revenues. An effective
program includes clear, defined guidelines and procedures combined with
technology solutions that enhance a hospital's system and effectively increase
revenues and reduce costs. When the Inpatient and/or Outpatient Compliance
modules are purchased with Facility Coding, the health care organization has
the flexibility to incorporate both an interactive, pre-bill and retrospective
review of the claim prior to submission for billing.
Our abstracting solutions enable healthcare facilities to accurately
collect and report patient demographic and clinical information. Our current
abstracting solutions include WinCODER+CS and the Cascade Master Systems. Both
products provide the customer the ability to calculate inpatient and outpatient
hospital reimbursements and customize data fields needed for state, federal,
and JCAHO regulatory requirements. Standard and custom reports provide the
customer the ability to generate facility-specific statistical reporting used
for benchmarking, outcomes and performance improvement, marketing, and
planning. Quantim Abstracting, currently in development, will provide
healthcare organizations the flexibility to customize abstracting workflow to
meet data collection reporting and analysis needs. Abstracting captures,
structures, and analyzes clinical and financial data utilizing standard and
customizable fields, rules and screen design. The Application Builder tool
provides the user the ability to customize workflow by creating fields and
rules and designing screen navigation. Quantim Abstracting will provide a
report library of standard reports and an ad-hoc report writer to design and
generate custom reports. When purchased with Quantim Coding and Quantim
Compliance, Quantim Abstracting will provide an integrated solution that
7
enables the user to access both the Coding and Compliance tools within a
patient encounter. Quantim Abstracting is scheduled to be beta ready in Q3
2003 and targeted for general availability in Q4 2003.
Our current record management product, MEDREC Millennium(r), automates the
record tracking and location functions, monitors record completeness, and
facilitates the release of information process within health information
management departments. This product assists healthcare facilities in properly
completing records pursuant to JCAHO, state, federal, and medical staff bylaw
requirements. Our record management solution consists of these main modules
that are sold individually or as a product suite and interface with a
facility's patient information system. The primary market for our record
management solution is acute care hospitals. The MEDREC Millennium Suite
includes distinctive features for IDNs, outpatient providers, and Veterans
Administration facilities. These tools are designed to monitor a facility's
adherence to patient privacy, disclosure, and patient bill of rights
requirements.
Prior to HIPAA legislation, the Health Information Department had sole
responsibility for facilitating disclosure of patient information. Under
HIPAA's privacy requirements, disclosures must be tracked and aggregated from
all departments in the organization, not just the Health Information
Department. The complexity of tracking disclosures throughout the
organization, as well as providing the patient a record of what has been
disclosed a minimum of 6 years, places an organization at risk. HIPAA calls
for severe civil and criminal penalties for noncompliance, including fines up
to $25,000 for multiple violations of the same standard in a calendar year and
fines up to $250,000 and/or imprisonment up to 10 years for knowing misuse of
individually identifiable health information. To provide our customers with
the tools needed to comply with the HIPAA privacy ruling effective April 2003,
Correspondence Management was added to the Quantim platform in December 2002.
Quantim Correspondence Management provides complete functionality to
facilitate a healthcare organization's compliance with the Disclosure
Management aspect of the HIPAA privacy mandate. In addition, it provides the
tools needed by HIM to automate the entire release of information workflow
process, including robust accounts receivable management.
Correspondence Management generates disclosure accounting and audit
reports, retains an on-line history of the Disclosure Accounting process and
permits tracking of the specific disclosure type all within a secure
environment. In addition, it tracks and monitors suspensions by health
oversight and law enforcement agencies. The release of information features
provide for tracking and monitoring of requests made by individuals or entities
outside of the healthcare organization.
The HIM Software Division will continue to conduct strategic planning and
development in 2003 to transition all the remaining Health Information
Management product offerings on the Quantim platform.
The following table provides a list of software products offered by our
Health Information Management Software Division:
Compliance Management o Inpatient Compliance - Quantim
Inpatient Compliance, IP Facts
o Outpatient Compliance - Quantim
Outpatient Compliance, OP Facts
o APC Compliance - Quantim APC
Compliance, Analyzer+
o VHA ProFee Compliance Suite
o Auditing Services
Coding and Reimbursement Management o Physician Coding - Quantim Physician
Coding, nCoder+MD
o Facility Coding - Quantim Facility
Coding, nCoder+, Cascade Encoder,
WinCoder Interactive
o VA Coding - nCoder+/PTF
Abstracting o WinCoder CS
o Cascade Master System
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Record Management o MEDREC Millennium Record Management
o Chart Completion
o Chart Locator
o Correspondence Management
o Enterprise Search and Reporting
o Electronic Signature
o Quantim Correspondence Management
Complysource Regulatory Compliance o Compliance Assessment and Management
Tool
Complysource HIPAA Compliance o HIPAA Assessment and Management Tool
Financial Services Division
- ---------------------------
Our Financial Services Division provides two services that identify and
collect accounts receivables for hospitals and medical groups: (i) Chancellor
Accounts Receivable Management; and (ii) Chancellor Managed Care Payment
Review.
Our Chancellor Accounts Receivable Management services provide a variety
of third-party collection services, including:
o Complete outsourcing that initially bill and collect accounts from time of
service;
o Early out programs that collect accounts of pre-designated age or amount;
o Aged accounts placement that collects aged accounts on a one-time basis;
o Resolution of accounts unable to be transferred as part of conversion to a
provider's new health information system;
o Operational assessments of hospital revenue cycles; and
o Training and education on business office operations and compliance issues
related to collection.
We also offer customization of accounts receivable services and detailed
reconciliation reports on our work. Our Financial Services Division provides
services only to customers in the United States, and its primary offices are
located in Escondido and San Diego, California.
We market our Chancellor Accounts Receivable Management services to large
or multi-hospital facilities. Historically, most of our clients for this
service have been in California. In 2000, we began to market the services in
other states and hired national sales representatives. Consequently, the
business grew throughout 2001 at a faster rate than in previous years. We
anticipate that demand for our Accounts Receivable Management services should
increase in the future as the hospital and healthcare industry continues to
emphasize faster accounts receivable collections and increasingly complex
reimbursement mechanisms.
Our Managed Care Payment Review Services audit managed care patient
accounts for appropriate payment pursuant to managed care contracts. In
providing this service, we use our own proprietary software that automates many
audit functions and permits greater reporting options.
In 2001, we ceased entering into new contracts for Capitated Payment
Review ("CPR") services. Under CPR contracts, we audited payments for
hospitals and medical groups that have accepted financial risk for Medicare
eligible health maintenance organizations ("HMO") enrollees and are paid by the
HMO on a percentage of the U.S. Centers for Medicare and Medicaid premium. The
service was only provided for healthcare providers with more than 3,000
Medicare HMO enrollees and most of the customers for this service were located
in California. The decision to end these services was made because we were
unable to achieve profitability from this service line.
