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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER ____________
LANDACORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2817962
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4151 ASHFORD DUNWOODY RD.,
SUITE 505
ATLANTA, GA 30319
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 531-9956
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK,
$0.001 PAR VALUE
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of 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 the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 31, 2000, was
approximately $54,148,000. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 31, 2000 was 13,683,849.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business..................................... 3
Item 2. Description of Property..................................... 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item Quantitative and Qualitative Disclosures About Market
7A. Risk........................................................ 26
Item 8. Financial Statements........................................ 26
Item 9. Changes In and Disagreement With Accountants on Accounting
and Financial Disclosure.................................... 44
PART II
Item Directors and Executive Officers of the Registrant..........
10. 44
Item Executive Compensation......................................
11. 46
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 47
Item Certain Relationships and Related Transactions..............
13. 49
PART III
Item Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 51
SIGNATURES........................................................... 53
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PART I
This report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to the Company that
are based on the beliefs of the management of the Company as well as assumptions
made by and information currently available to the management of the Company.
Actual results may differ materially from those indicated by these
forward-looking statements as a result of various important factors including,
but not limited to, Landacorp's dependence on a limited number of products with
limited market acceptance and other risk factors that are discussed in this
document and the Company's Registration Statement on Form S-1 filed with the
SEC. In addition, when used in this report, the words "likely," "will,"
"suggests," "may," "would," "could," "anticipate," "believe," "estimate,"
"expect," "intend," "plan," "predict" and similar expressions and their
variants, as they relate to the Company or the management of the Company, may
identify forward-looking statements. Such statements reflect the judgement of
the Company as of the date of this annual report on Form 10-K with respect to
future events, the outcome of which is subject to certain risks, including the
risk factors set forth below, which may have a significant impact on the
Company's business, operating results or financial condition. Investors are
cautioned that these forward-looking statements are inherently uncertain. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein. Landacorp undertakes no obligation to update forward
looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We offer business-to-business Internet-based and other electronic medical
management solutions to healthcare payers and providers designed to control the
cost and improve the quality of healthcare delivery. Our medical management
solutions automate and streamline administrative and business processes and
facilitate interaction among various healthcare participants. Our solutions help
our clients deliver consistent and appropriate medical care utilizing clinical
guidelines and business process rules specified by them, while minimizing
inefficient paper-, fax- and phone-based communications. We incorporated on
April 27, 1982 as Landa Management Systems Corporation, a California
corporation. We reincorporated as Landacorp, Inc., a Delaware corporation, on
December 3, 1999.
We currently offer two products to healthcare payers: maxMC and e-maxMC,
our new, Internet-based medical management solution. As of December 31, 1999,
five payers who claim to have a combined membership of six million participants
were using maxMC. We have completed internal testing of e-maxMC, and we expect
to complete testing with one of our payer customers in early 2000. We believe
that the lack of functionality offered by existing Internet-based medical
management products provides a significant market opportunity for e-maxMC. We
believe that the sticky applications incorporated in e-maxMC will drive repeat
visits to payers' Web sites by their providers members.
Maxsys II is our product for healthcare providers. As of December 31, 1999,
approximately 175 hospitals were using Maxsys II or its predecessor, Maxsys I,
which we continue to support with a maintenance program, but no longer market.
Our solutions utilize an n-tiered system architecture that enables them to
complement existing information systems, as well as other Internet-based
products, with a rich set of medical management functions. An n-tiered system
architecture is one that accommodates the concurrent operation of multiple
servers and applications. Our solutions are flexible and secure, and we can
deploy them across a broad range of computing environments. They are also
scalable, which means customers can use them on a small scale for a limited
number of users or on a large scale for multiple users without affecting product
performance. As a result, our customers can configure and adapt our solutions to
fit their specific administrative and business processes, clinical guidelines,
existing information systems and business models.
Our solutions provide the medical management functionality lacking in
existing Internet-based connectivity products and traditional healthcare
technology products. Our solutions utilize an n-tiered system
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architecture to manage communication and interaction among payers, providers and
members. Our solutions automate and streamline administrative and business
processes and clinical procedures and transactions, and minimize inefficient
paper-, fax- and phone-based communications among payers, providers and members.
Our solutions benefit payers by:
- automating and streamlining administrative and business processes and
clinical procedures and transactions to enhance operational efficiencies;
- increasing adherence to clinical guidelines to reduce delivery of
inappropriate care;
- providing sticky applications to attract providers and members to payers'
Web sites;
- enhancing member satisfaction; and
- aggregating member data for trend analysis and decision support.
Our solutions benefit providers by:
- automating and streamlining administrative and business processes and
clinical procedures and transactions to enhance operational efficiencies;
- reducing payment denials and claims appeals by payers;
- increasing quality and consistency of care;
- improving the efficiency of incident reporting and reducing the risk of
legal liability;
- assisting with accreditation and administration of compliance programs;
and
- aggregating data for trend analysis and decision support.
Members benefit from:
- increased access to health information content;
- empowerment and self-care, including participation in case management,
disease management and wellness programs; and
- improved information flow such as referral tracking, claims status
inquiries and personal information updating.
PRODUCTS
We currently market our solutions to healthcare payers and providers. The
flexible and open design of our solutions enables us to configure them to
address our customers' evolving needs and specific clinical, administrative and
business requirements. Our solutions feature:
Rules Based Processing Capabilities. Our workflow engine utilizes a series
of customized "if . . . then . . ." associations to trigger actions based upon
changes in the state of any data within the database (e.g., automatically
notifying a case manager if a high-risk authorization is requested).
Clinical Guidelines Integrated into Workflow Applications. Our solutions
incorporate industry standard clinical guidelines and specific medical
management criteria provided by our customers into automated authorization, case
management and disease management workflow processes.
Interfacing Capabilities. We have built more than 300 interfaces which
enable efficient integration of our medical management solutions with other data
systems. An interface is a method for transferring data from one system to
another and a point at which a user can automatically launch a third-party
program from within a given data system.
Trend Analysis and Decision Support Tools. Our solutions enable healthcare
personnel to graphically view data in order to identify trends and spend more
time resolving issues rather than identifying them.
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MAXMC. Our core medical management solution for payers is maxMC. maxMC
integrates a payer's internal medical management guidelines and clinical,
administrative and business processes with specific information about a payer's
members. Key functions of this product include:
Care Coordination Center. This function verifies membership and benefits
eligibility and incorporates industry standard clinical guidelines, including
InterQual(R) and Milliman & Robertson, and criteria provided by the payer into
the treatment decision process to ensure consistent decisions about care across
member populations. Once the treatment decision data is input and the treatment
request is authorized, the function enables the appropriate data to be directly
and promptly exported to the payer's claims adjudication systems.
Case and Disease Management. This function supports both case management
and disease management programs using a combination of clinical disease
assessment protocols selected by the client. The client can employ these
protocols to determine appropriate levels of care, perform short- and long-term
care planning and minimize costly unnecessary procedures. The client can deploy
health assessments to identify members requiring case or disease management,
care planning or healthcare education.
Credentialing. This function assists with maintenance and review of
healthcare provider credentials by automating the maintenance and review of
physician and other care provider information, such as continuing medical
education credits, medical board certifications and records of disciplinary and
other adverse actions. Using the function, a payer can efficiently send requests
for data to the National Practitioner Data Bank and other governmental bodies
and receive and incorporate that data in its systems for use in regulatory
compliance and other decision making.
E-MAXMC. Our new Internet-based medical management solution for payers,
e-maxMC, introduces providers and members into payers' internal medical
management systems by combining the immediate and broad-based connectivity of
the Internet with the medical management functions provided by our maxMC
solution. This solution will enable providers and members to access to a payer's
secure medical management information and proprietary business processes, giving
them the ability to engage in real-time, Internet-based transactions such as
clinically-based authorizations, referrals and health risk assessments. We have
successfully tested e-maxMC internally, and we expect to complete an on-site
test with one of our payer customers in early 2000.
e-maxMC will enable the following Web-based interactions between payers and
providers:
Referral Advice. Online notification to payers of referrals to specialists
and others by primary care physicians.
Treatment Requests and Communications. Affords primary care physicians and
specialists a medium for conducting online eligibility checks, requests for
care, clinical criteria analysis and benefits checks, in each case, in
accordance with individual payers' requirements.
Assignment of Care. Online capability for primary care physicians to assign
care management to appropriate specialists.
Cross-coverage. Online notification by one primary care physician that
another primary care physician will provide coverage for a specific period of
time.
Case and Disease Management Program Enrollment. Online requests that
patients be considered for enrollment in a particular case or disease management
program.
Inpatient Admission. Online notification by an inpatient facility that a
member has been admitted.
Health Risk Assessment. Online completion of health risk assessments by
primary care physicians and specialists.
e-maxMC will enable the following Web-based interactions between payers and
their members:
Information Exchange. Online reviewing and updating of member demographic
information and checking of plan benefit and claim status information.
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Physician Selection. Online selection of primary care physician in
accordance with payer-specific policies from up-to-date lists of in-network
physicians.
