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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)
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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)
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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
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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:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
February 9, 2000 to March 31, 2000.......................... $21.790 $7.875
</TABLE>
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.
11
<PAGE> 12
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
12
<PAGE> 13
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
<PAGE> 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:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
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)%
===== ===== =====
</TABLE>
14
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)
====== ====== ====== ======= ====== ======
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
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)
======= ======
</TABLE>
<TABLE>
<CAPTION>
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
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
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)%
====== ====== ====== ======= ======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
FOR THE QUARTER ENDED
---------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999
-------- ------------- ------------
<S> <C> <C> <C>
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)%
====== ======= ======
</TABLE>
17
<PAGE> 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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<PAGE> 19
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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<PAGE> 20
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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<PAGE> 21
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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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
27
<PAGE> 28
LANDACORP, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
LANDACORP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
System sales...................................... $ 3,136,000 $ 4,967,000 $ 7,251,000
Support services.................................. 902,000 1,250,000 2,059,000
----------- ----------- -----------
Total revenues............................ 4,038,000 6,217,000 9,310,000
----------- ----------- -----------
Cost of revenues:
System sales...................................... 1,097,000 2,330,000 3,071,000
Support services.................................. 299,000 422,000 594,000
----------- ----------- -----------
Total cost of revenues.................... 1,396,000 2,752,000 3,665,000
----------- ----------- -----------
Gross profit........................................ 2,642,000 3,465,000 5,645,000
----------- ----------- -----------
Operating expenses:
Sales and marketing............................... 1,176,000 1,875,000 3,222,000
Research and development.......................... 1,294,000 1,410,000 1,733,000
General and administrative........................ 975,000 2,165,000 3,175,000
----------- ----------- -----------
Total operating expenses.................. 3,445,000 5,450,000 8,130,000
----------- ----------- -----------
Loss from operations................................ (803,000) (1,985,000) (2,485,000)
Interest and other income, net...................... -- 101,000 103,000
Interest expense.................................... (208,000) (26,000) (17,000)
----------- ----------- -----------
Net loss............................................ $(1,011,000) $(1,910,000) $(2,399,000)
=========== =========== ===========
Net loss per share:
Basic and diluted................................. $ (.91) $ (1.84) $ (1.86)
=========== =========== ===========
Weighted average shares........................... 1,108,000 1,041,000 1,290,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 30
LANDACORP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE UNEARNED
------------------ ------------------ PAID-IN FROM STOCK-BASED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICERS COMPENSATION DEFICIT
--------- ------ --------- ------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 606,000 $1,000 1,101,000 $1,000 $ 4,026,000 $ -- $ -- $ (8,297,000)
Issuance of Common Stock....... -- -- 10,000 -- 21,000 -- -- --
Net loss....................... -- -- -- -- -- -- -- (1,011,000)
--------- ------ --------- ------ ----------- --------- ----------- ------------
Balance at December 31, 1997... 606,000 1,000 1,111,000 1,000 4,047,000 -- -- (9,308,000)
Issuance of Common Stock....... -- -- 95,000 -- 297,000 -- -- --
Conversion of Common Stock into
Preferred Stock.............. 18,000 -- (178,000) -- -- -- -- --
Conversion of Series A, B and C
Preferred Stock to Series D
Preferred Stock.............. 557,000 -- -- -- -- -- -- --
Issuance of Series D
Preferred Stock.............. 5,619,000 6,000 -- -- 6,592,000 -- -- --
Unearned stock-based
compensation................. -- -- -- -- 4,166,000 -- (4,166,000) --
Amortization of unearned stock-
based compensation........... -- -- -- -- -- -- 1,173,000 --
Net loss....................... -- -- -- -- -- -- -- (1,910,000)
--------- ------ --------- ------ ----------- --------- ----------- ------------
Balance at December 31, 1998... 6,800,000 7,000 1,028,000 1,000 15,102,000 -- (2,993,000) (11,218,000)
Issuance of Common Stock....... -- -- 10,000 -- 56,000 -- -- --
Common Stock issued for notes
receivable from officers..... -- -- 1,572,000 2,000 187,000 (189,000) -- --
Unearned stock-based
compensation................. -- -- -- -- 1,610,000 -- (1,610,000) --
Amortization of unearned stock-
based compensation........... -- -- -- -- -- -- 1,958,000 --
Net loss....................... -- -- -- -- -- -- -- (2,399,000)
--------- ------ --------- ------ ----------- --------- ----------- ------------
Balance at December 31, 1999... 6,800,000 $7,000 2,610,000 $3,000 $16,955,000 $(189,000) $(2,645,000) $(13,617,000)
========= ====== ========= ====== =========== ========= =========== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31, 1996... $(4,269,000)
Issuance of Common Stock....... 21,000
Net loss....................... (1,011,000)
-----------
Balance at December 31, 1997... (5,259,000)
Issuance of Common Stock....... 297,000
Conversion of Common Stock into
Preferred Stock.............. --
Conversion of Series A, B and C
Preferred Stock to Series D
Preferred Stock.............. --
Issuance of Series D
Preferred Stock.............. 6,598,000
Unearned stock-based
compensation................. --
Amortization of unearned stock-
based compensation........... 1,173,000
Net loss....................... (1,910,000)
-----------
Balance at December 31, 1998... 899,000
Issuance of Common Stock....... 56,000
Common Stock issued for notes
receivable from officers..... --
Unearned stock-based
compensation................. --
Amortization of unearned stock-
based compensation........... 1,958,000
Net loss....................... (2,399,000)
-----------
Balance at December 31, 1999... $ 514,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 31
LANDACORP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,011,000) $(1,910,000) $(2,399,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 162,000 239,000 395,000
Provision (recovery) of doubtful accounts............... 24,000 100,000 (4,000)
Amortization of unearned stock-based compensation....... -- 1,173,000 1,958,000
Stock issued at discount for services rendered.......... -- -- 48,000
Changes in assets and liabilities:
Accounts receivable and costs and estimated earnings
in excess of billing on uncompleted contracts, net... 529,000 (1,111,000) (435,000)
Other current assets................................. 17,000 (73,000) 14,000
Deferred offering costs.............................. -- -- (595,000)
Accounts payable..................................... 59,000 (296,000) 338,000
Accrued expenses..................................... 251,000 (225,000) 971,000
Deferred revenue and billings in excess of costs and
estimated earnings on uncompleted contracts.......... (228,000) 211,000 181,000
Accrued interest -- related party.................... 180,000 (495,000) --
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... (17,000) (2,387,000) 472,000
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment, net.................. (167,000) (321,000) (785,000)
Capitalized software development costs.................... (68,000) (76,000) (77,000)
----------- ----------- -----------
Net cash used in investing activities.............. (235,000) (397,000) (862,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 35,000 -- 270,000
Payments on bank long-term debt........................... -- -- (36,000)
Proceeds from stockholder notes payable................... 382,000 100,000 --
Payments on stockholder notes payable..................... (23,000) (2,032,000) --
Proceeds from Common Stock issuances...................... -- 8,000 8,000
Proceeds from Preferred Stock issuances................... -- 6,598,000 --
----------- ----------- -----------
Net cash provided by financing activities.......... 394,000 4,674,000 242,000
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ 142,000 1,890,000 (148,000)
Cash and cash equivalents, beginning of period.............. -- 142,000 2,032,000
----------- ----------- -----------
Cash and cash equivalents, end of period.................... $ 142,000 $ 2,032,000 $ 1,884,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 21,000 $ 526,000 $ 13,573
=========== =========== ===========
Cash paid for income taxes................................ $ 1,000 $ 1,000 $ 1,000
=========== =========== ===========
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Bank borrowing transferred to stockholder................. $ 163,000 $ -- $ --
=========== =========== ===========
Stockholder notes payable converted into Common Stock..... $ 21,000 $ 289,000 $ --
=========== =========== ===========
Series A, B and C Preferred Stock converted into Series D
Preferred Stock......................................... $ -- $ 1,291,000 $ --
=========== =========== ===========
Common Stock converted into Series D Preferred Stock...... $ -- $ 22,000 $ --
=========== =========== ===========
Common Stock issued for notes receivable from officers.... $ -- $ -- $ 189,000
=========== =========== ===========
Assets acquired under capital leases...................... $ -- $ -- $ 207,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE> 32
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
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 and Atlanta,
Georgia and derives all of its revenues from customers in the United States.
