SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-21031
QUADRAMED CORPORATION
(exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1992861
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
22 Pelican Way
San Rafael, California, 94901
(Address of Principal Executive
Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 482-2100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of March 29, 2001, was approximately $54,341,722
(based upon the closing price for shares of the Registrant's common stock
as reported on the Nasdaq SmallCap Market for March 29, 2001). Shares of
common stock held by each officer, director and holder of 5% or more of the
outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 29, 2001, 25,754,696 shares of the Registrant's common
stock, $0.01 par value per share, were outstanding.
QUADRAMED CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I................................................................... 1
Item 1 Business...................................................... 1
Item 2 Properties.................................................... 8
Item 3 Legal Proceedings............................................. 9
Item 4 Submission of Matters to a Vote of Security Holders........... 9
PART II.................................................................. 9
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6 Selected Financial Data....................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 22
Item 8 Financial Statements and Supplementary Data................... 23
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 23
PART III................................................................. 23
Item 10 Directors and Executive Officers of the Registrant............ 23
Item 11 Executive Compensation........................................ 26
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
Item 13 Certain Relationships and Related Transactions................ 38
PART IV.................................................................. 38
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 38
QuadraMed Corporation is amending and restating its Annual Report
on Form 10-K for the year ended December 31, 2000 to (i) amend Part III,
Items 10 and 12, (ii) amend Part IV to attach Exhibit 2.2, and (iii)
correct typographical errors.
PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, QuadraMed Corporation
("QuadraMed") and its management discuss and make statements regarding
their intentions, beliefs, and current expectations regarding QuadraMed's
future operations and performance. Such statements are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are often identified by words
such as "anticipates," "believes," "expects," "will," "should" and
"intends" and their negatives. QuadraMed Corporation and its management
caution prospective investors that such forward-looking statements are not
guarantees of future performance. Risks and uncertainties are inherent in
QuadraMed's future performance. Factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include, but are not limited to, those discussed in "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
QuadraMed and its management make forward-looking statements based on
currently available information and assume no obligation to update these
statements due to changes in underlying factors, new information, future
developments, or otherwise.
OVERVIEW
QuadraMed is a healthcare information and technology company. It
provides software solutions and consulting services to hospitals and
medical providers to meet their medical records, business and compliance
needs. QuadraMed's solutions have been implemented in over 4000 sites,
including approximately 60% of the hospitals in the United States.
QuadraMed was reincorporated in Delaware in 1996 after having been
originally incorporated in California in 1993.
From 1993 to 1999, acquisition-based growth was an integral part
of QuadraMed's business strategy. During this time, QuadraMed completed
twenty-eight (28) acquisitions, with twenty-three (23) occurring between
1997 and 1999. This rapid growth has had several consequences. First,
QuadraMed has significantly increased the range of health information
management products and services that it offers to healthcare providers.
Second, QuadraMed has increased its market share in the health information
management industry. Third, QuadraMed has acquired access to public markets
and has lowered its capital costs. At the same time, however, integration
issues have delayed anticipated synergies and efficiencies, and, since
1997, QuadraMed has incurred annual after-tax losses. Further, the
acquisitions have produced substantial goodwill that reduces future
earnings.
During 2000, QuadraMed focused on integration and making financial
and operational improvements. As part of this strategy, QuadraMed has
reduced expenses, sold non-strategic assets for cash, settled outstanding
litigation, made several management changes, and re-aligned the
organization into five operating divisions:
o Enterprise Products and Services Division, which provides
acute care hospitals with integrated enterprise information
systems to manage patient registration, clinical, and
financial information.
o Health Information Management Products Division, which
provides software products that automate and support hospital
and provider health information management departments in
maintaining accurate and timely patient treatment information
and in accurately coding for appropriate reimbursement.
o Collection Services Division, which identifies and collects
accounts receivables for hospitals and medical groups.
o Health Information Management Services Division, which
provides (1) health information interim management,
management consulting and department outsourcing services;
(2) coding, compliance and education services; (3)
compliance, legal and regulatory services; and (4) charge
description master reviews.
o EZ-CAP Division, which provides (1) software designed to
support managed care risk-taking organizations, such as
medical groups, physician-health organizations, independent
practice associations, and medical service organizations; and
(2) seminars for doctors and medical professionals.
QUADRAMED CORPORATE TRANSACTION HISTORY
Since its incorporation in 1993, QuadraMed has completed
twenty-eight (28) mergers and acquisitions as detailed in the following
table:
COMPANY/ASSETS MERGER/ASSET PURCHASE DATE
Coast Micro, Inc. Asset Purchase October 1993
Seton Financial Merger December 1993
Health Tech, Inc. Asset Purchase June 1994
Healthcare Design Systems Asset Purchase December 1995
InterMed Healthcare Systems, Inc. Merger December 1996
Healthcare Recovery, Inc. dba Synergy HMC Merger March 1997
Queen City Microsystems, Inc. Merger July 1997
Healthcare Revenue Management, Inc. Merger September 1997
Medicus Systems Corporation Merger November 1997
Fleming Softlink Systems, Inc. Merger December 1997
Resource Health Partners, L.P. Merger December 1997
Rothenberg Health Systems, Inc.
Healthcare Research Affiliates, Inc.
IPN, Inc.
Healthcare Cash Management Seminars, Inc. Asset Purchase January 1998
American Medical Network, Inc. Asset Purchase January 1998
Cabot Marsh Corporation Merger February 1998
Velox Systems Corporation Merger March 1998
Vision Software, Inc. Merger May 1998
Pyramid Health Group, Inc. Merger June 1998
Hospital Correspondence Corporation
Microport Applications, Inc.
Pyramid Health Solutions, Inc.
MetriCor, Inc. Merger June 1998
American Hospital Directory, Inc. Asset Purchase July 1998
CodeMaster Corporation Merger August 1998
Integrated Medical Networks, Inc. Merger September 1998
Premier Healthcare Corporation Merger December 1998
The Compucare Company Merger March 1999
Health Systems Integration, Inc.
Pro Intermed, Inc. Merger March 1999
Millennium Consulting Services, LLC Asset Purchase May 1999
Healthcare Financial Informatics Merger June 1999
LinkSoft Technologies, Inc. Merger June 1999
Med Data Systems, Inc. Asset Purchase July 1999
In 2000, QuadraMed divested its medical records management
business, the Release of Information ("ROI") Division, in three
transactions. First, on May 3, 2000, QuadraMed transferred and assigned the
assets and liabilities of the ROI Division to ChartOne, Inc. ("ChartOne"),
a newly formed subsidiary, pursuant to an Asset Contribution Agreement.
Second, on June 7, 2000, Warburg, Pincus Equity Partners, L.P. and certain
of its affiliates ("Warburg Pincus") and Prudential Securities Group, Inc.
("Prudential Securities") purchased 2,520,000 shares of ChartOne's Series A
Preferred Stock, representing approximately 43% of the fully diluted common
stock of ChartOne, for an aggregate purchase price of $25.2 million
pursuant to a Securities Purchase Agreement. Third, on October 19, 2000,
QuadraMed sold its remaining interest in ChartOne for approximately $26.6
million in cash to Warburg Pincus and Prudential Securities pursuant to the
terms of a second Securities Purchase Agreement.
DESCRIPTION OF OPERATING DIVISION PRODUCTS AND MARKETS
Enterprise Products and Services Division
QuadraMed's Enterprise Products and Services Division provides
acute care hospitals with integrated enterprise information systems to
manage patient registration, clinical, and financial information.
Affinity(R) is the division's core product. For the last three consecutive
review periods, Affinity has been selected as the top "Major Acute Care"
software solution in a survey of 2,500 hospital chief information officers
and department directors, as reported by KLAS Enterprises in its Healthcare
IT Top 20 report. Product development on Affinity began in 1989. It was
first released in 1991 by The Compucare Company ("Compucare"), which
QuadraMed acquired in 1999.
Affinity is a standards-based, integrated, healthcare information
system. It is highly scaleable and flexible and supports the business
application needs of varying sized hospitals, 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 an 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 thirty-eight (38) applications divided into three major functional and
infrastructure areas: Financial, Clinical, and Advantage. Affinity clients
typically purchase "core" applications, such as Registration, Medical
Records, Patient Accounting, and Order Management. In addition to "core"
applications, clients frequently purchase additional Affinity applications
that help to streamline their workflow processes, reduce administrative
expenses and improve the speed and accuracy of billing processes, and
assist in clinical decision-making and documentation. Affinity does not
contain laboratory, pharmacy, materiel management, or fixed asset
applications.
Affinity's development cycle revolves around one major annual
release to customers and up to four "update" releases. Content for the
annual releases are centered in five major categories: (i) regulatory
enhancements required by federal and state mandates; (ii) strategic
enhancements to the breadth and depth of functionality; (iii) user group
enhancements voted by Affinity customers pursuant to customer support
agreements; (iv) corrective maintenance to repair code; and (v)
modification retrofits funded by customers.
Affinity is installed in 171 hospitals in 32 states. Hospitals
generally use committees to make information technology purchase decisions.
Consequently, purchase decisions are often slow to be made. The average
sales cycle for Affinity is from 12 to 18 months from initial contact to
contract execution. Affinity sales are typically generated from four major
sources: (i) requests for proposals sent directly to QuadraMed by the
hospital or its retained consultant; (ii) referrals and recommendations
from consulting firms; (iii) health care trade shows; and (iv) QuadraMed's
sales force, which uses its professional relationships, telemarketing, and
direct-mail to generate sales.
In addition to Affinity, QuadraMed's Enterprise Products and
Services Division also markets EDM, an electronic document imaging and
management system, and QCM, a contract management system. In January of 2001
the division also began selling Performance Measurement, a clinical and
financial outcomes analysis and decision support system, and a suite of MPI
Software and Services (MPIspy, SmartID, SmartMerge, MPI Cleanup), which
enable the identification, correction and elimination of duplicate patient
records in a facility's master patient index.
QuadraMed primarily markets its Enterprise Products and Services
Division products to acute care hospitals. The non-federal acute care
market consists of approximately 5,000 hospitals within the United States
(American Hospital Association Statistics, 2001). Differentiation within
this market is by locale (rural/urban) and bed size (number of beds).
Approximately 2,800 hospitals are located in urban areas and approximately
2,200 are located in rural areas. Hospitals with fewer than 200 beds
constitute approximately 71% of the total acute care market and account for
approximately 28% of the aggregate expenditures by acute care hospitals on
information technology. Hospitals with more than 200 beds constitute
approximately 29% of the acute care hospital market and account for
approximately 72% of acute care hospital spending on information
technology. The acute care hospital market is mature and has been in the
process of consolidating over the past several years. Consequently,
QuadraMed believes that the greatest sales opportunities for its Enterprise
Products and Services Division between now and 2005 will be in the
replacement market for legacy healthcare information systems. Given
Affinity's functional flexibility and ability to interface with other
clinical systems, QuadraMed believes that it has significant opportunities
in the 200 bed or larger hospital market.
From 1998 to 2000, hospital information system sales as a whole
slowed due to expenditures on Year 2000 remediation, industry
consolidation, and generally poor economic conditions for hospitals
primarily due to reimbursement issues associated with managed care
contracts and the Balanced Budget Act of 1997 (the "Balanced Budget Act").
QuadraMed expects that demand for its Enterprise Product and Services
Division products will increase in the short term due to the need for
hospitals to improve quality measures. Government regulatory bodies and the
news media continue to scrutinize patient safety issues, increasing the
need to reduce clinical error. In addition, QuadraMed believes that
shortages of medical professionals, particularly in nursing, ancillary, and
health information management departments, are expected to drive the need
of hospitals and other healthcare providers to acquire health information
systems that reduce clinical errors and increase hospital efficiencies,
administrative cost reduction, and accuracy and speed of billing processes.
Health Information Management Products Division
QuadraMed's Health Information Management Products Division
provides software products that automate and support hospital and provider
health information management departments in maintaining accurate and
timely patient treatment information and in accurately coding for
appropriate reimbursement. QuadraMed's Health Information Management
Products fall into three main areas: (i) Data Management; (ii) Record
Management; and (iii) Compliance Management. The Division includes the
former operations of Medicus Systems Corporation, Med Data Corporation
Systems, Inc., and Codemaster Corporation. QuadraMed's Health Information
Management solutions are based on an enterprise n-tiered architecture that
support a variety of database engines, including Sybase SQL Anywhere,
Microsoft Access, and Oracle Enterprise Edition. The products are developed
in a combination of Microsoft Visual C++, Visual FoxPro, and Borland's
Delphi Enterprise Edition. They are only sold in the United States.
QuadraMed's Data Management solutions enable healthcare facilities
to accurately collect and report patient demographic and clinical
information. QuadraMed's data collection and abstracting solution,
Abstractor+, collects patient demographic and clinical information for
state, federal, and Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") regulatory requirements and for facility-specific
statistical reporting, benchmarking, outcomes and performance improvement,
marketing, and planning. QuadraMed's data collection tools provide patient
database tailored to a facility's data collection requirements. Abstractor+
is fully integrated with Business Objects to provide a completely user
customizable data collection and analytical processing (OLAP) capability.
QuadraMed's encoding software solutions, nCoder+ and WinCoder,
identify ICD-9-CM and HCPCS/CPT codes for accurate collection and reporting
of patient clinical information. The encoding methodology is
"knowledge-based" and adheres to the U.S. Department of Health and Human
Services Office of the Inspector General ("OIG") recommended use of the
ICD-9-CM Official Coding Source. The encoding tools include official coding
protocol, data quality edits, and the professional knowledge of QuadraMed's
credentialed HIM professionals. QuadraMed's Grouping solutions address the
reimbursement methodologies utilized by the Medicare inpatient and
outpatient prospective payment systems.
QuadraMed targets its standard encoding products to hospitals with
over 100 beds, which are approximately 68% of the approximately 5000
non-federal acute care hospitals. QuadraMed has developed a specialized
encoding product, nCoder+ MD, for Veterans Administration facilities and
the physician market. QuadraMed believes that significant opportunities
exist in the physician market for encoding product sales. QuadraMed also
believes that new opportunities for its encoding products could develop
with the anticipated implementation of ICD-10 in 2004. This new coding
classification system is expected to require the modification of coding and
data collections systems and the conversion of statistical information for
proper clinical reporting and reimbursement billing.
QuadraMed's Record Management solution, MEDREC Milliennium,
automates the record tracking and location functions, monitors record
completeness, and facilitates the release of information process within
health information management departments. This product assists healthcare
facilities in properly completing records pursuant to JCAHO, state, federal,
and medical staff bylaw requirements. QuadraMed's Record Management
solution consists of four main modules that are sold individually or as a
product suite and interface with a facility's health information system.
QuadraMed's primary market for its Record Management solution is
acute care hospitals. The MEDREC Millennium Suite (a 32-bit solution)
includes distinctive features for IDNs, outpatient providers, and Veterans
Administration facilities. These tools are designed to monitor a facility's
adherence to the patient privacy rules and patient bill of rights.
QuadraMed's Compliance Management solution, the Fraud and Abuse
Compliance Tracking System (FACTS), includes inpatient (IP-FACTS),
outpatient (OP-FACTS), and clinicals (Clinical FACTS). The FACTS product
line is designed to provide automated pre-billing monitoring of 100% of
inpatient and outpatient claims data. The screening within the Compliance
Management tools includes OIG and internally designed targets aimed at
providing 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 compliance
program to identify patterns in coding and physician documentation. The
management reporting module includes boardroom ready reports summarizing
clinical and financial results. This product line also includes a point of
registration system that determines medical necessity prior to the service
being rendered. The screening is based upon Local Medical Review Policies
("LMRPs") and generates an Advanced Beneficiary Notice ("ABN").
QuadraMed's primary market for Compliance solutions is acute care
hospitals. The market for compliance management products is growing and
reports have estimated that, by 2004, 50% of acute facilities will implement
a software monitoring and auditing tool. QuadraMed believes that the advent
of the Outpatient Prospective Payment System and APCs may also provide
additional opportunities for its outpatient auditing tool.
Collection Services Division
QuadraMed's Collection Services Division provides three services
that identify and collect accounts receivables for hospitals and medical
groups: (i) Accounts Receivable Management; (ii) Managed Care Payment
Review; and (iii) Capitation Payment Review.
QuadraMed's Accounts Receivable Management services provide a
variety of third party collection services, including (i) complete
outsourcing that initially bills and collects accounts from time of
service; (ii) early out programs that collect accounts of pre-designated
age or amount; (iii) aged accounts placement that collect aged accounts on
a one-time basis; and (iv) conversion account resolution that collect
accounts that have not been transferred into a provider's new information
system. In addition to these main accounts receivable services, QuadraMed
also provides operational assessments of hospital revenue cycles and
training and education on business office operations and compliance issues
related to collection. QuadraMed also offers customization of accounts
receivable services and detailed reconciliation reports on its work.
QuadraMed markets its Accounts Receivable Management services to
large or multi-hospital facilities. Historically, most of QuadraMed's
clients for this service have been in California. In 2000, QuadraMed began
to market the services in other states and hired national sales
representatives. QuadraMed anticipates that demand for its Accounts
Receivable Management services should increase in the future as the
hospital and healthcare industry continues to experience increasing
accounts receivable volume, decreasing third party coverage, and
increasingly complex reimbursement mechanisms.
QuadraMed's Managed Care Payment Review services audit managed
care patient accounts for appropriate payment pursuant to managed care
contracts. In providing this service, QuadraMed uses its own proprietary
software that automates many audit functions and permits greater reporting
options.
QuadraMed's Capitation Payment Review services audit 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. Health Care Finance Administration
("HCFA") premium. The service is only provided for health care providers
with more than 3000 Medicare HMO enrollees. Most of QuadraMed's customers
for this service are located in California.
Health Information Management Services Division
QuadraMed's Health Information Management Services Division provides
the following services:
o Health Information Interim Management. QuadraMed provides
both short-term and long-term interim management for hospital
health information departments. Minimum contract terms for
these services are typically three months. Through this
service, QuadraMed provides hospitals with qualified,
experienced managers.
o Health Information Management Consulting Services. QuadraMed
provides qualitative or quantitative health information
project management and consulting services to hospitals.
Examples of services are JCAHO accreditation review
preparation, departmental reviews and assessments, and
implementation of services or systems.
o Health Information Management Department Outsourcing
Services. QuadraMed contracts with hospitals to outsource
their entire health information management departments. These
contracts generally are multi-year and at a fixed fee, with
terms for base line performance.
o Coding, Compliance, and Education. QuadraMed provides
services associated with inpatient and outpatient coding and
coding compliance for hospitals, physicians, and clinic
practices, including backlog coding, coding auditing,
case-mix analysis, coding interim management, coding process
review, and coding education.
o Compliance, Legal, and Regulatory Services. QuadraMed
provides hospital-wide compliance risk assessments and
audits, compliance plan development, Department of Justice
corporate integrity agreement auditing and validation,
compliance help desk services, Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") compliance and
education services, HIPAA assessments, and the
ComplySource(R) (compliance and HIPAA) software solution.
o Charge Description Master Reviews. QuadraMed reviews hospital
charge description masters or charge control databases to
evaluate compliance and appropriate billing. Services are
provided at a hospital or remotely, typically under contracts
with terms of several months.
Due to shortages of professionals and need for broad-based
expertise, QuadraMed expects hospitals to continue to need consulting
services to assist in the management and execution of their health
information management strategies and responsibilities. In addition,
continued focus on billing and reimbursement accuracy by government payors
and law enforcement agencies is expected to continue to drive the demand
and need for these consulting services. QuadraMed provides services
throughout the country within a regionally-based operations structure.
QuadraMed markets it Health Information Management Services in a variety of
ways, including (i) requests for proposals sent directly to QuadraMed; (ii)
healthcare trade shows; and (iii) QuadraMed's professionals, who use their
professional contracts, telemarketing and direct mail to generate sales.
EZ-CAP Division
The EZ-CAP Division was established in August of 2000, and
EZ-CAP(R) is the division's core software product. The software automates
administration and management of managed care and at-risk provider
organizations. EZ-CAP(R) tracks patient encounters, determines eligibility
coverage under various benefit structures in multiple health plans,
processes physician authorizations and referrals, tracks patient, provider,
and health plan service incidents, and adjudicates and pays claims. The
first version of EZ-CAP was introduced in 1989 by the predecessor to
Rothenberg Health Systems, Inc., which QuadraMed acquired in 1997.
EZ-CAP's latest release, EZ-CAP Enterprise v4.0, runs on Microsoft
SQL Server 7.0 using client/server architecture on a scalable platform,
Microsoft Windows graphical user interface, and tested functionality.
EZ-CAP has evolved to support complex relationships between its users and
their contracted health plan payors. EZ-CAP also manages sub-contract
agreements that its users may have with providers, providing functionality
to support both provider network development and a variety of reimbursement
methods for professional and institutional providers. EZ-CAP is supported
by a variety of turnkey modules to enhance functionality. These modules
provide access to EZ-CAP information via the Internet, permit electronic
loading of data, and provide connections between EZ-CAP and practice
management or hospital information systems. The product is not customized,
and clients use a core system that is enhanced annually as part of EZ-CAP's
software maintenance option.
EZ-CAP is marketed to and used by at-risk physician groups and
hospitals that administer multiple contracts with managed care
organizations, such as HMOs or preferred provider organizations ("PPOs").
Although managed care organizations continue to undergo considerable
regulatory and public scrutiny, as health costs continue to trend upward,
QuadraMed believes that employers, health plans, and other third party
payors will continue to require the administrative efficiencies that EZ-CAP
provides to at-risk providers. The bulk of EZ-CAP's customers are in the
United States, but international sales have been made in Ghana, Singapore,
the Philippines and South Africa. As various forms of managed care continue
to be adopted globally, QuadraMed believes that additional international
sales opportunities should exist in the future.
QuadraMed's EZ-CAP Division also provides seminars for doctors and
medical professionals in three formats: (i) direct marketing seminars that
are conducted in various locations throughout the country on various
subjects, such as billing collection, coding, and patient satisfaction;
(ii) on-site education seminars that are performed by request at hospitals
and other healthcare organizations; and (iii) on-line education seminars
that are 100% Internet based, with particular emphasis on coding
certification for health information management professionals.
FINANCIAL INFORMATION ABOUT OPERATING DIVISIONS
The financial statements and supplementary data, including
financial information about QuadraMed's operating divisions, are included
in this Form 10-K beginning on page F-1.
CUSTOMERS
Historically, QuadraMed has marketed its products primarily to
hospitals and IDNs, which account for approximately 90% of its revenues.
QuadraMed also sells products to hospital associations, physician groups,
payors and self-administered employers. As of December 31, 2000, QuadraMed
and its subsidiaries had approximately 4,000 customers located in all 50
states, the District of Columbia, Canada, Ghana, the Philippines, Puerto
Rico, Singapore and South Africa. QuadraMed expects to maintain a high
percentage of hospital customers for the foreseeable future. In 2000, 1999,
and 1998, no single customer accounted for 10% or more of QuadraMed's total
revenue or of any one business division.
RESEARCH AND DEVELOPMENT
QuadraMed's product development strategy is focused on maintaining
and improving existing products. In addition, QuadraMed carries out its
development to meet changing healthcare regulatory demands. QuadraMed's
research and development is oriented toward enhancing the reporting
capabilities of its applications, expands its outpatient and inpatient
databases, and improves its comparative reporting and benchmarking
capabilities with third-party databases. As part of this process, a
significant amount of QuadraMed's research and development resources are
dedicated to integrating acquired technology.
In 2000, 1999, and 1998, QuadraMed's research and development
expenses respectively totaled $20.7 million, $21.8 million, and $20.6
million, representing 16.1%, 11.4%, and 12.0%, respectively, of its total
revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
HIGHLY COMPETITIVE MARKET
Competition for products and services in the healthcare
information management and technology industry is intense and is expected
to increase. QuadraMed competes with other healthcare information software
and services providers and healthcare consulting firms. Some principal
competitors include, among others:
o McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation in the market
for electronic document management products in the Enterprise
Products and Services Division;
o Eclipsys Corporation, Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., McKesson HBOC,
Shared Medical Systems, Inc., a division of Siemens, and
MediQual Systems, Inc., a division of Cardinal Health, Inc.,
in the market for decision support products in the Enterprise
Products and Services Division;
o McKesson HBOC, Inc., Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and IDX/Phamis in the market for enterprise
healthcare information systems in the Enterprise Products and
Services Division;
o Madison, McKesson HBOC, Shared Medical Systems, Inc., a
division of Siemens, and Medibase in the market for MPI
products and services in the Enterprise Products and Services
Division;
o 3M, SoftMed Corporation, Inc., MetaHealth, Eclypsis
Corporation, Cascade, and HSS in the market for medical
records products in the Health Information Management Product
Division;
o PriceWaterhouseCoopers, KPMG and Ernst and Young for our
compliance products and services and health information
management consulting services in the Health Information
Management Services Division;
o Physmark, Perot System's Health System Design,
Healtheon/WebMD's Medical Manager Corp., IDX Corporation and
Trigetto's Erisco, for at-risk managed care systems in the
EZ-CAP Division; and
o National consulting firms and on-line providers for physician
and other medical professional seminars in the EZ-CAP
Division.
In addition, current and prospective customers evaluate
QuadraMed's capabilities against the merits of their existing information
systems and expertise. Furthermore, major software information systems
companies that do not presently offer products that compete with those
offered by QuadraMed, including those specializing in the healthcare
industry, may enter QuadraMed's markets.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug
and Cosmetic Act. At present, none of QuadraMed's software products are so
regulated. They, however, could become subject to such regulation in the
future.
There is substantial federal and state regulation of the
confidentiality of patient medical records and the circumstances under
which such records may be disclosed to or processed by QuadraMed as a
consequence of its contacts with various health providers, including HIPAA.
Although compliance with these laws and regulations is presently the
principal responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are rapidly
evolving. Additional legislation governing the dissemination of medical
record information also has been proposed and may be adopted at the state
level. In addition, the Administrative Simplification provision of HIPAA
require the promulgation of regulations which will set standards for
electronic transactions, code sets, data security, unique identification
numbers, and privacy of individually identifiable health information, which
could materially impact QuadraMed's business. Moreover, during the past
several years, the healthcare industry 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.
INTELLECTUAL PROPERTY
QuadraMed relies on a combination of copyright, trademark and
trade secret law, and nondisclosure and noncompete agreements to protect
its proprietary methodologies, computer software, and databases. QuadraMed
has obtained copyright registrations in the United States for many of its
principal products, including Affinity(R) and EZ-CAP(R). QuadraMed
maintains the confidentiality of proprietary technology through a policy of
obtaining employment agreements that (1) prohibit employees from disclosing
or using QuadraMed's confidential information, and (2) require the
disclosure and assignment to QuadraMed of new ideas, developments,
discoveries or inventions related to QuadraMed's business. QuadraMed also
enters into non-disclosure agreements with business partners and customers.
