QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
1. THE COMPANY
The business
mission of QuadraMed Corporation, incorporated in the state of Delaware, along with our subsidiaries (QuadraMed or the Company), provides products that advance the success of healthcare organizations through IT solutions that
leverage quality care into positive financial outcomes. QuadraMed offers health information management (HIM) processes and systems combined with patient accounting systems through our Care-Based Revenue Cycle solutions. Our
products and services are sold to healthcare organizations of varying size, from small single entity hospitals to large multi-facility care delivery organizations, acute care hospitals, specialty hospitals, Veterans Health Administration facilities
and associated/affiliated businesses such as outpatient clinics, long-term care facilities, and rehabilitation hospitals. Our products are sold as standalone, bundled or fully integrated software packages. In September 2007, we acquired the assets
and related business of Misys Computerized Patient Record (CPR Business).
QuadraMeds driving principles include:
maintaining long-term client relationships, building a culture of customer care, focusing on innovation as the key to success, and striving to always deliver value. QuadraMed offers innovative, user-friendly software applications designed and
developed by the healthcare professionals and software specialists we employ.
In the healthcare market, clinical information and quality
measurements are becoming drivers of revenue management. Access management, financial decision support, HIM processes and systems combined with patient accounting systems are driving revenue management improvements and the movement to new
quality-based reimbursement models. As evolving reimbursement scenarios will challenge hospitals to leverage quality of care into appropriate payment, we believe that clients committing to QuadraMeds Care-Based Revenue Cycle
solutions will realize improved financial performance. QuadraMeds goal is to assist our clients in attaining significant improvement in financial success by leveraging quality of care into positive financial outcomes through performance-based
IT solutions. We seek to accomplish this goal by delivering healthcare information technology products and services that support the healthcare organizations efforts to improve the quality of the care they provide and the efficiency with which
it is delivered.
Using QuadraMeds solutions that are designed to optimize the patient experience and leverage quality of care into
payment, our clients seek to receive the proper reimbursement, in the shortest time, at the lowest administrative cost. Our products are designed to eliminate paper, improve processes, streamline efficiencies and decrease error through the efficient
management of patient clinical and financial records, resulting in better patient safety. We do business directly and through our subsidiaries, all of which are wholly owned and operated under common management.
2. SIGNIFICANT ACCOUNTING POLICIES
Financial
Statement Presentation
These condensed consolidated financial statements are unaudited and have been prepared in conformity with
generally accepted accounting principles in the United States (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not
include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. We suggest that you read these interim financial statements in conjunction with the
consolidated financial statements, and the notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 16, 2007. In the opinion of
7
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
management, the condensed consolidated financial statements for the periods presented herein include all normal and recurring adjustments that are necessary
for a fair presentation of the results for these interim periods. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results for the entire year ending December 31, 2007.
Principles of Consolidation
These condensed consolidated financial statements, which include the accounts of QuadraMed and all significant business divisions and wholly owned subsidiaries, have been prepared in conformity with (i) GAAP and (ii) the rules and
regulations of the SEC. All significant intercompany accounts and transactions between QuadraMed and its subsidiaries are eliminated in consolidation.
Use of Estimates in Preparation of Financial Statements
QuadraMed makes estimates, assumptions and
judgments that affect the reported amounts of assets and liabilities, contingent assets and liabilities, revenues and expenses. Significant estimates and assumptions have been made regarding revenue recognition, the allowance for doubtful accounts,
contingencies, litigation, intangibles resulting from our purchase business combinations and other amounts. QuadraMed bases its estimates and assumptions on historical experience and on various other assumptions which management believes to be
reasonable under the circumstances. Uncertainties inherent in these estimates include, among other things, significant estimates within percentage-of-completion accounting. In addition, QuadraMed annually reviews its estimates related to the
valuations of intangibles including acquired technology, goodwill, customer lists, trademarks and other intangibles and capitalized software. Actual results may differ materially from these estimates and assumptions.
Reclassifications
QuadraMed has
grown through multiple acquisitions based on a product-centric organizational structure. Acquired entities such as Tempus Software, Inc. and Détente Systems Pty Limited had been operated as standalone business units, rather than centralized
business functions. Historically, our organizational structure contained several departments and remote locations which performed multiple levels of tasks in a cross-functional environment in order to manage and support specific product lines within
the Company. In connection with our corporate vision, mission statement and executive management philosophy, during 2006 and early 2007 we implemented a new organizational structure designed to capitalize on our internal resources and strengths. The
new structure supports centralized operations, standardized processes and optimizes functional-based expertise. As a result, certain reclassifications have been made to prior year revenue and expenses classifications to conform to the current year
presentation. Such reclassifications include the reclassification of certain revenue components to more appropriately identify individual elements such as services, installation and hardware within our revenue mix, along with any associated cost
elements, as well as reclassifications of certain employee related expenses to better align functions performed with financial classifications.
Revenue Recognition
QuadraMeds revenue is principally generated from three sources: (i) licensing arrangements,
(ii) services and (iii) hardware.
The Companys license revenue consists of fees for licenses of the proprietary and
third-party software. Cost of license revenue primarily includes the costs of third-party software, royalties and amortization of
8
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
acquired technology and capitalized software. The Companys services revenue consists of maintenance, software installation, customer training and
consulting services related to our license revenue, fees for providing management services, specialized staffing, and analytical services. Cost of services consists primarily of salaries, benefits and allocated costs related to providing such
services. Hardware revenue includes third-party hardware used by our customers in connection with software purchased. Cost of hardware revenue consists of third-party equipment and installation.
QuadraMed licenses its products through its direct sales force. The Companys license agreements for such products do not provide for a right of
return, and historically, product returns have not been significant.