Health Risk Assessment. Online completion of health risk assessments by
members.
We will utilize e-maxMC's sticky applications to assist payers with the
development of their healthcare Web sites and other Internet healthcare
initiatives. We will seek to provide payer organizations with, among other
Internet services, healthcare content, disease management tools and e-commerce
capabilities in partnership with leading Internet companies. We believe that
this strategy will enable us to forge strong relationships with payers and could
potentially generate sponsorship, advertising and e-commerce revenues.
MAXSYS II. Maxsys II, our medical management solution for hospital
providers, enables hospital providers to improve communications and apply more
efficient workflow tools to the process of delivering healthcare. Maxsys II is
the successor to our Maxsys I product, which we continue to support with a
maintenance program, but no longer market. Key functions of our Maxsys II
solution include:
Case/Utilization Management. This function helps ensure that patients
receive appropriate levels of care and minimizes expenses associated with
inappropriate and unduly lengthy hospital stays. The function enables providers
to reduce inefficient use of human resources and reduce denials of reimbursement
by payers resulting from failure to follow payer guidelines. Our provider
customers achieve these outcomes through the automation of the initial
evaluation and on-going review of patient care in order to monitor compliance
with clinical guidelines, including guidelines provided by the provider customer
and industry standard clinical guidelines, such as InterQual(R) and Milliman &
Robertson.
Quality Management. This function helps identify deficiencies in patient
care or provider performance and alert process improvement personnel in order to
promote early intervention. The function allows a provider's staff to monitor
and evaluate the provider's care processes, treatments, operative procedures and
outcomes. It also permits quality managers to better monitor high-cost,
high-risk procedures and to enforce quality initiatives by providing variance
reporting, process monitoring and centralized data.
Risk Management. This function helps to reduce financial losses by
automating and supporting timely and thorough investigations, interventions,
communication and education regarding potential and actual claims. This function
enables a provider's risk management staff to be notified instantly as incidents
are reported by personnel anywhere within the organization. The function also
supports efficient management, tracking and analysis of potential and asserted
claims by patient/episode, staff members, physicians, allied health
professionals and visitors.
Infection Control. This function facilitates effective management of
epidemology and analysis of treatment protocols based on the National Nosocomial
Infections Study model, which reports the national standards for epidemology
studies. The function eliminates redundant manual data entry by extracting
pertinent data from other sources in a provider's information technology system
and from data collected by case and quality management staff.
Credentialing. This function supports the tracking of provider credentials
by automating the maintenance and review of physician and other care provider
information such as continuing medical education credits, medical board
certifications and records of disciplinary and other adverse actions. The
function also facilitates the exchange of data with the National Practitioner
Data bank and other governmental bodies.
SERVICES
We offer our payer and provider customers comprehensive implementation
services such as:
- management of projects;
- identification of customer-specific system requirements;
- consideration of interactions between our solutions and our customer's
information systems and designing appropriate administrative, clinical
and business processes;
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- building proprietary interfaces to other systems and configuring hardware
and software to support the customer's administrative, clinical and
business processes; and
- training customer personnel.
We plan to offer a broad range of Internet-related services, such as:
- co-developing payers' healthcare Web sites;
- designing and implementing branding strategies and sticky applications;
- determining hardware and software requirements; and
- providing general health content, disease management tools and e-commerce
capabilities in partnership with leading Internet companies.
CUSTOMERS
We target payers with membership ranging from several million to 50,000
covered lives. We currently serve five payers with a combined membership of more
than six million participants. Our top payer customers by total contract value
are Highmark (Blue Cross Blue Shield of Western Pennsylvania,) and Renal
Management Systems (a subsidiary of Baxter International Inc.). Highmark and
Renal Management Systems are currently using our maxMC solution. Renal
Management was the first of our customers to utilize maxMC's disease management
functionality, which they have implemented using a central database and
twenty-two remote satellite operations throughout the United States.
We target hospital providers with licensed beds ranging from several
thousand to as few as 250. We currently serve over 175 providers. Our top three
provider customers by total contract value are New York and Presbyterian Health
Network, All Children's Hospital of St. Petersburg and the Baptist Healthcare
Systems, Inc. New York and Presbyterian Health Network is currently implementing
Maxsys II at nine of its thirteen facilities. All Children's Hospital has
recently completed implementation of Maxsys II. Baptist Healthcare Systems has
completed implementation of Maxsys II across its five hospital system. Many of
our hospital provider customers continue to use Maxsys I, the predecessor of
Maxsys II, which we continue to support with a maintenance program, but no
longer market.
TECHNOLOGY
We believe that our proprietary technology platform provides us with a
competitive advantage. Our products utilize n-tiered and Web architecture
systems derived from our proprietary object oriented software foundation.
Through the application of middleware platforms or service oriented
applications that include business rules and service functions, our technology
supports our medical management solutions by ensuring high availability and
scalability. We currently employ Oracle database management systems to support
the data storage requirements of our solutions.
We have developed an open architecture standard, allowing separate
functional components to run on several different hardware platforms. Maxsys II
and maxMC, based upon the leading fourth generation language of PowerBuilder,
run on standard Intel-compatible personal computers. Our common object request
broker architecture, CORBA, based rules engine runs on Microsoft NT and Sun
Solaris systems. emaxMC, which utilizes Java, Java Servelets and XML for its
functionality and either Microsoft's Internet Explorer or Netscape's Netscape
Communicator browsers for the provider interface, makes use of any Internet
capable system with the application itself being served by a Microsoft NT or Sun
Solaris platform. Our data interface engine operates on the leading UNIX or
Microsoft NT platforms. Additional servers may be placed in the system, such as
report servers, fax servers or additional application servers, in order to
ensure scalability without performance loss. The interaction of all these
services and middleware makes the system truly n-tiered, rather than two-tiered
(client/server) or three-tiered (client/application/server).
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COMPETITION
The market for our solutions is highly competitive and is characterized by
rapidly changing technology, evolving user needs and the frequent introduction
of new products. The principal companies we compete against in the payer market
include HPR (a subsidiary of McKesson HBOC), MedDecision, PhyCom and Confer. In
the hospital provider market, we compete against MIDS, SoftMed Systems and
others.
We expect that competition will continue to increase as a result of
consolidation in the Internet, information technology and healthcare industries.
We believe that the principal factors affecting competition in our markets
include, product functionality, performance, flexibility and features, use of
open standards technology, quality of service and support, company reputation,
price and overall cost of ownership.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We depend upon our proprietary information and technology. We rely
primarily on a combination of copyright, trademark and trade secret laws and
license agreements to establish and protect our rights in our software products
and other proprietary technology. We require employees and third-party
consultants and contractors to enter into nondisclosure agreements to limit use
of, access to, and distribution of, our proprietary information. Nevertheless,
our means of protecting our proprietary rights may not be adequate to prevent
misappropriation. The laws of some foreign countries may not protect our
proprietary rights as fully or in the same manner as do the laws of the United
States. Also, despite the steps taken by us to protect our proprietary rights,
unauthorized third parties may be able to copy aspects of our products, reverse
engineer our products or otherwise obtain and use information that we regard as
proprietary. Furthermore, others may independently develop technologies similar
or superior to our technology, or design around the proprietary rights that we
own.
GOVERNMENT REGULATION
Participants in the healthcare industry, such as our payer and provider
customers, are subject to extensive and frequently changing laws and
regulations, including laws and regulations relating to the confidential
treatment and secure transmission of healthcare information such as patient
medical records. Legislators at both the state and federal levels have proposed
additional legislation relating to the use and disclosure of medical
information, and the federal government is likely to enact new federal laws or
regulations in the near future. Pursuant to the Health Insurance Portability and
Accountability Act of 1996, HIPAA, the Department of Health and Human Services,
DHHS, has proposed regulations setting forth security and privacy standards for
all health plans, clearinghouses and providers to follow with respect to an
individual's healthcare information that is electronically transmitted,
processed, or stored. In addition, Congress is currently considering various
legislative proposals regarding health information privacy.
While we do not believe that the security and privacy provisions of HIPAA
apply to Landacorp directly, our provider customers and our payer customers must
comply with HIPAA, its associated regulations and all other applicable
healthcare laws and regulations. Accordingly, in order for our medical
management solutions to be marketable, they must contain features and
functionality that allow our customers to comply with these laws and
regulations. We believe our products currently allow our customers to comply
with existing laws and regulations. However, because new regulations are yet to
come and because the proposed regulations may be modified prior to becoming
final, our products may require modification in the future. Any such
modification could be expensive, could divert resources away from other product
development efforts or could delay future releases or product enhancements. If
we fail to offer solutions that permit our customers to comply with applicable
laws and regulations our business will suffer.
In addition, laws governing healthcare payers and providers are often not
uniform among states. This could require us to undertake the expense and
difficulty of tailoring our products in order for our customers to be in
compliance with applicable state and local laws and regulations.
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The Internet and its associated technologies are also subject to government
regulation. Many existing laws and regulations, when enacted, did not anticipate
the methods of Internet-based medical management solutions we offer. We believe,
however, that these laws and regulations may nonetheless be applied to us.