QuadraMed has obtained trademark registrations in the United States for
most of its corporate and product trademarks, including QuadraMed(R),
Affinity(R), and EZ-CAP(R). Any of these protective measures could prove to
be inadequate, and QuadraMed could become subject to litigation involving
its intellectual property. QuadraMed has not filed for or obtained any
patents for its proprietary technology, though from time to time it may in
the future seek patents for new developments if, in QuadraMed's business
judgment, their importance warrants such steps and is appropriate under the
patent laws. In addition, QuadraMed depends on licenses for certain
technology used to develop its products from a number of third-party
vendors. Most of these licenses are non-exclusive and expire within three
to five years.
EMPLOYEES
As of December 31, 2000, QuadraMed employed 1,030 people,
including 62 in general administration, 178 in product design, research and
development, and quality assurance, 209 in technical services and support,
62 in sales and marketing, 469 in consulting services, and 50 in
operations. As of December 31, 1999, QuadraMed employed 1,610 people,
including 75 in general administration, 309 in product design, research and
development, and quality assurance, 254 in technical services and support,
116 in sales and marketing, 779 in consulting services, and 77 in
operations. None of QuadraMed's employees are represented by a union or
other collective bargaining group. QuadraMed believes that it has a
satisfactory relationship with its employees.
ITEM 2 PROPERTIES
QuadraMed leases all of its facilities and does not own any real
property. As of December 31, 2000, its executive and corporate offices were
located in San Rafael, California, in approximately 33,000 square feet of
leased office space under a lease that expires in 2009. QuadraMed also
maintains offices in Alameda, California; Austin, Texas; Chicago, Illinois;
Englewood, Colorado; Escondido, California; Irvine, California; Irving,
Texas; Kansas City, Missouri; Neptune, New Jersey; Pittsburgh,
Pennsylvania, Portland, Oregon; Princeton, New Jersey; Reston, Virginia;
San Diego, California; Santa Cruz, California; Vista, California; Woodland
Hills, California; and Wyomissing, Pennsylvania. QuadraMed believes that
its facilities provide sufficient space for its present needs, and that
additional suitable space, if needed, will be available on reasonable
terms.
In 2000, QuadraMed closed the following unused or underutilized
offices: Bethlehem, Pennsylvania; Bloomington, Minnesota; Carlsbad,
California; Fresno, California; Glen Allen, Virginia; Howell, New Jersey;
and Middletown, Connecticut.
ITEM 3 LEGAL PROCEEDINGS
In the normal course of business, QuadraMed is involved in
litigation relating to claims arising out of its operations. QuadraMed does
not believe that the ultimate resolution of any pending proceeding will
have a material adverse effect on its business, financial condition or
results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
QuadraMed's annual meeting of stockholders was held on October 6,
2000. Voting was conducted in person and by proxy as follows:
a) Stockholders voted to elect Albert L. Greene, F. Scott Gross
and E. A. Roskovensky as directors, each to serve until the
2003 annual meeting and until their successors are elected
and qualified. Continuing directors, whose terms do not
expire until 2001, are Michael J. King and Cornelius T. Ryan.
Continuing directors, whose terms do not expire until 2002,
are James D. Durham and Lawrence P. English.
For Against Abstain
--- ------- -------
Albert L. Greene 17,255,956 0 1,383,297
F. Scott Gross 17,307,770 0 1,331,483
E.A. Roskovensky 17,252,895 0 1,386,356
b) Stockholders voted to amend QuadraMed's 1996 Stock Incentive
Plan to (1) increase the maximum number of shares authorized
for issuance under such plan by 500,000 shares and (2)
increase the maximum number of shares for which any one
person may receive options, stock appreciation rights or
direct stock issuances by an additional 500,000 shares to
1,000,000 shares in the aggregate per calendar year. There
were 4,646,645 shares voted for this proposal, 3,379,519
against, 944,539 abstentions and 0 broker non-votes.
c) Stockholders voted to approve QuadraMed's 1999 Supplemental
Stock Option Plan and to increase the number of shares of
QuaraMed's common stock, par value $.01 per share (the
"Common Stock"), issuable upon the exercise of options
granted under the plan from 2,000,000 shares to 4,000,000
shares. There were 6,162,798 shares voted for this proposal,
1,853,991 against, 953,914 abstentions and 0 broker non-votes
d) Stockholders voted to ratify the appointment of Pisenti &
Brinker LLP as independent auditors of QuadraMed for the
fiscal year ending December 31, 2000. There were 18,081,679
shares voted for this proposal, 538,691 against, 18,883
abstentions and 0 broker non-votes.
PART II
ITEM 5..MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 31, 2000, the Nasdaq SmallCap Market began to quote
QuadraMed's Common Stock under the symbol "QMDC". From October 16, 1996 to
August 30, 2000, it had been quoted under the same symbol on the Nasdaq
National Market. The following table sets forth the range of QuadraMed's
Common Stock with high and low closing sales prices as reported on the
applicable Nasdaq market for the indicated periods
HIGH LOW
Year Ended December 31, 1999
First Quarter ............................ 29 7.625
Second Quarter............................ 12.0625 4.25
Third Quarter............................. 10.6875 6.0625
Fourth Quarter............................ 8.875 4.5
Year Ended December 31, 2000
First Quarter............................. 10.5 5
Second Quarter............................ 6 2.094
Third Quarter............................. 2.9687 1.1875
Fourth Quarter............................ 1.5312 0.625
Year Ended December 31, 2001
First Quarter (through March 29, 2001).... 2.688 0.75
On March 29, 2001, the closing price of QuadraMed's Common Stock
was $2.313 per share. As of that date, there were approximately 317 holders
of record of Common Stock (excluding beneficial owners whose shares are
held in the name of Cede & Co.).
QuadraMed has never declared or paid any cash dividends on shares
of its Common Stock. At this time, QuadraMed intends to retain all future
earnings, if any, to fund the development and growth of its business and
does not anticipate paying any cash dividends on shares of its Common Stock
in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DATA:
Revenues $128,971 $192,107 $172,228 $140,800 $101,076
Loss from Operations (74,727) (15,443) (16,308) (31,848) (8,169)
Net Loss (54,836) (12,330) (21,376) (37,985) (44,351)
Basis and diluted net loss per share (1) ($2.14) ($0.49) ($0.91) ($2.34) ($3.98)
======= ======= ======= ======= =======
AS OF DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Working capital (deficit) $62,795 $76,249 $83,463 $16,457 $7,234
Total assets $155,945 $214,661 $257,953 $124,022 $70,495
Stockholders' equity (deficit) $4,321 $62,581 $68,988 $24,762 $23,213
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing
net income per share.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 2000, QuadraMed moved away from its acquisition-based
growth strategy and began to focus on integrating its various businesses
and making financial and operational improvements. QuadraMed re-aligned its
organization into five operating divisions with zero-based operating budget
plans to emphasize customer service, product management, and expense
efficiencies. QuadraMed reduced its cost structure by eliminating redundant
management and consolidating offices.
Revenue in 2000 decreased from 1999. A number of healthcare
industry factors contributed to this decrease, including the decline in
information technology spending subsequent to Year 2000 remediation
expenditures and reimbursement shortfalls caused in part by the Balanced
Budget Act. Inefficient internal and business controls also contributed to
this decline.
QuadraMed carried out a full review of its assets and liabilities
as of June 30, 2000 and recorded charges for the necessary adjustments to
its balance sheet in the third quarter. In addition, the financial
performance and market position of each product line was re-evaluated as
part of developing strategies to improve integration and achieve synergies.
These actions improved fourth quarter financial results. Revenue
increased sequentially from the previous quarter, expenses were
significantly lower, and cash usage was near break even. QuadraMed also
realized a gain from the sale of its remaining interest in Chart One. In
addition, QuadraMed did not report any non-recurring charges for the
quarter. QuadraMed ended 2000 with a cash position of $48 million following
the ROI division divestiture, an increase relative to the previous year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the consolidated statement of operations of QuadraMed, expressed
as a percentage of total revenues.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Licenses............................... 58.5% 66.8% 69.6%
Services............................... 41.5 33.2 30.4
---- ---- ----
Total revenues......................... 100.0 100.0 100.0
Operating Expenses:
Cost of licenses....................... 19.4 13.7 14.5
Cost of services....................... 27.6 19.5 20.6
General and administration............. 39.1 27.5 29.3
Sales and marketing.................... 16.9 11.9 12.6
Research and development............... 16.1 11.4 12.0
Amortization of intangibles............ 5.6 4.2 3.7
Acquisition costs...................... 0.0 3.6 6.0
Impairment of intangibles.............. 0.7 5.5 0.0
Non-recurring changes.................. 32.5 9.8 2.4
Write-off of acquired in-process
research and development............ 0.0 0.9 8.4
--- --- ---
Total operating expenses............ 157.9 108.0 109.5
----- ----- -----
Loss from operations.......................... (57.9) (8.0) (9.5)
Interest income (expense), net................ (3.6) (1.5) 0.0
Other income (expense) net.................... 0.0 0.7 (0.1)
----- ----- ------
Net loss before provision for
income taxes and minority interest......... (61.5) (8.8) (9.6)
Provision for income taxes.................... (0.1) (0.2) (1.8)
Minority interest in income (loss)............ 0.0 0.0 (0.2)
Loss from discontinued operations............. 19.1 2.6 0.3
Dividend accretion............................ 0.0 0.0 (1.1)
----- --- ----
Net loss...................................... (42.5)% (6.4)% (12.4)%
====== ===== ======
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
QuadraMed currently classifies cost centers by primary activity to
estimate expenses by function. From 1998 to 2000, QuadraMed has implemented
a number of organizational changes, experienced a high level of employee
turnover, and converted to a new accounting system. Consequently, it is
impracticable to characterize the variances in results between 1998 and
1999, and QuadraMed believes that any such characterizations would not
enhance an understanding of its financial condition or results of
operations. As a result, the following Management Discussion and Analysis
focuses primarily on the comparison between 2000 and 1999.
REVENUES
Licenses. License revenues include license, installation,
consulting and post-contract support fees, third-party hardware sales, and
other revenues related to licensing of our software products. License
revenues in 2000 were $75.5 million, a 41% decrease from $128.4 million in
1999, and a 37% decrease from $119.8 million in 1998. The decrease in
license revenues in 2000 from 1999 resulted from delayed customer
purchasing decisions, poor operational execution, and the diversion of
management's attention to integrate QuadraMed's numerous acquisitions.
Services. Service revenues were $53.5 million in 2000, a 16%
decrease from $63.7 million in 1999, and approximately 2% greater than
$52.4 million in 1998. The loss of several hospital outsourcing service
contracts was the primary reason for the decline in service revenues in
2000 from 1999.
COST OF REVENUES
Cost of licenses. Cost of licenses consists primarily of salaries,
benefits and allocated costs related to software installations, hardware
costs, and royalties to third parties. Cost of licenses in 2000 were $25.0
million, a 5% decrease from $26.3 million in 1999, and approximately the
same as $24.9 million in 1998. As a percentage of license revenues, cost of
licenses increased to 33.1% in 2000 from 20.5% in 1999 and 20.8% in 1998.
Cost of licenses in the aggregate decreased in 2000 principally as a result
of the lower sales volume and the restructuring actions taken in 2000. The
cost of licenses as a percentage of license revenues increased in 2000
primarily due to the decline in revenue.
Cost of services. Cost of services in 2000 was $35.6 million, a 5%
decrease from $37.4 million in 1999, and approximately the same as $35.5
million in 1998. Cost of services includes expenses associated with
services performed primarily in connection with health information
management and business office outsourcing, compliance, and consulting
services. As a percentage of service revenues, cost of services increased
to 66.6% in 2000 from 58.8% in 1999 and decreased from 67.8% in 1998. Cost
of services in the aggregate decreased in 2000 primarily as a result of the
restructuring actions taken in 2000. Cost of services as a percentage of
service revenues increased in 2000 principally due to the decline in
revenue.
OPERATING EXPENSES
General and Administration. General and administration expenses
were $50.5 million in 2000, 4.9% less than $53.1 million in 1999, and
approximately the same as $50.4 million in 1998. As a percentage of total
revenues, general and administrative expenses were 39.1% in 2000, 27.5% in
1999, and 29.3% in 1998. The decrease in general and administration
expenses in 2000 was principally due to the restructuring actions taken in
2000. The increase in general and administration expenses in 2000 as a
percentage of total revenues was principally due to the decline in sales
volume.
Sales and Marketing. Sales and marketing expenses were $21.8
million in 2000, 5% less than $22.9 million in 1999, and approximately the
same as $21.7 million in 1998. As a percentage of total revenues, sales and
marketing expenses were 16.9% in 2000, 11.9% in 1999, and 12.6% in 1998.
The decrease in these expenses in 2000 was primarily due to the
restructuring actions taken in 2000. The increase in sales and marketing
expenses in 2000 as a percentage of total revenue was principally due to
the decline in sales volumes.
Research and Development. Research and development costs include
costs incurred to enhance QuadraMed's software products and meet changing
healthcare regulatory demands. Research and development expenses in 2000
were $20.8 million, 5% less than $21.8 million in 1999, and approximately
the same as $20.7 million in 1998. As a percentage of total revenues,
research and development costs were 16.1% in 2000, an increase from 11.4%
in 1999, and 12.0% in 1998. The research and development expense decrease
in 2000 was principally due to the reduction in product versions and
associated maintenance requirements. As a percentage of total revenues,
research and development EXPENSES increased in 2000 primarily due to a
smaller revenue base. QuadraMed capitalized $1.0 million, $4.8 million and
$3.1 million of software development costs in 2000, 1999, and 1998,
respectively, which represented 4.8%, 22.0% and 14.9% of total research and
development expenditures in 2000, 1999, and 1998 respectively. Amortization
of capitalized software development costs totaled $2.4 million, $0.7
million, and $0.7 million in 2000, 1999, and 1998, respectively.
QuadraMed believes that research and development expenditures are
essential to maintaining its competitive position. As a result, QuadraMed
intends to continue to make investments in the development of new products,
enhancement of existing products, and in the further integration of
acquired technologies.
Amortization of Intangibles. Amortization of intangibles decreased
to $7.2 million in 2000 from $8.0 million in 1999, and an increase from
$6.5 million 1998. The decrease in amortization of intangibles was
primarily due to the write-down of certain intangible assets during 2000.
In addition, in 2000 QuadraMed reclassified $3.6 million of intangible
assets to capitalized software in relation to the Med Data Systems, Inc.
("Med Data") acquisition.
Acquisition Costs. There were no acquisition charges for the year
ended December 31, 2000. In 1999, QuadraMed incurred $6.9 million of
acquisition costs, of which $6.3 million were associated with the
acquisition of Compucare, which was accounted for as a pooling of
interests. The $6.3 million in costs related to the acquisition of
Compucare were primarily for financial advisor fees of approximately $5.4
million incurred by QuadraMed and Compucare and to a lesser extent, legal
and accounting fees of approximately $900,000. In 1998, $10.3 million of
acquisition costs were associated with the acquisitions of Pyramid Health
Group Inc., ("Pyramid") Codemaster Corporation and Integrated Medical
Networks, Inc. ("IMN"), which were all accounted for on a pooling of
interests basis. Acquisition costs were related to fees for financial
advisors, legal counsel, and accounting firms hired by QuadraMed and the
acquired companies.
Non-Recurring Charges. Non-recurring charges totaled $42.0 million
in 2000, primarily associated with the following categories:
(a) Restructuring Costs -- $11.3 million
QuadraMed's restructuring plans were aimed at eliminating
redundant costs and overhead and consolidating offices. These costs
include: $2.5 million in severance for terminated employees; $5.4 million
associated with separation agreements for officers; $2.9 million to
downsize and close excess facilities; and $0.5 million in other
restructuring expenses. At December 31, 2000, the remaining liability for
restructuring costs totaled $3.2 million and is included in "accrued
liabilities."
(b) Asset Impairment Charges -- $26.4 million
QuadraMed recorded charges for a $10.6 million write-down of
assets associated with a transaction with Health+Cast L.L.C., $6.2 million
in charges associated with the elimination of the EnOvation product, and
$5.5 million in certain receivable writedowns and costs associated with
discontinued operations. In addition, the balance sheet review by
management resulted in charges of $4.1 million, primarily from the
elimination of write-down of unbilled revenue and a reduction in the
carrying value of fixed assets.
(c) Non-case-specific litigation costs -- $4.3 million
An accrual of $4.3 million for non-case-specific litigation fees,
costs, and expenses was set up during the 2000. As of December 31, 2000,
the balance in this reserve was $1.6 million and is included in "accrued
liabilities".
In 1999, Non-recurring charges totaled $18.8 million, primarily
associated with severance payments and future rent and lease obligations
associated with the closing of several duplicative operating facilities and
certain integration costs related to prior acquisitions. Non-recurring
charges in 1998 totaled $4.2 million, primarily due to costs associated
with closing a duplicative operating facility.
Intangible Assets. QuadraMed recorded a $0.9 million charge in
2000 to write-down certain intangible assets related to the acquisition of
Velox Systems Corp. ("Velox"). QuadraMed recorded a $10.6 million charge in
1999 to write-down certain intangible assets related to the acquisitions of
Healthcare Recovery, Inc., InterLink, Velox and American Hospital
Directory, Inc. made in 1997 and 1998. No charges to intangible assets were
made during 1998. In addition, in 2000 QuadraMed reclassified $3.6 million
of intangible assets relating to Med Data to capitalized software, and $0.5
million of acquisition costs from long term assets to intangibles.
Acquired In-Process Research and Development. There were no
charges to acquired in-process research and development during 2000. In
conjunction with the acquisition of Med Data during 1999, QuadraMed
recorded a $l.7 million shortage for acquired in-process research and
development charge as the technology had not achieved technological
feasibility and had no alternative future use. During 1998, in connection
with the acquisitions of Velox, Cabot Marsh Corporation, the remaining
43.3% interest in Medicus Systems Corporation and several other purchase
business combinations, QuadraMed allocated $14.5 million to acquired
in-process research and development.
Interest Expense. Interest expense, net of interest income, was
$4.5 million in 2000, $2.8 million in 1999, and $0 in 1998. Interest
expense in 2000 and 1999 was principally due to QuadraMed's $115 million
convertible subordinated debentures issued in May 1998, offset by interest
income from QuadraMed's cash and investments. The increase in interest
expense in 2000 compared to 1999 is the result of less interest income from
a smaller portfolio of investments.
Provision for Income Taxes. Provision for income taxes was $0.2
million in 2000, $0.5 million in 1999 and $3.0 million in 1998. The
provision for income taxes was primarily due to state and alternative
minimum tax liabilities on certain of QuadraMed's legal entities. For
financial reporting purposes, a 100% valuation allowance has been recorded
against QuadraMed's deferred tax assets under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, QuadraMed had $27.4 million in cash and cash
equivalents, $12.3 million of short-term investments, and $62.8 million in
net working capital compared to $10.6 million, $19.1 million, and $76.3
million, respectively, in 1999.
Net cash used in operating activities was $13.5 million in 2000
compared to $39.5 million in 1999. Net cash used in operating activities in
2000 related to the net loss for the period, offset by the write-down of
certain intangible assets and the increase in accounts payable and accrued
liabilities. The increase in net cash used in operating activities in 1999
was principally due to an increase in unbilled products and accounts
receivable, prepaid expenses, and other assets and a decrease in accounts
payable, accrued liabilities, and deferred revenue.
Net cash provided by investing activities was $29.5 million in
2000 compared to $2.6 million in 1999. Investing activities for 2000 were
comprised primarily of the approximately $40.4 million in proceeds from the
sale of our interest in ChartOne. Other investing activities included cash
outflows to purchase capital assets of $2.9 million and an increase in
restricted cash of $7.0 million. Investing activities for 1999 primarily
included the purchase of short and long-term investments using the proceeds
from the $115.0 million offering of convertible subordinated debentures and
an additional equity investment of $3.0 million in VantageMed Corporation.
Net cash provided by financing activities was $0.7 million in
2000, an improvement over the $18.4 million used in financing activities in
1999. Financing activities in 2000 primarily related to the proceeds from
the exercise of Common Stock options and purchases through the Employee
Stock Purchase Plan. Net cash used in financing activities was greater in
1999 primarily due to repayment of outstanding balances under the line of
credit assumed as part of the Compucare acquisition, partially offset by
the proceeds from the exercise of Common Stock options and purchases
through the Employee Stock Purchase Plan.
In May 1998, QuadraMed issued $115 million in convertible
subordinated debentures. The debentures are due May 1, 2005 and bear
interest at an annual rate of 5.25%, which is payable semi-annually. From
time to time, QuadraMed may repurchase some of its convertible subordinated
debentures in the open market.
QuadraMed believes that it will have sufficient liquidity and
operating cash flows to fund its scheduled debt service and other
obligations over the next twelve months.
INFLATION
The majority of QuadraMed's revenue is derived from perpetual and
long-term customer contracts. Term contracts range from one (1) to five (5)
years and generally allow price increases annually based on external
measures of inflation. QuadraMed has increased some of its prices under
these contract provisions. Accordingly, inflation has not had, and
QuadraMed does not believe that it will have, a significant impact on its
financial condition.
BUSINESS RISKS
QUADRAMED HAS ENCOUNTERED SIGNIFICANT CHALLENGES INTEGRATING ACQUIRED
BUSINESSES, AND ITS BUSINESS, OPERATIONS, AND FINANCIAL CONDITION HAVE BEEN
ADVERSELY AFFECTED.
Since its inception, QuadraMed has completed twenty-eight (28)
acquisitions. QuadraMed has encountered significant challenges related to
integrating acquired businesses into its operations and expects these
challenges to continue until incorporation is complete. Some of the
challenges QuadraMed has encountered or may encounter in integrating
acquired businesses include:
o Interruption, disruption or delay of QuadraMed's ongoing
business;
o Distraction of management's attention from other matters;
o Additional operational and administrative expense;
o Difficulty managing geographically dispersed operations;
o Failure of acquired businesses to achieve expected results
resulting in failure of QuadraMed to realize anticipated
benefits;
o Failure to retain key acquired personnel and difficulty and
expense of training those retained;
o Increases in stock compensation expense and increased
compensation expense resulting from newly hired employees;
o Assumption of liabilities of acquired businesses and
potential for disputes with the sellers;
o Customer dissatisfaction or performance problems related to
acquired businesses;
o Exposure to the risks of entering markets in which QuadraMed
has no direct prior experience and to risks associated with
market acceptance of acquired products and technologies; and
o Platform and technical issues related to integrating systems
from various acquired companies.
All of these factors have had, and QuadraMed expects will continue
to have, an adverse effect on its business, financial condition and results
of operations at least until the integration of the acquired businesses is
complete. In addition, these problems have led QuadraMed to refocus its
business strategy away from acquisitions, which could lead to slower future
growth and negatively impact its financial condition.
QUADRAMED HAS INCURRED LOSSES IN EACH OF THE PAST THREE YEARS AND COULD
CONTINUE TO INCUR LOSSES IN FUTURE PERIODS.
QuadraMed incurred net losses of $54.8 million, $12.3 million, and
$21.4 million in 2000, 1999, and 1998, respectively. As of December 31,
2000, QuadraMed's accumulated deficit was $260.3 million. Included in these
losses are the effect of both operating losses and write-offs for
in-process research and development of $1.7 million and 14.5 million in
1999 and 1998, respectively. No in-process research and development
write-offs occurred in 2000. Furthermore, in connection with its
acquisitions, QuadraMed may be required to amortize significant expenses
related to goodwill and other intangible assets in future periods.
Accordingly, if QuadraMed's operating results do not improve to offset
these and other expenses, QuadraMed will continue to experience losses in
future periods and may never be profitable.
QUADRAMED'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH
COULD ADVERSELY AFFECT ITS NET INCOME AND FINANCIAL RESULTS.
QuadraMed's quarterly operating results have varied significantly
in the past and may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside its control. Accordingly,
quarter to quarter comparisons of our operating results may not be a good
indication of QuadraMed's future performance. Some of the factors causing
these fluctuations include:
o Variability in demand for products and services;
o Introduction of product enhancements and new products by
QuadraMed and its competitors;
o Timing and significance of announcements concerning present
or prospective strategic alliances;
o Discontinuation of, or reduction in, the products and
services QuadraMed offers;
o Loss of customers due to consolidation in the healthcare
industry;
o Delays in product delivery requested by its customers;
o Customer budget cycle fluctuation;
o Investment in marketing, sales, research and development, and
administrative personnel necessary to support anticipated
operations;
o Costs incurred for marketing and sales promotional
activities;
o Software defects and other product quality factors;
o General economic conditions and their impact on the
healthcare industry;
o Cooperation from competitors on interfaces and implementation
when a customer chooses systems from various vendors;
o Delays in implementation due to product readiness or to
customer induced delays in training or installation;
o Final negotiated sales prices of systems;
o Federal regulations (i.e., OIG, HIPAA, ICD-10) that can
increase demand for new, updated systems;
o Federal regulations that directly affect reimbursements
received, and therefore the amount of money available for
purchasing information systems; and
o The fines and penalties a healthcare provider or system may
incur due to fraudulent billing practices.
QuadraMed's operating expense levels, which increase with the
addition of acquired businesses, are relatively fixed. Accordingly, if
future revenues are below expectations, QuadraMed would experience a
disproportionate adverse affect on its net income and financial results. In
the event of a revenue shortfall, QuadraMed will likely be unable to, or
may elect not to, reduce spending quickly enough to offset any such
shortfall. As a result, it is possible that QuadraMed's future revenues or
operating results may fall below the expectations of securities analysts
and investors. In such a case, the price of QuadraMed's publicly traded
securities may be adversely affected.
THE VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR PRODUCTS MAY
EXACERBATE THE UNPREDICTABILITY AND VOLATILITY OF OUR OPERATING RESULTS.
QuadraMed cannot accurately forecast the timing of its customer
purchases due to the complex procurement decision processes of most
healthcare providers and payors. How and when to implement, replace, expand
or substantially modify an information system are major decisions for
customers, and such decisions require significant capital expenditures by
them. As a result, QuadraMed typically experiences sales cycles that extend
over several quarters. In addition, certain products QuadraMed acquired as
a result of its acquisitions of IMN and Compucare have higher average
selling prices and longer sales cycles than many of its other products. As
a result, QuadraMed has only a limited ability to forecast the timing and
size of specific sales, making the prediction of quarterly financial
performance more difficult.
QUADRAMED MAY NOT BE ABLE TO HIRE AND RETAIN NECESSARY QUALIFIED PERSONNEL
AND THE UNCERTAINTY CAUSED BY QUADRAMED'S MANAGEMENT CHANGES COULD
ADVERSELY AFFECT THE PRICE OF ITS COMMON STOCK.