9
Health Information Management Services Division
- -----------------------------------------------
Our Health Information Management Services Division was disposed of in
December 2002. Prior to the disposition, the division provided various
services, such as Health Management Consulting and Department Outsourcing
Services and Complysource Regulatory and HIPAA Compliance Services.
Health Information Management Services Division provided services only in the
United States and its main office was in Englewood, Colorado.
Effective December 31, 2002 we closed the sale of our HIM Services
Division to Precyse Solutions LLC. We received $14 million in cash (of which
$1.5 million is to be held in escrow for 18 months) and a $300,000 promissory
note with a two-year term. As a result of the sale, we recorded a fourth
quarter 2002 after-tax gain of $8.8 million.
Financial Information About Segments
- ------------------------------------
The financial statements and supplementary data, including financial
information about our operating segments, are included in this Form 10-K
beginning on page F-1.
Customers
- ---------
We primarily market to acute care hospitals and IDNs, which account for
approximately 90% of our revenues. We also sell products to specialty
hospitals and hospital associations. As of December 31, 2002, we had customers
located in all 50 states, the District of Columbia, Puerto Rico, and Canada.
In 2002, 2001, and 2000, no single customer accounted for 10% or more of our
total revenue.
Highly Competitive Market
- -------------------------
Competition for products and services in the healthcare information management
and technology industry is intense and is expected to so remain. We compete
with other healthcare information software and services providers and
healthcare consulting firms. Some principal competitors include:
o In the enterprise healthcare information systems market for the Enterprise
Division: McKesson Corporation, Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation, Cerner, and
IDX/Corporation;
o In the electronic document management products market for the Enterprise
Division: McKesson Corporation, SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation;
o In the MPI products and services market for the Enterprise Division:
Madison Technologies, Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and Medibase;
o In the decision support products market for the Enterprise Division:
Eclipsys Corporation, Healthcare Microsystems, Inc., a division of Health
Management Systems Inc., McKesson Corporation, Shared Medical Systems,
Inc., a division of Siemens, and MediQual Systems, Inc., a division of
Cardinal Health, Inc.;
o In the coding, data collection, and record management products market for
the Health Information Management Software Division: 3M Corporation,
SoftMed Corporation, Inc., MetaHealth, Eclipsys Corporation,
PricewaterhouseCoopers LLP, and HSS, Inc.; and
o In the Financial Services Division: Advanced Receivables Strategy, Inc.,
a division of Perot Systems Corporation, NCO Group, Inc., Outsourcing
Solutions, Inc., Health Management Systems, Inc., and Triage Consulting
Group.
10
Government Regulation and Healthcare Reform
- -------------------------------------------
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by the
U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug and
Cosmetic Act. At present, none of our software products are so regulated by
the FDA.
There is substantial state and federal regulation of the confidentiality
of patient medical records and the circumstances under which such records may
be used by, disclosed to or processed by us as a consequence of our contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of covered entities
including hospitals, physicians, or other healthcare providers, regulations
governing patient confidentiality rights are rapidly evolving. Additional
federal and state legislation governing the dissemination of medical record
information may be adopted which may have a material affect on our business.
Those laws, including HIPAA and ICD 10 implementation, may significantly affect
our future business and materially impact our product development, revenue and
working capital. During the past several years, the healthcare industry also
has been subject to increasing levels of governmental regulation of, among
other things, reimbursement rates and certain capital expenditures. We are
unable to predict what, if any, changes will occur as a result of such
regulation.
Intellectual Property
- ---------------------
We rely on a combination of copyright, trademark and trade secret law, and
nondisclosure and non-compete agreements to protect our proprietary
methodologies, computer software, and databases. We maintain the
confidentiality of proprietary technology through a policy of obtaining
employment agreements that (i) prohibit employees from disclosing or using our
confidential information, and (ii) require the disclosure and assignment to us
of new ideas, developments, discoveries or inventions related to our business.
We also initiated a new branding strategy in 2001 that included the adoption of
a new trademark, "We do technology. So you can do healthcare(tm)". We also
enter into non-disclosure agreements with business partners and customers in
the ordinary course of business. We have obtained trademark registrations in
the United States for most of our corporate and product trademarks, including
QuadraMed, Affinity, Quantim, and Complysource. We had not filed for or
obtained any patents for our proprietary technology until 2001, when we sought
a patent on our Affinity CPOE software application. We may in the future seek
patents for new products if, in our business judgment, their importance
warrants such steps and is susceptible to protection under the patent laws. We
also depend on licenses for certain technology used to develop our products
from third-party vendors.
Employees
- ---------
We believe that we have a satisfactory relationship with our employees,
none of whom are represented by a union or other collective bargaining group.
As of December 31, 2002, we had 939 employees: 463 in technical, consulting and
support services, 214 in general and administration, 83 in sales and marketing,
and 179 in research and development.
Item 2. Properties
- ------ ----------
We lease all our facilities and do not own any real property. As of
December 31, 2002, our executive and corporate offices were located in Reston,
Virginia, in approximately 49,000 square feet of leased office space under a
lease that expires in 2011. The principal office locations related to our
three business segments are described in Item 1. We also lease approximately
41,000 and 34,000 square feet of office space in San Marcos, California and San
Rafael, California, respectively. These leases both expire in 2009. We
believe that our facilities provide sufficient space for our present needs, and
that additional suitable space, if needed, would be available on reasonable
terms.
Item 3. Legal Proceedings
- ------ -----------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11
11, 2002. The complaints seek unspecified monetary damages and other relief.
These matters are at an early stage. No responses to the complaints have yet
been filed, and no discovery has taken place. We intend to defend ourselves
vigorously against these allegations. On December 31, 2002, the Court entered
an order consolidating all related securities class actions against the
Company.