Current laws and regulations which may affect our Internet-based business relate
to the following:
- patient medical record information;
- the electronic transmission of information between healthcare providers,
payers, clearinghouses and other healthcare industry participants;
- the use of software applications in the diagnosis, cure, treatment,
mitigation or prevention of disease;
- health maintenance organizations, insurers, healthcare service providers
and/or employee health benefit plans; and
- the relationships between or among healthcare providers.
We expect to conduct our Internet-based medical management business in
substantial compliance with all material federal, state and local laws and
regulations governing our operations. However, the impact of regulatory
developments in the healthcare industry is complex and difficult to predict, and
our business could be adversely affected by existing or new healthcare
regulatory requirements or interpretations. These requirements or
interpretations could also limit the use of the Internet for our medical
management solutions or even prohibit the sale of a particular product or
service.
Because of the Internet's popularity and increasing use, new laws and
regulations with respect to the Internet are becoming more prevalent. Such laws
and regulations have covered, or may cover in the future, issues such as:
- security, privacy and encryption;
- pricing;
- taxation;
- content;
- copyrights and other intellectual property;
- contracting and selling over the Internet;
- distribution; and
- characteristics and quality of services.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Demand for our Internet-based applications and services may be affected by
additional regulation of the Internet. Any new legislation or regulation
regarding the Internet, or the application of existing law and regulations to
the Internet, could adversely affect our business. Additionally, while we do not
currently operate outside of the United States, the international regulatory
environment relating to the Internet market could have an adverse effect on our
business, especially if we expand internationally.
The growth of the Internet, coupled with publicity regarding Internet
fraud, may also lead to the enactment of more stringent consumer protection
laws. These laws may impose additional burdens on our business. The enactment of
any additional laws or regulations in this area may impede the growth of the
Internet, which could decrease our potential revenues or otherwise cause our
business to suffer.
EMPLOYEES
As of December 31, 1999, we employed one hundred seven employees, including
twenty-eight employees in research and development, forty-five employees in
client services (including implementation and support services), twenty-three
employees in sales and marketing and eleven employees in finance and
administration.
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Our success depends on our continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense in
the information technology industry, particularly for talented software
developers, service consultants, and sales and marketing personnel. We may not
be able to attract and retain qualified personnel in the future.
Our employees are not members of any labor union. We consider our relations
with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located in Atlanta, Georgia, and our
Research and Development and Support Departments are located in Chico,
California. We have under leases approximately 21,000 square feet of office
space. We anticipate that our current facilities are adequate for our current
needs.
ITEM 3. LEGAL PROCEEDINGS
Landacorp is not currently involved in any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year ended December 31, 1999, the following matters were
submitted to the shareholders of Landa Management Systems, Inc., a California
corporation ("Landacorp California"). Landacorp California merged into Landacorp
on December 3rd, 1999 for the purpose of changing its state of incorporation to
Delaware:
1. In September, 1999, prior to the Company's initial public offering, the
shareholders of Landacorp California, acting by written consent,
approved (i) Landacorp's 1999 Employee Stock Purchase Plan and the
reservation of 560,000 shares of Common Stock thereunder; and (ii) the
reincorporation merger of Landacorp California with and into Landacorp,
with Landacorp being the surviving corporation. Stockholders holding
more than 90% of the shares (on an as if converted into Common Stock
basis) outstanding at that time, consented to the foregoing.
2. In December, 1999, prior to the Company's initial public offering,
Landacorp California, the Company's then sole stockholder, acting by
written consent, approved (i) the amendment and restatement of the
Company's Certificate of Incorporation and (ii) the reincorporation
merger of Landacorp California with and into Landacorp, with Landacorp
being the surviving corporation.
3. In February, 2000, prior to the Company's initial public offering, the
shareholders of the Company, acting by written consent approved the
amended and restated Certificate of Incorporation of Landacorp to be in
effect upon closing of the initial public offering.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During the year ended December 31, 1999, the we sold and issued the
following unregistered securities:
1. In March 1999, we sold an aggregate of 1,357,284 shares of Common Stock
to employees, officers and directors for an aggregate purchase price of
$162,874.
2. In April 1999, we sold 5,000 shares of Common Stock to Michael Lake for
a purchase price of $2,500.
3. In May 1999, we sold an aggregate of 215,000 shares of common stock to
employees, officers and directors for an aggregate purchase price of
$25,800.
4. In August 1999, we sold 5,000 shares of common stock to Michael Lake for
a purchase price of $5,000.
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, Regulation D promulgated thereunder, or
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Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by
an issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through employment or
other relationships to information about Landacorp.
On February 14th, 2000, we completed an initial public offering (the
"Offering") of our Common Stock, which has a par value of $0.001 per share. The
managing underwriters in the Offering were Chase H&Q, Prudential Volpe
Technology Group a unit of Prudential Securities and S.G. Cowen (the
"Underwriters"). The shares of Common Stock sold in the Offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (the "Registration Statement") (Reg. No. 333-87435) that was declared
effective by the SEC on February 8th, 2000. The Offering commenced on February
9th, 2000. All 4,025,000 shares of Common Stock registered under the
Registration Statement (including 525,000 shares sold pursuant to the exercise
of the Underwriters' over-allotment option on February 14, 2000) were sold at a
price of $10.00 per share. The aggregate price for the Offering amount
registered was $40.25 million. $38.75 million of this total amount, less
underwriting discounts and commissions of $2.7 million, was paid to us and $1.50
million of this total amount, less underwriting discounts and commissions of
$105,000, was paid to certain selling shareholders who were in the Underwriters'
over-allotment option.
After deducting the underwriting discounts and commissions and the Offering
expenses, we received net proceeds of approximately $35.1 million. The company
intends to use the proceeds for general corporate purposes as described in the
prospectus for the Offering. Except for a bonus arising from the waiver of
deferred compensation in the amount of $335,000 paid to Mr. Bryan H. Lang, a
director and officer, as disclosed in the related transactions section of our
Offering document, none of the Company's net proceeds of the Offering were paid
directly or indirectly to any of our directors, officers, general partners or
their associates, persons owning 10% or more of any class of our equity
securities, or to any affiliate.
As of March 31, 2000, there were approximately 197 registered holders of
our common stock. Our common stock is listed for quotation on the Nasdaq Stock
Market's National Market System under the symbol "LCOR". The following table
sets forth for the period indicated, the high and low prices of our common stock
as quoted in the Nasdaq Stock Market's National Market System:
HIGH LOW
------- ------
February 9, 2000 to March 31, 2000.......................... $21.790 $7.875
We have not paid any dividends since our inception and do not intend to pay
any dividends on our capital stock in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following selected financial data in conjunction with
our financial statements and their related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report. We derived the following statement of operations data
for the years ended December 31, 1997, 1998 and 1999, and the balance sheet data
as of December 31, 1998 and 1999, from the audited financial statements included
at the end of this report. We derived the following statement of operations data
for the year ended December 31, 1996 and the balance sheet data as of December
31, 1995, 1996 and 1997 from audited financial statements not included elsewhere
in this report. We derived the following statement of operations data for the
year ended December 31, 1995 from our unaudited financial statements and, in our
opinion, such unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
Landacorp's financial position and results of operations.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales............................................ $ 583 $ 1,007 $ 3,136 $ 4,967 $ 7,251
Support services........................................ 980 932 902 1,250 2,059
------- ------- ------- ------- -------
Total revenues........................................ 1,563 1,939 4,038 6,217 9,310
------- ------- ------- ------- -------
Cost of revenues:
System sales............................................ 282 499 1,097 2,330 3,071
Support services........................................ 235 285 299 422 594
------- ------- ------- ------- -------
Total cost of revenues................................ 517 784 1,396 2,752 3,665
------- ------- ------- ------- -------
Gross profit.............................................. 1,046 1,155 2,642 3,465 5,645
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing..................................... 376 782 1,176 1,875 3,222
Research and development................................ 1,127 1,269 1,294 1,410 1,733
General and administrative.............................. 408 801 975 2,165 3,175
------- ------- ------- ------- -------
Total operating expenses.............................. 1,911 2,852 3,445 5,450 8,130
------- ------- ------- ------- -------
Loss from operations...................................... (865) (1,697) (803) (1,985) (2,485)
Interest and other income, net............................ -- -- -- 101 103
Interest expense.......................................... (52) (200) (208) (26) (17)
------- ------- ------- ------- -------
Net loss.................................................. $ (917) $(1,897) $(1,011) $(1,910) $(2,399)
======= ======= ======= ======= =======
Net loss per share:
Basic and diluted....................................... $ (0.87) $ (1.74) $ (0.91) $ (1.84) $ (1.86)
======= ======= ======= ======= =======
Weighted average shares................................. 1,058 1,088 1,108 1,041 1,290
DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 81 $ -- $ 142 $ 2,032 $ 1,884
Working capital (deficit)................................. (2,700) (4,482) (5,545) 455 (1,035)
Total assets.............................................. 613 1,536 1,181 4,313 5,859
Notes payable and accrued interest to stockholders........ 1,588 2,035 2,716 -- --
Stockholders' equity (deficit)............................ (2,420) (4,269) (5,259) 899 514
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements, trend analyses and other information contained in the
following discussion relative to markets for our products and trends in
revenues, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "could" "estimate,"
"expect" "intend" and "plan" and other similar expressions, constitute
forward-looking statements. These forward-looking statements are subject to
business and economic risks and uncertainties, and our actual results of
operations may differ materially from the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Risk Factors" as well as other risks and uncertainties
referenced in this prospectus.