In large part, QuadraMed's future success will depend upon its
ability to attract and retain executive officers, product managers, and
other key sales, marketing and development personnel. Competition for
personnel in the software and healthcare information management industry is
intense. At times, QuadraMed has had difficulty attracting and retaining
highly qualified candidates within specific geographic areas or with
specific industry experience. If QuadraMed's competitors increase their use
of valid non-compete agreements, the pool of candidates may narrow in some
geographic areas. The failure to attract, retain, train, and effectively
manage personnel could increase QuadraMed's costs and impair its
development, sales, and customer service efforts.
In 2000, QuadraMed also made several changes in senior executive
management. Uncertainty created by these changes could lead some employees
to seek other employment, and QuadraMed could experience difficulty
replacing them. Moreover, the trading price of QuadraMed's Common Stock
could fluctuate due to uncertainties about its senior executive management.
CHANGES IN PROCUREMENT PRACTICES OF HOSPITALS HAVE AND MAY CONTINUE TO HAVE
A NEGATIVE IMPACT ON QUADRAMED'S REVENUES.
A substantial portion of QuadraMed's revenues has been and is
expected to continue to be derived from sales of software products and
services to hospitals. Consolidation in the healthcare industry,
particularly in the hospital and managed care markets, could decrease the
number of existing or potential purchasers of products and services and
could adversely affect QuadraMed's business. In addition, the decision to
purchase QuadraMed's products often involves a committee approval.
Consequently, it is difficult for QuadraMed to predict the timing or
outcome of the buying decisions of its customers or potential customers. In
2000, QuadraMed's license revenues decreased. QuadraMed attributed this
decline in large part to delayed customer purchasing decisions stemming
from concerns about government regulation and general hospital industry
economic pressures. Moreover, QuadraMed's service revenues decreased due to
the loss of hospital service contracts. If either of these trends
continues, QuadraMed's business will be adversely affected. In addition,
many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater regional market power. These emerging systems
could have greater bargaining power, which may lead to decreases in prices
for QuadraMed's products, which could adversely affect QuadraMed's
business, financial condition and results of operations.
CHANGES IN THE HEALTHCARE FINANCING AND REIMBURSEMENT SYSTEM COULD
ADVERSELY AFFECT THE AMOUNT OF AND MANNER IN WHICH QUADRAMED'S CUSTOMERS
PURCHASE ITS PRODUCTS AND SERVICES.
Changes in current healthcare financing and reimbursement systems
could result in unplanned product enhancements, delays or cancellations of
product orders or shipments or reduce the need for certain systems.
QuadraMed could also have the endorsement of products by hospital
associations or other customers revoked. Any of these occurrences could
have a material adverse effect on QuadraMed's business.
The healthcare industry in the United States is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operations of healthcare organizations. The
commercial value and appeal of QuadraMed's products may be adversely
affected if the current healthcare financing and reimbursement system were
to revert to a fee-for-service model. In addition, many of QuadraMed's
customers provide services under capitated service agreements, and a
reduction in the use of capitation arrangements as a result of regulatory
or market changes could have a material adverse effect on QuadraMed's
business. During the past several years, the healthcare industry has been
subject to increasing levels of governmental regulation of, among other
things, reimbursement rates and capital expenditures. Proposals to reform
the healthcare system have been and are being considered by the United
States Congress. These proposals, if enacted, could change the operating
environment of QuadraMed's customers in ways that cannot be predicted.
Healthcare organizations may react to these proposals by curtailing or
deferring investments, including those for QuadraMed's products and
services. In addition, the regulations promulgated under HIPAA could lead
healthcare organizations to curtail or defer investments in non-HIPAA
related features in the next several years.
IF QUADRAMED IS UNABLE TO COMPETE EFFECTIVELY, IT COULD EXPERIENCE PRICE
REDUCTION, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
Competition for QuadraMed's products and services is intense and
is expected to increase. Increased competition could result in reductions
in QuadraMed's prices, gross margins, and market share and have a material
adverse affect on QuadraMed's business, financial condition and results of
operations. QuadraMed competes with other providers of healthcare
information software and services, as well as healthcare consulting firms.
Some competitors have formed business alliances with other competitors that
may affect QuadraMed's ability to work with some potential customers. In
addition, if some of our competitors merge, a stronger competitor may
emerge. Some principal competitors include:
o McKesson HBOC, Inc., SoftMed Corporation Inc., FileNet,
Lanvision, MedPlus, and Eclipsys Corporation in the market
for electronic document management products in the Enterprise
Products and Services Division;
o Eclipsys Corporation, Healthcare Microsystems, Inc., a
division of Health Management Systems Inc., McKesson HBOC,
Shared Medical Systems, Inc., a division of Siemens, and
MediQual Systems, Inc., a division of Cardinal Health, Inc.,
in the market for decision support products in the Enterprise
Products and Services Division;
o McKesson HBOC, Inc., Shared Medical Systems, Inc., a division
of Siemens, MediTech Corporation, Eclipsys Corporation,
Cerner, and IDX/Phamis in the market for enterprise
healthcare information systems in the Enterprise Products and
Services Division;
o Madison, McKesson HBOC, Shared Medical Systems, Inc., a
division of Siemens, and Medibase in the market for MPI
products and services in the Enterprise Products and Services
Division;
o 3M, SoftMed Corporation, Inc., MetaHealth, Eclypsis
Corporation, Cascade, and HSS in the market for medical
records products in the Health Information Management Product
Division;
o PriceWaterhouseCoopers, KPMG and Ernst and Young for our
compliance products and services and health information
management consulting services in the Health Information
Management Services Division;
o Physmark, Perot System's Health System Design,
Healtheon/WebMD's Medical Manager Corp., IDX Corporation and
Trigetto's Erisco, for at-risk managed care systems in the
EZ-CAP Division; and
o National consulting firms and on-line providers for physician
and other medical professional seminars in the EZ-CAP
Division.
Current and prospective customers evaluate QuadraMed's
capabilities against the merits of their existing information systems and
expertise. Furthermore, major software information systems companies,
including those specializing in the healthcare industry, that do not
presently offer competing products may enter QuadraMed's markets. Many of
QuadraMed's competitors and potential competitors have significantly
greater financial, technical, product development, marketing and other
resources and market recognition than QuadraMed. Many of these competitors
also have, or may develop or acquire, substantial installed customer bases
in the healthcare industry. As a result of these factors, QuadraMed's
competitors may be able to respond more quickly to new or emerging
technologies, changes in customer requirements, and changes in the
political, economic or regulatory environment in the healthcare industry.
These competitors may be in a position to devote greater resources to the
development, promotion and sale of their products than QuadraMed. QuadraMed
may not be able to compete successfully against current and future
competitors, and such competitive pressures could materially adversely
affect QuadraMed's business, financial condition and operating results.
QUADRAMED MAY NOT BE ABLE TO INTRODUCE OR MARKET NEW PRODUCTS OR PRODUCT
ENHANCEMENTS SUCCESSFULLY OR IN A TIMELY MANNER, WHICH COULD ADVERSELY
AFFECT ITS COMPETITIVE POSITION.
QuadraMed's performance depends in large part upon its ability to
provide the increasing functionality required by its customers through the
timely development and successful introduction of new products and
enhancements to its existing suite of products. QuadraMed may not
successfully, or in a timely manner, develop, acquire, integrate, introduce,
or market new products or product enhancements. Product enhancements or new
products developed by QuadraMed also may not meet the requirements of
hospitals or other healthcare providers and payors or achieve or sustain
market acceptance. QuadraMed's failure to either estimate accurately the
resources and related expenses required for a project, or to complete its
contractual obligations in a manner consistent with the project plan upon
which a contract was based, could have a material adverse effect on its
business, financial condition and results of operations. In addition,
QuadraMed's failure to meet a customer's expectations in the performance of
its services could damage its reputation and adversely affect QuadraMed's
ability to attract new business.
QUADRAMED'S INABILITY TO PROTECT ITS INTELLECTUAL PROPERTY COULD LEAD TO
UNAUTHORIZED USE OF ITS PRODUCTS, WHICH COULD HAVE AN ADVERSE EFFECT ON ITS
BUSINESS.
QuadraMed relies on a combination of trade secret, copyright and
trademark laws, nondisclosure, noncompete and other contractual provisions
to protect its proprietary rights. QuadraMed has not filed any patent
applications covering its technology. Measures taken by QuadraMed to
protect its intellectual property may not be adequate, and QuadraMed's
competitors could independently develop products and services that are
substantially equivalent or superior to QuadraMed's products and services.
Any infringement or misappropriation of its proprietary software and
databases could put QuadraMed at a competitive disadvantage in a highly
competitive market and could cause QuadraMed to lose revenues, incur
substantial litigation expense and divert management's attention from other
operations.
QuadraMed depends on licenses for certain technology used to
develop its products from a number of third-party vendors. Most of these
licenses expire within three to five years. Such licenses can be renewed
only by mutual consent and may be terminated if QuadraMed breaches the
license terms and fails to cure the breach within a specified time period.
If such licenses are terminated, QuadraMed may not be able to continue
using the technology on commercially reasonable terms or at all. As a
result, QuadraMed may have to discontinue, delay or reduce product
shipments until equivalent technology is obtained, which could have a
material adverse effect on QuadraMed's business, financial condition and
results of operations. Most of QuadraMed's third-party licenses are
non-exclusive and competitors may obtain the same or similar technology. In
addition, if vendors choose to discontinue support of the licensed
technology, QuadraMed may not be able to modify or adapt its products.
Intellectual property litigation is increasingly common in the
software industry. The risk of an infringement claim against QuadraMed may
increase over time as the number of competitors in its industry segment
grows and the functionality of products overlaps. Third parties could
assert infringement claims against QuadraMed in the future. Regardless of
the merits, QuadraMed could incur substantial litigation expenses in
defending any such asserted claim. In the event of an unfavorable ruling on
any such claim, a license or similar agreement may not be available to
QuadraMed on reasonable terms, if at all. Infringement may also result in
significant monetary liabilities that could have a material adverse effect
on QuadraMed's business, financial condition and results of operations.
QuadraMed may not be successful in the defense of these or similar claims.
THE NATURE OF QUADRAMED'S PRODUCTS MAKES THEM PARTICULARLY VULNERABLE TO
UNDETECTED ERRORS, OR BUGS, THAT COULD REDUCE REVENUES, MARKET SHARE OR
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES.
Products such as QuadraMed's may contain errors or failures,
especially when initially introduced or when new versions are released.
Although QuadraMed conducts extensive testing on its products, software
errors have been discovered in certain enhancements and products after
their introduction. Despite such testing by QuadraMed and by its current
and potential customers, products under development, enhancements, or
shipped products may contain errors or performance failures, resulting in,
among other things:
o loss of customers and revenues;
o delay in market acceptance;
o diversion of resources;
o damage to QuadraMed's reputation; or
o increased service and warranty costs.
Any of these consequences could have a material adverse effect on
QuadraMed's business, financial condition, and results of operations.
BECAUSE NO MIRROR PROCESSING SITE FOR ITS TWO CUSTOMER DATA PROCESSING
FACILITIES EXISTS, QUADRAMED'S BUSINESS, FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED IF EITHER OF THESE FACILITIES
WERE SUBJECT TO A CLOSURE FROM A CATASTROPHIC EVENT OR OTHERWISE.
QuadraMed currently processes substantially all of its customer
data at its facilities in Austin, Texas and Neptune, New Jersey. Although
QuadraMed backs up its data nightly and has safeguards for emergencies,
such as power interruption or breakdown in temperature controls, QuadraMed
has no mirror processing site to which processing could be transferred in
the case of a catastrophic event at either of these facilities. If a major
catastrophic event occurs at either the Austin or the Neptune facility,
possibly leading to an interruption of data processing, or any other
interruption or closure, QuadraMed's business, financial condition, and
results of operations could be adversely affected.
QUADRAMED MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO AN INCREASE IN ITS
OUTSOURCING BUSINESS, WHICH COULD HAVE A NEGATIVE IMPACT ON REVENUES.
QuadraMed provides compliance, consulting, and health information
management outsourcing and accounts receivable management services,
including the billing and collection of receivables. If QuadraMed
experiences a period of substantial expansion in its outsourcing business,
QuadraMed may be required to make substantial investments in capital assets
and personnel. QuadraMed may not be able to assess accurately, or have the
funds required for, any investment, and it may not be able to negotiate and
perform in a profitable manner any of the outsourcing contracts it may be
awarded.
QUADRAMED MAY BE REQUIRED TO MAKE SUBSTANTIAL CHANGES TO ITS PRODUCTS IF
THEY BECOME SUBJECT TO FDA REGULATION, WHICH COULD REQUIRE A SIGNIFICANT
CAPITAL INVESTMENT.
Computer products used or intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease or other conditions or that
affect the structure or function of the body are subject to regulation by
the FDA under the Federal Food, Drug and Cosmetic Act. At present, none of
QuadraMed's software products are so regulated. In the future, the FDA
could determine that some of QuadraMed's products, because of their
predictive aspects, are clinical decision tools and subject them to
regulation. Compliance with FDA regulations could be burdensome, time
consuming, and expensive. Other new laws and regulations affecting
healthcare software development and marketing also could be enacted in the
future. If so, it is possible that QuadraMed's costs and lengths of time
for product development and marketing could increase and that other
unforeseeable consequences could arise.
GOVERNMENTAL REGULATION OF THE CONFIDENTIALITY OF PATIENT RECORDS COULD
RESULT IN QUADRAMED'S CUSTOMERS BEING UNABLE TO USE ITS PRODUCTS WITHOUT
SIGNIFICANT MODIFICATION, WHICH COULD REQUIRE SUBSTANTIAL EXPENDITURES BY
QUADRAMED.
There is substantial state regulation of the confidentiality of
patient medical records and the circumstances under which such records may
be disclosed to or processed by QuadraMed as a consequence of its contacts
with various health providers. Although compliance with these laws and
regulations is presently the principal responsibility of the hospital,
physician or other healthcare provider, regulations governing patient
confidentiality rights are rapidly evolving. Additional legislation
governing the dissemination of medical record information also has been
proposed and may be adopted at the state level.
HIPAA and, in particular, its administrative simplification
provisions, require the promulgation of regulations that will set standards
for electronic transactions, code sets, data security, unique
identification numbers, and privacy of individually identifiable health
information. The regulations are in various stages of development. A final
regulation governing transaction and code set standards has been published
and is expected to become effective on October 16, 2002. The privacy
regulation has been published as a final regulation and is expected to
become effective on April 14, 2001. The HIPAA privacy regulation is complex
and far reaching. Compliance will be required of certain covered entities,
including healthcare providers, health plans, and healthcare
clearinghouses. QuadraMed may be implicated by these regulations either as
a covered entity or as a business associate of a covered entity. The HIPAA
and state healthcare privacy regulations could materially restrict the
ability of healthcare providers to submit information from patient records
using QuadraMed products and services or could require QuadraMed to make
substantial capital expenditures to be in compliance.
HIPAA's data security regulation has been published as a proposal.
At this time, no information is available on when the regulation will be
published as final or whether the regulation will be revised prior to final
publication. At this time, it is not possible to assess the specific
implications of the security regulation on QuadraMed. The regulation may
require holders of individual personal healthcare information, including
QuadraMed, to implement stringent security measures. Implementing such
measures may require substantial capital expenditures by QuadraMed due to
required product, service, and procedure changes.
In addition, during the past several years, the healthcare
industry has been subject to, among other things, increasing levels of
governmental regulation of reimbursement rates and certain capital
expenditures. Certain proposals to reform the healthcare system have been
and are being considered by Congress. These proposals, if enacted, could
change the operating environment for QuadraMed's clients in ways that could
have a negative impact on QuadraMed's business, financial condition and
results of operations. QuadraMed is unable to predict what, if any, changes
will occur.
IF QUADRAMED'S PRODUCTS FAIL TO ACCURATELY ASSESS, PROCESS, OR COLLECT
HEALTHCARE CLAIMS OR ADMINISTER MANAGED CARE CONTRACTS, QUADRAMED COULD BE
SUBJECT TO COSTLY LITIGATION AND BE FORCED TO MAKE COSTLY CHANGES TO ITS
PRODUCTS.
Some of QuadraMed's products and services are used in the payment,
collection, coding and billing of healthcare claims and the administration
of managed care contracts. If QuadraMed's employees or QuadraMed's products
fail to accurately assess, process or collect these claims, customers could
file claims against QuadraMed. QuadraMed's insurance coverage may not
adequately cover such claims. A successful claim that is in excess of, or
is not covered by, insurance coverage could adversely affect QuadraMed's
business, financial condition, and results of operations. Even a claim
without merit could result in significant legal defense costs and could
consume management time and resources. In addition, claims could increase
QuadraMed's premium such that appropriate insurance could not be found at
commercially reasonable rates. Furthermore, if QuadraMed were found liable,
QuadraMed may have to significantly alter one or more of its products,
possibly resulting in additional unanticipated research and development
expenses.
PROVISIONS IN QUADRAMED'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE LAW COULD DELAY OR DISCOURAGE THIRD PARTIES FROM ACQUIRING
QUADRAMED THE COMPANY AT A PREMIUM, WHICH COULD ADVERSELY AFFECT THE PRICE
OF ITS COMMON STOCK.
QuadraMed's board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by holders of QuadraMed's Common
Stock. If preferred stock is issued, the voting and other rights of the
holders of QuadraMed's Common Stock may be subject to, and may be adversely
affected by, the rights of the holders of QuadraMed's preferred stock. The
issuance of preferred stock may have the effect of delaying or preventing a
change of control of QuadraMed that would have been at a premium price to
our stockholders.
Certain provisions of QuadraMed's certificate of incorporation and
bylaws could discourage potential takeover attempts and make attempts by
stockholders to change management difficult. For example, QuadraMed's board
of directors, which is classified into three classes of directors serving
staggered, three-year terms, has the authority to impose various procedural
and other requirements that could make it more difficult for QuadraMed's
stockholders to effect certain corporate actions. In addition, QuadraMed's
certificate of incorporation provides that directors may be removed only by
the affirmative vote of the holders of two-thirds of the shares of
QuadraMed's capital stock entitled to vote. Any vacancy on QuadraMed's
board of directors may be filled only by vote of the majority of directors
then in office. Further, QuadraMed's certificate of incorporation provides
that the affirmative vote of two-thirds of the shares entitled to vote,
voting together as a single class, subject to certain exceptions, is
required for certain business combination transactions. These provisions,
and certain other provisions of QuadraMed's certificate of incorporation,
could have the effect of delaying or preventing (i) a tender offer for
QuadraMed's Common Stock or other changes of control of QuadraMed that
could be at a premium price, or (ii) changes in its management.
In addition, certain provisions of Delaware law could have the
effect of delaying or preventing a change in control of QuadraMed, Section
203 of the Delaware General Corporation Law, for example, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
THE TRADING PRICE OF QUADRAMED'S COMMON STOCK HAS BEEN, AND IS EXPECTED TO
CONTINUE TO BE, EXTREMELY VOLATILE.
The NASDAQ SmallCap Market on which QuadraMed is listed, and stock
markets in general, have historically experienced extreme price and volume
fluctuations that have affected companies unrelated to their individual
operating performance. The trading price of QuadraMed's Common Stock has
been and is likely to continue to be highly volatile due to such factors
as:
o Variations in quarterly results of operations;
o Announcements of new products or acquisitions by QuadraMed's
competitors;
o Governmental regulatory action;
o Developments or disputes with respect to proprietary rights;
o General trends in QuadraMed's industry and overall market
conditions.
The market price of QuadraMed's Common Stock may also be affected
by movements in prices of equity securities in general.
FUTURE SALES OF A SUBSTANTIAL NUMBER OF SHARES OF QUADRAMED'S COMMON STOCK
COULD CAUSE THE PRICE OF THE STOCK TO DECREASE OR FLUCTUATE SUBSTANTIALLY.
Existing stockholders of QuadraMed hold a significant number of
shares of Common Stock that may be sold in the future under Rule 144 of the
Securities Act or through the exercise of registration rights. Sales of a
substantial number of the aforementioned shares in the public markets or
the prospect of such sales could adversely affect or cause substantial
fluctuations in the market price of QuadraMed's Common Stock and
convertible debentures and impair QuadraMed's ability to raise additional
capital through the sale of its securities.
IF QUADRAMED IS UNABLE TO ACHIEVE PROFITABILITY, IT MAY BE FORCED TO FILE
FOR BANKRUPTCY.
If QuadraMed's financial condition deteriorates and QuadraMed is
unable to reduce its losses or obtain additional financing, QuadraMed may
be forced to seek relief under Chapter 11 of the U.S. Bankruptcy Code.
Chapter 11 permits a company to remain in control of its business,
protected by a stay of all creditor action while the company attempts to
negotiate and confirm a plan of reorganization with its creditors. If
QuadraMed commenced a Chapter 11 case it would expect deterioration in its
customer relationships, a reduction in orders, the loss of suppliers, and
an erosion of employee morale. QuadraMed may be unsuccessful in its
attempts to confirm a plan of reorganization with its creditors. Many
Chapter 11 cases are unsuccessful, and virtually all involve substantial
expense and damage to the business. If QuadraMed were unsuccessful in
obtaining confirmation of a plan of reorganization, its assets could be
liquidated and could be insufficient to pay all of its securityholders.
QUADRAMED MAY LOSE SOME OR ALL OF ITS EQUITY INVESTMENTS IN EARLY STAGE
COMPANIES IF SUCH COMPANIES BECOME BANKRUPT OR INSOLVENT OR DO NOT SUCCEED
IN EXECUTING THEIR BUSINESS STRATEGY APPROPRIATELY.
QuadraMed has made equity investments and acquired minority
interests in certain early stage companies. QuadraMed does not have the
ability to control the operations of these companies and these investments
are subject to significant risks. There is no guarantee that QuadraMed will
realize any return on such investments. QuadraMed could also lose some or
all of its principal investment if these companies become bankrupt or
insolvent or do not succeed in executing their business strategy.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
QuadraMed's exposure to market risk for changes in interest rates
primarily relates to its investment portfolio and its convertible
subordinated debentures. It is QuadraMed's intent to ensure the safety and
preservation of its invested principal funds by limiting default risk,
market risk and reinvestment risk. QuadraMed invests in high-quality
issuers, including money market funds, corporate debt securities, and debt
securities issued by the United States government. QuadraMed has a policy
of investing in securities with maturities of two years or less. QuadraMed
does not invest in derivative financial or foreign investments. The table
below presents fair values of principal amounts and weighted average
interest rates for QuadraMed's investment portfolio as of December 31, 2000
(in thousands, except average interest rates):
AGGREGATE WEIGHTED AVERAGE
FAIR VALUE INTEREST RATE
Cash and cash equivalents:
Money Market funds............................ $27,368 6.42%
-------
Total cash and cash equivalents........... $27,368
=======
Short-term investments:
Corporate debt securities..................... $ 7,302 6.05%
Debt issued by the U.S. government............ 4,994 5.31%
--------
Total short-term investments......... $12,296
========
Long-term investments:
Corporate debt securities..................... $ 500 6.63%
Debt securities issued by the U.S. government. 519 5.83%
--------
Total long-term investments.......... $ 1,019
========
Outstanding Debt. As of December 31, 2000, QuadraMed had
outstanding long-term debt of $115,000,000, consisting of its convertible
subordinated debentures that mature as follows (in thousands, except
average interest rates):
Maturity Carrying Fair Weighted Average
Date Amount Value Interest Rate
---- ------ ----- -------------
2005 $115,000 $41,113 5.25%
QuadraMed is not exposed to material changes in interest rate
because the interest rate on its convertible subordinated debentures, the
bulk of QuadraMed's debt, is fixed at 5.25%.
FOREIGN CURRENCY RISK
Although QuadraMed from time-to-time sells its products
internationally, all such transactions are denominated in U.S. currency and
there is no foreign currency fluctuation risk.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included in
this Report on Form 10-K beginning on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
QuadraMed reported a change in accountants Current Reports on Form
8-K filed with the Securities and Exchange Commission ("SEC") on March 31,
2000 and May 15, 2000.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
QuadraMed's Bylaws provide for (i) the appointment of seven
directors, divided into three classes designated as Class I, Class II and
Class III, and (ii) their election at QuadraMed's annual meeting of
stockholders. The term for each class of directors is three years and
directors serve until their successors are elected and qualified, or until
their earlier resignation or removal. No family relationships exist between
any of QuadraMed's current directors and executive officers. The following
chart lists QuadraMed's directors by class and provides information
regarding their age, occupation, and tenure on the Board.
CLASS I - DIRECTORS CONTINUING IN OFFICE UNTIL THE 2003 ANNUAL MEETING OF
STOCKHOLDERS
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
Albert L. Greene Chairman of the Board of
HealthCentral.com 1997 51
F. Scott Gross President and Chief Executive 2000 55
Officer of Primus Management, Inc.
E. A. Roskovensky President and Chief Executive 1999 56
Officer of Davis Wire Corporation
and President and Chief Operating
Officer of Robertson-Ceco Corp.
CLASS II - DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
Michael J. King Chairman and Chief Executive 1999 62
Officer of Healthscribe, Inc.
Cornelius T. Ryan Founding General Partner of Oxford Partners 2000 69
LP, and Oxford Bioscience Partners, LP
CLASS III - DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING OF STOCKHOLDERS
NAME PRINCIPAL OCCUPATION SINCE AGE
- ---- -------------------- ----- ---
James D. Durham Chairman, Market Insite Group 1993 54
Lawrence P. English Chairman of the Board and Chief Executive 2000 60
Officer of QuadraMed
The following is certain biographical information, as of March 6,
2001, regarding the current members of QuadraMed's Board of Directors.
LAWRENCE P. ENGLISH has been Chief Executive Officer and a director of
QuadraMed since June 12, 2000. He was elected Chairman of the Board of
QuadraMed effective December 31, 2000. From January 1999 until immediately
prior to joining QuadraMed, Mr. English was the founder and Chief Executive
Officer of Lawrence P. English, Inc., a private turn-around management
firm, where he consulted to such organizations as Amedex Insurance Company
and Paracelsus Healthcare Corporation. From July 1997 to January 1999, Mr.
English was Chairman of the Board and Chief Executive Officer of Aesthetics
Medical Management, Inc., a physician practice management company for
plastic surgeons. From March 1992 until August 1996, Mr. English was
president of CIGNA Healthcare, one of the largest HMO providers in the
United States. Mr. English has been a director of Curative Healthcare
Corporation since May 2000. He also has been Director of Paracelsus
Healthcare Corporation since May 1999 and was elected Non-Executive
Chairman of the Board in February 2000. Mr. English holds a Bachelor of
Arts degree from Rutgers University and a Master of Business Administration
from George Washington University. He also graduated from Harvard Business
School's Advanced Management Program.