Following our August 12, 2002 announcement that we intended to restate
prior period financial statements, the staff of the San Francisco District
Office of the SEC requested certain information and documents relating to this
matter as part of an informal, preliminary inquiry. We provided that
information, and expect to provide further information now that the restatement
is completed. On February 28, 2003, we reported that the SEC had issued a
formal non-public order of investigation concerning our accounting and
financial reporting practices for the period beginning January 1, 1998. We
intend to continue to cooperate with the SEC in the event it requests other
information. We cannot predict whether such information will be requested,
when the SEC will conclude its inquiry, or the impact or outcome thereof.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matters were submitted during the fourth quarter of 2002 to the vote of
security holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
(a) Market Information
------------------
On March 4, 2003, our common stock was delisted from the Nasdaq National
Market. From May 23, 2002 to March 3, 2003, the Nasdaq National Market quoted
our common stock under the symbol "QMDC". From August 31, 2000 to May 22,
2002, our common stock had been quoted under the same symbol on the Nasdaq
SmallCap Market. From October 16, 1996 to August 30, 2000, our common stock
had been quoted under the same symbol on the Nasdaq National Market. The
following table sets forth the range of our common stock with high and low
closing sales prices as reported on the applicable Nasdaq Market for the
indicated periods:
High Low
---- ---
Year Ended December 31, 2001
First Quarter................... $ 2.688 $ 0.750
Second Quarter.................. 4.980 1.625
Third Quarter................... 6.300 3.090
Fourth Quarter.................. 9.250 4.330
Year Ended December 31, 2002
First Quarter................... $ 11.550 $ 8.110
Second Quarter.................. 9.640 5.570
Third Quarter................... 6.980 1.470
Fourth Quarter.................. 3.000 1.160
(b) Holdings
--------
On July 31, 2003, a bid for our common stock in the "Pink Sheets" over-
the-counter market was $2.45 per share. As of that date, there were
approximately 280 holders of record of common stock (excluding beneficial
owners whose shares are held in the name of Cede & Co.).
(c) Dividends
---------
At this time, we intend to retain all future earnings, if any, to fund the
development and growth of our business and do not anticipate paying any cash
dividends on shares of our common stock in the foreseeable future.
12
(d) Recent Sales of Unregistered Securities
---------------------------------------
None.
(e) Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------
This table provides information about our common stock subject to equity
compensation plans as of December 31, 2002.
Number of securities
Number of securities remaining available
Plan Category to be issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding options outstanding options compensation plans
- ------------------ -------------------- ------------------- ------------------
Approved By
Stockholders* 6,022,632(1) $ 5.36 2,465,620(2)
- -------------------------------------------------------------------------------
* We have 2 active equity compensation plans, the 1996 Stock Incentive Plan,
as amended, and approved by stockholders June 15, 2001 (the 1996 Plan);
and the 1999 Supplemental Stock Option Plan, as amended, and approved by
stockholders October 5, 2000 (the 1999 Plan).
(1) Includes options originally issuable under various benefit plans of
entities acquired by us.
(2) This number excludes options and restricted shares outstanding and shares
issued upon exercise of options plan-to-date, as of December 31, 2002. The
1996 Plan provides for automatic future increases in the number of shares
of common stock available for issuance, such that on the first trading day
of each calendar year that number is increased by an amount equal to 1.5%
of the total number of shares of common stock outstanding on the last
trading day of the immediately preceding calendar year as such, 407,473
additional shares became available for issuance on January 1, 2003.
(f) Preferred Stock
---------------
We have authorized 5,000,000 shares of preferred stock, par value $0.01
per share. Our board of directors has authority to provide for the issuance of
our shares of preferred stock in series, to establish from time to time the
number of shares to be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, without any further vote
or action by the shareholders. As of December 31, 2002, we had no outstanding
preferred stock.
13
Item 6. Selected Financial Data
------ -----------------------
The selected consolidated financial data presented below for the five
years ended December 31, 2002, is derived from our Consolidated Financial
Statements and related notes thereto. This selected consolidated financial
data should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the
Consolidated Financial Statements and related notes thereto included in Item 8
of this Form 10-K. Historical results are not necessarily indicative of future
results.
Year ended December 31,
------------------------------------------------------
(in thousands, except per
share amounts) 2002 2001 2000 1999 1998 (1)(2)
---- ---- ---- ---- ----
Consolidated Statement of
Operations Data:
Revenue $109,585 $117,046 $121,012 $199,162 $172,228
Restatement costs $ 7,463 $ -- $ -- $ -- $ --
Income (loss) from
continuing operations $(20,858) $ 11,952 $(39,354) $(52,527)
Extraordinary gain on
redemption of debentures $ -- $ 12,907 $ -- $ -- $ --
Net income (loss) $(14,362) $ 9,413 $(36,675) $(47,388) $(21,376)
Basic income (loss) per
share from continuing
operations $ (0.77) $ 0.47 $ (1.53) $ (2.20)
Basic net income (loss)
per share $ (0.53) $ 0.37 $ (1.43) $ (1.99) $ (0.91)
Diluted income (loss) per
share from continuing
operations $ (0.77) $ 0.47 $ (1.53) $ (2.20)
Diluted net income (loss)
per share $ (0.53) $ 0.37 $ (1.43) $ (1.99) $ (0.91)
- -----------------------------
(1) Revenue for 1998 does not reflect the adoption of EITF No. 01-14, Income
------
Statement Characterization of Reimbursements for 'Out-of-Pocket' Expenses
-------------------------------------------------------------------------
Incurred. Accordingly, revenue has not been increased to reflect any
--------
billable out-of-pocket reimbursable expenses. All other periods presented
reflect the adoption of this standard.
(2) Discontinued operations have not been segregated from the 1998 results as
the Company's structure was significantly different at that time. All other
periods presented reflect the classification of HIMS Services Division as a
discontinued operation.
December 31,
------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998 (1)(2)
---- ---- ---- ---- ----
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short term investments $ 26,191 $ 32,213 $ 39,664 $ 29,732 $ 89,574
Total assets $126,927 $125,133 $149,286 $ 201,759 $ 264,733
Deferred revenue $ 39,492 $ 30,721 $ 22,489 $ 7,258 $ 14,021
Working capital $ 18,137 $ 32,509 $ 46,107 $ 61,030 $ 94,963
Debentures $ 73,719 $ 73,719 $115,000 $ 115,000 $ 115,000
Stockholders' equity
(deficit) $ (7,235) $ 4,221 $ (7,166) $ 27,512 $ 68,988
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement on Risks Associated With Forward-Looking Statements
- ------------------------------------------------------------------------
You should read the following discussion in conjunction with our
Consolidated Financial Statements and related notes. This Report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that are subject to risks and uncertainties. The
words "believe", "expect", "anticipate", "predict", "intend", "plan",
"estimate", "may", "will", "should", "could", and similar expressions and their
negatives are intended to identify such statements. Forward-looking statements
are not guarantees of future performance and are to be interpreted only as of
the date on which they are made. We undertake no obligation to update or
revise any forward-looking statement. You should not place undue reliance on
these forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Report,
and in other documents we file with the SEC from time to time.
14
Critical Accounting Policies and Estimates
- ------------------------------------------
Our critical accounting policies have a considerable impact on
Management's Discussion and Analysis.