REINCORPORATION
In December 1999, the Company reincorporated in the State of Delaware. As a
result of the reincorporation, the Company changed its name from Landa
Management Systems Corporation to Landacorp, Inc., and is authorized to issue
15,000,000 shares of $0.001 par value Common Stock and 8,000,000 shares of
$0.001 par value Preferred Stock. The Board of Directors has the authority to
issue the undesignated Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ROUNDING
Dollar amounts, except per share data, in the financial statements are
rounded to the closest $1,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives revenues from the installation and licensing of health
care quality and resource management software systems, sales of third party
software applications as part of system implementations and from the delivery of
post-contract customer support, training and consulting services.
The Company accounts for their multiple element contracts in accordance
with the provision of SOP 97-2. As the Company provides significant production,
modification and/or customization of the software installed, system sales
revenues, including training and consulting services essential to the software
system, and the associated costs are recognized using the
percentage-of-completion method, using labor hours incurred relative to total
estimated contract hours as the measure of progress towards completion. When the
current estimates of total contract revenue and contract cost indicate a loss,
the Company records a provision for the estimated loss on the contract. The
allowance for contract losses totaled $100,000 and $97,000 at December 31, 1998
and 1999, respectively. Sales of software products of other vendors are
recognized upon installation. Support services included in the initial licensing
agreement and annual support service renewal contracts are deferred and are
recognized ratably over the support period. Revenues from training and
consulting not considered essential to the functionality of the software system
are recognized when the Company has delivered the services in accordance with
the terms of the service agreements or have no future performance obligations.
Amounts billed in advance of revenue recognition are recorded as deferred
revenue.
In future periods, the Company plans to introduce a new subscription-based
fee structure to payer organizations that would provide for implementation
services at a fixed hourly rate and licensing of the
32
<PAGE> 33
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
installed system and post-contract customer support through a monthly
subscription fee based upon the number of members maintained by the payer
organization. In connection with such future arrangements, if any, that conform
to the new licensing structure, the Company will recognize the fair value of the
implementation services as such services are delivered and will recognize
license and post-contract customer support fees on a monthly basis at the
subscription rate.
The Company has not experienced any material product returns to date.
Accordingly, no provision for future product returns has been made.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's revenues are derived from software licensing and service
transactions with customers in the United States. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for probable
credit losses based upon its historical experience.
At December 31, 1998, three customers accounted for 12%, 11% and 10% of
gross accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts, respectively. At December 31, 1999, two customers
accounted for 18% and 10% of gross accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts, respectively.
During the year ended December 31, 1998, one customer accounted for 10% of
total revenues. During the year ended December 31, 1999, two customers accounted
for 19% and 14% of total revenues, respectively. No individual customer
accounted for 10% or more of total revenues during the year ended December 31,
1997.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with maturities of three
months or less when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the asset, generally
three to five years, or the lease term, if shorter. Depreciable lives are as
follows:
<TABLE>
<S> <C>
Furniture and fixtures........................... 7 years
Computer equipment............................... 3 - 5 years
Leasehold improvements........................... 5 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows available to such assets.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company capitalizes certain software development costs from the
date the technological feasibility of the product is established, using the
working
33
<PAGE> 34
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
model approach, through the date the product is available for general release to
customers. Capitalized costs are amortized on a product-by-product basis, based
on the greater amount computed by using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product, or (b) straight-line amortization over the estimated
product life. The Company evaluates the estimated net realizable value of
capitalized costs relating to each software product on a quarterly basis and
records write-downs to net realizable value for any amounts for which the net
book value is in excess of net realizable value. Net realizable value is
determined based upon the estimated future gross revenues from each product
reduced by the estimated future costs of completing and disposing of that
product. No write-downs of software development costs occurred during the years
ended December 31, 1997, 1998 and 1999.
RESEARCH AND DEVELOPMENT
Research and development costs include expenses incurred by the Company to
develop and enhance its software products and are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock. The Company utilizes the multiple option approach to account for all
unearned stock-based compensation.
The Company accounts for stock issued to non-employees in accordance with
the provisions SFAS No. 123.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and totaled $183,000, $152,000
and $115,000 during the years ended December 31, 1997, 1998 and 1999,
respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding. Diluted net loss per share is computed using the
weighted average number of common and potential common shares outstanding.
Potential common shares consist of outstanding common shares subject to
repurchase by the Company, the incremental number of common shares issuable upon
conversion of Preferred Stock (using the if-converted method) and common shares
issuable upon the exercise of stock options and warrants (using the treasury
stock method). Potential common shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share computations are in accordance
with SFAS No. 128, "Earnings Per Share," and the Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 98.
34
<PAGE> 35
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The weighted average potential common shares excluded from the
determination of basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Preferred Stock................................... 606,000 5,782,000 6,800,000
Common Stock subject to repurchase................ -- -- 700,000
Common Stock options.............................. 818,000 941,000 1,357,000
Common Stock warrants............................. -- 292,000 350,000
--------- --------- ---------
1,424,000 7,015,000 9,207,000
========= ========= =========
</TABLE>
FAIR VALUE OF FINANCIAL INFORMATION
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
fair value due to the short maturity of these instruments.
SEGMENT INFORMATION
The Company identifies its operating segments based on business activities,
management responsibility and geographical location, and reports one measure of
profitability to the chief operating decision maker. During the three years
ended December 31, 1999, the Company operated in a single business segment;
licensing, installing and supporting computer software to customers located in
the United States.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions other than its reported net losses, that are required to be
reported in comprehensive income.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
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. The Company has adopted the provisions of SOP 98-1
in its fiscal year beginning January 1, 1999, 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 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"
35
<PAGE> 36
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter of all fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 in its quarter ending March 31, 2001 and does not expect such
adoption to have a material effect on the Company's financial statements.