JAMES D. DURHAM has been a director of QuadraMed since 1993. He served as
Chairman of the Board of QuadraMed from May, 1996 until December 31, 2000
and served as its Chief Executive Officer until June 12, 2000. Mr. Durham
founded QuadraMed in September 1993 when he became its President and Chief
Executive Officer and director. Mr. Durham is currently serving as chairman
of Market Insite Group, a company that provides products and services to
match businesses to geographic location. He is also a part-time employee of
QuadraMed. Mr. Durham, a certified public accountant, holds a Bachelor of
Science degree with honors in Industrial Engineering from the University of
Florida and a Master of Business Administration with an emphasis in Finance
from the University of California, Los Angeles.
ALBERT L. GREENE has been a director of QuadraMed since May 1997. Mr.
Greene is the Chairman of the Board of HealthCentral.com, an online
consumer health information and products service company. He has served as
Chairman of HealthCentral.com since November 2000 and was its Chief
Executive Officer from November 2000 until FebRuary 2001. From 1997 to
2000, Mr. Greene was the President of HealthCentral.com. From June 1996
until September 1998, Mr. Greene was the Chief Executive Officer of Sutter
Health East Bay, a healthcare delivery system and the parent company of
Alta Bates Health System. From May 1990 until March 1998, Mr. Greene served
as the President and Chief Executive Officer of Alta Bates Medical Center,
a 527-bed acute care hospital located in Berkeley, California. From January
1996 until March 1998, Mr. Greene also served as the President and Chief
Executive Officer of Alta Bates Health System, the parent company of Alta
Bates Medical Center. Mr. Greene has been a director of Sierra Health
Services, a health and worker insurance company, since April 2000. Mr.
Greene received a Masters of Hospital Administration from the University of
Michigan, and is presently a diplomat of the American College of Healthcare
Executives and a member of the American Hospital Association. Mr. Greene is
past chair of the California Healthcare Association.
F. SCOTT GROSS has been a director of QuadraMed since March 2000. Mr. Gross
is currently the founder, President and Chief Executive Officer of Primus
Management, Inc., a health services management he founded in 1989. Mr.
Gross has been a director of Fountain View, Inc., a nursing home chain,
since 1999. Mr. Gross holds a Bachelor of Science degree in Biology from
California State University, Northridge, and a Masters Degree in Public
Administration (Healthcare Management Option) from the University of
Southern California.
MICHAEL J. KING has been a director of QuadraMed since May 1999. Mr. King
has been the Chief Executive Officer of Healthscribe, Inc. since June 1999.
From September 1996 until May 1999, Mr. King served as Chairman of the
Board of Directors and Chief Executive Officer of The Compucare Company, a
healthcare information systems company acquired by QuadraMed in March 1999.
Prior to joining The Compucare Company, Mr. King was Chairman of the Board
of Directors, Chief Executive Officer and President of Software AG of the
Americas, an Enterprise Information Systems Company. He has been a director
of Osprey Systems, an e-business consulting services firm, from 1999 to the
present. Mr. King holds a degree in Mechanical Engineering from the
University of Sheffield and a Master of Business Administration equivalent
in Management Studies from the University of Hatfield.
E. A. ROSKOVENSKY has been a director of QuadraMed since May 1999. Mr.
Roskovensky has been the President and Chief Operating Officer of
Robertson-CECO Corp., a company that manufactures custom engineered metal
buildings, since November 1994. Mr. Roskovensky also has been the President
and Chief Executive Officer of Davis Wire Corporation, a wire fencing
company, since 1991. He has been the President and Chief Executive Officer
of National Standard Corp., a company dealing in wire and engineered
products segments, since August 2000. Mr. Roskovensky holds a Bachelor of
Science in Chemical Engineering from Villanova University, a Master of
Business Administration from Duquesne University and a Juris Doctor from
the University of Detroit School of Law. He is a member of the Pennsylvania
Bar Association.
CORNELIUS T. RYAN has been a director of QuadraMed since March 2000, and
was previously a director of QuadraMed from March 1995 to May 1999. Mr.
Ryan is a founding general partner of Oxford Partners III, LP, a Delaware
limited partnership since 1981 and of OBP Management, L.P. and OBP
Management (Bermuda) Limited Partnership since 1992. OBP Management, L.P.
and OBP Management (Bermuda) Limited Partnership are the general partners
of Oxford Bioscience Partners, L.P. and Oxford Bioscience Partners
(Bermuda) Limited Partnership, respectively. Mr. Ryan holds a Bachelor of
Commerce in Economics from the University of Ottawa and a Master of
Business Administration from the University of Pennsylvania.
MANAGEMENT
The following table sets forth information concerning QuadraMed's
executive officers and senior management, as of March 6, 2001:
NAME AGE POSITION
- ---- --- --------
Lawrence P. English 60 Chief Executive Officer and Chairman
of the Board
Mark N. Thomas 48 Chief Financial Officer
Michael H. Lanza 39 Executive Vice President and Corporate
Secretary
Peter T. van der Grinten 49 President--Enterprise Division
Michael Wilstead 43 President--EZ-CAP Division
Dean Souleles 40 Chief Technology Officer
LAWRENCE P. ENGLISH was named Chief Executive Officer of QuadraMed since
June 12, 2000 and Chairman of the Board of QuadraMed since December 31,
2000. See "Directors" for biographical information on Mr. English.
MARK N. THOMAS has been Chief Financial Officer and Executive Vice
President of QuadraMed since June 2000. From 1998 until joining QuadraMed,
Mr. Thomas was the Chief Financial Officer of Lifeguard, Inc., an
independent health plan. From 1993 to 1997, Mr. Thomas held executive
management positions for Coregis Insurance Group and Industrial Indemnity
Company, insurance companies owned by Xerox Corporation, where he served as
controller, managing director and treasurer. Mr. Thomas received a Bachelor
of Arts degree in Economics and Political Science from Occidental College
and received a double Master of Business Administration degree in Finance
and Strategic Planning from Wharton School of Business. He also earned a
degree in executive education in corporate strategy from the University of
Michigan.
MICHAEL H. LANZA has been Executive Vice President since September 2000.
Prior to joining QuadraMed, Mr. Lanza was employed for seven years at CIGNA
Corporation, a publicly owned employee benefits company. Most recently, he
evaluated healthcare operations and investments in Brazil as Vice President
& Assistant General Counsel, CIGNA International. Previously, Mr. Lanza
supervised CIGNA HealthCare's compliance programs and directed all of
CIGNA's state regulatory and government affairs. Prior to joining CIGNA,
Mr. Lanza was an attorney in private practice specializing in real estate
development, finance, and work out. He also was a political consultant. Mr.
Lanza received a Bachelor of Arts from the University of Connecticut and a
Juris Doctor from the University of Connecticut School of Law.
PETER T. VAN DER GRINTEN has been President of the Enterprise Division
since January 2001. Prior to joining QuadraMed, Mr. van der Grinten was
General Manager for North American operations of IMS Health Strategic
Technology, a software company, from 1999 to 2000, and President, from 1997
to 1999, of National Data Corporation's Hospital Management Services
Division, which provided business office outsourcing for physician
practices and hospitals, several of which were QuadraMed Enterprise
customers. From 1995 to 1997 he was director of the healthcare division of
SAP America Inc., a health technology company. Previously, he held sales,
marketing, operations, and development positions with HBO and Company, a
technology company. Mr. Van der Grinten also was Chief Operating Officer of
Simborg Systems, a healthcare technology company. After Simborg's
acquisition by Bell Atlantic Healthcare Systems, Mr. van der Grinten served
as Vice President of International Operations. Mr. van der Grinten received
a Bachelor of Science degree in Computer Science from Purdue University and
was a Captain in the United States Army.
MICHAEL WILSTEAD has been President of the EZ-CAP Division in January 2001
after joining QuadraMed in July 1998 as Vice President of Sales. Prior to
joining QuadraMed, Mr. Wilstead served as a group president at STERIS
Corporation, a microbial reduction and surgical support products company,
from 1995 to 1998. In addition, he held various positions at AMSCO
International and AMSCO Canada, both of which are medical equipment
companies, from 1995 to 1998. Mr. Wilstead holds a Bachelor of Science
degree in Business Administration from the University of Phoenix.
DEAN SOULELES, has been Chief Technology Officer since August 2000. Prior
to joining QuadraMed, Mr. Souleles served as the chief technology officer
and director of research and development for Chase Credit Systems, Inc., a
software and technical services firm serving the mortgage credit reporting
industry. For over ten years before that, Mr. Souleles served as a
consultant to NASA's Jet Propulsion Laboratory as principal engineer and
system architect on various space, civil and defense programs.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires QuadraMed's directors and executive officers, and persons who own
more than 10% of a registered class of QuadraMed's equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of QuadraMed's equity securities. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish QuadraMed
with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such forms received by it, or written
representation from certain reporting persons that no Forms 5 were required
for those persons, QuadraMed believes that all reporting requirements under
Section 16(a) for the fiscal year ended December 31, 2000 were met in a
timely manner by its directors, executive officers, and greater than 10%
beneficial owners, except that the filing of three Form 3 reports, one by
Lawrence P. English, one by Mark N. Thomas, and one by Michael H. Lanza
were late.
ITEM 11 EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Each non-employee director receives an annual retainer of $15,000 plus
$1,500 for each board meeting attended and $500 for each committee meeting
attended. Non-employee directors are also reimbursed for their reasonable
expenses incurred in connection with board meetings. Every non-employee
director has the option to apply all or a portion of their annual retainer
fee otherwise payable in cash each year to the acquisition of a special
option grant under the 1996 Stock Option Plan ("1996 Plan"). Upon election,
the grant is made automatically on the first trading day in January with an
exercise price per share equal to 1/3 of the fair market value of Common
Stock per share on the date of grant and a maximum term of ten years. The
number of shares of Common Stock subject to the option is determined by
dividing the total dollar amount of the retainer fee subject to the
director's election by 2/3 of the fair market value per share of Common
Stock on the grant date. As a result, the difference between the fair
market value of the Common Stock subject to the option and the aggregate
exercise price payable is equal to the portion of the retainer fee subject
to such director's election. Fifty percent of the options vest upon
completion of six months of Board service following this election, and the
balance vest in equal monthly installments over the next six months of
Board service. In 2000, no non-employee director has made such an election.
In addition, pursuant to the 1996 Plan, each non-employee director
receives at the time of his or her initial election or appointment to the
Board an automatic option grant for 10,000 shares of Common Stock, provided
such person was not previously employed by QuadraMed. Each continuing
non-employee director also receives at the time of each annual meeting of
QuadraMed's stockholders an option to purchase 4,000 shares of Common
Stock, provided such person has served as a non-employee director for at
least six months. Each option has an exercise price per share equal to 100%
of the fair market value per share of Common Stock on the date of grant and
a maximum term of ten years. Each option is immediately exercisable for all
of the shares of Common Stock subject thereto, but any purchased shares are
subject to repurchase by QuadraMed, at the exercise price paid, upon the
optionee's cessation of Board service prior to vesting. With respect to
each initial 10,000-share grant, one-third of the options vest, and
QuadraMed's repurchase right lapses, upon the optionee's completion of one
year of Board service, and the balance vests in a series of 24 successive
equal monthly installments. Each annual 4,000-share grant vests, and
QuadraMed's repurchase right lapses, in a series of 12 successive equal
monthly installments. Non-employee directors are also eligible to receive
discretionary option grants pursuant to the 1996 Plan. Directors who are
employees of QuadraMed or any of its subsidiaries do not receive any
additional compensation for serving as directors.
In 2000, each of Messrs. Gross and Ryan received an option to purchase
10,000 shares upon his appointment to the Board in March, at an exercise
price of $5.00 per share. In addition, each of Messrs. Greene, Gross, King,
Roskovensky and Ryan received an option for 4,000 shares on October 5,
2000, the date of the 2000 annual meeting of stockholders, at an exercise
price of $1.50.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned by or paid to (1) persons serving as QuadraMed's Chief
Executive Officer, (2) each of the four other most highly compensated
executive officers of QuadraMed serving as such as of the end of the last
fiscal year whose total annual salary and bonus exceeded $100,000, and (3)
up to two additional individuals who would have qualified under clause (2),
but for the fact that the individual was not serving as an executive
officer of QuadraMed at the end of the last fiscal year (each of (1), (2)
and (3), the "Named Executive Officers"), in each case for services
rendered in all capacities to QuadraMed and its subsidiaries during the
last three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Other Securities
Annual Restricted Underlying
Fiscal Compensation Stock Options/ All Other
Name and Principal Position Year Salary($) Bonus($) ($) Awards ($) Warrants (#) Compensation
- --------------------------- ---- --------- ----- ------------ ------ -------- ------------
Lawrence P. English......... 2000 $ 222,820 1,000,000 $ 708.35(10)
Chairman of the Board and
Chief Executive Officer(1)
James D. Durham............. 2000 $ 337,830 $367,307 $ 2,419,618(2)(8)
Former Chairman of the 1999 374,000 367,307 100,000 60,007
Board and Chief 1998 275,000 412,500 $1,862,000(6) 300,000 30,021
Executive Officer (2)
John V. Cracchiolo.......... 2000 $ 169,063 $251,580
Former President 1999 256,000 251,580 75,000 $ 700,978(3)(10)(8)
and Chief Operating 1998 200,000 210,000 $997,500.00(6) 150,000 3,977
Officer (3) 2,017
Mark N. Thomas.............. 2000 $ 135,416 $22,987(5) 350,000
Chief Financial Officer
and Executive Vice
President (4)
Nancy Nelson................ 2000 $ 214,874 $ 92,700 $ 249,835(7)(10)
Executive Vice President 1999 206,000 92,700 125,000 2,403
(7) 1998 190,000 76,220 14,853
Patrick Ahearn.............. 2000 $ 206,000 $ 50,000 $ 3,400(10)
Executive Vice President 1999 200,000 75,000 3,349
(9) 1998 49,134 31,250
125,000
Michael Wilstead............ 2000 $ 226,250 $ 50,000 25,000 $ 1,700(10)
Executive Vice President 1999 182,951 50,000 90,000
1998 111,911 3,833 40,000
- -----------------------------
(1) Mr. English was appointed Chief Executive Officer of QuadraMed
effective June 12, 2000 and elected Chairman of the Board effective
December 31, 2000.
(2) Mr. Durham resigned as Chief Executive Officer of QuadraMed,
effective June 12, 2000. Pursuant to the Separation Agreement with
Mr. Durham, QuadraMed paid a lump sum severance benefit of
$2,316,000 to Trigon Resources Corporation, a company owned 100% by
Mr. Durham and his children. In addition, pursuant to the Separation
Agreement, QuadraMed has paid $3,959 in medical benefits on behalf
of Mr. Durham (see "Employment and Other Agreements; Change in
Control Arrangements" for a description of Mr. Durham's Separation
Agreement).
(3) Mr. Cracchiolo resigned as President and Chief Operating Officer of
QuadraMed, effective June 30, 2000. Pursuant to the Separation
Agreement, QuadraMed paid Mr. Cracchiolo a lump sum severance
benefit of $687,500 to Mr. Cracchiolo. In addition, pursuant to the
separation agreement QuadraMed has paid $5,939 in medical benefits
on behalf of Mr. Cracchiolo. See "Employment and Other Agreements;
Change in Control Arrangements" for a description of Mr.
Cracchiolo's Separation Agreement.
(4) Mr. Thomas was appointed Chief Financial Officer on June 9, 2000.
(5) Pursuant to Mr. Thomas' employment agreement, Mr. Thomas was
reimbursed by QuadraMed for his unvested 401(k) funds from his
previous employer.
(6) In October 1998, Mr. Durham and Mr. Cracchiolo were awarded a right
to receive 112,000 and 60,000 shares of Common Stock, respectively,
under QuadraMed's 1996 Stock Incentive Plan. The shares vest over a
period of 5 years. Pursuant to a Separation Agreement, dated June
12, 2000, between Mr. Durham and QuadraMed, all restrictions or
repurchase rights with respect to Mr. Durham's 112,000 restricted
shares have lapsed. Pursuant to a Separation Agreement, dated June
12, 2000, between Mr. Cracchiolo and QuadraMed, all restrictions or
repurchase rights with respect to Mr. Cracchiolo's 60,000 restricted
shares have lapsed.
(7) Ms. Nelson resigned as Executive Vice President effective October
16, 2000. Pursuant to Ms. Nelson's employment agreement, she was
paid a lump sum severance benefit of $245,000 and QuadraMed has
paid $1663.17 in health benefits on her behalf.
(8) Represents the cash value benefit of split-dollar life insurance
premiums paid by QuadraMed. The dollar value was established using
the demand loan valuation method for the whole life portion of the
premium paid by QuadraMed, projected on an actuarial basis. The
amount for Mr. Durham is $99,659. The amount for Mr. Cracchiolo is
$5,839. See "Employment and Other Agreements; Change in Control
Arrangements" below.
(9) Mr. Ahearn resigned as Executive Vice President on January 31, 2001.
(10) Represents contributions made by QuadraMed to QuadraMed's 401(K)
plan on behalf of Mr. English in the amount of $708.35, Mr.
Cracchiolo in the amount of $1,700, Mr. Wilstead in the amount of
$1,700, Mr. Ahearn in the amount of $3400, and Ms. Nelson in the
amount of $3,172.54
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the stock
option grants made to each of the Named Executive Officers during the 2000
fiscal year. No stock appreciation rights were granted during the 2000
fiscal year to the Named Executive Officers.
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(3)
- ----------------------------------------------------------------------------------------- --------------------------
Percent of
Total
Number of Options Exercise
Securities Granted to or Base
Underlying Options Employees in Price Expiration
Name Granted (1) Fiscal 2000 ($/Sh) (2) Date 5% 10%
- ---- ------------------ ----------- ---------- ---- -- ---
Lawrence P. English 1,000,000 29% $2.50 6/12/10 $1,570,000 $8,060,000
James D. Durham 0 0%
John V. Cracchiolo 0 0%
Mark N. Thomas 150,000 4.35% $1.50 10/4/10 $ 141,000 $ 724,500
200,000 5.8% $2.18 5/24/10 $ 274,000 $1,406,000
Nancy Nelson 100,000 2.9% $2.18 5/24/10 $ 137,000 $ 703,000
Patrick Ahearn 75,000 2.18% $2.18 5/24/10 $ 102,750 $ 527,250
Michael Wilstead 25,000 .73% $1.00 12/14/10 $ 15,750 $ 80,750
100,000 2.9% $2.18 5/24/10 $ 137,000 $ 703,000
- ------------------------------------------------------------------------------------------------------------------------
(1) Each option set forth in the table above has a maximum term of ten
years, subject to earlier termination upon the executive officer's
termination of service with QuadraMed. Twenty-five percent of each
option vests on the one year anniversary of the date of grant and
the balance vests in equal monthly installments over the next three
years of service thereafter. Each option will become immediately
exercisable in full upon an acquisition of QuadraMed by merger or
asset sale unless the options are assumed by the successor
corporation.
(2) The exercise price is equal to the fair market value of the Common
Stock on the date of grant.
(3) There can be no assurance provided to any executive officer or any
other holder of QuadraMed's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5%
and 10% compounded annual rates or at any other defined level.
Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made
to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information with respect to the
Named Executive Officers concerning option exercises during the 2000 fiscal
year as well as the number of shares of QuadraMed's Common Stock subject to
exercisable and unexercisable stock options which the Named Executive
Officers held at the end of the 2000 fiscal year. No stock appreciation
rights were exercised during the 2000 fiscal year.
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED
----------------- IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR END($)(1)
----------- ------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE(#) REALIZED (2) EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
Lawrence P. English 0 0 - 0
James D. Durham(3) 300,000 $2,416,000 405,000 / 0 - / 0
John V. Cracchiolo(4) 150,000 $1,208,000 0 / 0 - / 0
Mark N. Thomas 0 / 350,000 - / 0
Nancy Nelson 264,510 / 0 - / 0
Patrick Ahearn 232,334 / 0 - / 0
Michael Wilstead 59,687 / 195,313 - / 0
- ---------------
(1) Calculated by multiplying the number of underlying shares of Common
Stock by the difference between the fair market value of the Common
Stock as of December 31, 2000 and the exercise price of the option.
(2) Calculated by multiplying the number of shares acquired on exercise
by the difference between the fair market value of the shares on the
date of exercise and the exercise price.
(3) On January 3, 2000, Mr. Durham exchanged 300,000 QuadraMed stock
options for $2,416,000. The $2,416,000 amount was calculated using
the Black-Scholes option pricing model utilizing the January 3, 2000
closing price for QuadraMed stock of $9.6875. In lieu of receiving
the $2,416,000 immediately, Mr. Durham agreed to have $1,208,000 of
the proceeds deferred. The second $1,208,000 was immediately
converted to 124,696 shares of QuadraMed Common Stock.
(4) On January 3, 2000, Mr. Cracchiolo exchanged 150,000 QuadraMed stock
options for the sum of $1,208,000, which was calculated using the
Black-Scholes option pricing model and the January 3, 2000 closing
price of $9.6875. In lieu of receiving the $1,208,000 immediately,
Mr. Cracchiolo agreed to have $604,000 of his proceeds deferred and
the second $604,000 converted to 62,348 shares of QuadraMed Common
Stock, which was calculated using the Black-Scholes pricing model
and the January 3, 2000 closing price of $9.6875.
EMPLOYMENT AND OTHER AGREEMENTS
LAWRENCE P. ENGLISH AND MARK N. THOMAS EMPLOYMENT AGREEMENTS
QuadraMed entered into letter agreements with Lawrence P. English
and Mark N. Thomas on June 12, 2000 and May 12, 2000, respectively. The
letter agreements provide for terms of two years, in each case with a
provision for automatic one year extensions, unless either the executive or
QuadraMed notifies the other that such party does not wish to extend the
agreement. Mr. English and Mr. Thomas are currently paid salaries of
$400,000 and $250,000, respectively, and may be paid such higher amounts as
may from time to time be determined by QuadraMed. In addition, Mr. English
and Mr. Thomas were guaranteed bonuses of $100,000 each and subsequent
bonuses will be established by the Board in its sole discretion. The
agreements confirmed a grant of stock options to Mr. English and Mr. Thomas
to purchase 1,000,000 and 250,000 shares of Common Stock, respectively. In
addition, Mr. English will be paid additional compensation in an amount
equal to the net increase in his state income tax resulting solely from his
becoming a California resident; and Mr. Thomas was reimbursed $22,987,
representing unvested 401(k) funds with his prior employer.
The agreements provide that, in the event of death, the
executive's estate will be paid any unpaid compensation for services
rendered through the date of death. In addition, Mr. Thomas will receive a
special termination payment equal to 30 days base salary. If either
executive is disabled, he will be paid any unpaid compensation for services
rendered through the date of disability, together with any income
continuation payments provided under any policies or programs funded by
QuadraMed on his behalf. In addition, Mr. Thomas will receive the severance
benefits payable in the event of an Involuntary Termination of employment
other than a Termination for Cause (as those terms are defined in the
letter agreement). If terminated by reason of an Involuntary Termination
other than a Termination for Cause, Mr. English and Mr. Thomas will each
receive in one lump sum an aggregate amount equal to two times and one
times their then current base salaries, respectively. At their option, the
executives may receive the severance payment in monthly installments over a
one-year period following the date of Involuntary Termination. In addition,
if Mr. Thomas is terminated by reason of Involuntary Termination (other
than a Termination for Cause), he will receive a lump sum payment equal to
his annual bonus of 40% of base compensation and will be provided life,
health and disability participation, benefits and other coverages for a
period of 12 months after his disability or Involuntary Termination. If Mr.
English voluntarily resigns or is terminated by reason of Involuntary
Termination during the one-year period ending June 12, 2001, QuadraMed will
make the lease payments for an apartment inhabited by Mr. English through
June 12, 2001. If either executive is terminated involuntary, all options
granted under the 1996 Plan will automatically accelerate and vest and all
Mr. English' and Mr. Thomas' vested options will remain exercisable for the
full term of the option and for a period of three years following the
involuntary termination, respectively.
In the event of a change in control (as defined in the
agreements), Mr. English will have the option, to voluntarily terminate his
employment (the "Termination Election"). Effective upon such Termination
Election, one-half of any of his options, which are unvested at the time of
such Termination Election, will accelerate and vest in full upon such
Change in Control and together with Mr. English's other vested options,
will remain exercisable and outstanding for the full term of the option. In
the event that Mr. English makes the Termination Election, he will have no
right to receive any severance payments pursuant to his letter agreement.
Acceleration of Mr. English's options is contingent on his continued
employment for a minimum of 60 days after such Change in Control.
To the extent any acquiring company in a Change in Control
transaction does not assume or otherwise continue in force Mr. Thomas's
outstanding options, those options will automatically accelerate and vest
so that each such option, immediately prior to the Change in Control,
becomes fully exercisable; such options will terminate immediately after
the Change in Control. With respect to any options that are to be assumed
or otherwise continued in effect after a Change in Control, and any
restricted or unvested shares of Common Stock held by Mr. Thomas or Mr.
English at the time of the Change in Control, any such options will
accelerate and vest at the time of the Change in Control so that each
option will become fully exercisable immediately prior to the Change in
Control transaction and any restricted or unvested shares of Common Stock
will immediately vest at that time and QuadraMed's repurchase rights with
respect to those shares will terminate.
MICHAEL WILSTEAD, PATRICK AHEARN AND NANCY NELSON EMPLOYMENT AGREEMENTS
On April 1, 1999, QuadraMed entered into letter agreements with
Patrick Ahearn, Executive Vice President, Michael Wilstead, Executive Vice
President, and Nancy Nelson, Executive Vice President. Pursuant to the
letter agreements, Mr. Ahearn's base salary was set at $208,000 for the
2000 calendar year, Ms. Nelson was to receive a base salary of $206,000,
increased to $245,000 in January 2000, and Mr. Wilstead was to receive a
base salary at the annual rate of $200,000 for calendar year 1999,
increased to $235,000 in April 2000. Each executive is eligible for such
annual cash bonuses as the Board in its discretion may award. The letter
agreements also provide that if the executive is terminated by reason of
disability or an Involuntary Termination other than a Termination for Cause
(as those terms are defined in the letter agreement), each executive will
receive an aggregate amount equal to his or her then current annual rate of
base salary and will also continue to receive for a period of 12 months his
or her life, health and disability and other benefits. In addition, upon a
Change in Control or an Involuntary Termination other than a Termination
for Cause as was defined in the Letter Agreement, outstanding options and
all restricted or unvested Common Stock will vest immediately and remain
exercisable for a period of three years thereafter. The term of the
agreement is two years from the effective date and will be extended
automatically on each succeeding anniversary of the effective date of the
agreement for an additional one year period unless, not later than three
months preceding such anniversary date, QuadraMed shall have given written
notice to the executive that it will not extend the term of the letter
agreement.