QuadraMed recognizes revenue on its software products in accordance
with AICPA Statement of Position (SOP) 97-2,
Software Revenue Recognition
, as amended; SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts
; and SEC Staff Accounting Bulletin
(SAB) 104,
Revenue Recognition
.
QuadraMed recognizes revenue when all of the following criteria are met: there is
persuasive evidence of an arrangement; the product has been delivered; we no longer have significant obligations with regard to implementation; the fee is fixed and determinable; and collectibility is probable. Delivery is considered to have
occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. The Company considers all arrangements with payment terms extending
beyond 180 days to be neither fixed nor determinable. Revenue for arrangements with extended payment terms is recognized when the payments become due, provided all other recognition criteria are satisfied. The Company typically defers revenue and
recognizes revenue on a cash basis for renewals of term license and support if the Companys initial assessment is modified by facts and circumstances and collection is no longer deemed probable. Revenue may also be deferred and recognized on a
cash basis if there is a contractual dispute and payments are delayed. Revenue is recognized when the collection becomes reasonably assured and/or the contract dispute is resolved.
QuadraMed allocates revenue to each element in a multiple-element arrangement based on the elements respective fair value, with the fair value
determined by the price charged when that element is sold separately. Specifically, QuadraMed determines the fair value of the maintenance portion of the arrangement based on the price if sold separately and measured by the renewal rate offered to
the customer. The professional services portion of the arrangement is based on hourly rates which QuadraMed charges for these services when sold separately from software. If evidence of fair value of all undelivered elements exists but evidence does
not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as
revenue. The proportion of revenue recognized upon delivery varies from quarter-to-quarter depending upon the mix of licensing arrangements, perpetual or term-based, and the determination of vendor-specific objective evidence (VSOE) of
fair value for undelivered elements. Many of our licensing arrangements include fixed implementation fees and do not allow us to recognize license revenue until these services have been performed. We recognize revenue only after establishing that we
have VSOE for all undelivered elements.
Some of the licenses are term or time-based licenses. QuadraMed recognizes revenue from these
contracts ratably over the term of the arrangement. Post-contract Customer Support (PCS) for all of the license term is bundled together with the term license and is included in license revenue on our consolidated financial statements.
9
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
Contract accounting is applied where services include significant software modification, installation
or customization. In such instances, the services and license fee is accounted for in accordance with SOP 81-1, whereby the revenue is recognized, generally using the percentage-of-completion method measured on labor input hours. QuadraMed uses the
completed-contract method of revenue recognition rather than the percentage-of-completion method for contracts with short implementation service periods (typically less than 3-9 months) and in circumstances in which the Companys financial
position and results of operations would not vary materially from those resulting from the use of the percentage-of-completion method. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is
charged to operations in the period the loss first becomes known. The complexity of the estimation process and judgment related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of
accounting can affect the amounts of revenue and related expenses reported in its consolidated financial statements. The Company classifies revenues from these arrangements as license, installation, hardware, and services revenue based on the
estimated fair value of each element using the residual method, and revenues are reflected in respective revenue categories in our consolidated financial statements.
Service revenues from software maintenance and support are recognized ratably over the maintenance term, which in most cases is one year. Service revenues from training, consulting and other service elements are
typically recognized as the services are performed.
Hardware revenue is generated primarily from transactions in which customers purchased
bundled solutions that included the Companys software and third-party hardware. If the bundled solution includes services that provide significant modification, installation or customization, contract accounting is applied in accordance with
SOP 81-1, whereby the revenue is recognized, generally using the percentage-of-completion method measured on labor input hours. Otherwise, hardware revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable and collection is reasonably assured.
Deferred revenue includes amounts billed to or received from customers
for which revenue has not been recognized. This generally results from deferred maintenance, software installation, consulting and training services not yet rendered; license revenue is deferred until all revenue requirements have been met or as
services are performed. Additionally, there are term-based licenses for which revenues are recognized over the term of the contract, which is generally one year. Unbilled receivables are established when revenue is deemed to be recognized based on
QuadraMeds revenue recognition policy, however the Company does not have the right to bill the customer per the contract terms.
Cash and Cash Equivalents
Cash and cash equivalents is comprised principally of money market instruments and demand
deposits with financial institutions. These instruments carry insignificant interest rate risk.
Investments
QuadraMed considers its holdings of short-term and long-term securities, consisting primarily of fixed income securities, to be available-for-sale
securities. The difference between cost or amortized cost (cost adjusted for amortization of premiums and accretion of discounts that are recognized as adjustments to interest income) and fair value, representing unrealized holdings gains or losses,
net of the related tax effect, if any, is recorded, until realized, as a separate component of stockholders equity. Gains and losses on the sale of debt securities are determined on a specific identification basis. Realized gains and losses
are included in other income (expense) in the accompanying Consolidated Statements of Operations.
10
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to QuadraMed from its normal business activities. QuadraMed provides an allowance for doubtful
accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific identified risks.
Concentration of Credit Risk
Accounts receivable subject QuadraMed to its highest potential concentration of credit risk.
QuadraMed reserves for credit losses and does not require collateral on its trade accounts receivable. In addition, QuadraMed maintains cash and investment balances in accounts at various domestic banks and brokerage firms. QuadraMed is insured by
the Federal Deposit Insurance Corporation for up to $100,000 at each bank. Balances maintained at the brokerage firms are not insured.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over their
estimated useful lives, which are generally three years for computer equipment and purchased software and five years for office furnishings and equipment. Leasehold improvements are amortized over the shorter of the term of the lease or the useful
life (generally 10 years). Maintenance and repair costs are expensed as incurred. QuadraMed reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.
Goodwill and Intangible Assets
We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired in accordance with Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. The determination of fair value of the identifiable net assets acquired was determined based upon a third party valuation and evaluation of other information.
SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite
lives, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. We elected to perform its annual analysis during
the first quarter of each fiscal year and no indicators of impairment have been identified.
Intangible assets subject to amortization
include trademarks, customer marketing and technology related assets. Such intangible assets are amortized based on the estimated economic benefit over their estimated useful lives, which are generally two to ten years.
Impairment of Long-Lived Assets
We
review long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future
cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset. We had no such impairments for the nine months ended September 30, 2007 and 2006.
Accounting for and Disclosure of Guarantees and Indemnifications
QuadraMeds software license agreements generally include a performance guarantee that QuadraMeds software products will substantially operate
as described in the applicable program documentation for a period of 90 days after delivery. QuadraMed also generally warrants that services performed will be provided in a manner
11
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
consistent with reasonably applicable industry standards. To date, QuadraMed has not incurred any material costs associated with these warranties.
QuadraMeds software license agreements typically provide for indemnification of customers for claims for infringement of intellectual property. To date, no such claims have been filed against the Company.
Stock-Based Compensation
In December
2004, the FASB issued SFAS No. 123(R),
Share-Based Payment,
which is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their grant-date fair values, using prescribed options-pricing models. We have adopted SFAS No. 123(R) for our fiscal year beginning January 1, 2006. See Note 12Stock-based Compensation.
Net Income (Loss) Per Share
Basic income (loss) per share is determined using the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is determined using the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and conversion of preferred stock (using the as-converted method).
Common equivalent shares are excluded from the diluted computation if their effect is anti-dilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements
, (EITF 06-4) was issued and is effective for fiscal years beginning after December 15, 2007. EITF 06-4 requires that, for split-dollar life insurance arrangements that provide a
benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106. EITF 06-4 requires that recognition of the effects of adoption should be either by
(a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. We
do not expect the adoption to have a material impact on our results of operations or on our financial position.
In September 2006,
the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently analyzing the impact,
if any, of SFAS No. 157 on our results of operations or our financial position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Asset and Financial Liability: Including an amendment to FASB Statement No. 115
(SFAS No. 159). The standard permits all entities to elect to measure certain financial
instruments and other items at fair value with changes in fair value reported in earnings. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159
is not expected to have a material impact on our results of operations or our financial position.
12
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
4. ACQUISITION OF THE MISYS COMPUTERIZED PATIENT RECORD BUSINESS
On September 23, 2007, the Company, through QuadCopper, LLC, a Delaware limited liability company and indirect, wholly-owned subsidiary of the
Company, completed its acquisition of substantially all of the Computerized Patient Record (CPR) assets and related business (the CPR Business) from Misys Hospital Systems, Inc. (MHS), a division of Misys plc,
pursuant to the previously announced asset purchase agreement (the Agreement), dated July 22, 2007, by and among MHS, Misys plc, QuadCopper LLC, and the Company. Pursuant to the terms of the Agreement, the Company paid $33 million
in cash for the CPR Business. As a result of the acquisition, QuadraMed believes that it is in a better position to compete for clinical information systems business in large hospitals and multi-facility engagements and further believes that it
provides the opportunity to compete as a single-source supplier of clinical, administrative and financial applications.
The total purchase
price, including related acquisition costs of approximately $0.7 million, was approximately $33.7 million. The cash used by the Company to acquire the CPR Business came from the Companys available cash and the conversion of short term
investments to cash. No gains or losses were recorded as the investments were not sold prior to their maturity dates.
The results of the
CPR Business operations have been included in the consolidated financial statements since the date of acquisition.
The following table
summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
CPR Business assets and liabilities
|
|
|
|
$
|
6,761
|
Identifiable intangible assets
|
|
|
|
|
|
Trade Names (2 years - straight line amortization)
|
|
300
|
|
|
|
Technology (10 years - sum of years digits amortization)
|
|
5,400
|
|
|
|
Customer Relationships (10 years - sum of years digits amortization)
|
|
6,700
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
|
|
12,400
|
Goodwill
|
|
|
|
|
14,513
|
|
|
|
|
|
|
Net Asset Acquired
|
|
|
|
$
|
33,674
|
|
|
|
|
|
|
We expect that the purchase price allocation will be finalized by December 31, 2007.
The purchase price includes $14.5 million in goodwill, which will be amortized over 15 years for income tax purposes.
The following table summarizes unaudited pro forma financial information assuming that the CPR Business acquisition had occurred on January 1, 2006.
This unaudited pro forma financial information was prepared by adding the operations of the CPR Business, as operated by Misys, to QuadraMeds actual operating results for the same periods, with adjustments for elements excluded by the
Agreement. These pro forma operating results do
13
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
not represent what we believe would have occurred if the transaction had taken place on the dates presented and should not be taken as representative of our
future consolidated results of operations or financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
Three months ended
September 30,
|
|
Pro forma
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited - in thousands)
|
|
(Unaudited - in thousands)
|
|
Revenue
|
|
$
|
38,677
|
|
|
$
|
39,923
|
|
$
|
116,887
|
|
|
$
|
115,327
|
|
Net income attributable to common shareholders
|
|
$
|
(2,661
|
)
|
|
$
|
2,196
|
|
$
|
(4,056
|
)
|
|
$
|
(4,273
|
)
|
Basic earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
Diluted earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
5. EXIT COST OF FACILITY CLOSINGS
Financial Services Division
Due to
increasing operating losses in our Financial Services Division (FSD), and the lack of a qualified buyer for the business, we announced the shutdown of this division on December 15, 2004. The shutdown of this division was completed
on February 14, 2005. The lease associated with this facility does not terminate until May 2008. Our annual cost under the lease is approximately $0.2 million for the remainder of 2007 and $0.3 million in 2008. At the time of the facility
closing, we estimated the facility closing costs based upon then current and available market information related to potential sublease rental income, sublease commission costs and the length of time expected to secure a sublease. We have continued
to evaluate those assumptions on an annual basis and have adjusted our accrued liability in accordance with SFAS No. 146. During 2006, the Company secured a sub-tenant for 100% of the space.
