<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-87435
LANDACORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3346710
(State or other jurisdiction of (I.R.S. Employer
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of Common stock, par value of $0.001, outstanding as of
September 30, 2000: 13,705,825
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LANDACORP, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Balance Sheets as of December 31, 1999 and September 30, 2000 ...... 1
Statements of Operations for the nine months and for the three
months ended September 30, 1999 and September 30, 2000 ............. 2
Statements of Cash Flows for the nine months ended
September 30, 1999 and September 30, 2000 .......................... 3
Notes to Financial Statements ...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 16
Item 2. Changes in Securities .............................................. 16
Item 3. Defaults in Senior Securities ...................................... 16
Item 4. Submission of Matters to Vote of Security Holders .................. 16
Item 5. Other Information .................................................. 16
Item 6. Exhibits and Reports on Form 8-K ................................... 16
</TABLE>
<PAGE> 3
LANDACORP, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(audited) (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,884,000 $ 32,071,000
Accounts receivable and costs and estimated
earnings in excess of billings on uncompleted
contracts, net 2,090,000 4,084,000
Other current assets 164,000 341,000
------------ ------------
Total current assets 4,138,000 36,496,000
Property and equipment, net 1,057,000 1,456,000
Intangible Assets, net -- 919,000
Capitalized software, net 61,000 49,000
Deferred offering costs 595,000 --
Other assets 8,000 16,000
------------ ------------
$ 5,859,000 $ 38,936,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 463,000 $ 367,000
Accrued expenses 1,804,000 2,094,000
Deferred revenue and billings in excess of costs
and estimated earnings on uncompleted contracts 2,637,000 2,677,000
Current portion of long-term debt 277,000 259,000
------------ ------------
Total current liabilities 5,181,000 5,397,000
Long-term debt, net of current portion 164,000 146,000
------------ ------------
5,345,000 5,543,000
------------ ------------
Stockholders' equity:
Preferred Stock, $0.001 par value, aggregate liquidation amount $8,160,000 at
December 31, 1999; 8,000,000 shares authorized; 6,800,000 shares issued
and outstanding at December 31, 1999; none at September 30, 2000 7,000 --
Common Stock, $0.001 par value, 15,000,000 shares
authorized; 2,610,000 and 13,706,000
shares issued and outstanding 3,000 14,000
Additional paid-in capital 16,955,000 52,575,000
Notes receivable from officers (189,000) (187,000)
Unearned stock-based compensation (2,645,000) (1,679,000)
Accumulated deficit (13,617,000) (17,330,000)
------------ ------------
Total stockholders' equity 514,000 33,393,000
------------ ------------
$ 5,859,000 $ 38,936,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
LANDACORP, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (audited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
System sales $ 1,908,000 $ 3,371,000 $ 5,633,000 $ 7,741,000
Support services 508,000 597,000 1,434,000 1,902,000
------------ ------------ ------------ ------------
Total revenues 2,416,000 3,968,000 7,067,000 9,643,000
------------ ------------ ------------ ------------
Cost of revenues:
System sales 746,000 1,099,000 2,223,000 3,194,000
Support services 144,000 170,000 440,000 546,000
------------ ------------ ------------ ------------
Total cost of revenues 890,000 1,269,000 2,663,000 3,740,000
------------ ------------ ------------ ------------
Gross profit 1,526,000 2,699,000 4,404,000 5,903,000
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 790,000 1,600,000 2,294,000 4,927,000
Research and development 470,000 1,013,000 1,241,000 2,505,000
General and administrative 837,000 1,155,000 2,393,000 3,480,000
------------ ------------ ------------ ------------
Total operating expenses 2,097,000 3,768,000 5,928,000 10,912,000
------------ ------------ ------------ ------------
Loss from operations (571,000) (1,069,000) (1,524,000) (5,009,000)
Interest and other income, net 27,000 548,000 76,000 1,331,000
Interest expense (4,000) (9,000) (4,000) (34,000)
------------ ------------ ------------ ------------
Net loss $ (548,000) $ (530,000) $ (1,452,000) $ (3,712,000)
============ ============ ============ ============
Net loss per share:
Basic and diluted $ (0.42) $ (0.04) $ (1.21) $ (0.33)
============ ============ ============ ============
Weighted average shares 1,293,000 12,976,000 1,204,000 11,352,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
LANDACORP, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