JOHN V. CRACCHIOLO SEPARATION AGREEMENT
On April 1, 1999, QuadraMed entered into a letter agreement with
John V. Cracchiolo pursuant to which Mr. Cracchiolo served as the President
and Chief Operating Officer of QuadraMed. QuadraMed entered into a
Separation Agreement, dated June 12, 2000, with John V. Cracchiolo,
pursuant to which Mr. Cracchiolo's employment with QuadraMed as its
President and Chief Operating Officer, terminated effective June 30, 2000
and he resigned as a director and/or officer of all subsidiaries and
affiliates of QuadraMed and as a trustee of QuadraMed's pension plans.
QuadraMed and Mr. Cracchiolo agreed that Mr. Cracchiolo would provide
consulting services to QuadraMed at the rate of $150 per hour as requested
from time to time through and including October 31, 2000.
Pursuant to the Separation Agreement, QuadraMed is obligated to
make the following payments and provide the following benefits to Mr.
Cracchiolo: (a) As payment in full of its obligations under Mr.
Cracchiolo's employment agreement to pay severance benefits upon an
Involuntary Termination (as defined in the employment agreement), a lump
sum severance benefit of $687,500 and continuation for a minimum period of
12 months of all life, health and disability plan participation, benefit
plans and other coverages to which Mr. Cracchiolo and his dependents are
entitled; (b) All restrictions and repurchase rights on 60,000 restricted
shares of Common Stock of QuadraMed granted to Mr. Cracchiolo in October,
1998, shall be deemed to have lapsed; (c) Accelerated vesting of 68,235
options granted to Mr. Cracchiolo, for a total of 270,000 fully vested
options, which options will remain exercisable for the full term of the
applicable option agreement; (d) Continuation of indemnification of Mr.
Cracchiolo and coverage under QuadraMed's Directors' and Officers'
Insurance, until December 31, 2007 with respect to acts occurring prior to
termination of his employment; (e) vest in full immediately Mr.
Cracchiolo's interest in the QuadraMed Corporation Stock Exchange Deferred
Compensation Plan; (f) Mr. Cracchiolo agreed to forfeit all rights to
payment of any kind under QuadraMed's Supplemental Executive Retirement
Plan and that his termination of employment would not be treated as an
Involuntary Termination under that Plan; (g) Mr. Cracchiolo is entitled to
reimbursement for all customary, ordinary and necessary business expenses
incurred in connection with his consulting duties; (h) QuadraMed will
continue to pay premiums with respect to Mr. Cracchiolo's split-dollar life
insurance arrangement and (i) Mr. Cracchiolo will be entitled to gross-up
payments relating to excise taxes resulting from payments by QuadraMed to
Mr. Cracchiolo. Mr. Cracchiolo agreed that his termination of employment
would not be treated as an Involuntary Termination under the Stock Exchange
Deferred Compensation Plan and, therefore, amounts due Mr. Cracchiolo
pursuant to the Stock Exchange Deferred Compensation Plan are not payable
immediately, but will be payable in accordance with the terms thereof.
As a condition to Mr. Cracchiolo's entitlement to the
compensation, payments and benefits provided under the Separation
Agreement, Mr. Cracchiolo executed and delivered to QuadraMed an
irrevocable general release. QuadraMed also executed and delivered a
general release to Mr. Cracchiolo.
JAMES D. DURHAM SEPARATION AGREEMENT
In January 1999, QuadraMed entered into a letter agreement with
Mr. Durham pursuant to which Mr. Durham served as QuadraMed's Chief
Executive Officer. QuadraMed entered into a Separation Agreement, dated
June 12, 2000, with Mr. Durham, pursuant to which Mr. Durham's employment
with QuadraMed as its Chief Executive Officer, terminated effective June
12, 2000. Mr. Durham also resigned as a director and/or officer of all
subsidiaries and affiliates of QuadraMed (except ChartOne). QuadraMed and
Mr. Durham agreed that Mr. Durham would continue as a part-time employee of
QuadraMed and as Chairman of the Board. Mr. Durham resigned as Chairman on
December 31, 2000.
Pursuant to the Separation Agreement, QuadraMed is obligated to
make the following payments and provide the following benefits to Mr.
Durham: (a) payment in full of its obligations under Mr. Durham's
employment agreement to pay severance benefits upon an Involuntary
Termination (as defined in the employment agreement), a lump sum severance
benefit of $2,316,000 was paid to Trigon Resources Corporation, which is
owned by Mr. Durham and his children. Mr. Durham also received continuation
for a minimum period of 24 months of all life, health and disability plan
participation, benefit plans and other coverages to which Mr. Durham and
his dependents are entitled; (b) In consideration for Mr. Durham's
continued services as Chairman and a part-time employee, salary at an
annual rate of $250,000 through January 1, 2001 and thereafter through
December 31, 2003 at a rate of $2,000 per month; (c) All restrictions and
repurchase rights on 112,000 restricted shares of Common Stock granted to
Mr. Durham in October, 1998, were deemed to have lapsed; (d) Accelerated
vesting of 105,208 options granted to Mr. Durham, for a total of 405,000
fully vested options, which options will remain exercisable for the full
term of the applicable option agreement; (e) Continuation of
indemnification of Mr. Durham and coverage under QuadraMed's Directors' and
Officers' Insurance, until December 31, 2007 with respect to acts occurring
prior to termination of his employment and/or Board membership; (f) Mr.
Durham's interest in the QuadraMed Corporation Stock Exchange Deferred
Compensation Plan and QuadraMed Corporation's Supplemental Executive
Retirement Plan will continue to vest during the period of Mr. Durham's
continued service as a director. Mr. Durham agreed that the changes
effected by the Separation Agreement would not be treated as an involuntary
termination under these Plans. QuadraMed made premium payments of
approximately $500,000 with respect to life insurance policies designed to
fund payments under the Stock Exchange Deferred Compensation Plan in each
of the third and fourth fiscal quarters of 2000; (g) Mr. Durham was
reimbursed for all customary, ordinary and necessary business expenses
through December 31, 2000; (h) QuadraMed will continue to pay premiums with
respect to Mr. Durham's split-dollar life insurance arrangement and will
continue Mr. Durham's group life insurance policy in the amount of
$1,000,000 during the time Mr. Durham is serving as an employee or director
of QuadraMed and (i) Mr. Durham is entitled to gross-up payments relating
to excise taxes resulting from payments by QuadraMed to Mr. Durham.
As a condition to Mr. Durham's entitlement to the compensation,
payments and benefits provided under the Separation Agreement, Mr. Durham
executed and delivered to QuadraMed an irrevocable general release.
QuadraMed also executed and delivered a general release to Mr. Durham.
CHANGE IN CONTROL ARRANGEMENTS
In connection with an acquisition of QuadraMed by merger or asset
sale, each outstanding option held by the Chief Executive Officer and the
other executive officers under QuadraMed's 1994 Stock Plan (the predecessor
equity incentive program to the 1996 Plan) or the 1996 Plan will
automatically accelerate in full, except to the extent such options are to
be assumed by the successor corporation. In addition, the Compensation
Committee as Plan Administrator of the 1996 Plan will have the authority to
provide for the accelerated vesting of the shares of Common Stock subject
to outstanding options held by the Chief Executive Officer or any other
executive officer or any unvested shares of Common Stock subject to direct
issuances held by such individual, in connection with the termination of
the officer's employment following: (1) a merger or asset sale in which
these options are assumed or are assigned or (2) certain hostile changes in
control of QuadraMed.
DEFERRED COMPENSATION PLAN
Effective January 1, 2000, QuadraMed adopted a deferred
compensation plan (the "DCP") to provide specified benefits to, and help
retain, a select group of management and highly compensated employees and
directors who contribute materially to QuadraMed's continued growth,
development and future business success. The DCP is unfunded for tax
purposes and for purposes of Title I of ERISA. A committee of the Board is
responsible, in its sole discretion, to select the employees and directors
to participate in the DCP.
Under the DCP, a participant may elect to defer for each plan year
a minimum amount of $2,000 of his or her base annual salary and a minimum
amount of $2,000 of his or her annual bonus, and a maximum amount of 90%
(less applicable withholding) of his or her base annual salary, a maximum
amount of 90% (less applicable withholding) of his or her annual bonus, and
100% of his or her director's fees. QuadraMed may, in its sole discretion,
credit any amount it desires to any participant's company contribution
account. QuadraMed is required to contribute a matching amount equal to 50%
of a participant's annual deferral amount, up to 2% of such participant's
total annual compensation for each plan year, to the participant's company
contribution account. The amount contributed by a participant is 100%
vested at all times. The amount contributed by QuadraMed is vested in
relation to each participant's years of service after January 1, 2000 as
follows: (1) 0% if less than one year; (2) 25% for one year; (3) 50% for
two years; (4) 75% for three years; and (5) 100% for four years or more. In
the event of a change in control or involuntary termination of employment,
other than a termination of employment for cause, a participant's company
contribution account immediately becomes 100% vested.
STOCK EXCHANGE DEFERRED COMPENSATION PLAN
Effective January 3, 2000, QuadraMed adopted a Stock Exchange
Deferred Compensation Plan (the "SEDCP") to provide specified benefits to,
and help retain, a select group of management and highly compensated
employees who contribute materially to QuadraMed's continued growth,
development and future business. The SEDCP is unfunded for tax purposes and
for purposes of Title I of ERISA. A committee of the board of directors is
responsible, in its sole discretion, to select the employees to participate
in the SEDCP.
Under the SEDCP, QuadraMed is required to credit an amount to a
participant's account under the SEDCP as of the date specified in the
participant's Exchange Agreement. One-half of the amount so credited must
be credited to the participant's company stock account and the other half
must be credited to the participant's other investments account. A
participant is vested in his or her SEDCP account in relation to each
participant's years of service after January 3, 2000 as follows: (1) 0% if
less than three years and (2) 100% if three years or more. In the event of
a change in control, a participant's death, disability, retirement or
involuntary termination of employment, other than a termination of
employment for cause, a participant's SEDCP account immediately becomes
100% vested.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective January 1, 2000, QuadraMed adopted a Supplemental
Executive Retirement Plan (the "SERP") to provide specified benefits to,
and help retain, a select group of management and highly compensated
employees who contribute materially to QuadraMed's continued growth,
development and future business success. The SERP is unfunded for tax
purposes and for purposes of Title I of ERISA. A committee of the Board is
responsible, in its sole discretion, to select the employees to participate
in the SERP.
Under the SERP, participants receive a 20-year installment
benefit, payable monthly and commencing at age 60, equal to the product of
0.05 multiplied by such participant's highest annual compensation
multiplied by his or her years of service (not to exceed 13) multiplied by
1/12. A participant is vested in his or her SERP benefit in relation to
such participant's years of participation in the plan on the date of
termination of employment, as follows: (1) 0% if less than seven years and
(2) 100% if seven years or more. In the event of a change in control, a
participant's death, disability, retirement or involuntary termination of
employment, other than a termination of employment for cause, a participant
becomes immediately vested in his or her SERP benefit. In the event of an
involuntary termination, other than for cause, a participant is entitled to
a lump sum amount, rather than the installment payments described above,
equal to the actuarial equivalent of a 20-year monthly installment payment
equal to the product of 0.65 multiplied by the participant's highest annual
compensation multiplied by 1/12.
The following table shows the estimated annual payments payable at
normal retirement to a SERP participant. The benefits shown in the table
are not subject to offset for Social Security or other benefits.
PENSION PLAN TABLE
ANNUAL BENEFITS UPON RETIREMENT
WITH YEARS OF SERVICE INDICATED
HIGHEST ANNUAL COMPENSATION 5 YEARS 10 YEARS 15 YEARS
- --------------------------- ------- -------- --------
$500,000................................ $125,000 $250,000 $325,000
$600,000................................ $150,000 $300,000 $390,000
$700,000................................ $175,000 $350,000 $455,000
$800,000................................ $200,000 $400,000 $520,000
$900,000................................ $225,000 $450,000 $585,000
For purposes of the SERP, "highest annual compensation" means a
participant's highest annual compensation, including salary and bonuses,
during the participant's last ten years of employment. The "salary" and
"bonuses" used to determine a participant's "highest annual compensation"
are the same as the salary and bonuses disclosed in the "Salary" and
"Bonuses" columns of the Summary Compensation Table.
As of December 31, 2000, the "years of service" for Mr. Durham
were approximately 7 years. Under Mr. Durham's Separation Agreement, his
interest in the SERP will continue to vest in accordance with the terms of
the SERP during the period he continues to serve as a director of
QuadraMed. Mr. Durham agreed that his Separation Agreement did not
constitute an Involuntary Termination as defined in the SERP. Any failure
by the stockholders to elect Mr. Durham, however, as a director will
immediately vest his benefits under the SERP but will not accelerate the
payment of such benefits as of December 31, 2000. No QuadraMed executive
officers other than Mr. Durham were participants in the SERP.
GRANTOR TRUST AGREEMENT
Effective January 1, 2000, QuadraMed entered into a Grantor Trust
Agreement with Wachovia Bank, N.A. pursuant to which QuadraMed agreed to
make contributions to a trust to satisfy QuadraMed's obligations under the
DCP, the SEDCP and the SERP. Upon a threatened change in control, QuadraMed
is required to make contributions to the trust in an amount equal to not
less than 100%, but not more than 120%, of the amount necessary to pay all
benefits due under the Plans on the date the threatened change in control
occurs. In the event a change in control does not occur within six months
of the threatened change in control, QuadraMed has the right to recover
such funds. Upon a change in control, QuadraMed is obligated to make an
irrevocable contribution to the trust in an amount equal to not less than
100%, but not more than 120%, of the amount necessary to pay all benefits
due under the Plans on the date the change in control occurs. QuadraMed is
also obligated to fund a $125,000 expense reserve for the trustee upon a
threatened change in control or a change in control. A "threatened change
in control" is defined to include any pending offer for QuadraMed's
outstanding shares of Common Stock, any pending offer to acquire QuadraMed
by merger, or any pending action or plan to effect a change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 2000 to October 4, 2000, QuadraMed's Compensation
Committee consisted of E.A. Roskovensky and Albert L. Greene. At the
October 4, 2000 Board meeting, Messrs. Roskovensky and Green resigned and
Cornelius T. Ryan and Michael J. King were elected in their place. No
member of the Compensation Committee was at any time during the 2000 fiscal
year or at any other time an officer or employee of QuadraMed.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Compensation Committee to review and
determine the salaries and bonuses of executive officers of QuadraMed,
including the Chief Executive Officer, and to establish the general
compensation policies for such individuals. The Compensation Committee also
has the sole and exclusive authority to make discretionary option grants to
QuadraMed's executive officers under QuadraMed's 1996 Plan.
The Compensation Committee believes that the compensation programs
for QuadraMed's executive officers should reflect QuadraMed's performance
and the value created for QuadraMed's stockholders. In addition, the
compensation programs should support the short-term and long-term strategic
goals and values of QuadraMed and should reward individual contribution to
QuadraMed's success. QuadraMed is engaged in a very competitive industry,
and QuadraMed's success depends in part upon its ability to attract and
retain qualified executives with competitive compensation packages.
General Compensation Policy. The Compensation Committee's policy
is to provide QuadraMed's executive officers with compensation
opportunities that (i) are tied to personal performance and contribution to
QuadraMed's financial performance and (ii) are competitive enough to
attract and retain highly skilled individuals. Each executive officer's
compensation package is comprised of three elements: (1) base salary, (2)
variable incentive awards and (3) long-term, equity-based incentive awards.
The Compensation Committee has retained the services of an
independent compensation consulting firm to provide advice on executive
compensation matters including the base salary and incentive compensation
levels for executive officers. Specifically, the consulting firm furnished
the Committee with compensation surveys and data for purposes of comparing
QuadraMed's executive compensation levels with those at companies within
and outside the industry with which QuadraMed competes for executive talent
and provided the Committee with specific recommendations for maintaining
QuadraMed's executive compensation at a level competitive with the
marketplace.
Factors. The principal factors that were taken into account in
establishing each executive officer's compensation package for the 2000
fiscal year are described below. The Compensation Committee, however, may,
in its discretion, apply entirely different factors, such as different
measures of financial performance, for future fiscal years.
Chief Executive Officer Compensation. In setting the base salary
level payable for the 2000 fiscal year to QuadraMed's former Chief
Executive Officer, James D. Durham, the Compensation Committee reviewed a
detailed performance evaluation compiled for Mr. Durham. The performance
evaluation took into consideration Mr. Durham's qualifications, the level
of experience brought to his position and gained while in the position,
QuadraMed goals for which Mr. Durham had responsibility, specific
accomplishments to date, and the importance of Mr. Durham's individual
contributions to the achievement of QuadraMed's goals and objectives set
for the prior fiscal year. In addition, the Compensation Committee sought
to provide him with a level of base salary which it believed, on the basis
of its understanding of the salary levels in effect for other chief
executive officers at similar-sized companies in the industry, to be
competitive with those base salary levels.
Effective June 12, 2000, Lawrence P. English became Chief
Executive Officer and effective December 31, 2000, he was elected as the
Chairman of the Board. The Compensation Committee believes the total
compensation arrangement for Mr. English is competitive with that provided
by comparable companies and is commensurate with the responsibilities of
his office as Chief Executive Officer of QuadraMed.
Other Executive Officer Compensation. In setting base salaries for
executive officers other than the Chief Executive Officer, the Compensation
Committee reviewed the compensation data and surveys provided by the
independent consultant for comparative compensation purposes. A peer group
of companies was identified for such comparative purposes. In selecting the
peer group companies, the Compensation Committee focused primarily on
whether those companies were actually competitive with QuadraMed in seeking
executive talent, whether those companies had a management style and
corporate culture similar to QuadraMed's and whether similar positions
existed within their corporate structure.
The base salary for each executive officer other than the Chief
Executive Officer reflects the salary levels for comparable positions at
the peer group companies as well as the individual's personal performance
and internal alignment considerations. The relative weight given to each
factor varies with each individual in the sole discretion of the
Compensation Committee. Each executive officer's base salary is adjusted
each year on the basis of (1) the Compensation Committee's evaluation of
the officer's personal performance for the year and (2) the competitive
marketplace for persons in comparable positions.
Variable Incentive Awards. To reinforce the attainment of Company
goals, the Committee believes that a substantial portion of the annual
compensation of each executive officer should be in the form of variable
incentive pay. The annual incentive pool for executive officers is
determined on the basis of QuadraMed's achievement of the financial
performance targets established at the beginning of the fiscal year and the
executive's individual contribution.
Long-Term, Equity-Based Incentive Awards. The goal of QuadraMed's
long-term equity-based incentive awards is to align the interests of
executive officers with stockholders and to provide each executive officer
with a significant incentive to manage QuadraMed from the perspective of an
owner with an equity stake in the business. The Committee determines the
size of long-term, equity-based incentives according to each executive's
position within QuadraMed and sets the incentives at a level it considers
appropriate to create a meaningful opportunity for stock ownership. In
addition, the Committee takes into account an individual's recent
performance, his or her potential for future responsibility and promotion,
and comparable awards made to individuals in similar positions with
comparable companies. The relative weight given to each of these factors
varies among individuals at the Committee's discretion.
Compliance with Internal Revenue Code Section 162(m). Section
162(m) of the Internal Revenue Code disallows a tax deduction to publicly
held companies for compensation paid to certain of their executive
officers, to the extent that compensation exceeds $1 million per covered
officer in any fiscal year. The limitation applies only to compensation
which is not considered to be performance-based. Non-performance based
compensation paid to QuadraMed's executive officers for the 2000 fiscal
year did not exceed the $1 million limit per officer. Because it is
unlikely that the cash compensation payable to any of QuadraMed's executive
officers in the foreseeable future will approach the $1 million limit, the
Compensation Committee has decided at this time not to take any action to
limit or restructure the elements of cash compensation payable to
QuadraMed's executive officers. The Compensation Committee will reconsider
this decision should the individual cash compensation of any executive
officer ever approach the $1 million level. The Board of Directors did not
modify any action or recommendation made by the Compensation Committee with
respect to executive compensation for the 2000 fiscal year. It is the
opinion of the Compensation Committee that the executive compensation
policies and plans provide the necessary total remuneration program to
properly align QuadraMed's performance and the interests of QuadraMed's
stockholders through the use of competitive and equitable executive
compensation in a balanced and reasonable manner, for both the short and
long-term.
Submitted by the Compensation Committee of QuadraMed's Board
of Directors
Cornelius T. Ryan
Michael King
PERFORMANCE GRAPH
The following chart, which was produced by Research Data Group,
depicts QuadraMed's performance for the period beginning on October 10,
1996 (QuadraMed's initial public offering date) and ending December 31,
2000, as measured by total stockholder return on the Common Stock compared
with the total return of the NASDAQ Stock Market (U.S.) Index and the
NASDAQ Computer and Data Processing Index. Upon request, QuadraMed will
furnish stockholders a list of the component companies of such indexes.
COMPARISON OF 38 MONTH CUMULATIVE TOTAL RETURN*
AMONG QUADRAMED CORPORATION, THE NASDAQ STOCK
MARKET (U.S.) INDEX AND THE NASDAQ COMPUTER &
DATA PROCESSING INDEX
10/10/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
QuadraMed Corporation 100 94.85 226.80 169.07 71.91 6.71
Nasdaq Stock Market 100 104.12 127.50 179.83 334.20 201.08
Nasdaq Computer of
Data Processing 100 103.07 126.61 225.92 496.40 229.59
Notwithstanding anything to the contrary set forth in any of
QuadraMed's previous filings under the Securities Act of 1933 or the
Securities Exchange Act of 1934 that might incorporate future filings made
by QuadraMed under those statutes, the preceding Report of the Compensation
Committee of the Board of Directors on Executive Compensation and
QuadraMed's Stock Performance Graph will not be incorporated by reference
into any of those prior filings, nor will such report or graph be
incorporated by reference into any future filings made by QuadraMed under
those statutes.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of QuadraMed's Common Stock as of March 6, 2001 by (1)
each person (or group of affiliated persons) known by QuadraMed to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock,
(2) each director of QuadraMed, (3) each Named Executive Officer of
QuadraMed and (4) all current executive officers and directors of QuadraMed
as a group.
SHARES OF COMMON
STOCK BENEFICIALLY
OWNED (1)
NAME OF BENEFICIAL OWNERS NUMBER PERCENT
- ------------------------- ------ -------
Nitin T. Mehta(2)............................................................. 1,326,362 5.15%
58 Greenoaks Drive
Atherton, California 94027
Lawrence P. English(3)........................................................ 100,000 *
James D. Durham(4)............................................................ 1,368,465 5.31%
Albert L. Greene(5)........................................................... 20,333 *
F. Scott Gross(6)............................................................. 7,944 *
Michael J. King(7)............................................................ 158,035 *
E.A. Roskovensky(8)........................................................... 11,613 *
Cornelius T. Ryan(9).......................................................... 23,944 *
John V. Cracchiolo(10)........................................................ 62,348 *
Mark N. Thomas(11)............................................................ -- *
Nancy Nelson(12).............................................................. 274,518 1.07%
Patrick Ahearn(13)............................................................ 232,334 *
Michael Wilstead(14).......................................................... 67,567 *
All executive officers and directors as a group
(12 persons)(15).............................................................. 1,757,901 6.8%
- ---------------
* Less than 1%
(1) Percentage ownership is based on 25,754,696 shares of Common Stock
outstanding on March 6, 2001. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options, warrants and
convertible notes currently exercisable or convertible, or
exercisable or convertible within 60 days, are deemed outstanding
for determining the number of shares beneficially owned and for
computing the percentage ownership of the person holding such
options, but are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons
named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them.
(2) Represents shares beneficially owned by Nitin T. Mehta based on
information contained in a Schedule 13G filed on June 15, 1998.
(3) Excludes 1,000,000 shares subject to options not exercisable within
60 days of March 6, 2001.
(4) Includes 23,295 shares of Common Stock owned by Trigon Resources
Corporation ("Trigon"), a corporation owned by Mr. Durham and his
two children, and 134,574 shares of Common Stock issuable upon
exercise of a warrant held by Trigon. Also includes 405,000 shares
issuable upon exercise of fully vested options, and 112,000 shares
of Common Stock granted to Mr. Durham in October 1998. Also includes
123,944 shares of Common Stock owned by Mr. Durham's wife, Sandra J.
Durham, as to which Mr. Durham disclaims any beneficial ownership.
Also includes 89,356 shares purchased by Mr. and Mrs. Durham and
124,696 shares received in a stock exchange plan in January 2000.
Mr. Durham was Chairman of the Board of Directors until his
resignation effective December 31, 2000 and was Chief Executive
Officer of QuadraMed until his resignation effective June 12, 2000.
See "Employment and Other Agreements; Change in Control
Arrangements" for a description of Mr. Durham's Separation
Agreement.
(5) Includes 20,333 shares of Common Stock issuable upon exercise of
options, and excludes 1,667 shares subject to options not
exercisable within 60 days of March 6, 2001.
(6) Includes 7,944 shares of Common Stock issuable upon exercise of
options, and excludes 8,056 shares subject to options not
exercisable within 60 days of March 6, 2001.
(7) Includes 158,035 shares of Common Stock issuable upon exercise of
options, and excludes 5,287 shares subject to options not
exercisable within 60 days of March 6, 2001.
(8) Includes 8,713 shares of Common Stock issuable upon exercise of
options, and excludes 5,287 shares subject to options not
exercisable within 60 days of March 6, 2001.
(9) Includes 23,944 shares of Common Stock issuable upon exercise of
options, and excludes 8,056 shares subject to options not
exercisable within 60 days of March 6, 2001.
(10) Includes 60,000 shares of Common Stock granted to Mr. Cracchiolo in
October 1998. Mr. Cracchiolo resigned as President and Chief
Operating Officer of QuadraMed effective June 30, 2000. See
"Employment and Other Agreements; Change in Control Arrangements"
for a description of Mr. Cracchiolo's Separation Agreement.
(11) Excludes 350,000 shares subject to options not exercisable within 60
days of March 6, 2001.
(12) Includes 274,510 shares of Common Stock issuable upon exercise of
options.
(13) Includes 232,334 shares of Common Stock issuable upon exercise of
options.
(14) Includes 65,067 shares of Common Stock issuable upon exercise of
options, and excludes 189,933 shares subject to options not
exercisable within 60 days of March 6, 2001.
(15) See notes 1 through (9), (11) and (14) above. Excluded are 200,000
non-qualified stock options granted to Michael H. Lanza, Executive
Vice President and Corporate Secretary; 200,000 non-qualified stock
options granted to Peter van der Grinten, President-Enterprise
Division; and 100,000 non-qualified stock options granted to Dean
Souleles, Chief Technology Officer.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Michael King, a QuadraMed director, is the Chief Executive Officer
of Healthscribe, Inc., a provider of transcription services. During 2000,
QuadraMed paid a total of $916,662.07 to Healthscribe, Inc. for
transcription services. Most contracts for these services had been
established before Mr. King became Chief Executive Officer of Healthscribe,
Inc.