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts, net:
Accounts receivable....................................... $1,291,000 $1,705,000
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 547,000 568,000
Less: Allowance for doubtful accounts..................... (87,000) (85,000)
Less: Allowance for contract losses....................... (100,000) (98,000)
---------- ----------
$1,651,000 $2,090,000
========== ==========
Other current assets:
Prepaid license fees...................................... $ 85,000 $ 54,000
Prepaid expenses and other................................ 101,000 118,000
---------- ----------
$ 186,000 $ 172,000
========== ==========
Property and equipment, net:
Computer equipment........................................ $ 870,000 $1,437,000
Furniture and fixtures.................................... 140,000 431,000
Leasehold improvements.................................... 48,000 120,000
---------- ----------
1,058,000 1,988,000
Less: accumulated depreciation............................ (706,000) (931,000)
---------- ----------
$ 352,000 $1,057,000
========== ==========
Capitalized software, net:
Capitalized software...................................... $ 284,000 $ 361,000
Less: accumulated amortization............................ (192,000) (300,000)
---------- ----------
$ 92,000 $ 61,000
========== ==========
Accrued expenses:
Payroll related........................................... $ 733,000 $1,199,000
Other..................................................... 100,000 605,000
---------- ----------
$ 833,000 $1,804,000
========== ==========
Deferred revenue and billings in excess of costs and
estimated earnings on uncompleted contracts:
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. $1,235,000 $1,029,000
Deferred support revenue.................................. 1,167,000 1,507,000
Other deferred revenue.................................... 54,000 101,000
---------- ----------
$2,456,000 $2,637,000
========== ==========
</TABLE>
36
<PAGE> 37
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS
At December 31, 1997, the Company had notes payable to certain stockholders
totaling $2,221,000, which accrued interest at an annual rate of 12%. Interest
expense recognized on stockholder notes totaled $180,000 and $31,000 for the
years ended December 31, 1997 and 1998, respectively. In March 1998, these
stockholder notes payable and related accrued interest totaling $2,558,000 were
repaid using proceeds from the Series D Preferred Stock issuance (See Note 7).
During the year ended December 31, 1998, stockholders converted notes
payable totaling $289,000 as payment for the exercise of 91,000 vested options.
At December 31, 1999, the Company held full recourse notes receivable from
officers related to their purchases of Common Stock in the amount of $189,000.
The notes accrue interest at 6% per annum, are collateralized by all shares of
the Company's Common Stock purchased by these individuals and are due and
payable in 2006 or immediately in the event of termination.
5. INCOME TAXES
No current provision or benefit for federal or state income taxes has been
recorded for the years ended December 31, 1997, 1998 and 1999, as the Company
has incurred net operating losses and has no carryback potential.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $7,109,000 and $1,842,000, respectively,
available to reduce future taxable income. Utilization of such carryforwards 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 through 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 can
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.
Net deferred tax assets are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward........................... $ 2,228,000 $ 2,524,000
Depreciation and amortization............................. 629,000 375,000
Research and development credits.......................... 210,000 210,000
Allowance for doubtful accounts........................... 35,000 34,000
Allowance for contract losses............................. 40,000 39,000
Other..................................................... 40,000 123,000
----------- -----------
Gross deferred tax assets................................. 3,182,000 3,305,000
Less: Valuation allowance................................. (3,182,000) (3,305,000)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
Based on a number of factors, including the lack of a history of profits
and net operating loss carryforward limitations due to changes in ownership,
management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has been
provided.
37
<PAGE> 38
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its facilities and certain furniture and equipment under
noncancelable operating and capital leases which expire at various times through
2005. The capital lease is payable in monthly installments of $4,000 through
October 2004. Future minimum lease payments at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ----------
<S> <C> <C>
2000...................................................... $ 48,000 $ 258,000
2001...................................................... 48,000 218,000
2002...................................................... 48,000 167,000
2003...................................................... 48,000 157,000
2004...................................................... 39,000 145,000
Thereafter.................................................. -- 96,000
-------- ----------
Total minimum lease payments................................ 231,000 $1,041,000
==========
Less: amount representing interest, at 5.7%................. (30,000)
--------
Present value of capital lease payments..................... 201,000
Less: current portion....................................... (37,000)
--------
$164,000
========
</TABLE>
Rent expense under noncancelable operating leases totaled $208,000,
$139,000 and $253,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
LINE OF CREDIT AGREEMENT
In February 1999, the Company obtained a line of credit that allows maximum
borrowings of $2 million. The Company is allowed to designate up to $300,000 of
the maximum borrowings as a term note to finance purchases. Advances on the line
of credit are collateralized by all tangible and intangible personal property of
the Company, accrue interest at prime and are due in March 2000. At December 31,
1999, the Company had no outstanding borrowings under the line of credit
agreement, $55,000 in issued letters of credit, and $240,000 on the term note.
The interest rate for borrowings under the term note is the Bank's prime rate
plus 1%, 9.5% at December 31, 1999. There are various restrictive covenants
under the line of credit and term note, 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 through March 31, 2000, the expiration date
of the line of credit and term note.
SHAREHOLDER BONUS
In February 1998, the Company entered into an agreement with a shareholder
whereby the Company would pay a bonus of $335,000 to the shareholder upon the
successful completion of an initial public offering. As discussed in Note 11,
the Company completed its initial public offering in February 2000. Accordingly,
the Company paid the $335,000 to the shareholder and recorded such amount as an
operating expense during February 2000.
SHAREHOLDER SETTLEMENT
In December 1999, an investment Corporation (the Corporation), a
shareholder of the Company, alleged that the Company had agreed to merge with
the Corporation in a manner that would provide tax benefits to the Corporation.
The Company denies the allegation, but in the interest of avoiding professional
costs, the Company, on December 6, 1999 entered into a settlement agreement with
the Corporation. The agreement
38
<PAGE> 39
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
specifies that upon the Corporation's liquidation, the Corporation will
distribute its Landacorp shares to the Corporation's shareholders and the
Company will pay a portion of the Corporation's corporate income taxes related
to such liquidation, up to $115,000. The Company has recorded $140,000, the
estimated settlement plus related professional fees, as a general and
administrative expense in December 1999.
7. PREFERRED STOCK
As of December 31, 1999, the Company's Articles of Incorporation, as
amended, authorized the Company to issue 8,000,000 shares of Preferred Stock, of
which 6,800,000 shares, designated as Series D Preferred Stock, were issued and
outstanding at December 31, 1998 and 1999, and the remaining 1,200,000 were
undesignated. At December 31, 1999, the gross proceeds and liquidation
preference related to the Preferred Stock amounted to $8,513,000 and $8,160,000,
respectively. As discussed in Note 11, in February 2000, the Company completed
its initial public offering, and in conjunction with such offering all Preferred
Stock was converted into common stock on a one-for-one basis.
RECAPITALIZATION IN 1998
At December 31, 1997, the Company had 606,000 outstanding shares of Series
A, B and C Preferred Stock. During 1998, these shares were converted to a total
of 1,163,000 shares of Series D Preferred Stock. In addition, the Company issued
5,619,000 shares of Series D Preferred Stock to new investors for approximately
$1.20 per share. Offering costs of $145,000 were recorded as an offset to the
gross proceeds from the sale of Series D Preferred Stock.
Additionally, certain stockholders converted 178,000 shares of Common Stock
into 18,000 shares of Series D Preferred Stock using a conversion ratio of
approximately 0.10 shares of Series D Preferred Stock issued for each share of
Common Stock converted.
8. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorized the Company
to issue 15,000,000 shares of Common Stock of which 2,612,000 were outstanding
shares at December 31, 1999.