------------ ------------
(audited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,452,000) $ (3,712,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 270,000 745,000
Provision for doubtful accounts 28,000 126,000
Amortization of unearned stock-based compensation 1,464,000 1,406,000
Stock issued at a discount for services rendered 48,000 --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable and costs and estimated earnings in
in excess of billings on uncompleted contracts, net (595,000) (2,120,000)
Other assets (9,000) (185,000)
Accounts payable 158,000 (96,000)
Accrued expenses 443,000 272,000
Deferred revenue and billings in excess of costs
and estimated earnings on uncompleted contracts 80,000 40,000
------------ ------------
Net cash provided by (used in) operating activities 435,000 (3,524,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (578,000) (694,000)
Capitalized software development costs (58,000) (89,000)
------------ ------------
Net cash used in investing activities (636,000) (783,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing on line of credit -- 217,000
Proceeds from borrowing on long term debt 270,000 15,000
Payments on long-term debt (15,000) (1,518,000)
Collection on notes receivable from officers -- 2,000
Proceeds from issuance of common stock, net 8,000 35,778,000
------------ ------------
Net cash provided by financing activities 263,000 34,494,000
------------ ------------
Increase in cash and cash equivalents 62,000 30,187,000
Cash and cash equivalents, beginning of period 2,032,000 1,884,000
------------ ------------
Cash and cash equivalents, end of period $ 2,094,000 $ 32,071,000
============ ============
Supplemental cash flow information:
Cash paid for interest $ 4,000 $ 34,000
============ ============
Cash paid for income taxes $ 1,000 $ 1,000
============ ============
Supplemental non-cash financing activities:
Common stock issued for notes receivable from officers $ 189,000 $ --
============ ============
Forfeiture of unvested stock options $ -- $ --
============ ============
Issuance of note payable in conjunction with the acquisition
of IHD $ -- $ 1,250,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. THE COMPANY AND BASIS OF PRESENTATION
Landacorp, Inc. (the Company) was established in 1982 for the purpose of
developing health care quality and resource management systems that
target cost containment and quality improvement for hospitals and managed
care organizations. The Company maintains offices in Chico, California,
Portland, Oregon and Atlanta, Georgia and derives all of its revenues
from customers in the United States.
The accompanying unaudited financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. These unaudited financial statements should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. The balance sheet at December 31, 1999 is
derived from the audited financial statements included in the Form 10-K
for the year ended December 31, 1999. The statements of operations and
cash flows for the nine months ended September 30, 1999 are derived from
the audited financial statements included in the Form S-1 filed with the
SEC in connection with the Company's initial public offering that was
completed in February 2000. However, this Form 10-Q does not include all
Form 10-K, Form S-1 and other disclosures required by generally accepted
accounting principles in the United States for the balance sheet and
statements of operations and cash flows as presented herein. In the
opinion of management, the accompanying unaudited financial statements
reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results for the periods
presented.
The results of operations presented for the three month and nine month
periods ended September 30, 2000 are not necessarily indicative of the
results to be expected for any other interim period or any future fiscal
year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. In June 2000, the SEC issued SAB 101B to defer
the effective date of implementation of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999
with earlier application encouraged. The Company is currently assessing
the impact, if any, of the adoption of SAB 101 on the Company's financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25. This Interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.
4
<PAGE> 7
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIN 44 is effective July 1, 2000; the Company has adopted the provisions
of FIN 44 and the effects of adoption did not have a material effect on
the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging
activities, and is effective for fiscal years beginning after June 15,
2000, as amended by SFAS No. 137. The Company believes the adoption of
this pronouncement will have no material impact on the Company's
financial position and results of operations.