Use of Estimates
----------------
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. In preparing these financial
statements, we make estimates, assumptions, and judgments that affect the
reported amounts of assets and liabilities, contingent assets and liabilities,
revenues, and expenses. Significant estimates and assumptions have been made
regarding revenue recognition, the allowance for doubtful account, investments,
capitalized software, income taxes, restructuring, pensions and other benefits,
and contingencies and litigation and intangibles, primarily goodwill and
customer lists, resulting from our purchase business combinations. We base our
estimates, assumptions, and judgments on historical experience and on various
other assumptions believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Uncertainties inherent in these estimates include projections of future
operating results and the discount rates used to determine the net present
values of these future results and useful lives of the acquired assets as well
as technological advances. In addition, for our fixed-price contracts, we make
significant estimates within percentage-of-completion accounting, including
estimating total costs to be incurred as calculated on a labor hour basis. We
periodically review and test our estimates, specifically those related to the
valuations of intangibles including acquired software, goodwill, customer
lists, trademarks and other intangibles, and capitalized software. Actual
results may differ materially from these estimates.
Restatement
-----------
In 2002, we discovered accounting and reporting errors within our
Quarterly Report on Form 10-Q as filed for the three months ended March 31,
2002 and our Annual Report on Form 10-K as filed for the years ended December
31, 2001, 2000 and 1999. These errors resulted in us determining that the
reports for these years needed to be restated. In June 2003, we amended and
restated our 2001 Annual Report on Form 10-K/A including the years ended 2001,
2000 and 1999 and all respective quarters. This report is also being filed
simultaneously with the restatement of our Quarterly Report on Form 10-Q/A for
the three months ended March 31, 2002. The restatement process which lasted
approximately ten months, due to restating three years, new auditors and
staffing to diligently review and account for transactions, adversely affected
our revenue and business in the latter half of fiscal 2002. Additionally, the
Company spent $7.5 million in restatement fees, which included accountants',
consultants' and attorneys' fees in fiscal 2002.
Revenue Recognition
-------------------
Our revenue in the ordinary course of business is principally generated
from two sources: (i) licensing arrangements and (ii) services.
Our license revenue consists of fees for licenses of our software and
hosted services. Cost of license revenue primarily includes product, delivery
and royalty costs and facilities costs. Our services revenue consists of
maintenance, customer training and consulting services and fees for providing
management services such as accounts receivable and payment collection
outsourcing, specialized staffing, analytical services and seminars. Cost of
services consists primarily of salaries, benefits, and allocated costs related
to providing such services, labor costs for engineers performing implementation
services and technical support and training personnel.
We license our products through our direct sales force. Our license
agreements for such products do not provide for a right of return, and
historically product returns have not been significant.
We recognize revenue on our software products in accordance with Statement
of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9,
----------------------------
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
- -------------------------------------------------------------------------------
Transactions; SOP 81-1, Accounting for Performance of Construction-Type and
- ------------ ---------------------------------------------------
Certain Production-Type Contracts; and Staff Accounting Bulletin ("SAB") 101,
- ---------------------------------
Revenue Recognition in Financial Statements.
- -------------------------------------------
15
We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations by us with regard to implementation
remain; the fee is fixed and determinable; and, collectibility is probable.
Delivery is considered to have occurred when title and risk of loss have been
transferred to the customer, which generally occurs when media containing the
licensed programs is provided to a common carrier. We consider all
arrangements with payment terms extending beyond 180 days to be not fixed and
determinable, and revenue is recognized as payments become due from the
customer. If collectibility is not considered probable, revenue is recognized
when the fee is collected.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance, support and professional services, based on the relative
fair values of the elements specific to us. Our determination of fair value of
each element in multi-element arrangements is based on vendor-specific
objective evidence ("VSOE"). We limit our assessment of VSOE for each element
to either the price charged when the same element is sold separately or the
price established by management, having the relevant authority to do so, for an
element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue from hosted applications is recognized
ratably over the term of the arrangement. The proportion of revenue recognized
upon delivery may vary from quarter to quarter depending upon the relative mix
of licensing arrangements and the availability of VSOE of fair value for
undelivered elements.
Certain of our perpetual and time-based licenses include unspecified
additional products and/or payment terms that extend beyond 12 months. We
recognize revenue from perpetual and time-based licenses that include
unspecified additional software products ratably over the term of the
arrangement.
Contract accounting is utilized for services revenues from fixed-price
contracts and those requiring significant software modification, development or
customization. In such instances, the arrangement fee is accounted for in
accordance with SOP 81-1, whereby the arrangement fee is recognized, generally
using the percentage-of-completion method measured on labor input costs. If
increases in projected costs-to-complete are sufficient to create a loss
contract, the entire estimated loss is charged to operations in the period the
loss first becomes known. The complexity of the estimation process and
judgment related to the assumptions, risks and uncertainties inherent with the
application of the percentage-of-completion method of accounting affect the
amounts of revenue and related expenses reported in its consolidated financial
statements. A number of internal and external factors can affect its
estimates, including labor rates, utilization, changes to specification and
testing requirements and collectibility of unbilled receivables.
Service revenues from software maintenance and support are recognized ratably
over the maintenance term, which in most cases is one year. Service revenues
from training, consulting and other service elements are recognized as the
services are performed.
Service revenues from providing management services such as accounts
receivable and payment collection outsourcing are recognized in accordance with
SAB 101. When all criteria for revenue recognition, as noted above, have been
met, revenue is recognized upon invoicing. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Accounts Receivable and Allowance for Doubtful Accounts
-------------------------------------------------------
Accounts receivable consist primarily of amounts due us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
16
Intangible Assets
-----------------
Goodwill - In June 2001, the Financial Accounting Standards Board ("FASB")
--------
issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
--------
and Other Intangible Assets, effective for fiscal years beginning after
- ---------------------------
December 15, 2001. Under SFAS 142, goodwill and intangible assets deemed to
have indefinite lives are to be separately disclosed on the balance sheet, and
no longer amortized but subject to annual impairment tests. With the adoption
of SFAS 142, we ceased amortization of goodwill as of January 1, 2002. Prior to
this point, goodwill was amortized using the straight-line method over its
estimated useful life.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (i.e., business segments) upon adoption and at least annually
thereafter using a two-step impairment analysis. In accordance with SFAS 142,
we performed the first of the required two-step impairment tests of goodwill
and indefinite-lived assets as of January 1, 2002. In performing the first step
of this analysis, we first assigned our assets and liabilities, including
existing goodwill and other intangible assets, to our identified reporting
units to determine their carrying value. For this purpose, our reporting units
equated to our five business segments then in place. Our reporting units equate
to our business segments since this is the lowest level of QuadraMed at which
operating plans are prepared and operating profitability is measured for
assessing management performance. See note 18 for more information regarding
our business segments. Based on an analysis by an independent third party
appraiser, we then estimated the fair value of each reporting unit with
significant goodwill utilizing various valuation techniques including the
Income Approach and the Market Approach. The Income Approach provides an
estimation of the fair value of a reporting unit based on the discounted cash
flows derived from the reporting unit's estimated remaining life plus the
present value of any residual value. The Market Approach indicates the fair
value of a reporting unit based upon a comparison to publicly-traded companies
in similar lines of business. Step one of this analysis was then completed by
comparing the carrying value of each of the-analyzed reporting units to its
fair value. This comparison resulted in the fair values of the analyzed
reporting units exceeding the carrying values of the net assets. Accordingly,
no indicators of impairment existed. As a result, we did not perform step two
as described by SFAS 142.