Pursuant to the terms of an Asset Contribution Agreement dated May
3, 2000, QuadraMed created a wholly owned subsidiary, ChartOne, and
transferred and assigned to it the assets and liabilities of its ROI
business. On June 7, 2000, ChartOne completed the sale of 2,520,000 shares
of its Series A Preferred Stock to Warburg Pincus and Prudential Securities
for an aggregate cash purchase of $25.2 million, pursuant to the terms of a
Securities Purchase Agreement. In addition, on June 7, 2000, ChartOne
completed the sale of 151,000 shares of its common stock to James D.
Durham, the then-Chairman of QuadraMed, and 30,000 shares of its common
stock to James D. Durham and Sandra J. Durham, jointly, at a purchase price
equal to the independently appraised value of $2.36 per share, pursuant to
the terms of a Management Subscription Agreement. The aggregate purchase
price of $427,160 was paid $18,100 in cash and by the delivery of a note in
the amount of $341,260 issued by James D. Durham (the "Durham Note") and a
note in the amount of $67,800 issued by James D. Durham and Sandra J.
Durham (the "Joint Note"). The Durham Note is secured by 151,000 shares of
ChartOne common stock and 93,436 shares of QuadraMed Common Stock. The
Joint Note is secured by 30,000 shares of ChartOne common stock and 18,564
shares of QuadraMed Common Stock. On October 19, 2000, QuadraMed sold its
remaining interest in ChartOne for approximately $26.6 million in cash to
Warburg Pincus and Prudential Securities pursuant to the terms of a second
Securities Purchase Agreement.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Financial Statements.
The consolidated financial statements contained herein are as
listed on the Exhibit Index on page 42.
2. Financial Statement Schedule.
Reference is made to Schedule II - Valuation and Qualifying
Accounts following the signature pages hereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K. QuadraMed filed the following reports on Form 8-K
during the last quarter of the fiscal year covered by this Annual
Report on Form 10-K:
1. Current Report on Form 8-K dated November 6, 2000, filed on
November 6, 2000, for the purpose of reporting, under Item 5,
QuadraMed's sale of interest in ChartOne, Inc., to Warburg,
Pincus Equity Partners, L.P. and its affiliates, pursuant to
the terms of a Securities Purchase Agreement ("Securities
Purchase Agreement"), dated as of September 28, 2000, by and
among QuadraMed and QuadraMed Operating Corporation, as
sellers, and the investors named therein, and under Item 7,
exhibit 2.1, Securities Purchase Agreement.
2. Current Report on Form 8-K dated December 21, 2000, filed on
December 21, 2000, for the purpose of reporting, under Item
5, election of Lawrence P. English, as QuadraMed's Chief
Executive Officer effective December 31, 2000.
(c) Exhibits:
The exhibits listed on the accompanying Exhibits Index are filed
as part of this Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized.
Quadramed corporation
Date: April 9, 2001
By: /s/ Lawrence P. English
------------------------
Lawrence P. English
Chairman of the Board
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed by the following persons in
the capacities and on the date indicated:
Signatures Title Date
* Chairman of the Board and April 9, 2001
- ------------------------------------ Chief Executive Officer
Lawrence P. English (Principal Executive
Officer)
Chief Financial Officer
* (Principal Financial and April 9, 2001
- ------------------------------------- Accounting Officer)
Mark N. Thomas
* Director April 9, 2001
- ------------------------------------
James D. Durham
* Director April 9, 2001
- ------------------------------------
Albert L. Greene
* Director April 9, 2001
- ------------------------------------
F. Scott Gross
* Director April 9, 2001
- ------------------------------------
Michael J. King
* Director April 9, 2001
- -------------------------------------
E. A. Roskovensky
* Director April 9, 2001
- -------------------------------------
Cornelius T. Ryan
* By: /s/ Lawrence P. English
------------------------------
Lawrence P. English
Attorney-in-Fact
EXHIBIT INDEX
2.1 Securities Purchase Agreement dated September 28, 2000, by and
between QuadraMed Corporation, QuadraMed Operating Corporation,
and investors whose names and addresses are set forth on Schedule
I thereto. (13)
2.1 Securities Purchase Agreement dated as of May 5, 2000 by and among
QuadraMed Corporation, QuadraMed Operating Corporation, Certain
Investors and ChartOne, Inc. (9)
2.2 Asset Contribution Agreement dated as of May 3, 2000 by and among
QuadraMed Corporation, QuadraMed Operating Corporation and
ChartOne, Inc.
3.4 Amended and Restated Bylaws of QuadraMed. (1)
3.5 Third Amended and Restated Certificate of Incorporation of
QuadraMed. (5)
4.1 Reference is made to Exhibits 3.4 and 3.5. (1) (5)
4.2 Form of Common Stock certificate. (1)
4.11 Form of Warrant to Purchase Common Stock. (1)
4.12 Registration Rights Agreement dated December 5, 1996, by and
between QuadraMed and the investors listed on Schedule A thereto.
(2)
4.14 Registration Rights Agreement, dated as of June 5, 1998, by and
among QuadraMed Corporation and the stockholders of Pyramid Health
Group, Inc. named therein. (3)
4.15 Subordinated Indenture, dated as of May 1, 1998 between QuadraMed
and The Bank of New York. (4)
4.16 Officers' Certificate delivered pursuant to Sections 2.3 and 11.5
of the Subordinated Indenture. (4)
4.17 Registration Rights Agreement dated April 27, 1998 by and among
QuadraMed and the Initial Purchasers named therein. (4)
4.18 Form of Global Debenture. (4)
4.19 Form of Certificated Debenture. (4)
4.21 Registration Rights Agreement dated December 23, 1998 by and
between QuadraMed and the shareholders listed therein. (7)
4.22 Registration Rights Agreement, dated as of March 3, 1999, by and
among QuadraMed Corporation and the stockholders of The Compucare
Company named therein. (6)
10.1 1996 Stock Incentive Plan of QuadraMed. (l)
10.2 1996 Employee Stock Purchase Plan of QuadraMed. (1)
10.3 Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4 Form of Indemnification Agreement between QuadraMed and its
directors and executive officers. (1)
10.5 1999 Supplemental Stock Option Plan for QuadraMed. (14)
10.51 Employment Agreement dated January l, 1999 between James D. Durham
and QuadraMed. (8)
10.52 Employment Agreement dated April 1, 1999 between Michael Sanderson
and QuadraMed. (10)
10.53 Employment Agreement dated April l, 1999 between Michael Wilstead
and QuadraMed. (10)
10.54 Employment Agreement dated April 1, 1999 between Nancy Nelson and
QuadraMed. (10)
10.56 Employment Agreement dated April 1, 1999 between Patrick Ahearn
and QuadraMed. (10)
10.57 Employment Agreement dated April 1, 1999 between Keith Roberts and
QuadraMed. (10)
10.59 Employment Agreement dated May 18, 1999 between John V. Cracchiolo
and QuadraMed. (10)
10.64 Separation Agreement dated June 12, 2000, between James D. Durham
and QuadraMed. (11)
10.65 Separation Agreement dated June 12, 2000 between John V.
Cracchiolo and QuadraMed. (11)
10.66 Employment Agreement dated June 12, 2000 between Lawrence P.
English and QuadraMed. (11)
10.67 Employment Agreement dated May 12, 2000 between Mark Thomas and
QuadraMed. (11)
10.67 Employment Agreement dated August 16, 2000 between Dean Souleles
and QuadraMed.
10.68 Employment Agreement dated September 18, 2000 between Michael H.
Lanza and QuadraMed. (12)
10.69 Employment Agreement dated January 7, 2001, between Peter van der
Grinten and QuadraMed.
23.1 Consent of Pisenti & Brinker, Independent Public Accountants.
24.1 Power of Attorney (set forth in the signature page hereto).
27.1 Financial Data Schedule for the Year Ended 12/31/2000.
27.2 Financial Data Schedule for the Year Ended 12/31/1999.
27.3 Financial Data Schedule for the Year Ended 12/31/1998.
(1) Incorporated herein by reference from the exhibit with the same
number to our Registration Statement on Form SB-2, No.
333-5l80-LA, as filed with the Commission on June 28, 1996, as
amended by Amendment No. l, Amendment No. 2 and Amendment No. 3
thereto, as filed with the Commission on July 26, 1996, September
9, 1996, and October 2, 1996, respectively.
(2) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as filed with the Commission on August 14, 1997, as
amended September 4, 1997.
(3) Incorporated by reference from our Current Report on Form 8-K, as
filed with the Commission on June 11, 1998.
(4) Incorporated by reference from our Registration Statement on Form
S-3, No. 333-55775, as filed with the Commission on June 2, 1998,
as amended by Amendment No. 1 thereto, as filed with the
Commission on June 17, 1998.
(5) Incorporated by reference from the exhibit with the same number to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, as filed with the Commission on August 14, 1998, as amended
on August 24, 1988.
(6) Incorporated herein by reference from our Current Report on Form
8-K/A filed with the Commission on March 22, 1999.
(7) Incorporated herein by reference from our Registration Statement
on Form S-3, No. 333-80617, as filed with the Commission on June
14, 1999, as amended by Amendment No. l thereto, as filed with the
Commission on August 4, 1999.
(8) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 as filed with the Commission on May 17, 1999.
(9) Incorporated herein by reference from exhibit with the same number
to our Current Report on Form 8-K filed with the Commission on
June 22, 2000.
(10) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 as filed with the Commission on August 16, 1999.
(11) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 as filed with the Commission on August 14, 2000.
(12) Incorporated herein by reference from the exhibit with the same
number to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 as filed with the Commission on November 15,
2000.
(13) Incorporated herein by reference from the exhibit with the same
number to our Current Report on Form 8-K filed with the Commission
on November 6, 2000.
(14) Incorporated herein by reference from our annual report on Form
10-K, as filed with the Commission on March 30, 2000, as amended
by May 1, 2000.
QUADRAMED CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
Balance at Charged to Additions
Beginning of Costs and Charged to Other End of
Description Year Expenses Accounts* Deductions Year
- ----------- ---- -------- ---------- ---------- ----
Year ended December 31, 1998
Allowance for doubtful accounts...... $ 2,834 $ 6,089 $ 1,902 $ (6,097) $ 4,728
Year ended December 31, 1999
Allowance for doubtful accounts...... $ 4,728 $ 3,816 $ - $ (4,414) $ 4,130
Year ended December 31, 2000
Allowance for doubtful accounts...... $ 4,130 $ 1,335 $ - $ (3,061) $ 2,404
* This includes adjustments recorded in purchase accounting associated
with QuadraMed's acquisition of Medicus Systems Corporation in November
1997.
REPORTS OF INDEPENDENT ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS
QUADRAMED CORPORATION
PAGE
Report of Independent Public Accountants...................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999...............F-3
Consolidated Statements of Operations for the years ended December
31, 2000, 1999, and 1998...................................................F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2000,
1999, and 1998.............................................................F-5
Consolidated Statements of Cash Flows for the years ended December
31, 2000 and 1999..........................................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of QuadraMed Corporation:
We have audited the accompanying consolidated balance sheet of
QuadraMed Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2000, and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive loss and cash flows for
the year then ended. These consolidated financial statements and the
schedule referred to below are the responsibility of QuadraMed's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit. The consolidated financial
statements of QuadraMed Corporation for the years ended December 31, 1998
and 1999 were audited by other auditors whose report dated February 24,
2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 2000 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
QuadraMed Corporation and subsidiaries as of December 31, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2)
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Pisenti & Brinker LLP
------------------------------------
PISENTI & BRINKER LLP
Petaluma, California
March 6, 2001
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
---------------------
ASSETS 2000 1999
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 27,368 $ 10,623
Restricted cash 7,995 1,036
Short-term investments 12,296 19,109
Accounts receivable, net of allowance for
uncollectible accounts of $2,404, and
$4,130, respectively 36,879 51,480
Unbilled receivables 7,995 17,027
Notes and other receivables 689 2,390
Prepaid expenses and other current assets 1,936 6,072
--------- ---------
Total current assets 95,158 107,737
========== ==========
LONG-TERM INVESTMENTS 1,019 12,102
LONG-TERM NOTES RECEIVABLE 3,600 3,600
EQUIPMENT:
Equipment, at cost 28,774 36,962
Less accumulated depreciation and amortization (20,200) (25,123)
--------- ---------
Equipment, net 8,574 11,839
--------- ---------
CAPITALIZED SOFTWARE DEVELOPMENTS, net of
accumulated amortization
of $5,517 and $3,155, respectively 9,713 8,958
ACQUIRED SOFTWARE, net of accumulated amortization
of $3,441 and $2,610 respectively 1,380 8,211
INTANGIBLES, net of accumulated amortization of
$17,443 and $14,693, respectively 28,593 38,533
MARKETABLE INVESTMENTS 638 4,700
OTHER LONG-TERM ASSETS 7,270 18,981
--------- ---------
TOTAL ASSETS $ 155,945 $ 214,661
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 323 $ 437
Accounts payable 699 3,392
Accrued payroll and related 7,515 5,209
Accrued interest 1,006 1,019
Other accrued liabilities 10,256 14,173
Deferred revenue 12,564 7,258
--------- ---------
Total current liabilities 32,363 31,488
CAPITAL LEASE OBLIGATIONS, less current portion 128 207
CONVERTIBLE SUBORDINATED DEBENTURES 115,000 115,000
NET LIABILITIES OF DISCONTINUED OPERATIONS 4,133 5,385
--------- ---------
TOTAL LIABILITIES
Total liabilities 151,624 152,080
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par, 50,000 shares
authorized, 25,755 and 25,319 shares
issued and outstanding, respectively 191 187
Additional paid-in-capital 268,485 270,691
Deferred compensation - (2,519)
Accumulated other comprehensive loss (4,028) (287)
Accumulated deficit (260,327) (205,491)
--------- ---------
Total stockholders' equity 4,321 62,581
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 155,945 $ 214,661
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
REVENUES:
Licenses $ 75,458 $128,395 $119,840
Services 53,513 63,712 52,388
---------- -------- --------
Total Revenues 128,971 192,107 172,228
---------- -------- --------
OPERATING
EXPENSES:
Cost of licenses 25,003 26,282 24,918
Cost of services 35,613 37,435 35,492
General and administration 50,538 53,125 50,368
Sales and marketing 21,794 22,909 21,720
Research and development 20,760 21,822 20,690
Amortization of intangibles
and acquired software 7,169 8,013 6,398
Write-off of acquired research
and development in process -- 1,722 14,494
Acquisition costs -- 6,898 10,254
Impairment of intangible assets 927 10,592 --
Non-recurring charges 41,894 18,752 4,202
----------- --------- --------
Total operating expenses 203,698 207,550 188,536
----------- --------- --------
LOSS FROM OPERATIONS (74,727) (15,443) (16,308)
---------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (6,621) (7,669) (5,858)
Interest income 2,081 4,827 5,859
Other income (expense), net (55) 1,345 (204)
---------- -------- --------
Total other expense, net (4,595) (1,497) (203)
---------- -------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (79,322) (16,940) (16,511)
PROVISION FOR INCOME TAXES (200) (455) (3,000)
---------- -------- --------
LOSS BEFORE MINORITY INTEREST (79,522) (17,395) (19,511)
MINORITY INTEREST IN LOSS -- -- (379)
---------- ------- --------
LOSS FROM CONTINUING OPERATIONS (79,522) (17,395) (19,890)
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES 24,686 5,065 434
----------- --------- --------
NET LOSS (54,836) (12,330) (19,456)
DIVIDEND ACCRETION -- -- (1,920)
-------------- ----------- ----------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (54,836) $(12,330) $(21,376)
=========== ========= =========
BASIC AND DILUTED NET LOSS PER SHARE FROM CONTINUING
OPERATIONS $ (3.10) $ (0.70) $ (0.85)
=========== ========= =========
BASIC AND DILUTED NET INCOME PER SHARE FROM
DISCONTINUED OPERATIONS $ 0.96 $ 0.21 $ 0.02
=========== ========= =========
BASIC AND DILUTED NET LOSS PER SHARE FROM ACCRETION
OF DIVIDENDS $ -- $ -- (0.08)
=========== ========= =========
BASIC AND DILUTED NET LOSS PER SHARE AVAILABLE TO
COMMON STOCKHOLDERS $ (2.14) $ (0.49) $ (0.91)
=========== ========= =========
WEIGHTED AVERAGE COMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
BASIC AND DILUTED 25,617 24,979 23,370
=========== ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
- -------------------------------------------------------------------------------------------
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Accumulated Other
Common Stock Additional Other Accumu- Total
------------------ Paid in Deferred Comprehensive lated Stockholders' Comprehensive
Shares Amount Capital Compensation Loss Deficit Equity Loss
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
BALANCE AT DECEMBER 31, 1997 20,388 $ 131 $ 195,289 $ - $ - $ (170,658) $ 24,762 $ -
Issuance of common stock
and to record the effect
of an immaterial acquisition
accounted for as a pooling
of interests................. 507 5 212 - - (1,127) (910) -
Issuance of common stock in
connection with the InterLink
acquisition.................. 65 1 1,467 - - - 1,468 -
Issuance of common stock in
connection with the Cabot
Marsh acquisition............ 384 4 8,417 - - - 8,421 -
Issuance of common stock in
connection with the Velox
acquisition.................. 41 - 1,372 - - - 1,372 -
Issuance of common stock in
connection with the Medicus
acquisition.................. 892 15 24,518 - - - 24,533 -
Issuance of Common Stock
through employee
Stock Purchase Plan.......... 38 - 467 - - - 467 -
Issuance of restricted
shares of common stock....... - - 3,940 (3,940) - - - -
Issuance of Common Stock...... 880 9 8,862 - - - 8,871 -
Exercise of warrants to
purchase common stock........ 907 9 17,404 - - - 17,413 -
Exercise of common stock
options...................... 340 4 4,120 - - - 4,124 -
Net unrealized loss on
available-for-sale
securities................... - - - - (157) - (157) (157)
Dividend accretion............ - - - - - (1,920) (1,920) -
Net loss...................... - - - - - (19,456) (19,456) (19,456)
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
BALANCE AT DECEMBER 31, 1998 24,442 178 266,068 (3,940) (157) (193,161) 68,988 (19,613)
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
Issuance of common stock in
connection with acquisitions
accounted for as a purchase.. 97 1 634 - - - 635 -
Issuance of common stock
through Employee Stock
Purchase Plan................ 91 1 1,039 - - - 1,040 -
Amortization of restricted
shares of common stock....... - - - 955 - - 955 -
Cancellation of restricted
shares of common stock....... - - (582) 466 - - (116) -
Issuance of common stock for
legal settlement............. 70 - 346 - - - 346 -
Exercise of warrants to
purchase common stock........ 360 4 1,330 - - - 1,334 -
Exercise of common stock
options....................... 259 3 1,588 - - - 1,591 -
Compensation related to
accelerated vesting of
common stock options......... - - 268 - - - 268 -
Net unrealized loss on
available-for-sale
securities................... - - - - (130) - (130) (130)
Net loss...................... - - - - - (12,330) (12,330) (12,330)
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
BALANCE AT DECEMBER 31, 1999 25,319 187 270,691 (2,519) (287) (205,491) 62,581 (12,460)
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
Issuance of common stock
through Employee Stock
Purchase Plan ............... 58 - 488 - - - 488 -
Release of restricted shares.. - - (2,183) 2,183 - - - -
Compensation related
to release of
restricted shares............ - - (713) 336 - - (377) -
Issuance of common stock for
legal expenses............... 79 1 (236) - - - (235) -
Exercise of common stock
options...................... 299 3 438 - - - 441 -
Net unrealized loss on
available-for-sale
securities................... - - - - (3,741) - (3,741) (3,741)
Net loss...................... _ _ _ _ _ (54,836) (54,836) (54,836)
-------- --------- --------- ------------ ----------- ----------- ----------- -------------
BALANCE AT DECEMBER 31, 2000 25,755 $ 191 $ 268,485 $ - $( 4,028) $(260,327) $ 4,321 $(58,577)
======== ========= ========= ============ =========== =========== =========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
-------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (54,836) $(12,330) $(19,456)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 13,982 12,954 9,981
Amortization of deferred compensation -- 1,107 --
Salaries related to issuance of common stock,
cancellation of restricted shares and
forfeiture of common stock options (377) -- --
Write-off of in-process research and development -- 1,722 14,494
Write-off of note payable -- 1,200 --
Write-off of property and equipment 1,833 -- --
Write-off of capitalized software 1,473 -- --
Write-off of acquired software 5,632 -- --
Impairment of intangible assets 927 10,592 --
Noncash settlement of litigation -- 346 --
Gain on the sale of division, net of tax (23,228) -- --
Cash flows from discontinued operations (1,252) (3,772) (1,760)
Minority interest in net loss -- -- 379
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables, net 23,633 (22,794) (10,503)
Prepaid expenses and other 17,976 (8,779) 112
Accounts payable and accrued liabilities (4,546) (12,318) (19,953)
Deferred revenue 5,306 (7,394) (1,424)
--------- --------- ---------
Cash used in operating activities (13,477) (39,466) (28,130)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Cabot Marsh,
net of cash acquired -- -- (2,748)
Cash paid for the acquisition of Velox,
net of cash acquired -- -- (3,121)
Cash paid for the acquisition of other
companies, net of cash acquired -- (8,172) (6,832)
Proceeds from the sale of division, net of tax 40,408 -- --
Purchased technology -- (6,000) --
Maturity (purchase) of available-for-sale securities, net (33) 33,343 (63,577)
Additions to equipment (2,922) (6,568) (7,611)
Change in restricted cash (6,960) (1,000) --
Purchase of marketable investments -- (3,000) --
Issuance of notes receivable and other -- (2,215) (539)
Capitalization of computer software development costs (1,000) (3,787) (2,175)
--------- --------- ---------
Cash provided by (used in) investing activities 29,493 2,601 (86,603)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations (193) (436) (2,346)
Borrowings (repayments) under notes and loans payable (7) (21,941) 2,503
Issuance of convertible notes payable to related parties -- -- 400
Proceeds from issuance of convertible subordinated notes
payable, net of offering costs -- -- 110,827
Distributions by pooled entities -- -- (1,370)
Issuance of common stock, net of issuance costs -- -- 6,530
Issuance of common stock through
Employee Stock Purchase plan 488 1,040 467
Proceeds from exercise of common stock options
and warrants to purchase common stock 441 2,924 14,869
--------- --------- ---------
Cash provided by (used in) financing activities 729 (18,413) 131,880
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 16,745 (55,278) 17,147
CASH AND CASH EQUIVALENTS, beginning of year 10,623 65,901 48,754
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 27,368 $ 10,623 $ 65,901
========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 6,620 $ 6,315 $ 8,002
Cash paid for taxes 418 1,659 600
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING TRANSACTIONS:
Conversion of notes payable and accrued interest to
contributed capital $ -- $ 500 --
Issuance of common stock in connection with
Cabot Marsh acquisition -- -- 8,400
Issuance of common stock in connection
with Velox acquisition -- -- 1,500
Issuance of common stock in connection
with InterLink acquisition -- -- 1,500
Conversion of subordinated notes payable to common stock -- -- 8,000
Issuance of common stock warrants and common stock in
connection with acquisition of Medicus Systems Corporation -- -- 24,533
Issuance (cancellation) of restricted common stock (2,183) (582) 3,940
Issuance of common stock in payment of legal expenses 235 -- --
Issuance of common stock in connection
with other acquisitions -- 635 --
F-6
QUADRAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. QUADRAMED CORPORATION
QuadraMed Corporation is a healthcare information technology leader
with software, web-enabled solutions, and professional consulting services
that enable hospitals and providers to efficiently and effectively manage
their delivery of healthcare. QuadraMed provides products and services
facilitating all facets of healthcare information management, including
clinical, patient, financial, compliance, and managed care. QuadraMed
serves more than half of the U.S. hospitals and supports global healthcare
initiatives with a dedicated staff of over 1000 professionals.
QuadraMed was incorporated in California in 1993 and reincorporated
in Delaware in 1996. Its stock is publicly traded under the symbol "QMDC"
on the Nasdaq SmallCap Market. From October 16, 1996 to August 30, 2000,
QuadraMed's stock was traded on the Nasdaq National Market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
QuadraMed Corporation and all significant business divisions and
subsidiaries (hereinafter "QuadraMed") and have been prepared in conformity
with (i) generally accepted accounting principles; and (ii) the rules and
regulations of the U.S. Securities and Exchange Commission ("SEC"). All
significant intercompany accounts and transactions between QuadraMed and
its subsidiaries are eliminated in consolidation.
Results of QuadraMed's Release Of Information ("ROI") Division are
reported as discontinued operations because control of that business was
transferred in May of 2000. Unless otherwise indicated, amounts in these
statements exclude the effects of all discontinued operations.
(b) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1999
consolidated financial statements to conform to the 2000 presentation.
Specifically, prior year financial statements have been restated to be
consistent with the current classification of cost of licenses, cost of
services, general and administration, sales and marketing, research and
development, marketable investments and discontinued operations.
(c) USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
In preparing these financial statements in conformity with generally
accepted accounting principles, QuadraMed's management has made estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosed contingent assets and liabilities, and reported revenues and
expenses. Actual results could differ from these estimates. Significant
estimates and assumptions have been made regarding intangible assets,
primarily goodwill, resulting from QuadraMed's acquisitions. QuadraMed
periodically conducts revenue tests to validate carried intangible asset
valuations.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTS
QuadraMed states all financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, and securities at
their fair values. The fair values of Convertible Subordinated Debentures
at December 31, 2000 and 1999 were $41.1 million and $55.2 million,
respectively.
(e) CASH AND CASH EQUIVALENTS
QuadraMed treats all certificates of deposit, money market accounts,
and commercial paper with maturities of three months or less, as cash
equivalents.
(f) RESTRICTED CASH
As collateral for stand-by letters of credit, QuadraMed had
restricted cash balances of $8.0 million and $1.0 million, at December 31,
2000 and 1999, respectively.
(g) INVESTMENTS
QuadraMed considers its short and long-term securities, consisting
primarily of debt securities, to be available-for-sale securities. The
difference between cost and amortized cost (cost adjusted for amortization
of premiums and accretion of discounts that are recognized as adjustments
to interest income) and fair value (representing unrealized holdings gains
or losses) are recorded, until realized, as a separate component of
stockholders' equity. Gains and losses on the sale of debt securities are
determined on a specific identification basis. Realized gains and losses
are included in other income (expense) in the accompanying consolidated
statement of operations.
(h) EQUIPMENT
Equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life, which is generally
from three to five years. Depreciation expense was $4.4 million, $5.1
million, and $5.0 million for the years ended 2000, 1999, and 1998,
respectively. Leasehold improvements are amortized over the term of the
lease. Maintenance and repairs are expensed as incurred.