COMMON STOCK WARRANTS
In conjunction with certain Preferred Stock issuances, the Company issued
warrants to two stockholders for the rights to purchase 100,000 and 250,000
shares, respectively, of Common Stock at a price of $1.20 per share. The
warrants were fully vested and exercisable on the date of grant and expire on
the earlier of February 2003, or the closing of an initial public offering by
the Company. These warrants were accounted for in accordance with SFAS No. 123,
and the fair value of warrants, determined using the Black-Scholes option
pricing model, was immaterial at the date of issuance. As discussed in Note 11,
these warrants were exercised subsequent to December 31, 1999 in connection with
the Company's initial public offering.
RESTRICTED COMMON STOCK
In March and May 1999, certain officers exercised, in exchange for full
recourse notes payable to the Company, stock options to purchase 1,572,284
shares of the Company's Common Stock at a price of $0.12 per share (See Note 4).
Under the terms of the stock purchase agreements, the Company has the right to
repurchase the unvested shares of Common Stock at the original issue price in
the event the officers cease to be employees of the Company. The repurchase
rights lapse ratably over 48 months from the original grant date of the options.
At December 31, 1999, 973,336 shares of Common Stock were subject to repurchase
rights.
39
<PAGE> 40
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS
The Company has two stock option plans, the 1995 Stock Option Plan (1995
Plan) and the 1998 Equity Incentive Plan (1998 Plan), which provide for the
granting of incentive stock option awards to employees of the Company. Under the
two plans, options must be issued at prices not less than 100 percent of the
estimated fair value of the stock on the date of grant and are exercisable for
periods not exceeding ten years from the date of grant. Options granted to
stockholders who own greater than 10 percent of the outstanding stock at the
time of grant are exercisable for periods not exceeding five years from the date
of grant and must be issued at prices not less than 110 percent of the estimated
fair value at the date of grant. Options granted under the 1995 Plan vest in 25
percent increments 9, 15, 21 and 27 months after the date of grant. The vesting
provisions of individual options granted to employees under the 1998 Plan may
vary at the discretion of the Board of Directors, but must vest at a rate of at
least 20 percent per year over five years from the grant date. Options granted
to officers and directors under the 1998 Plan vest over periods determined by
the Board of Directors. Options granted in 1998 to officers and directors were
immediately exercisable. As discussed in Note 8, the immediately exercisable
options to purchase 1,572,284 shares of the Company's Common Stock granted in
1998 were exercised by certain officers during 1999 and are subject to
repurchase by the Company. In July 1999, certain directors of the Company were
granted options to purchase 50,000 shares of the Company's Common Stock. These
options were immediately exercisable and are also subject to the same
restriction described in Note 8.
The following table summarizes the status of the Company's stock option
plans as of and for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1998 1999
------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year..... 609,048 $2.85 900,298 $2.54 2,253,947 $0.71
Granted above fair value......... 379,500 1.95 -- -- -- --
Granted below fair value......... -- -- 1,750,349 0.12 310,100 1.52
Exercised........................ (10,000) 2.09 (95,000) 3.13 (1,572,284) 0.12
Forfeited........................ (78,250) 2.13 (6,700) 1.90 (9,800) 0.15
Expired.......................... -- -- (295,000) 1.99 (70,848) 8.00
------- --------- ----------
Outstanding at period end.......... 900,298 2.54 2,253,947 0.71 911,115 1.44
======= ========= ==========
Options exercisable at period
end.............................. 602,298 2.84 2,005,132 0.72 556,722 1.49
======= ========= ==========
Weighted-average fair value of
options granted below fair value
during the period................ $ -- $2.40 $5.57
===== ===== =====
</TABLE>
As of December 31, 1997, 1998 and 1999, 465,167, 588,802 and 359,350 shares
of Common Stock were reserved for future issuance, respectively.
40
<PAGE> 41
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF REMAINING NUMBER OF REMAINING
EXERCISE SHARES CONTRACTUAL LIFE SHARES CONTRACTUAL LIFE
PRICES OUTSTANDING IN YEARS EXERCISABLE IN YEARS
- -------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$0.12 168,565 8.8 73,972 8.8
0.50 28,000 9.5 -- --
1.00 251,800 9.6 50,000 9.6
1.90 432,750 5.0 432,750 5.0
6.80 30,000 10.0 -- --
------- ---- ------- ---
911,115 7.3 556,722 5.9
======= ==== ======= ===
</TABLE>
FAIR VALUE DISCLOSURES
The Company calculated the fair value of each option on the date of grant
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using
the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rates.................................... 6.3% 5.8% 6.1%
Expected lives (in years)................................... 5.0 5.0 5.0
Dividend yield.............................................. 0.0% 0.0% 0.0%
Expected volatility......................................... 0.1% 0.1% 0.1%
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined based on the minimum value method prescribed by SFAS No. 123, the
Company's net pro forma loss would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported............................... $(1,011,000) $(1,910,000) $(2,399,000)
Pro forma................................. $(1,011,000) $(1,912,000) $(2,478,000)
Basic and diluted net loss per share:
As reported............................... $ (0.91) $ (1.84) $ (1.86)
Pro forma................................. $ (0.91) $ (1.84) $ (1.92)
</TABLE>
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described above and because additional option grants
are expected to be made each year, the above pro forma disclosures are not
representative of the pro forma effect of option grants on reported net loss for
future years.
UNEARNED STOCK-BASED COMPENSATION
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), as applicable, using the multiple option approach prescribed
by SFAS No. 123.
41
<PAGE> 42
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Cost of system sales revenue................................ $ 86,000 $ 190,000
Cost of support sales revenue............................... 3,000 14,000
Sales and marketing expense................................. 287,000 419,000
Research and development expense............................ 17,000 164,000
General and administrative expense.......................... 780,000 1,171,000
---------- ----------
Total amortization of unearned stock-based
compensation.................................... $1,173,000 $1,958,000
========== ==========
</TABLE>
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.
10. EMPLOYEE BENEFIT PLANS
401(K) PROFIT SHARING PLAN
All full-time employees who are at least 21 years old and have completed 90
days of service are eligible to participate in the Company's 401(k) Profit
Sharing Plan. Participants may elect to contribute up to 15% of their taxable
compensation or of the statutorily prescribed limit, whichever is lower, to the
Plan. The Company contributes matching funds of up to 25% of employee
contributions, subject to a cap of $900 per employee. The Company's
contributions totaled $11,000, $18,000 and $32,000 during the years ended
December 31, 1997, 1998, and 1999, respectively.
STOCK PURCHASE PLAN
In December 1999, the Company adopted an employee stock purchase plan.
Under the plan, eligible employees may purchase common stock through payroll
deductions of up to 15% of the participants' compensation. The price per share
is the lower of 85% of the market price at the beginning or end of the offering
period. The first offering period commenced on February 9, 2000, the first
trading date after the Company's initial public offering (Note 11). The plan
provides for purchases by employees of up to an aggregate of 560,000 shares
through 2009.
11. SUBSEQUENT EVENTS
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 to be paid
in four quarterly installments commencing 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.
