<PAGE>
As filed with the Securities and Exchange Commission on March 20, 2000
Registration No. 333-88277
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 5
TO THE
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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VELOCITY.COM, INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 7374 68-0347739
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation
or organization) ---------------
330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
(415) 495-4741
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Jack D. Anderson
Chief Executive Officer
Velocity.com, Inc.
330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
(415) 495-4741
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Patrick A. Pohlen, Esq. Rodd M. Schreiber, Esq.
Cooley Godward LLP Skadden, Arps, Slate, Meagher & Flom (Illinois)
Five Palo Alto Square 333 West Wacker Drive
3000 El Camino Real Chicago, IL 60606
Palo Alto, CA 94306-2155
---------------
Approximate date of commencement of the proposed sale to the public: as
soon as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor does it +
+seek offers to buy these securities in any jurisdiction where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 20, 2000
PRELIMINARY PROSPECTUS
3,000,000 Shares
Velocity.com, Inc.
Common Stock
------------
We are offering 3,000,000 shares of common stock with this prospectus. We
expect the initial public offering price to be between $9.00 and $11.00 per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "VCTY."
------------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
------------
<TABLE>
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<CAPTION>
Per Share Total
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<S> <C> <C>
Initial Public Offering Price....................... $ $
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Underwriting Discount............................... $ $
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Proceeds, before expenses, to Velocity.com, Inc..... $ $
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</TABLE>
The underwriters may also purchase up to an additional 450,000 shares from us
at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus, to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
------------
Needham & Company, Inc. Punk, Ziegel & Company
The date of this Prospectus is , 2000
<PAGE>
Description of Artwork:
1. Front inside cover: Description of artwork. This diagram represents our
ASP architecture. The top box, labeled the Organic Browser, diagrams the client
side of our client server architecture and depicts the user view. It is
connected to the Internet either via a local network or directly through
modems. The Internet feeds the application data from the client side into
Velocity.com's ASP. The Velocity.com ASP (the Server side of the architecture)
resides on our partner Conxion's Internet Service Provider, providing full
outsourced hosting services.
2. Back inside cover. Description: Five overlapping circles. The circles are
labelled Clinic Management, Practice Management, Credentialing, Clinical Drug
Trials and Disease Management. The words The CoreModel appear in the center.
Bullets points above the graphic are as follows:
. Internet Delivery, ASP Delivery Service
. Fully integrated solutions, built on a single model, the CoreModel(TM)
. Manages the entire clinical and business process in a single system
. Multiple users with simultaneous access
. Scalable to accommodate a growing number of users and solutions
. Easily tailored to accommodate user process and practice variations
. Easy to use, easy to change
. Cost effective alternative to legacy applications
The text of the caption below the graphic reads as follows:
Our CoreModel(TM) is a model of the real world components of the healthcare
delivery process. Each of the components is represented by an object. The
CoreModel(TM) is the blueprint to how these objects can be linked to build
applications. The specialized knowledge of healthcare required to build the
CoreModel(TM) originated from the experience of our employees as well as
extensive interviews with our users and other healthcare professionals.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
Capitalization and Short-Term Debt....................................... 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
Management............................................................... 47
Certain Relationships and Related Transactions........................... 60
Principal Stockholders................................................... 64
Description of Capital Stock............................................. 66
Shares Eligible for Future Sale.......................................... 69
Underwriting............................................................. 71
Legal Matters............................................................ 73
Experts.................................................................. 73
Available Information.................................................... 73
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of Velocity.com.
Investors should read the entire prospectus carefully.
Velocity.com
We develop, and deploy over the Internet, software applications that help
healthcare clinics and physician group practices process clinical information
and manage the day-to-day operations of their businesses. Our customers can
access and use our software applications over the Internet or their local or
private information networks. We charge our customers a monthly subscription
fee for these applications. We rely on a third party to provide the application
hosting, Internet infrastructure and data centers necessary to deploy our
applications over the Internet. The business of providing software applications
over the Internet for a monthly fee is known as the "application service
provider" or "ASP" business. We currently have developed ASP applications in
three areas: disease management and clinical drug trials recruitment, which
were first implemented in February 1999, and credentialing, which was developed
in November 1999. We are developing applications designed to manage all
elements of the business and clinical processes of our customers within a
single integrated system.
The growth of the managed care, risk sharing and other alternative payment
and reimbursement mechanisms, increased government regulation and the rise of
healthcare delivery networks have increased the need for information technology
products and services. In order to reduce unnecessary spending and manage costs
while delivering quality care, healthcare providers are increasingly demanding
software solutions that enable them to effectively extract and analyze data
located throughout their enterprises, measure clinical results, evaluate
operational efficiency and support process improvement. The Internet has
emerged as an accessible, low-cost and flexible means of accessing and
distributing information, making it particularly well-suited for deploying
software solutions for the healthcare industry. We believe that providing
software applications over the Internet for a monthly fee addresses many of the
shortcomings of traditional healthcare information technology. Customers rent,
rather than own, the applications they require, reducing the capital commitment
necessary for information technology and reducing the need for a dedicated
staff of information technology personnel.
Our ASP applications are built using a technology we created that represents
a major change in the way software is built and deployed. Traditionally,
software has been built as a linear "program" using a programing language
called "code." Building an application with code and modifying it after it is
built are time-consuming and expensive processes. Software can also be
structured in a non-linear architecture using what is known as "object-
oriented" technology which requires a less time-consuming and expensive
process. Until now, object-oriented software has been built with both object-
oriented technology and linear programming using code. We have developed a new
object-oriented technology, which we refer to as the Organic Architecture, that
allows us to create applications without any code or linear programming. We
have applied for five patents on our technology and have received a Notice of
Allowance from the United States Patent and Trademark Office on each of the
first three applications.
All our ASP applications are built on our CoreModel, which is a
representation of the clinical and business processes in the healthcare
industry. To develop our CoreModel and applications, we selectively acquired
companies with expertise in particular areas of healthcare. These acquisitions
also provided us with traditional code-based legacy software products and
related service capabilities, customers and revenues. We intend to phase out
sales of these legacy products and related services, which historically
represented substantially all of our revenues, while simultaneously selling our
ASP applications as upgrades to our legacy products.
1
<PAGE>
Our objective is to become the leading healthcare ASP serving clinics and
group practices by capitalizing on our early market entrance, extending our
technology and continuing to implement a subscription-based business model that
generates recurring revenue. We intend to achieve this objective by:
. leveraging our proprietary technology platform by rapidly developing
additional applications, functions and features;
. achieving rapid market penetration by focusing on customers within our
target market segments and cross-selling our ASP applications to our
existing base of customers; and
. enhancing our capabilities by forming strategic alliances that provide
us with specific expertise and access to new customer channels.
Our ASP applications provide the following advantages:
Comprehensive. Our applications are designed to enable our customers to rely
on us as the single source for their software, whether these applications are
deployed over the Internet or their own local or private information networks.
Cost-effective. Our applications eliminate the need for our customers to
incur significant capital expenditures for hardware, operating systems and
application software and significantly reduce the costs for technical support
and training.
Adaptable. Our applications are built with flexible links between data sets
instead of code, which makes them easier and less expensive to tailor to
accommodate practice variations and workflow of each user.
Integrated. Information and applications are stored on a single remote
database and can be accessed simultaneously by multiple users in geographically
dispersed locations.
In addition, our ASP applications are scalable, modular, secure and easy to
use.
As part of our strategy, we have entered into relationships with strategic
partners for distribution, consulting and implementation services, Internet
infrastructure and application hosting. Our initial ASP application, which
manages patient-reported health and clinical data, is being distributed as part
of our strategic relationship with Pfizer Health Solutions Inc, with whom we
have had a relationship since 1997. We also have entered into an alliance with
Superior Consultant Holdings Corporation. Under this agreement, Superior will
introduce and outline the advantages of our ASP applications based on client
interests, as well as provide systems integration, process improvement,
consulting and implementation services to healthcare organizations. Superior is
a leading provider of business solutions, including consulting, systems
integration, e-health and outsourcing to the healthcare industry. Superior
serves clients nationally and internationally and has over 1,500 professionals
located throughout the United States.
We also have entered into agreements with Conxion Corporation, which
provides us with application hosting, Internet infrastructure and data centers.
We depend on Conxion to provide these services and support the delivery of our
software applications and do not intend to provide these services ourselves.
Our business relationship with Conxion began in May 1997, and in April 1999
Conxion purchased $550,000 of our preferred stock.
We were incorporated in California in January 1995 under the name Object
Products, Inc. and reincorporated in Delaware in April 1996. The company
changed its name to OrganicNet, Inc. in May 1999 and to Velocity.com, Inc. in
January 2000. Our principal executive offices are located at 330 Townsend
Street, Suite 206, San Francisco, California, 94107-1630. Our telephone number
is (415) 495-4741. Our website is www.velocity.com. Information contained on
our website is not a part of this prospectus.
--------------
The terms "Velocity.com", "company", "we", "our" and "us" refer to
Velocity.com, Inc. and its subsidiaries unless the context suggests otherwise.
The term "you" refers to a prospective investor.
Velocity.com, the Velocity.com logo, Organic Architecture, Object Products,
CoreModel and Organic Browser are trademarks of Velocity.com, Inc. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by Velocity.com................ 3,000,000 shares
Total shares outstanding after this offering.. 10,729,506 shares
Use of proceeds............................... To repay short-term debt,
including amounts owed to or
guaranteed by certain of our
directors, officers and
stockholders, to continue
development of our solutions
and architecture, expand our
sales and marketing efforts,
expand our administrative
infrastructure, acquisitions
and for working capital and
other general corporate
purposes.
Nasdaq National Market symbol................. VCTY
</TABLE>
The common stock to be outstanding after this offering is based on the shares
outstanding as of February 29, 2000 and excludes:
. 1,241,580 shares of common stock issuable as of February 29, 2000 upon
the exercise of outstanding stock options issued at a weighted average
exercise price of $4.15 per share under our stock option plans;
. 2,918,931 shares of common stock reserved for issuance under our stock
option plans as of February 29, 2000;
. 300,000 shares of common stock reserved for issuances under our employee
stock purchase plan as of February 29, 2000;
. 14,880 shares of common stock reserved for issuance under stock options
held by former PSI-Med Corporation optionholders as of February 29,
2000. If shares are issued upon exercise of such options, Velocity.com
will remove that same number of shares from an escrow of shares to
former PSI-Med shareholders to satisfy that obligation; and
. the exercise of warrants for a total of 168,750 shares of common stock
outstanding as of February 29, 2000.
Except as otherwise indicated, information in this prospectus assumes the
following:
. the 0.56 for 1 reverse split of the outstanding shares of our capital
stock;
. the conversion of all outstanding shares of preferred stock into common
stock upon consummation of this offering;
. the filing of our amended and restated certificate of incorporation, the
provisions of which are summarized in "Description of Capital Stock;"
. no exercise of the underwriters' over-allotment option; and
. shareholder approval of the 1999 Equity Incentive Plan and employee
stock purchase plan.
Risk Factors
You should consider the risk factors before investing in Velocity.com's
common stock and the impact from various events which could adversely affect
our business.
3
<PAGE>
Summary Financial Data
The following table summarizes our consolidated statements of operations for
the years ended December 31, 1996, 1997, 1998 and 1999, as well as our
unaudited pro forma combined statements of operations for the years ended
December 31, 1998 and 1999 that gives effect to our acquisition of PSI-Med
Corporation as if the acquisition occurred at the beginning of the periods
presented. The unaudited pro forma information is not necessarily indicative of
the results that would have occurred had the acquisition taken place as of the
beginning of the periods presented, nor is it necessarily indicative of results
that may occur in the future. The table also includes consolidated balance
sheet data as of December 31, 1999 on an actual and pro forma as adjusted
basis. See the consolidated financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended
Years Ended December 31, December 31,
-------------------------------------- --------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1999 1999
------- ------- ------- ----------- ------- -----------
(unaudited) (unaudited)
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Revenue:
License................ $ -- $ 424 $ 571 $ 1,087 $ 963 $ 1,262
Product development.... -- 1,375 565 565 337 337
Service................ 371 1,173 3,488 5,182 4,415 5,554
------- ------- ------- ------- ------- -------
Total revenue.......... 371 2,972 4,624 6,834 5,715 7,153
------- ------- ------- ------- ------- -------
Cost of revenue:
License................ -- 475 756 756 845 890
Product development.... -- 320 209 209 79 79
Service................ 238 892 2,314 3,850 2,880 3,753
------- ------- ------- ------- ------- -------
Total cost of revenue.. 238 1,687 3,279 4,815 3,804 4,722
------- ------- ------- ------- ------- -------
Gross profit............ 133 1,285 1,345 2,019 1,911 2,431
------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing.... 24 1,395 1,644 1,812 1,215 1,277
Research and
development........... 724 1,345 1,833 2,069 2,670 2,896
General and
administrative........ 1,690 3,332 3,768 4,677 4,070 4,508
------- ------- ------- ------- ------- -------
Total operating
expense............... 2,438 6,072 7,245 8,558 7,955 8,681
------- ------- ------- ------- ------- -------
Operating loss.......... (2,305) (4,787) (5,900) (6,539) (6,044) (6,250)
Interest expense........ (9) (20) (93) (93) (141) (150)
Other income (expense).. 7 13 (9) (95) 27 2
------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (2,307) (4,794) (6,002) (6,727) (6,158) (6,398)
Provision for income
taxes.................. 4 6 4 5 5 5
------- ------- ------- ------- ------- -------
Net loss................ $(2,311) $(4,800) $(6,006) $(6,732) $(6,163) $(6,403)
======= ======= ======= ======= ======= =======
Net loss per share:
Basic and diluted...... $ (.80) $ (1.58) $ (1.97) $ (2.21) $ (2.00) $ (2.08)
Weighted average shares
outstanding:
Basic and diluted...... 2,906 3,038 3,051 3,051 3,077 3,077
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------
Pro Forma
Actual As Adjusted
----------- --------------
(unaudited)
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................... $ 566 $ 25,322
Working capital (deficit)........................... (3,057) 21,999
Total assets........................................ 6,563 31,319
Total stockholders' equity (deficit)................ (856) 24,903
</TABLE>
The preceding consolidated balance sheet data is shown on a pro forma as
adjusted basis to give effect to:
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon consummation of this offering;
. the sale of 3,000,000 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses; and
. the use of proceeds of $2.75 million to repay notes payable in the
amount of $1.3 million which existed at December 31, 1999, after
consideration of expensing a $297,000 note discount upon payment, and
$1,450,000 of debt incurred subsequent to December 31, 1999.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this prospectus, before purchasing shares of
common stock of Velocity.com. Each of these risk factors could adversely affect
our business, operating results and financial condition, as well as adversely
affect the value of an investment in our common stock. This investment involves
a high degree of risk.
Risks Related To Our Business
Our business is difficult to evaluate because we have a limited operating
history.
We were incorporated in January 1995 and have a limited operating history,
which makes an evaluation of our business and prospects difficult. Since our
inception, we have been developing our codeless, object-oriented technology as
the platform for our applications. We have also been marketing legacy software
products created using traditional software code that were developed by the
companies we acquired. In February 1999, we delivered our first ASP software
application. As a result, we only have a limited number of ASP software
applications currently in use. Revenue to date from our ASP software
applications has not been material. You must consider our business and
prospects in light of the risks, uncertainties and difficulties frequently
encountered by companies in their early stages of development, particularly
those in new and rapidly evolving markets such as ours, which use new and
unproven business models. We cannot assure you that our business strategy will
be successful or that we will be able to complete the development of and sell
our ASP software applications.
Our historical revenue was derived primarily from products and services
that we do not expect to be the focus of our business in the future, which
makes it difficult to evaluate our current and future financial
performance.
We currently derive substantially all of our revenue from the sale of our
legacy software products and services. These software products and related
services are substantially different from the ASP software applications that
will be our focus. We intend to phase out sales of legacy products and related
services and expect the associated revenue to decline substantially. As a
result, our historical financial information does not reflect the results of
the current and future focus of our business and cannot be used to predict our
future revenue or results of operations.
We expect to continue to incur operating losses and net cash outflow and
may never achieve profitability, which may cause our stock price to
decline.
We have experienced net losses in each quarterly and annual period since
inception. We recorded net operating losses of approximately $4.8 million for
the year ended December 31, 1997, approximately $5.9 million for 1998 and
approximately $6.0 million for the year ended December 31, 1999. As of December
31, 1999, we had an accumulated deficit of approximately $19.5 million. We
intend to increase our operating expenses substantially, particularly expenses
related to development of our applications and architecture, expansion of our
sales and marketing efforts, and expansion of our administrative
infrastructure. Therefore, we expect to incur significant operating losses and
to record significant net cash outflow for the foreseeable future. We cannot
assure you that we will achieve significant revenues from our applications or
achieve, sustain or improve profitability on a quarterly or annual basis in the
future.
Our quarterly operating results are expected to fluctuate and could cause
our stock price to decline.
Our quarterly operating results have varied in the past and we expect them
to continue to fluctuate in future periods. These fluctuations depend on a
number of factors described below and elsewhere in this "Risk Factors" section
of the prospectus, many of which are outside our control. In particular, the
sale and implementation of our software applications are subject to delay due
to our potential customers' internal procedures for approving expenditures and
deploying new technologies within their clinics or group practices. We provide
our applications to customers on a monthly subscription basis. We cannot
predict subscription fees
5
<PAGE>
accurately because we have limited experience selling our applications. In
addition, our customers may decide to stop using our applications at any time
with very little notice. We may spend substantial time and resources developing
or tailoring applications for channel partners or customers prior to the time
that we have entered into subscription agreements with them. If we do not enter
into agreements with these channel partners and customers or if our customers
do not subscribe for these applications for a sufficient period of time, we
will not be able to achieve revenue to recoup our investment. For these and
other reasons, our stock price could decline.
Our business model is unproven and may not effectively address our market.
Providing software applications over the Internet to the healthcare industry
is a business that has only recently begun to develop. It is difficult to value
our business and evaluate our prospects because our business model and our
revenue and income potential are unproven. Our business model depends on our
ability to generate usage by a large number of clinics and group practices.
Growth in demand for and acceptance of business software applications,
including our ASP offerings, by clinics and group practices is highly
uncertain. This uncertainty is due in part to the possibility that customers
using existing systems may refuse to adopt new systems when they have made
extensive investment in hardware, software, and training for existing systems,
or if they perceive that our ASP applications will not adequately or cost-
effectively address their requirements.
In order to successfully sell our software applications, we may need to
convince potential customers that the features and functionality of our
applications justify their cost, as well as the time and administrative expense
required to switch to our applications. Achieving market acceptance for our
software applications will require substantial marketing efforts and
expenditure of significant funds to increase awareness and demand by our target
customers. We cannot assure you that we will be able to succeed in positioning
our ASP offerings as appropriate applications to address the clinical and
business needs of potential users, or that our ASP model will be economically
viable or acceptable to clinics and group practices. If our strategy does not
prove successful or if the market for our applications does not grow or grows
more slowly than we currently anticipate, achieving profitability could take
longer than expected or we may never achieve profitability, either of which
could harm our business.
If we cannot develop additional software applications, we may be unable to
achieve or sustain profitability.
We are unlikely to achieve or sustain profitability unless we offer and
successfully market a broad range of software applications. Our business
strategy depends on developing applications to manage the entire clinical and
business process for clinics and group practices. We have only completed
development of a limited number of applications and have not commenced
development of the full range of applications required to provide a
comprehensive solution. We cannot assure you that we will be able to develop
the applications we need to keep our ASP software applications competitive and
to meet our business plan objectives. If we cannot develop these additional
applications, our sales may suffer and achieving profitability could take
longer than expected or we may never achieve profitability, either of which
could cause our stock price to decline.
We depend on third parties to provide our Internet infrastructure and
application hosting.
We do not intend to develop or maintain Internet infrastructure or
application hosting capabilities to support delivery of our software
applications over the Internet. Therefore, we are dependent on obtaining those
capabilities from third parties. We currently obtain Internet infrastructure
and application hosting services from Conxion Corporation and include them as
part of our ASP software applications. The ability to deliver our software
applications over the Internet is central to our business strategy and depends
on the efficient and uninterrupted operation of the computer and Internet
network systems at Conxion.
Conxion's operations are vulnerable to damage or interruption from fire,
flood, tornado, hurricane, earthquake, power loss, telecommunications or
Internet failure, viruses, physical and electronic break-ins, or other similar
events and it has recently suffered a service disruption at one of its data
centers related to a
6
<PAGE>
system upgrade. The ability of Conxion or any other third party we might use to
prevent system failures or manage the effects of system failures which occur in
computer and Internet network systems is limited. If Conxion or another third
party suffers a system failure, it would prevent us from maintaining our
service standards. The occurrence of such a failure could harm our reputation,
business and prospects. If Conxion fails to perform its obligations under this
agreement or if this agreement is terminated or not renewed and we are unable
to obtain comparable services on favorable financial terms, or at all, our
business would be harmed.
Our systems may be vulnerable to security breaches and viruses.
Our success depends on the confidence of our customers in our ability to
securely transmit confidential information over the Internet. Any failure to
provide secure online communication services could harm our business and
reputation. Our systems and those of our hosting services provider rely on
encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. Neither we
nor any third party may be able to stop unauthorized attempts to gain access to
or disrupt the transmission of communications by our customers. Anyone who is
able to circumvent our security measures could misappropriate confidential user
information or interrupt our, or our customers', operations. In addition, our
servers at Conxion's data centers may be vulnerable to viruses, physical or
electronic break-ins, and similar disruptions. We depend on Conxion to prevent
these disruptions and its failure to do so could limit use of our applications
and otherwise harm our business. Computer viruses, break-ins and other
disruptions could lead to interruptions or delays in data transmissions to our
customers, or loss of customer data. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could impair our
ability to deliver our software applications to our customers which could
expose us to litigation, damage our reputation or otherwise harm our business.
Although we generally limit warranties and liabilities relating to security
in our customer contracts, our customers may seek to hold us liable for any
losses suffered as a result of unauthorized access to their information. We may
not have adequate insurance to cover these losses. We may be required to expend
significant capital and other resources to protect against these security
breaches or to alleviate the problems they cause and to defend any lawsuits or
claims. Moreover, concerns over the security of transactions conducted on the
Internet and commercial online services, which may be heightened by publicized
compromises of security, may also deter future customers from using our
applications or cause current customers to terminate their application
subscriptions. In either case, this could harm our business and prospects. Our
security measures may not be sufficient to prevent security breaches, and
failure to prevent security breaches could harm our reputation, business and
prospects.
Errors in our Organic Architecture or software applications may harm our
reputation and cause us to lose customers.
Our Organic Architecture and software applications may contain undetected
errors resulting in performance problems. Such errors are most frequently found
during the period immediately following introduction of new software
applications or enhancements to existing applications. Despite extensive
product testing prior to introduction, our software has in the past contained
errors that were discovered after commercial introduction. We cannot assure you
that errors or performance problems will not be discovered in the future with
respect to any of our products. Errors and mistakes in the processing of client
data may result in loss of data, inaccurate information and delays. Such errors
could cause us to lose clients and incur liability. Any errors in our Organic
Architecture and software applications could harm our reputation, business and
prospects.
We plan to expand rapidly and it may be difficult to manage our growth.
We intend to rapidly grow our business. However, we cannot be sure that we
will successfully manage our growth. In order to successfully manage our
growth, we must:
. expand and enhance our administrative infrastructure;
. improve our management, financial and information systems and controls;
and
. expand, train and manage our employees effectively.
7
<PAGE>
Continued growth could place a further strain on our management, operational
and financial resources. There will also be additional demands on our sales,
marketing and administrative resources as we increase our applications
offerings and expand our target markets and customers. We cannot assure you
that our operating and financial control systems, administrative
infrastructure, facilities and personnel will be adequate to support our future
operations or to effectively adapt to future growth. If we cannot manage our
growth effectively, our business may be harmed.
We may undertake additional acquisitions which may pose risks to our
business.
Our strategy contemplates the possibility of completing additional
acquisitions. We may be unable to retain the acquired companies' personnel or
integrate them into our company. In addition, we may be unable to integrate
their operations, services, or technology into our business model. Our
profitability may suffer because of acquisition-related costs or amortization
of acquired goodwill and other intangible assets. Similarly, the time and
expense associated with finding suitable and compatible companies to enhance
our object-oriented software technology or grow our ASP delivery model could
disrupt our ongoing business and divert our management's focus.
Others may seize the market opportunity we have identified because we may
not effectively execute our strategy.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have
identified. Our strategy is complex and requires that we successfully and
simultaneously complete many tasks, including:
. developing and protecting our technology;
. developing economically attractive applications for our current and
future customers;
. negotiating and maintaining effective channel partnerships for the
delivery of our applications;
. selling and marketing our applications;
. attracting and retaining highly skilled employees; and
. integrating acquired companies into our operations.
We cannot assure you that we will be able to successfully execute any or all
elements of our strategy. If we are unable to do so, our business could be
harmed and our stock price could decline.
Our issuances of Series B preferred stock and Series C preferred stock
might be considered public offerings in violation of the federal securities
laws. These issuances might also have been in violation of certain state
securities laws. If these issuances were public offerings under federal
securities laws or in violation of certain state securities laws, some of
the holders of these securities might be granted the right to rescind the
sale of shares and demand that we return the purchase price of the shares.
We issued securities to approximately 392 of our stockholders in financings
that we believe were conducted as private placements under Section 4(2) of the
Securities Act of 1933, as amended, and did not require registration under the
federal securities laws. However, due to the number of persons who were offered
the opportunity to purchase our securities it is possible that the holders of
these securities may allege that the offering and sale of these securities was
not a valid private placement under Section 4(2) and was not made in accordance
with Section 5 of the Securities Act of 1933. Generally, the statute of
limitations for this type of claim is one year after the date of the alleged
violation and, if successful, would entitle the owners to rescind the issuance
of the securities to them and demand a return to them of the purchase price of
those securities. As of March 1, 2000, if we did violate Section 5 of the
Securities Act of 1933, We believe that a claim could be made by approximately
197 stockholders, representing a total potential claim of approximately
$7,427,500.
8
<PAGE>
We also believe that we have violated or may have violated the securities
laws of several states in connection with the issuance of our Series C
preferred stock. Similar to the recourse provided under the federal securities
laws, holders of these securities may be able to make a claim to rescind the
sale or issuance of these securities to them and demand a return of the
purchase price paid for these shares. The recission rights that may be granted
to these holders under state law is not cumulative to the rights granted under
federal law. Accordingly, if these stockholders rescind the sale of these
securities under federal law, they would not have the right to additional
payments from the Company under state law.
We are not aware of any pending claims of rescission against us. We intend
to vigorously defend any rescission or other claim by the holders of our
securities. Nevertheless, it is possible that a claim could be made by one or
more of the holders of our securities, and if a court were to hold that the
private placement exemption is not available for the sale of our securities or
that we violated state securities laws, we could be forced to rescind the sales
of our securities, requiring significant monetary payments to the claiming
owners. These claims, if successful, could significantly exceed our cash
reserves and require us to borrow funds and would materially and adversely
affect our results of operations and financial condition.
We may be unable to attract and retain qualified personnel and we depend on
certain personnel.
We believe that our success depends largely on our ability to attract and
retain highly skilled technical, managerial and marketing personnel to develop
our object-oriented technology and our ASP delivery model. Individuals with the
information technology skills we need to further develop our applications are
in short supply and competition for qualified personnel is particularly
intense. We may not be able to hire the necessary personnel to implement our
business strategy, or we may need to pay higher compensation for employees than
we currently expect. We cannot assure you that we will succeed in attracting
and retaining the personnel we need to continue to grow and to implement our
business strategy. If we are unable to do so, our business could be harmed.