3. ASSET ACQUISITION
On January 31, 2000, the Company acquired the net assets of Interactive
Healthcare Division (IHD) of High Technology Solutions, Inc. (HTS). The
acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired on the basis of their respective
fair values on the acquisition date. The fair value of intangible assets
was determined based upon preliminary valuations and other available
information.
Of the total purchase price of $1,268,000, the Company assumed
liabilities of $18,000 and paid $250,000 at closing, with the remaining
balance paid in April 2000. Of the purchase price of $1,250,000 plus
$18,000 of assumed liabilities, approximately $63,000 has been allocated
to property and equipment, and the remainder has been allocated to
intangible assets, including intellectual property ($165,000), work force
($160,000), and goodwill ($880,000). The acquired intangible assets will
be amortized over their estimated useful lives of twenty-four to
thirty-six months.
The historical operations of IHD are not material to the Company's
financial position or results of operations, therefore, the results of
operations on a proforma basis have not been presented. Results of
operations of IHD are included with those of the Company for periods
subsequent to the acquisition date.
5
<PAGE> 8
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. NET LOSS PER SHARE
Loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average
number of common and potential common shares outstanding during the
period if their effect is dilutive. Potential common shares comprise
common stock subject to repurchase and incremental common shares issuable
upon the exercise of stock options. The potential common shares, which
are excluded from the determination of diluted net loss per share as the
effect of such shares on a weighted average basis is anti-dilutive, as at
September 30, 1999 and September 30, 2000 are 9,467,000 (includes
6,800,000 shares of preferred stock and warrants to purchase 350,000
shares of common stock, that were converted/exercised in conjunction with
the initial public offering in February 2000) and 1,699,000,
respectively.
5. UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the nine months
ended September 30, 2000, the Company recognized unearned compensation
totaling $497,000, which is being amortized over the vesting periods,
using the multiple option approach prescribed by FIN No. 28.
Amortization expense in connection with unearned stock-based compensation
recognized during the three month and nine month periods ended September
30, 2000, totaled $377,000 and $1,406,000, respectively, and has been
allocated to operating expenses.
The Company expects to amortize $325,000 during the remainder of 2000,
$897,000 in 2001, $362,000 in 2002, $85,000 in 2003, and $10,000 in 2004.
The Company will reduce unearned compensation expense for future periods
to the extent that options terminate prior to full vesting. During the
nine months ended September 30, 2000, unearned compensation was reduced
by $57,000 as a result of options that terminated prior to vesting.
6. INITIAL PUBLIC OFFERING
On February 14, 2000, the Company completed its initial public offering
of 3,500,000 shares of common stock. In addition, 525,000 shares (375,000
shares sold by the Company and 150,000 shares sold by existing
shareholders) were sold pursuant to the exercise of the underwriters'
over-allotment option. Net proceeds to the Company after commission and
offering related expenses, were approximately $35 million.
In conjunction with the offering, 6,800,000 shares of Preferred Stock
were converted into Common stock on a one-for-one basis. Additionally,
the holders of warrants to purchase 350,000 shares of Common stock
exercised the warrants in a cashless exercise resulting in a net issuance
of 308,000 shares of common stock.
6
<PAGE> 9
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LINE OF CREDIT
In April 2000, the Company renewed its line of credit that allows maximum
borrowings of $2.0 million. Advances on the line of credit are
collateralized by all of the Company's tangible and intangible personal
property. At September 30, 2000, $217,000 was drawn against the renewed
line of credit and is included as current portion of long-term debt on
the balance sheet.
8. SUBSEQUENT EVENTS
On October 27, 2000 the Company acquired the business assets and
liabilities of ProMedex from PMX Holdings, Inc. for $584,375 in cash and
the issuance of 250,000 shares of the Company's common stock. On November
2, 2000 the Company also acquired all of the shares of PatientCentrix,
Inc. for $5,850,000 in cash, the issuance of 1,157,000 shares of the
Company's common stock and assumption of all the issued and outstanding
options of PatientCentrix, Inc. It is anticipated that there will be
additional net cash expenditure required to fund both business units
before they can become cash flow neutral or cash flow positive.