As of January 1, 2003, we re-engaged the same independent appraiser to
review the goodwill as of this date for impairment. The result of performing
step one of this analysis resulted in the fair values of the analyzed reporting
units exceeding the carrying values of the net assets once again. Accordingly,
step two was not performed.
Capitalized Software - Software development costs are capitalized upon the
--------------------
establishment of technological feasibility. In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
- ------------------------------------------------------------------------------
Marketed, we establish technological feasibility upon completion of a detailed
- --------
program design determined on a project-by-project basis, which substantiates
that the computer software product can be produced in accordance with its
design specifications. Software development costs are capitalized based upon
an assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors, including, but not
limited to, anticipated future gross margins, estimated economic lives, and
changes in software and hardware technology. Amortization is based on the
greater of the ratio that current revenues bear to total and anticipated future
revenues for the applicable product, or the straight-line method over the
remaining estimated economic life of the product, generally five years, and is
charged to cost of licenses.
Other Intangible Assets - Other intangible assets primarily relate to
-----------------------
acquired software, trademarks and customer lists acquired in our purchase
business combinations. On January 1, 2002, we adopted the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
generally requires impairment losses to be recorded on long-lived assets
(excluding goodwill) used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The provisions of this statement
did not have a significant impact on our financial condition or operating
results.
On an annual basis, we review our intangible assets for impairment based
on estimated future undiscounted cash flows attributable to the assets in
accordance with the recently-adopted provisions of SFAS No. 144. In the event
such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets are written down to their net realizable values.
17
Amortization of other intangible assets totaled $2.5 million, $2.7 million and
$2.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
Stock Based Compensation
------------------------
SFAS 123, Accounting for Stock Based Compensation, encourages, but does
---------------------------------------
not require, companies to record compensation cost for stock based employee
compensation plans at fair value. We have chosen to continue to account for
stock based employee compensation using the intrinsic value method prescribed
in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
--------------------
Issued to Employees, and Related Interpretations. Accordingly, compensation
- ------------------------------------------------
cost for stock options granted to employees is measured as the excess, if any,
of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
--------------------
Retirement Obligations. The statement addresses financial accounting and
- ----------------------
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No.
143 are required to be applied starting with fiscal years beginning after June
15, 2002. We expect that implementation of the new standard will not have a
significant impact on our financial condition, results of operations, and cash
flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
-----------------------------
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
- ---------------------------------------------------------------------
Corrections. This statement updates and clarifies existing pronouncements
- -----------
relating to the classification and reporting of gains and losses from the
extinguishment of debt, the treatment of sale-leaseback transactions and also
makes technical corrections to existing pronouncements. The provisions of SFAS
No. 145 are required to be applied starting with fiscal years beginning after
May 15, 2002. We anticipate that implementation of this new standard will not
have a significant impact on our financial condition, results of operations and
cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
--------------------
Associated with Exit or Disposal Activities, effective for exit or disposal
- -------------------------------------------
activities initiated after December 31, 2002. Under SFAS 146 a liability for
the cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under prior guidance, a liability for such costs could
be recognized at the date of commitment to an exit plan. SFAS 146 also requires
that the liability be measured and recorded at fair value. Accordingly, the
adoption of this standard may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. We will adopt the
provisions of SFAS 146 prospectively for all restructuring activities initiated
after December 31, 2002.
In November 2002, the FASB reached a consensus on Emerging Issues Task
Force ("EITF") No. 00-21, Accounting for Revenue Arrangements with Multiple
-------------------------------------------------
Deliverables. The guidance in EITF 00-21 is effective for revenue arrangements
- ------------
entered into in fiscal years beginning after June 15, 2003. This issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically,
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and, if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earning processes for revenue recognition purposes. This issue also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. We are evaluating the effect
implementation of this new guidance will have on our financial condition,
results of operations and cash flows.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
- ----------------------------------------------------------------------------
indirect Guarantees of Indebtedness of Others. FIN 45 requires that we
- ---------------------------------------------
recognize the fair value for guarantee and indemnification arrangements issued
or modified by us after December 31, 2002, if these arrangements are within the
scope of the interpretation. In addition, we must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If we determine it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by us
contain provisions that indemnify licensees of our software from damages and
costs resulting from claims alleging that our software infringes the
intellectual property rights of a third party. We have historically received
only a limited number of requests for indemnification under these provisions
and have not been required to make material payments pursuant to these
18
provisions. Accordingly, we have not recorded a liability related to these
indemnification provisions. We will be required to implement the provisions of
FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a
material impact on our financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
--------------------------
Compensation - Transition and Disclosure, effective for fiscal years ending
- ----------------------------------------
after December 15, 2002. SFAS 148 amends SFAS 123, to provide alternative
methods of transition to the voluntary fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require that disclosure of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed in tabular format within a Company's summary of significant
accounting policies. We have not yet adopted SFAS 148 and accordingly, the
accompanying financial statements reflect the required disclosures of SFAS 123.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
-------------------------
Interest Entities. FIN 46 expands upon and strengthens existing accounting
- -----------------
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Disclosure requirements apply to
any financial statements issued after January 31, 2003. We have considered the
provisions of FIN 46 and believe it will not be necessary to include in our
financial statements any assets, liabilities, or activities of the third-party
entities holding our corporate headquarters leases. We will continue to
evaluate the impact of FIN 46 on other areas of our financial statements and
disclosures.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
-----------------------------
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
- ---------------------------------------------
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149
-------------------------------------------------------------
is generally effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. We are
currently evaluating the impact of SFAS 149 on our consolidated financial
position and results of operations. We do not expect the adoption of SFAS 149
to have a material impact on our consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
----------------------
Financial Instruments with Characteristics of both Liabilities and Equity.
- -------------------------------------------------------------------------
SFAS 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We do not expect the adoption of SFAS 150 to have a
material impact on our consolidated financial position, results of operations
or cash flows.
19
Results of Operations
- ---------------------
The following table sets forth certain items from our consolidated
statement of operations, expressed as percentage of total revenue.