We depend on the performance of our executive officers and other key
employees. The loss of any member of our senior management or other key
employees could negatively impact our ability to execute our strategy. We do
not maintain "key person" life insurance policies on any of our employees.
We are dependent upon a third party database management system.
We use a database management system to store our data and software
applications, which we license from a third party. If we change our database
management system or if the license of our current database management system
is terminated, we would need to secure a license to use another database
management system. If we were to use a different database management system, we
would need to modify the interface with our application server to recognize
that system, which could take several weeks. If modifying that interface took
longer than expected or if there was insufficient time to obtain and implement
the new system before we lost the use of our current system, we would be unable
to provide uninterrupted service to our customers, and our business and
reputation would be harmed.
If we are unable to protect our intellectual property rights from third
party challenges, it may significantly impair our competitive position.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect the intellectual property rights
related to our legacy and object-oriented technology. We cannot assure you that
the patent applications we have filed on aspects of our technology will be
successful. 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
attempt to copy or otherwise obtain and use our products or technology.
Monitoring use of our products is difficult, and we cannot assure you that the
steps we have taken will 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.
9
<PAGE>
Intellectual property infringement claims against us could cost a
significant amount of money to defend and could divert management's
attention away from our business.
As the number of software products in our target markets increases and as
the functionality of these products further overlaps, we may become
increasingly subject to the threat of infringement claims. Any infringement
claims alleged against us, even if without merit, can be time-consuming and
expensive to defend. Any such claims may divert our management team's attention
and resources, and could also cause delays in the delivery of our applications
to our customers. Settlement of any infringement claims could also require us
to enter into costly royalty or licensing agreements. If a claim of product
infringement against us was successful and we were unable to license the
infringing or similar technology, our business, financial condition and results
of operations could be harmed and our stock price could decline.
Risks Related To Our Industry
Our success depends on Internet acceptance.
Our success depends, in part, on the adoption of Internet applications by
commercial users. Our business could suffer dramatically if Internet solutions
are not accepted or are not perceived to be effective. The recent growth in
Internet use has resulted in frequent periods of poor performance. Internet
service providers and other organizations with links to the Internet have
responded by upgrading routers and switches, telecommunications links and other
components forming the Internet infrastructure. Any perceived degradation in
the performance of the Internet as a whole could undermine the value of the
applications we provide over the Internet. Performance improvements in our
applications partly depend upon, and are ultimately limited by, the speed and
reliability of networks. In order for the market for our applications to emerge
and grow, improvements must be made to the entire Internet infrastructure to
ease overloading and congestion.
Several telecommunications carriers are supporting regulation of the
Internet by the Federal Communications Commission (FCC) in the same manner that
the FCC regulates other telecommunications services. If the FCC regulates the
Internet in the manner it regulates other telecommunications services and
imposes fees, it could increase the cost of doing business on or through the
Internet, slow the growth of the Internet and adversely affect the demand for
our products and services or increase our cost of doing business.
Technology solutions may change faster than we are able to update our
technology.
The healthcare software application market in which we compete is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and the frequent introduction of new services, software
and other products. Our success depends partly on our ability to:
. develop new or enhance existing applications, software and services to
meet our customers' changing needs in a timely and cost-effective way;
. respond effectively to technological changes and new product offerings
of our competitors; and
. maintain and continue to develop relationships with providers of
Internet infrastructure and application hosting capabilities.
We cannot assure you that we will be able to accomplish any or all of these
goals. Many of our competitors may develop products or technologies that are
better or more attractive than ours or that may render our technology or
applications obsolete. If we do not succeed in adapting our technology, our
business could be harmed.
Our business may be harmed if our software applications are not compatible
with other products and services.
Our ability to compete successfully also depends on the continued
compatibility of our software applications with products, services and
architectures offered by other software vendors, particularly for
10
<PAGE>
customers who have installed other software applications. We cannot assure you
that other products will be compatible with our software applications. Although
we currently plan to support emerging standards, we cannot anticipate what new
industry standards will develop. In addition, we cannot assure you that we will
be able to conform to these new standards quickly enough to stay competitive.
If our software applications are not compatible with other products and
services, our business could be harmed and our stock price could decline.
The markets we serve are highly competitive and many of our competitors
have much greater resources.
The business of providing application software and services to clinics and
group practices is extremely competitive. In addition, the market for Internet-
based application service providers is relatively new and evolving, and we
anticipate that competition will continue to intensify as the use of the
Internet grows. Our competitive position in the healthcare software application
market is difficult to evaluate due to the variety of current and potential
competitors and the evolving nature of our market and the ASP model.
Our primary competitors include legacy software vendors, application service
providers, healthcare e-commerce and portal companies and object application
software developers. Each of these types of companies either competes or in the
future can be expected to compete with us in delivering software applications
to the clinic and group practice markets, including the delivery of software
applications over the Internet. Furthermore, major software companies and other
entities, including those specializing in the healthcare industry that are not
currently offering applications, products or services that compete with our
applications, may enter our markets. In addition, our existing and future
strategic partners may compete with us from time to time by selling, consulting
on or hosting other software that competes with our software applications.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the healthcare
application market than we have. In addition, the lack of barriers to entry in
our market exposes us to a potentially increasing number of competitors. We
cannot assure you that we will have the resources or expertise to compete
successfully in the future. If we are unable to develop and expand our software
applications or adapt to changing customer needs as well as our current or
future competitors are able to do, we may experience reduced profitability and
a loss of market share, either of which could harm our business.
The principal competitive factors in our market include:
. features and functionality;
. fit with the user's practice, processes and needs;
. cost;
. ease of implementation and use;
. level of service;
. business and technical expertise;
. integration of applications;
. quality of customer service and support;
. reliability; and
. scalability.
We cannot assure you that we will have the resources or expertise to compete
successfully in the future based on these or any other criteria or that
competitive pressures we face will not harm our business.
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<PAGE>
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet and could limit our customers' use of the
Internet.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. Laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, copyrights, distribution and characteristics,
and quality of products and services. The adoption of any additional laws or
regulations may impede the growth of the Internet, which could, in turn,
decrease the demand for our applications and services and increase our cost of
doing business, or otherwise harm our business. 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. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the Internet and other online services could harm our
business.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the healthcare provider, regulations
governing patient confidentiality rights are evolving rapidly. Additional
legislation governing the dissemination of medical record information has been
proposed at both the state and federal level. This legislation may require
holders of this information to implement security measures. Such legislation
might require us to make substantial expenditures to implement such measures.
We cannot assure you that changes to state or federal laws will not materially
restrict the ability of healthcare providers to submit information from patient
records using our applications.
Legislation currently being considered at the federal level could impact the
manner in which we conduct our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000. We are
designing our applications to enable compliance with the proposed regulations
but cannot assure you that we will be able to comply with those proposed
regulations in a timely manner or at all. Moreover, until the proposed
regulations become final, they could change, which could require us to expend
additional resources to comply with the revised standards and we may not be
able to comply with the revised standards in a timely manner or at all. Based
on our present business operations, we believe that the HIPAA requirements
related to the maintenance and exchange of electronic health information may
apply to legacy products sold by our wholly owned subsidiary, PSI-Med
Corporation, but not to our other products, services or applications. If any of
our products, services or applications are subject to those regulations, we may
be required to incur additional expenses in order to comply with these
requirements and we may not be able to comply with them in a timely manner or
at all. In addition, the success of our compliance efforts may also be
dependent on the success of healthcare participants in dealing with the
standards. If we are unable to comply with regulations implementing HIPAA in a
timely manner or at all, the sale of our applications and business could be
harmed.
The United States Food and Drug Administration (FDA) is responsible for
assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer applications and software are considered
medical devices and are subject to regulation by the FDA when they are
indicated, labeled or intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. We do not believe
that any of our current applications or services are subject to FDA regulation
as medical devices; however, we plan to expand our application and service
offerings into areas that may be subject to FDA regulation. We have no
experience in complying with FDA regulations. Our compliance with such FDA
regulations could prove to be time consuming, burdensome and expensive, which
could adversely affect our ability to introduce new applications or services in
a timely manner.
12
<PAGE>
Changes in the regulatory and economic environment and consolidation in the
healthcare industry could adversely affect our business.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could require us to make
unplanned enhancements of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our services by
our channel partners and others. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services. We do not know what effect any of these proposals
would have on our business.
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 a
relationship with each industry participant will become greater. These industry
participants may try to use their market power to negotiate price reductions
for our software applications and services. If we were forced to reduce our
prices, our operating results could suffer.
Risks Related To This Offering
Our management will have broad discretion to allocate the net proceeds of
this offering and the proceeds may not be used appropriately.
Our management will retain broad discretion allocating the proceeds of this
offering. We estimate the net proceeds from this offering to be approximately
$26.1 million, after deducting estimated offering expenses. We plan to use
these proceeds to repay short-term debt, including amounts owed to or
guaranteed by certain of our directors, officers and stockholders, for
development of our applications and architecture, expansion of our sales and
marketing efforts, and expansion of our administrative infrastructure. We have
no specific allocations for any other net proceeds of this offering.
Consequently, management will retain a significant amount of discretion over
the application of these proceeds. Because of the number and variability of
factors that will determine the use of these proceeds, how we spend the
proceeds may vary substantially from our current intentions.
We may need additional capital to fund our operations and finance our
growth, and we may not be able to obtain it on terms acceptable to us or at
all.
We will require substantial additional capital to finance our future growth
and applications development activities. We expect that the net proceeds from
this offering, together with our existing assets, anticipated debt and capital
lease financing, and revenue from operations will be sufficient to fund our
operations for at least the next 12 months. The timing and amount of our
capital requirements will depend on many factors, including:
. acceptance and demand for our applications;
. the costs of developing new applications or enhancing existing
applications;
. the costs associated with expanding our operations; and
. the number and timing of acquisitions.
If we issue additional stock to raise capital, your percentage ownership
will be reduced. If funding is insufficient at any time in the future, we may
be unable to develop or enhance our applications, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
13
<PAGE>
Our existing principal stockholders, executive officers and directors will
continue to control our company and the outcome of proposals put to a vote
of stockholders after this offering.
When this offering is completed, our executive officers, directors, existing
5% or greater stockholders and their affiliates will, in the aggregate, own
shares representing approximately 33.7% of our outstanding voting capital
stock. As a result, these persons, acting together, will be able to have a
significant influence on all matters submitted to our stockholders for approval
and on our management and affairs.
The market price of our common stock could be affected by the substantial
number of shares that are eligible for future sale.
After this offering is completed, 10,729,506 shares of our common stock will
be issued and outstanding, assuming no exercise of the underwriter's over-
allotment option. There can be no assurance as to what effect, if any, future
sales of shares or the availability of shares for future sale will have on the
market price of the common stock. The market price of our common stock could
drop due to sales of a large number of shares in the market after this offering
or the perception that sales of large numbers of shares could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock. All of the shares of common stock sold in this
offering will be freely tradable under the Securities Act of 1933, as amended,
unless purchased by our "affiliates," as that term is defined in the Securities
Act. Our officers, directors and stockholders have entered into lock-up
agreements under which they have agreed not to, directly or indirectly, offer,
sell, offer to sell, pledge, grant any option to purchase or otherwise sell or
dispose of any shares of common stock or securities convertible into or
exchange or exerciseable for shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of the
underwriters. Upon expiration of this lock-up period and as set forth in the
chart below, the shares owned by these persons prior to completion of this
offering may be sold into the public market without a registration statement
under the Securities Act in compliance with the volume limitations and other
applicable restrictions of Rule 144 under the Securities Act. As these
restrictions on resale end, the market price of our common stock could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
<TABLE>
<CAPTION>
Date of availability for resale
Number of shares into public market
---------------- -------------------------------
<C> <S>
1,764,349 180 days after the date of this prospectus due to a lock-up
agreement our officers, directors and stockholders have with
the underwriters. However, the underwriters can waive this
restriction at any time and without notice.
5,016,769 Between 180 and 365 days after the date of this prospectus
subject to the requirements and limitations of the federal
securities laws.
</TABLE>
After the date of this prospectus, we intend to file one or more
registration statements under the Securities Act to register all shares of
common stock issuable upon the exercise of outstanding stock options or
reserved for issuance under our stock plans, of which 817,572 shares will be
immediately exercisable upon the completion of this offering and an additional
22,909 shares will be exercisable within 60 days of February 29, 2000. Those
registration statements are expected to become effective immediately upon
filing, and subject to the vesting requirements and exercise of the related
options as well as the terms of the lock-up agreements, shares covered by those
registrations statements will be eligible for sale in the public markets,
except for any shares held by our "affiliates."
Our stock price could be volatile.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. We cannot
assure you that an active public market for our common stock will develop or
continue after this offering. Investors may
14
<PAGE>
not be able to sell their common stock at or above our initial public offering
price. Prices for the common stock will be determined in the marketplace and
may be influenced by many factors, including variations in our financial
results, changes in earnings estimates by industry research analysts,
investors' perceptions of us and our financial prospects, and general economic,
industry and market conditions.
We believe that there are relatively few comparable companies that have
publicly-traded equity securities. This may also affect the trading price of
our common stock after this offering. In addition, the stock market has from
time to time experienced extreme price and volume volatility, and this
volatility may adversely affect the market price of our common stock.
We have certain anti-takeover defenses that could delay or prevent a change
of control and that could adversely affect the price of our common stock.
Provisions of our amended and restated certificate of incorporation and
bylaws and the provisions of Delaware law could delay, defer or prevent an
acquisition or change of control of Velocity.com or otherwise adversely affect
the price of our common stock. For example, our board of directors is staggered
in three
classes, so that only one-third of the directors could be replaced at any
annual meeting. Additionally, our bylaws limit the ability of stockholders to
call a special meeting or act by written consent. Our certificate of
incorporation also permits our board to issue shares of preferred stock without
stockholder approval. In addition to delaying or preventing an acquisition, the
issuance of a substantial number of preferred shares could adversely affect the
price of the common stock.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about Velocity.com, including, among other
things:
. general economic and business conditions, both nationally and in our
markets;
. our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
. anticipated trends in our business;
. existing and future regulations affecting our business; and
. other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to Velocity.com, our business or our management,
are intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-
looking statements.
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 3,000,000 shares of common stock in
this offering, assuming a public offering price of $10.00 per share, are
estimated to be $26.1 million ($30.2 million if the underwriters' over-
allotment option is exercised in full), after deducting underwriting discounts
and commissions and estimated offering expenses. The primary purposes of this
offering are to take advantage of favorable market conditions, to raise
additional equity capital, to create a public market for our common stock and
to facilitate future access to public markets.
Approximately $2.75 million of the proceeds will be used to repay short-term
debt, including amounts owed to or guaranteed by certain of our directors
officers and shareholders, and including $1,450,000 of debt incurred subsequent
to December 31, 1999. See "Certain Relationships and Related Transactions." We
have no other current specific plans for the remaining net proceeds from this
offering.
We generally intend to use the remaining net proceeds as follows:
. to continue the development of our solutions and architecture;
. to continue the expansion of our sales and marketing efforts;
. to continue the expansion of our administrative infrastructure; and
. for working capital and other general corporate purposes.
In addition, the net proceeds may also be used to fund acquisitions or
acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations to do so.
Pending these uses, we may invest the net proceeds from this offering
temporarily in short-term, investment-grade, interest bearing securities or
guaranteed obligations of the United States government.
DIVIDEND POLICY
We have not declared or paid, and do not anticipate declaring or paying, any
dividends on our common stock in the near future. We currently intend to retain
future earnings, if any, to fund the expansion and growth of our business. Any
future determination as to the declaration and payment of dividends will be at
the discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors that our board of directors considers relevant.
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<PAGE>
DILUTION
Purchasers of our common stock in this offering will experience immediate
and substantial dilution in the pro forma net tangible book value of their
common stock from the initial public offering price. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
on a pro forma basis after giving effect to the conversion of all outstanding
shares of our preferred stock upon the consummation of this offering. The pro
forma net tangible book value of our common stock on December 31, 1999 was
$(3,307,160), or approximately $(0.43) per share. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately afterwards.
After giving effect to the sale of 3,000,000 shares of common stock by us in
this offering at an assumed initial public offering price of $10.00 and after
deducting the underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom, our pro
forma net tangible book value would have been $22,451,333 or approximately
$2.09 per share. This represents an immediate increase in pro forma net
tangible book value of $2.52 per share to existing stockholders and an
immediate and substantial dilution of $7.91 per share to new investors. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
Pro forma net tangible book value as of December 31,
1999..................................................... $(0.43)
Increase attributable to new investors.................... $ 2.52
Pro forma net tangible book value after this offering....... 2.09
------
Dilution in pro forma net tangible book value to new
investors.................................................. $ 7.91
======
</TABLE>
The following table sets forth, as of December 31, 1999, on the same pro
forma basis, the number of shares of common stock purchased from us by existing
stockholders and by the new investors at the assumed initial public offering
price together with the total price and average price per share paid by each of
these groups, before deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount (1) Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 7,729,214 72% $17,833,681 37% $ 2.31
New investors............... 3,000,000 28% 30,000,000 63% 10.00
---------- --- ----------- ---
Total..................... 10,729,214 100% $47,833,681 100%
========== === =========== ===
</TABLE>
- --------
(1) For existing stockholders, includes $13,699,746 of cash consideration paid,
$2,668,236 of stock issued in connection with acquisitions and $1,465,699
of stock issued for services, compensation and repayment of loans.
Except as noted above, the foregoing discussions and tables assume no
exercise of any outstanding stock options or warrants. As of December 31, 1999,
there were options outstanding to purchase 1,011,186 shares of common stock
pursuant to our stock option plans at a weighted average exercise price of
$3.03 per share. To the extent that any of these options are exercised, there
will be further dilution to the new investors.
18
<PAGE>
CAPITALIZATION AND SHORT-TERM DEBT
The following table sets forth as of December 31, 1999:
. our actual capitalization and short-term debt;
. our pro forma capitalization after giving effect to the conversion of
all outstanding shares of our preferred stock into a total of 4,577,374
shares of common stock upon the consummation of this offering, and
. our pro forma as adjusted capitalization after giving effect to the sale
of 3,000,000 shares of common stock sold in this offering at the assumed
initial public offering price of $10.00 per share, after deducting the
underwriting discounts and commissions and the estimated offering
expenses and the application of the estimated net proceeds therefrom,
and after repayment of $1.3 million of notes payable which existed at
December 31, 1999, after consideration of expensing a $297,000 note
discount upon payment, and $1,450,000 of debt incurred subsequent to
December 31, 1999.
You should read the following table in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Short-term debt, including lines of credit and
note payable to bank, notes payable to related
parties and others, and current portion of
capital leases................................. $ 829 $ 829 $ 529
Capital lease obligations, less current
portion........................................ 34 34 34
Notes payable to employee and others, less
current portion................................ 730 730 28
------- ------- --------
1,593 1,593 591
------- ------- --------
Stockholders' equity (deficit):
Convertible preferred stock, all $0.01 par
value, none pro forma and pro forma as
adjusted:
Series A, 840,000 shares authorized; 735,456
shares issued and outstanding actual......... 7 -- --
Series A-II, 64,400 shares authorized; 43,722
shares issued and outstanding actual ........ -- -- --
Series A-III, 3,032 shares authorized; 3,032
shares issued and outstanding actual ........ -- -- --
Series B, 700,000 shares authorized; 666,886
shares issued and outstanding actual......... 7 -- --
Series C, 2,240,000 shares authorized;
2,239,952 shares issued and outstanding
actual....................................... 22 -- --
Common stock, $0.001 par value, 16,520,000
shares authorized actual and pro forma,
16,520,000 shares authorized pro forma as
adjusted; 3,151,840 shares issued and
outstanding actual, 7,729,214 shares issued
and outstanding pro forma and 10,729,214
shares issued and outstanding pro forma as
adjusted...................................... 3 8 11
Additional paid-in capital..................... 18,663 18,694 44,747
Deferred compensation.......................... (67) (67) (67)
Accumulated deficit............................ (19,491) (19,491) (19,788)
------- ------- --------
Total stockholders' equity (deficit)............ (856) (856) 24,903
------- ------- --------
Total capitalization............................ $ 737 $ 737 $ 25,494
======= ======= ========
</TABLE>
The shares of common stock outstanding in the actual, pro forma and pro
forma adjusted columns exclude:
. 1,011,186 shares of common stock issuable as of December 31, 1999 upon
the exercise of outstanding stock options issued at a weighted average
exercise price of $3.03 per share under our stock option plans;
. 349,695 shares of common stock reserved for issuance under our stock
option plans as of December 31, 1999; and
. 125,000 shares of common stock issuable upon the exercise of outstanding
warrants as of December 31, 1999.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Consolidated Statement
of Operations" and "Consolidated Balance Sheet Data," as of and for each of the
years in the five years ended December 31, 1995, 1996, 1997, 1998 and 1999, are
derived from the consolidated financial statements of Velocity.com, Inc. and
subsidiaries, which consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants. The selected consolidated
financial data should be read in conjunction with the consolidated financial
statements as of December 31, 1998 and 1999 and for each of the years in the
three-year period ended December 31, 1999, the related notes and the
independent auditors' report, which contains an explanatory paragraph which
states that the Company has a significant contingent liability related to
certain sales of preferred stock as well as recurring losses from operations
and a net capital deficiency which have raised substantial doubt about the
Company's ability to continue as a going concern, appearing elsewhere in this
prospectus. The consolidated financial statements and the selected data do not
include any adjustments that might result from the outcome of that uncertainty.
The pro forma selected data presented below for the years ended December 31,
1998 and 1999 are derived from the unaudited pro forma condensed combined
financial statements of Velocity.com, Inc. and its subsidiaries, including PSI-
Med Corporation, included elsewhere in this prospectus and give effect to our
acquisition of PSI-Med as if such acquisition had occurred as of the beginning
of the periods presented. The unaudited pro forma information is not
necessarily indicative of the combined results that would have occurred had
such acquisition taken place as of the beginning of the periods presented, nor
is it necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended
Years Ended December 31, December 31,
---------------------------------------------- --------------------
Pro Forma Pro Forma
1995 1996 1997 1998 1998 1999 1999
------ ------- ------- ------- ----------- ------- -----------
(unaudited) (unaudited)
(in thousands, except per share information)
Consolidated Statement of
Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ -- $ -- $ 424 $ 571 $ 1,087 $ 963 $ 1,262
Product development.... -- -- 1,375 565 565 337 337
Service................ 525 371 1,173 3,488 5,182 4,415 5,554
------ ------- ------- ------- ------- ------- -------
Total revenue.......... 525 371 2,972 4,624 6,834 5,715 7,153
------ ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ -- -- 475 756 756 845 890
Product development.... -- -- 320 209 209 79 79
Service................ -- 238 892 2,314 3,850 2,880 3,753
------ ------- ------- ------- ------- ------- -------
Total cost of revenue.. -- 238 1,687 3,279 4,815 3,804 4,722
------ ------- ------- ------- ------- ------- -------
Gross profit............ 525 133 1,285 1,345 2,019 1,911 2,431
------ ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing.... 7 24 1,395 1,644 1,812 1,215 1,277
Research and
development........... 508 724 1,345 1,833 2,069 2,670 2,896
General and
administrative........ 212 1,690 3,332 3,768 4,677 4,070 4,508
------ ------- ------- ------- ------- ------- -------
Total operating
expense............... 727 2,438 6,072 7,245 8,558 7,955 8,681
------ ------- ------- ------- ------- ------- -------
Operating loss.......... (202) (2,305) (4,787) (5,900) (6,539) (6,044) (6,250)
Interest expense........ (9) (9) (20) (93) (93) (141) (150)
Other income (expense).. 1 7 13 (9) (95) 27 2
------ ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (210) (2,307) (4,794) (6,002) (6,727) (6,158) (6,398)
Provision for income
taxes.................. 1 4 6 4 5 5 5
------ ------- ------- ------- ------- ------- -------
Net loss................ $ (211) $(2,311) $(4,800) $(6,006) $(6,732) $(6,163) $(6,403)
====== ======= ======= ======= ======= ======= =======
Net loss per share:
Basic and diluted...... $(0.09) $ (0.80) $ (1.58) $ (1.97) $ (2.21) $ (2.00) $ (2.08)
Weighted average shares
outstanding:
Basic and diluted...... 2,240 2,906 3,038 3,051 3,051 3,077 3,077
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of December 31,
------------------------------ --------------------
Pro Forma
As Adjusted
1995 1996 1997 1998 1999 1999
----- ----- ------- ------- ------- -----------
(unaudited)
(in thousands)
Consolidated Balance Sheet
Data:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 25 $ -- $ 47 $ 41 $ 566 $25,322
Working capital
(deficit)............... 223 (524) (3,149) (6,290) (3,057) 21,999
Total assets............. 144 761 2,904 2,215 6,563 31,319
Total stockholders'
equity (deficit)........ (205) (55) (1,257) (5,047) (856) 24,903
</TABLE>
The preceding consolidated balance sheet data is shown on a pro forma as
adjusted basis to give effect to:
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon consummation of this offering,
. the sale of 3,000,000 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses and application of the net proceeds therefrom, and
. the use of proceeds of $2.75 million to repay notes payable of $1.3
million which existed as of December 31, 1999, after consideration of
expensing a $297,000 note discount upon payment, and $1,450,000 of debt
incurred subsequent to December 31, 1999.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the accompanying financial
statements and related notes included elsewhere in this prospectus. The
following discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause
or contribute to such differences include but are not limited to, those
discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
Overview
We are an application service provider (ASP) that develops software
applications for healthcare clinics and physician group practices using our
proprietary technology platform. Our customers can access and use our
applications over the Internet or their own private networks. We charge our
customers a monthly subscription fee for our ASP software applications. We also
market and support legacy software products that were developed by the
companies we acquired, as discussed below. Our software applications and
acquired legacy products are sold by our own direct sales force and through
third parties. We currently provide the following range of services principally
related to our acquired legacy products: post-contract customer support,
maintenance, technical support, consulting, installation of simple interfaces,
training, credentialing and case management services.
Historically, we derived substantially all of our revenue from the sale of
legacy software products and services. Our legacy products address
credentialing, scheduling, resource management, case management and
disease/outcomes management. From our inception in January 1995, we have been
developing our Organic Architecture, a flexible platform for creating software
applications without code. As a part of our development strategy, we have
acquired companies that provided us with expertise in particular areas of
healthcare, as well as near-term products, customers and revenues. In February
1999, we delivered our first pre-production ASP software application using our
Organic Architecture to customers, and in April 1999, we deployed our first
pre-production ASP software application over the Internet. With the
introduction of our ASP software applications, we are de-emphasizing the sale
of legacy systems and expect sales of these systems and related service revenue
to substantially decline in future periods. We expect to market and sell these
ASP software applications as an upgrade to our existing legacy products in the
future, as we develop additional ASP software applications to replace our
legacy products. Due to the anticipated substantial decline in revenue
associated with these legacy systems and the costs associated with the
development and commercialization of our ASP software applications, as well as
the development of sales and marketing support for these applications, we
expect that our operating losses will increase substantially in future periods
and continue for at least the next several years. Our ability to achieve
profitability will depend on our successful development and marketing of our
applications. With our strategy, we are subject to the risks inherent in both
the ASP business model and the entry into a new and uncertain market. Our
applications may not achieve market acceptance. Accordingly, the extent of
future losses and the time required to achieve profitability, if any, is highly
uncertain.
We have generated and will continue to generate revenue from software
license, product development and service fees from our legacy products.
Software license fees are derived from the licensing of acquired legacy
products and are expected to decline substantially in future periods. Product
development fees have been and will continue to be generated from co-
development agreements with Pfizer Health Solutions Inc, but we expect these
revenues and their related costs to substantially decline in the future.