7
<PAGE> 10
ITEM 2. 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 our S-l prospectus and other forms filed periodically with the SEC.
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 September 30,
2000, 7 payers who claim to have a combined membership of eight million
participants were using our maxMC solution, and approximately 160 hospital
providers were using our Maxsys solutions. We have successfully implemented
e-maxMC at a customer site in October 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 consumer 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 the first quarter of 2000 we expanded 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
8
<PAGE> 11
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. the
assets of the iHealthmedia.com division 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 paid the balance of the purchase price of
$1,000,000 in April 2000. The acquired assets include equipment, know how,
trademarks and other intangible rights used 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 nine months ended September 30, 2000, we recorded unearned
stock-based compensation totaling $497,000 in connection with the grant of
stock-based awards to certain employees. 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 $1,406,000 during the nine months ended September 30, 2000 and it
has been allocated to operating expense. We expect to amortize $325,000 during
the remainder of 2000, $897,000 in 2001, $362,000 in 2002, $85,000 in 2003 and
$10,000 in 2004. We will reduce unearned compensation expense for future periods
to the extent that options terminate prior to full vesting. During the six
months ended June 30, 2000, unearned compensation was reduced by $57,000 as a
result of options that terminated prior to vesting.
RESULTS OF OPERATIONS
The following table presents the statement of operations data as a percentage of
total revenues:
9
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended September 30,
Dollars % of Revenues
-------------------------------- ----------------------
1999 2000 1999 2000
------------- ------------ ----------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
System sales $ 1,908,000 $ 3,371,000 79.0% 85.0%
Support services 508,000 597,000 21.0% 15.0%
------------ ------------
Total revenues 2,416,000 3,968,000 100.0% 100.0%
------------ ------------
Cost of revenues:
System sales 746,000 1,099,000 30.8% 27.7%
Support services 144,000 170,000 6.0% 4.3%
------------ ------------
Total cost of revenues 890,000 1,269,000 36.8% 32.0%
------------ ------------
Gross profit 1,526,000 2,699,000 63.2% 68.0%
------------ ------------
Operating expenses:
Sales and marketing 790,000 1,600,000 32.8% 40.3%
Research and development 470,000 1,013,000 19.4% 25.6%
General and administrative 837,000 1,155,000 34.6% 29.1%
------------ ------------
Total operating expenses 2,097,000 3,768,000 86.8% 95.0%
------------ ------------
Loss from operations (571,000) (1,069,000) (23.6)% (27.0)%
Interest and other income, net 27,000 548,000 1.1% 13.8%
Interest expense (4,000) (9,000) (0.2)% (0.2)%
------------ ------------
Net loss $ (548,000) $ (530,000) (22.7)% (13.4)%
============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, % of Revenues
------------------------------- ----------------------
1999 2000 1999 2000
------------ ------------ ----------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
System sales $ 5,633,000 $ 7,741,000 79.7% 80.3%
Support services 1,434,000 1,902,000 20.3% 19.7%
------------ ------------
Total revenues 7,067,000 9,643,000 100.0% 100.0%
------------ ------------
Cost of revenues:
System sales 2,223,000 3,194,000 31.5% 33.1%
Support services 440,000 546,000 6.2% 5.7%
------------ ------------
Total cost of revenues 2,663,000 3,740,000 37.7% 38.8%
------------ ------------
Gross profit 4,404,000 5,903,000 62.3% 61.2%
------------ ------------
Operating expenses:
Sales and marketing 2,294,000 4,927,000 32.5% 51.1%
Research and development 1,241,000 2,505,000 17.5% 26.0%
General and administrative 2,393,000 3,480,000 33.8% 36.0%
------------ ------------
Total operating expenses 5,928,000 10,912,000 83.8% 113.1%
------------ ------------
Loss from operations (1,524,000) (5,009,000) (21.5)% (51.9)%
Interest and other income, net 76,000 1,331,000 1.1% 13.8%
Interest expense (4,000) (34,000) (0.1)% (0.4)%
------------ ------------
Net loss $ (1,452,000) $ (3,712,000) (20.5)% (38.5)%
============ ============
</TABLE>
10
<PAGE> 13
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Comparison of the third quarter and nine month periods ended September 30, 1999
and 2000.