42
<PAGE> 43
LANDACORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of IHD, certain employees of IHD were
granted options to purchase 68,750 shares of the Company's common stock at an
exercise price of $3.00 per share and 88,750 shares of the Company's common
stock at an exercise price of $8.50 per share, which was below the fair market
value of the Company's common stock on the date of grant. Accordingly, the
Company recognized unearned compensation of $427,000 during January 2000. The
unearned compensation will be amortized over the vesting period of the options,
which is over 4 years.
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 commissions 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 (see Note 8) exercised the
warrants in a cashless exercise resulting in a net issuance of 308,000 shares of
common stock.
43
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) The following table sets forth information with respect to our
executive officers and directors as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene Santa Cattarina...... 52 President, Chief Executive Officer and Director
Stephen Kay................. 38 Chief Operating Officer and Chief Financial Officer
Bryan Lang.................. 41 Chief Technology Officer, Chief Marketing Officer and Director
David Brown................. 44 Senior Vice President, Sales
Marlene McCurdy............. 46 Senior Vice President, Client Services
Thomas Stephenson........... 57 Chairman of the Board of Directors
Howard Cox.................. 55 Director
Jason Rosenbluth, MD........ 42 Director
Jerome Grossman, MD......... 60 Director
</TABLE>
Eugene Santa Catarina, President and Chief Executive Officer and Director,
came to Landacorp in July 1998, after serving since 1996 as President and Chief
Executive Officer of Medicode, Inc., a leading healthcare information technology
company that was recently acquired by United Healthcare Corporation. From 1986
to 1993, Mr. Santa Cattarina served in a number of leadership positions with TDS
Healthcare Systems Corporation, a healthcare software systems company, including
President and Chief Operating Officer. Following the acquisition of TDS
Healthcare Systems Corporation by ALLTEL Corporation in 1993, Mr. Santa
Cattarina continued as President and Chief Operating Officer of TDS Healthcare
Systems Corporation until 1994, and as Executive Vice President of ALLTEL
Information Services -- Healthcare Division from 1994 to 1995. From 1967 to
1986, he held various positions with Technicon Corporation, a clinical
laboratory automation company, including President, Domestic Division.
Stephen Kay, Chief Operating Officer and Chief Financial Officer, has been
involved with Landacorp since 1992, initially as the Director of Finance of
Landacorp UK Ltd. In early 1995, Mr. Kay was promoted to Chief Operating Officer
of Landacorp. He is currently Chief Operating Officer and Chief Financial
Officer of Landacorp and is responsible for overseeing finance and operations.
He has worked in a consultative capacity in the structuring of contracts,
implementation, and deployment plans of healthcare information systems for
hospitals, integrated delivery networks, managed care organizations, and
insurance companies, as well as for the United Kingdom's National Health
Service. Mr. Kay is a member of The Institute of Chartered Accountants in
England and Wales. He received his training at Touche Ross (now Deloitte Touche)
in London, England.
Bryan Lang, Chief Technology Officer and Chief Marketing Officer and
Director, is the founder of Landacorp. Mr. Lang served as Chief Executive
Officer of Landacorp from 1993 to 1996, has served as Chief Technology Officer
since 1998, and as Chief Marketing Officer since January 1999. Mr. Lang has been
a consultant and automated systems designer for fifteen years during which time
he has worked extensively with healthcare industry projects in the United
States, the United Kingdom, Canada, Saudi Arabia and Australia. As a specialist
in healthcare process optimization, information systems and resource management,
his efforts include work with hundreds of hospitals, health maintenance
organizations, ambulatory care services, private physician practices and the
U.S. and Saudi armed forces.
44
<PAGE> 45
David Brown, Senior Vice President, Sales, joined Landacorp in July 1998.
From 1997 to 1998, he was Vice President-Sales for HBO & Company's (now
McKesson/HBOC) provider and payer solutions. From 1985 to 1997, Mr. Brown served
in a number of sales and sales executive positions including Regional Sales
Director/Vice President-Sales for Eclipsys Corporation (formerly ALLTEL
Information Services-Healthcare Division, TDS Healthcare Systems Corporation and
Technicon Data Systems). From 1983 to 1985, Mr. Brown was Regional Sales
Director for Compucare, a provider of mainframe- and minicomputer-based software
and services to hospitals. Mr. Brown began his career in healthcare with
Technicon in 1980 as a Hospital Consultant and then moved into the position of
Sales Representative.
Marlene McCurdy, Senior Vice President, Client Services, joined Landacorp
in July 1996 after serving as Director, Implementation Strategy/Research &
Development for Eclipsys Corporation since 1995. From 1990 to 1995, Ms. McCurdy
held a number of implementation and technical support positions for TDS
Healthcare Systems Corporation and ALLTEL Information Services -- Healthcare
Division, including Director, Implementation Services.
Thomas Stephenson, Director and Chairman of the Board, has been a director
of Landacorp since February 1998. He has been a general partner and managing
member of Sequoia Capital General Funds since 1988. Prior thereto, Mr.
Stephenson was President of Fidelity Venture Associates, the venture capital
subsidiary of Fidelity Investments. Mr. Stephenson is a director of Chapters
Online and a number of private companies. Mr. Stephenson received his BA and MBA
from Harvard University, and a law degree from Boston College Law School.
Howard Cox, Director, has served as a director of Landacorp since February
1998. He is a General Partner of Greylock, a national venture capital firm
headquartered in Boston, with which he has been associated for 28 years. Mr. Cox
is a Director of Stryker Corporation in Michigan and numerous other private
companies. Prior to joining Greylock, Mr. Cox served in the Office of the
Secretary of Defense.
Jason Rosenbluth, MD, Director, has served as a director of Landacorp since
February 1998. Dr. Rosenbluth is a Managing Director of Bedrock Capital
Partners, a venture capital firm which he co-founded in 1997. From 1993 to 1997,
Dr. Rosenbluth was a healthcare securities analyst and managing director of
Volpe Brown Whelan & Company, an investment banking firm. Dr. Rosenbluth
currently serves as a director of a number of privately-held technology
companies. Dr. Rosenbluth holds an MD from Cornell University Medical College
and an MBA from the Wharton School of the University of Pennsylvania.
Jerome Grossman, MD, Director, has been a director of Landacorp since May
1998. Dr. Grossman is currently chairman and Chief Executive Officer of a newly
formed company, Lion Gate Management Corporation. From 1995 to early 1999, he
was Chief Executive Officer of Health Quality Inc. He is chairman emeritus of
New England Medical Center, Inc. Dr. Grossman has been a founder of several
healthcare companies, and has held teaching, research, and medical positions at
Tufts University School of Medicine, Massachusetts General Hospital and Harvard
Medical School. Dr. Grossman serves as Trustee/Director of several corporations
and institutions, including Wellesley College, Stryker Corporation, Arthur D.
Little, Inc. and Stryker Corp. He served on the Board of the Federal Reserve
Bank of Boston from 1990 to 1997 and was its Chairman from 1994 to 1997.
BOARD COMPOSITION
Landacorp's board of directors is currently comprised of six members. Four
of our directors, Thomas Stephenson, Howard Cox, Jason Rosenbluth, MD and Jerome
Grossman, MD, are not employees of Landacorp.
BOARD COMMITTEES
Audit Committee. The audit committee of the board of directors is comprised
of Thomas Stephenson, Howard Cox, Jason Rosenbluth, MD and Jerome Grossman, MD.
Jason Rosenbluth is the chairman of the audit committee.