Revenue received under these co-development agreements with Pfizer Health
Solutions Inc represented 49% of total revenue in 1997, 20% of total revenue in
1998 and 19% of total revenue in 1999. Service fees are derived from
post-contract software support, case management, credentialing, training,
installation and simple interfaces for legacy products, which we expect to
decline substantially as sales of our legacy systems decline.
22
<PAGE>
In the future, we expect to generate revenue substantially from subscription
and service fees from the sale of our ASP software applications. Subscription
fees will be derived from our ASP software applications on a monthly basis. We
began to generate subscription fees for these applications in the second
quarter of 1999. We cannot predict subscription fees accurately because we have
limited experience selling our applications. In addition, our customers may
decide to stop using our applications at any time with very little notice. We
may spend substantial time and resources developing or tailoring applications
for channel partners or customers prior to the time we have entered into
subscription agreements with them. If we do not enter into agreements with
these channel partners and customers do not subscribe for these applications
for a sufficient period of time, we will not be able to achieve revenue to
recoup our investment. Service fees related to our applications will increase
as we deploy them.
License revenue is recognized when the related contract has been executed,
the product has been shipped, collectibility is probable and the software
license fees are fixed and determinable. In the event that the contract
provides for multiple elements (e.g., training, simple interfaces or post-
contract customer support), the total fee is allocated to these elements based
on vendor-specific objective evidence of fair value. If any portion of the
license fee is subject to forfeiture, refund or other contractual
contingencies, we will postpone revenue recognition until these contingencies
have been removed.
Subscription fees for our ASP software applications will be recognized on a
monthly basis. We recognize product development revenue from our co-development
agreements using a percentage-of-completion method either as services are
performed or based on meeting key milestone events over the term of the
contracts. Service revenue from post-contract customer support and maintenance
is recognized ratably over the term of the maintenance period. Revenue from
case management, credentialing, training and installation services is recorded
as the services are performed.
Historically, cost of revenue consisted of the cost of licenses, product
development and services. In the future, we expect cost of revenue to consist
of the cost of subscription, license and service related to our ASP software
applications. Cost of subscription revenue will include the charges paid to our
Internet service, application host and data center provider, as well as the
amortization of the costs of third party database licenses and ongoing annual
fees for these licenses. Cost of license revenue consists of personnel
salaries, benefits and related overhead expenses, as well as the amortization
of acquired technologies. Cost of service revenue includes direct costs, such
as salaries and benefits, and related overhead expenses, such as occupancy
charges. As we focus on our ASP applications, we expect the cost of
subscription revenue and services related to our ASP applications to increase
and the cost of license revenue and services related to our legacy products to
decrease.
Sales and marketing expense consists of salaries, related benefits,
commissions, printing of promotional material, public relations, attendance at
industry trade shows, advertising and other costs associated with our sales and
marketing efforts. We expect to incur substantial expenditures related to sales
and marketing as we build our direct sales force and expand our distribution
channels.
Research and development expense consists primarily of salaries, related
benefits, third party consultant fees and other costs. With respect to software
development, we establish technological feasibility once testing of a working
model has been completed. The time between establishment of a working model and
general release is short. Development costs incurred subsequent to
technological feasibility have not been material. We expect to continue to make
substantial investments in research and development activities as we seek to
advance our technology and broaden our ASP software applications.
General and administrative expense consists primarily of salaries and
related benefits, amortization of goodwill and workforce-in-place, and fees for
professional services, such as legal and accounting. We expect general and
administrative expense to increase as we add personnel, including select senior
management personnel, and incur additional costs related to the anticipated
growth of our business and operation as a public company.
23
<PAGE>
We were incorporated in January 1995 as a California corporation and
reincorporated in Delaware in 1996. Since our inception, we have incurred
significant losses and as of December 31, 1999, had an accumulated deficit of
approximately $19.5 million.
Acquisitions
As a result of our experience with healthcare information systems, we
concluded that the legacy software applications used by the healthcare industry
could not provide the adaptable, cost-effective applications needed by clinics
and group practices. To develop applications that could address these needs, we
decided to pursue a strategy of selectively acquiring companies with healthcare
domain expertise and enabling technologies. In April 1996, we completed our
first acquisition, a company with expertise in and technology tools for the
development of object-oriented software. With our second acquisition, we
acquired a company with expertise in modeling and business process
reengineering methodology. Using this methodology, we created a map of the core
processes involved in managing a clinic or group practice. This map became the
process map of the Organic Clinic and it was used to identify the tasks needed
to deliver a software application that could manage the entire clinical and
business process. We then targeted and acquired six small software and service
companies, each representing specialized healthcare domains that had been
identified in the process map.
In our first three years of operations, we completed the following
acquisitions:
<TABLE>
<CAPTION>
Company Acquisition date Expertise
- ------- ----------------- ------------------------------
<S> <C> <C>
First Principles, Inc. ...... April 22, 1996 Object Technology
RiteLine Systems, Inc. ...... April 30, 1996 Business Methodology
Comprehensive Provider
Credentialing Services,
Inc. ....................... May 23, 1996 Credentialing Service
Velocity Healthcare
Informatics, Inc. .......... December 20, 1996 Outcomes/Disease Management
Res-Q, Inc., formerly MMS,
Inc. ....................... May 14, 1997 Scheduling/Resource Management
Intedata, Inc. .............. June 4, 1997 Marketing Service
L.I.N.C., Inc. .............. June 23, 1997 Case Management
Healthcheck, Incorporated ... November 14, 1997 Credentialing Service
</TABLE>
Healthcheck, L.I.N.C., Res-Q and Velocity Healthcare Informatics remain
wholly owned operating subsidiaries and function as an integrated part of
OrganicNet. All of our acquisitions were accounted for using the purchase
method of accounting and, accordingly, the results of the acquired companies'
operations are included in our consolidated financial statements from their
respective effective dates forward. Under the terms of the acquisition
agreements, the consideration included preferred shares, notes payable, common
shares and cash. We acquired all of the outstanding common stock for each of
the acquired companies except for Velocity Healthcare Informatics, which was
structured as an asset purchase. Total consideration for our acquisitions,
completed through December 31, 1998, was approximately $1.7 million.
For each of the acquired companies, the purchase price was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their fair values on the acquisition date. Amounts allocated to
acquired technology and workforce-in-place are amortized on a straight-line
basis over a three-year period. Amounts allocated to goodwill are amortized on
a straight-line basis over an estimated useful life of three to seven years.
PSI-Med Corporation
On September 20, 1999, we completed our acquisition of PSI-Med Corporation,
which sells and services practice management software and is engaged as a full
service provider of medical insurance billing and accounts receivable
collection services. We acquired all of the outstanding capital stock of PSI-
Med Corporation in exchange for 9,322 shares of preferred stock, which will
convert into 186,440 shares of our common stock upon the closing of this
offering. These shares have been valued at approximately $1,283,000. Our
acquisition was accounted for using the purchase method of accounting,
resulting in approximately $2.2 million of goodwill to be amortized using the
straight-line method over its estimated useful life of seven
24
<PAGE>
years. The results of PSI-Med's operations are included in our consolidated
financial statements beginning with the effective date of the acquisition which
was August 31, 1999. PSI-Med remains a wholly owned operating subsidiary and
functions as an integrated part of Velocity.com.
Results of Operations
Years Ended December 31, 1999 and 1998
License revenue
License revenue includes fees from the licensing of our acquired legacy
products. License revenue increased 69% to approximately $963,000 for the year
ended December 31, 1999 from approximately $571,000 for the year ended December
31, 1998. The increase in license revenue was primarily due to an increase of
$336,000 in our scheduling and resource management products related to
increased customer sales.
Product development revenue
Product development revenue is primarily generated from co-development
agreements addressing outcomes, credentialing and survey software and services
with Pfizer Health Solutions Inc. Product development revenue decreased 40% to
approximately $336,000 for the year ended December 31, 1999 from approximately
$564,000 for the year ended December 31, 1998 due to the timing and size of
co-development contracts completed with Pfizer Health Solutions Inc.
Service revenue
Service revenue is comprised of fees from post-contract software support,
case management services, credentialing services, training and installation of
simple interfaces. Service revenue increased 27% to approximately $4.4 million
for the year ended December 31, 1999 from approximately $3.5 million for the
year ended December 31, 1998. The increase in service revenue was primarily due
to an increase of $354,000 in sales of credentialing services and approximately
$605,000 of revenues associated with our acquisition of PSI-Med, offset by a
decrease of approximately $82,000 of revenue from our scheduling and resource
management products.
Cost of license revenue
Cost of license revenue consists of personnel salaries, benefits and related
overhead expenses, as well as the amortization of acquired technologies. Cost
of license revenue increased 12% to approximately $845,000 for the year ended
December 31, 1999 from approximately $756,000 for the year ended December 31,
1998 due to the acquisition of PSI-Med and the salaries and expenses related to
those employees.
Cost of product development revenue
Cost of product development includes direct costs, such as personnel
salaries and benefits, and related overhead expenses, such as occupancy
charges. Cost of product development revenue decreased 62% to approximately
$78,000 for the year ended December 31, 1999 from approximately $209,000 for
the year ended December 31, 1998, due to the decreased level of development
efforts associated with the Pfizer Health Solutions Inc co-development
agreements.
Cost of service revenue
Cost of service revenue includes direct costs, such as personnel salaries
and benefits, and related overhead expenses, such as occupancy charges. Cost of
service revenue increased 24% to approximately $2.9 million in the year ended
December 31, 1999 from approximately $2.3 million for the year ended December
31, 1998, primarily due to $305,000 of increased costs associated with our
increased sales of credentialing services, and $366,000 related to our
acquisition of PSI-Med.
25
<PAGE>
Sales and marketing expense
Sales and marketing expense consists primarily of salaries, related
benefits, commissions, printing of promotional material, public relations,
attendance at industry trade shows, advertising and other costs associated with
our sales and marketing efforts. Sales and marketing expenses decreased 26% to
approximately $1.2 million for the year ended December 31, 1999 from
approximately $1.6 million for the year ended December 31, 1998. This decrease
was due to decreased spending for trade show and third party marketing
activities.
Research and development expense
Research and development expense consists primarily of salaries, related
benefits, third party consultant fees and other costs. Research and development
expense increased 46% to approximately $2.7 million for the year ended December
31, 1999 from approximately $1.8 million for the year ended December 31, 1998,
due to increased personnel costs associated with additional headcount and
facilities expense for the development of our Organic Architecture and ASP
software applications.
General and administrative expense
General and administrative expense consists primarily of salaries and
related benefits, amortization of intangible assets for goodwill and workforce-
in-place, and fees for professional services, such as legal and accounting.
General and administrative expense decreased 8% to approximately $4.1 million
for the year ended December 31, 1999 from approximately $3.8 million for the
year ended December 31, 1998, due to an increase of approximately $50,000 in
salaries and related expenses, an increase in bad debts of $57,000, and
approximately $140,000 associated with the acquisition of PSI-Med. The
remaining increase was due to increases in general corporate expenses.
Interest expense
Interest expense increased 52% to approximately $141,000 for the year ended
December 31, 1999 from approximately $93,000 for the year ended December 31,
1998, primarily due to increased borrowings used to fund our operations.
Income taxes
Income taxes paid to state taxing authorities consisted of minimum payments
of $4,800 for the year ended December 31, 1999 and $4,000 for the year ended
December 31, 1998. As a result of operating losses, no provision or benefit for
income taxes has been recorded for either period. Deferred tax assets
associated with net operating losses generated have not been recognized as
there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
Years Ended December 31, 1998 and 1997
License revenue
License revenue increased 35% to approximately $571,000 in 1998 from
approximately $424,000 in 1997. Of this increase, $136,000 was primarily due to
inclusion in 1998 of a full year of license revenue for our scheduling,
resource management and case management products compared to a partial year of
license revenue in 1997.
Product development revenue
Product development revenue decreased 59% to approximately $565,000 in 1998
from approximately $1.4 million in 1997, due to the timing and size of co-
development contracts completed with Pfizer Health Solutions Inc in 1998 as
compared to 1997.
26
<PAGE>
Service revenue
Service revenue increased 197% to approximately $3.5 million in 1998 from
approximately $1.2 million in 1997. Of this increase, $1.1 million was due to
the inclusion in 1998 of a full year of service revenue for sales of service
and support contracts and $851,000 was due to the increased sales of
credentialing services.
Cost of license revenue
Cost of license revenue increased 59% to approximately $756,000 in 1998 from
approximately $475,000 in 1997. Of this increase, $167,000 was due to 1998
being the first full year of amortization of our acquired technologies and
$114,000 was due to the increased costs from inclusion in 1998 of a full year
of license revenue as compared to a partial year of license revenue in 1997.
Cost of product development revenue
Cost of product development revenue decreased 35% to approximately $209,000
in 1998 from approximately $320,000 in 1997 due to the decreased level of
development under our Pfizer Health Solutions Inc co-development agreements.
Cost of service revenue
Cost of service revenue increased 159% to approximately $2.3 million in 1998
from approximately $892,000 in 1997. Of this increase, $841,000 was due to the
inclusion in 1998 of a full year of costs associated with generating service
revenue for our outcomes surveys, scheduling, resource management and case
management products and $540,000 was due to higher costs associated with our
increased sales of credentialing services.
Sales and marketing expense
Sales and marketing expense increased 18% to approximately $1.6 million in
1998 from approximately $1.4 million in 1997, due to the inclusion of a full
year of salaries and benefits associated with sales and marketing personnel
gained through our acquisitions made in 1997.
Research and development expense
Research and development expense increased 36% to approximately $1.8 million
in 1998 from approximately $1.3 million in 1997, primarily due to an increase
of $469,000 from the growth in personnel costs through additional headcount and
facilities expense for the development of our Organic Architecture and ASP
software applications.
General and administrative expense
General and administrative expense increased 13% to approximately $3.8
million in 1998 from approximately $3.3 million in 1997, due to increased
personnel and facility costs as a result of a full year of operations from the
businesses we acquired in 1997.
Interest expense
Interest expense increased 365% to approximately $93,000 in 1998 from
approximately $20,000 in 1997, due to increased borrowings used to fund our
operations.
Income taxes
Income taxes paid to state tax authorities consisted of minimum payments of
$4,000 in 1998 and $6,400 in 1997. As a result of operating losses, no
provision or benefit for income taxes has been recorded. Deferred tax assets
associated with net operating losses generated have not been recognized as
there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
27
<PAGE>
Years Ended December 31, 1997 and 1996
License revenue
License revenue of approximately $424,000 in 1997 was attributable to the
software products of the companies we acquired in 1997. We had no license
revenue in 1996.
Product development revenue
Product development revenue was approximately $1.4 million in 1997, due to
1997 being the first year of our co-development agreements with Pfizer Health
Solutions Inc.
Service revenue
Service revenue increased 216% to approximately $1.2 million in 1997 from
approximately $371,000 in 1996. Of this increase, $647,000 was due to the
inclusion of service revenue associated with companies we acquired in 1997 and
$291,000 was due to the inclusion in 1997 of a full year of service revenue for
companies we acquired in 1996, including service and support contracts
associated with the legacy software products we acquired in each year. Deferred
revenue increased from 1996 to 1997 due to our acquisitions in 1997 of
L.I.N.C., Res-Q, and Healthcheck. Deferred revenue from these businesses
resulted from payments received in advance of rendering services under post
customer support and credentialing service contracts.
Cost of license revenue
Cost of license revenue was approximately $475,000 in 1997. We had no cost
of license revenue in 1996. Of this increase, $281,000 was due to amortization
of our acquired technologies and $194,000 was attributable to the cost of
software products of the companies we acquired in 1997.
Cost of product development revenue
Cost of product development revenue was approximately $320,000 in 1997, due
to the first year of our co-development agreements with Pfizer Health Solutions
Inc.
Cost of service revenue
Cost of service revenue increased 275% to approximately $892,000 in 1997
from approximately $238,000 in 1996. Of this increase, $415,000 was due to the
inclusion of the cost of service revenue associated with companies we acquired
in 1997 and $239,000 was due to the inclusion in 1997 of a full year of the
cost of service revenue for companies we acquired in 1996, including service
and support contracts associated with the legacy software products we acquired
in each year.
Sales and marketing expense
Sales and marketing expense increased to approximately $1.4 million in 1997
from approximately $24,000 in 1996, due to the increase in salaries and
benefits of the sales and marketing personnel acquired through our 1997
acquisitions.
Research and development expense
Research and development expense increased 86% to approximately $1.3 million
in 1997 from approximately $724,000 in 1996. Of this increase, $435,000 was due
to the growth in personnel costs as a result of increased headcount and
facilities expense for the development of Organic Architecture and ASP software
applications.
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General and administrative expense
General and administrative expense increased 97% to approximately $3.3
million in 1997 from approximately $1.7 million in 1996, due to increased
personnel and facility costs as a result of a full year of operations from the
businesses we acquired in 1996.
Interest expense
Interest expense increased to approximately $20,000 in 1997 from
approximately $9,000 in 1996, due to increased borrowings used to fund our
operations.
Income taxes
Income taxes paid to state tax authorities consisted of minimum payments of
$6,400 in 1997 and $4,000 in 1996. As a result of operating losses, no
provision or benefit for income taxes has been recorded. Deferred tax assets
associated with net operating losses generated have not been recognized as
there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
Pro Forma Financial Information
The unaudited condensed combined financial statements included elsewhere
herein give effect to our business combination with PSI-Med Corporation. See
"Unaudited Pro Forma Condensed Combined Financial Information, Velocity.com,
Inc. and PSI-Med Corporation."
Pro Forma Year Ended December 31, 1999
On a pro forma basis, our revenue for the year ended December 31, 1999 was
approximately $7.2 million, compared to actual revenue of approximately $5.7
million. Pro forma total revenue of PSI-Med includes sales of medical
accounting software and service revenue from post-contract customer support
agreements, accounts receivable management and collection services, and rental
arrangements for medical accounting software on a shared computer system
maintained at PSI-Med.
Our pro forma operating loss for the year ended December 31, 1999 was
approximately $6.3 million, compared to an actual operating loss of
approximately $6.0 million. The operating loss increased primarily as a result
of additional goodwill amortization from the business combination of
approximately $321,000.
Our pro forma net loss for the year ended December 31, 1999 was
approximately $6.4 million, which reflects the increase in the operating loss
from the additional goodwill amortization resulting from the business
combination.
Pro Forma Year Ended December 31, 1998
Our pro forma total revenue for 1998 was approximately $6.8 million compared
to our actual revenue of approximately $4.6 million.
Our pro forma operating loss in 1998 was approximately $6.5 million compared
to our actual operating loss of approximately $5.9 million. The increase in our
operating loss on a pro forma basis was primarily the result of the addition of
approximately $317,000 in pro forma PSI-Med operating losses and the additional
goodwill amortization of approximately $321,000 resulting from the business
combination.
Our pro forma net loss for 1998 was approximately $6.7 million compared to
our actual net loss of approximately $6.0 million. The increase in our net loss
was for the same reasons as the increase in our operating loss.
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Liquidity and Capital Resources
Since December 31, 1996, we have spent approximately $12.4 million primarily
for our operations and the development of our Organic Architecture and ASP
software applications. We have financed these operating and development
activities through approximately $13.2 million raised from the sale of our
capital stock and the issuance of notes to employees and stockholders.
Investing activities to date included receipt of approximately $256,000 in cash
from acquired businesses offset by approximately $443,000 of investments in
capital assets. As of December 31, 1999, we have approximately $566,000 in cash
reserves and a working capital deficit of approximately $3.1 million.
Net cash used in operating activities was approximately $7.2 million for the
year ended December 31, 1999, approximately $2.5 million in 1998 and
approximately $2.7 million in 1997. Cash used in operating activities for the
year ended December 31, 1999 resulted primarily from the funding of our
operations and our payment of current liabilities.
Our investing activities used approximately $161,000 for the year ended
December 31, 1999, used approximately $32,000 in 1998 and provided
approximately $6,000 in 1997. Investing activities during those periods
consisted primarily of aggregate net cash obtained from acquisitions of
approximately $256,000 and capital expenditures of approximately $204,000 for
the year ended December 31, 1999, approximately $32,000 in 1998 and
approximately $207,000 in 1997. We have no significant capital spending or
purchase commitments other than normal commitments under facilities and
equipment leases.
Financing activities provided cash of approximately $7.8 million during the
year ended December 31, 1999, approximately $2.6 million in 1998 and
approximately $2.8 million in 1997, primarily from the aggregate net proceeds
from sales of capital stock and the issuance of notes to employees and
stockholders. We used cash from financing activities to make aggregate payments
under notes payable to employees and stockholders and capital leases of
approximately $591,000 during these periods.
Our issuances of Series B preferred stock and Series C preferred stock might
be considered public offerings in violation of the federal securities laws. If
these issuances were public offerings, some of the holders of these securities
might be granted the right to rescind the sale of shares and demand that we
return the purchase price of the shares.
We issued shares of on Series B and Series C preferred stock to
approximately 392 stockholders in financings that we believe were conducted as
private placements under Section 4(2) of the Securities Act of 1933, as
amended, and did not require registration under the federal securities laws. In
conducting these private placements, we received signed representations of
accredited investor status from each actual investor and in the Series C
preferred stock financing, we retained an agent to introduce us to potential
investors. However, due to the number of persons who were offered the
opportunity to purchase our securities it is possible that the holders of these
securities may allege that the offering and sale of these securities was not a
valid private placement under Section 4(2) and was not made in accordance with
Section 5 of the Securities Act of 1933. Generally, the statute of limitations
for this type of claim is one year after the date of the alleged violation and,
if successful, would entitle the owners to rescind the issuance of the
securities to them and demand a return to them of the purchase price of those
securities. As of March 1, 2000, if we did violate Section 5 of the Securities
Act of 1933, we believe that a claim could be made for approximately 1,400
shares of the Series B preferred stock and approximately 1,511,384 shares of
Series C preferred stock held by approximately 197 stockholders, representing a
total potential claim of approximately $7,427,500. Assuming the statute of
limitations for this type of claim is one year after the alleged violation
date, the total potential liability for such claims would be reduced to
approximately $6,949,576 on March 31, 2000, $5,562,391 on April 30, 2000,
$4,099,506 on May 31, 2000, $2,787,244 on June 30, 2000, $1,041,626 on July 31,
2000 and $5,625 on August 31, 2000.
We also believe that we have violated or may have violated the securities
laws of several states in connection with the issuance of our Series B and
Series C preferred stock. We believe the issuance of securities
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to a total of five stockholders violated the securities laws of four states.
Similar to the recourse provided under the federal securities laws, holders of
these securities may be able to rescind the sale or issuance of these
securities to them and demand a return of the purchase price paid for these
securities. If we are required to rescind all of the sales of these securities,
the total liability we may face is approximately $175,850. In addition, we
believe we may have violated the securities laws in one additional state in
connection with the issuance of our Series B and Series C preferred stock. If
we are held to have issued these additional securities in violation of the
securities laws of this additional state the holders of these securities may be
granted the right to rescind the sale of the securities which could cause us to
incur an additional liability of up to approximately $381,000. The rescission
rights that may be granted to these holders under state law is not cumulative
to the rights granted under federal law. Accordingly, if these stockholders
rescind the sale of these securities under federal law, they will not have the
right to additional payments from the Company under state law.
We are not aware of any pending claims of rescission against us. We intend
to vigorously defend any rescission or other claim by the holders of our
securities. Nevertheless, it is possible that a claim could be made by one or
more of the holders of our securities, and if a court were to hold that the
private placement exemption is not available for the sale of our securities or
that we violated state securities laws we could be forced to rescind the sales
of our securities, requiring significant monetary payments to the claiming
owners. These claims, if successful, could significantly exceed our cash
reserves and require us to borrow funds or reduce our capital and would
materially and adversely affect our results of operations and financial
condition.
As of December 31, 1999, we had net operating loss carryforwards for federal
income tax purposes of approximately $19 million expiring in the years 2010
through 2019. We had net operating loss carryforwards for state income tax
purposes of approximately $10 million expiring primarily in 2003. The
difference between federal and state net operating loss carryforwards is due
primarily to a 50% limitation on net operating loss carryforwards for
California income tax purposes. Due to the "change in ownership" provisions of
the Tax Reform Act of 1986, utilization of the net operating loss carryforwards
will be subject to an annual limitation regarding their utilization against
taxable income in future periods.
We expect that the net proceeds from this offering, together with our
existing assets, anticipated debt and capital lease financing, and revenue from
operations will be sufficient to fund our operations for at least the next 18
months. Thereafter, we may seek to raise additional funds through public or
private equity financings or from other sources. If we raise additional funds
by issuing equity securities, dilution to stockholders may result. There can be
no assurance that additional financing will be available on favorable terms or
at all. If funding is insufficient at any time in the future, we may be unable
to develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
Year 2000 Preparedness
Many currently installed computer systems and software products are written
using two digits rather than four to define the applicable year. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in systems failures or miscalculations causing disruptions of
operations for any company using such computer systems or software, including,
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities. Testing has been completed on
our internal information technology systems and based on that testing, we
believe that our information technology systems are Year 2000 compliant. To
date, we have not experienced any Year 2000 related problems.
We have not incurred any significant costs to date with respect to our Year
2000 compliance efforts, and we do not anticipate that future costs associated
with Year 2000 remediation efforts will be material. However, if our customers,
our providers of hardware and software, our third party network providers or we
fail to remedy any Year 2000 issues, our services and certain transactions
could be interrupted and we could experience a material loss of revenue that
could harm our business, financial condition and operating results.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and in July 1999 issued Financial
Accounting Standard No. 137, "Accounting For Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective
date for SFAS 133 to fiscal years beginning after
June 15, 2000. We do not believe that the impact of this statement will have a
material effect on our financial position or results of operations upon the
adoption of this accounting standard.
Quantitative and Qualitative Disclosure about Market Risk
We have considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Investments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
We had no holdings of derivative financial or commodity instruments at December
31, 1999, nor has the Company had any foreign currency denominated sales.
However, we are exposed to financial market risks associated with interest
rates. This exposure is directly related to our normal operating and funding
activities.
We manage interest rate exposure by investing excess funds in cash
equivalents and short-term investments bearing variable interest rates, which
are tied to various market indices. As a result, we do not believe that near-
term changes in interest rates will result in a material effect on our future
earnings, fair values or cash flows.
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BUSINESS
Overview
We are an application service provider (ASP) that develops proprietary
software applications for healthcare clinics and physician group practices
using our proprietary technology platform. Our customers can access and use our
applications over the Internet or their local or private information networks.
We are developing integrated applications designed to manage all elements of
the business and clinical processes of our customers within a single system. We
currently have developed and implemented applications in disease management and
clinical drug trials recruitment. In addition, we have recently completed
development of our credentialing application. We charge our customers a monthly
subscription fee for our applications.
Industry Background
According to the Health Care Financing Administration, the healthcare
industry is the largest sector of the United States economy with annual
expenditures reaching approximately $1.3 trillion by the year 2000. Rising
costs have driven employers, insurers and the government sector to attempt to
control expenses through managed care. Rising costs have also led to the
creation of new payment mechanisms, including fixing fees, lowering
reimbursement rates, restricting coverage for services, limiting access to a
select group of providers, negotiating discounts and shifting the economic risk
for the delivery of care through alternative reimbursement modes, such as
capitation and risk pools. As a result, healthcare providers are bearing
greater financial risk and need to contain costs and deliver care efficiently
in order to operate profitably and remain competitive. Pressures to control
costs have also contributed to the movement of care from relatively expensive
inpatient settings to less costly outpatient settings. These outpatient care
providers, particularly clinics and group practices, deliver the majority of
healthcare services and are responsible for a substantial portion of total
healthcare spending.