Revenues. System sales revenues increased by $1,463,000 or 77% from
$1,908,000 for the third quarter of 1999 to $3,371,000 in the third quarter of
2000. For the nine months ended September 30, 2000 system sales revenue
increased by $2,108,000 or 37% to $7,741,000 from $5,633,000 in the
corresponding period of the previous fiscal year. During the nine months ended
September 30, 2000, three customers accounted for 44%, 12% and 11% of the
systems sales. Two customers accounted for 23% and 16% of system sales revenues
during the corresponding period of 1999.
Support services revenues increased by $89,000 or 18% from $508,000 in
third quarter of 1999 to $597,000 in third quarter of 2000. During the nine
months ended September 30, 2000 support service revenues increased 33% to
$1,902,000 compared to $1,434,000 during the corresponding period of the
previous year. The increase 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. No customers accounted for 10% or more of the support
services revenues during either the quarters ended September 30, 1999 and 2000
or during nine month periods ended September 30, 1999 and 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. During the quarter ended September 30, 2000 these costs were
$1,099,000 or 28% of system sales revenues, compared to costs of $746,000
representing 31% of system sales revenue during the third quarter of 1999. Cost
of system sales increased by $971,000 or 44% from $2,223,000, representing 32%
of system sales revenues, during the nine months ended September 30, 1999 to
$3,194,000, representing 33% of system sales revenues, during the nine months
ended September 30, 2000. 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 costs
associated with iHealthMedia.com's implementation staff and other associated
costs. iHealthMedia.com was acquired by the company as a new division at the end
of January 2000. The decrease in the gross margin on system sales from 61% for
the nine months ended September 30, 1999 to 59% during the corresponding period
in 2000 resulted from an increase in headcount as we added personnel in
anticipation of increases in the volume of systems contracts, together with a
decrease in the revenue recognized for health plan contracts per implementation
day expended on a customer, resulting from the change in the way we sell systems
to health plans, as outlined above.
Cost of support services revenues increased by $26,000 or 18% from $144,000 to
$170,000, representing 28% of support services revenues during both of the third
quarters of 1999 and 2000. Cost of support services increased by $106,000 or 24%
from $440,000 representing 31% of support services revenues during the nine
months ended September 30, 1999 to $546,000 representing 29% of support services
revenue during the nine months ended September 30, 2000. 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 increase in the
gross margin on support services from 69% during the first nine months of 1999
to 71% for the first nine months of 2000 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 amount 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 margin percentages.
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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 totaled $1,013,000 or 26% of total revenues during the quarter ended
September 30, 2000, an increase of $543,000 or 116% compared to expenses
totaling $470,000 representing 20% of total revenues during the quarter ended
September 30, 1999. Research and development expenses increased by $1,264,000 or
102% from $1,241,,000, representing 18% of total revenues, during the nine
months ended September 30, 1999 to $2,505,000, representing 26% of total
revenues, during the nine months ended September 30, 2000. This increase
resulted from the inclusion of the iHealthMedia.com division in February 2000
together with an increase in headcount, 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.
This is also in line with our announcement last quarter that we intended to
increase our Research and Development expenses as we begin to create our
Advanced Products Group to more fully leverage Internet technologies in our
marketplace. 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 consist principally of
compensation for our sales and marketing personnel, amortization of unearned
stock-based compensation, advertising, trade show and other promotional costs,
and departmental overhead. Sales and marketing expenses during the quarter ended
September 30, 2000 amounted to $1,600,000 representing 40% of total revenues, in
comparison with $790,000 representing 33% of total revenues during the
corresponding quarter of the previous year. Sales and marketing expenses
increased by $2,633,000 or 115% from $2,294,000, representing 33% of total
revenues, during the nine months ended September 30, 1999 to $4,927,000,
representing 51% of total revenues, during the nine months ended September 30,
2000. 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. There was also a one time bonus of $335,000 paid to the Chief
Marketing Officer during the first quarter of 2000 in connection with deferred
compensation that became payable in the event the company went public. As a
result of the company completing its Initial Public Offering in the first
quarter of 2000, this amount was booked to Sales and Marketing expenses in this
period. Further disclosure of this non-recurring item can be found in our S-1
prospectus filed with the SEC. Other than this non-recurring item, 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
increase expenses on our total operating expenses.