45
<PAGE> 46
Compensation Committee. The compensation committee of the board of
directors is comprised of Thomas Stephenson, Howard Cox, Jason Rosenbluth, MD
and Jerome Grossman, MD. Howard Cox is the chairman of the compensation
committee.
ITEM 11. EXECUTIVE COMPENSATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive offices whose total salary, bonus and other compensation
exceeded $100,000 during the year ended December 31, 1999. In accordance with
the rules of the Securities Exchange Commission, the compensation described in
this table does not include perquisites and other personal benefits received by
the executive officers named in the table below which did not exceed the lesser
of $50,000 or 10% of the total salary or bonus reported for those officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER 2000 ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION SALARY(1)
--------------------------- -------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Eugene Santa Cattarina................... $250,000 $109,037 -- -- $268,750
President and Chief Executive Officer
Stephen Kay.............................. 175,200 65,422 -- -- 188,340
Chief Operating Officer and
Chief Financial Officer
Bryan Lang............................... 175,200 51,592 50,000 -- 188,340
Chief Technology Officer and
Chief Marketing Officer
David Brown.............................. 150,000 68,790 -- -- 161,250
Senior Vice President, Sales
Marlene McCurdy.......................... 120,000 34,669 -- -- 140,000
Senior Vice President, Client Services
</TABLE>
- ---------------
(1) Figures are based on annualized salary, excluding bonus, if any.
OPTION GRANTS
The following table provides certain information regarding options granted
by Landacorp to the named executive officers during the fiscal year ended
December 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
DATE OF OPTIONS DURING PRICE EXPIRATION ---------------------------
NAME GRANT GRANTED PERIOD ($/SHARE) DATE 5% 10%
---- --------- ---------- ------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bryan Lang........... July 1999 50,000 17.85% $1.00 July 2009 $764,500 $1,247,000
</TABLE>
46
<PAGE> 47
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides certain information with respect to options
exercised by named executive officers during the fiscal year ended December 31,
1999 and the value of unexercised options held by named executive officers as of
December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF
NUMBER OF OPTIONS AT FISCAL UNEXERCISED OPTIONS
SHARES ACQUIRED VALUE YEAR END 1999 AT FISCAL YEAR END 1999(2)
NAME ON EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(5)
---- --------------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Eugene Cattarina......... 605,550 $2,859,703 -- / -- -- / --
Stephen Kay.............. 300,000 1,065,000 -- / -- -- / --
Bryan Lang............... 195,000 920,400 -- / 50,000 -- / $450,000
David Brown.............. 151,041 536,196 -- / -- -- / --
Marlene McCurdy.......... 100,694 357,464 -- / -- -- / --
</TABLE>
- ---------------
(1) For purposes of this calculation, value is based upon the difference between
the fair market value of the securities at the time of exercise, and the
exercise price. We based the calculation of the fair market value price at
the time of exercise on the Black-Scholes valuation used for calculation of
the cheap stock compensation, as set forth in Note 8 -- Fair Value
Disclosures -- to the Financial Statements included herewith.
(2) For purposes of this calculation, value is based upon the difference between
the fair market value of the securities at the fiscal year ended December
31, 1999, and the exercise price. We based the calculation of the fair
market value price at the end of fiscal year ended December 31, 1999 on the
price per share of this offering.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. The number and percentage of shares beneficially
owned are based on 9,717,851 shares of common stock outstanding as of December
31, 1999, assuming the conversion of all outstanding preferred stock and the
exercise of all outstanding warrants. Shares of common stock subject to options
that are currently exercisable or exercisable within sixty days of December 31,
1999 are deemed to be outstanding and to be beneficially owned by the person
holding the options for the purpose of computing the percentage ownership of
that person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. The number of shares of common stock
outstanding after the initial public offering includes shares of common
47
<PAGE> 48
stock offered and includes the shares that were subject to the underwriters'
over-allotment option. Unless otherwise indicated, the address for each listed
stockholder is the same as Landacorp's.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Bedrock Capital Partners I,
LP(1)..................................................... 1,750,000 18.0% 13.2%
One Boston Place, Suite 3310
Boston, MA 02108
Greylock IX Limited Partnership............................. 2,500,000 25.7 18.9
One Federal Street
Boston, MA 02110
Sequoia Capital VII(2)...................................... 2,500,000 25.7 18.9
3000 Sandhill Road, Building 4, Suite 780
Menlo Park, CA 94025
Eugene Santa Cattarina...................................... 847,217 8.7 6.4
Bryan Lang(3)............................................... 626,307 6.4 4.7
Gilbert Lang(4)............................................. 178,077 1.8 1.3
Beulah Lang(5).............................................. 178,077 1.8 1.3
Jason Rosenbluth, M.D.(6)................................... 1,750,000 18.0 13.2
One Maritime Plaza, 5th Floor
San Francisco, CA 94111
Howard Cox(7)............................................... 2,500,000 25.7 18.9
One Federal Street
Boston, MA 02110
Thomas Stephenson(8)........................................ 2,500,000 25.7 18.9
3000 Sandhill Road, Building 4, Suite 780
Menlo Park, CA 94025
Jerome Grossman, M.D.(9).................................... 33,565 -- --
72 Spooner Road
Chestnut Hill, MA 02617
Stephen Kay................................................. 300,000 3.1 2.3
David Brown................................................. 151,041 1.6 1.1
Marlene McCurdy............................................. 100,694 1.0 --
</TABLE>
<TABLE>
<CAPTION>
All directors and executive officers as a group (9 persons)(10). 8,808,824 90.7 % 66.6
<S> <C> <C> <C>
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 1,575,000 shares held by Bedrock Capital Partners I, LP, 87,500
shares held by Credit Suisse First Boston Bedrock Fund, L.P., 6,260 shares
held by Chris Paul, 6,250 shares held by Theodore Ridgeway, and 75,000
shares held by the VBW Employee Bedrock Fund, L.P. Bedrock General Partner
I, LLC is a general partner of Bedrock Capital Partners I, L.P. and of VBW
Employee Bedrock Fund, L.P.
(2) Includes 2,287,000 shares held by Sequoia Capital VII, 100,000 shares held
by Sequoia Technology Partners VII, 46,4000 shares held by SQP 1997, 26,100
shares held by Sequoia 1997 and 40,000 shares held by Sequoia International
Partners, SC VII-A Management Company LLC is a general partner of Sequoia
Capital VII, Sequoia Technical Partners VII and Sequoia International
Partners.
(3) In February 2000 the underwriters exercised their over-allotment option and
Bryan Lang sold 62,000 shares of common stock. The percentage of shares
beneficially owned by Mr. Lang after this sale was 4.2%.
(4) Includes warrants to purchase 100,000 shares of common stock held jointly
with his spouse, Beulah Lang. Gilbert and Beulah Lang are Bryan Lang's
parents. Gilbert and Beulah Lang exercised the warrants on a cashless basis
immediately prior to completion of our initial public offering, resulting
in a net issuance of 88,000 shares of common stock. In February 2000 the
underwriters exercised their over-
48
<PAGE> 49
allotment option and Gilbert and Beulah Lang sold 88,000 shares in this
initial public offering. The percentage of shares beneficially owned by
them after the offering is less than 1% of the outstanding shares of common
stock.