In order to provide quality and cost-efficient healthcare while managing
costs, hospitals, large healthcare organizations, individual physicians,
physician groups and other outpatient care providers are forming affiliations
with one another to take advantage of economies of scale. Although these
affiliations have enhanced economies of scale, they have generally not
addressed the inefficient delivery of healthcare services. Substantial
resources are wasted in the healthcare industry through the delivery of
unnecessary care, performance of redundant procedures and tests, or excessive
administrative costs. We believe that a portion of this wasteful spending is
attributable to the inefficient collection, management, sharing and storage of
data. To operate efficiently, healthcare delivery networks must be able to
manage patient care and workflow processes which may extend across multiple
locations and member organizations. We anticipate that process and information
management will become even more critical to healthcare organizations as new
governmental regulations requiring greater documentation are adopted. For
example, the Health Insurance Portability and Accountability Act of 1996
(HIPAA) imposes additional regulatory compliance responsibilities on the
healthcare industry relating to the storage, maintenance and transmission of
healthcare information. Proposed regulations implementing HIPAA would impose
new requirements on the healthcare industry to maintain the security of
healthcare information.
Demand for Information Services in Healthcare
The growth of managed care, the increase in government regulation and the
rise of healthcare delivery networks have increased the need for information
technology products and services. Annual healthcare information systems
expenses are expected to reach approximately $18 billion by the year 2000
according to industry sources. Healthcare providers increasingly demand
integrated solutions that offer the core functions required to manage clinical
and business healthcare processes. In addition, geographically dispersed
healthcare delivery networks require central databases and analysis tools that
permit them to effectively extract and analyze data located throughout the
enterprise, measure clinical results, control costs, evaluate operational
efficiency and support process improvement.
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Traditional Healthcare Information Systems
Traditional healthcare information systems, known as legacy systems, were
built with specialized computer languages using "code." The first legacy
systems were introduced in the 1970s. Building systems out of code requires
highly trained technicians and can take anywhere from several months to several
years to complete. Users' needs frequently change before code-based systems are
completed from the initial design to product delivery. Modifying the original
code is a time-consuming and expensive process. As a result, legacy systems
cannot be easily adapted to the changing functional requirements of end-users,
such as the need to address practice variations within clinics and group
practices. These factors contribute to the high cost of legacy systems, which
often requires a significant commitment of capital for the initial acquisition
of hardware and system infrastructure. In addition, healthcare providers may
incur additional capital expenditures in expanding installed systems when
increasing their internal capacity.
Most legacy systems were originally developed to address the financial
aspects of information management, such as capturing charges and generating
bills. Most hospitals and managed care organizations have installed legacy
systems that continue to perform the functions for which they were originally
designed. As end-user information requirements expanded to include the need to
manage clinical information, legacy vendors introduced code-based legacy
applications that were either built by those legacy vendors or acquired from
other software developers. Because these new applications generally were not
included in the design of the original systems, these legacy vendors are
required to develop complex system interfaces that permit the integrated
exchange of information between applications and systems. The time and expense
associated with building interfaces make legacy systems less adaptable to
structural and organizational changes within healthcare organizations.
The Emergence of the Internet and the ASP Model in Healthcare
The Internet has emerged as an important means of accessing and distributing
information, as well as a medium to facilitate the transfer of secure
information between organizations. We believe the Internet's key attributes as
an open, accessible, low-cost and flexible network make it particularly well-
suited for the information technology and communication needs of the healthcare
industry. We believe that the Internet will ultimately become the primary
method of communication and commerce in the healthcare industry.
The increasing acceptance of the Internet as a medium to access and exchange
data has contributed to the development of a new business model for the
delivery of mission-critical healthcare software applications--the application
service provider model. ASPs offer software applications deployed over the
Internet from a remote facility. This eliminates the need for a customer to
invest in complex and expensive software and hardware, such as installing
network servers. Industry analysts estimate that the total cost of hosted
applications under the ASP model can be significantly less than traditional
licensing and internally managed software.
According to the International Data Corporation (IDC), in 1998 the
enterprise ASP market was $23.1 million. IDC estimates the ASP market to grow
to over $2 billion by 2003.
Designing a Comprehensive Information Technology Solution
Healthcare entities' information technology needs vary greatly and are
dependent upon their range of operating activities, which can be impacted by
frequent government and regulatory changes, ongoing margin pressures and Year
2000 challenges. Large, self-contained healthcare entities with significant
information technology budgets have been able to keep up with the changing
requirements. However, smaller healthcare entities, such as clinics and group
practices, need sophisticated information technology applications that can be
accessed cost-effectively. We believe that a comprehensive information
technology application for the smaller healthcare provider should:
. manage the entire clinical and business process in a single system;
. expand easily to accommodate more users and applications;
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. enable the creation of fully integrated applications;
. allow trained users to quickly and easily tailor solutions to
accommodate their different needs;
. offer a cost-effective alternative to currently available software
applications;
. permit Internet delivery or on-site installation;
. provide different users simultaneous access and the ability to modify
data in real time;
. contain the requisite healthcare domain expertise; and
. facilitate easy use.
The Velocity.com Solution
Our proprietary technology provides a platform for the rapid development and
deployment of codeless software applications designed to manage the entire
clinical and business processes for clinics and group practices. These
processes include patient enrollment and patient health assessment, scheduling,
diagnosis, selecting and monitoring treatment plans, billing and contract
management. We design our software applications to be deployed over the
Internet, the users' intranet, or their local or private information networks
with our ASP model. As an ASP, we charge our customers on a monthly
subscription basis for the delivery of our software applications. We provide
integrated applications that can be incrementally implemented, easily extended
and rapidly tailored for each user's needs. Our applications offer the
following benefits:
Comprehensive. We provide our customers with a comprehensive application
that combines our software applications with Internet infrastructure,
application hosting, as well as consulting and implementation services provided
by our strategic partners. Our software applications address a range of
business and clinical processes, such as billing and claims, scheduling,
credentialing and disease management. Our applications are designed to enable
our customers to rely on us as the single source for their software
applications, whether these applications are deployed over the Internet or
their local or private information networks.
Cost-effective. We believe that our ASP model allows users to access
sophisticated software applications for a lower start-up cost and reduced
operating cost. Our technology enables most customers to run our applications
using their existing computer equipment. Each user needs only a relatively
modest desktop computer and a modem that allows the computer to connect to our
remote servers over standard telephone lines. As a result, our applications
eliminate the need for the user to incur significant capital expenditures for
hardware, operating systems and application software. In addition, our
applications are designed to significantly reduce the costs for technical
support and training, thereby reducing the need for in-house information
technology experts.
Adaptable. Our applications are built with data instead of code. As a
result, we can avoid many of the limitations of code-based software systems and
more easily tailor any component of an application to meet the needs of each
user. Trained clients can quickly modify our software to adapt to practice
variation and practice changes. Our clients do not have to conform their
clinical and business processes to the fixed features and functions of rigidly-
coded legacy systems.
Scalable. Our applications run on an object-oriented database management
system designed to manage large and complex databases. In addition, we have
partnered with Conxion Corporation to provide application hosting services,
Internet infrastructure and data centers. The combination of our proprietary
architecture and technology, the bandwidth capacity of Conxion's data centers
and the storage capacity of our database management system minimizes the cost
of adding incremental users and applications.
Integrated. Our software applications are built on a single, integrated
database so that information and applications are stored centrally and shared
simultaneously by all users. As a result, data is entered once and shared
across all applications on the system. We believe the single entry of patient
and other data will increase efficiency and lower costs while reducing the
errors that result from duplicative data entry. Changes to data made by a
single user in one application are immediately shared by all authorized users
across applications.
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Internet accessible. Our applications can be provided over the Internet.
Multiple users can simultaneously and continuously access the same software
applications and data from geographically dispersed locations. Users access our
software applications using our Organic Browser, a proprietary, thin client
browser that provides the interface between the user, the applications and the
database.
Easy to use. We design our software applications in consultation with users
to accommodate their workflow and processes. The appearance of the computer
screen and the information that is displayed can be designed so that users see
only those features that they need. Users are not required to navigate through
features and applications they do not need or use. For example, schedulers will
see only the scheduling tools and information they need on their screens.
Embedded domain expertise. Our applications incorporate the collective
healthcare knowledge and experience of our personnel. We are highly experienced
in each of the following domains:
. outcomes and disease management;
. clinical drug trials;
. practice management;
. credentialing and provider profiling;
. scheduling and resource management;
. business process reengineering; and
. case management.
We use our expertise in these areas to create comprehensive, integrated
software applications for our customers and to continually refine those
applications as the needs of our customers evolve.
Security. To safeguard user data, we have designed our applications to
support the security options necessary to meet our user's requirements on an
application by application basis. We offer the following security options:
. client authentication: proprietary communication protocols that generate
a public key infrastructure-based key to uniquely identify each client;
. user authentication: standard login ID/password identification and other
more secure means to identify and authenticate users;
. access control: system mechanisms to restrict a user's access to only
the data they have clearance to see;
. channel security: proprietary transmission protocol makes it difficult
to intercept data during transmission;
. database security: data in the database can be encrypted; and
. physical site security: Conxion hosts our data and applications at
government rated Class A data centers. To be rated as a Class A data
center, Conxion must conform to government security requirements and be
able to guarantee 72 hours of independent continuous operations.
Our Strategy
Our objective is to become the leading ASP serving clinics and group
practices. We believe that we are one of the first ASPs to deliver software
applications to clinics and group practices over the Internet. Our strategy is
to capitalize upon our early market entrance, extend our technology and
implement a subscription-based business model focused on recurring revenue.
Elements of our strategy include:
Leverage our proprietary technology platform. Our proprietary, object-
oriented technology provides a platform for the rapid, codeless development of
ASP software applications for clinics and group practices. Our
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platform combines a universal set of clinical and business processes with the
capability to quickly create a application that can be easily tailored to meet
the specific needs of each customer. Using this platform, we have developed
applications for the disease management, clinical drug trials and credentialing
markets. We are using our platform to complete development of a software
application that manages the entire clinical and business process for clinics
and group practices. The scalable, adaptable and interactive design of our
software applications enables us to offer a customer an initial application
targeting a specific business or clinical need, with the opportunity to easily
sell additional functions and features.
Achieve rapid market penetration. We are using a sales and marketing
strategy that focuses on identifying channels of customers with common needs
and cross-selling our applications to our existing customer base. We intend to
establish relationships with specialty healthcare industry groups who will
endorse and co-market our applications to their customers and members in these
channels. In addition, we have an existing base of over 500 customers using the
legacy systems sold by the companies we have acquired. To capitalize on our
customer base, we developed and are developing ASP software applications that
will be sold as an upgrade to our existing systems. We use our Internet sales
team to quickly reach many customers and increase our market penetration.
Enhance our capabilities by forming strategic alliances. We believe that our
ability to offer a complete, integrated and adaptable software application to
our customers will be an important element in their selection of us as their
applications provider. In order to continue to specialize in software
application development, we have formed and will continue to form strategic
alliances with leading companies that can provide us with specific expertise in
areas important to providing complete applications, such as Internet
infrastructure, application hosting, consulting and implementation services.
Given the significant time, financial and human resources required to
internally develop our own Internet connectivity and data storage requirements,
we believe that we can offer cost-effective software applications by partnering
with recognized leaders in these areas. Our strategic alliance with Conxion
Corporation, a leader in network hosting, is an example of such a partnership.
Selectively acquire complementary businesses and technologies. Historically,
we have grown through acquisitions that brought us new personnel with domain
knowledge of the healthcare industry, additional customers, software products
and technology. In the future, we will continue to acquire businesses and
domain knowledge, product lines or technologies that will enhance our
applications and domain expertise, and increase our customer base.
Protect our intellectual property. We believe that our technology
incorporates a unique approach to the codeless development of software
applications. We believe that our software technology is a significant asset
which we intend to actively protect. We have filed five patent applications
relating to key elements of our architecture and intend to seek appropriate
intellectual property protection for the technologies that we develop in the
future.
Our Technology
Object-oriented technology. Our applications embody object-oriented
technology. Traditional software applications are built with computer language
using "code." Code essentially instructs the computer how to use pieces of
information, or "data." Most commercial software applications consist of up to
millions of lines of code. Each line is written by a highly trained programmer.
Object-oriented technology breaks up the lines of code into specialized
programs, or "objects," which perform discrete tasks within the application. An
object can also be simultaneously used by different applications so that
complex systems can be easily built. The self-contained nature of objects
allows them to be tested, modified and maintained independently from the rest
of the system. Therefore, object-oriented applications can be upgraded and
maintained without modifying the entire application.
After five years of development, we have developed a method of interpreting
data without instructions written in code. Using this method, we can build
applications that are not based on code. Since September
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1999, we have received a Notice of Allowance from the United States Patent and
Trademark Office for three of our inventions including the ability to write
applications using data instead of code and the ability to write queries using
data instead of code.
CoreModel. The experience and knowledge of our healthcare industry experts,
and input from clinicians and users, have contributed to the development of our
CoreModel. Our CoreModel is a model of the real-world components of the
healthcare delivery process. Each of the components is represented by an
object. The CoreModel is the blueprint of how these objects can be linked to
build applications. As objects can be shared by different applications, all our
applications can be built using the set of objects contained in our CoreModel.
Therefore, data is not duplicated and applications are integrated. Once a user
has one of our applications, other applications can be added incrementally
without needing to be integrated, since integration is organic to all
applications.
Organic Browser. The Organic Browser is our application browser that resides
on the user's computer. Applications are delivered to the user by the
interaction between our proprietary application server software and the Organic
Browser. When a user logs on to the system and enters a user name and password,
the Organic Browser requests the data required to display the user's software
applications from the application server. The application server communicates
that request to our database management system, which retrieves the data
required and delivers it to the application server. The application server then
assembles the user's software application and delivers it to the Organic
Browser which renders it on the user's screen. Our Organic Browser is able to
do this as quickly as traditional systems with modest computers and an Internet
connection over standard telephone lines.
The Organic Browser and our application server require relatively little
hard disk space on the user's computer regardless of the size of the software
applications they are running because of our data-based and object-oriented
architecture. As a result, most users can run our software applications on
their existing computers and do not have to invest in additional hardware. The
Organic Browser requires only six megabytes of hard disk space on the user's
computer to run, which is less computing power than general purpose Internet
browsers, which typically require about 80 megabytes. Applications, such as our
browser, that require little disk space and are used to access applications
stored on a server are referred to as "thin clients." Our software applications
can run on a thin client because they are built using data, which can be stored
in a database on a server instead of on the user's computer. In contrast,
typical software applications built with code must be stored and executed on
the user's computer and therefore cannot be run with a thin client. Because our
CoreModel is stored in the database, we can increase the total number of
software applications and the functionality of any software application running
on our system without changing the Organic Browser or the rest of the user's
system.
Our application server software requires only two megabytes of hard disk
space. Typically, application server software requires at least 10 megabytes of
storage space, but can require up to several hundred megabytes for more complex
applications. Our application server software requires less disk space because
the processes, generally referred to as "server side processes," are written in
data rather than code and stored in the database. Server side processes
generally include:
. queries: used to locate and retrieve data elements from the database;
. triggers: used to activate particular processes upon the occurrence of
another process; and
. constraints: used to limit acceptance of data entry to defined
parameters.
Our ability to store server side processes as data, instead of code, enables
us to quickly and easily modify the server side processes for increased
adaptability.
Our Software Applications
We are in the process of developing the Organic Clinic, a software
application that will manage the entire clinical and business process for
clinics and group practices. We are designing the Organic Clinic to be deployed
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over the Internet or the user's intranet or area network using our ASP model.
In the interim, we are offering software applications for use in specific
practice areas, such as disease management, clinical drug trials recruitment
and credentialing. We have targeted these areas to accelerate adoption of our
technology based on our domain knowledge, the strength of our channel partner
contacts and the potential of these markets.
To build our applications, we begin by spending a few days in a clinic
interviewing users and modeling and mapping the processes of that clinic. We
assemble an application by using the library of healthcare tasks built by our
domain experts as extensions of the CoreModel. These tasks share the same data
objects and are integrated with all of our applications. We have built and can
utilize hundreds of healthcare specific tasks such as "enroll a patient,"
"schedule a patient" or "bill a patient." These tasks comprise the templates we
use to tailor an application for a particular clinic. Providing a tailored
application generally takes three to six weeks, depending on the complexity of
the process and practice variation.
We are currently offering the following ASP applications:
Disease Management. Healthcare providers are increasingly employing disease
management solutions to achieve favorable patient outcomes while controlling
costs. Annually, an aggregate of over $50 billion is spent in the United States
to treat the disease states of asthma, diabetes and congestive heart failure. A
number of specialty healthcare providers have targeted the treatment of these
specific disease states. These providers often contract to treat patients at a
fixed cost and therefore depend on strict patient compliance with treatment
plans to manage their costs and to deliver quality care to their patients. We
have designed effective disease management applications that have the following
attributes:
. Improved patient selection. Our applications use patient questionnaires
and clinical data to identify and select patients with specific chronic
conditions who are most at risk for poor clinical outcomes.
. Automated clinical process. Our applications link all network users,
including doctors, laboratories and pharmacies, track compliance, and
provide real time and updated information.
. Customized care plans. Our applications allow healthcare providers to
design and monitor care plans that meet the specific needs of individual
at-risk patients using guidelines and predictive outcomes established at
the clinic.
We delivered our first disease management application in February 1999. As
of February 29, 2000, we have deployed nine of our ASP software applications
for the disease management market.
As part of our disease management applications, we developed Outcomes
Partner III, a healthcare outcomes management software application. This
application was developed in collaboration with Pfizer Health Solutions Inc, a
subsidiary of Pfizer Inc. that provides information technology solutions to
Pfizer Inc. clients. Outcomes Partner III combines patient-reported health and
functional status with outcomes program administration and reporting tools that
evaluate the effectiveness of disease management. Through our relationship with
Pfizer Inc., we have installed Outcomes Partner III at the American Medical
Group Association's headquarters. The American Medical Group Association is a
trade association representing over 230 medical groups composed of
approximately 48,000 physicians. In conjunction with Pfizer Inc., we intend to
market Outcomes Partner III to the American Medical Group Association's member
clinics.
Clinical Drug Trials Recruitment. We believe there is a significant market
for a software application that improves the efficiency of clinical drug trials
management based on the level of expenditures spent on clinical trials to
support drug development efforts. We believe there is not an adequate system
for managing patient recruitment and enrollment in the clinical drug trials
process.
A clinic's participation in the clinical drug trial process begins with
patient recruitment and enrollment. Participation in clinical drug trials can
be a significant revenue source for clinics and group practices. Pharmaceutical
companies set compensation for investigators based on the number of patients
enrolled and the time taken to complete recruitment.
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Clinical drug trials recruitment is conducted by various types of healthcare
organizations including clinics and group practices. These organizations must
conduct broad searches of their practice management systems to identify
patients who meet general criteria. They then review patients' medical charts
to find individuals who meet the trial's requirements. Manual chart review is a
time consuming and expensive process. Even for simple studies, it can take a
clinic site several months to identify, screen, recruit and enroll its target
number of patients. We believe an effective patient recruitment application can
significantly reduce the time required to complete these tasks.
Our patient recruitment application provides a comprehensive set of easy-to-
use tools for efficient patient screening, recruitment and enrollment. Our
first application was delivered in February 1999. Our application offers
clinics and group practices several important benefits, such as:
. Simplified data management. Interfaces with a practice management system
to eliminate the need to duplicate data entry.
. Reduced number of chart reviews. Quickly queries system data to
prioritize patients that are most likely to meet the inclusion criteria
for a trial.
. Customized patient screening. Uses adaptable tools to enable customized
follow-up screening interviews and medical history questionnaires with
no additional programming, and provides survey administration over the
Internet.
. Reduced enrollment time. Facilitates quick and efficient enrollment of
patients who meet the inclusion criteria for a trial.
. Integrated patient contact tracking. Includes user-friendly tools to
help track and manage all contacts with patients from initial screening
through the completion of their participation in a clinical drug trial.
. Reduced computer hardware costs. Permits data input using scan forms,
which enables clinic staff to interact with the system without a
computer on their desk.
Credentialing. Credentialing is the process of reviewing a clinician's
education, qualifications, licenses and history in order to provide a record of
accreditation of individual clinicians for healthcare organizations.
Credentialing services performed by third parties are estimated to represent a
multi-hundred million dollar market with annual expenditures primarily
consisting of credentialing services and software. However, this amount is
estimated to represent only a minority of the overall credentialing market. The
majority of credentialing is done internally by healthcare organizations with
inefficient solutions using spreadsheets or paper processes. This internal
process is labor intensive, expensive and often not integrated with the central
information systems of healthcare organizations. Depending on the number of
organizations or plans to which a clinician intends to provide services, a
single clinician may need to be credentialed multiple times during a year.
While doctors have historically been the only medical professional required to
be credentialed, requirements are being expanded to include associated care
professionals, such as physician assistants and nurses.
Our credentialing application offers customers different options to meet
their credentialing needs. An organization can subscribe to our complete
application and bring the entire process in-house. Alternatively, an
organization can subscribe to a partial solution and pay a per item charge for
us to provide specified portions of the required data collection process.
Applications for credentialing can be completed by clinicians over the Internet
or through a scan form. Our application allows organizations to track the
status of clinician credentialing from their desktops. The system links
numerous doctors, clinics and group practices to a single database, making
original clinician data reusable and available each time a credentialing
process is required. Organizations will be able to customize their
credentialing applications and the software will automate implementation and
tracking throughout the process.
Our software stores and catalogues the data needed to verify a clinician's
credentials in a database. We have developed an online form for the clinician
to enter this data. All of our credentialing services are provided through our
wholly owned subsidiary, Healthcheck, Incorporated.
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In September 1999, we entered into a letter of intent with a credentialing
consulting firm to market our application to its customers. We cannot assure
you this letter of intent will result in a definitive agreement. We will market
this application through Healthcheck.
Our Software Applications in Development. As part of our strategy of
completing the Organic Clinic and targeting markets in which we have domain
knowledge, channel partners or existing customers, we are currently developing
the following solutions:
. Workers' Compensation. We are developing a workers' compensation
application to integrate the management of clinical and business
processes in occupational medicine. This application will enable us to
track progress and compliance during the course of a patient's
treatment. Our application will capture patient medical histories, help
physicians determine diagnoses and suggest appropriate treatment
protocols at the point of care. The criteria for diagnosis and treatment
protocols will be established by the physicians at the treatment clinic.
. Patient Management. We are developing a patient management application
that will streamline claims processing by making eligibility information
obtained at a clinic available to the billing service over the Internet.
In September 1999, we entered into a letter of intent with California
Medical Billing Association, an association of billing service bureaus,
to market this application to its 200 member billing services and their
clinic customers. We cannot assure you that this letter of intent will
result in a definitive agreement.
. Medical Record Management. We are developing a medical record management
application to expand the process of managing clinical data by making
electronic medical records available over the Internet to the
association's entire network. This application is covered by our letter
of intent with California Medical Billing Association.
. Practice Management. This application will provide scheduling, billing
and contract management features. We will initially market this
application as an upgrade to the traditional legacy products sold by
PSI-Med Corporation, one of our wholly owned subsidiaries.
. Case Management. This application will provide tracking, management and
analysis of case-specific information required to manage a patient's
treatment. We will initially market this application as an upgrade to
the traditional application sold through L.I.N.C., Inc., one of our
wholly owned subsidiaries.
. Urology Management. We are developing a clinical management application
for urology clinics and have a letter of intent with a urology
association to market the application.
. Cardiology Management. We are developing a clinical management
application for cardiology clinics.
Our Legacy Software Products. We currently market traditional legacy
software products for credentialing, scheduling, practice management, resource
management, case management and outcomes management applications. These
products were developed by the companies we have acquired since our inception
in 1995. We acquired these companies primarily for their specific domain
expertise and enabling technologies. Our acquired domain expertise is
incorporated into our CoreModel and has been used to build our current
applications and applications in development. We intend to continue to market
these legacy products until we have completed development of a comparable
application that can be delivered using our ASP model. As each of these
applications is completed, we will market it as an upgarde to our existing
legacy products. For more information concerning our acquisitions, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Strategic Relationships and Alliances
We have entered into strategic relationships and alliances with companies to
expand our sales distribution capabilities and improve our ability to deliver
reliable, scalable ASP software applications. We will continue to consider
strategic relationships and alliances that enable us to leverage our core
competencies in the
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development of advanced technologies and software applications. These strategic
relationships and alliances include the following:
Pfizer Health Solutions Inc. We have had a strategic relationship with
Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc., since 1997. We have
entered into agreements with Pfizer Health Solutions Inc that provide it with
non-exclusive distribution rights to the applications described below. Pursuant
to these agreements, we cannot enter into distribution agreements for the same
applications with any competitor of Pfizer Inc. Since 1997 through December 31,
1999, we have received approximately $3.5 million in revenue through this
relationship with Pfizer and its customers. The applications covered by these
agreements include:
. Outcomes Partner III. We are working to implement this quality
measurement tool in innovative pilot projects, including several
designed to use outcomes in support of disease management. This is a
three-year agreement which expires on May 28, 2002. This agreement may
be renewed by mutual agreement of the parties for additional periods of
12 months.
. Surveys. We also collaborate with Pfizer Health Solutions Inc in
marketing and implementing standard and tailored surveys for managed
care organizations. This is a two-year agreement which expires on June
15, 2000. This agreement may be renewed by mutual agreement of the
parties for additional periods of 12 months.
. Credentialing. Along with Pfizer Health Solutions Inc, we offer
credentialing services and software on a contract basis. This is a
three-year agreement which expires on January 15, 2002, unless testing
of the final version of the software extends beyond January 15, 2000, in
which case the term of the agreement will be extended by the period by
which such testing is extended. This agreement may be renewed by mutual
agreement of the parties for additional periods of 12 months.
Superior Consultant Holdings Corporation. In September 1999, we entered into
a Distribution and Services Agreement, as amended, with Superior Consultant
Holdings Corporation under which Superior agreed to introduce and outline the
advantages of our ASP software applications based on client interests, as well
as providing systems integration, process improvement, consulting and
implementation services to healthcare organizations. We agreed to market
Superior's healthcare consulting services and business integration services, to
promote Superior as our exclusive alliance partner for the provision of
healthcare consulting services and not to offer distribution rights to our
Organic Architecture and applications to any direct competitor of Superior
without Superior's prior written approval. Under the agreement, Superior has a
non-exclusive worldwide license to market, use, install and display our Organic
Architecture and applications. We have also appointed Superior as our
international provider of healthcare consulting services to our clients. The
agreement entitles Superior to appoint a member to our board of directors and
to receive a vested non-statutory stock option grant exercisable for 112,000
shares of our common stock at an exercise price of $10.71 per share. Pursuant
to this agreement, Superior has appointed James P. Clark to our board of
directors. The initial term of the agreement runs through August 31, 2002 and
may be renewed by Superior for up to two additional two-year terms.
Conxion Corporation. We have entered into several agreements with Conxion
Corporation, under which they supply us with application hosting services and
Internet infrastructure for our ASP software applications. Conxion houses the
equipment for these services in government rated Class A data centers from
which our ASP software applications are deployed and run. Our business
relationship with Conxion began in May 1997, and in April 1999 Conxion
purchased $550,000 of our preferred stock. We have been using Conxion's
services to deploy our ASP applications since May 1999 and have been using them
as our Internet service provider since June 1998. These agreements typically
have terms of one year. Conxion has agreed to enter into extensions of these
agreements and to enter into supplemental service agreements, as required by us
on terms not less favorable to us as they offer to any of their customers.
Conxion cannot terminate or suspend the services provided under these
agreements even if a bona fide dispute exists so long as undisputed payments
are paid. If we withhold an undisputed payment, Conxion must notify us of the
breach in writing and provide us thirty days to cure the breach.
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Velocity.com Subsidiaries
Healthcheck, Incorporated, L.I.N.C., Inc., Res-Q, Inc., Velocity Healthcare
Informatics and PSI-Med Corporation are wholly owned subsidiaries of
Velocity.com and function as an integrated part of Velocity.com. Each of our
subsidiaries maintains operational management teams in their respective
locations, but depend on Velocity.com to provide overall financial and
administrative support. Our subsidiaries provide legacy products and services
to our customers.