OVERVIEW
We offer business-to-business electronic medical management solutions to
healthcare payers and providers that are designed to help our clients control
the cost and improve the quality of healthcare delivery. Our applications
automate and streamline administrative and business processes and enable
real-time interaction among various healthcare participants. As of December 31,
1999, five payers who claim to have a combined membership of six million
participants were using our maxMC solution, and approximately 175 hospital
providers were using our Maxsys solutions. We recently began offering e-maxMC,
our Internet-based medical management solution for payers. We have successfully
tested e-maxMC internally and expect to complete a customer test of the
application in early 2000.
We have historically derived revenues from the installation and licensing
of our maxMC and Maxsys solutions, sublicensing third-party software
applications as part of system implementations and delivery of post-contract
customer support, training and consulting services. We are currently focusing
our primary development, sales and marketing efforts on our e-maxMC, maxMC and
Maxsys II solutions. Although we do not anticipate future system sales or
enhancements of Maxsys I, we continue to provide maintenance services to, and
receive maintenance fees from, customers who purchased this product in the past.
We plan to continue to support Maxsys I for the foreseeable future as a service
to such customers and pursuant to ongoing contractual obligations.
Traditionally, we have recognized system sales revenues and associated
costs using the percentage-of-completion method, with labor hours incurred
relative to total estimated contract hours as the measure of progress towards
completion. We recognize revenues from sublicensing of third-party software upon
installation of such software. We recognize revenues from support services
ratably over the support period. We recognize revenues from training and
consulting as such services are delivered.
We have introduced a new subscription-based fee structure for our e-maxMC
and maxMC solutions that provides for implementation services at a fixed hourly
rate and the licensing of installed systems and post customer contract support
through a monthly subscription fee based upon the number of members covered by
the payer organization. Subscription-based contracts allow us to recognize the
fair value of the implementation services as such services are delivered and
recognize subscription fees on a monthly basis.
We expect to expand our operations and employee base, including our sales,
marketing, research and development, implementation, and support services
resources. In particular, we intend to expand our sales force significantly. To
accelerate the implementation of elements of our strategy, we intend to target
and pursue strategic acquisitions and relationships, such as marketing alliances
with vendors of complementary products and services and partnerships with
Internet providers of healthcare content, disease management and health-related
e-commerce services. Investigating or entering into any such strategic
relationships could lead to additional expenditures.
On January 31, 2000, we purchased from High Technology Solutions, Inc.
assets related to its business of providing Web site services to healthcare
payers. The purchase price for the assets is $1,268,000 (including an estimated
$18,000 in assumed liabilities) of which we paid $250,000 at the closing. We
will pay the balance in four quarterly payments of approximately $250,000 in
accordance with a promissory note secured by the assets we purchased. The
acquired assets include equipment, know how, trademarks and other intangible
rights used
13
14
by High Technology Solutions, Inc. in the operation of its business of providing
Web site services to healthcare payers, as well as contracts, none of which are
material. In connection with the acquisition we hired a number of former
employees of High Technology Solutions, Inc. who we believe possess valuable
expertise and relationships with potential healthcare payer customers. We
believe the acquisition benefits Landacorp by providing us with valuable
expertise and strategic relationships in the area of providing Web site services
to healthcare payers faster and more cost-effectively than we would have been
able to develop internally. As a result, the acquisition will allow us to
accelerate the implementation of our strategy of providing Web site services to
healthcare payers.
The purchase price of $1,268,000 (including an estimated $18,000 in assumed
liabilities) has been allocated to the various tangible and intangible assets
acquired. The acquired intangible assets will be amortized over their estimated
useful lives of twenty-four to thirty-six months. Factors considered by the
Company in determining estimated useful lives of the intangible assets include,
service life expectancies of the workforce based on anticipated option vesting
schedules of eighteen months and other short-lived incentive compensation
arrangements, effects of obsolescence on intellectual property, and the effects
of competition and other economic factors on goodwill, such as our intention to
assimilate the acquired business into our operations rather than operate it as a
separate business.
During the year ended December 31, 1998 and 1999, we recorded unearned
stock-based compensation totaling $4,166,000 and $1,610,000, respectively, in
connection with the grant of stock-based awards to employees and directors. We
are amortizing these amounts over the four-year vesting period of the related
options. We issued these options to create incentives for continued performance.
Of the total unearned compensation, we amortized $1,173,000 in 1998 and
$1,958,000 in 1999. We expect to amortize $1,503,000 in 2000, $765,000 in 2001,
$289,000 in 2002 and $54,000 in 2003. We will reduce unearned compensation
expense for future periods to the extent that options terminate prior to full
vesting.
RESULTS OF OPERATIONS
The following table presents the statement of operations data as a
percentage of total revenues:
PERCENTAGE OF REVENUES
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales.............................................. 77.7% 79.9% 77.9%
Support services.......................................... 22.3 20.1 22.1
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
System sales.............................................. 27.2 37.5 33.0
Support services.......................................... 7.4 6.8 6.4
----- ----- -----
Total cost of revenues................................. 34.6 44.3 39.4
----- ----- -----
Gross profit................................................ 65.4 55.7 60.6
----- ----- -----
Operating expenses:
Sales and marketing....................................... 29.1 30.1 34.6
Research and development.................................. 32.0 22.7 18.6
General and administrative................................ 24.1 34.8 34.1
----- ----- -----
Total operating expenses............................... 85.2 87.6 87.3
----- ----- -----
Loss from operations........................................ (19.8) (31.9) (26.7)
Interest and other income, net.............................. -- 1.6 1.1
Interest expense............................................ (5.2) (0.4) (0.2)
----- ----- -----
Net loss.................................................... (25.0)% (30.7)% (25.8)%
===== ===== =====
14
15
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Revenues. System sales revenues increased by $1,831,000 or 58% from
$3,136,000 in 1997 to $4,967,000 in 1998 and by $2,284,000 or 46% to $7,251,000
in 1999. The increase in revenues between 1997 and 1999 resulted from growth in
the volume of maxMC and Maxsys II contracts and an increase in the value of
MaxMC contracts. In 1998, one customer accounted for 13% of system sales
revenues and in 1999, two customers accounted for 19% and 14% of system sales
revenues. No customer accounted for more than 10% of system sales revenues in
1997.
Support services revenues increased by $348,000 or 39% from $902,000 in
1997 to $1,250,000 in 1998 and increased by $809,000 or 65% to $2,059,000 in
1999. The increase from 1997 to 1998 in support services revenue resulted from
additional support contracts obtained as a result of the completion of maxMC and
Maxsys II software implementations, partially offset by a decline in Maxsys I
support revenues resulting from a continued decline in the total number of
Maxsys I support customers. The increase from 1998 to 1999 in support service
revenues resulted from an increase in the number of support contracts sold for
completed maxMC and Maxsys II contracts, partially offset by declines in the
number of Maxsys I support customers.
We believe that the number of contracts with hospital providers has
decreased due to their internal Year 2000 issues. We expect this trend to
continue through the first quarter of 2000.
Cost of Revenues. Cost of system sales consists principally of costs
incurred in the implementation of our software products, including personnel
costs, amortization of unearned stock-based compensation, non-reimbursed travel
expenditures, related department overhead, amortization of capitalized software
development costs, costs of third party software products, and depreciation on
equipment. Cost of system sales increased by $1,233,000 or 112% from $1,097,000,
representing 35% of system sales revenues, in 1997 to $2,330,000, representing
47% of system sales revenues, in 1998 and by $741,000 or 32% to $3,071,000,
representing 42% of system sales revenues, in 1999. This cost increase resulted
from an increase in personnel costs as we added employees to perform software
implementations, stock-based compensation expense further discussed below, and
additional license fees that were paid to third party software vendors resulting
from an increase in the volume of completed software contracts. The decrease in
the gross margin on system sales from 65% in 1997 to 53% in 1998 resulted from
an increase in headcount as we added personnel in anticipation of increases in
the volume of software contracts as well as stock-based compensation, which was
first recorded in 1998. The increase in the gross margin on system sales from
53% in 1998 to 58% in 1999 resulted from implementation efficiencies realized
from the increased volume of software contracts, and the increased size of
individual software contracts. We expect that cost of system sales revenues will
continue to increase as we add personnel to meet anticipated increases in
contract volume. We cannot yet determine the impact of these increased costs on
our gross margins. Cost of support services revenues consists of personnel
costs, amortization of unearned stock-based compensation, support costs for
third party software licenses, related department overhead and depreciation on
equipment.