Headquarters Relocation
During the
fourth quarter of 2004, we vacated and closed our San Rafael, California facility as a result of the relocation of our headquarters to Reston, Virginia. The San Rafael lease payments total approximately $2.1 million for the remainder of
2007 through 2009, including the Companys share of common costs. The Company estimated its liability under its operating lease agreement, such estimate being reduced by the estimated sublease rental income. The present value of the estimated
liability was recorded as an accrued exit cost of facility closing. The lease for this facility terminates in December 2009. We actively marketed and subleased 33% of the vacant San Rafael, California facility in 2006. We continue to actively market
for sublease the remaining space.
14
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
The following table sets forth a summary of the exit cost charges and accrued exit costs for both the
San Marcos, California and San Rafael, California facilities as of September 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
Exit Costs for the San Rafael Facility:
|
|
|
|
|
|
|
|
|
Accrued exit cost of facility closing, beginning of period
|
|
$
|
3,078
|
|
|
$
|
4,217
|
|
Principal reductions
|
|
|
(854
|
)
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
Accrued exit cost of facility closing, end of period
|
|
$
|
2,224
|
|
|
$
|
3,476
|
|
|
|
|
|
|
|
|
|
|
Exit Cost for the San Marcos Facility:
|
|
|
|
|
|
|
|
|
Accrued exit cost of facility closing, beginning of period
|
|
$
|
534
|
|
|
$
|
1,275
|
|
Principal reductions
|
|
|
(321
|
)
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
Accrued exit cost of facility closing, end of period
|
|
$
|
213
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
Total Exit Cost Charges and Accrued Exit Costs
|
|
$
|
2,437
|
|
|
$
|
3,613
|
|
|
|
|
|
|
|
|
|
|
Summary:
|
|
|
|
|
|
|
|
|
Accrued Exit Cost Liability
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
1,338
|
|
|
$
|
1,547
|
|
Long-term
|
|
|
1,099
|
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,437
|
|
|
$
|
3,613
|
|
|
|
|
|
|
|
|
|
|
6. EMPLOYMENT MATTERS
The Company and its legal counsel have recently completed a Company initiated review of job descriptions and employee wage/hour classifications. As a result, the Company has changed the wage/hour classifications for
certain employees to ensure compliance with applicable law and will pay past overtime to the affected employees at the end of November. In connection therewith, the Company has recorded $1.5 million of additional compensation expense in the three
and nine month periods ended September 30, 2007.
During the first quarter of fiscal year 2006, the Company announced a corporate
reorganization and a reduction in our workforce of 37 positions. The Company recorded a charge for severance and related costs of approximately $0.3 million, associated with terminated employees, in the Companys results of operations for the
quarter ended March 31, 2006.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of Goodwill are as follows (in thousands):
|
|
|
|
Balance, as of December 31, 2006
|
|
$
|
25,983
|
Additions: Goodwill related to the CPR Acquisition
|
|
|
14,513
|
|
|
|
|
Balance, as of September 31, 2007
|
|
$
|
40,496
|
|
|
|
|
15
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
As of December 31, 2006
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
18,749
|
|
$
|
(11,919
|
)
|
|
$
|
6,830
|
|
$
|
12,049
|
|
$
|
(10,919
|
)
|
|
$
|
1,130
|
Trade Names
|
|
|
2,190
|
|
|
(1,890
|
)
|
|
|
300
|
|
|
1,890
|
|
|
(1,810
|
)
|
|
|
80
|
Technology
|
|
|
21,947
|
|
|
(16,530
|
)
|
|
|
5,417
|
|
|
16,547
|
|
|
(15,625
|
)
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
|
$
|
42,886
|
|
$
|
(30,339
|
)
|
|
$
|
12,547
|
|
$
|
30,486
|
|
$
|
(28,354
|
)
|
|
$
|
2,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over a period of two to ten years, which the Company estimated to
reflect their useful lives.
Amortization of acquired technology, a component of other intangible assets, for the three months ended
September 30, 2007 and 2006 was zero and $0.7 million, respectively. For the nine months ended September 30, 2007 and 2006, amortization of acquired technology was $0.8 million and $2.2 million, respectively, and is included in cost of
license revenue for the respective periods. For the three months ended September 30, 2007 and 2006, amortization expense, other than acquired technology was $0.3 million and $0.5 million, respectively which was included in amortization of
intangible assets and depreciation on the consolidated statements of operations. For the nine months ended September 30, 2007 and 2006, amortization expense, other than acquired technology, was $1.1 million and $1.7 million, respectively.
We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
|
|
|
|
For the remaining three months ended December 31, 2007
|
|
$
|
780
|
For the years ended December 31,
|
|
|
|
2008
|
|
|
2,380
|
2009
|
|
|
2,102
|
2010
|
|
|
1,750
|
2011
|
|
|
1,510
|
2012
|
|
|
1,270
|
Thereafter
|
|
|
2,755
|
|
|
|
|
|
|
$
|
12,547
|
|
|
|
|
8. LINE OF CREDIT
On December 5, 2006, QuadraMed entered into a working capital line of credit agreement with our principal bank, under which we may borrow up to $2.0 million. This credit facility is secured by 90-Day Certificates
of Deposits. Borrowings under the line of credit bear interest at varying rates based on an independent index which is defined as the rate charged by the Lender on the underlying Certificates of Deposit plus 1.5 basis points. As of September 30,
2007 the current interest rate is 6.45% per annum. The line of credit has a stated maturity of December 1, 2007. There have been no borrowings, and there is no balance outstanding associated with this line of credit as of
September 30, 2007 or as of December 31, 2006.