Year ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
Revenue
Services 70.1% 70.5% 76.4%
Licenses 29.9 29.5 23.6
------ ------ ------
Total revenue 100.0 100.0 100.0
------ ------ ------
Cost of revenue
Cost of services 32.9 29.1 45.3
Cost of licenses 8.3 7.4 5.9
------ ------ ------
Total cost of revenue 41.2 36.5 51.2
------ ------ ------
Gross margin 58.8 63.5 48.8
------ ------ ------
Operating expenses
General and administration 37.5 30.5 47.1
Sales and marketing 19.7 17.7 19.6
Research and Development 15.7 12.3 20.3
Amortization, impairment and other
operating charges 2.8 7.7 9.2
------ ------ ------
Total operating expenses 75.7 68.2 96.2
------ ------ ------
Loss from operations (16.9) (4.7) (47.4)
Other income (expense)
Interest expense (3.2) (4.1) (5.4)
Interest income 0.6 1.7 1.8
Gain on sale of assets 1.4 6.1 22.5
Other income (expense), net (0.9) 0.3 (3.4)
------ ------ ------
Other income (expense), net (2.1) 4.0 15.5
------ ------ ------
Loss from continuing operations before
income taxes and extraordinary item (19.0) (0.7) (31.9)
Provision for income taxes -- (0.1) (0.5)
------ ------ ------
Loss from continuing operations before
extraordinary item (19.0) (0.8) (32.4)
Gain on redemption of debentures -- 11.0 --
------ ------ ------
Net income (loss) from continuing
operations (19.0) 10.2 (32.4)
Income (loss) from discontinued
operations (net of income taxes) (2.1) (2.2) 2.2
Gain on disposal of discontinued operations 8.0 -- --
------ ------ ------
Net income (loss) (13.1)% 8.0% (30.2)%
====== ====== ======
20
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------
Revenue
-------
Services.
--------
Service revenue consists of consulting, maintenance, installation,
hardware, reimbursable expenses and other service revenue. Service revenue was
$76.8 million in 2002, a decrease of $5.7 million or 6.9% from $82.5 million in
2001. The decrease was primarily due to decrease in services associated with
the sale of the EZ-CAP Division in August 2001 and reduction in Financial
Services Division.
Service revenue of $82.5 million in 2001 represented a decrease of $9.9
million or 10.7% from the $92.4 million reported 2000. The decrease was
primarily due to a substantial decrease of $23.8 million due to the sale of the
ROI Division in 2000, a decrease in Health Management Services Division, slight
decrease due to the sale of EZ-CAP Service Division in August 2001, offset by
an increase in the Enterprise Division installation and services and increase
in Health Management Software Division maintenance revenue and Financial
Services Division revenue.
Licenses.
--------
License revenue consists of license and third-party software sales.
License revenue in 2002 was $32.8 million, a decrease of $1.8 million or 5.2%
from $34.6 million in 2001. The decrease in license revenue was primarily
attributable to the decrease in license associated with the sale of EZ-CAP
Division revenue offset by an increase in Health Management Software government
licenses.
License revenue of $34.6 million in 2001 showed an increase of $6.0
million or 20.8% from the $28.6 million in 2000. The increase was primarily
attributable to an increase in the Enterprise Division and Health Management
Software Division.
Cost of Revenue
---------------
Cost of Services.
----------------
Cost of services consists of salaries and related expenses associated with
services performed for customer support and consulting services as well as
third-party hardware costs. Cost of services in 2002 was $36.1 million, an
increase of $2.0 million or 5.8% from $34.1 million in 2001. The increase was
primarily due to an increase in salaries and benefits offset by a slight
decrease in third-party hardware costs. The gross margin earned on services
revenue in 2002 was 53.0%, which was 5.7 percentage points less than the 2001
level of 58.7%.
Cost of services in 2001 of $34.1 million was $20.7 million or 37.8% below
the 2000 cost of $54.8 million. Cost of services decreased primarily due to
salary and benefits expense reduction in the consulting organization.
Cost of Licenses.
----------------
Cost of licenses consists of third party royalties, amortization of
capitalized software and documentation and production costs of our software.
Cost of licenses in 2002 was $9.1 million, 5.3% above the corresponding 2001
level of $8.7 million. Gross margin on license revenue was 72.1%, a
deterioration of 2.8 percentage points from the 2001 level of 74.9%. The
absolute dollars were consistent from period to period.
Cost of licenses in 2001 of $8.7 million was up $1.6 million or 21.8% from
$7.1 million in 2000. Gross margin was consistent from period to period.
Amortization of capitalized software development costs totaled $2.4
million, $2.0 million, and $1.7 million in 2002, 2001, and 2000, respectively.
21
Operating Expenses
------------------
General and Administration.
--------------------------
General and administration expense consists of compensation and benefit
costs for executive, finance, legal, information technology, and administrative
personnel. General and administrative expenses were $41.1 million in 2002, an
increase of $5.4 million or 15.2% compared to $35.7 million in 2001. As a
percentage of total revenue, general and administration expense increased to
37.5% in 2002 from 30.5% in 2001. The increase was primarily due to an
increase in accountants', consultants' and attorneys' fees, as part of the
restatement process in the year of approximately $7.5 million, offset by other
operating costs. We anticipate that general and administration expenses will
be lower in absolute dollars in 2003 than in 2002.
General and administration expense of $35.7 million in 2001 reflected a
decrease of $21.3 million or 37.4% compared to $57.0 million in 2000. The
decrease was primarily due to severance costs and provision for bad debt
expense in the prior period. As a percentage of total revenue, general and
administration expense decreased to 30.5% in 2001, compared to 47.1% in 2000.
Sales and Marketing.
-------------------
Sales and marketing expense includes costs associated with our sales and
marketing personnel and product marketing personnel and consists primarily of
compensation and benefits, commissions and bonuses, promotional and advertising
expenses. Sales and marketing expense increased by only $841,000 in 2002 to
$21.6 million from $20.7 million in 2001. Sales and marketing expenses were
consistent from period to period. We anticipate that sales and marketing
expense will be slightly higher in absolute dollars and as a percentage of
revenue in 2003 than in 2002 due to increased promotional expenditures.
Sales and marketing expense of $20.7 million in 2001 was $3.1 million less
than the $23.8 million recorded in 2000 reflecting a decrease as a percentage
of revenue to 17.7% from 19.6% in the prior year. The decline in sales and
marketing expense was primarily due to a decrease in commission expense.
Research and Development.
------------------------
Research and development expense includes costs associated with the
development of new products, enhancements of existing products for which
technological feasibility has not been achieved, and quality assurance
activities, and primarily includes compensation and benefits expense. Research
and development expense for 2002 was $17.2 million, a 19.4% increase from 2001.
As a percentage of revenue, the increase was 3.4 percentage points to 15.7% in
2002 from 12.3% in 2001. The increase in research and development expense was
due to increased product development efforts on the Computerized Physician
Order Entry product. In addition to these expenses, we capitalized $1.8
million in development costs representing 10% of research and development
expenditures in 2002, compared to $1.8 million or 11.0% of expenditures in
2001, on products qualifying for capitalization under the definition of
technological feasibility. We anticipate that research and development
expenses will increase in absolute dollars in 2003 due to increased development
of products.