Healthcheck is located in Denver, Colorado and provides credentialing
services to verify the credentials of physicians, allied health professionals
and mid-level providers. Res-Q is located in Los Angeles, California and
provides resource management and scheduling software to allow customers to
manage their personnel resources more effectively. L.I.N.C. is located in Los
Angeles, California and provides case management software, services and
consultation to manage a wide range of medical, disability and workers'
compensation cases. Velocity Healthcare Informatics is located in Minneapolis,
Minnesota and provides outcomes management software applications and survey
services related to patient satisfaction.
Sales and Marketing
Our sales and marketing strategy is to increase acceptance of our ASP
applications in clinics and group practices by (1) entering into partnerships
with specialty industry groups and associations who provide us access to
customer channels and (2) selling our ASP applications as upgrades to our
installed base of over 500 customers that currently use legacy systems. We
believe that our channel partner relationships will enable us to identify
customers with common needs as a channel for our sales efforts. Our current
channel partner, Pfizer Health Solutions Inc, endorses our ASP software
applications and provides for co-marketing to its customers.
Our sales force is divided into Internet, strategic and tactical teams. The
Internet team sells services and products over the Internet and telephone,
which makes more efficient use of their time. The strategic sales team is
focused on selling through our channel partners as well as through our
strategic relationships with Superior and Pfizer Health Solutions Inc. The
tactical sales team focuses on selling our legacy software products and
services. Our tactical sales force is also responsible for selling our ASP
software applications as upgrades to our installed legacy products. We
currently have nine employees in our sales force, five of which are in the
tactical sales team. We intend to expand the Internet and strategic sales teams
significantly following this offering.
We market our applications and services through our website, articles in
industry publications, direct mail and participation in trade shows. From our
website, prospective customers can obtain product information, and download and
run demonstration software. We also use our website to identify and qualify
prospective customers who request information. We believe that publication of
relevant articles in key trade journals is an important method of building
industry awareness. Since 1998, we have published 13 articles under the bylines
of our staff.
Research and Development
Our research and development organization is comprised of development
engineers who work on system architecture and applications development teams
who work with our domain experts to build solutions for each domain
incorporated in the CoreModel. As of February 29, 2000, we had approximately 28
professionals dedicated to architecture and applications development. We will
continue to make substantial investments in research and development to enhance
our proprietary architecture and support the development of additional
applications.
Competition
The business of providing application software and services to clinics and
group practices is extremely competitive. In addition, the market for Internet-
based ASPs is relatively new and evolving, and we anticipate that competition
will continue to intensify as the use of the Internet grows.
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Our competitive position in the healthcare software application market is
difficult to evaluate due to the variety of current and potential competitors
and the evolving nature of our market and the ASP model. Our primary
competitors include:
. legacy software vendors such as Cerner Corporation, Eclipsys
Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Medical
Manager Corporation;
. application service providers such as CareTools, Inc., Confer Software,
Inc., MedicaLogic, Inc., The Trizetto Group, Inc. and U.S.
Internetworking, Inc.;
. healthcare e-commerce and portal companies such as CareInsite, Inc. and
Healtheon Corporation; and
. object software application developers such as TenFold Corporation.
Each of these types of companies either is or in the future can be expected
to compete with us in delivering software applications to the clinic and group
practice markets, including the delivery of software applications over the
Internet. Furthermore, major software companies and other entities, including
those specializing in the healthcare industry that are not currently offering
applications, products or services that compete with our products and services,
may enter our markets. In addition, our existing and future strategic partners
may compete with us from time to time by selling, consulting on or hosting
other software that competes with our software applications.
We believe the principal differentiating characteristics upon which we
compete are:
. features and functionality--our applications provide different users
simultaneous access and the ability to modify data in real time;
. fit with the user's practice, processes and needs--our applications can
be tailored to specific users' needs;
. cost--our applications are accessed over the Internet eliminating the
need for costly servers and reducing the need for in-house technology
experts;
. ease of implementation and use--our applications can be designed so that
users do not need to navigate through features they do not use;
. business and technical expertise--our applications incorporate the
collective healthcare knowledge of our personnel and other healthcare
experts;
. integration of applications--our applications are designed to allow
users to manage the entire clinical and business process in a single
system;
. reliability--our applications are easy to maintain because they are
built with data instead of code;
. scalability--the scope of our applications can be expanded or reduced to
easily and quickly accommodate our customers' specific and changing
needs.
Despite these differentiating characteristics, many of our competitors have
greater financial, technical and marketing resources, greater name recognition
and more established relationships in the healthcare market than we have. Low
barriers to entry also expose us to potential new competitors. We cannot assure
you that we will be able to compete successfully now or in the future.
To remain competitive, we must continue to enhance our software
applications, as well as expand our sales, marketing and distribution channels
to respond promptly and effectively to:
. changing needs of clinics and group practices;
. advances in the delivery of software applications over the Internet;
. technological innovation and change;
. our competitors' new products, services and pricing models; and
. challenges of hiring and retaining qualified information technology
professionals.
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For additional information concerning risks associated with competition, see
"Risk Factors--The markets we serve are highly competitive and many of our
competitors have much greater resources."
Intellectual Property Rights
Our success and ability to compete are dependent in part upon our
proprietary technology. We rely upon a combination of copyright, patent,
trademark and trade secret laws and other means to protect our technology.
However, the steps we have taken may not prevent the misappropriation of our
products or technology. In addition, effective proprietary rights protection
may be unavailable or limited in some foreign countries. We have two
U.S. patent applications pending and have received a Notice of Allowance from
the United States Patent and Trademark Office for three of our inventions. In
addition, we have five registered trademarks and have 13 trademark applications
pending.
We retain ownership of our CoreModel and the software applications we
develop. In addition, we have entered into agreements for the right to use
third party software components, such as our database program, in our products
on a non-exclusive basis. Our breach of these agreements could result in our
loss of these rights and would harm our business. Our success will depend in
part on our ability to continue to license additional third party software and
upgrades to existing third party software in order to enhance our products.
However, we may not be able to license additional rights for this software on
commercially reasonable terms or at all. If we cannot obtain required licenses,
we could encounter delays or unanticipated development expense while we attempt
to internally develop substitute technology.
We may become the target of intellectual property litigation. Although we
have not been notified that any of our products infringe third party
intellectual property rights, we may receive notices of these claims in the
future. Any litigation to determine the validity of such claims, including
claims arising from our contractual indemnification obligations to our
customers, regardless of its merit or resolution, would likely be costly and
may divert management's attention and resources, or cause service
implementation delays. In the event of an adverse ruling in any such
litigation, we could be required to pay substantial damages, cease the sale of
infringing products or obtain a license of the intellectual property rights of
the third party claiming infringement. There can be no assurance that such a
license would be available to us on reasonable terms or at all.
We also seek to protect our trade secrets and proprietary technology through
confidentiality agreements with employees, customers, consultants and other
appropriate parties. However, we may not have an adequate remedy in the event
these agreements are breached or any remedy if our trade secrets are
independently developed by others.
For information concerning risks associated with intellectual property
rights, see "Risk Factors."
Government Regulation
Government Regulation and Healthcare Reform. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. Laws and regulations may be adopted with respect to the Internet
covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services. The
adoption of any additional laws or regulations may impede the growth of the
Internet or other online services, which could, in turn, decrease the demand
for our applications and services and increase our cost of doing business, or
otherwise have an adverse effect on our business, financial condition and
results of operations. 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. Any such new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and other online services could harm our business.
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The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of this information to implement security
measures. Such legislation might require us to make substantial expenditures to
implement such measures. We cannot assure you that changes to state or federal
laws will not materially restrict the ability of healthcare providers to submit
information from patient records using our applications.
Legislation currently being considered at the federal level could impact the
manner in which we conduct our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000. We are
designing our applications to enable compliance with the proposed regulations,
but cannot assure you that we will be able to comply with those proposed
regulations in a timely manner or at all. Moreover, until the proposed
regulations become final, they could change, which could require us to expend
additional resources to comply with the revised standards and we may not be
able to comply with the revised standards in a timely manner or at all. Based
on our present business operations, we believe that the HIPAA requirements
related to the maintenance and exchange of electronic health information may
apply to legacy products sold by our wholly owned subsidiary, PSI-Med
Corporation, but not to our other products, services or solutions. If any of
our products, services or applications are subject to those regulations, we may
be required to incur additional expenses in order to comply with these
requirements and we may not be able to comply with them in a timely manner or
at all. In addition, the success of our compliance efforts may also be
dependent on the success of healthcare participants in dealing with the
standards. If we are unable to comply with regulations implementing HIPAA in a
timely manner or at all, the sale of our solutions and business could be
harmed.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the Federal Food, Drug
and Cosmetic Act. Computer applications and software are considered medical
devices and subject to regulation by the FDA when they are indicated, labeled
or intended to be used in the diagnosis of disease or other conditions, or in
the cure, mitigation, treatment or prevention of disease, or are intended to
affect the structure or function of the body. We do not believe that any of our
current applications or services are subject to FDA regulation as medical
devices; however, we plan to expand our application and service offerings into
areas that may subject it to FDA regulation. We have no experience in complying
with FDA regulations. Our compliance with such FDA regulations could prove to
be time consuming, burdensome and expensive, which could have a material
adverse effect on our ability to introduce new applications or services in a
timely manner.
Employees
As of February 29, 2000, we had approximately 123 employees. Our employees
are not subject to any collective bargaining agreements and we generally have
good relationships with our employees.
Facilities
We lease eight facilities, all of which are located within the United
States. Our principal executive and corporate offices are located in San
Francisco, California. In addition, we maintain offices in Berkeley, Santa Ana
and Calabasas, California, Denver, Wheat Ridge and Ft. Collins, Colorado and
Minneapolis, Minnesota. Our leases have expiration dates ranging from January
2000 to August 2002. We believe that our facilities are adequate for our
current operations and that additional leased space can be obtained if needed.
Legal Proceedings
There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated actions against us.
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MANAGEMENT
Directors and Executive Officers
The following table presents information regarding each of our directors and
executive officers as of February 29, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jack D. Anderson...................... 55 Chairman of the Board; Chief
Executive Officer
William W. Shaw, III.................. 42 President, Secretary and
Treasurer
William H. Matthews................... 45 Chief Financial Officer
Robert L. Anderson.................... 55 Director; Senior Vice President
Michael J. Barry...................... 39 Chief Information Officer
David W. McComb....................... 47 Director; Vice President,
Research and Development
Michael E. Meisel..................... 45 Chief Sales Officer; President
and CEO of Res-Q, Inc., a wholly
owned subsidiary of Velocity.com
M. Jan Roughan........................ 54 Director; President and CEO of
L.I.N.C., Inc., a wholly owned
subsidiary of Velocity.com
James P. Clark........................ 46 Director
Robert S. Garvie...................... 50 Director
Gail E. Oldfather..................... 64 Director
Michael A. Wilson..................... 52 Director
</TABLE>
Jack D. Anderson co-founded Velocity.com in January 1995. He has been
Chairman of the Board and Chief Executive Officer since inception. Mr. Anderson
has approximately 28 years of experience in healthcare management and
approximately 20 years of experience in healthcare information systems. From
1993 to 1994, Mr. Anderson served as a Business Development Consultant for
Velocity Healthcare Informatics, Inc., which was purchased by Velocity.com in
December 1996. In 1978, he co-founded Cost Containment Systems, Inc., a
healthcare software company, which was subsequently merged with Serving
Software, Inc. Mr. Anderson served as a director of Serving Software from 1992,
when it became a public company, until it was acquired by HBO & Company in
1994.
William W. Shaw, III has been President of Velocity.com since February 1997
and Secretary and Treasurer since July 1996. From July 1996 to June 1999, he
also served as Chief Financial Officer of Velocity.com. Mr. Shaw was a
consultant to the Company from October 1995 to July 1996. Mr. Shaw has
approximately 16 years of management experience in the healthcare industry.
From February 1993 to July 1995, he was Executive Vice President, Vice
President of Marketing and Research and Development for Aesculap, Inc., a
surgical products company and wholly owned subsidiary of Aesculap AG. From 1983
to February 1993, Mr. Shaw held several other positions at Aesculap including
Chief Operating Officer, Vice President Finance, Treasurer and Controller. From
1980 to 1983, Mr. Shaw was an Audit Supervisor with Coopers & Lybrand.
William H. Matthews has been the Chief Financial Officer of Velocity.com
since June 1999. He joined OrganicNet in February 1999 as a financial and
accounting consultant. From October 1994 to February 1999, Mr. Matthews was the
Chief Financial Officer for Imagicast, Inc., formerly Telescan Systems, Inc., a
developer of software and hardware for interactive retail point of sale
applications. From 1993 to 1994, Mr. Matthews served as the controller for
Ravenswood Winery. From 1988 to 1992, Mr. Matthews was the Chief Financial
Officer for Ocean Colony Partners, a real estate development firm. From 1981 to
1987, Mr. Matthews held financial management positions for various companies.
From 1977 to 1981, he was a Senior Auditor for Coopers & Lybrand.
Robert L. Anderson co-founded Velocity.com in January 1995 and has been
Senior Vice President of Velocity.com since January 1996. He has served as a
director since inception. Mr. Anderson has approximately
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20 years of experience in the development of applications for complex project
and program management engagements. From August 1993 to October 1994, he served
as Director of Practice Development of BSW Advanced Technology, Inc., an
object-oriented project management software company.
Michael J. Barry joined Velocity.com as Chief Information Officer in January
1996. Mr. Barry has approximately 20 years of software development experience.
From June 1993 to January 1996, he served as Vice President of Research and
Development at Velocity Healthcare Informatics, Inc. From 1991 to 1993,
Mr. Barry served as the Information Systems Manager for the Carlson Companies,
Inc., a relationship marketing company. From 1985 to 1991, he was an
independent software consultant.
David W. McComb co-founded Velocity.com in January 1995. He has been Vice
President of Research and Development and a director since June 1995. Mr.
McComb has approximately 20 years of experience in software project management.
From 1989 to 1994, he was President of First Principles, Inc., which he founded
to develop an object-oriented business application framework. First Principles
was acquired by Velocity.com in April 1996. From June 1993 to January 1995, Mr.
McComb also served as Vice President of Research and Development for BSW
Advanced Technology, where he developed object-oriented project management
systems. From 1976 to 1989, he managed client software projects at Andersen
Consulting. He is a frequent lecturer for systems development groups and has
published numerous articles on the subject of systems development.
Michael E. Meisel was appointed Chief Sales Officer of the Company in
February 1999. Since 1987, Mr. Meisel has served as the President of Res-Q,
Inc., formerly MMS, Inc., which became a wholly owned subsidiary of
Velocity.com in May 1997. Mr. Meisel has approximately 20 years of experience
in healthcare systems product development.
M. Jan Roughan has been a director of Velocity.com since December 1998. She
joined Velocity.com as the President and Chief Executive Officer of L.I.N.C.,
Inc. in connection with Velocity.com's acquisition of L.I.N.C. in June 1997.
Ms. Roughan founded L.I.N.C. in 1987. From 1982 to 1987, she worked for the
Equitable Life Assurance Society in various capacities including Vice President
and Business Manager. Ms. Roughan is a Registered Nurse, a Certified Disability
Management Specialist, a Certified Rehabilitation Registered Nurse, a Certified
Case Manager and a Certified Developmental Disabilities Nurse.
James P. Clark has been a director of Velocity.com since November 1999. He
is currently President of the Healthcare Systems Division of Superior
Consultant Company, an independent healthcare consulting firm. Mr. Clark joined
Superior in 1990 and has served in a variety of management positions, including
Senior Vice President, Vice President and Executive Manager. Mr. Clark also
currently serves as Chairman of the Board of Directors and Chief Executive
Officer of Golf Safari, Inc., a privately-held adventure golf corporation. From
1988 to 1990 Mr. Clark was the founder and President of Health Systems
Management Associates, a healthcare information technology consulting firm.
From 1986 to 1988 he served as a senior manager with First Consulting Group, a
healthcare consulting company.
Robert S. Garvie has been a director of Velocity.com since March 1996. Mr.
Garvie has served as a director for various private companies in the medical
device and healthcare industries. In 1993, Mr. Garvie founded ArthroCare, a
medical device company. From 1992 to 1993, Mr. Garvie served as the Vice
President of Sales and Marketing for Citation Caliber, Inc., a diagnostic
medical device company. From 1991 to 1992, Mr. Garvie was a consultant for Shaw
Medical Management Group, an electrosurgical products company. From 1986 to
1991, Mr. Garvie served as Vice President, Surgical Products Division for
Haemonetics, a medical device company. Prior to Haemonetics, Mr. Garvie co-
founded Cost Containment Systems, Inc., a healthcare software company.
Gail E. Oldfather has been a director of Velocity.com since October 1995.
Since 1985, Mr. Oldfather has held various positions for GEO Communications, a
financial consulting company. Mr. Oldfather is currently the President of GEO
Communications.
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<PAGE>
Michael A. Wilson has been a director of Velocity.com since March 1998. He
is currently an independent healthcare consultant. From September 1997 to July
1999, he was President and Chief Executive Officer of the CHW Medical
Foundation in San Francisco, a division of Catholic Healthcare West. Before
joining CHW in September 1997, Mr. Wilson served for eight years as President
and Chief Administrative Officer of the Dean Medical Clinic in Madison,
Wisconsin. He is also a former president of the Medical Group Management
Association and is a member of the board of directors of Physician Insurance
Company of Wisconsin.
Board Composition
The board of directors currently consists of eight members. Velocity.com's
Amended and Restated Certificate of Incorporation, as in effect immediately
prior to the consummation of this offering, divides the board of directors into
three classes. The members of each class of directors serve for staggered
three-year terms. The board of directors is composed of (1) three Class I
directors, Messrs. Jack D. Anderson, Robert L. Anderson and David W. McComb,
whose terms expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2000; (2) three Class II
directors, Mr. Michael A. Wilson, Ms. M. Jan Roughan and Mr. James P. Clark,
whose terms expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2001; and (3) two Class III
directors, Mr. Robert S. Garvie and Mr. Gail E. Oldfather, whose terms expire
upon the election and qualification of directors at the annual meeting of
stockholders to be held in 2002.
Pursuant to our agreement with Superior Consultant Holdings Corporation,
Superior has the right to appoint a member to our board of directors and has
appointed James P. Clark to our board.
Our executive officers are appointed by the board of directors and serve
until their successors are qualified and appointed. There are no family
relationships among any of our directors or executive officers.
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee of the board of directors consists of Messrs. Oldfather,
Wilson and Clark. The audit committee reviews our financial statements and
accounting practices, makes recommendations to the board of directors regarding
the selection of independent auditors and reviews the results and scope of the
audit and other services provided by our independent auditors.
The compensation committee of the board of directors consists of Messrs.
Oldfather, Wilson and Garvie. The compensation committee makes recommendations
to our board of directors concerning salaries and incentive compensation for
our officers and employees and administers our employee benefit plans.
Director Compensation
Directors who are also executive officers do not receive additional
compensation for serving on the board or any board committee. Directors are
reimbursed for reasonable travel expenses incurred in attending meetings. There
are no formal arrangements for compensating non-employee directors. We have
compensated non-employee directors with stock options for their service on the
board. In December 1996, Robert S. Garvie received an option to purchase 5,600
shares of common stock at an exercise price of $.89 per share and Gail E.
Oldfather received an option to purchase 10,080 shares of common stock at an
exercise price of $.89 per share. In March 1998, Mr. Garvie and Mr. Oldfather
each received options to purchase 2,520 shares of common stock at an exercise
price of $2.68 per share. All of Mr. Garvie's and Mr. Oldfather's options are
fully vested. Michael A. Wilson received an option in March 1998 to purchase
1,400 shares of common stock at an exercise price of $2.68, half of which are
fully vested.
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<PAGE>
In addition, the following directors received the following options to
purchase common stock in consideration for granting bridge loans to us:
. In October 1998, Robert S. Garvie received an option to purchase 560
shares of common stock at an exercise price of $3.57 per share;
. In October 1998, Gail E. Oldfather received an option to purchase 672
shares of common stock at an exercise price of $3.57 per share; and
. In December 1998, Gail E. Oldfather received an option to purchase 560
shares of common stock at an exercise price of $3.57 per share.
See "Certain Relationships and Related Transactions" for a description of
these bridge loans.
Compensation Committee Interlocks and Insider Participation
Prior to July 1997, we did not have a separate compensation committee or
other board committee performing equivalent functions. These functions were
performed by Jack D. Anderson and William W. Shaw, III. No interlocking
relationships exist between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any other interlocking relationship existed in the past.
Executive Compensation
The following table sets forth the total compensation for services rendered
by our Chief Executive Officer and each of our seven other most highly
compensated executive officers including Ms. Roughan, who is an executive
officer of one of our wholly owned subsidiaries during the fiscal year ended
December 31, 1999. These individuals are referred to as the "named executive
officers." The titles listed below are the titles of the named executive
officers as of December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------------------
Securities
Name and Principal Position Salary Bonus Underlying Options (#)
- --------------------------- ---------- -------------------------------
<S> <C> <C> <C>
Jack D. Anderson, Chairman of
the Board and Chief Executive
Officer........................ $ 120,000 (1) $ -- --
William W. Shaw, III, President,
Secretary and Treasurer........ 120,000 (1) -- 9,800
William H. Matthews, Chief
Financial Officer.............. 125,000 (2) -- --
Robert L. Anderson, Senior Vice
President...................... 120,000 (1) -- --
Michael J. Barry, Chief
Information Officer............ 120,000 (3) -- 9,800
David W. McComb, Vice President,
Research and Development....... 120,000 (1) -- --
Michael E. Meisel, Chief Sales
Officer; President and CEO of
Res-Q, Inc..................... 150,000 67,169 2,240
M. Jan Roughan, President and
Chief Executive Officer of
L.I.N.C., Inc.................. 175,000 5,102 1,960
</TABLE>
- --------
(1) Includes $40,000 of salary accrued during fiscal year 1999 but has not yet
been paid.
(2) Includes $31,250 of salary accrued during fiscal year 1999 but has not yet
been paid.
(3) Includes $30,000 of salary accrued during fiscal year 1999 but has not yet
been paid.
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<PAGE>
Option Grants in Fiscal Year 1999
The following table sets forth grants of stock options to each of the named
executive officers during the fiscal year ended December 31, 1999. The
potential realizable value is calculated by assuming that the initial public
offering price appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price on the last day
at the appreciated price. The 5% and 10% assumed annual rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock prices.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (2)
---------------------------------------------------- ---------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Expiration
Name Granted Fiscal Year (1) Exercise Price Date 5% 10%
- ---- ---------- --------------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Anderson........ -- -- -- -- -- --
William W. Shaw, III.... 4,200 1.96% $3.57 03/02/09 $ 53,419 $ 93,941
5,600 2.61% 4.46 08/06/09 $ 66,242 $ 120,271
William H. Matthews..... 2,240 1.04% 4.46 04/21/09 $ 26,496 $ 48,108
1,380 .64% 4.46 06/22/09 $ 16,324 $ 29,638
50,400 23.57% 4.46 06/22/09 $ 596,181 $ 1,082,441
Robert L. Anderson...... -- -- -- -- -- --
Michael J. Barry........ 4,200 1.96% 3.57 03/02/09 $ 53,420 $ 93,941
5,600 2.61% 4.46 08/06/09 $ 66,242 $ 120,271
David W. McComb......... -- -- -- -- -- --
Michael E. Meisel....... 2,240 1.04% 3.57 03/02/09 $ 28,491 $ 50,102
M. Jan Roughan.......... 1,960 .92% 3.57 03/02/09 $ 24,929 $ 43,839
</TABLE>
- --------
(1) In 1999, we granted options to purchase an aggregate of 368,917 shares of
common stock to employees.
(2) The potential realizable value is calculated by assuming that the initial
public offering price of $10.00 per share appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price. The potential realizable value computation is net of the applicable
exercise price, but does not take into account applicable federal or state
income tax consequences and other expenses of option exercises or sales of
appreciated stock. The values shown do not consider non-transferability or
termination of the options upon termination of such employee's employment
with Velocity.com.
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<PAGE>
Option Exercises in Fiscal Year 1999 and Fiscal Year-End Option Values
The following table sets forth summary information with respect to
exercisable and unexercisable stock options held as of December 31, 1999 by
each of the named executive officers and with respect to the fiscal year ended
December 31, 1999. None of the named executive officers exercised options in
the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-
Unexercised Options Money Options at
at December 31, 1999 December 31, 1999 (2)
---------------------- -----------------------
Name Vested (1) Unvested Vested Unvested
- ---- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Jack D. Anderson................... -- -- -- --
William W. Shaw, III............... 149,333 6,067 $1,430,658 $ 40,672
William H. Matthews................ 3,620 50,400 $ 20,055 $ 279,216
Robert L. Anderson................. -- -- -- --
Michael J. Barry................... 149,333 6,067 $1,430,658 $ 40,672
David W. McComb.................... -- -- -- --
Michael E. Meisel.................. 933 4,107 $ 6,830 $ 28,070
M. Jan Roughan..................... -- 1,960 -- $ 12,603
</TABLE>
- --------
(1) Exercisable refers to those options which will be vested and exercisable
immediately upon completion of this offering, while "unexercisable" refers
to those options which will be unvested at such time.
(2) Value is determined by subtracting the exercise price from the fair market
value of the common stock based on an assumed initial public offering price
of $10.00, multiplied by the number of shares underlying the options.
Employment Agreements and Change of Control Arrangements
Jack D. Anderson entered into an employment agreement with Velocity.com on
January 1, 1996. Mr. Anderson's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Anderson or the company. Under the terms of his employment
agreement, Mr. Anderson receives a base salary of $120,000, subject to change
at the sole discretion of the board of directors. In addition, the board of
directors, or a duly appointed committee thereof will, no less than once
annually, determine if the award of a bonus is warranted and the amount of such
bonus, if any. If we terminate Mr. Anderson's employment without cause or if
Mr. Anderson resigns for good reason, upon a change of control or due to
disability or death, he would be entitled to receive his then existing base
salary for a period of 18 months from the date of termination. In addition, Mr.
Anderson would be entitled to his annual bonus, prorated to his date of
termination, and immediate and full vesting of all outstanding stock options
granted through any termination date. The terms of Mr. Anderson's employment
agreement also provide that Mr. Anderson will not, during the course of his
employment and the 18 months following the date of the termination of his
employment with us: (1) engage or otherwise have a financial interest in any
business activity which is in competition with us or (2) solicit our employees.
William W. Shaw, III entered into an employment agreement with Velocity.com
on June 1, 1996. Mr. Shaw's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Shaw or the company. Under the terms of his employment agreement,
Mr. Shaw receives a base salary of $120,000, subject to change at the sole
discretion of the board of directors. In addition, the board of directors, or a
duly appointed committee thereof will, no less than once annually, determine if
the award of a bonus is warranted and the amount of such bonus, if any.
Pursuant to his employment agreement, we issued Mr. Shaw options to purchase up
to 140,000 shares of our common stock and he is eligible for future issuances
at the discretion of the board of directors. If we terminate Mr. Shaw's
employment without cause or if Mr. Shaw resigns for good reason, upon a change
of control or due to disability or death, he would be entitled to receive his
then existing base salary for a period of 18 months from the date of
termination. In addition, Mr. Shaw would be entitled to his annual bonus,
including the cash value of shares issued, prorated to his date of termination,
and immediate and full vesting of all outstanding stock
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<PAGE>
options granted through the termination date. The terms of Mr. Shaw's
employment agreement also provide that Mr. Shaw will not, during the course of
his employment and the 18 months following the date of the termination of his
employment with us: (1) engage or otherwise have a financial interest in any
business activity which is in competition with us or (2) solicit our employees.