16
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
9. SERIES A PREFERRED STOCK
On June 17, 2004, QuadraMed issued 4.0 million shares of Series A Cumulative Mandatory Convertible Preferred Stock (the Series A Preferred Stock) in a private, unregistered offering to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Series A Preferred Stock was sold for $25 per share, and QuadraMed used the $96.1 million of net proceeds of the offering to repurchase all of our Senior Secured
Notes due 2008 (the 2008 Notes) and our 5.25% Convertible Subordinated 2005 Notes (the 2005 Notes), together with accrued interest and related redemption premiums; the remainder was used for general corporate purposes.
The Series A Preferred Stock holders do not have any relative, participating, optional or other voting rights and powers, except that
(i) if four quarterly dividend payments are in arrears, such holders are entitled to elect two substitute directors to the Board of Directors at any annual or special meeting, and (ii) in certain circumstances, such holders are entitled to
vote on the authorization or creation of securities ranking on par with or above the Series A Preferred Stock, certain amendments to the Certificate of Incorporation or the Certificate of Designation for the Series A Preferred Stock and the
incurrence of new senior indebtedness in an aggregate principal amount exceeding $8.0 million. Prior to the authorization or creation of, or increase in the authorized amount of, any shares of any class or series (or any security convertible into
shares of any class or series) ranking senior to or on par with the Series A Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of QuadraMed or in the payment of dividends, QuadraMed must have the
affirmative vote of a majority of any outstanding shares of the Series A Preferred Stock (along with any shares of every other series or class of common stock ranking on par with the Series A Preferred Stock having like voting rights). In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the Company, before any payment or distribution of the Companys assets is made or set apart for the holders of common stock or any other class or series of shares of the
Companys capital stock ranking junior to the Series A Preferred Stock as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, the holders of the Series A Preferred Stock shall be entitled
to receive a liquidation preference of $25 per share plus an amount equal to all dividends (whether or not earned or declared) accumulated, accrued and unpaid to the date of final distribution. However, for purposes of the foregoing provision,
(1) a consolidation or merger of the Company with one or more entities, (2) a statutory share exchange or (3) a sale or transfer of all or substantially all of the Companys assets shall not be deemed to be a liquidation,
dissolution or winding up of the Company.
The Series A Preferred Stock is entitled to quarterly dividends of $0.34 (5.5% per annum) and is
convertible into shares of common stock of the Company at a conversion price of $3.10, equivalent to a conversion rate of 8.0645 shares of common stock for each share of Series A Preferred Stock. The initial conversion price of $3.40 (conversion
rate of 7.3529 shares of common stock for each share of Series A Preferred Stock) decreased to $3.10 as of August 1, 2005, pursuant to the terms of the Certificate of Designation relating to the Series A Preferred Stock, as the volume weighted
average of the daily market price per share during a period of 30 consecutive trading days equaled $2.75 or less during the one year period beginning on the first anniversary of the issue date. Additionally, as provided in the Certificate of
Designation, because the Company had not as of June 15, 2005 completed the registration of the Series A Preferred Stock with the SEC, the dividend rate for such stock increased to $0.40625 per quarter ($1.625 per annum) on June 16, 2005,
and such rate applied through December 1, 2006, the date the registration statement for the four million Series A Preferred Stock shares, and the 32.3 million shares of common stock into which the Series A Preferred Stock may be converted,
was declared effective. The Company has the right to demand conversion on or after May 31, 2007, in the event the volume weighted average of the daily market price per share during a period of 20 consecutive trading days equals or exceeds
$5.10.
17
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
Upon the conversion of shares of the Series A Preferred Stock to shares of common stock on or before
June 1, 2007, the Series A Preferred Stock holders had an option to convert and receive, when declared by the Board of Directors, dividends equal to the total previously unpaid dividends payable from the effective date of conversion through
June 1, 2007 at a rate of $1.375 per annum, or 5.5% per annum, discounted to present value at a rate of 5.5% per annum, payable in cash or common shares or any combination thereof at the option of the Company. No shares were converted
on or before the option date of June 1, 2007.
As a result of the aforementioned discounted dividend feature, at the date of issuance
of the Series A Preferred Stock, the Company recorded dividends payable of $15.2 million, which represents the present value of the three-year dividends. The present value adjustment of $1.3 million is being amortized over three years as interest
expense using the effective interest rate method. For the three months ended September 30, 2007 and 2006, interest expense totaled $2,000 and 67,000, respectively, and totaled $50,000 and $0.3 million for the nine months ended
September 30, 2007 and 2006, respectively. As a result of the conclusion of the three year mandatory dividend period, the Company declared non-mandatory dividends of $1.8 million as of September 30, 2007.
The carrying value of the Series A Preferred Stock was also reduced by $15.2 million, which represents the imputed discount on the Series A Preferred
Stock and which has been accreted over three years using the effective interest rate method. Accretion on the preferred stock discount which was charged to accumulated deficit was $0.2 million and $1.3 million for the three month period ended
September 30, 2007 and 2006, respectively, and was $2.9 million and $3.8 million for the nine months ended September 30, 2007 and 2006, respectively. If any Series A Preferred Stock shares had been converted prior to the end of the
three-year period, the related accretion would have been accelerated. The Company determined that there was no beneficial conversion feature attributable to the Series A Preferred Stock.