Research and development expense in 2001 was $10.2 million less than in
2000, a decline of 41.5%. As a percentage of revenue, the decrease was 8.0
percentage points to 12.3% in 2001 from 20.3% in 2000. The decline in research
and development expense was due to the elimination of corporate research and
development projects to shift our focus to specific product line development,
elimination of support costs for divested products, and the termination of
several product development efforts that were not critical to our core
strategies. In addition to these expenses, we capitalized $1.8 million in
development costs compared to $527,000 or 2.1% of expenditures in 2000.
Amortization, Impairment and Other Operating Charges.
----------------------------------------------------
Amortization, impairment and other operating charges were $3.1 million,
$9.1 million and $11.1 million in 2002, 2001 and 2000, respectively, which
primarily consists of the following items:
o Amortization of goodwill and other intangible assets, excluding
capitalized software development costs, declined to $2.5 million in 2002
from $6.2 million in 2001 and $7.8 million in 2000 as certain assets
reached the end of their amortized lives and goodwill was not amortized in
2002.
22
o During 2000, we recorded $1.2 million in charges to write-down certain
software assets primarily related to our 1998 acquisition of IMN.
o Charges of $4.7 million were incurred during the year ended December 31,
2000. The charges consisted of $3.4 million associated with separation
agreements for officers and $1.3 million for employee severance and
closure of facilities. As of December 31, 2002, there is no remaining
liability for restructuring costs.
Other Income (Expense)
---------------------
Interest Income (Expense)
------------------------
Interest expense, net of interest income, was $2.8 million, $2.7 million
and $4.4 million for 2002, 2001 and 2000, respectively. Interest expense was
principally due to our Debentures, offset by interest earned on our cash and
investments. The change from 2001 to 2002 was not significant as expected,
while the decrease in 2001 of $1.1 million compared to 2000 is attributable to
the retirement of $41.3 million of our Debentures during 2001.
On April 16, 2003, we announced that we had executed an agreement with
certain of our bondholders to refinance $61.8 million of our 2005 Debt and
issue new 2008 Debt with an interest rate of 10% and 11.3 million detachable
warrants. As a result, we will incur higher interest charges in 2003 through
2008.
Gain on Sale of Assets
----------------------
In 2002, we recorded a gain of $8.8 million on the sale of the HIM
Services Division and received $1.5 million related to an earn-out provision on
the 2001 sale of EZ-CAP. We recorded a $7.1 million initial gain on the sale
of our EZ-CAP business in 2001. Our gain of $27.2 million in 2000 resulted
primarily from the sale of the ROI division to ChartOne.
Extraordinary Item
------------------
Gain on Redemption of Bonds
---------------------------
During 2001, we repurchased approximately $41.3 million of our Debentures
on the open market for a total of $28.4 million in cash, resulting in a gain of
$12.9 million.
Discontinued Operations
-----------------------
On December 31, 2002, we announced the sale of certain assets of our HIM
Services Division to Precyse Solutions, LLC. We received $14 million in cash
(of which $1.5 million is to be held in escrow for 18 months) and a $300,000
promissory note with a two-year term. We recorded a gain of $8.8 million in
connection with the sale.
The results of operation have been presented as a discontinued operation
for all periods presented. The operating results were as follows (in
thousands):
Year ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
Revenue $ 17,313 $ 19,735 $ 29,968
Income (loss) from operations of
discontinued operation $ (2,270) $ (2,539) $ 2,679
Gain on disposal 8,776 -- --
-------- -------- --------
Total income (loss) on discontinued
operations $ 6,506 $ (2,539) $ 2,679
======== ======== ========
Provision for Income Taxes
--------------------------
There was no provision for income taxes in 2002 due to a current book and
tax loss. There was a $150,000 provision for income taxes in 2001 due to state
tax liabilities on certain of our legal entities. For financial reporting
purposes, a 100% valuation allowance has been recorded against our deferred tax
assets under SFAS No. 109, Accounting for Income Taxes, as our history of
losses makes realization of the asset uncertain. We had federal net operating
loss carryforwards of approximately $76.1 million and state net operating loss
carryforwards of approximately $2.0 million as of December 31, 2002. In
addition, we had gross federal and California research and development credit
carryforwards of approximately $4.2 million and $1.8 million respectively.
Liquidity And Capital Resources
- -------------------------------
As of December 31, 2002, we had $26.2 million in cash, cash equivalents
and short-term investments, compared to $32.2 million as of December 31, 2001.
As of December 31, 2002, we had a positive working capital of $18.1 million
compared to $32.5 million as of December 31, 2001. On June 30, 2003, we had
approximately $32.0 million in cash, cash equivalents and short-term
investments.
Year ended December 31,
----------------------------------
(in thousands) 2002 2001 2000
- -------------------------------------- ---- ---- ----
Cash (used in) provided by operating
activities $ (982) $ 13,844 $(30,275)
Cash (used in) provided by investing
activities $ (6,602) $ 17,097 $ 46,132
Cash provided (used in) financing
activities $ 1,448 $(28,510) $ (18)
Cash (used in) provided by operating activities was $(982,000), $13.8
million, and $(30.3) million in 2002, 2001 and 2000, respectively. The
$982,000 of cash used by operations in 2002 arose from the $20.9 million loss
from continuing operations and $2.3 million cash used in discontinued
operations offset by non-cash expenses of $12.2 million plus $11.4 million
provided by changes in other working capital items partially offset by a non-
cash gain of $1.5 million on the sale of assets.
The $13.8 million of cash provided by operating activities in 2001 was
primarily due to net income from continuing operations of $12.0 million, $1.7
million used in discontinued operations, net non-cash related expenses of $18.3
million, and a net decrease in operating assets and liabilities of $5.3
million, partially offset by non-cash gains on the redemption of debentures of
$12.9 million and the sale of assets of $7.1 million. The $30.3 million of
cash used in operating activities in 2000 was due principally to the $39.4
million net loss from continuing operations, $3.4 million provided by
discontinued operations and $27.2 million of non-cash gains offset by $29.7
million of net non-cash expenses and a $3.2 million decrease in operating
assets and liabilities.
Net cash (used in) provided by investing activities was $(6.6) million,
$17.1 million and $46.1 million in 2002, 2001 and 2000, respectively.
Investing activities consumed $6.6 million of cash in 2002 primarily for the
acquisition of businesses ($11.9 million), the purchases of equipment ($2.6
million), and the development of software ($1.8 million). These cash outflows
were offset in part by $9.8 million received from the sale of assets. Of the
$17.1 million provided in 2001, $8.1 million came from the sale of the EZ-CAP
managed care software business, $1.3 million from the release of restricted
cash, and $12.2 million from the sale of available-for-sale securities, offset
in part by $2.7 million in equipment purchases and $1.8 million in expenditures
on capitalizable software. In 2000 the $46.1 million provided by investing
activities arose from the proceeds of $38.4 million from the sale of ROI assets
and $18.3 million from the sale of available-for-sale securities, offset by a
$7.0 million increase in restricted cash, $3.1 million in equipment purchases
and $527,000 in capitalized software costs.