General and Administrative. General and administrative expenses consist
of compensation for personnel, fees for outside professional services, costs
associated with maintaining the company as a public corporation, amortization of
unearned stock-based compensation, and allocated occupancy and overhead costs.
General and administrative expenses increased by $318,000 or 38% from $837,000,
representing 35% of total revenues, in the third quarter of 1999 to $1,155,000,
representing 29% of total revenues, in the third quarter of 2000. General and
administrative expense amounted to $3,480,000 representing 36% of total revenues
during the nine months ended September 30, 2000, an increase of $1,087,000 or
45% from expenses totaling $2,393,000 representing 34% of total revenues, for
the corresponding nine month period in the previous year. The increase was due
to an increase in the number of employees due to the inclusion of
iHealthMedia.com as a division in February 2000, higher professional service
fees, stock-based compensation expense further discussed below, together with
costs associated with operating as a public company. Also, we had increased
occupancy costs due to our expanded facility in Chico that started in September
1999 and the commencement of our Portland office lease from February 2000 in
connection with our iHealthMedia.com acquisition. Finally, we incurred goodwill
amortization expense arising from the acquisition of iHealthMedia.com of
$224,000 during the nine months ended September 30, 2000. We believe that our
general and administrative expenses will continue to increase in dollar amounts
as a result
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<PAGE> 15
of our growing operations 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 issuance during the years ended December 31, 1998 and 1999, and for
the nine months ended September 30, 2000, the Company recognized unearned
compensation totaling $4,166,000, $1,610,000 and $497,000 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 for year ended December 31,
1999), as applicable, using the multiple option approach prescribed by FIN 28.
Amortization expense recognized during the first three quarters of 1999 and 2000
totaled $1,512,000, and $1,406,000, respectively, and has been allocated to the
various operating expenses based on the associated personnel.
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 $27,000 and $548,000 for the quarters ended
September 30, 1999 and 2000, respectively. Interest and other income totaled
$76,000 and $1,331,000 during the nine months ended September 30, 1999 and 2000,
respectively. The substantial increase in income in 2000 is due to the higher
levels of cash and cash equivalents held during the period arising from funds
generated from the initial public offering in February 2000. Interest expense of
$9,000 during the third quarter of 2000 and $34,000 for the nine months ended
September 30, 2000 arises from financing certain fixed assets through a finance
lease.
Income Taxes. We recorded no current provision or benefit for federal or
state income taxes for either the first, second or third quarters of 1999 or
2000, as the Company had incurred net operating losses and had no carry-back
potential. As of September 30, 2000, we had net operating loss carry-forwards
for federal tax purposes in excess of $10 million and for state tax purposes, in
excess of $3 million. These federal and state tax loss carry-forwards are
available to reduce future taxable income. Utilization of such carry-forwards
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 will expire at varying amounts during the period from December 31,
2000 to 2014. The Company believes that there were cumulative changes of
ownership of greater than 50 percent in February 1998. Accordingly, the amount
of loss carry-forwards that may be utilized to reduce future taxable income for
federal and state income tax purposes may be limited. The amount of the
limitation has not yet been calculated. We have not recognized a deferred tax
asset on our balance sheet.
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<PAGE> 16
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. During February 2000, we completed our initial
public offering through which we raised net proceeds of approximately $35
million. As of September 30, 2000, we had $32.1 million in cash and cash
equivalents and $31.1 million in working capital with outstanding debt totaling
$0.4 million.