(i) INTANGIBLES
Intangibles include goodwill, which is the amount of purchase
price in excess of the fair value of the tangible net assets, and other
identifiable intangible assets acquired through QuadraMed's acquisitions.
Capitalized amounts are amortized on a straight-line basis over a period of
five to ten years. Goodwill is evaluated quarterly for impairment and
written down to net realizable value if necessary.
(j) REVENUE RECOGNITION
QuadraMed's revenues are derived from two sources: (1) software
products; and (2) consulting services. Software product revenues include
amounts received for licenses and software-related services, such as
installation and post-installation customer support fees, third-party
hardware sales, and other software-related revenue. Consulting services
revenues include amounts from QuadraMed's Health Information Management
Outsourcing, Cash Flow Management Consulting Services, and Compliance
Consulting Services.
QuadraMed's software products (enterprise-wide systems and specific
applications) can be licensed individually or as a suite of interrelated
products. Licenses are granted for a specified term (generally ranging from
one to three years; typically paid monthly or annually) or in perpetuity.
Revenues from enterprise-wide systems are recognized on the basis of
percentage of completion. Term licenses for specific applications are
recognized monthly or annually over the term of the license arrangement,
beginning at the date of installation. Revenues from perpetual licenses for
specific applications are recognized upon shipment of the software if there
is persuasive evidence of an agreement, collection of the resulting
receivable is probable, and the fee is fixed and determinable. If there is
a contractual acceptance period, revenues are recognized on the earlier: of
(i) acceptance; or (ii) the expiration of the acceptance period.
Software-related service revenue is recognized upon completion of
installation. Unbilled receivables consist of work performed or software
delivered which has not been billed pursuant to the customer contract.
Post-installation customer support is recognized ratably over the term of
the support period. Deferred revenue is revenue received in advance from
customers for future work. Costs of software products include hardware,
royalties to third parties, and installation costs. QuadraMed also
capitalizes a portion of software product costs for internally developed
software products. These capitalized costs relate primarily to the
development of new products and the extension of applications to new
markets or platforms using existing technologies. The capitalized costs are
amortized on a straight-line basis over the estimated lives (usually five
years) of the products, commencing when each product is available to the
market.
QuadraMed's consulting services are rendered under contracts with
providers calling for fixed monthly payments and revenue is recognized at
the end of each month as services are provided. Cash flow management
contracts generally provide for incentive payments based on a percentage of
dollars recovered for the provider. QuadraMed recognizes this additional
incentive revenue upon receipt of payment from the provider. Cost of
service revenues consists primarily of salaries, benefits and allocated
costs related to providing such services.
(k) NET LOSS PER SHARE
Basic net loss per share available to common stockholders is computed
using the weighted average number of common shares outstanding during the
period. Diluted net loss available to common stockholders per share is
computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of
stock options and warrants (using the treasury stock method) and
convertible subordinated debentures (using the if converted method). Common
equivalent shares are excluded from the dilutive computation only if their
effect is anti-dilutive. As QuadraMed recorded a net loss in each of the
last three years ended December 31st, there were no shares in 2000, and 0.8
million and 2.8 million common equivalent shares were not included in
diluted weighted average common shares outstanding for 1999 and 1998,
respectively.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
QuadraMed adopted The Financial Accounting Standards Board ("FASB")
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An
Amendment of FASB Statement No. 133," effective January 1, 2001. Because of
QuadraMed's limited use of derivative instruments, QuadraMed has elected
not to account for its derivative instruments as hedges. Accordingly, upon
adoption the fair values of derivative instruments will be recorded as
assets or liabilities on the balance sheet, and changes in fair values of
these instruments beyond normal sales and purchases will be reflected in
current income. QuadraMed may elect to apply hedge accounting, which has
different financial statement effects, to possible future transactions
involving derivative instruments, if significant. Such an election would
reduce earnings volatility that might otherwise result if changes in fair
values were recognized in current income. The adoption of SFAS No. 133 and
SFAS No. 138 did not have a significant impact on QuadraMed's results of
operations or financial position.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - A Replacement of FASB Statement No. 125" ("SFAS No. 140").
SFAS No. 140 is effective for transfers occurring after March 31, 2001, and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS No. 140 has no
significant effect on QuadraMed's accounting or disclosures for the types
of transactions within the scope of the new standard.
3. INTANGIBLES
During 2000, QuadraMed recorded a $0.9 million charge for the
write-down of certain intangible assets determined to be impaired in
accordance with SFAS No. 121, "Impairment of Long-Lived Assets." In
addition, QuadraMed reclassified $3.6 million of intangible assets relating
to Med Data to capitalized software, and $0.7 million of acquisition costs
from long term assets to intangibles.
During 1999, QuadraMed recorded a $10.6 million charge for the
write-down of certain intangible assets. The intangible assets were
primarily related to the acquisitions of Synergy in 1997, and InterLink,
Velox and American Hospital Directory in 1998. In accordance with SFAS No.
121, projected cash flows from these product lines were not sufficient to
cover future amortization of the intangible assets and the assets were
therefore written down.
Amortization of intangibles was $6.0 million, $7.0 million and $5.4
million for the years ended December 31, 2000, 1999 and 1998, respectively.
4. COMPUTER SOFTWARE
(a) SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized upon the establishment of
technological feasibility, generally representing establishment of a
working model that is typically the beta version of the software.
Capitalized software development costs require a continuing assessment of
their recoverability. This assessment requires considerable judgment by us
with respect to various factors, including, but not limited to, anticipated
future gross product revenues, estimated economic lives and changes in
software and hardware technology. We capitalized software development costs
of $1.0 million, $4.8 million, and $3.1 million in 2000, 1999 and 1998,
respectively. QuadraMed recorded a $1.5 million charge in 2000 to
write-down certain capitalized software assets related to acquisition of
IMN in September 1999. In addition, QuadraMed reclassified $3.6 million of
intangible assets, related to the Med Data acquisition, to capitalized
software.
Amortization of capitalized software development costs was $2.4
million, $0.7 million, and $0.7 million for the years ended December 31,
2000, 1999 and 1998, respectively. Amortization is based upon the greater
of the amount computed using (a) the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the product, generally five years.
Expenditures for research activities prior to the establishment of
technological feasibility and for product upgrades to improve product
performance or to respond to updated regulations and business requirements,
are charged to expense as incurred. Such expenditures amounted to $20.8
million, $21.8 million, and $20.7 million in 2000, 1999, and 1998,
respectively.
(b) ACQUIRED SOFTWARE
In May 2000, as part of the ROI sale, QuadraMed disposed of $6.0
million of acquired software. QuadraMed purchased this software in March,
1999 to license the source code of a chart tracking software product. The
amount was recorded in the balance sheet as acquired software on the date
of acquisition.
Amortization of acquired software was $1.2 million, $1.0 million and
$1.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
(c) IN-PROCESS RESEARCH AND DEVELOPMENT
In-process research and development expense in the 1999 and 1998
statements of operations represents the value assigned to research and
development projects in a purchase business combination. These projects
were commenced but not completed at the date of acquisition, for which
technological feasibility had not been established and which had no
alternative future use in research and development activities or otherwise.
In accordance with SFAS No. 2 "Accounting for Research and Development
Costs", as interpreted by FASB Interpretation No. 4 "Application of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase
Method", amounts assigned to in-process research and development meeting
the above criteria must be charged to expense at the date of consummation
of the purchase business combination.
The value allocated to IPR&D was determined by estimating the costs
to develop the purchased technology into commercially viable products,
estimating the resulting net cash flows from each project, excluding the
cash flows related to the portion of each project that was incomplete at
the acquisition date, and discounting the resulting net cash flows to their
present value. Each of the project forecasts was based upon future
discounted cash flows, taking into account the stage of development of each
in-process project, the cost to develop that project, the expected income
stream, the life cycle of the product ultimately developed, and the
associated risks. In each case, the selection of the applicable discount
rate was based on consideration of QuadraMed's weighted average costs of
capital, as well as other factors including the useful life of each
technology, profitability levels of each technology, the uncertainty of
technology advances that were known at the time, and the stage of
completion of each technology.
No IPR&D charges were incurred during the year ended December 31,
2000.
During the year ended December 31, 1999, charges of $1.7 million were
allocated for in-process research and development costs in conjunction with
the purchase of Med Data.
In connection with the acquisitions of Velox, Cabot Marsh, the
remaining 43.3% interest in Medicus, and several other purchase business
combinations during the year ended December 31, 1998, QuadraMed allocated
$14.5 million to IPR&D.
5. NON-RECURRING CHARGES
Non-recurring charges totaled $42.0 million in 2000, primarily
associated with the following categories:
Restructure costs -- $11.3 million
QuadraMed's restructuring plans were aimed at eliminating redundant
costs and overhead and consolidating its offices. These costs include: $2.5
million in severance for terminated employees; $5.4 million associated with
officers' separation agreements; $2.9 million to downsize and consolidate
facilities and, $0.5 million in other restructuring expenses. At December
31, 2000, the remaining liability for restructuring costs totaled $3.2
million and is included in accrued liabilities.
Asset impairment charges -- $26.4 million
QuadraMed recorded charges for a $10.6 million write-down of
HealthCast assets, $6.2 million in charges associated with the sunsetting
of the EnOvation product and $5.5 million in certain receivable write-downs
and costs associated with discontinued operations. In addition, the balance
sheet review by management resulted in charges of $4.1 million, primarily
from the write-down of unbilled revenue and a reduction in the carrying
value of fixed assets.
Non-specific litigation costs -- $4.3 million
An accrual of $4.3 million for non-specific litigation fees, costs,
and expenses was set up during 2000. As of December 31, 2000, the balance
in this reserve was $1.6 million and is included in accrued liabilities.
Non-recurring charges totaled $18.8 million in 1999, primarily
associated with severance payments and future rent and lease obligations
associated with the closing of several duplicative operating facilities and
certain integration costs related to prior acquisitions.
The following table sets forth QuadraMed's restructuring and
non-specific litigation reserves and the activity against these reserves
during 1999 and 2000 (in thousands):
Balance Balance Balance
at at at
December December December
Description 31, 1998 Additions Payments (1) 31, 1999 Additions Payments (1) 31, 2000
- ----------- -------- --------- ------------ --------- --------- ------------ --------
Restructure/Other.. $ 1,579 $ 18,752 $(18,864) $ 1,467 $ 3,857 $ (2,118) $ 3,206
Non-Specific
Legal.............. - - - - 4,331 (2,715) 1,616
-------- --------- ----------- --------- --------- ----------- --------
Total reserves..... $ 1,579 $ 18,752 $(18,864) $ 1,467 $ 8,188 $ (4,833) $ 4,822
======== ========= =========== ========= ========= =========== ========
(1) Termination benefits included in restructure/other payments
during 2000 amounted to $677.
6. INVESTMENTS
(a) MARKETABLE INVESTMENTS
QuadraMed has held an investment in VantageMed Corporation
("VantageMed"), a company that develops and sells software to physician
groups, since 1997. In February 2000, when VantageMed began to trade its
shares publicly, QuadraMed began accounting for the investment as a
marketable equity security. As of December 31, 2000, the fair value of the
VantageMed investment was $638,000 and QuadraMed owned 6.9% of VantageMed's
outstanding common stock. Prior to February 2000, the VantageMed investment
had been recorded as a non-marketable investment. As of December 31, 1999,
the fair value of the investment was $4.7 million and QuadraMed owned 12.1%
of VantageMed's outstanding stock as a consequence of its original equity
investment, an additional $3 million equity contribution in 1999, and the
conversion to equity in 1999 of a $500,000 revolving line of credit loan
that VantageMed borrowed completely in 1998. In 1998, the fair value of the
VantageMed investment was $1.2 million.
At December 31, 2000 and 1999, unrealized holding losses were $4.0
million and $0.3 million, respectively. The cost and amortized cost,
aggregate fair value and gross unrealized holding gains and losses by major
security type were as follows:
As of December 31, 2000:
Unrealized
Gain (Loss)
on
Cost or Aggregate Available-
Amortized Fair for-Sale
Cost Value Securities
-------- --------- ----------
(In thousands)
Short-term:
Debt securities issued by The United
States Government................. $ 4,997 $ 4,994 $ (3)
Corporate debt securities.......... 7,343 7,302 (41)
-------- -------- -------
$ 12,340 $ 12,296 $ (44)
======== ======== -------
Long-term:
Debt securities issued by The United
States Government................. $ 463 $ 519 $ 56
Corporate debt securities.......... 478 500 22
-------- -------- -------
$ 941 $ 1,019 $ 78
======== ======== -------
Marketable Equity Investment:
VantageMed Corporation............ $ 4,700 $ 638 $(4,062)
======== ======== -------
Total Unrealized Loss......... $(4,028)
=======
As of December 31, 1999:
Unrealized
Gain (Loss)
on
Cost or Aggregate Available-
Amortized Fair for-Sale
Cost Value Securities
-------- --------- ----------
(In thousands)
Short-term:
Debt securities issued by The United
States Government................. $ 2,486 $ 2,473 (13)
Corporate debt securities.......... 16,753 16,636 (117)
-------- -------- -------
$ 19,239 $ 19,109 $ (130)
======== ======== -------
Long-term:
Debt securities issued by The United
States Government................. $ 4,997 $ 4,938 $ (59)
Corporate debt securities.......... 7,262 7,164 (98)
-------- -------- -------
$ 12,259 $ 12,102 $ (157)
======== ======== -------
Marketable Equity Investment:
VantageMed Corporation............ $ 4,700 $ 4,700 $ -
======== ======== -------
Total Unrealized Loss......... $ (287)
=======
Proceeds from the sale of available-for-sale securities were $10.2
million, $21.1 million, and $90.5 million during 2000, 1999, and 1998,
respectively. Gross realized gains and losses were $61.0 thousand, $28.4
thousand, and $709 thousand during 2000, 1999, and 1998, respectively.
(b) NON-MARKETABLE INVESTMENTS
As of December 31, 2000, QuadraMed had no non-marketable investments.
7. NOTES AND OTHER RECEIVABLES
QuadraMed purchased certain accounts receivables in 1997 from
Chama, Inc. ("Chama"), a hospital holding company that was being managed by
Arcadian Management Services, Inc. ("Arcadian"), a hospital management
company with which QuadraMed had an agreement to develop a centralized
business office and to provide full business office outsourcing services
for its managed hospitals. At the time, John Austin, the CEO of Arcadian,
was a member of the QuadraMed Board of Directors. QuadraMed perfected a
security interest in the receivables at a stated rate of 5.5% and, in 1998,
Chama filed for reorganization under Chapter 11. In 1999, QuadraMed
wrote-off approximately $1.2 million of the original receivable balance and
obtained a bankruptcy court order for the segregation of the receivables as
they are collected. As of December 31, 2000, no interest has been accrued
and the remaining balance included in notes and other receivables on the
accompanying consolidated balance sheets was $230,000. As of December 31,
1999, the balance was $1.2 million. QuadraMed believes the remaining
receivable is collectible.
QuadraMed loaned $3.6 million to a physician management
software company in 1999 in exchange for a convertible promissory note. The
note is due in full on January 21, 2002, and interest is accrued at an
annual rate of 8% and paid quarterly with the first installment made in
January 2000. At December 31, 2000 and 1999, the outstanding balance of
$3.6 million is included in long-term notes receivable on the accompanying
consolidated balance sheet.
Accrued interest receivable of $0.2 million and $0.5
million for 2000 and 1999, respectively, related to QuadraMed's
marketable investments is also included in notes and other
receivables. QuadraMed is periodically paid this accrued interest
on dates in the various investment instruments.
8. CREDIT FACILITIES AND DEBENTURES
(a) STAND-BY LETTERS OF CREDIT AND LINES OF CREDIT
During the years ended December 31, 2000 and 1999, QuadraMed opened
$6.0 million and $1.0 million, respectively, of stand-by letters of credit
under bank financing agreements. QuadraMed paid a 1% annual fee to renew
the stand-by letters of credit and secured all of the stand-by letters of
credit with $5.0 million and $1.0 million certificate of deposits, recorded
in the balance sheet at December 31, 2000 and 1999, as restricted cash.
In 1998, QuadraMed entered into several agreements with a healthcare
software company to integrate that company's software into QuadraMed's ROI
division software products, and QuadraMed guaranteed a $12.5 million bank
line of credit with an 8.5% interest rate and October 2001 maturity. As a
condition of the guarantee, QuadraMed was required to maintain a minimum
cash balance of $50 million. As part of the ROI division divestiture,
ChartOne, Inc. assumed most assets and liabilities associated with the ROI
division, including those related to the healthcare software company. As a
result of negotiations in June of 2000 between QuadraMed, ChartOne, and the
bank that issued the line of credit, ChartOne assumed the guaranty for the
principal amount of the line of credit and QuadraMed's guarantee was
amended and limited to only outstanding interest under the line of credit.
The bank required QuadraMed to secure the amended guarantee with a $2
million escrow deposit. Contemporaneously, QuadraMed, ChartOne, and the
healthcare software company entered into a reimbursement agreement under
which QuadraMed assumed all rights, including subrogation rights, against
the healthcare software company for any amounts ChartOne paid to the bank
under ChartOne's guarantee. As the healthcare software company makes
interest payments, the escrow is reduced. The amounts held in escrow are
reflected on the balance sheet as restricted cash. As of December 31, 2000,
$1.6 million was restricted to secure the amended guarantee.
(b) SUBORDINATED CONVERTIBLE DEBENTURES
In April 1998, QuadraMed completed an offering of $115 million
principal amount of Convertible Subordinated Debentures (the "Debentures"),
including the underwriters' over-allotment option. The Debentures are due
May 1, 2005 and bear interest at 5.25% per annum. The Debentures are
convertible into common stock at any time prior to the redemption or final
maturity, initially at the conversion price of $33.25 per share (resulting
in an initial conversion ratio of 30.075 shares per $1,000 principal
amount). Net proceeds to QuadraMed from the offering were $110.8 million.
9. CAPITAL AND OPERATING LEASE OBLIGATIONS
QuadraMed leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under QuadraMed's
capital and operating leases at December 31, 2000 are as follows (in
thousands):
Capital Operating
Leases Leases
--------- ----------
2001....................................... $ 378 $ 4,587
2002....................................... 78 3,817
2003....................................... 20 3,190
2004....................................... -- 2,575
2005....................................... -- 1,755
Thereafter................................. -- 9,734
--------- ----------
Total minimum payments.... 476 $ 25,658
===========
Interest on capital lease obligations at a
rate of 8.5%............................... (25)
---------
Net minimum principal payments............. 451
Current maturities......................... (323)
$ 128
=========
Rental expense was $6.5 million, $7.7 million and $5.1 million for
the years ended December 31, 2000, 1999, and 1998, respectively. At
December 31, 2000 and 1999, the gross book value of equipment leased under
noncancelable capital leases totaled $.9 million and $1.4 million,
respectively. As of December 31, 2000 and 1999, related accumulated
depreciation totaled $.8 million and $1.1 million, respectively.
10 WARRANTS
QuadraMed issued warrants in 1995 and 1996 to James D. Durham, then
QuadraMed's Chairman and Chief Executive Officer, to purchase up to 355,600
shares of common stock at $3.75 per share. In connection with the 1996
warrant, QuadraMed recorded deferred compensation for $381,000,
representing the intrinsic value of the warrant at the date of issuance
which would be amortized over the vesting period. QuadraMed recorded
compensation expense of $336,000 for the year ended December 31, 1997 as a
result of the vesting of the warrants. The warrants were exercised in full
during 1999.
In connection with a 1996 bridge loan agreement, QuadraMed issued
warrants to purchase an aggregate of 957,376 shares of common stock at a
purchase price of $3.75 per share. The warrants were partially exercised
into 240,960 and 430,705 shares of common stock during 1997 and 1998,
respectively. The remaining warrants expire on January 31, 2001. The value
of the warrants at the date of issuance was nominal; therefore, no value
had been assigned to the warrants for accounting purposes.
In connection with a line of credit arrangement QuadraMed entered
into during 1996, which has since expired, QuadraMed issued a warrant to
purchase common stock. The warrant was exercised into 7,663 shares of
common stock during 1998.
In connection with the acquisition of the minority interest in
Medicus in May 1998, a former officer and director of Medicus exercised a
warrant to purchase 67,503 shares of QuadraMed common stock and, a warrant
issued by Medicus for 100,000 of its shares prior to the acquisition was
exercised for 100,000 shares of QuadraMed common stock. The value of the
warrants at the date of issuance was nominal; therefore, no value had been
assigned to the warrants for accounting purposes.
In connection with the Compucare acquisition in March 1999, QuadraMed
assumed warrants to purchase 71,751 shares of common stock at exercise
prices ranging from $0.15 to $233.09 per share and expiring at various
dates through 2006.
In connection with an acquisition in June 1999, QuadraMed assumed
warrants to purchase 6,424 shares of common stock at an exercise price of
$0.03 per share, expiring in March 2008. The warrants were partially
exercised for 5,396 shares of common stock during the third quarter of
1999.
In October 1995, QuadraMed entered into a joint development
arrangement with another software company pursuant to which QuadraMed
issued a warrant to purchase 28,560 shares of common stock at a purchase
price of $5.25 per share. The warrant was partially exercised for 18,984
shares of common stock during 1997. The remaining warrants expire on June
25, 2001.
11. COMMON STOCK
In November 1998, QuadraMed issued 237,000 shares of restricted
common stock with a fair market value of $16.625 per share to certain
officers of QuadraMed. In connection with the common stock issuance,
QuadraMed recorded deferred compensation for $3.9 million, representing the
intrinsic value of the restricted common stock at the date of issuance
which will be amortized over the vesting period of five years. During the
fourth quarter of 1999, 35,000 shares of restricted stock were canceled.
Compensation expense recognized during the year ended December 31, 1999
related to the restricted stock was $.8 million.
In June 2000, 182,000 shares of restricted stock were released to the
former CEO and former President as a result of their separation agreements
for which $.3 million of compensation expense was recognized. At this time,
deferred compensation was reduced by $1.9 million for the reduction in
market value corresponding to the release. The remaining restricted shares
were forfeited during 2000 due to the resignation of the former Executive
Vice President and General Counsel, reducing deferred compensation by $0.3
million.
In 1998, the Board of Directors and Stockholders of QuadraMed
approved an increase to the authorized shares of common stock from
20,000,000 to 50,000,000.
12. STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLANS
The Company has two main stock option plans: the 1996 Stock
Incentive Plan and the 1999 Supplemental Stock Option Plan. In addition,
the Company amended and restated the former Compucare Company 1997 Stock
Compensation Plan (the "Compucare Plan") and the Pyramid Heath Group, Inc.
1997 Employee and Consultant Stock Option Plan (the "Pyramid Plan") and
has made limited grants under these plans. The terms and conditions of the
options granted under the amended and restated Compucare and Pyramid Plans
are substantially similar to the terms and conditions of options granted
under the 1996 Stock Incentive Plan.
1996 STOCK OPTION PLAN
Under QuadraMed's 1994 Stock Option Plan and its successor plan, the
1996 Stock Incentive Plan, which became effective in October 1996
(collectively, the "Option Plan"), the Board of Directors may grant
incentive and nonqualified stock options to employees, directors and
consultants. The Option Plan is divided into the following five separate
equity programs: the discretionary option grant program under which
eligible persons may, at the discretion of the Board, be granted options;
the salary investment option grant program under which eligible employees
may elect to have a portion of their base salary invested each year in
special option grants; the stock issuance program under which eligible
persons may be issued shares of common stock either through the immediate
purchase of such shares or as a bonus for services rendered QuadraMed; the
automatic option grant program under which eligible nonemployee board
members automatically receive option grants at periodic intervals to
purchase shares of common stock; and the director fee option program under
which nonemployee board members may elect to have all or any portion of
their annual retainer fee otherwise payable in cash applied to a special
option grant.
The exercise price per share for an incentive stock option cannot be
less than the fair market value on the date of grant. The exercise price
per share for a nonqualified stock option cannot be less than 85% of the
fair market value on the date of grant. Option grants under the Option Plan
generally expire ten years from the date of grant and generally vest over a
four-year period. Options granted under the Option Plan are exercisable
subject to the vesting schedule. As of December 31, 2000, a total of
3,567,661 shares of common stock have been authorized by QuadraMed's
stockholders for grant under the Option Plan. As of December 31, 1999, a
total of 3,067,661 shares of common stock have been authorized by
QuadraMed's stockholders for grant under the Option Plan. The Option Plan
provides that the share reserve automatically increases each year by an
amount equal to 1.5% of the outstanding shares on the last trading day of
the immediately preceding calendar year.
1999 SUPPLEMENTAL STOCK OPTION PLAN
In 1999, QuadraMed's Board of Directors approved QuadraMed's 1999
Supplemental Stock Option Plan ("1999 Supplemental Plan"). The 1999
Supplemental Plan permits non-statutory option grants to be made to
employees and independent consultants and advisors who are not QuadraMed
officers, directors, or Section 16 insiders. The 1999 Supplemental Plan is
administered by the Board of Directors or its Compensation Committee and
terminates in March of 2009. The exercise price of all options granted
under the 1999 Supplemental Plan may not be less than 100% of fair market
value on the date of the grant. Options vest on a schedule determined by
the Board of Directors or the Compensation Committee with a maximum option
term of ten years. As of December 31, 2000, 2,420,946 shares were available
for grant. As of December 31, 1999, 149,200 shares were available for grant
under the 1999 Supplemental Plan.
QuadraMed accounts for its stock-based awards using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related
interpretations. Under this principle, no compensation expense was
recognized during 2000 and $268,000 was recognized during the year ended
December 31, 1999, primarily related to the acceleration of vesting terms
for certain outstanding stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires the disclosure of pro forma net income and earnings per share had
QuadraMed adopted the fair value method as of the beginning of fiscal year
1995. In accordance with SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models. These
models require subjective assumptions, including future stock price
volatility and expected time to exercise. QuadraMed's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur.