William H. Matthews entered into an employment agreement with Velocity.com
on June 17, 1999. Mr. Matthew's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Matthews or the company. Under the terms of his employment
agreement, Mr. Matthews receives a base salary of $125,000 which will be
adjusted by the compensation committee within 45 days of the closing of this
offering to an amount that represents a market range salary for a public
company of our size and in our industry. If we terminate Mr. Matthews'
employment without cause or if Mr. Matthews resigns for good reason, upon a
change in control or upon a material breach of the employment agreement by us,
he would be entitled to receive his then existing base salary for a period of
nine months from the date of termination. Pursuant to his employment agreement,
we issued to Mr. Matthews options to purchase up to 50,400 shares of our common
stock at an option price of $4.46 per share and he is eligible for future
issuances. Upon the occurrence of a change of control before June 20, 2000,
fifty percent of Mr. Matthews' remaining unvested options will vest. Should a
change of control occur after June 20, 2000, all of his remaining options will
vest.
Robert L. Anderson entered into an employment agreement with Velocity.com on
January 1, 1996. Mr. Anderson's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Anderson or the company. Under the terms of his employment
agreement, Mr. Anderson receives a base salary of $120,000, subject to change
at the sole discretion of the board of directors. In addition, the board of
directors, or a duly appointed committee thereof will, no less than once
annually, determine if the award of a bonus is warranted and the amount of such
bonus, if any. If we terminate Mr. Anderson's employment without cause or if
Mr. Anderson resigns for good reason, upon a change of control or due to
disability or death, he would be entitled to receive his then existing base
salary for a period of 18 months from the date of termination. In addition, Mr.
Anderson will be entitled to his annual bonus, including the cash value of
shares issued, prorated to his date of termination, and immediate and full
vesting of all outstanding stock options granted through the termination date.
The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson
will not, during the course of his employment and the 18 months following the
date of the termination of his employment with us: (1) engage or otherwise have
a financial interest in any business activity which is in competition with us
or (2) solicit our employees.
Michael J. Barry entered into an employment agreement with Velocity.com on
January 1, 1996. Mr. Barry's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Barry or the company. Under the terms of his employment agreement,
Mr. Barry receives a base salary of $120,000, subject to change at the sole
discretion of the board of directors. In addition, the board of directors, or a
duly appointed committee thereof will, no less than once annually, determine if
the award of a bonus is warranted and the amount of such bonus, if any.
Pursuant to his employment agreement, we issued to Mr. Barry options to
purchase up to 140,000 shares of our common stock and he is eligible for future
issuances at the discretion of the board of directors. If we terminate Mr.
Barry's employment without cause or if Mr. Barry resigns for good reason, upon
a change of control or due to disability or death, he would be entitled to
receive his then existing base salary for a period of 18 months from the date
of termination. In addition, Mr. Barry would be entitled to his annual bonus,
including the cash value of shares issued, prorated to his date of termination,
and immediate and full vesting of all outstanding stock options granted through
the termination date. The terms of Mr. Barry's employment agreement also
provide that Mr. Barry will not, during the course of his employment and the 18
months following the date of the termination of his employment with us:
(1) engage or otherwise have a financial interest in any business activity
which is in competition with us or (2) solicit our employees.
M. Jan Roughan entered into an employment agreement with Velocity.com on
January 1, 1997. Ms. Roughan's employment agreement ends on December 31, 1999.
Under the terms of her employment agreement, Ms. Roughan receives a base salary
of $175,000. In addition, incentive bonuses will be awarded to
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<PAGE>
Ms. Roughan based upon net revenue realized from the sale of L.I.N.C., Inc.
software products during the preceding year. Either Velocity.com or Ms.
Roughan may terminate this agreement by giving written notice to the other
party. Pursuant to the terms of her employment agreement, if Ms. Roughan is
terminated for cause, as specified in the agreement, or upon her death, the
company is obligated to pay her base salary and benefits through the effective
date of termination, or the date of her death, as applicable, plus an
additional 12 months of base salary and benefits. If Ms. Roughan is terminated
without cause upon a majority vote of the board of directors, she is entitled
to the greater of her base salary and benefits through the term of the
agreement or 12 months of her then base salary and benefits. The terms of Ms.
Roughan's employment agreement also provide that she will not, during the
course of her employment and the 12 months following the date of the
termination of her employment with us: (1) engage or otherwise have a
financial interest in any business activity which is in competition with us or
(2) solicit our employees.
Limitation of Liability and Indemnification Matters
Our bylaws limit the personal liability of our directors to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and
officers, provided that this provision does not eliminate or limit the
liability of a director for the following:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions;
. any transaction from which the director derived an improper personal
benefit;
. if the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests; or
. with respect to any criminal action or proceeding, if the officer or
director had reasonable cause to believe his conduct was unlawful.
We believe that indemnification provisions under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties.
1999 Equity Incentive Plan
In November, 1999 our board of directors adopted, subject to stockholder
approval, the 1999 Equity Incentive Plan. A total of 2,800,000 shares of
common stock of the Company have been reserved for issuance under the 1999
Plan. The shares reserved under the 1999 Plan shall include those shares which
remain available for issuance under the 1996 Stock Option/Stock Issuance Plan
and the 1997 Stock Option/Stock Issuance Plan upon the closing of this
offering. In addition, the share reserve will be increased annually on the
date of the Company's annual meeting by the lesser of either (1) the sum of
(A) 2% of the outstanding shares on the date of the annual meeting plus (B)
the number of shares subject to an option under either the 1996 Plan or the
1997 Plan which expires unexercised; or (2) 5% of the shares of the Company's
total outstanding shares on the date the 1999 Plan was adopted. When a stock
award expires or is terminated before its is exercised, the shares not
acquired pursuant to the stock awards shall again become available for
issuance under the 1999 Plan.
The 1999 Plan permits the grants of options to directors, officers,
employees and consultants and advisors. Options may be either incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, or nonstatutory stock options. In addition, the 1999
Plan permits the grant of stock bonuses and rights to purchase restricted
stock.
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<PAGE>
The 1999 Plan is administered by the board of directors. The board of
directors may delegate its authority to administer the 1999 Plan to the
compensation committee. The administrator has the authority to select the
eligible persons to whom award grants are to be made, to designate the number
of shares to be covered by each award, to determine whether an option is to be
an ISO or a nonstatutory stock option, to establish vesting schedules, to
specify the exercise price and the type of consideration to be paid upon
exercise and to specify other terms.
In general, the exercise price of an ISO cannot be less than 100% of the
fair market value of the common stock on the date of grant; provided, however,
that for a person who at the time of grant owns 10% of the total voting power
of the Company, the exercise price shall be at least 110% of the fair market
value on the date of grant. The exercise price for a nonstatutory stock option
cannot be less than 85% of the fair market value of the common stock on the
date of grant. In addition, the aggregate fair market value, determined at the
grant date, of an ISO that are exercisable for the first time during a calendar
year, under the 1999 Plan and all of our other stock plans may not exceed
$100,000.
The maximum term of options granted under the 1999 Plan is 10 years. In the
case of a 10% stockholder, the term of an ISO must not exceed five years from
the date of grant. Unless the terms of the stock option agreement provide for
earlier termination, an option shall expire three months after the termination
of an optionholder's service. However, if an optionholder is permanently
disabled or dies during his or her service, that person's options may be
exercised up to 12 months following disability or 18 months following death.
Generally, an optionholder may not transfer a stock option other than by
will or the laws of descent or distribution unless the optionholder holds a
nonstatutory stock option that provides otherwise. However, an optionholder may
designate a beneficiary who may exercise the option following the
optionholder's death.
Upon the completion of this offering, subject to certain exceptions, each
non-employee director will automatically be granted an option to purchase
10,000 shares of common stock. Any individual who becomes a non-employee
director after this offering will automatically receive this initial grant upon
being elected to the board of directors. On each annual meeting of each year,
commencing in calendar year 2001, any person who is then a non-employee
director will automatically be granted an option to purchase 2,500 shares of
common stock, provided that if any non-employee director that had not served in
that capacity for the entire period since the preceding annual meeting, then
the number of shares subject to the annual grant shall be reduced, pro rata,
for each full quarter the person did not serve during the previous period.
Initial grants and annual grants vest and become immediately exercisable upon
grant.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to specific
employees in a taxable year to the extent the compensation exceeds $1,000,000.
When we become subject to Section 162(m), the board of directors may not grant
awards under the 1999 Plan to an employee covering an aggregate of more than
1,200,000 shares in any calendar year.
In the event of certain changes in control, all outstanding options under
the 1999 Plan either will be assumed, continued or substituted for by any
surviving entity. If the surviving entity determines not to assume, continue or
substitute for such awards, the vesting provisions of such stock awards will be
accelerated and such stock awards will be terminated upon the change of control
if not previously exercised.
The board of directors has the authority to amend or terminate the 1999
Plan; provided, however, that no amendment or termination of the 1999 Plan may
adversely affect the rights and obligations with respect to options or unvested
awards unless the participant consents to such an amendment or modification.
Amendments will generally be submitted for stockholder approval only to the
extent required by applicable law.
As of February 29, 2000 no awards had been issued under the 1999 Plan.
Employee Stock Purchase Plan
In November, 1999, the board of directors adopted, subject to stockholder
approval, the 1999 Employee Stock Purchase Plan. A total of 300,000 shares of
common stock has been authorized for issuance under the
55
<PAGE>
Purchase Plan. The share reserve will increase automatically every year,
starting on January 1, 2001, by 150,000 shares. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Internal Revenue Code of 1986, as amended. Under the Purchase Plan,
eligible employees will be able to purchase common stock at a discount price in
periodic offerings. The Purchase Plan will commence on the effective date of
this initial public offering.
Unless otherwise determined by the board of directors, all employees are
eligible to participate in the Purchase Plan so long as they are employed by us
(or a subsidiary designated by the board of directors) for at least 20 hours
per week and are customarily employed by us (or a subsidiary designate by the
board of directors) for at least five months per calendar year.
Under the Purchase Plan, employees who participate in an offering may have
up to 15% of their earnings for the period of that offering withheld. The
amount withheld is used at the end of the offering period to purchase shares of
common stock. The price paid for common stock at the commencement date of that
offering period will equal the lower of 85% of the fair market value of the
common stock at the commencement date of that offering period or 85% of the
fair market value of the common stock on the relevant purchase date. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment.
Upon changes in control of the Company, the board of directors has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right substituted by the successor entity or the board of
directors may provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control
transaction.
The board of directors has the authority to amend or terminate the Purchase
Plan; provided, however, that no amendment or termination of the Purchase Plan
may adversely affect any outstanding rights to purchase common stock.
Amendments will generally be submitted for stockholder approval only to the
extent required by law.
1997 Stock Option/Stock Issuance Plan
In November 1997, the board of directors adopted, and the stockholders
approved, the 1997 Stock Option/Stock Issuance Plan. As of December 31, 1999,
an aggregate of 827,967 shares of common stock were authorized for issuance
under the 1997 Plan. This share reserve will automatically be increased on the
first business day of each calendar year by an amount equal to 2% of the total
outstanding shares of common stock on the last business day of the immediately
preceding calendar year. No incentive stock option may be granted on the basis
of the annual share increases. When a stock award expires, is terminated before
it is exercised or is cancelled, the shares set aside for that award are
returned to the pool of shares available for future awards. Shares that are
issued when an award is exercised and that are subsequently repurchased by us
will again become available for future awards.
The 1997 Plan permits the grant of options to employees, non-employee
directors, and consultants and other independent advisors to the company.
Options may be either ISOs within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or nonstatutory stock options. In addition,
the 1997 Plan permits the grant of stock bonuses and rights to purchase
restricted stock.
The 1997 Plan is administered by the board of directors. The board of
directors may delegate its authority to administer the 1997 Plan to a committee
of two or more board members appointed by the board of directors. The
administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an ISO or nonstatutory stock
option, to establish vesting schedules, to specify the exercise price of
options and the type of consideration to be paid upon exercise and to specify
other terms of awards.
In general, the stock options granted under the 1997 Plan may not exceed 10
years. An optionholder may not transfer a stock option other than by will or
the law of descent or distribution. The exercise price for an
56
<PAGE>
ISO cannot be less than 100% of the fair market value of the common stock on
the date of grant. The exercise price for nonstatutory stock options cannot be
less than 85% of the fair market value of the common stock on the date of
grant. In the event the optionholder is a 10% stockholder, then the exercise
price per share shall not be less than 110% of the fair market value of common
stock on the date of grant.
Unless the terms of an optionholder's stock option agreement provide for
earlier termination, in the event an optionholder's service relationship with
us, or any affiliate of ours, ceases due to disability or death, the
optionholder (or his beneficiary) may exercise any vested options up to 12
months after the date such service relationship ends. If an optionholder's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionholder may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
up to three months from cessation of service. Should an optionholder's
relationship with us be terminated for misconduct, then all outstanding options
held by the optionholder will terminate immediately and cease to remain
outstanding.
ISOs may be granted only to our employees. The aggregate fair market value,
determined at the time of grant, of shares of our common stock with respect to
which ISOs are exercisable for the first time by an optionholder during any
calendar year under all of our stock plans may not exceed $100,000. If any ISO
is granted to any employee who at the time of the grant owns or is deemed to
own stock possessing more than 10% of the total combined voting power of the
Company or any of its affiliates, the term of the ISO award may not exceed five
years from the date of grant.
In the event of certain changes in control, all outstanding options under
the incentive plan either may be assumed, continued or substituted for by any
surviving entity. If the surviving entity determines not to assume, continue or
substitute for such awards, the vesting provisions of such stock options will
be accelerated and such stock options will be terminated upon the change in
control if not previously exercised. The portion of any ISO accelerated by a
change in control will remain exercisable as an ISO only to the extent the
$100,000 limitation is not exceeded. To the extent this dollar limitation is
exceeded, the accelerated portion of such option will be exercisable as a
nonstatutory stock option under the Federal tax laws. Even if the surviving
entity does assume or substitute outstanding stock awards, if the holder of an
award is terminated other than for misconduct, or constructively terminated,
within a specified period not more than 18 months following the change in
control, the holder's award will vest in full.
The terms of any stock bonuses or restricted stock purchase awards granted
under the 1997 Plan will be determined by the administrator. However, the
administrator may not impose a vesting schedule which is more restrictive than
20% per year, with initial vesting to occur no later than one year after the
issuance date. Such limitation shall not apply to any common stock issuance
made to officers, non-employee directors or consultants. The administrator may
award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the 1997 Plan may be subject to
repurchase by us. The purchase price of restricted stock under any restricted
stock purchase agreement will not be less than 85% of the fair market value of
the company's common stock on the date of grant. However, the purchase price
per share of common stock for a 10% stockholder shall not be less then 110% of
the fair market value on the date of grant.
Upon a change in control, all outstanding repurchase rights will terminate
and the shares of common stock subject to those rights will immediately vest in
full, except to the extent the repurchase rights are assigned to the successor
entity or such accelerated vesting is precluded by limitations imposed by the
administrator at the time the repurchase right was issued. In addition, the
administrator will have full and complete discretion with regard to outstanding
shares to provide that repurchase rights will automatically terminate on an
accelerated basis and that the shares shall immediately vest in the event the
participant's relationship with the company should terminate by reason of the
change in control within no more than 18 months following the effective date of
the change in control.
The board of directors may amend or modify the 1997 Plan at any time.
However, no such amendment or modification shall adversely affect the right and
obligations with respect to options or unvested awards unless the participant
consents to such an amendment or modification. In addition, certain amendments
may require stockholder approval.
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<PAGE>
As of February 29, 2000, the Company had issued and outstanding under the
1997 Plan options to purchase 782,204 shares of common stock.
On November 23, 1999, the board voted to terminate the future issuance of
options under the 1997 Plan upon the closing of this offering. All options
outstanding as of the closing of this offering will remain outstanding subject
to the terms of the 1997 Plan. All shares reserved for future issuance under
the 1997 Plan but not issued as of the closing of this offering will be added
to those shares reserved for issuance under the 1999 Plan.
1996 Stock Option/Stock Issuance Plan
On April 30, 1996, the board of directors adopted, and the stockholders
approved, the 1996 Stock Option/Stock Issuance Plan. On April 22, 1997, the
board of directors adopted, and on November 21, 1997, the stockholders
approved, an amendment and restatement of the incentive plan. A maximum of
560,000 shares are authorized under the 1996 Plan. The authorized share reserve
is comprised of (1) 420,000 shares originally available under the incentive
plan and (2) an additional 140,000 shares of common stock authorized by the
board on April 22, 1997, subject to stockholder approval. When a stock award
expires, is terminated before it is exercised or is cancelled, the shares set
aside for that award are returned to the pool of shares available for future
awards. Awards may be granted in excess of the number of shares of common stock
then available for issuance under the 1996 Plan, provided any excess shall be
held in escrow until stockholder approval is obtained increasing the number of
shares of common stock available for issuance. If approval is not obtained
within 12 months after the issuance of the excess is made, then (1) any
unexercised options granted on the basis of the excess will terminate and cease
to be outstanding and (2) the company will refund the exercise or purchase
price plus interest.
The 1996 Plan permits the grant of options to employees, non-employee
directors and consultants. Options may be either ISOs within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory
stock options. In addition, the 1996 Plan permits the grant of stock bonuses
and rights to purchase restricted stock.
The 1996 Plan is administered by the board of directors. The board of
directors may delegate its authority to administer the 1996 Plan to a committee
of two or more board members appointed by the board of directors. The
administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an ISO or nonstatutory stock
option, to establish vesting schedules, to specify the exercise price of
options and the type of consideration to be paid upon exercise and to specify
other terms of awards.
In general, the stock options granted under the 1996 Plan may not exceed 10
years. An optionholder may not transfer a stock option other than by will or
the law of descent or distribution. However, a nonstatutory option may be
assigned in whole or in part during optionholder's lifetime in accordance with
the terms of a qualified domestic relations order. The exercise price for an
ISO cannot be less than 100% of the fair market value of the common stock on
the date of grant. The exercise price for nonstatutory stock options cannot be
less than 85% of the fair market value of the common stock on the date of
grant. In the event the optionholder is a 10% stockholder, then the exercise
price per share will not be less than 110% of the fair market value of common
stock on the date of grant.
Unless the terms of an optionholder's stock option agreement provide for
earlier termination, in the event an optionholder's service relationship with
us, or any affiliate of ours, ceases due to death, the optionholder's
beneficiary may exercise any vested options up to 12 months after the date such
service relationship ends. In the event an optionholder's service relationship
with us, or any affiliate of ours, ceases due to disability, the optionholder
may exercise any vested option up to six months (12 months for permanent
disability) after the cessation of service. If an optionholder's relationship
with us, or any affiliate of ours, ceases for any reason other than disability
or death, the optionholder may (unless the terms of the stock option agreement
provide for earlier termination) exercise any vested options up to three months
from cessation of service. Should an optionholder's relationship with us be
terminated for misconduct, then all outstanding options held by the
optionholder will terminate immediately and cease to remain outstanding.
58
<PAGE>
ISOs may be granted only to our employees. The aggregate fair market value,
determined at the time of grant, of shares of our common stock with respect to
which incentive stock options are exercisable for the first time by an
optionholder during any calendar year under all of our stock plans may not
exceed $100,000. If any ISO is granted to any employee who at, the time of the
grant, owns or is deemed to own stock possessing more than 10% of the total
combined voting power of the Company or any of its affiliates, the term of the
ISO award may not exceed five years from the date of grant.
In the event of certain changes in control, all outstanding options under
the incentive plan may be assumed by any surviving entity. If the surviving
entity determines not to assume the options, they will terminate and no longer
be outstanding on the effective date of such change in control.
The terms of any stock bonuses or restricted stock purchase awards granted
under the 1996 Plan will be determined by the administrator. However, the
administrator may not impose a vesting schedule which is more restrictive than
20% per year, with initial vesting to occur no later than one year after the
issuance date. Such limitation shall not apply to any common stock issuance
made to officers, non-employee directors or consultants. The administrator may
award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the 1996 Plan may be subject to
repurchase by the company. The purchase price of restricted stock under any
restricted stock purchase agreement will not be less than 85% of the fair
market value of the company's common stock on the date of grant. However, the
purchase price per share of common stock for a 10% stockholder will not be less
then 110% of the fair market value on the date of grant.
Upon a change in control, all outstanding repurchase rights will terminate
to the extent the surviving entity does not accept the assignment of the
repurchase rights.
The board of directors may amend or modify the 1996 Plan at any time.
However, no such amendment or modification shall adversely affect the right and
obligations with respect to options or unvested awards unless the participant
consents to such an amendment or modification. In addition, the board of
directors will not without the approval of the stockholders (1) increase the
maximum number of shares issuable under the 1996 Plan (except for permissible
adjustments in the event of certain changes in the Company's capitalization),
(2) materially modify the eligibility requirements for participation or (3)
materially increase the benefits accruing to participants.
As of February 29, 2000, the Company had issued and outstanding under the
1996 Plan options to purchase 459,376 shares of common stock.
On November 23, 1999, the board voted to terminate the future issuance of
options under the 1996 Plan upon the closing of this offering. All options
outstanding as of the closing of this offering will remain outstanding subject
to the terms of the 1996 Plan. All shares reserved for future issuance under
the 1996 Plan but not issued as of the closing of this offering will be added
to those shares reserved for issuance under the 1999 Plan.
401(k) Plan
We sponsor a 401(k) plan, a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code of 1986, as amended. All
employees who exceed 20 hours per week and 1,000 hours per year and who
complete one month of service are eligible to participate. Participants may
make pre-tax contributions
to the 401(k) plan of up to 20% of their eligible earnings, subject to a
statutorily prescribed annual limit ($10,000 in calendar year 1999). Under the
401(k) plan, each employee is fully vested in his or her deferred salary
contributions. Employee contributions are held and invested by the 401(k)
plan's trustee. The 401(k) plan also permits us to make matching contributions
and profit-sharing contributions, subject to established limits.
Each participant's contributions and the corresponding investment earnings
are generally not taxable to the participants until withdrawn. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1999, some of our directors, executive officers and
affiliates have entered into transactions with us as follows:
Purchase Of Capital Stock
<TABLE>
<CAPTION>
Number of
Shares of
Common Stock
Issuable
After
Conversion
Date of Number of of Preferred
Name Purchase Type of Security Price per Share Shares Stock (6)
- ---- -------- ------------------------ --------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Jack D. Anderson (1).... 08/10/99 Series C Preferred Stock $4.91 29,001 29,001
William H. Matthews
(2).................... 01/06/99 Series C Preferred Stock 4.91 4,000 4,000
06/07/99 Series C Preferred Stock 4.91 8,399 8,399
07/07/99 Series C Preferred Stock 4.91 5,600 5,600
07/12/99 Series C Preferred Stock 4.91 5,600 5,600
08/02/99 Series C Preferred Stock 4.91 11,200 11,200
Michael E. Meisel....... 04/01/99 Series C Preferred Stock 4.91 2,800 2,800
Robert S. Garvie (3).... 02/19/99 Series C Preferred Stock 4.91 17,421 17,421
04/05/99 Common Stock (5) .89 5,600 --
04/05/99 Common Stock (5) 2.68 2,520 --
04/05/99 Common Stock (5) 3.57 560 --
04/05/99 Series C Preferred Stock 4.91 6,485 6,485
08/05/99 Series C Preferred Stock 4.91 20,363 20,363
Gail E. Oldfather (4)... 03/31/99 Series C Preferred Stock 4.91 5,600 5,600
07/20/99 Series C Preferred Stock 4.91 42,000 42,000
</TABLE>
- --------
(1) Includes shares purchased by Mr. Anderson's spouse.
(2) Includes shares purchased by Mr. Matthews' relatives.
(3) Includes shares purchased by Omeah Ltd. Partnership. Mr. Garvie is a
General Partner of Omeah Ltd. Partnership.
(4) Includes shares purchased on behalf of Mr. Oldfather's spouse and
relatives.
(5) Shares purchased pursuant to the exercise of stock options.
(6) The shares of the Company's Preferred Stock will convert into shares of
common stock on a one-to-one basis effective upon the closing of this
offering.
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<PAGE>
Since January 1, 1999, we have granted options to purchase common stock to
some of our directors, executive officers and affiliates as follows:
Issuance Of Stock Options
<TABLE>
<CAPTION>
Name Date Granted Exercise Price Options
- ---- ------------ -------------- -------
<S> <C> <C> <C>
Jack D. Anderson............................ 01/11/00 9.00 5,000
William W. Shaw, III........................ 03/02/99 3.57 4,200
08/06/99 4.46 5,600
01/11/00 9.00 15,000
William E. Matthews......................... 04/21/99 4.46 2,240
06/22/99 4.46 1,380
06/22/99 4.46 50,400
01/11/00 9.00 6,200
Robert L. Anderson.......................... 01/11/00 9.00 5,000
Michael J. Barry............................ 03/02/99 3.57 4,200
08/06/99 4.46 5,600
01/11/00 9.00 8,750
David W. McComb............................. 01/11/00 9.00 5,000
Michael E. Meisel........................... 03/02/99 3.57 2,240
01/11/00 9.00 5,000
M. Jan Roughan.............................. 03/02/99 3.57 1,960
01/11/00 9.00 3,000
Gail E. Oldfather........................... 08/06/99 4.46 15,120
</TABLE>
Lock-Up Agreements
Each of the individuals listed above have entered into lock-up agreements
pursuant to which they have agreed not to, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of any shares of common stock, preferred stock or any
substantially similar securities or securities convertible into or exchangeable
or exercisable for shares of common stock, preferred stock or any substantially
similar securities for a period of 180 days from the date of this prospectus
without the prior written consent of the underwriter. The underwriters may, at
any time and without notice, waive the terms of these lock-up agreements.
Loan From Jack D. Anderson and Peggy L. Anderson to Velocity.com
On September 30, 1997, Mr. and Mrs. Anderson loaned $60,000 to us at an
interest rate of 6.5% per annum. As of December 31, 1999, the Company has
repaid a total of approximately $56,371 of the loan, approximately $31,453 of
which was repaid in cash and approximately $24,917 of which was repaid in the
form of 5,073 shares of Series C preferred stock. The remaining balance on this
loan is approximately $11,218.
Agreement with Superior Consultant Holdings Corporation
We entered into a marketing alliance with Superior Consultant Holdings
Corporation in September 1999, under which Superior will introduce, promote and
demonstrate our ASP software applications. Pursuant to this agreement, we
granted Superior an option to purchase 112,000 shares of our common stock at an
exercise price of $10.71 per share. See "Business--Strategic Relationships and
Alliances" for a description of this agreement. James P. Clark, a director of
Velocity.com, is the president of Superior's Healthcare Systems Division.
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<PAGE>
Indemnity and Subrogation Agreement between Michael E. Meisel and Velocity.com
On January 1, 1998, Michael E. Meisel entered into an Indemnity and
Subrogation Agreement with us in connection with a line of credit agreement
between our wholly owned subsidiary Res-Q, Inc. (formerly MMS, Inc.) and Wells
Fargo Bank. This line of credit was assigned to and assumed by us upon the
acquisition of MMS, Inc. In connection with this line of credit, Mr. Meisel
provided a personal guaranty. Velocity.com agreed to indemnify Mr. Meisel for a
maximum amount of $200,000, the current amount of Mr. Meisel's guaranty plus
accrued interest, for any deficiency in repayment that he may suffer after
making a claim for reimbursement from the principal borrower.
Promissory Note dated April 1, 1999 between Michael E. Meisel and Velocity.com
In connection with our acquisition of Res-Q, Inc. (formerly MMS, Inc.),
Velocity.com and Mr. Meisel executed two $50,000 promissory notes on April 4,
1997 and December 1, 1997, respectively. These notes were consolidated on April
1, 1999. Under this consolidated promissory note, we are obligated to pay Mr.