The following table summarizes the Series A Preferred Stock activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2007
|
|
Total issued
|
|
|
|
|
$
|
100,000
|
|
Less: Issuance cost
|
|
|
|
|
|
(3,856
|
)
|
Less: Unaccreted discount
|
|
|
|
|
|
|
|
Original present value of discount
|
|
(15,174
|
)
|
|
|
|
|
2007 preferred stock accretion
|
|
2,854
|
|
|
|
|
|
2006 preferred stock accretion
|
|
5,059
|
|
|
|
|
|
2005 preferred stock accretion
|
|
4,796
|
|
|
|
|
|
2004 preferred stock accretion
|
|
2,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of preferred stock at September 30, 2007
|
|
|
|
|
$
|
96,144
|
|
|
|
|
|
|
|
|
|
10. RESTRICTED STOCK GRANTS
During the three and nine months ended September 30, 2007 and 2006, there was no common stock issued as a result of restricted stock grants. These grants are periodically made to certain senior executives
for no monetary consideration. The majority of the Companys restricted shares fully vest over three to four years. QuadraMed has recorded the fair value of the restricted shares on the date they were granted as deferred compensation within the
Stockholders Equity section of the Condensed Consolidated Balance Sheets. This amount is amortized over the period in which the restrictions lapse. Compensation expense associated with the grants of restricted stock totaled $0.1 million for
both of the three months ended September 30, 2007 and 2006 and $0.3 million for each of the nine month periods ended September 30, 2007 and 2006.
18
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
As of September 30, 2007, 580,000 restricted shares remained subject to forfeiture.
11. NET INCOME (LOSS) PER SHARE AND COMPREHENSIVE INCOME (LOSS)
Basic income (loss) per share is determined using the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is determined using the weighted average number of common
shares and common equivalent shares outstanding during the period. Common equivalent shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and conversion of the preferred stock (using the
as-converted method). Common equivalent shares are excluded from the diluted computation if their effect is anti-dilutive.
For the three
months ended September 30, 2007, common stock equivalent options and warrants to purchase 7.1 million shares of common stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.
These shares could dilute earnings per share in the future. For the nine months ended September 30, 2007, common stock equivalent options to purchase 3.0 million shares of common stock have been excluded from the computation of diluted
earnings per share as their effect would be anti-dilutive. These shares could dilute earnings per share in the future. For the three months ended September 30, 2006, common stock equivalent options to purchase 6.5 million shares of common
stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. For the nine months ended September 30, 2006, common stock equivalent options to purchase 6.5 million shares of common
stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.
For the three and nine
months ended September 30, 2007, preferred shares convertible to 32.2 million shares of common stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. For the nine months ended
September 30, 2006, preferred shares convertible to 32.2 million shares of common stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted income per common share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
2006
|
|
|
(in thousands,
except per share data)
|
|
(in thousands,
except per share data)
|
Net (loss) income attributable to common shareholders - basic
|
|
$
|
(522
|
)
|
|
$
|
4,457
|
|
$
|
1,669
|
|
$
|
3,464
|
Preferred stock dividends, premiums and accretion
|
|
|
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders - diluted
|
|
$
|
(522
|
)
|
|
$
|
5,979
|
|
$
|
1,669
|
|
$
|
3,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
43,846
|
|
|
|
42,156
|
|
|
43,881
|
|
|
41,788
|
Dilutive effect of preferred stock
|
|
|
|
|
|
|
32,258
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
2,753
|
|
|
2,063
|
|
|
2,984
|
Dilutive effect of common stock equivalents
|
|
|
|
|
|
|
926
|
|
|
1,376
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted
|
|
|
43,846
|
|
|
|
78,093
|
|
|
47,320
|
|
|
45,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.08
|
Diluted
|
|
|
(0.01
|
)
|
|
|
0.08
|
|
|
0.04
|
|
|
0.08
|
19
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
The components of QuadraMeds comprehensive income include the unrealized gain (loss) on
available-for-sale securities and foreign currency translation adjustment. The following table sets forth the computation of comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(522
|
)
|
|
$
|
4,457
|
|
|
$
|
1,669
|
|
|
$
|
3,464
|
|
Unrealized gain (loss)
|
|
|
28
|
|
|
|
19
|
|
|
|
23
|
|
|
|
(24
|
)
|
Foreign currency translation adjustment
|
|
|
70
|
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(424
|
)
|
|
$
|
4,460
|
|
|
$
|
1,687
|
|
|
$
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment
, which is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on their grant-date fair values, using prescribed option-pricing models. The fair value is expensed over the requisite service period of the individual grantees, which
generally equals the vesting period. Since the adoption of SFAS No. 123(R) on January 1, 2006, pro forma disclosure is no longer an alternative.
Effective January 1, 2006, the Company adopted SFAS No. 123(R)s fair value method of accounting for share-based payments, using the modified prospective transition method. Accordingly, periods prior to
adoption have not been restated and are not directly comparable to periods after adoption. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123. Under
the modified prospective method, compensation cost recognized in both of the three month periods ended September 30, 2007 and 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of the
adoption date of SFAS No. 123(R), based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, less estimated forfeitures, and (b) compensation costs for all share-based payments granted and
vested subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous
literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Stock-based compensation expense for the three months ended September 30, 2007 and 2006 totaled $0.8 million and
$0.2 million, respectively, and $1.5 million and $0.7 million for the nine month periods ended September 30, 2007 and 2006, respectively and is allocated to the various expense categories to be aligned with the other employee related costs.
There was no income tax benefit or excess tax benefit related to stock-based compensation during the three and nine months ended September 30, 2007 and 2006. There were no capitalized stock-based compensation costs for the three and nine months
ended September 30, 2007 and 2006.