Had compensation cost for QuadraMed's option plans been determined
based on the fair value at the grant dates for the awards calculated in
accordance with the method prescribed by SFAS No. 123, QuadraMed's net loss
and net loss per share would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
2000 1999 1998
---- ---- ----
Net loss available to common As reported $ (54,836) $ (12,330) $ (21,376)
stockholders
Pro forma $ (54,836) $ (18,652) $ (32,754)
Basic and diluted net loss per As reported $ (2.14) $ (0.49) $ (0.91)
share
Pro forma $ (2.14) $ (0.75) $ (1.40)
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Expected dividend yield........... 0.0% 0.0% 0.0%
Expected stock price
volatility....................... 107.1% 91.7% 77.5%
Risk-free interest rate........... 6.51% 6.49% 4.74%
Expected life of
options.......................... 5.0 years 5.0 years 6.8 years
The weighted average fair value of options granted during 2000, 1999,
and 1998 was $2.11, $8.22 and $21.31 per share, respectively. Option
activity under the option plans is as follows, (in thousands, except per
share amounts):
Options Outstanding
-------------------
Weighted
Number Average
of Exercise
Shares Price
--------- --------
Balance, December 31, 1997............... 2,403 9.98
Granted.................................. 2,028 20.93
Exercised................................ (386) 11.30
Canceled................................. (318) 17.17
--------- --------
Balance, December 31, 1998............... 3,727 15.23
--------- --------
Granted.................................. 2,559 8.12
Exercised................................ (261) 6.27
Canceled................................. (518) 13.31
--------- --------
Balance, December 31, 1999............... 5,507 12.53
--------- --------
Granted.................................. 3,442 2.11
Exercised................................ (258) 12.65
Canceled................................. (3,372) 12.77
--------- --------
Balance, December 31, 2000............... 5,320 5.63
========= ========
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of as of Remaining Exercise as of Exercise
Exercise 12/31/00 Contractual Price 12/31/00 Price
Prices Life
--------- ---------- ----------- -------- ----------- --------
$ 0.11 -
$ 5.71 3,299,966 9.32 $ 2.31 383,815 $ 3.96
$ 7.38 -
$ 9.13 1,318,930 8.10 8.30 853,257 8.43
$ 9.63 -
$11.56 230,858 6.03 11.25 229,779 11.26
$12.00 -
$16.63 234,393 7.40 15.87 164,082 15.55
$16.84 -
$21.34 94,256 5.21 18.34 92,999 18.33
$22.38 -
$25.81 121,253 7.15 22.69 106,262 22.68
$26.26 -
$27.97 10,000 7.59 27.00 5,833 27.00
$30.13 -
$39.16 10,000 7.53 30.13 6,042 30.13
-------- ---- ----- ------- -----
$ 0.11 -
$39.16 5,319,656 8.66 $5.63 1,842,069 $9.94
========= ==== ====== ========= =====
EMPLOYEE STOCK PURCHASE PLAN
QuadraMed's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by QuadraMed's Board of Directors in June 1996. A total of 200,000
shares of common stock has been reserved for issuance under the Purchase
Plan. The Purchase Plan enables eligible employees to designate up to 10%
of their compensation for the purchase of stock. The purchase price is 85%
of the lower of the fair market value of QuadraMed's common stock on the
first day or the last day of each six-month purchase period. No
compensation expense is recorded in connection with the Purchase Plan.
QuadraMed issued 90,927 and 37,310 and shares of common stock under the
Purchase Plan during the years ended December 31, 1999 and 1998, for an
aggregate purchase price of $1.0 million and $0.5 million, respectively.
The Purchase Plan terminated in January 2000.
13. RELATED PARTY TRANSACTIONS
QuadraMed, through the acquisition of Rothenberg Health Systems,
Inc., assumed a long-term agreement, expiring in 2010, to provide
management services to Physical Therapy Provider Network, Inc. ("PTPN"), an
affiliated entity. Under the terms of the agreement, QuadraMed provided
PTPN with management services, employees and facilities and incurred other
operating costs on behalf of PTPN. All employee, facility and other
operating costs were directly reimbursed by PTPN. QuadraMed also received a
50% share of PTPN's net income before taxes, which is shown in other income
(expense) in the consolidated statement of operations. Direct costs
incurred by QuadraMed and reimbursed by PTPN were $1.1 million, $1.0
million, and $1.0 million for the years ended December 31, 2000, 1999 and
1998, respectively.
14. EMPLOYEE BENEFIT PLAN
QuadraMed maintains a 401(k) Savings Plan (the "Plan"). All eligible
QuadraMed employees may participate in the Plan and elect to contribute up
to 15% of pre-tax compensation to the Plan. Employee contributions are 100%
vested at all times. In its discretion, QuadraMed may match employee
contributions to the Plan. The vesting of such contributions is based on
the employee's years of service, becoming 100% vested after 4 years. For
the years ending December 31, 2000, 1999, and 1998, QuadraMed made
respective discretionary contributions of $1.0 million, $0.9 million and
$0.2 million.
In 1999, QuadraMed merged into the Plan the 401(k) Savings Plan of
The Compucare Company, acquired in 1999. In 1998, it merged into the Plan
the 401(k) Savings Plans of Rothenberg Health Systems, Inc., acquired in
1997, and Medicus Systems Corporation, acquired in 1997.
15. ACQUISITIONS AND DIVESTITURES
(a) ACQUISITIONS
In January 1998, QuadraMed acquired entities affiliated with
InterLink Corporation for 65,224 shares of QuadraMed's common stock, the
aggregate fair market value of which was $1.5 million, and approximately
$1.7 million in cash and the extinguishment of notes receivable of
$250,000. In connection with this acquisition, which was accounted for as a
purchase, QuadraMed allocated the purchase price based upon the estimated
fair value of the acquired assets and liabilities assumed.
In February 1998, QuadraMed acquired Cabot Marsh Corporation ("Cabot
Marsh") for 382,767 shares of QuadraMed's common stock, the fair market
value of which was approximately $8.4 million, and approximately $2.8
million in cash. In connection with this acquisition, which was accounted
for as a purchase, QuadraMed allocated the purchase price based upon the
estimated fair value of the assets acquired and liabilities assumed.
In March 1998, QuadraMed acquired Velox Systems Corporation ("Velox")
for 40,562 shares of QuadraMed's common stock, the market value of which
was approximately $1.4 million, and approximately $3.1 million in cash. In
connection with this acquisition, which was accounted for as a purchase,
QuadraMed allocated the purchase price based upon the estimated fair value
of the assets acquired and liabilities assumed.
In May 1998, QuadraMed completed its acquisition of Medicus Systems
Corporation (Medicus) by purchasing the remaining 43.3% interest. QuadraMed
acquired 56.7% of Medicus in November 1997 and has accounted for the
acquisition as a purchase. The purchase price for the remaining 43.3%
interest was allocated based on the estimated fair values of the assets
acquired and liabilities assumed.
In June 1998, QuadraMed acquired all of the outstanding capital stock
of Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares
of common stock. The acquisition was accounted for as a pooling of
interests. Upon closing of the acquisition, the assets and liabilities of
Pyramid were recorded at net book value and consisted primarily of accounts
receivable, fixed assets, accounts payable and accrued liabilities. The
accompanying consolidated financial statements have been restated to
reflect the acquisition of Pyramid on a pooling of interests basis.
In September 1998, QuadraMed acquired all the outstanding capital
stock of Integrated Medical Networks, Inc. ("IMN") in exchange for
1,550,000 shares of common stock. The acquisition was accounted for as a
pooling of interests. Upon closing of the acquisition, the assets and
liabilities of IMN were recorded at book value and consisted primarily of
accounts receivable, fixed assets, accounts payable, accrued liabilities,
and notes payable. The accompanying consolidated financial statements have
been restated to reflect the acquisition of IMN on a pooling of interests
basis.
In 1998, QuadraMed acquired all of the outstanding capital stock of
another healthcare company, in exchange for 507,000 shares of common stock
of QuadraMed. The acquisition was accounted for as a pooling of interests,
however the operations of the acquired company were not material to
QuadraMed, therefore QuadraMed did not restate the consolidated financial
statements to reflect the pooling of interests.
In March 1999, QuadraMed completed the acquisition of the Compucare
Company ("Compucare") by acquiring all the outstanding capital stock of
Compucare in exchange for 2,957,000 shares of common stock. The acquisition
was accounted for as a pooling of interests. Upon closing of the
acquisition, the assets and liabilities of Compucare were recorded at net
book value and consisted primarily of accounts receivable, fixed assets,
accounts payable, accrued liabilities, and deferred revenue. The
accompanying consolidated financial statements have been restated to
reflect the acquisition of Compucare on a pooling of interests basis.
In July 1999, QuadraMed acquired Med Data Systems, Inc. ("Med Data")
for $5 million in cash. In connection with this acquisition, which was
accounted for as a purchase, QuadraMed allocated the purchase price based
upon the estimated fair value of the assets and liabilities assumed.
A reconciliation of the current consolidated statement of operations
with previously reported separate Company information for entities with
which QuadraMed has pooled is presented below, (in thousands):
2000 1999 1998
--------- ---------- ----------
Revenues:
QuadraMed................... $128,971 $182,829 $ 51,904
Pyramid and IMN............. -- -- 77,157
Compucare................... -- 9,280 43,167
-------- -------- ---------
Consolidated............... $128,971 $192,107 $ 172,228
======== ======== =========
Net Loss:
QuadraMed $(54,836) $ (12,044) $ (17,196)
Pyramid and IMN............. -- -- (3,078)
Compucare................... -- (286) (1,102)
-------- -------- ---------
Consolidated............... $(54,836) $ (12,330) $(21,376)
======== ======== =========
Results of operations for all acquired companies which have been
accounted for using purchase accounting have been included for the periods
subsequent to the closing date of each transaction.
(b) DIVESTITURES
In 2000, QuadraMed sold its investment in ChartOne, Inc. to Warburg,
Pincus Equity Partners, L.P. for $51.8 million, in two separate
transactions, resulting in a pretax gain of $24.3 million.
16. DISCONTINUED OPERATIONS
In connection with the acquisition of Compucare in March
1999, QuadraMed assumed the net liabilities of discontinued
operations from previous Compucare acquisitions. Included in this
net liability are balances related to Compucare's sale of two
wholly owned subsidiaries. The two sales were as follows: (1)
Antrim Corporation in November, 1996; and (2) Health Systems
Integration, Inc. ("HSII").
Condensed and summarized balance sheet data for the discontinued
operations of Antrim and HSII is summarized as follows, (in thousands):
2000 1999
------ ------
Assets:
Current assets:
Cash and cash equivalents... $ - $ -
Accounts receivable......... - -
Other current assets........ 205 205
-------- --------
Total current assets...... 205 205
Property and equipment, net.... - -
Other and intangible assets, net - -
-------- --------
Total assets...... $ 205 $ 205
======== ========
Liabilities:
Current liabilities......... 4,338 4,590
Non-current liabilities..... - 1,000
Total liabilities.. 4,338 5,590
--------- ---------
Net liabilities of discontinued
operations...................... $ 4,133 $ 5,385
========= =========
QuadraMed created a wholly owned subsidiary named ChartOne, Inc. and
transferred and assigned to ChartOne, Inc. the assets and liabilities of
its ROI division pursuant to the terms of an Asset Contribution Agreement
dated May 3, 2000. On June 7, 2000, ChartOne, Inc., completed the sale of
2,520,000 shares of its Series A Preferred Stock to Warburg, Pincus Equity
Partners, L.P. and certain of its affiliates, and Prudential Securities
Group, Inc. for an aggregate purchase of $25.2 million representing 43
percent of the equity interest in ChartOne, Inc. The sale of the securities
was made pursuant to the terms of the Securities Purchase Agreement, dated
May 5, 2000. On October 19, 2000, QuadraMed sold its remaining 57 percent
equity interest in ChartOne, Inc., represented by 2,130,000 shares of
series B Preferred Stock, 1,200,000 shares of Series C Preferred Stock and
1 share of Common Stock to Warburg, Pincus Equity Partners, L.P. and
certain of its affiliates, and Prudential Securities Group Inc. for an
aggregate cash purchase price of $26.6 million pursuant to a Securities
Purchase Agreement dated September 28, 2000. On the basis of these
transactions, QuadraMed recorded a gain on the sale of ChartOne for the
year ended December 31, 2000 of $ 23.3 million (net of income tax expense
of $1.0 million).
Results of the ROI Division have been included in discontinued
operations for all periods, as required by APB-30. For the years ended
December 31, 2000, 1999 and 1998 income from discontinued operations net of
income taxes were $1.5 million, $5.1 million and $0.4 million,
respectively.
Below is a summarized statement of operations data for the
discontinued operations of HSII and the ROI Division as follows, (in
thousands):
Year Ended December 31,
------------------------
2000 1999 1998
------ ------ ------
Revenues $ 23,809 $ 47,478 $ 41,499
Costs and expenses...................... 22,111 41,351 39,762
--------- --------- --------
Income from discontinued operations
before income taxes.................... 1,698 6,127 1,737
Provision for income taxes.............. (240) (1,062) (1,303)
--------- -------- ---------
Income from discontinued operations..... $ 1,458 $ 5,065 $ 434
========= ========= =========
The gain from the aforementioned sale is excluded from this table.
17. MAJOR CUSTOMERS
In the years ended December 31, 2000, 1999, and 1998, no single
customer accounted for more than 10% of total revenue.
18. CONCENTRATION OF CREDIT RISK
Accounts receivable subject QuadraMed to its highest potential
concentration of credit risk. QuadraMed reserves for credit losses.
QuadraMed does not require collateral on trade accounts receivables.
19. CONTINGENCIES
In 1999, QuadraMed settled a legal action brought in 1998 against its
subsidiary, The Compucare Company. Sunquest Corporation, which had
purchased all of the stock of Antrim, Compucare's wholly owned subsidiary,
alleged that Compucare breached certain representations and warranties, and
misrepresented and or failed to disclose certain material facts in the
course of the transaction. In 1999 and 1998, there was an accrual for the
settlement in the net liabilities of discontinued operations in the
accompanying consolidated balance sheets.
From time to time in the normal course of its business, QuadraMed may
be involved in litigation relating to its operations. As of December 31,
2000, QuadraMed was not a party to any legal proceedings that, if decided
adversely, would, individually or in the aggregate, have a material adverse
effect on QuadraMed's business, financial condition or results of
operations.
20. INCOME TAXES
QuadraMed accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS No. 109"). SFAS No. 109 provides for an asset and liability approach
to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. QuadraMed has incurred net operating losses in
years ending 2000, 1999, and 1998.
The components of the net deferred tax asset are as follows (in
thousands):
Year Ended December 31,
---------------------------
2000 1999 1998
---- ---- ----
Deferred tax assets:
Research and development credits.... $ 2,415 $ 1,182 $ 1,182
Net operating loss carryforwards.... 17,302 15,740 11,639
Accruals and reserves............... 7,525 5,361 6,736
Write-off of acquired research and
development in process............. 1,783 1,976 2,207
------- ------- -------
29,025 24,259 21,764
------- ------- -------
Deferred tax liabilities:
Depreciation........................ 675 1,142 553
Intangible assets................... 1,396 452 849
------- ------- -------
2,071 1,594 1,402
Net deferred tax asset before
allowance............................... 26,954 22,665 20,362
Valuation allowance..................... (26,954) (22,665) (20,362)
------- ------- -------
Net deferred tax asset $ - $ - $ -
======== ======== ========
The significant components of the provision for income taxes are as
follows (in thousands):
2000 1999 1998
---- ---- ----
Current:
Federal............................. 1,208 800 3,674
State............................... 200 717 629
------- ------- -------
Total current........... 1,408 1,517 4,303
Deferred:
Federal............................. (3,543) (1,958) (4,162)
State............................... (746) (345) (734)
------- ------- -------
Total deferred.......... (4,289) (2,303) (4,896)
Change in valuation allowance, net of
the effect of acquisitions........ 4,289 2,303 4,896
------ ------- -------
1,408 1,517 4,303
======= ======= =======
Reconciliation of the provision for income taxes computed at the
statutory rate to the effective tax rate is as follows:
2000 1999 1998
---- ---- ----
Federal income tax rate...................... (34) % (34) % (34) %
Change in valuation allowance................ 8 21 38
Acquisition costs............................ 24 24 27
Other taxes and credits...................... 5 3 2
---- ----- -----
Effective tax rate.................... 3 % 14 % 33 %
==== ===== =====
A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset
including QuadraMed's history of losses.
QuadraMed's tax provision for the year ended December 31, 2000 of
$1.4 million is comprised of the following items: (1) $0.2 million
provision for operating results; (2) $0.2 million provision related to
discontinued operations of ROI Division; and (3) $1.0 million as a
provision for the pre-tax gain of $24.3 million on the sale of ChartOne
(see Discontinued Operations).
As of December 31, 2000, QuadraMed had net operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $50.9 million and $6.6 million, respectively. These
carryforwards expire in various periods from 2005 to 2019. In addition,
QuadraMed had general business credit carryforwards for federal income tax
purposes of approximately $2.4 million, expiring through 2020. The Tax
Reform Act of 1986 contains provisions which may limit the net operating
loss and research and development credit carryforwards to be used in any
given year upon the occurrence of certain events, including a significant
change in ownership interest.
21. SEGMENT REPORTING
QuadraMed reorganized its operations in 2000 to focus on five
operating segments: Enterprise Products and Services Division, HIM Software
Division, HIM Services Division, Physician Products and Services Division,
and Collection Services Division. Although not reported as a business
segment, QuadraMed also generated approximately five percent of its revenue
from specialty product lines discontinued or not aligned with an operating
division referenced as Other. This reorganization was undertaken to more
closely align products targeted to shared markets, to more accurately
measure financial performance by product/division, and to establish greater
management accountability. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies. QuadraMed evaluates financial performance by division
as summarized in the subsequent table. The financial results for these
operating segments for prior years have been restated on an estimated
basis.
QuadraMed's reportable segments are strategic business units that
offer different products and services. Each segment, with its own unique
position in the healthcare technology and services marketplace, provides
customized expertise for the purchasers of healthcare IT and financial
solutions.
The Enterprise Division consists of our Affinity Healthcare
Information System and our Electronic Document Management product, which
principally target acute care hospitals across the United States. The
Affinity solution is a healthcare information system that provides
financial and clinical applications. Affinity provides a patient-centered
database designed to enable users to track each patient throughout the
continuum of care in real time. Affinity integrates financial information
such as patient accounting and DRG/case mix with clinical data such as
medical charting and plan of care to automate federal and state reporting,
scheduling, registration, and medical records information. This Division
also includes our Electronic Document Management solution that enables
users to create secure electronic patient folders that combine both
computerized and scanned documents.
The HIM Software Division represents a suite of compliance, encoding
and grouping, medical record management, and patient database applications,
which enable a hospital to accurately track medical records for internal
and external purposes. The compliance products assist hospitals in managing
the complexities of evolving federal requirements and in submitting
accurate billing and clinical data. The coding and grouping solutions
protect the integrity of a healthcare organization's clinical data and
improve accuracy and coding compliance for ICD-9, CPT, and HCPCS codes. The
medical record management product locates and reserves charts and
authenticates and distributes transcribed medical records. In addition, the
Master Patient Index solution eliminates existing duplicate medical records
and prevents creation of new duplicates at the point of registration.
The HIM Services Division provides healthcare information management
departments with experienced, qualified, and if necessary, credentialed
professionals to perform IT, coding, auditing, accounting, compliance, and
medical record services. The Division also provides experienced executives
for interim assignments in financial and management positions. These
services are offered to acute care facilities as well as large physician,
clinic, and ambulatory practices.
The Physician Products and Services Division provides medical groups,
independent practice associations, hospitals, and health plans with a
complete managed care claims payment and management information system
incorporating eligibility, plan benefits, providers, claims, capitation,
case management, and customer service. This Division also includes
education services, seminars, and training for healthcare organizations.
The Collections Services Division provides resources to healthcare
providers to reduce accounts receivables' backlogs and accelerate cash
flow. The Division conducts analysis of patient accounts to identify
outstanding or underpaid third party payments, to re-bill, and to follow-up
on third party claims. (in thousands)
YEAR ENDED DECEMBER 31, 2000
Consoli-
HIM HIM Collection Physician All dated
Description Enterprise Software Services Services Services Other(1) Total
------- ------- ------- ------- ------- ------- --------
Total revenues $39,631 $26,347 $28,909 $11,562 $10,683 $11,839 $128,971
======= ======= ======= ======= ======= ======= ========
Interest income 838 606 177 151 249 60 2,081
Interest expense (2,038) (1,354) (1,486) (594) (549) (600) (6,621)
------- ------- ------- ------- ------- ------- --------
Interest income
(expense), net (1,200) (748) (1,309) (443) (300) (540) (4,540)
======= ======= ======= ======= ======= ======= ========
Depreciation &
amortization expense 1,307 6,200 1,378 506 903 3,169 13,463
======= ======= ======= ======= ======= ======= ========
Provision for income
taxes 105 62 - - 33 - 200
======= ======= ======= ======= ======= ======= ========
Segment earnings
(loss) 6,401 3,763 (10,130) (3,782) 2,034 (53,122) (54,836)
======= ======= ======= ======= ======= ======= ========
Segment assets 28,749 47,773 31,294 7,249 11,442 29,438 155,945
======= ======= ======= ======= ======= ======= ========
(1) All Other includes specialty division, immaterial product lines and
unallocated corporate charges.
YEAR ENDED DECEMBER 31, 1999
Consoli-
HIM HIM Collection Physician All dated
Description Enterprise Software Services Services Services Other(1) Total
------- ------- ------- ------- ------- ------- --------
Total revenues $56,169 $40,233 $36,058 $15,964 $18,194 $25,489 $192,107
======= ======= ======= ======= ======= ======= ========
Interest income 1,249 1,286 809 523 527 433 4,827
Interest expense (2,261) (1,547) (1,385) (618) (643) (1,215) (7,669)
------- ------- ------- ------- ------- ------- --------
Interest income
(expense), net (1,012) (261) (576) (95) (116) (782) (2,842)
======= ======= ======= ======= ======= ======= ========
Depreciation &
amortization expense 1,053 4,894 1,224 417 349 1,988 9,925
======= ======= ======= ======= ======= ======= ========
Provision for income
taxes - 255 - 116 84 - 455
======= ======= ======= ======= ======= ======= ========
Segment earnings
(loss) (5,650) 10,491 (124) 4,752 3,474 (25,273) (12,330)
======= ======= ======= ======= ======= ======= ========
Segment assets 43,009 61,234 36,509 11,886 16,986 45,037 214,661
======= ======= ======= ======= ======= ======= ========
(1) All Other includes specialty division, immaterial product lines and
unallocated corporate charges.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL
INFORMATION
QUADRAMED CORPORATION
PAGE
Unaudited Quarterly Results of Operations/Supplementary Financial
Information............................................................ G-2
QUADRAMED CORPORATION
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
- ---------------------------------------------------------------------------------------
QUARTER
-------------------------------------------------
(thousands of dollars, except per
share amounts) FIRST SECOND THIRD FOURTH TOTAL
- ---------------------------------------------------------------------------------------
2000
- ----
REVENUES
Licenses $ 18,171 $ 22,904 $ 16,215 $ 18,168 $ 75,458
Services 15,005 13,424 12,006 13,078 53,513
-------------------------------------------------
TOTAL REVENUES 33,176 36,328 28,221 31,246 128,971
-------------------------------------------------
OPERATING AND OTHER EXPENSES
Cost of licenses 7,026 5,425 5,898 6,654 25,003
Cost of services 10,008 10,739 8,791 6,075 35,613
General and administrative 14,202 10,710 11,958 13,669 50,538
Sales and marketing 6,124 6,604 5,115 3,951 21,794
Research and development 5,834 5,663 5,507 3,756 20,760
Other costs and expenses 16,421 18,869 16,331 2,964 54,585
-------------------------------------------------
TOTAL EXPENSES 59,615 58,010 53,600 37,069 208,293
-------------------------------------------------
Loss from continuing operations
before provision for income taxes
and minority interest (26,439) (21,682) (25,379) (5,823) (79,322)
-------------------------------------------------
Provision for income taxes 243 (403) 0 (40) (200)
Minority interests 0 0 0 0 0
-------------------------------------------------
Loss from continuing operations (26,196) (22,085) (25,379) (5,863) (79,522)
Discontinued operations, net of tax 667 17,999 0 6,020 24,686
-------------------------------------------------
NET INCOME (LOSS) $(25,529) $ (4,085) $(25,378) $ 157 $(54,836)
=================================================
EARNINGS PER COMMON SHARE - BASIC
Income from continued operations $ (1.02) $ (0.86) $ (0.99) $ (0.23) $ (3.10)
Discontinued operations 0.02 0.70 0.00 0.24 0.96
-------------------------------------------------
TOTAL $ (1.00) $ (0.16) $ (0.99) $ 0.01 $ (2.14)
-------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED
Income from continued operations $ (1.02) $ (0.86) $ (0.99) $ (0.23) $ (3.10)
Discontinued operations 0.02 0.70 0.00 0.24 0.96
-------------------------------------------------
TOTAL $ (1.00) $ (0.16) $ (0.99) $ 0.01 $ (2.14)
-------------------------------------------------
STOCK PRICES
High $ 10.50 $ 6.00 $ 2.97 $ 1.53 $ 10.50
Low $ 5.00 $ 2.09 $ 1.19 $ 0.63 $ 0.63
- --------------------------------------------------------------------------------------------
1999
REVENUES
Licenses $ 33,729 $ 29,676 $ 32,797 $ 32,193 $ 128,395
Services 15,772 16,586 16,563 14,791 63,712
------------------------------------------------------
TOTAL REVENUES 49,501 46,262 49,360 46,984 192,107
------------------------------------------------------
OPERATING AND OTHER EXPENSES
Cost of licenses 6,342 5,975 6,797 7,168 26,282
Cost of services 9,033 8,511 9,681 10,210 37,435
General and administrative 12,819 12,078 13,739 14,488 53,124
Sales and marketing 5,528 5,209 5,925 6,248 22,910
Research and development 5,266 4,961 5,644 5,951 21,822
Other costs and expenses 38,196 2,806 4,481 1,991 47,474
----------------------------------------------------
TOTAL EXPENSES 77,184 39,540 46,267 46,056 209,047
----------------------------------------------------
Income (loss) from continuing
operations before provision for
income taxes and minority interest (27,683) 6,721 3,094 928 (16,940)
--------------------------------------------
Provision for income taxes 354 (1,168) 506 (147) (455)
Minority interests 0 0 0 0 0
--------------------------------------------
Income (loss) from continuing
operations (27,329) 5,553 3,600 781 (17,395)
Discontinued operations, net of tax 865 1,765 927 1,508 5,065
--------------------------------------------
NET INCOME (LOSS) (26,464) 7,318 4,527 $ 2,289 (12,330)
============================================
EARNINGS PER COMMON SHARE - BASIC
Income from continued operations $ (1.11) $ 0.22 $ 0.14 $ 0.04 $ (0.70)
Discontinued operations 0.03 0.07 0.04 0.08 0.21
---------------------------------------------
TOTAL $ (1.08) $ 0.29 $ 0.18 $ 0.12 $ (0.49)
---------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED
Income from continued operations $ (1.11) $ 0.22 $ 0.14 $ 0.04 $ (0.70)
Discontinued operations 0.03 0.07 0.04 0.08 0.21
---------------------------------------------
TOTAL $ (1.08) $ 0.29 $ 0.18 $ 0.12 $ (0.49)
---------------------------------------------
STOCK PRICES
High $29.00 $12.06 $10.69 $8.88 $29.00
Low $ 7.63 $ 4.25 $ 6.06 $4.50 $ 4.25