Cost of support services revenues increased by $123,000 or 41% from
$299,000, representing 33% of support services revenues, in 1997 to $422,000,
representing 34% of support services revenues, in 1998 and by $172,000 or 41% to
$594,000, representing 29% of support system revenues, in 1999. This increase in
dollars resulted from an increase in salaries, benefits, stock-based
compensation expense further discussed below, and other personnel-related
expenses as we increased the size of the support services staff due to the
increased volume of customers purchasing support contracts. The decrease in
gross margin on support services from 67% in 1997 to 66% in 1998 resulted from
an increase in headcount to support the increase in customers purchasing support
contracts. The increase in the gross margin on support services from 66% during
1998 to 71% during 1999 resulted from efficiencies realized from additional
support contracts sold for completed Maxsys II and maxMC contracts. We expect
that cost of support services revenues will continue to increase in dollar
amounts as we continue to expand our customer support department to meet
anticipated customer demand. We cannot yet determine the impact of these
increased costs on our gross margins.
Research and Development. Research and development expenses consist of
personnel costs, amortization of unearned stock-based compensation, related
department overhead and depreciation on equipment. Research and development
expenses increased by $116,000 or 9% from $1,294,000, representing 32% of total
15
16
revenues, in 1997 to $1,410,000, representing 23% of total revenues, in 1998 and
by $323,000 or 23% to $1,733,000, representing 19% of total revenues, in 1999.
This increase in dollars resulted from an increase in salaries, benefits and
other personnel-related expenses, including stock-based compensation expense
further discussed below, as we increased the size of the research and
development staff. We anticipate that we will continue to devote substantial
resources to research and development and that such expenses will increase in
dollar amounts. We cannot yet determine the impact of these increased costs on
our total operating expenses.
Sales and Marketing. Sales and marketing expenses consists principally of
compensation for our sales and marketing personnel, amortization of unearned
stock-based compensation, advertising, trade show and other promotions, costs,
and department overhead. Sales and marketing expenses increased by $699,000 or
60% from $1,176,000, representing 29% of total revenues, in 1997 to $1,875,000,
representing 30% of total revenues, in 1998 and by $1,347,000 or 72% to
$3,222,000, representing 35% of total revenues, in 1999. This increase resulted
from increased salaries, benefits and other personnel-related expenses due to
growth in the number of sales and marketing personnel, stock-based compensation
expense further discussed below, increases in sales commissions due to an
increase in the volume of customer contracts, increases in travel costs due to
the increased headcount, and increases in trade shows and other marketing
expenses incurred to build additional product awareness. We expect that sales
and marketing expenses will continue to increase in dollar amounts as we
continue to expand our sales and marketing efforts, continue to add personnel
and increase promotional activities. We cannot yet determine the impact of these
increased expenses on our total operating expenses.
General and Administrative. General and administrative expenses consist of
compensation for personnel, fees for outside professional services, amortization
of unearned stock-based compensation, and allocated occupancy and overhead
costs. General and administrative expenses increased by $1,190,000 or 122% from
$975,000, representing 24% of total revenues, in 1997 to $2,165,000,
representing 35% of total revenues, in 1998 and by $1,010,000 or 47% to
$3,175,000 representing 34% of total revenues, in 1999. The increase in dollars
was due to an increase in the number of employees, higher professional service
fees, stock-based compensation expense further discussed below, and increased
occupancy costs due to the commencement of our Atlanta office lease payment in
December 1998. We believe that our general and administrative expenses will
continue to increase in dollar amounts as a result of our growing operations,
the commencement of our new lease for expanded facilities in Chico in September
1999 and the expenses associated with operating as a public company. We cannot
yet determine the impact of these increased expenses on our total operating
expenses.
Stock-based Expenses. In connection with certain stock option grants and
common stock issuances during the years ended December 31, 1998 and 1999, the
Company recognized unearned compensation totaling $4,166,000 and $1,610,000
respectively, which is being amortized over the vesting periods or as the
Company's repurchase rights lapse (See Note 8 of Notes to Financial Statements),
as applicable, using the multiple option approach prescribed by SFAS No. 123.
Amortization expense recognized during the year ended December 31, 1998 and
1999, totaled $1,173,000 and $1,958,000, respectively, and has been allocated to
operating expenses. Additionally, compensation expense of $48,000 was recorded
during 1999 for stock sold at a discount to a third party consultant for
services provided, and is included in general and administrative expense. See
Note 9 of Notes to Financial Statements.
Interest and Other Income and Interest Expense. Interest and other income
consists primarily of earnings on our cash and cash equivalents. Interest and
other income amounted to $101,000 and $103,000 for the year ended December 31,
1998 and 1999, respectively. Interest expense decreased from $208,000 in 1997 to
$26,000 in 1998 due to the repayment of stockholder borrowings using proceeds
from the sale of preferred stock in March 1998, and decreased to $17,000 in
1999.
Income Taxes. We recorded no current provision or benefit for federal or
state income taxes for the years ended December 31, 1997, 1998 and 1999, as the
Company had incurred net operating losses and had no carryback potential. As of
December 31, 1999, we had net operating loss carryforwards for federal tax
purposes of approximately $7,109,000 and for state tax purposes of approximately
$1,842,000. These federal and state tax loss carryforwards are available to
reduce future taxable income. Utilization of such carryfor-
16
17
wards may be limited in certain circumstances including, but not limited to,
cumulative stock ownership changes of more than 50 percent over a three-year
period and expire at varying amounts during the period from 1999 to 2013. The
Company believes that there were cumulative changes of ownership of greater than
50 percent in February 1998. Accordingly, the amount of loss carryforwards that
may be utilized to reduce future taxable income for federal and state income tax
purposes will be limited. The amount of the limitation has not yet been
calculated. We have not recognized a deferred tax asset on our balance sheet.
See Note 5 of Notes to the Financial Statements.
UNAUDITED QUARTERLY FINANCIAL RESULTS
The following table presents our quarterly results of operations for each
of the eight quarters in the period ended December 31, 1999. You should read the
following table in conjunction with our financial statements and the related
notes included in this Report. We have prepared this unaudited information on
the same basis as the audited financial statements. This table includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Revenues:
System sales................ $ 677 $1,392 $1,766 $ 1,132 $1,688 $2,037
Support services............ 239 275 299 437 444 482
------ ------ ------ ------- ------ ------
Total revenues............ 916 1,667 2,065 1,569 2,132 2,519
------ ------ ------ ------- ------ ------
Cost of revenues:
System sales................ 432 522 672 704 755 722
Support services............ 90 100 107 125 149 147
------ ------ ------ ------- ------ ------
Total cost of revenues.... 522 622 779 829 904 869
------ ------ ------ ------- ------ ------
Gross profit.................. 394 1,045 1,286 740 1,228 1,650
------ ------ ------ ------- ------ ------
Operating expenses:
Sales and marketing......... 363 394 346 772 752 752
Research and development.... 335 318 371 386 390 381
General and
administrative............ 264 274 461 1,166 772 784
------ ------ ------ ------- ------ ------
Total operating
expenses................ 962 986 1,178 2,324 1,914 1,917
------ ------ ------ ------- ------ ------
(Loss) income from
operations.................. (568) 59 108 (1,584) (686) (267)
Interest and other income,
net......................... 16 33 26 26 22 27
Interest expense.............. (26) -- -- -- -- --
------ ------ ------ ------- ------ ------
Net (loss) income............. $ (578) $ 92 $ 134 $(1,558) $ (664) $ (240)
====== ====== ====== ======= ====== ======
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Revenues:
System sales................ $ 1,908 $1,618
Support services............ 508 625
------- ------
Total revenues............ 2,416 2,243
------- ------
Cost of revenues:
System sales................ 746 848
Support services............ 144 154
------- ------
Total cost of revenues.... 890 1,002
------- ------
Gross profit.................. 1,526 1,241
------- ------
Operating expenses:
Sales and marketing......... 790 928
Research and development.... 470 492
General and
administrative............ 837 782
------- ------
Total operating
expenses................ 2,097 2,202
------- ------
(Loss) income from
operations.................. (571) (961)
Interest and other income,
net......................... 27 27
Interest expense.............. (4) (13)
------- ------
Net (loss) income............. $ (548) $ (947)
======= ======
AS A PERCENTAGE OF TOTAL REVENUES
FOR THE QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
--------- -------- ------------- ------------ ---------
Revenues:
System sales................ 73.9% 83.5% 85.5% 72.1% 79.2%
Support services............ 26.1 16.5 14.5 27.9 20.8
------ ------ ------ ------- ------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- ------
Cost of revenues:
System sales................ 47.2 31.3 32.5 44.9 35.4
Support services............ 9.8 6.0 5.2 7.9 7.0
------ ------ ------ ------- ------
Total cost of revenues.... 57.0 37.3 37.7 52.8 42.4
------ ------ ------ ------- ------
Gross profit.................. 43.0 62.7 62.3 47.2 57.6
------ ------ ------ ------- ------
Operating expenses:
Sales and marketing......... 39.6 23.6 16.7 49.2 35.3
Research and development.... 36.6 19.1 18.0 24.6 18.3
General and
administrative............ 28.8 16.4 22.3 74.3 36.2
------ ------ ------ ------- ------
Total operating
expenses................ 105.0 59.1 57.0 148.1 89.8
------ ------ ------ ------- ------
(Loss) income from
operations.................. (62.0) 3.6 5.3 (100.9) (32.2)
Interest and other income,
net......................... 1.7 2.0 1.2 1.6 1.1
Interest expense.............. (2.8) -- -- -- --
------ ------ ------ ------- ------
Net (loss) income............. (63.1)% 5.6% 6.5% (99.3)% (31.1)%
====== ====== ====== ======= ======
AS A PERCENTAGE OF TOTAL REVENUES
FOR THE QUARTER ENDED
---------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999
-------- ------------- ------------
Revenues:
System sales................ 80.9% 79.0% 72.1%
Support services............ 19.1 21.0 27.9
------ ------- ------
Total revenues............ 100.0 100.0 100.0
------ ------- ------
Cost of revenues:
System sales................ 28.7 30.8 37.9
Support services............ 5.8 6.0 6.8
------ ------- ------
Total cost of revenues.... 34.5 36.8 44.7
------ ------- ------
Gross profit.................. 65.5 63.2 55.3
------ ------- ------
Operating expenses:
Sales and marketing......... 29.9 32.8 41.3
Research and development.... 15.1 19.4 22.0
General and
administrative............ 31.1 34.6 34.9
------ ------- ------
Total operating
expenses................ 76.1 86.8% 98.2
------ ------- ------
(Loss) income from
operations.................. (10.6) (23.6) (42.8)
Interest and other income,
net......................... 1.1 1.1 1.2
Interest expense.............. -- (.2) (.6)
------ ------- ------
Net (loss) income............. (9.5)% (22.7)% (42.2)%
====== ======= ======
17
18
Our revenues in the fourth quarter have generally been lower than those in
the third quarter due to staff vacations and our customers' holiday schedules,
which impact the progress of our implementation efforts.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through net cash generated
from operating activities, and private sales of common and preferred stock, with
net proceeds totaling $11.1 million. As of December 31, 1999, we had $1.9
million in cash and cash equivalents and ($1,035) in working capital deficit
with outstanding debt totaling $441,000.