Net cash provided by (used in) operating activities was $435,000 and
($3,524,000) during the nine months ended September 30, 1999 and 2000,
respectively. Net cash used to fund operating activities in 2000 reflects net
losses before non-cash charges for depreciation, amortization of intangible
assets, increases in general provisions for bad and doubtful accounts, and stock
based compensation, increases in net accounts receivable, other current assets
and a decrease in accounts payable, partially offset by an increase in accrued
expenses and deferred revenue. Net cash provided by operating activities in 1999
consists of net losses before non-cash charges for depreciation and amortization
of intangible assets, increases in general provisions for bad and doubtful
accounts, and stock based compensation, increases from accounts receivable and
other assets partially offset by increases in accounts payable, accrued expenses
and deferred revenue.
Net cash used in investing activities was $636,000 in 1999 and $783,000 in 2000.
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 $263,000 in 1999 and $34.5
million in 2000. Net cash generated from financing activities in 1999 resulted
from the proceeds from commencing a finance lease program less payment on the
program, and the issuance of some common stock. Net cash generated from
financing activities in 2000 resulted from the issuance of common stock in
connection with the Company's initial public offering that was completed during
February 2000 less the payment for the acquisition of iHealthMedia.com, as
described below, and additional finance lease payments.
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. We paid the remaining
balance of the promissory note in April 2000.
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 sales and
marketing expense for that period.
In April, 2000 we renewed a line of credit that allows maximum borrowings of
$2.0 million. Advances on the line of credit are collateralized by all of our
tangible and intangible personal property. At December 31, 1999, we had not
drawn against the previous line of credit, but $233,000 was outstanding on a
term note, which we used to finance the purchase of certain fixed assets. The
previous line of credit and term note contain various restrictive covenants, one
of which the Company was not in compliance with at December 31, 1999. From
January 2000 through April 2000, the Company obtained waivers for all financial
covenants for the period beginning September 30, 1999 through April 30, 2000. As
of September 30, 2000 there was $217,000 drawn against the renewed line of
credit without breach of any covenant.
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.
On October 27, 2000 we acquired the business assets and liabilities of ProMedex
from PMX Holdings, Inc. for $584,375 in cash and the issuance of 250,000 shares
of the Company's common stock.
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<PAGE> 17
On November 2, 2000 we acquired all of the shares of PatientCentrix, Inc. for
$5,850,000 in cash, the issuance of 1,157,000 shares of the Company's common
stock and assumption of all the issued and outstanding options of
PatientCentrix, Inc. It is anticipated that there will be additional net cash
expenditure required to fund both business units before they can become cash
flow neutral or cash flow positive.
Additionally, 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 additional acquisitions or investments in other
businesses, technologies or product lines. We believe that available cash and
cash equivalents and the net proceeds from the sale of the common stock in our
February 2000 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 financing. 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.
Recent Accounting Pronouncements:
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999 with earlier application
encouraged. The Company is currently assessing the impact, if any, of the
adoption of SAB 101 on the Company's financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB 25.
This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000; the Company has adopted the provisions of FIN
44 and the effects of adoption did not have a material effect on the Company's
financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. The Company
believes the adoption of this pronouncement will have no material impact on the
Company's financial position and results of operations.
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while, at the same time, maximizing the 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 and debt securities. Our
investment in debt securities is 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 and debt securities that also have an average
maturity of less than one year. As a result, we do not believe we are subject to
significant market risk.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)The following exhibits have been filed with this report:
27.1 Financial Data Schedule
(b)Reports on Form 8-K
(i). Report on Form 8-K relating to our acquisition of the
business assets and liabilities of the ProMedex business
from PMX Holdings, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 14, 2000
LANDACORP, INC.
(Registrant)
/s/ Eugene Santa Cattarina
------------------------------------
President, Chief Executive Officer,
(principal executive officer)
/s/ Stephen P. Kay
------------------------------------
Chief Operating Officer and
Chief Financial Officer
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INDEX TO EXHIBITS
(i). 27.1 Financial Data Schedule
(ii). Report on Form 8-K filed on November 13, 2000 relating to our acquisition
of the business assets and liabilities of the ProMedex business from PMX
Holdings, Inc. incorporated by reference hereto.
17