Meisel $105,187, plus interest at the rate of 10% per annum, compounded
monthly. This note becomes due and payable on June 30, 2000 and can be prepaid
at any time in whole or in part without premium or penalty. As of September 30,
1999, the outstanding balance of this note was $108,256. In August 1999, we
repaid $5,000 of this note. We will repay the entire outstanding balance of
this note from the proceeds of this offering.
Line of Credit Agreement between First National Bank and Jack D. Anderson,
David W. McComb and Robert L. Anderson
On October 28, 1997, First National Bank extended a line of credit in the
amount of $100,000 to three of our executive officers and directors, Jack D.
Anderson, David W. McComb and Robert L. Anderson. The terms of the line of
credit are for a term for one year at a variable rate of interest, currently
10%. The line of credit has been extended to September 30, 2000. Messrs.
Anderson, McComb and Anderson have borrowed $100,000 under this line of credit
for our benefit. We have assumed the obligation to repay this loan. Messrs.
Anderson, McComb and Anderson have executed promissory notes with First
National Bank and have personally guaranteed this loan.
Promissory Notes dated June 1, 1997 and December 1, 1997 between M. Jan Roughan
and Velocity.com
In connection with our acquisition of L.I.N.C., Inc. on June 23, 1997,
Velocity.com and Ms. Roughan executed two promissory notes in the amount of
$50,000 each on June 1, 1997 and December 1, 1997. As of December 31, 1999, the
total balance of these notes was $121,057. In August 1999, we repaid a total of
$5,000 of these notes. We will repay the entire outstanding balance of these
notes from the proceeds of this offering.
Promissory Note dated October 2, 1998 between Robert S. Garvie and Velocity.com
On October 2, 1998, Mr. Garvie loaned us $20,000 at an interest rate of 12%
per annum. As consideration for this loan, we granted Mr. Garvie options to
purchase 560 shares of common stock at an exercise price of $3.57 per share. We
have repaid this loan.
Promissory Note dated November 25, 1998 between Gail B. Oldfather and
Velocity.com
On November 25, 1998, Mr. Oldfather loaned us $20,000 at an interest rate of
12% per annum. As consideration for this loan, we granted Mr. Oldfather options
to purchase 560 shares of common stock at an exercise price of $3.57 per share.
We have repaid this loan.
Promissory Note dated October 19, 1998 between Gail B. Oldfather and
Velocity.com
On October 19, 1998, Mr. Oldfather loaned us $24,000 at an interest rate of
12% per annum. As consideration for this loan, we granted Mr. Oldfather options
to purchase 672 shares of common stock at an exercise price of $3.57 per share.
We have repaid this loan.
62
<PAGE>
Promissory Note dated February 17, 2000 between Gail B. Oldfather and
Velocity.com
On February 17, 2000, Mr. Oldfather loaned us $100,000 at an interest rate
of 12% per annum. As consideration for this loan, we granted Mr. Oldfather
warrants to purchase 12,500 shares of common stock at an exercise price of
$9.00 per share.
Promissory Note dated February 28, 2000 between Robert S. Garvie and
Velocity.com
On February 28, 2000, Mr. Garvie loaned us $100,000 at an interest rate of
10% per annum. As consideration for this loan, we granted Mr. Garvie warrants
to purchase 12,500 shares of Common Stock at an exercise price of $9.00 per
share.
Other Related Party Transactions
We have entered into an employment agreement with William H. Matthews, a
named executive officer. See "Management--Employment Agreements and Change of
Control Arrangements."
Indemnification Agreements
We intend to enter into indemnification agreements with our officers and
directors containing provisions that require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors, other than
liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
We believe that all transactions described in this section "Certain
Relationships and Related Transactions" were made on terms no less favorable to
us than would have been obtained from unaffiliated third parties. All future
transactions, if any, with our executive officers, directors and affiliates
will be on terms no less favorable to us than could be obtained from unrelated
third parties and will be approved by a majority of the board of directors and
by a majority of the disinterested members of the board of directors.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of February 29, 2000 and as adjusted to
reflect the sale of common stock offered by us pursuant to this offering. The
following table lists:
. each person known by us to beneficially own more than 5% of our
outstanding common stock;
. each director;
. each named executive officer; and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The address for each listed director and officer is
Velocity.com, Inc., 330 Townsend Street, Suite 206, San Francisco, California,
94107-1630. Except as indicated by footnote, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares
of common stock underlying options that are exercisable within 60 days of
February 29, 2000, but excludes shares of common stock underlying options held
by any other persons. Percentage of beneficial ownership prior to the offering
is based on 7,729,506 shares of common stock outstanding as of February 29,
2000 after giving effect to the conversion of our currently outstanding
preferred stock. Percentage of beneficial ownership after the offering is based
on 10,729,506 shares outstanding after the offering.
<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Owned
Beneficially --------------------------------
Name of Beneficial Owner Owned Prior to Offering After Offering
- ------------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Jack D. Anderson.............. 1,286,169 (1) 16.63% 11.98%
William W. Shaw, III.......... 199,910 (2) 2.53% 1.84%
William H. Matthews........... 55,689 (3) * *
Robert L. Anderson............ 757,632 (4) 9.80% 7.06%
Michael J. Barry.............. 191,165 (5) 2.42% 1.76%
David W. McComb............... 521,957 (6) 6.75% 4.86%
Michael E. Meisel............. 291,563 (7) 3.77% 2.72%
M. Jan Roughan................ 146,383 (8) 1.89% 1.36%
James P. Clark................ -- * *
Robert S. Garvie.............. 132,663 (9) 1.72% 1.24%
Gail E. Oldfather............. 398,612 (10) 5.14% 3.71%
Michael A. Wilson............. 1,400 (11) * *
All directors and executive
officers as a group (12
persons)..................... 3,983,143 (12) 49.18% 35.89%
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the common
stock.
(1) Includes 127,770 shares of common stock owned by Mr. Anderson's spouse and
held in trust for the benefit of Mr. Anderson and his spouse and 5,000
shares of common stock beneficially owned as a result of options that
become exercisable within 60 days of February 29, 2000.
(2) Includes 156,666 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
(3) Includes 8,820 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
(4) Includes 25,760 shares of common stock owned by Mr. Anderson's spouse, son
and nephews and held in trust for the benefit of Mr. Anderson's son and
nephews and 5,000 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
64
<PAGE>
(5) Includes 155,416 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
(6) Includes 15,994 shares of common stock owned by Mr. McComb's spouse and
5,000 shares of common stock beneficially owned as a result of options
that become exercisable within 60 days of February 29, 2000.
(7) Includes 119,814 shares of common stock owned by Mr. Meisel's spouse and
held in trusts established for the benefit of Mr. Meisel's children, and
2,613 shares of common stock beneficially owned as a result of options
that become exercisable within 60 days of February 29, 2000.
(8) Includes 653 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
(9) Includes 2,036 shares of common stock held in trust for the benefit of Mr.
Garvie's family and 130,629 shares owned by Omeah Ltd. Partnership. Mr.
Garvie is a General Partner of Omeah Ltd. Partnership.
(10) Includes 211,179 shares held in trusts established for the benefit of Mr.
Oldfather's family, and 28,952 shares of common stock beneficially owned
as a result of options that become exercisable within 60 days of February
29, 2000.
(11) Includes 1,400 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of February 29, 2000.
(12) Includes shares described in the notes above, as applicable.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered by this prospectus,
our authorized capital stock will consist of 100,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.01 par
value.
Common Stock
As of February 29, 2000, there were 7,729,506 shares of common stock
outstanding held of record by approximately 460 stockholders, on an as-
converted basis. There will be 10,729,506 shares of common stock outstanding
after giving effect to the sale of the shares of common stock offered in this
prospectus. This number assumes no exercise of the underwriter's over-allotment
option and no exercise of options after February 29, 2000.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred
stock, the holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of legally available
funds. In the event of our liquidation, dissolution or winding up, holders of
the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preferences of any outstanding
shares of preferred stock. Holders of common stock have no preemptive rights or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
Effective upon the closing of this offering, we will be authorized to issue
5,000,000 shares of undesignated preferred stock. Our board of directors will
have the authority to issue the undesignated preferred stock in one or more
series and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing any change in control may
adversely affect the voting and other rights of holders of common stock, and
the likelihood that the holders will receive dividend payments and payments
upon liquidation. At present, we have no plans to issue any shares of preferred
stock.
Registration Rights
The Amended and Restated Investor Rights Agreement dated October 31, 1997,
provides holders of the preferred stock rights to register shares of our
capital stock. At any time after the later of six months after the effective
date of the first registration statement that we file under the Securities Act
or December 31, 2001, holders of a majority of the registrable securities, as
defined in the Investor Rights Agreement, may require us to effect registration
under the Securities Act of their Registrable Securities, subject to the board
of directors' right to defer the registration for a period of up to 120 days.
The investors also have the right, upon demand made by 25% of the holders of
registrable securities, to cause us to register their securities on Form S-3
when it becomes available to us if they propose to register securities having a
value of at least $1 million. In addition, if we propose to register securities
under the Securities Act, other than registrations on Form S-4 or Form S-8,
then any of the investors has a right, subject to quantity limitations, as
determined by the underwriter if the offering is underwritten to request that
we register such holder's registrable securities. We will bear all registration
expenses incurred in connection with registrations. We have agreed to indemnify
the investors against liabilities related to the accuracy of the registration
statement used in connection with any registration effected pursuant to the
foregoing.
66
<PAGE>
Effect of Selected Provisions of the Certificate of Incorporation and Bylaws,
and the Delaware Anti-takeover Statute
Amended and Restated Certificate of Incorporation and Bylaws
Upon the closing of this offering, our amended and restated certificate of
incorporation will provide that our board of directors be classified into three
classes of directors and all stockholder action must be effected at a duly
called meeting of stockholders and not by a consent in writing. The amended and
restated certificate of incorporation and bylaws provide that only our Chief
Executive Officer, the Chairman of the board of directors or a majority of the
members of the board of directors may call a special meeting of the
stockholders. Directors may not be removed without cause. The amended and
restated bylaws establish procedures including advance notice with regard to
the nomination of directors and stockholder proposals. These provisions of the
amended and restated certificate of incorporation and bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control.
These provisions also may have the effect of preventing changes in our
management.
The board of directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the common stock
will be subject to, and may be harmed by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding
voting stock, thereby delaying, deferring or preventing a change in control.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, plan or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
67
<PAGE>
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is LaSalle Bank N.A.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "VCTY."
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 10,729,506 shares of common stock will be outstanding,
11,179,506 shares if the underwriter exercises its over-allotment options in
full. Of these shares, the 3,000,000 shares sold in this offering, 3,450,000
shares if the underwriter's over-allotment options are exercised in full, will
be freely tradable without restriction under the Securities Act except for
shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act. The remaining 7,729,506 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act. The restricted
securities generally may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Securities Act.
Our officers, directors and stockholders holding 6,968,569 shares of common
stock have entered into lock-up agreements under which they have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of, any shares of
common stock, preferred stock or any substantially similar securities or
securities convertible into or exchangeable or exercisable for shares of common
stock, preferred stock or any substantially similar securities for a period of
180 days after the date of this prospectus without the prior written consent of
the underwriters. The underwriters do not intend to release any "affiliates" of
the Company from the lock-up agreements. The underwriters will not provide
notice of the release of any stockholder from a lock-up agreement. Following
the lock-up period and as set forth in the chart below, these shares will be
eligible for sale in the public market without registration under the
Securities Act if such sales meet the applicable conditions and restrictions of
Rule 144 as described above. As these restrictions on resale end, the market
price of our common stock could drop significantly if the holders of these
restricted shares sell them, or are perceived by the market as intending to
sell them.
<TABLE>
<CAPTION>
Date of availability for resale
Number of shares into public market
---------------- -------------------------------
<C> <S>
1,764,349 180 days after the date of this prospectus due to a lock-up
agreement our officers, directors and stockholders have with
the underwriters. However, the underwriters can waive this
restriction at any time and without notice.
5,016,769 Between 180 and 365 days after the date of this prospectus
subject to the requirements and limitations of the federal
securities laws.
</TABLE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, any person, or persons whose shares are
aggregated, including an affiliate, who has beneficially owned shares for a
period of at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of:
. 1% of the then-outstanding shares of common stock; and
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us. In
addition, a person or persons whose shares are aggregated who has not been an
affiliate of us at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. The above summary of Rule 144
is not intended to be a complete description.
69
<PAGE>
In addition, our employees, directors, officers, advisors or consultants who
were issued shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and permits affiliates to sell their Rule 701 shares without having
to comply with Rule 144's holding period restrictions, in each case commencing
90 days after the date of this prospectus.
As soon as practicable following the closing of this offering, we intend to
file a registration statement under the Securities Act to register
approximately 4,500,000 shares of common stock issuable upon the exercise of
outstanding stock options or reserved for issuance under our stock option plans
and our stock purchase plans, of which 817,572 shares subject to options under
our stock option plans will be exercisable immediately upon the closing of this
offering and an additional 22,909 shares subject to options under our stock
option plans will be exercisable within 60 days of February 29, 2000. After the
effective date of such registration statement, these shares will be available
for sale in the open market subject to the lock-up agreements described above
and, for our affiliates, to the conditions and restrictions of Rule 144.
70
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. We are obligated to sell, and the underwriters are obligated to
purchase, all of the shares offered on the cover page of this prospectus, if
any are purchased. Subject to certain conditions of the underwriting agreement,
the underwriter has agreed to purchase the shares indicated opposite its name:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Needham & Company, Inc................................................
Punk, Ziegel & Company, L.P...........................................
---------
Total............................................................... 3,000,000
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and it has for a period of 30 days
from the date of this prospectus, an over-allotment option to purchase up to
412,500 additional shares from us. If any additional shares are purchased, the
underwriters will purchase the shares in the same proportion as per the table
above.
The underwriters have advised us that the shares will be offered to the
public at the offering price indicated on the cover page of this prospectus.
The underwriters may allow selected dealers a concession not in excess of $
per share and such dealers may reallow a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the underwriter may change the offering price and the concessions. The
underwriters have informed us that they do not intend to sell shares to any
investor who has granted them discretionary authority.
We have agreed to pay to the underwriters the following fees, assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us........... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $1,484,062 in
expenses for this offering. We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.
We, our officers and directors, and our stockholders have entered into lock-
up agreements pursuant to which we and they have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose of any shares of common stock,
preferred stock or any substantially similar securities or securities
convertible into or exchangeable or exercisable for shares of common stock,
preferred stock or any substantially similar securities for a period of 180
days from the date of this prospectus without the prior written consent of the
underwriters. The underwriters may, at any time and without notice, waive the
terms of these lock-up agreements as specified in such agreements.
Prior to this offering, there has been no public market for the common stock
of Velocity.com. The initial public offering price, negotiated between
Velocity.com and the underwriters, will be based upon various
71
<PAGE>
factors such as our financial and operating history and condition, our
prospects, the prospects for our industry and prevailing market conditions.
The underwriters may engage in the following activities in accordance with
applicable securities rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. The underwriter may elect to reduce this short
position by exercising some or all of the over-allotment option.
. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the underwriters to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short-
covering transactions.
Such activities, which may be commenced or discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
In March 1998, certain entities and persons affiliated with Punk, Ziegel &
Company, L.P. at such time, including William Punk, Jr. and Punk, Ziegel &
Company Investors, LLC, a limited liability company serving as an investment
vehicle for Tarun Chandra, Barbara Horn, Roberta E. Hurst, Michael E. Knepper,
Douglas Sturmak and David Whelen purchased an aggregate of 33,762 shares of
our Series C Preferred Stock at a purchase price of $4.91 per share for an
aggregate amount of approximately $165,700. These shares of Series C Preferred
Stock were purchased for investment purposes. Such shares will convert into
33,762 shares of common stock upon the closing of this offering.
We have asked the underwriters to reserve shares for sale at the offering
price to our officers, directors, employees and other business affiliates or
related third parties. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase the
reserved shares.
72
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters
will be passed upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedule of Velocity.com, Inc. as of December 31, 1998 and 1999, and
for each of the years in the three-year period ended December 31, 1999, and the
financial statements of PSI-Med Corporation as of May 31, 1998 and 1999, and
for each of the years in the three-year period ended May 31, 1999, have been
included herein and in the registration statement in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KPMG LLP covering the December 31, 1999, Velocity.com, Inc.
consolidated financial statements contains an explanatory paragraph that states
that the Company has a significant contingent liability related to certain
sales of preferred stock as well as recurring losses from operations and a net
capital deficiency raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
The report of KPMG LLP covering the December 31, 1999, PSI-Med Corporation
financial statements contains an explanatory paragraph that states that
Velocity.com, Inc. acquired PSI-Med Corporation on September 20, 1999. As such,
the PSI-Med Corporation financial statements as of May 31, 1999 and for each of
the years in the three-year period ended May 31, 1999 do not include any
adjustments relating to the realization and classification of assets and
liabilities that might be necessary to reflect the actions or future intentions
of Velocity.com, Inc.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1, including the exhibits and
schedules thereto, under the Securities Act of 1933, as amended, with respect
to the common stock offered hereby. This prospectus does not contain all of the
information contained in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted in accordance
with the rules and regulations of the Commission. For further information about
OrganicNet and the common stock offered under this prospectus, you should
review the registration statement and the exhibits and schedules filed as a
part of the registration statement. Descriptions of contracts or other
documents referred to in this prospectus are not necessarily complete. If the
contract or document is filed as an exhibit to the registration statement, you
should review that contract or document. You should be aware that when we
discuss these contracts or documents in the prospectus we are assuming that you
will read the exhibits to the registration statement for a more complete
understanding of the contract or document. The registration statement and its
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C., 20549, and the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048.
Copies of all or any portion of the registration statement may be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a website at
www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants, such as Velocity.com, that make electronic
filings with the Commission.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements, Velocity.com, Inc.
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Deficit....................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Pro Forma Condensed Combined Financial Information,
Velocity.com, Inc. and PSI-Med Corporation
Financial Information.................................................. F-27
Condensed Combined Statements of Operations............................ F-28
Financial Statements, PSI-Med Corporation
Independent Auditors' Report........................................... F-30
Balance Sheets......................................................... F-31
Statements of Operations............................................... F-32
Statements of Stockholders' Deficit.................................... F-33
Statements of Cash Flows............................................... F-34
Notes to Financial Statements.......................................... F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Velocity.com, Inc.
We have audited the accompanying consolidated balance sheets of
Velocity.com, Inc. (a Delaware Corporation) and subsidiaries (the
Company) as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Velocity.com, Inc. and subsidiaries as of December 31, 1998 and
1999, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Notes 1 and 8 to the financial statements, the Company has a
significant contingent liability related to certain sales of preferred
stock as well as recurring losses from operations and a net capital
deficiency which have raised substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
San Francisco, California
March 3, 2000
F-2
<PAGE>
Velocity.com, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
December 31, 1999
-------------------------- ----------------
Pro forma
stockholders'
1998 1999 deficit (note 1)
------------ ------------ ----------------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 41,104 $ 566,440
Accounts receivable, net of
allowance for doubtful accounts
of $128,800 and $237,900 in
1998, and 1999, respectively... 732,370 708,497
Prepaid hosting services........ -- 471,682
Prepaid offering costs.......... -- 1,427,070
Prepaid distribution services... -- 358,784
Prepaids and other current
assets......................... 158,186 66,043
------------ ------------
Total current assets........... 931,660 3,598,516
Property and equipment, net of
accumulated depreciation of
$615,402 and $1,223,867 in 1998
and 1999, respectively........... 348,134 408,850
Intangible assets, net of
accumulated amortization of
$928,094 and $1,610,658 in 1998
and 1999, respectively........... 884,970 2,451,243
Other noncurrent assets........... 50,284 104,845
------------ ------------
$ 2,215,048 $ 6,563,454
============ ============
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' DEFICIT
---------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable................ $ 2,359,263 $ 2,066,685
Deferred revenue................ 2,372,162 2,243,408
Due to employees................ 1,162,895 865,504
Notes payable to employees and
stockholders................... 918,892 666,567
Lines of credit and note payable
to bank........................ 163,897 76,329
Current portion of capital
leases......................... 19,506 40,459
Current portion of note
payable........................ -- 46,000
Other current liabilities....... 224,695 650,281
------------ ------------
Total current liabilities...... 7,221,310 6,655,233
Long-term portion of capital
leases........................... 40,742 33,850
Long-term portion of notes payable
to employee and others........... -- 27,795
Long-term note payable............ -- 702,493
------------ ------------
Total liabilities.............. 7,262,052 7,419,371
Commitments and contingencies
Stockholders' deficit:
Series A, A-II, A-III, B and C
preferred stock, $0.01 par
value, authorized 7,840,000
shares; issued and outstanding
2,060,427 and 3,689,048 shares
in 1998 and 1999, respectively;
none pro forma; with an
aggregate liquidation
preference of $6,856,398 and
$14,990,200 in 1998 and 1999,
respectively................... 20,604 36,890 $ --
Common stock, $0.001 par value,
16,520,000 shares authorized;
3,059,509 and 3,151,840 shares
issued and outstanding in 1998
and 1999, respectively;
7,729,214 shares pro forma..... 3,060 3,152 7,729
Additional paid-in capital...... 8,257,264 18,662,568 18,694,881
Deferred compensation........... -- (67,572) (67,572)
Accumulated deficit............. (13,327,932) (19,490,955) (19,490,955)
------------ ------------ ------------
Total stockholders' deficit.... (5,047,004) (855,917) $ (855,917)
------------ ------------ ============
$ 2,215,048 $ 6,563,454
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Velocity.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
License............................... $ 424,340 $ 570,694 $ 963,299
Product development................... 1,375,000 564,560 336,519
Service............................... 1,172,145 3,488,397 4,414,932
----------- ----------- -----------
Total revenue....................... 2,971,485 4,623,651 5,714,750
----------- ----------- -----------
Cost of revenue:
License............................... 474,849 756,156 845,495
Product development................... 319,974 208,533 78,373
Service............................... 892,183 2,314,026 2,879,676
----------- ----------- -----------
Total cost of revenue............... 1,687,006 3,278,715 3,803,544
----------- ----------- -----------
Gross profit............................ 1,284,479 1,344,936 1,911,206
----------- ----------- -----------
Operating expense:
Sales and marketing................... 1,394,852 1,643,868 1,215,300
Research and development.............. 1,344,640 1,832,783 2,670,018
General and administrative............ 3,332,443 3,768,388 4,070,054
----------- ----------- -----------
Total operating expense............. 6,071,935 7,245,039 7,955,372
----------- ----------- -----------
Operating loss.......................... (4,787,456) (5,900,103) (6,044,166)
Interest expense........................ (3,397) (27,543) (78,913)
Interest expense to related parties..... (16,355) (65,412) (61,800)
Other income (expense).................. 13,596 (8,643) 26,656
----------- ----------- -----------
Loss before income taxes................ (4,793,612) (6,001,701) (6,158,223)
Provision for income taxes.............. 6,400 4,000 4,800
----------- ----------- -----------
Net loss................................ $(4,800,012) $(6,005,701) $(6,163,023)
=========== =========== ===========
Net loss per share:
Basic and diluted..................... $ (1.58) $ (1.97) $ (2.00)
=========== =========== ===========
Weighted average shares outstanding:
Basic and diluted..................... 3,038,355 3,050,779 3,077,115
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Velocity.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable Total
------------------ ---------------- paid-in Deferred Accumulated related to stockholders'
Shares Amount Shares Amount capital compensation deficit sale of stock deficit
--------- ------- --------- ------ ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1996............ 979,605 $ 9,796 3,038,355 $3,038 $ 2,454,561 $ -- $ (2,522,219) $ -- $ (54,824)
Issuance of
Series A
preferred stock
in lieu of
compensation.... 47,600 476 -- -- 84,524 -- -- -- 85,000
Issuance of
Series B
preferred
stock........... 426,321 4,263 -- -- 1,713,711 -- -- -- 1,717,974
Issuance of
Series B
preferred stock
in lieu of
compensation.... 22,400 224 -- -- 89,776 -- -- -- 90,000
Issuance of
Series C
preferred
stock........... 121,557 1,216 -- -- 595,760 -- -- -- 596,976
Series A-II
preferred stock
issued upon the
acquisition of
Res-Q........... 13,065 131 -- -- 497,329 -- -- -- 497,460
Series A-II
preferred stock
issued upon the
acquisition of
LINC............ 7,466 75 -- -- 284,451 -- -- -- 284,526
Series A-II
preferred stock
issued upon the
acquisition of
Healthcheck..... 4,828 48 -- -- 183,093 -- -- -- 183,141
Series A-II
preferred stock
issued upon the
acquisition of
Intedata........ 3,734 37 -- -- 142,237 -- -- -- 142,274
Net loss......... -- -- -- -- -- -- (4,800,012) -- (4,800,012)
--------- ------- --------- ------ ----------- --------- ------------ -------- -----------
Balances at
December 31,
1997............ 1,626,576 16,266 3,038,355 3,038 6,045,442 -- (7,322,231) -- (1,257,485)
Issuance of
Series C
preferred
stock........... 433,851 4,338 -- -- 2,126,180 -- -- -- 2,130,518
Stock options
granted to non-
employees....... -- -- -- -- 29,001 -- -- -- 29,001
Common shares
issued for
purchase price
adjustment for
CPCS............ -- -- 21,154 22 56,641 -- -- -- 56,663
Net loss......... -- -- -- -- -- -- (6,005,701) -- (6,005,701)
--------- ------- --------- ------ ----------- --------- ------------ -------- -----------
Balances at
December 31,
1998............ 2,060,427 20,604 3,059,509 3,060 8,257,264 -- (13,327,932) -- (5,047,004)
Issuance of
Series C
preferred stock,
net............. 1,421,711 14,217 -- -- 6,878,381 -- -- -- 6,892,598
Issuance of
Series C
preferred stock
to Conxion...... 112,000 1,120 -- -- 548,880 -- -- (550,000) --
Issuance of
Series C
preferred stock
in exchange for
legal services.. 84,000 840 -- -- 411,660 -- -- -- 412,500
Issuance of
Series C
preferred stock
in exchange for
other services.. 20,262 203 -- -- 99,300 -- -- -- 99,503
Issuance of
Series C
preferred stock
to repay loans
to related
parties......... 46,571 466 -- -- 228,230 -- -- -- 228,696
Series A-II
preferred stock
issued upon the
acquisition of
PSI-Med ........ 9,322 93 -- -- 1,282,614 -- -- -- 1,282,707
Issuance of
common stock
pursuant to
exercise of
stock options... -- -- 27,086 27 50,656 -- -- -- 50,683
Conversion of
Series A to
common stock.... (58,774) (588) 58,774 59 529 -- -- -- --
Conversion of
Series B to
common stock.... (6,471) (65) 6,471 6 59 -- -- -- --
Stock options
granted to non-
employees....... -- -- -- -- 67,412 -- -- -- 67,412
Stock options
granted to
Superior
Consultant
Holdings
Corporation..... -- -- -- -- 391,400 -- -- -- 391,400
Issuance of
warrants for
financing....... -- -- -- -- 322,298 -- -- -- 322,298
Deferred
compensation
related to stock
option grants... -- -- -- -- 123,885 (123,885) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 56,313 -- -- 56,313
Repayment of
receivable
related to
sale of stock... -- -- -- -- -- -- -- 550,000 550,000
Net loss......... -- -- -- -- -- -- (6,163,023) -- (6,163,023)
--------- ------- --------- ------ ----------- --------- ------------ -------- -----------
Balances at
December 31,
1999............ 3,689,048 $36,890 3,151,840 $3,152 $18,662,568 $(67,572) $(19,490,955) $ -- $ (855,917)
========= ======= ========= ====== =========== ========= ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Velocity.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(4,800,012) $(6,005,701) $(6,163,023)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 522,506 752,911 922,615
Provision for bad debts............... 113,000 15,800 56,668
Noncash compensation expense.......... 175,000 29,001 123,725
Changes in operating assets and
liabilities:
Accounts receivable................... (61,920) 57,517 103,211
Prepaid expenses and other current and
non-current assets................... (28,079) (53,532) (1,808,158)
Accounts payable and other current
liabilities.......................... 5,645 1,184,988 4,698
Deferred revenue...................... 805,558 782,345 (201,964)
Due to employees...................... 516,180 646,716 (251,510)
Interest on notes from related
parties.............................. 16,355 65,412 61,800
----------- ----------- -----------
Net cash used in operating
activities.......................... (2,735,767) (2,524,543) (7,151,938)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................... (206,916) (32,194) (203,775)
Cash received from acquisitions........ 212,822 -- 43,111
----------- ----------- -----------
Net cash (used in) provided by
investing activities................ 5,906 (32,194) (160,664)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to related
parties............................... 448,125 389,000 --
Repayment of notes payable to related
parties............................... (77,168) -- (446,491)
Borrowings (payments) from banks, net.. 92,790 71,107 (87,568)
Proceeds from preferred stock issued in
private placements.................... 2,314,950 2,130,518 6,892,598
Repayment of long-term debt............ -- -- (95,707)
Proceeds from exercise of stock
options............................... -- -- 50,684
Repayment of capital lease
obligations........................... (2,278) (39,342) (25,578)
Proceeds from Notes payable............ -- -- 1,000,000
Repayment of note receivable........... -- -- 550,000
----------- ----------- -----------
Net cash provided by financing
activities.......................... 2,776,419 2,551,283 7,837,938
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................ 46,558 (5,454) 525,336
Cash and cash equivalents at beginning
of period.............................. -- 46,558 41,104
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 46,558 $ 41,104 $ 566,440
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes................................ $ 6,400 $ 4,000 $ --
Supplemental schedule of noncash
investing and financing activities:
Summary of the acquisitions described
in note 2:
Fair value of assets acquired......... $ 2,435,357 $ 56,663 $ 2,477,439
Net cash received..................... 212,822 -- 43,111
Stock issued.......................... (1,107,401) (56,663) (1,282,707)
Notes issued.......................... (200,000) -- --
----------- ----------- -----------
Liabilities assumed.................. $ 1,340,778 $ -- $ 1,237,843
=========== =========== ===========
Stock and options issued in exchange
for equity finders fees.............. $ -- $ -- $ 87,479
Stock issued as settlement for legal
services rendered in prior periods .. -- -- 412,500
Stock issued as settlement for other
services rendered in prior periods .. -- -- 99,503
Stock issued to repay loans to related
parties.............................. -- -- 228,696
Assets acquired under capital lease
obligations.......................... 114,524 33,620 --
Prepaid distribution services......... -- -- 391,400
Issuance of warrants.................. -- -- 322,298
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(1) Nature of Business and Summary of Significant Accounting Policies
Business of the Company
We are an application service provider (ASP) that develops proprietary
software applications for healthcare clinics and physician group practices
using our proprietary technology platform. Our customers can access and use our
applications over the Internet or their local or private information networks.