Net cash used in operating activities was $17,000 in 1997 and $2.4 million
in 1998. Net cash provided by operating activities was $472,000 in 1999. Net
cash used to fund operating activities in 1997 reflects net losses before
non-cash charges for depreciation and amortization and decreases in deferred
revenue, offset in part by increases in accounts payable and accrued expenses,
and decreases in accounts receivable. Net cash used to fund operating activities
in 1998 reflects net losses before non-cash charges for depreciation and
amortization, amortization of unearned stock-based compensation, increases in
accounts receivable, decreases in deferred revenue, and decreases in accounts
payable and accrued expenses. Net cash provided by operating activities in 1999
consists of net losses before non-cash charges for depreciation and
amortization, and increases to accounts payable, accrued expenses and deferred
revenue.
Net cash used in investing activities was $235,000 in 1997, $397,000 in
1998 and $862,000 in 1999. Investing activities consist primarily of purchases
of computer equipment, office furniture and leasehold improvements, and
additions to capitalized software development costs.
Net cash generated from financing activities was $394,000 in 1997, $4.7
million in 1998 and $242,000 in 1999. Net cash generated from financing
activities in 1997 resulted almost entirely from net proceeds from bank and
stockholder borrowings. Net cash generated from financing activities in 1998
resulted from the issuance of preferred stock and common stock, partially offset
by principal payments on stockholder notes payable.
We purchased assets from High Technology Solutions, Inc. on January 31,
2000. At the closing, we paid High Technology Solutions, Inc. $250,000 and
delivered a promissory note in the principal amount of $1,000,000. Pursuant to
the terms of the promissory note we will pay High Technology Solutions, Inc.
four quarterly payments of $250,000 after the closing. The promissory note is
secured by the assets we purchased.
In February 1998, the Company entered into an agreement with Brian Lang
whereby the Company agreed to pay a bonus of $335,000 to Mr. Lang upon the
successful completion of an initial public offering. This amount was paid on
March 1, 2000 following our Initial Public Offering and the expense was recorded
as operating expense for that period.
In February 1999, we obtained a line of credit that allows maximum
borrowings of $2.0 million. The agreement allows us to designate up to $300,000
of the maximum borrowings as a term note. Advances on the line of credit and the
term note are secured by all of our tangible and intangible personal property.
At December 31, 1999, we had not drawn against the line of credit, and $233,000
was outstanding on the term note, which we used to finance the purchase of
certain fixed assets. The line of credit and term note contain various
restrictive covenants, one of which the Company was not in compliance with at
December 31, 1999. In January 2000, the Company obtained waivers for all
financial covenants for the period beginning September 30, 1999 through March
31, 2000, the expiration date of the line of credit and term note. In March
2000, the Company obtained a further waiver and extension through April 30,
2000.
We signed a lease for a new principal facility in March 1999. We began
making lease payments in September 1999 and we will continue to make such
payments for eighty-four months, resulting in aggregate lease expenses of
approximately $34,000 per quarter.
We expect to experience significant growth in our operating expenses for
the foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in other businesses,
technologies or product lines. We believe that available cash
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and cash equivalents and the net proceeds from the sale of the common stock in
our recent offering will be sufficient to meet our working capital and operating
expense requirements for at least the next twelve months. Thereafter, we may
require additional funds to support our working capital and operating expense
requirements or for other purposes and may seek to raise such additional funds
through public or private debt or equity financings. Such additional financing
may be unavailable, or if it is available, it may only be available on
unreasonable terms and may be dilutive to our stockholders.
YEAR 2000 COMPLIANCE
As of April 24, 2000, we have not experienced any material problems
associated with the year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. We have adopted the provisions of SOP 98-1 in our
fiscal year beginning January 1, 1999, and the effects of adoption did not have
a material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal year
beginning after June 15, 2000. We will adopt SFAS 133 in our quarter ending
March 31, 2001 and do not expect such adoption to have a material effect on our
financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR BUSINESS WILL SUFFER IF OUR MAXMC AND E-MAXMC MEDICAL MANAGEMENT SOLUTIONS
DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE AMONG HEALTHCARE PAYER ORGANIZATIONS
Achieving our growth objectives depends on our maxMC and e-maxMC medical
management solutions achieving widespread market acceptance among healthcare
payer organizations, which is difficult to determine at this time. We
commercially released maxMC in 1997 and only five payer customers currently use
it. Therefore, maxMC currently has limited market acceptance. We expect to
complete testing e-maxMC in early 2000. As a result, e-maxMC has not achieved
any market acceptance at this time and we currently do not have sufficient
evidence to determine whether and to what extent it will achieve market
acceptance. Achieving market acceptance for our medical management solutions
will require ongoing improvement of their features and functionalities and
enhanced sales and marketing efforts. If we do not gain significant market share
for our maxMC and e-maxMC medical management solutions before our competitors
introduce alternative products with features similar to ours, our operating
results will suffer. Our operating results will also suffer if our pricing
strategies, such as our planned subscription pricing for payers, are not
economically viable or acceptable to our customers.
THE HEALTHCARE INDUSTRY MAY NOT ACCEPT OUR MEDICAL MANAGEMENT SOLUTIONS
To be successful, we must attract a significant number of payer customers,
such as managed care companies, and continue to attract provider customers, such
as hospitals. We cannot determine the extent to
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which the payer market will accept our medical management solutions as
substitutes for traditional methods of processing healthcare information and
managing patient care. To date, many healthcare industry participants have been
slow to adopt new technology solutions. We believe that the complex nature of
healthcare processes and communications among healthcare industry participants,
as well as concerns about confidentiality of patient information, may hinder the
development and acceptance of new technology solutions such as our medical
management solutions.
In addition, customers using existing information systems in which they
have made significant investments may refuse to adopt our solutions if they
perceive that our solutions will not complement their existing systems. As a
result, the conversion from traditional methods of communication to electronic
information exchange may not occur as rapidly as we expect it will. Even if the
conversion does occur as rapidly as expected, payers and providers may use
solutions, products and services offered by others.
WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR REVENUE AND
OPERATING RESULTS, AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY
RESULTING VOLATILITY IN OUR STOCK PRICE
Our quarterly and annual revenue and operating results have varied
significantly in the past and will likely vary significantly in the future due
to a number of factors, many of which we cannot control. The factors that may
cause our quarterly revenue and operating results to fluctuate include:
- fluctuations in demand for our medical management solutions and related
services, including payers' and providers' reluctance to make large
technology purchases around the time of the change to the year 2000;
- the timing of customer orders and product implementations, particularly
orders from large customers involving substantial implementation;
- the length of our sales cycle, which varies and is unpredictable;
- the length of our implementation process, which varies, is unpredictable
and often depends on matters outside of our control such as the
customer's ability to commit its resources to the implementation process;
- our ability to develop, introduce, implement and support new products and
product enhancements;
- the rate of adoption of our medical management solutions, which often
require our customers to change some aspects of the way in which they
have traditionally conducted business;
- announcements and new product introductions by our competitors and
deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors; and
- changes in the prices at which we can sell our medical management
solutions.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. In some future periods, our operating
results may not meet expectations of public market analysts or investors. If
this occurs, our stock price may decline.