(5) Includes 78,077 shares of common stock owned by her spouse, Gilbert Lang,
and warrants to purchase 100,000 shares of common stock held jointly with
him. Gilbert and Beulah Lang are Bryan Lang's parents. Gilbert and Beulah
Lang exercised the warrants on a cashless basis immediately prior to
completion of the offering, resulting in a net issuance of 88,000 shares of
common stock. In February 2000 the underwriters exercised their
over-allotment option and Gilbert and Beulah Lang sold 88,000 shares in the
offering. The percentage of shares beneficially owned by them after the
offering is less than 1% of the outstanding shares of common stock.
(6) Includes 1,750,000 shares held by Bedrock Capital Partners I, LP and its
affiliates, as listed in note 1 above. Dr. Rosenbluth is a co-founder and
managing partner of Bedrock General Partner I, LLC, the general partner of
Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. Dr.
Rosenbluth disclaims beneficial ownership of the shares held by the
entities or persons listed in note 1 above, except to the extent of his
direct pecuniary interest in the shares. Bedrock General Partner I, LLC has
voting and disposition power over the shares underlying the options held by
Dr. Rosenbluth.
(7) Includes 2,500,000 shares held by Greylock IX Limited Partnership. Mr. Cox
is a general partner of Greylock IX GP Limited Partnership, which is a
general partner of Greylock IX Limited Partnership. Mr. Cox disclaims
beneficial ownership of the shares held by Greylock IX Limited Partnership,
except to the extent of this direct pecuniary interest in the shares.
(8) Includes 2,500,000 shares held by Sequoia Capital VII and its affiliates,
as listed in note 2 above. Mr. Stephenson is a managing member of SC VII-A
Management Company LLC, the general partner of Sequoia Capital VII, Sequoia
Technology Partners VII and Sequoia International Partners. Mr. Stephenson
disclaims beneficial ownership of the shares held by the entities listed in
note 2 above, except to the extent of his direct pecuniary interest in the
shares.
(9) Includes 33,565 shares of common stock issuable upon the exercise of
options exercisable within sixty days of December 31, 1999.
(10) Includes 33,565 shares of common stock issuable upon the exercise of
options exercisable within sixty days of December 31, 1999. Includes
1,750,000 shares held by Bedrock Capital Partners I, LP and its affiliates,
as listed in notes 1 and 6 above, 2,500,000 shares held by Greylock IX
Limited Partnership, as listed in note 7 above, and 2,500,000 shares held
by Sequoia Capital VII and its affiliates, as listed in notes 2 and 8
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Series D Preferred Stock Financing
In February 1998, we amended our articles of incorporation to authorize the
issuance of 6,800,000 shares of Series D Preferred Stock ("Series D Preferred
Stock"), to designate the Series D Preferred Stock and to provide the holders
thereof with certain rights, privileges and preferences, including certain
liquidation and dividend preferences. In addition, we entered into an Investors'
Rights Agreement with each holder of Series D Preferred Stock pursuant to which
Landacorp granted the holders of Series D Preferred Stock "piggy-back"
registration rights with respect to certain registrations of our securities
pursuant to the Securities Act. See "Description of Capital Stock."
Immediately following the authorization, we converted all 41,000 shares of
Series A Preferred Stock then outstanding into shares of Series D Preferred
Stock, on a one-for-one basis, and all 115,000 shares of Series B Preferred
Stock and 450,000 shares of Series C Preferred Stock then outstanding into
1,122,000 shares of Series D Preferred Stock, using a ratio of 1.9833 shares of
Series D Preferred Stock for each share of Series B and Series C Preferred
Stock. In February 1998, following these conversions, the holders of the
converted Series D Preferred Stock sold all their shares to new investors, for
$1.20 per share. At the same time we sold an additional 5,619,000 shares of
Series D Preferred Stock to the new investors.
49
<PAGE> 50
The following directors and beneficial owners of more than five percent of
our outstanding capital stock acquired beneficial ownership of Series D
Preferred Stock in this private placement as follows:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS/5% STOCKHOLDERS SHARES
------------------------- ---------
<S> <C>
Bedrock Capital Partners I, LP(1)........................... 1,750,000
Greylock IX Limited Partnership............................. 2,500,000
Sequoia Capital VII(2)...................................... 2,500,000
Eugene Santa Cattarina...................................... 41,667
Jason Rosenbluth(3)......................................... 1,750,000
Howard Cox(4)............................................... 2,500,000
Thomas Stephenson(5)........................................ 2,500,000
</TABLE>
- ---------------
(1) Includes 1,575,000 shares held by Bedrock Capital Partners I, LP, 87,500
shares held by Credit Suisse First Boston Bedrock Fund, LP, 6,250 shares
held by Chris Paul, 6,250 shares held by Theodore Ridgeway and 75,000 shares
held by the VBW Employee Bedrock Fund, LP. Bedrock General Partner I, LLC is
a general partner of Bedrock Capital Partners I, LP and of VBW Employee
Bedrock Fund, LP.
(2) Includes 2,287,500 shares held by Sequoia Capital VII, 100,000 shares held
by Sequoia Technology Partners VII, 46,400 shares held by SQP 1997, 26,100
shares held by Sequoia 1997 LLC and 40,000 shares held by Sequoia
International Partners. SC VII-A Management Company LLC is a general partner
of Sequoia Capital VII, Sequoia Technical Partners VII and Sequoia
International Partners.
(3) Includes 1,750,000 shares held by Bedrock Capital Partners I, LP and its
affiliates, as listed in note 1 above. Dr. Rosenbluth is a co-founder and
managing partner of Bedrock General Partner I, LLC, the general partner of
Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. Dr.
Rosenbluth disclaims beneficial ownership of the shares held by the entities
or persons listed in note 1 above, except to the extent of his direct
pecuniary interest in the shares.
(4) Includes 2,500,000 shares held by Greylock IX Limited Partnership. Mr. cox
is a general partner of Greylock IX Limited Partnership. Mr. Cox is a
general partner of Greylock IX GP Limited Partnership, which is a general
partner of Greylock IX Limited Partnership. Mr. Cox disclaims beneficial
ownership of the shares held by Greylock IX Limited Partnership, except to
the extent of his direct pecuniary interest in the shares.
(5) Includes 2,500,000 shares held by Sequoia Capital VII and its affiliates, as
listed in note 2 above. Mr. Stephenson is a managing member of SC VII-A
Management Company LLC, the general partner of Sequoia Capital VII, Sequoia
Technology Partners VII and Sequoia International Partners. Mr. Stephenson
disclaims beneficial ownership of the shares held by the entities listed in
note 2 above, except to the extent of his direct pecuniary interest in the
shares.
Warrants
In conjunction with our sale of preferred stock in February 1998, we issued
warrants to Mr. Gilbert Lang and Mrs. Beulah Lang and to Westminster Health Care
Limited for the purchase of 100,000 and 250,000 shares of common stock,
respectively, at the price of $1.20 per share. The warrants were fully vested
and were exercised in February 2000 by cashless transfer into 88,000 and 220,000
shares of common stock, respectively.