Net cash provided by (used in) used in financing activities was $1.4
million, $(28.5) million and $(18,000) in 2002, 2001 and 2000, respectively.
The $1.4 million of cash generated by financing activities in 2002 arose from
$1.9 million of proceeds from the issuance of common stock offset by $455,000
of debt repayments. Financing activities in 2001 included the repurchase of
$41.3 million of our debentures at a $12.9 million gain, the purchase of
200,000 shares of treasury common stock amounting to $821,000 and $800,000 in
proceeds from the issuance of common stock. The activity in 2000 consisted of
$945,000 in repayment of debt and $927,000 from the issuance of common stock.
The Board of Directors has authorized us to repurchase the debentures at our
discretion and to repurchase up to 6 million shares of treasury stock.
24
The following table summarizes financial data for our contractual
obligations and other commercial commitments, including interest obligations,
as of December 31, 2002 (in thousands):
Payments Due by Period
---------------------------------------
Less
than 1 1-3 3-5 After 5
Contractual Obligations Total year years years years
- --------------------------- -------- --------- --------- --------- ---------
Long-term debt $ 82,749 $ 3,870 $ 78,879 $ -- $ --
Operating leases 30,440 4,981 8,334 7,245 9,880
Other long-term obligations 1,449 483 966 -- --
-------- -------- -------- -------- --------
Total contractual cash
obligations $114,638 $ 9,334 $ 88,179 $ 7,245 $ 9,880
======== ======== ======== ======== ========
Other Commercial Commitments
- ----------------------------
Standby letters of credit(1) $ 4,409 $ 1,166 $ 105 $ 2,620 $ 518
-------- -------- -------- -------- --------
Total commercial commitments $ 4,409 $ 1,166 $ 105 $ 2,620 $ 518
======== ======== ======== ======== ========
(1) The 3-5 years amount of $2.6 million is for an existing surety bond
requirement on December 31, 2002. Actual requirements may be less as work
is completed towards the underlying contract.
As of December 31, 2002, we had $73.7 million in outstanding 5.25%
Convertible Subordinated Debentures due 2005 (the "2005 Debt"), which bear
interest at 5.25% per annum. On April 16, 2003, we announced that we had
executed an agreement with certain of our bondholders to refinance our 2005
Debt. On April 17, 2003, under the terms of the refinance agreement, we issued
$71.0 million of our Senior Secured Notes due 2008 (the "2008 Debt"). The
proceeds from the issuance of the 2008 Debt were used to repurchase $61.8
million (plus $1.5 million in accrued interest) of the 2005 Debt which became
subject to repurchase by us as a result of our delisting from the Nasdaq
National Market on March 4, 2003. Accordingly, the net proceeds to us as a
result of the issuance of the 2008 Debt less the costs (including fees)
associated with the repurchase of the 2005 Debt was $7.6 million, with $11.9
million of the 2005 Debt remaining outstanding. Additionally, the repurchase
right on the 2005 Debt remaining outstanding expired on April 17, 2003. The
2008 Debt bears interest at an initial rate of 10% which will be reduced to 9%
upon the relisting of QuadraMed's common stock on the Nasdaq, including Nasdaq
SmallCap or U.S. National Market and is secured by certain intellectual
property of QuadraMed. However, we may be obligated to redeem the 2005 and
2008 debentures earlier than the maturity dates based upon certain events of
default occurring as defined within the debenture agreements. These events
include: failure to timely repay principal or interest owed on the debentures,
default under any other borrowing, and bankruptcy.
In addition, as of December 31, 2002, we had approximately $30.4 million
in minimum operating lease commitments that will be repaid through 2011.
Finally, we have a Supplemental Executive Retirement Plan that will require
total payments from 2008 through 2027 estimated at $7.8 million. We owe annual
premiums of $483,000 on the SERP through 2005 to fund this obligation.
We expect that cash provided by operating activities may fluctuate in
future periods as a result of a number of factors, including fluctuations in
our operating results, specifically the timing of when we recognize revenue,
our accounts receivable collections and the timing of other payments. In
addition, cash used in investing activities may fluctuate due to the
capitalization of our software development efforts, which are expected to
increase in 2003, and costs associated with our investments in fixed assets and
information technology. For additional discussion, see the Risk Factors
section.
We believe that we will have sufficient liquidity and capital resources to
fund our scheduled debt and other obligations through the next twelve months.
Inflation
- ---------
The majority of our revenue is derived from perpetual and long-term
customer contracts. The term of contracts range from one to five years and the
contracts generally allow for price increases annually based on external
25
measures of inflation. We have increased some of our prices under these
contract provisions. Our maintenance contract terms also allow annual price
increases based on external measures of inflation. Accordingly, inflation has
not had, and we do not believe that it will have, a significant impact on our
financial condition.
Business Risks
- --------------
Factors that have affected our results of operations in the past and are
likely to affect our results of operations in the future, include the
following:
Our Vendors, Suppliers and Customers May React Adversely to the Lack of
-----------------------------------------------------------------------
Timely SEC Filings of Our Historical Financial Statements.
- ---------------------------------------------------------
Our future success depends in large part on the support of our vendors and
suppliers, who may react adversely to the lack of timely SEC filings of our
historical financial statements. The restatement of our historical financial
statements has resulted in negative publicity about us, which may cause some of
our potential customers to defer purchases of our products. Our vendors and
suppliers may re-examine their willingness to do business with us, to develop
critical interfaces for us or to supply software and services if they lose
confidence in our ability to fulfill our commitments.
We Are Currently the Target of Securities Litigation and May Be the Target
--------------------------------------------------------------------------
of Further Actions, Which May Be Costly and Time Consuming to Defend.
- --------------------------------------------------------------------
In October 2002, a series of securities law class action complaints were
filed in the United States District Court, California Northern District,
against us and certain of our officers and directors. The plaintiffs in these
actions allege, among other things, violations of the Securities Exchange Act
of 1934 due to issuing a series of allegedly false and misleading statements
concerning our business and financial condition between May 11, 2000 and August
11, 2002. The complaints seek unspecified monetary damages and other relief.
The ultimate outcome of these matters cannot presently be determined and
may require significant commitment of our financial and management resources
and time, which may seriously harm our business, financial condition and
results of operations. We cannot assure you that any of the allegations
discussed above can be resolved without costly and protracted litigation, and
the outcome may have a materially adverse impact upon our financial position,
results of operations and cash flows.
In addition, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
The uncertainty of the currently pending investigation and litigation could
lead to more volatility in our stock price.