Stock Incentive Plans
The Company has issued stock options and restricted stock under its 1996 Stock Incentive Plan (the 1996 Plan), the 1999 Supplemental Stock
Option Plan (the 1999 Plan), and the 2004 Stock Compensation Plan (the
20
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
2004 Plan), all of which were approved by stockholders. The 2004 Plan superseded the 1996 Plan, as amended, and the 1999 Plan, as amended,
although stock options and restricted stock under the 1996 and 1999 Plans outstanding as of that date remain subject to the terms of those plans. Significant grants were made outside these plans pursuant to contracts with executives as an inducement
to employment. Total non-plan stock options outstanding at September 30, 2007 were 1,325,000.
1996 Stock Incentive Plan
Under the 1996 Plan, the Board of Directors may grant incentive and nonqualified stock options to employees, directors, and
consultants. The 1996 Plan is divided into the following five separate equity programs: (i) the discretionary option grant program under which eligible persons may, at the discretion of the plan administrator, be granted options to purchase
shares of common stock; (ii) the salary investment option grant program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants; (iii) the stock issuance program under
which eligible persons may, at the discretion of the plan administrator, be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to QuadraMed; (iv) the automatic option
grant program under which eligible non-employee board members shall automatically receive option grants at periodic intervals to purchase shares of common stock; and (v) the director fee option program under which non-employee board members may
elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special option grant.
The exercise
price per share for an incentive stock option cannot be less than the fair market value on the date of grant. 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 1996 Plan generally expire 10 years from the date of grant and generally vest over a four-year period. Options granted under the 1996 Plan are exercisable subject to the vesting schedule. QuadraMeds stockholders had authorized
a total of 8,651,097 shares of common stock for grant under the 1996 Plan, of which 2,901,677 were outstanding at September 30, 2007. There were no shares available for grant under this plan at September 30, 2007.
1999 Supplemental Stock Option Plan
In 1999, QuadraMeds Board of Directors approved the 1999 Plan. The 1999 Plan permits non-statutory option grants to be made to employees, independent consultants, and advisors who are not QuadraMed officers, directors, or
Section 16 insiders. The 1999 Plan is administered by the Board of Directors or its Compensation Committee and was scheduled to terminate in March 2009. The exercise price of all options granted under the 1999 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 10 years. QuadraMeds stockholders had authorized a total of 3,519,258
shares of common stock for grant under the 1999 Plan, of which 965,929 were outstanding at September 30, 2007. There were no shares available for grant under this plan at September 30, 2007.
2004 Stock Compensation Plan
On
April 1, 2004, QuadraMeds Board of Directors approved the 2004 Plan. QuadraMeds stockholders ratified the adoption of the 2004 Plan on May 6, 2004 at QuadraMeds 2004 Annual Meeting of Stockholders. The 2004 Plan replaces
the 1996 Plan and 1999 Plan with respect to the unissued shares of common stock that
21
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
were remaining in the 1996 Plan and the 1999 Plan on the date the 2004 Plan was ratified. Awards previously granted under the 1996 Plan and 1999 Plan remain
subject to the terms of those plans. QuadraMeds stockholders initially authorized 1,536,369 shares of common stock for grant under the 2004 Plan and increased the number of shares available to the 2004 Plan by 3,000,000 shares at the 2007
Annual Meeting of Stockholders on June 7, 2007. As a result, QuadraMeds stockholders authorized a total of 4,536,369 shares of common stock, for grant under the 2004 Plan, of which, 3,181,250 were outstanding at September 30, 2007.
There were 1,295,768 shares available for grant under this plan at September 30, 2007.
The 2004 Plan permits the grant of
non-statutory options, incentive stock options, stock appreciation rights, restricted stock and restricted stock units to employees, prospective employees, directors, and advisors, consultants, and other individuals who provide services to
QuadraMed. The exercise price of all options and stock appreciation rights granted under the 2004 Plan may not be less than 100% of fair market value on the date of the grant. The 2004 Plan also features (i) a Non-Employee Director Option Grant
Program, whereby non-employee members of the Board automatically receive grants of options with an exercise price of the fair market value per share of common stock as of the date the options are granted as of the date of our annual meetings of
stockholders or upon their initial election or appointment to the Board and (ii) a Director Fee Option Grant Program, whereby non-employee Board members may elect to have all or any portion of their annual cash retainer fee applied to special
stock option grants with a below-market exercise price. The 2004 Plan is administered by the Compensation Committee and terminates in May 2014.
Employee Stock Purchase Plan
QuadraMeds 2002 Employee Stock Purchase Plan (the 2002 Purchase Plan) was
adopted by the Board of Directors in January 2002. A total of 703,450 shares of common stock are reserved for issuance under the 2002 Purchase Plan, pursuant to which eligible employees are able to contribute up to 10% of their compensation for the
purchase of QuadraMed common stock at a purchase price of 85% of the lower of the fair market value of the shares on the first or last day of the six-month purchase period. Stock-based compensation expense relating to shares purchased on behalf of
plan participants for the nine months ended September 30, 2007 and 2006 totaled $117,864 and $32,000, respectively.
Stock
Options:
Stock options generally vest over four years, 25% after the first year and the balance in monthly increments over the next
three years, from date of grant and terminate ten years from date of grant. The exercise price of the options granted equaled or exceeded the market value of the common stock at the date of the grant. A summary of the stock option activity under all
plans is as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercised
Price
|
|
Intrinsic
Value
|
Options outstanding, January 1, 2007
|
|
7,833
|
|
|
$
|
3.61
|
|
|
|
Granted
|
|
2,413
|
|
|
|
3.09
|
|
|
|
Exercised
|
|
(1,076
|
)
|
|
|
1.92
|
|
|
|
Cancelled
|
|
(729
|
)
|
|
|
8.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2007
|
|
8,441
|
|
|
$
|
3.33
|
|
$
|
3,642
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2007
|
|
5,066
|
|
|
$
|
3.56
|
|
$
|
2,765
|
|
|
|
|
|
|
|
|
|
|
22
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
Stock-based compensation expense relating to stock options for the three months ended
September 30, 2007 and 2006 totaled $0.8 million and $0.2 million, respectively, and $1.5 million and $0.7 million for the nine months ended September 30, 2007 and 2006, respectively.