At December 31, 1996, we had notes payable to Mr. Gilbert Lang, Mrs. Beulah
Lang, Mr. Bryan Lang and Mr. Roger Stratton totaling $1,720,000. At December 31,
1997, we had notes payable to Mr. Gilbert Lang, Mrs. Beulah Lang, Mr. Bryan
Lang, Mr. Roger Stratton and Westminster Health Care Limited totaling
$2,221,000. These notes accrued interest at an annual rate of 12%. In March
1998, we used the proceeds of our February 1996 preferred stock financing to
repay stockholder notes and related accrued interest totaling $2,558,000.
50
<PAGE> 51
During the year ended December 31, 1996, Mr. Bryan Lang converted notes
payable totaling $27,000 as payment of the exercise price of 13,000 vested
options. During the year ended December 31, 1997, Mr. Bryan Lang converted notes
payable totaling $21,000 as payment of the exercise price of 10,000 vested
options. During the six months ended June 30, 1998 and the year ended December
31, 1998, Mr. Gilbert Lang and Mrs. Beulah Lang converted notes payable totaling
$289,000 as payment of the exercise price of 91,000 vested options.
Early Exercise of Stock Options
As of December 1999, we had full recourse notes from Mr. Eugene Santa
Cattarina, Mr. Stephen Kay, Mr. David Brown, Ms. Marlene McCurdy, Mr. Brandon
Raines and Mr. Bryan Lang, all employees, related to the early exercise of stock
options in the amount of $189,000. These notes accrue interest at a rate of 6%
per year, are secured by such shares of common stock, and are due and payable in
the event of termination of employment. Pursuant to the terms of restricted
stock purchase agreements entered into with these employees, we have the option
to repurchase a portion of these shares in the event of termination of
employment.
Bonus in Respect of Waiver of Deferred Compensation
Pursuant to agreement dated February 27, 1998, and in connection with the
sale of the preferred stock, Bryan Lang agreed to waive any and all rights to
$335,000 in deferred compensation that had accrued to his benefit. In connection
with this waiver, we further agreed that if either Landacorp's common stock
became publicly traded following an initial public offering, or if Landacorp was
sold for a value in excess of $40,000,000, then a success fee from the proceeds
would be paid to Mr. Lang in the amount of $335,000. This bonus payment was paid
in March 2000 and was recognized as an operating expense.
Line of Credit
In 1997, we maintained an operating line of credit with a bank which was
guaranteed by Westminster Health Care Limited. This line of credit expired on
December 31, 1997, and the outstanding balance of $163,000 was repaid to the
bank by Westminster Health Care Limited in exchange for a note payable by
Landacorp. We repaid the note in March 1998.
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2(1) Registration Rights Agreement dated October 29, 1997, as
amended
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(1) 1995 Stock Plan and form of agreements thereunder
10.3(1) 1998 Equity Incentive Plan
10.4(1) 1999 Employee Stock Purchase Plan
10.5(1) Sublease Agreement for Offices located at 4151 Ashford
Dunwoody Rd., Atlanta, Georgia, between Landacorp and Unisys
Corporation, dated September 1, 1991
10.6(1) Lease Agreement for offices located on Fortress Avenue,
Chico, CA, between Landacorp and Fortress Development Group,
dated March 8, 1999
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.7(1) Licensing Agreement by and between Interqual(R) Incorporated
and Landa Management Systems Corporation, dated September 8,
1992.
10.8(1) Sublicensor Agreement by and between Interqual(R)
Incorporated and Landa Management Systems, effective April
15, 1994.
10.9(1) Distribution Agreement for Interqual(R) Medical
Appropriateness Review Systems, signed on January 1, 1996
10.10(1) License Agreement -- Software Developers, between Milliman &
Robertson, Inc. and Landacorp, dated August 17, 1998
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (file no. 333-84703), as amended.
14(b) Reports on Form 8-K:
None
52
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Atlanta, Georgia,
on April 26, 2000.
LANDACORP, INC.
By: /s/ EUGENE SANTA CATTARINA
------------------------------------
Eugene Santa Cattarina
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Eugene Santa Cattarina and Stephen
P. Kay, and each of them acting individually, as his attorney-in-fact, each with
full power of substitution for him in any and all capacities, to sign any and
all amendments to this report on Form 10-K, and file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our attorney to any and all amendments to said Report.
Pursuant to the requirements of the Exchange Act, this report has been
signed below on April 26, 2000 by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ EUGENE SANTA CATTARINA Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
Eugene Santa Cattarina and Director
/s/ STEPHEN P. KAY Chief Financial Officer
- ----------------------------------------------------- (Principal Financial and
Stephen P. Kay Accounting Officer)
/s/ BRYAN LANG Chief Technology Officer, Chief
- ----------------------------------------------------- Marketing Officer and Director
Bryan Lang
/s/ THOMAS F. STEPHENSON Chairman of the Board of
- ----------------------------------------------------- Directors
Thomas F. Stephenson
/s/ HOWARD E. COX Director
- -----------------------------------------------------
Howard E. Cox
/s/ JASON M. ROSENBLUTH Director
- -----------------------------------------------------
Jason M. Rosenbluth
/s/ JEROME H. GROSSMAN Director
- -----------------------------------------------------
Jerome H. Grossman
</TABLE>
53
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2(1) Registration Rights Agreement dated October 29, 1997, as
amended
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(1) 1995 Stock Plan and form of agreements thereunder
10.3(1) 1998 Equity Incentive Plan
10.4(1) 1999 Employee Stock Purchase Plan
10.5(1) Sublease Agreement for Offices located at 4151 Ashford
Dunwoody Rd., Atlanta, Georgia, between Landacorp and Unisys
Corporation, dated September 1, 1991
10.6(1) Lease Agreement for offices located on Fortress Avenue,
Chico, CA, between Landacorp and Fortress Development Group,
dated March 8, 1999
10.7(1) Licensing Agreement by and between Interqual(R) Incorporated
and Landa Management Systems Corporation, dated September 8,
1992.
10.8(1) Sublicensor Agreement by and between Interqual(R)
Incorporated and Landa Management Systems, effective April
15, 1994.
10.9(1) Distribution Agreement for Interqual(R) Medical
Appropriateness Review Systems, signed on January 1, 1996
10.10(1) License Agreement -- Software Developers, between Milliman &
Robertson, Inc. and Landacorp, dated August 17, 1998
24.1 Power of Attorney (included on page 53)
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (file no. 333-84703), as amended.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,884 2,032
<SECURITIES> 0 0
<RECEIVABLES> 2,273 1,838
<ALLOWANCES> (183) (187)
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,146 3,869
<PP&E> 2,349 1,342
<DEPRECIATION> (1,231) (898)
<TOTAL-ASSETS> 5,859 4,313
<CURRENT-LIABILITIES> 5,181 3,414
<BONDS> 0 0
0 0
7 7
<COMMON> 3 1
<OTHER-SE> 504 891
<TOTAL-LIABILITY-AND-EQUITY> 5,859 4,313
<SALES> 9,310 6,217
<TOTAL-REVENUES> 9,310 6,217
<CGS> 3,665 2,752
<TOTAL-COSTS> 3,665 2,752
<OTHER-EXPENSES> 8,130 5,450
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 86 75
<INCOME-PRETAX> (2,399) (1,910)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,399) (1,190)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,399) (1,910)
<EPS-BASIC> 1.86 1.84
<EPS-DILUTED> 1.86 1.84
</TABLE>