IF WE DO NOT HIRE AND RETAIN ADDITIONAL SALES, MARKETING AND IMPLEMENTATION
PERSONNEL WE MAY NOT SUCCEED IN IMPLEMENTING OUR GROWTH STRATEGY AND ACHIEVING
OUR TARGET REVENUE GROWTH
Our future growth depends to a significant extent on our ability to hire
additional sales, marketing and implementation personnel. Competition for these
people is intense. We have experienced difficulty in hiring qualified sales and
marketing professionals, as well as database administrators, and we may not be
successful in attracting and retaining such individuals. If we do not hire
additional qualified sales and marketing personnel, we may not succeed in
implementing our growth strategy and our targeted revenue growth may not
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be achieved. In addition, even if our sales increase, our market penetration and
revenue growth will be limited if we are unable to hire additional personnel to
implement the medical management solutions we sell.
We also believe that our success depends to a significant extent on the
ability of our key personnel to operate effectively, both individually and as a
group. Many of our employees have only recently joined us, and we may experience
high turnover rates in some categories of personnel. If we do not assimilate new
employees in a timely and cost-effective manner, the productivity of those
employees will be low, and as a result our operating results may decrease.
In addition, companies in our industry whose employees accept positions
with competitors frequently claim that their competitors have engaged in unfair
hiring practices. Competitors or other companies may make such claims against us
in the future as we seek to hire qualified personnel. Any claim of this nature
could result in material litigation. We could incur substantial costs in
defending ourselves against these claims, regardless of their merits.
BECAUSE WE OFFER A LIMITED NUMBER OF PRODUCTS AND OPERATE EXCLUSIVELY IN THE
MARKET FOR MEDICAL MANAGEMENT SOLUTIONS, WE ARE PARTICULARLY SUSCEPTIBLE TO
COMPETITION, PRODUCT OBSOLESCENCE AND DOWNTURNS IN THE MARKET FOR MEDICAL
MANAGEMENT PRODUCTS
We depend on a limited number of products and we operate exclusively in the
market for medical management solutions. To date, we have derived substantially
all of our revenue from the sale and associated support of Maxsys II (and its
predecessor Maxsys I), a medical management solution marketed to hospital
providers. We anticipate that substantially all of our revenue in the
foreseeable future will be attributable to continued sales and associated
support of that solution, as well as sales and support of maxMC and e-maxMC, our
medical management solutions marketed to payers. Dependence on a limited product
line makes us particularly susceptible to the successful introduction of, or
changes in market preferences for, competing products. In addition, operating
exclusively in the market for medical management solutions makes us particularly
susceptible to downturns in that market that may be unrelated to the quality or
competitiveness of our solutions.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART UPON THE CONTINUED SERVICE OF OUR
SENIOR MANAGEMENT PERSONNEL
Eugene Santa Cattarina, our President and Chief Executive Officer, and
Stephen Kay, our Chief Operating Officer and Chief Financial Officer, have a
great deal of experience in the healthcare information technology industry in
general and in the market for medical management solutions in particular.
Therefore, they are uniquely qualified to manage our business and would be
difficult to replace. We do not have employment contracts with these officers or
any of our other key personnel. As a result, these employees may voluntarily
terminate their employment with us at any time. The search for a replacement for
any of our key personnel could be time consuming, and could distract our
management team from the day-to-day operations of our business. This could delay
the implementation of our growth strategy and negatively impact our ability to
achieve targeted revenue growth. In addition, with the exception of two
executive officers and one key employee, we do not maintain key person life
insurance on our key personnel.
WE HAVE A LONG HISTORY OF LOSSES AND MAY NEVER BECOME PROFITABLE
We have been in business since 1982 and we have incurred significant losses
since that time. We expect to continue to incur losses on an annual basis for
the foreseeable future. As of December 31, 1999, our accumulated deficit was
$13.6 million. We expect to incur increased levels of product development, sales
and marketing and administrative expenses and, as a result, we will need to
increase our revenue significantly to achieve future profitability. Although our
revenue has grown in recent quarters, we may not be able to sustain this growth
and we may not realize sufficient revenue to achieve profitability. Further,
even if we achieve profitability, due to competition and the evolving nature of
the healthcare information technology and Internet market, we could fail to
sustain or increase profitability on a quarterly or annual basis.
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THE LENGTH AND COMPLEXITY OF OUR SALES CYCLE AND PRODUCT IMPLEMENTATION PERIOD
MAY CAUSE US TO EXPEND SUBSTANTIAL TIME, EFFORT AND FUNDS WITHOUT RECEIVING
RELATED REVENUE
We do not control many of the factors that influence our customers' buying
decisions and the implementation of our medical management solutions. The sales
and implementation process for our solutions is lengthy, involves a significant
technical evaluation and requires our customers to commit a great deal of time
and money. The sale and implementation of our solutions are subject to delays
due to healthcare payers' and providers' internal budgets and procedures for
approving large capital expenditures and deploying new technologies within their
organizations. The sales cycle for our solutions is unpredictable and has
generally ranged from six to twenty-four months from initial contact to contract
signing. The time it takes to implement our solutions is also difficult to
predict and has typically ranged from six to fifteen months from contract
execution to the commencement of live operation. During the sales cycle and the
implementation period, we may expend substantial time, effort and money
preparing contract proposals, negotiating the contract and implementing the
solution without receiving any related revenue.
OUR MEDICAL MANAGEMENT SOLUTIONS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE
ERRORS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR
REVENUES
Complex software products such as those included in our medical management
solutions frequently contain undetected errors when first introduced or as new
versions are released. We have, from time to time, found errors in the software
products included in our solutions, and in the future we may find additional
errors. In addition, we combine our solutions with software and hardware
products from other vendors. As a result, we may experience difficulty in
identifying the source of an error. The occurrence of hardware and software
errors, whether caused by our solutions or another vendor's products, could:
- cause sales of our solutions to decrease and our revenues to decline;
- cause us to incur significant warranty and repair costs;
- divert the attention of our technical personnel away from product
development efforts; and
- cause significant customer relations problems.
BECAUSE OUR MEDICAL MANAGEMENT SOLUTIONS RELY ON TECHNOLOGY THAT WE OWN, OUR
BUSINESS WILL SUFFER IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS TO
THAT TECHNOLOGY AGAINST INFRINGEMENT BY COMPETITORS
To protect our intellectual property rights, we rely on a combination of
copyright, trademark and trade secret laws and restrictions on disclosure. We
also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy or
otherwise obtain and use our products or technology. Monitoring unauthorized use
of our solutions is difficult and the steps we have taken may not prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. If
we fail to protect our intellectual property from infringement, other companies
may use our intellectual property to offer competitive products at lower prices.
If we fail to compete effectively against these companies we could lose
customers and sales of our solutions and our revenue could decline.
EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY OR OUR ALLEGED MISUSE OF THE
INTELLECTUAL PROPERTY OF OTHERS MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND
LENGTHY LITIGATION
Although we are not currently involved in any intellectual property
litigation, we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement by us
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of the intellectual property of others. These claims and any resulting
litigation could subject us to significant liability or invalidate our ownership
rights in the technology used in our solutions. Litigation, regardless of the
merits of the claim or outcome, could consume a great deal of our time and money
and would divert management time and attention away from our core business. Any
potential intellectual property litigation could also force us to do one or more
of the following:
- stop using the challenged intellectual property or selling our products
or services that incorporate it;
- obtain a license to use the challenged intellectual property or to sell
products or services that incorporate it, which could be costly or
unavailable; and
- redesign those products or services that are based on or incorporate the
challenged intellectual property, which could be costly and time
consuming or could adversely affect the functionality and market
acceptance of our products.
If we must take any of the foregoing actions, we may be unable to
manufacture and sell our solutions, which would substantially reduce our
revenue.
WE FACE SIGNIFICANT COMPETITION FROM, AMONG OTHERS, SOFTWARE VENDORS, INTERNET
COMPANIES AND CONSULTING GROUPS FOCUSED ON THE HEALTHCARE INDUSTRY
We face intense competition in the market for our medical management
solutions. Many of our competitors have greater financial, technical, product
development, marketing and other resources than we have. Because these
organizations may be better known and have more customers than us, we may not
compete successfully against them. The principal companies we compete against in
the payer market include HPR (a subsidiary of McKesson HBOC), MedDecision,
PhyCom and Confer. In the hospital provider market, we compete against MIDS,
SoftMed Systems and others. We expect that competition will continue to increase
as a result of consolidation in the Internet, information technology and
healthcare industries.
RAPIDLY CHANGING TECHNOLOGY MAY IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR
MEDICAL MANAGEMENT SOLUTIONS
Because our business relies on technology, it is susceptible to:
- rapid technological change;
- changing customer needs;
- frequent new product introductions; and
- evolving industry standards.