The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding at September 30, 2007 were 6.5 years and
$3.6 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable at September 30, 2007 were 4.6 years and $2.8 million, respectively. As of September 30, 2007,
unrecognized compensation expense related to stock options totaled approximately $5.4 million, which will be recognized over a weighted average period of 1.6 years.
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:
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Expected dividend yield
|
|
|
%
|
|
|
%
|
Expected stock price volatility
|
|
85.97
|
%
|
|
85.97
|
%
|
Risk-free interest rate
|
|
4.20
|
%
|
|
4.84
|
%
|
Expected life of options
|
|
5.30 years
|
|
|
5.73 years
|
|
The dividend yield of zero is based on the fact that the Company has never paid cash dividends on
its common stock, and has no present intention of doing so. The risk-free interest rate is based on U.S. treasury yield curve in effect at the time of the grant for a term equivalent to the expected life of the option. The expected life and expected
volatility are based on historical experience. The Company uses an estimated forfeiture rate of 25.63% for calculating stock-based compensation expense related to stock options and this rate is based on historical experience.
Based on the above assumptions, the weighted average estimated fair value of options granted during the three months ended September 30, 2007 and
2006 was $2.31 and $1.88, and $2.46 and $1.84 for the nine months ended September 30, 2007 and 2006, respectively.
Restricted
Share Awards:
The Company issues its common stock as restricted share awards at no exercise price as provided for under
QuadraMeds stock compensation plans and other contractual commitments. The grants are generally made to certain senior executives for no monetary consideration. The majority of the restrictions lapse over three to four years. The Company
records the fair value of the restricted shares on the date they are granted as deferred compensation within the Stockholders Equity section of the condensed consolidated balance sheets. Deferred compensation has been combined with additional
paid-in-capital as a result of the adoption of SFAS No. 123(R). This amount is amortized as compensation expense over the period in which the restrictions lapse.
23
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
A summary of our restricted stock awards as of September 30, 2007 is as follows (in thousands
except per share data):
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
Restricted stock awards, as of January 1, 2007
|
|
615
|
|
|
$
|
1.77
|
Granted
|
|
|
|
|
|
|
Exercised Restrictions released
|
|
(35
|
)
|
|
|
1.77
|
Cancelled Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards, as of September 30, 2007
|
|
580
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
Stock-based compensation expense relating to restricted share grants for each of the three month
periods ended September 30, 2007 and 2006 totaled $0.1 million and was $0.3 million for each of the nine month periods ended September 30, 2007 and 2006. As of September 30, 2007, 580,000 restricted shares remained subject to
forfeiture.
13. MAJOR CUSTOMERS
For
the three and nine months ended September 30, 2007, sales to Veterans Health Administration facilities accounted for approximately 22% and 19%, respectively, of our total revenues and sales to The County of Los Angeles accounted for
approximately 10% and 12%, respectively, of our total revenues. For the three and nine months ended September 30, 2006, sales to Veterans Health Administration facilities accounted for approximately 12% and 13%, respectively, of our total
revenues. No other single customer accounted for 10% or more of our total revenues.
The Company is currently negotiating a renewal of its
term license with the Veterans Health Administration for its fiscal year, which will end September 30, 2008. The Company is also currently permitting the Veterans Health Administration to continue its operation of the software while
negotiations are being conducted, although the prior term expired on September 30, 2007.
14. INCOME TAXES
The Company has adopted
FIN 48, Accounting for Uncertainty in Income Taxes
, as of January, 1, 2007. This standard modifies the previous guidance
provided by
FAS 5, Accounting for Contingencies
and
FAS 109, Accounting for Income Taxes
for uncertainties related to the Companys global income tax liabilities. The Company has analyzed its income tax posture using the criteria
required by FIN 48 and concluded that there is no cumulative effect allocable to equity as a result of adopting this standard. The Company has derecognized approximately $8.1 million in deferred tax assets related to its general business credits and
net operating loss carry forwards that were previously offset by a full valuation allowance as a result of adopting FIN 48, which has no net balance sheet impact and has not been charged to equity in the transition.
24
QUADRAMED CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2007
(unaudited)
A condensed roll forward of the Companys unrecognized tax benefits is presented as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
12/31/06
|
|
Non-Equity
Transition
Adjustment
|
|
|
Adjusted
Balance
1/1/07
|
|
|
Changes
Through
9/30/07
|
|
Balance
9/30/07
|
|
Unrecognized tax benefits affecting tax rate upon recognition
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
$
|
|
|
Unrecognized tax benefits not affecting tax rate or are offset by valuation allowances
|
|
|
|
|
|
(8,100
|
)
|
|
|
(8,100
|
)
|
|
|
|
|
|
(8,100
|
)
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized tax benefits
|
|
$
|
|
|
$
|
(8,100
|
)
|
|
$
|
(8,100
|
)
|
|
$
|
|
|
$
|
(8,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no material change to the amount of unrecognized tax benefits reported at
September 30, 2007. The Company is maintaining its historical method of accruing interest (net of related tax benefits) and penalties associated with unrecognized income tax benefits as a component of its income tax expense.
As of January 1, 2007 open tax years in major jurisdictions date back to 1993 due to the taxing authorities ability to adjust operating loss
carry forwards. No changes in settled tax years have occurred through September 30, 2007. The Company does not anticipate a material change to its total amount of unrecognized tax benefits within the next 12 months.
25