In particular, the Internet is evolving rapidly and the technology used in
Internet related products changes rapidly. As the Internet, computer and
software industries continue to experience rapid technological change, we must
quickly modify our solutions to adapt to such changes. The demands of operating
in such an environment may delay or prevent our development and introduction of
new solutions and additional functions for our existing solutions that
continually meet changing market demands and that keep pace with evolving
industry standards. Moreover, competitors may develop products superior to our
solutions, which could make our products obsolete.
OUR CUSTOMERS MAY ENCOUNTER SYSTEM DELAYS, FAILURES OR LOSS OF DATA WHEN USING
OUR NEW INTERNET-BASED MEDICAL MANAGEMENT SOLUTION AS A RESULT OF DISRUPTIONS OR
OTHER PROBLEMS WITH INTERNET SERVICES AND INTERNET ACCESS PROVIDED BY THIRD
PARTIES
System delays, failures or loss of data experienced by our customers could
harm our business. The success of our new Internet-based medical management
solution for payers will depend on the efficient operation of Internet
connections among our payer customers and their members and associated
providers.
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These connections, in turn, depend on the efficient operation of Web browsers,
Internet connections and Internet service providers. In the past, Internet users
have occasionally experienced difficulties with Internet connections and
services due to system failures. Any disruption in Internet access provided by
third parties could delay or disrupt the performance of our new Internet-based
solution, and consequently, make it less acceptable to payers. Furthermore, we
will depend on our customers' hardware suppliers for prompt delivery,
installation and service of the equipment that runs our applications.
SECURITY BREACHES AND SECURITY CONCERNS ABOUT INTERNET TRANSMISSIONS MAY CAUSE
CUSTOMERS TO REFUSE TO PURCHASE OR DISCONTINUE THE USE OF OUR MEDICAL MANAGEMENT
SOLUTIONS
Our customers will retain confidential customer and patient information
using our solutions. An experienced computer user who is able to access our
customers' computer systems could gain access to confidential patient and
company information. Therefore, our products must remain secure and the market
must perceive them as secure. The occurrence of security breaches could cause
customers to refuse to purchase or discontinue use of our solutions. Protecting
against such security breaches or alleviating problems caused by security
breaches may require us to expend significant capital and other resources. In
addition, upgrading our systems to incorporate more advanced encryption and
authentication technology as it becomes available may cause us to spend
significant resources and encounter costly delays. Concerns over the security of
the Internet and other online transactions and the privacy of users may also
inhibit the growth of the market for our Internet-based medical management
solution.
WE OPERATE IN AN INDUSTRY SUBJECT TO CHANGING REGULATORY INFLUENCES, WHICH COULD
LIMIT THE USEFULNESS OF OUR SOLUTIONS OR REQUIRE US TO MAKE EXPENSIVE AND
TIME-CONSUMING MODIFICATIONS TO OUR PRODUCTS
During the past several years, federal, state and local governments have
increased their regulation of the U.S. healthcare industry and have proposed
numerous healthcare industry reforms. These reforms may increase governmental
involvement in healthcare, continue to reduce reimbursement rates and otherwise
change the operating environment for our customers. Our customers may react to
these proposals and the uncertainty surrounding the proposals by curtailing or
deferring investments, including those for our medical management solutions.
Existing state and federal laws regulate the confidentiality of healthcare
information and the circumstances under which such records may be released.
Congress is considering legislation and the Department of Health and Human
Services has proposed regulations that would further regulate the
confidentiality of healthcare information. In addition, the Department of Health
and Human Services has proposed regulations setting forth security standards for
all health plans, clearinghouses and providers to follow with respect to
healthcare information that is electronically transmitted, processed or stored.
While these laws and regulations may not apply to us directly, our products must
comply with existing and future laws and regulations in order to achieve market
acceptance. Such compliance may be difficult and expensive or even impossible to
achieve. These laws or regulations could restrict the ability of our customers
to obtain, use or disseminate patient information, which in turn could limit the
usefulness of our medical management solutions causing a decrease in our sales.
Because of the Internet's popularity and increasing use, new laws and
regulations with respect to the Internet are becoming prevalent. Such new laws
and regulations could limit the effectiveness and market acceptance of our
Internet-based medical management solutions or could cause us to have to modify
our solutions, which could be expensive and time consuming.
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CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD LEAD TO LARGE INTEGRATED
HEALTHCARE DELIVERY SYSTEMS WHO MAY USE THEIR ENHANCED MARKET POWER TO FORCE
PRICE REDUCTIONS FOR OUR MEDICAL MANAGEMENT SOLUTIONS AND RELATED SERVICES
Many healthcare industry participants are consolidating to create
integrated healthcare delivery systems with greater market power. As the
healthcare industry consolidates, competition to provide products and services
to industry participants will become more intense and the importance of
establishing relationships with large industry participants will become greater.
These industry participants may try to use their market power to negotiate price
reductions for our products and services. Our operating results may suffer if we
reduce our prices without achieving corresponding reductions in our expenses.
WE MAY ENCOUNTER ACQUISITION-RELATED RISKS SUCH AS BECOMING RESPONSIBLE FOR
UNEXPECTED LIABILITIES OF ACQUIRED BUSINESSES AND DIFFICULTIES INTEGRATING
EMPLOYEES AND OPERATIONS OF ACQUIRED BUSINESSES
We expect to review opportunities to acquire other businesses or
technologies. In connection with acquisitions, we could:
- issue stock that would dilute our stockholders' percentage ownership;
- incur debt; or
- assume liabilities.
Acquisitions could involve numerous risks, including:
- problems integrating the purchased operations, technologies or products;
- unanticipated costs or unexpected liabilities;
- diversion of our management's attention from our core business;
- interference with existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might purchase in the future.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER, WHICH MAY LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER STOCKHOLDER
MATTERS
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own, in the aggregate, approximately 66% of
our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us.
IF WE DO NOT MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO DEVELOP
OR ENHANCE OUR MEDICAL MANAGEMENT SOLUTIONS, TAKE ADVANTAGE OF FUTURE
OPPORTUNITIES OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED EVENTS
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and expected cash flow from
operations, will allow us to meet our capital requirements at least through the
next 12 months. However, we may need or want to seek additional capital prior to
that time. Such capital may
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not be available to us on favorable terms, or at all. Further, if we raise
capital by issuing new equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise capital
on acceptable terms, we may not have the resources to develop new products or
enhance existing products, take advantage of future opportunities or respond to
competitive pressures or unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while, at the same time, maximizing yields without significantly increasing
risk. To achieve this objective, we invest in highly liquid and high-quality
money market accounts that invest in debt securities. Our investments in debt
securities are subject to interest rate risk. To minimize the exposure due to
adverse shifts in interest rates, we invest in money market accounts that invest
only in short-term securities that maintain an average maturity of less than one
year. As a result, we do not believe we are subject to significant rate risk.
ITEM 8. FINANCIAL STATEMENTS
LANDACORP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... 27
Balance Sheets.............................................. 28
Statements of Operations.................................... 29
Statements of Stockholders' Equity (Deficit)................ 30
Statements of Cash Flows.................................... 31
Notes to Financial Statements............................... 32
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Landacorp, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Landacorp, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, California
February 16, 2000
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LANDACORP, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 2,032,000 $ 1,884,000
Accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts, net....... 1,651,000 2,090,000
Other current assets...................................... 186,000 172,000
------------ ------------
Total current assets.............................. 3,869,000 4,146,000
Property and equipment, net................................. 352,000 1,057,000
Capitalized software, net................................... 92,000 61,000
Deferred offering costs..................................... -- 595,000
------------ ------------
$ 4,313,000 $ 5,859,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 125,000 $ 463,000
Accrued expenses.......................................... 833,000 1,804,000
Deferred revenue and billings in excess of costs and
estimated earnings on uncompleted contracts............ 2,456,000 2,637,000
Current portion of long-term debt......................... -- 277,000
------------ ------------
Total current liabilities......................... 3,414,000 5,181,000
Long-term debt, net of current portion...................... -- 164,000
------------ ------------
3,414,000 5,345,000
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred Stock, $0.001 par value, aggregate liquidation
amount $8,160,000 at December 31, 1998 and 1999;
8,000,000 shares authorized; 6,800,000 shares issued
and outstanding........................................ 7,000 7,000
Common Stock, $0.001 par value, 15,000,000 shares
authorized; 1,030,000 and 2,610,000 shares issued and
outstanding............................................ 1,000 3,000
Additional paid-in capital................................ 15,102,000 16,955,000
Notes receivable from officers (Note 4)................... -- (189,000)
Unearned stock-based compensation......................... (2,993,000) (2,645,000)
Accumulated deficit....................................... (11,218,000) (13,617,000)
------------ ------------
Total stockholders' equity........................ 899,000 514,000
------------ ------------
$ 4,313,000 $ 5,859,000
============ ============
The accompanying notes are an integral part of these financial statements.
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LANDACORP, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998