We are developing integrated applications designed to manage all elements of
the business and clinical processes of our customers within a single system.
Our software applications are built using our object-oriented Organic
Architecture. Central to our Organic Architecture is our CoreModel, which is
comprised of objects that represent a universal set of clinical and business
processes. To develop our CoreModel and solutions, we selectively acquired
companies with healthcare domain expertise and enabling technologies. These
acquisitions also provided near term products, customers and revenues. We were
incorporated in January 1995 as a California corporation and reincorporated in
Delaware in April 1996. We changed our name to Velocity.com, Inc. in January,
2000. We are headquartered in San Francisco, California.
On September 17, 1999, our Board of Directors authorized our management to
file a Registration Statement with the Securities and Exchange Commission to
sell shares of our common stock to the public.
Stock Split
On November 23, 1999, our Board of Directors approved a 0.56 for 1 reverse
stock split of our common and preferred stock. All references in the
accompanying financial statements to the number of shares and per share amounts
have been retroactively restated to reflect this stock split.
Basis of Presentation
Our consolidated financial statements include the accounts of Velocity.com,
Inc. and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Liquidity
As discussed in Note 8, we have a significant contingency related to certain
sales of our Series B and C preferred stock which has raised substantial doubt
about our ability to continue as a going concern. We are not aware of any
pending claims against us. We intend to vigorously defend any rescission or
other claim by the holders of the preferred stock. Nevertheless, it is possible
that a claim could be made by one or more of the holders, and if a court were
to hold that the private placement exemption is not available for the sale of
the preferred stock, we could be forced to rescind the sales of the preferred
stock, requiring significant monetary payments to the claiming owners. These
claims, if successful, could significantly exceed our cash reserves and require
us to borrow funds and would materially and adversely affect our results of
operations and financial condition.
We have incurred net losses since our inception and have an accumulated
deficit of $19,490,955. Although we believe that we have sufficient capital for
our short-term needs, our future liquidity and capital requirements will
require us to raise additional capital and/or borrowings in order for us to
meet our operating plans. We are currently in the process of raising additional
capital.
F-7
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us 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
consolidated financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Revenue Recognition
License revenue includes fees from the licensing of our acquired legacy
products. Product development revenue consists of revenue derived from
development of customer requested software or customer satisfaction surveys
and development of the related database. Service revenue is composed of post-
contract software support, case management, credentialing, training, and
installation of simple interfaces for legacy products.
Beginning January 1, 1998, we have recognized revenue in accordance with
the American Institute of Certified Public Accountants' Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9,
Software Revenue Recognition with Respect to Certain Transactions. Revenue is
recognized from licenses of our software application products when the
contract has been executed, the product has been shipped, collectibility is
probable and the software license fees are fixed and determinable. In the
event that the contract provides for multiple elements (e.g., training,
installation of simple interfaces or post-contract customer support), the
total fee is allocated to these elements based on vendor-specific objective
evidence of fair value. If any portion of the license fee is subject to
forfeiture, refund or other contractual contingencies, we will postpone
revenue recognition until these contingencies have been removed. Revenues from
fees paid for access to our applications delivered through the ASP model will
be recorded as subscription revenue earned over the access period. We
recognize product development revenue from co-development contracts using a
percentage-of-completion method either as services are performed or based on
meeting key milestone events over the term of the contracts. Service revenue
from post-contract customer support (PCS) and maintenance is recognized
ratably over the term of the maintenance period. Revenue from case management,
credentialing, training and installation of simple interfaces is recorded as
the services are performed.
Our adoption of SOP 97-2 did not have a material effect on our revenue
recognition or our results of operations. Prior to adoption of SOP 97-2, we
accounted for software and related revenues in accordance with SOP 91-1,
Software Revenue Recognition.
Deferred Revenue
We defer revenues related to annual payments of PCS agreements and
recognize those revenues as the services are performed over the PCS contract
periods. Payments of license fees received prior to fulfilling our obligations
are recorded as deferred revenue until the obligations have been completed.
Advance payments and deposits received on subscription and other service
contracts are deferred and recognized as the related services are rendered.
Research and Development
Research and development expenditures are charged to expense in the period
incurred.
Advertising Costs
All costs associated with advertising and promoting products are charged to
expense in the period incurred.
F-8
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Net Loss per Share
We compute net loss per share based upon SFAS No. 128, Earnings per Share.
The basic net loss per share is computed by dividing the net loss available to
common stockholders by the weighted-average number of common shares
outstanding. Potential common shares relating to stock options of 482,120,
696,506 and 1,011,186 in 1997, 1998, and 1999, respectively, are anti-dilutive
due to the net losses sustained by us. Convertible preferred stock of
1,626,576, 2,060,427, and 3,689,048 shares in 1997, 1998, and 1999,
respectively, have also been excluded from the calculations of net loss per
share as the impact would be anti-dilutive. Thus, the diluted net loss per
share in these years is the same as the basic net loss per share.
Unaudited pro forma basic and diluted net loss per share was $(1.23) and
$(1.00) for the years ended December 31, 1998 and 1999, respectively, based on
pro forma weighted average shares outstanding of 4,872,024 and 6,143,918 for
those respective periods. This information reflects per share data assuming the
conversion of all outstanding shares of convertible preferred stock at a
conversion rate of 20 common shares for each preferred share of Series A-II and
A-III and at a conversion rate of one common share for each preferred share of
Series A, B, and C as if the conversion of the preferred stock had taken place
at the beginning of 1998 or at the date of issuance, if later.
Stock-Based Compensation
We account for our stock option plans under SFAS No. 123, Accounting for
Stock-Based Compensation. This statement establishes financial accounting and
reporting standards for stock-based compensation, including employee stock
purchase plans and stock option plans. As allowed by SFAS No. 123, we continue
to measure compensation expense for options granted to employees under the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
We have recorded deferred compensation for the difference between the
exercise price and the deemed fair market value of the common stock for
financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized on a straight-line
basis over the vesting period of the related stock options.
Comprehensive Loss
We have no components of other comprehensive loss other than our net loss
and, accordingly, our comprehensive loss is equivalent to our net loss for all
periods presented.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original
maturity of three months or less from the date of purchase to be cash
equivalents.
F-9
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets, Including Intangible Assets
We account for long-lived assets under SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment loss to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. We estimate fair value based on the best
information available, making judgments and projections as considered
necessary.
Intangible assets consist of items related to our business
combinations. Goodwill is amortized over a three to seven year period depending
on the acquisition. Acquired technology is being amortized over its estimated
useful life of approximately three years. Workforce-in-place is being amortized
over the lesser of the employment tenure of the employee or the agreement term.
Software Development Costs
Software development costs are accounted for in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. This statement provides for capitalization of certain software
development costs once technological feasibility is established. We establish
technological feasibility once testing of a working model has been completed.
The time between establishment of a working model and general release is short.
Therefore, we believe that software development costs incurred subsequent to
technological feasibility have not been material.
Property and Equipment
Property and equipment is stated at cost. Computer and related equipment is
depreciated over a useful life of three years using the straight-line method.
Office furniture and fixtures are depreciated over useful lives ranging from
three to five years using the straight-line method. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful life or
remaining lease term.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of
credit risk, consist principally of trade receivables. We control credit risk
through credit approvals, credit limits, a reserve for doubtful accounts, and
monitoring procedures.
We have several product development and collaborative agreements with Pfizer
Health Solutions Inc to co-develop, market, license and distribute various
Velocity.com products and services. Co-development and marketing agreements to
date include development of Velocity.com's Outcomes Partner III, care
management and credentialing applications. Additionally, we have co-developed
and marketed several survey products including the National Committee for
Quality Assurance Member Satisfaction Survey, disenrollment and patient
satisfaction surveys. Sales to Pfizer Health Solutions Inc amounted to
approximately $1,466,000, $945,000, and $1,095,000 for the years ended December
31, 1997, 1998 and 1999, respectively. These sales represented approximately
49%, 20%, and 19%, respectively, of our total revenue for those periods.
Accounts receivable from Pfizer Health Solutions Inc amounted to approximately
$253,000 and $22,000 at December 31, 1998 and 1999, respectively.
A different customer accounted for 13% of total revenue for the year ended
December 31, 1999.
F-10
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The carrying amounts of trade receivables, accounts payable, lines of credit
and notes payable and other current liabilities approximate fair value due to
the short maturities of these instruments. The related party liabilities are
not traded on any public market and approximate our best estimate of fair
value.
Pro Forma Stockholders' Deficit (Unaudited)
The unaudited pro forma stockholders' deficit gives effect to the conversion
of 3,689,048 shares of Series A, A-II, A-III, B and C convertible preferred
stock outstanding as of December 31, 1999 into 4,577,374 shares of common
stock, at a conversion rate of 20 common shares for each preferred share of
Series A-II and A-III and at a conversion rate of one common share for each
preferred share of Series A, B and C, upon closing of our initial public
offering.
(2) Business Combinations
(a) Acquisitions prior to January 1, 1999
During the years ended December 31, 1996 and 1997, we completed the
following acquisitions:
<TABLE>
<CAPTION>
Company Acquisition Date Expertise
- ------- ----------------- ------------------------------
<S> <C> <C>
First Principles, Inc.
(FPI)....................... April 22, 1996 Object Technology
RiteLine Systems, Inc.
(RiteLine).................. April 30, 1996 Business Methodology
Comprehensive Provider
Credentialing Services, Inc.
(CPCS)...................... May 23, 1996 Credentialing Service
Velocity Healthcare
Informatics, Inc.
(Velocity).................. December 20, 1996 Outcomes/Disease Management
Res-Q, Inc., formerly MMS,
Inc. (Res-Q)................ May 14, 1997 Scheduling/Resource Management
Intedata, Inc. (Intedata).... June 4, 1997 Marketing Service
L.I.N.C., Inc. (LINC)........ June 23, 1997 Case Management
Healthcheck, Incorporated
(Healthcheck)............... November 14, 1997 Credentialing Service
</TABLE>
We acquired all of the outstanding stock of each of the above companies,
with the exception of Velocity. We purchased certain assets of Velocity,
including all of its intellectual property. Under terms of the acquisition
agreements, we paid cash and issued notes payable and the following shares of
common, Series A-II preferred and Series A-III preferred stock, valued at the
fair market value of the stock on the respective acquisition dates:
<TABLE>
<CAPTION>
Series A-II Series A-III
Common preferred preferred
Acquired company stock stock stock
---------------- ------- ----------- ------------
<S> <C> <C> <C>
FPI......................................... 893,797 -- --
RiteLine.................................... -- 1,277 --
CPCS........................................ 43,632 998 --
Velocity.................................... -- 3,032 3,032
Intedata.................................... -- 3,734 --
LINC........................................ -- 7,466 --
Res-Q....................................... -- 13,065 --
Healthcheck................................. -- 4,828 --
</TABLE>
The acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of the companies' operations are included in our
consolidated financial statements from their respective acquisition dates
forward.
F-11
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consideration paid was as follows:
<TABLE>
<S> <C>
Common stock..................................................... $ 220,283
Series A-II preferred stock...................................... 1,140,874
Series A-III preferred stock..................................... 24,372
Cash paid (CPCS)................................................. 74,900
Notes payable (LINC and Res-Q)................................... 200,000
----------
$1,660,429
==========
</TABLE>
The purchase price was allocated to the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 265,690
Accounts receivable............................................. 874,855
Other current assets............................................ 145,719
Property and equipment.......................................... 440,283
Goodwill........................................................ 492,964
Workforce-in-place.............................................. 142,274
Acquired technology............................................. 1,177,826
Liabilities..................................................... (761,456)
Customer deposits and deferred maintenance...................... (1,117,726)
-----------
$ 1,660,429
===========
</TABLE>
In conjunction with the Intedata acquisition, we entered into two employment
agreements with the former founders of Intedata. As there were no assets to be
acquired or liabilities to be assumed in the Intedata acquisition, the full
purchase price has been allocated to those agreements as workforce-in-place and
is being amortized over the lesser of the employment tenure of the employee or
the agreement term of three years from the acquisition date.
We acquired certain software technology in the LINC and Res-Q acquisitions.
These amounts were fully amortized as of December 31, 1999.
Goodwill, which arose from the FPI, CPCS and Healthcheck acquisitions,
represents the excess of the purchase price over the fair value of the assets
acquired and liabilities assumed, and is amortized using the straight-line
method over its estimated life of seven years for CPCS and Healthcheck.
Goodwill recorded in conjunction with the acquisition of FPI has been fully
amortized as of December 31, 1999.
The above purchase price includes $56,663 of contingent payments to CPCS for
the issuance of 21,154 shares of our common stock valued at $2.68 per share
which was the value of our common stock on the date the contingency was
resolved. This amount has been allocated to goodwill and is being amortized
using the straight-line method over five years, which is the remaining
estimated life of the goodwill.
Effective March 1998, the operations of CPCS were combined with Healthcheck.
Effective December 31, 1996, the operations of FPI and RiteLine were combined
with our Corporate Headquarters.
We issued $200,000 of notes to the former shareholders of LINC and Res-Q in
conjunction with the LINC and Res-Q acquisitions. The notes are due on June 30,
2000, or the date of the funding of an initial public offering or the next
round of financing in excess of $7 million dollars, and bear interest at 10%
per year.
F-12
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Acquisition of PSI-Med Corporation
On September 20, 1999, we completed our acquisition of all of the
outstanding stock of PSI-Med Corporation (PSI-Med) in exchange for 9,322 shares
of our Series A-II preferred stock. PSI-Med Corporation sells and services
practice management software and is engaged as a full service provider of
medical insurance billing and accounts receivable collection services. The
Series A-II preferred stock has been valued at $1,282,707. We accounted for the
acquisition under the purchase method of accounting and, accordingly, the
results of PSI-Med's operations are included in our consolidated financial
statements beginning with the effective date of the acquisition which was
August 31, 1999.
The allocation of the purchase price to the assets acquired and liabilities
assumed is as follows:
<TABLE>
<S> <C>
Cash............................................................. $ 43,111
Accounts receivable.............................................. 136,006
Other assets..................................................... 20,397
Property and equipment........................................... 72,199
Goodwill......................................................... 2,248,837
Accounts payable ................................................ (240,512)
Notes payable ................................................... (380,724)
Capital lease obligations ....................................... (39,638)
Other accrued expenses .......................................... (362,052)
Long-term debt .................................................. (141,707)
Customer deposits and deferred maintenance....................... (73,210)
----------
$1,282,707
==========
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the assets acquired and liabilities assumed, and is amortized using the
straight-line method over its estimated useful life of seven years.
The following table shows unaudited pro forma results of operations assuming
the acquisition of PSI-Med had been consummated at the beginning of 1998. The
unaudited pro forma information is not necessarily indicative of the combined
results that would have occurred had the acquisition taken place as of the
beginning of the periods presented, nor is it necessarily indicative of results
that may occur in the future:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Pro forma basis:
Total net revenues............................. $ 6,834,242 $ 6,327,070
Net loss....................................... $(6,731,045) $ (6,516,812)
Net loss per share: Basic and diluted.......... $ (2.21) $ (2.12)
Weighted average shares outstanding:
Basic and diluted............................ 3,050,779 3,077,115
</TABLE>
F-13
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
--------- -----------
<S> <C> <C>
Computers and related equipment...................... $ 752,400 $ 1,285,807
Furniture and fixtures............................... 201,076 310,174
Leasehold improvements............................... 10,060 36,736
--------- -----------
963,536 1,632,717
Less accumulated depreciation and amortization....... (615,402) (1,223,867)
--------- -----------
$ 348,134 $ 408,850
========= ===========
</TABLE>
Depreciation and amortization expense on property and equipment was
approximately $175,000, $189,000 and $215,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
(4) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Goodwill........................................... $ 492,964 $ 2,741,801
Acquired technology................................ 1,177,826 1,177,826
Workforce-in-place................................. 142,274 142,274
----------- -----------
1,813,064 4,061,901
Less accumulated amortization...................... (928,094) (1,610,658)
----------- -----------
$ 884,970 $ 2,451,243
=========== ===========
</TABLE>
(5) Other Current Liabilities
The following items are included in other current liabilities:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Accounts payable, non-trade............................... $ 15,000 $ --
Bank overdraft............................................ 62,025 --
Other accrued expenses.................................... 147,670 650,281
-------- --------
$224,695 $650,281
======== ========
</TABLE>
(6) Notes Payable to Employees and Stockholders
The notes payable to employees and stockholders consist of notes with
interest rates generally ranging from 9% to 12%. Certain of the notes to
stockholders provided for the lender to receive options for shares of the
Company's common stock at a rate of 10% times the principal loaned divided by
$3.57, which was the fair market value of our common stock when the notes were
issued. Options to purchase 5,824 shares of the Company's common stock were
granted in conjunction with this provision. A portion of the proceeds of the
F-14
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
notes was allocated to the value of the options based on the Black-Scholes
option pricing model and was amortized into the statement of operations during
the year ended December 31, 1998 (note 9). All of these notes payable to
stockholders were repaid during the year ended December 31, 1999.
We acquired certain notes payable to stockholders from our PSI-Med
acquisition in September 1999. The interest rates range from 10%-12% on those
notes. One note is due on February 1, 2002, a second note is due on June 1,
2000 and the remaining notes are due on demand.
(7) Commitments, Contingencies and Borrowings
Leases
We lease office facilities and equipment under noncancelable operating and
capital leases. The leases provide for us to pay property taxes, insurance and
other operating costs of the leased property and generally contain renewal
provisions.
Future minimum lease payments under all noncancelable capital and operating
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ----------
<S> <C> <C>
Year ending December 31:
2000.................................................. $ 51,393 $ 418,770
2001.................................................. 31,518 265,216
2002.................................................. 4,550 197,896
2003.................................................. -- 151,527
2004 and thereafter................................... -- 53,109
-------- ----------
Total minimum payments................................. 87,461 $1,086,518
==========
Less amount representing interest...................... (13,152)
--------
Present value of capital lease obligations............. 74,309
Less current portion................................... (40,459)
--------
Lease obligations, long term........................... $ 33,850
========
</TABLE>
Equipment recorded under capital leases is included in property and
equipment as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Computers and related equipment......................... $ 62,968 $131,403
Accumulated depreciation................................ (31,540) (89,522)
-------- ---------
$ 31,428 $ 41,881
======== =========
</TABLE>
Rent expense for operating leases totaled approximately $248,000, $428,000,
and $424,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Lines of Credit
We have a $200,000 revolving line of credit with Wells Fargo Bank, which
bears interest at a rate of 1.0% above the prime rate. The weighted average
interest rate was approximately 9.50%, 8.75% and 8.81% for the
F-15
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
years ended December 31, 1997, 1998 and 1999, respectively. We are required to
make regular monthly payments of accrued interest. The line of credit is
collateralized by all accounts receivable, inventory and furniture and
equipment of Res-Q. In addition, an officer of Res-Q has provided a guaranty in
connection with this line of credit. We agreed to indemnify the officer for a
maximum amount of $200,000 (the amount of the officer's guaranty plus accrued
interest) for any deficiency that may be suffered after making a claim for
reimbursement from the principal borrower.
On July 8, 1999 we entered into a $25,000 line of credit with Foothills Bank
which bears interest at a rate of 2.25% above the prime rate. The weighted
average interest rate was approximately 10.5% for the year ended December 31,
1999. We make monthly payments of accrued interest. The line of credit matures
on January 8, 2000 and is secured by accounts receivable of Healthcheck.
The balance outstanding under lines of credit was $92,790, $163,897 and
$76,329 at December 31, 1997, 1998 and 1999, respectively.
Notes Payable
We acquired a note payable to a bank from our PSI-Med acquisition that is
secured by PSI-Med's assets and a personal guarantee by an officer of PSI-Med.
The note bears interest at a rate of prime plus 6.25% (14.75% at December 31,
1999). Principal and interest are due monthly and the note matures on June 15,
2000. The balance due on the note was $26,133 at December 31, 1999.
We have an unsecured non-interest bearing note payable to the prior owners
of a company acquired by PSI-Med. Principal is payable monthly based on a
percentage of gross billings collected related to the acquired customer base.
The note is due January 15, 2001.
On November 29, 1999, we entered into an agreement with an individual under
which we received $1,000,000 in exchange for a promissory note. The note is due
and payable upon the earlier of a) January 1, 2001, or b) upon the initial
public offering of our common stock or our next round of financing in excess of
$7,000,000. The note bears interest at 10% per annum. Interest payments are due
monthly. In addition, the holder of the note received a warrant to purchase
125,000 shares of our common stock, at an exercise price of $8.00 per share.
The warrant is exercisable upon the earlier of (i) the 26th day following an
initial public offering, or (ii) November 29, 2000. The warrant expires on
November 29, 2002. $322,298 of the proceeds from the note were allocated to the
value of the warrants based on the Black-Scholes option pricing model which
valued the warrant at $2.58 per share. This discount is being amortized into
the statement of operations over the term of the note as interest expense. The
unamortized discount was approximately $297,000 at December 31, 1999.
F-16
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Capital Stock
We are authorized to issue 7,840,000 shares of preferred stock. The
preferred shares are automatically convertible into common shares upon an
initial public offering of our common stock. A summary of preferred stock and
the amounts received follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- -----------
<S> <C> <C>
Series A, 840,000 shares designated, $.01 par value
per share, 794,230 and 735,456 shares issued and
outstanding in 1998 and 1999, respectively,
liquidation preference of $1,418,270 in 1998 and
$1,309,112 in 1999.................................. $1,418,270 $ 1,309,112
Series A-I, 840,000 shares designated, $.01 par value
per share, none issued and outstanding.............. -- --
Series A-II, 64,400 shares designated, $.01 par value
per share, 34,400 and 43,722 shares issued and
outstanding in 1998 and 1999, respectively.......... 1,140,874 2,423,581
Series A-III, 3,032 shares designated, $.01 par value
per share, 3,032 shares issued and outstanding in
1998 and 1999....................................... 24,372 24,372
Series B, 700,000 shares designated, $.01 par value
per share, 673,357 and 666,886 shares issued and
outstanding in 1998 and 1999, respectively,
liquidation preference of $2,710,634 in 1998 and
$2,681,088 in 1999.................................. 2,710,634 2,681,088
Series B-I, 700,000 shares designated, $.01 par value
per share, none issued and outstanding.............. -- --
Series C, 2,240,000 shares designated, $.01 par value
per share, 555,408 and 2,239,952 shares issued and
outstanding in 1998 and 1999, respectively,
liquidation preference of $2,727,494 and $11,000,000
in 1998 and 1999, respectively, cash transaction
costs of $65,066 in 1999............................ 2,727,494 10,934,934
Series C-I, 2,240,000 shares designated, $.01 par
value per share, none issued and outstanding........ -- --
---------- -----------
$8,021,644 $17,373,087
========== ===========
</TABLE>
The Series A-II and Series A-III preferred shares have been issued in
conjunction with our acquisitions as discussed in note 2. Series A shares were
issued at $1.78 per share, Series B shares were issued at $4.03 per share, and
Series C shares were issued at $4.91 per share. In addition to Series C
transaction costs paid, we issued 4,911 shares of Series C stock valued at
$4.91 and issued options to purchase 22,719 shares of common stock valued at
$63,364 (note 9) as Series C finders fees.
The rights, preferences, and privileges of preferred stockholders are as
follows:
. Series A, B and C stockholders are entitled to cumulative dividends, if
declared by the Board of Directors, of $.08 per share per annum, payable
in preference to the payment of any dividends on the common stock (other
than a common stock dividend). No such dividends have been declared.
Series A-II and A-III stockholders are not entitled to receive dividends.
. Series, A, B and C stockholders have a liquidation preference of an
amount equal to the original price of the preferred stock plus any
declared but unpaid dividends. Any remaining liquidation proceeds are
distributed pro rata to the common, Series A-II and Series A-III
stockholders.
. Each share of Series A, A-II, B and C votes equally with shares of common
stock. Series A-III shares have no voting rights.
F-17
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Each share of Series A, A-II, A-III, B and C is convertible at any time
into common stock at the original issue price, with automatic conversion
upon an initial public offering, upon the consolidation or merger of the
Company, or upon the sale of substantially all of the assets of the stock
Company. The conversion rate is one for one for Series A, B and C shares
and 20 shares of common stock for each share of Series A-II and A-III.
The conversion price will be equal to the issue price of the shares.
Our issuances of Series B preferred stock and Series C preferred stock might
be considered public offerings in violation of the federal securities laws. If
these issuances were public offerings, some of the holders of these securities
might be granted the right to rescind the sale of shares and demand that we
return the purchase price of the shares.
We issued shares of our Series B and Series C preferred stock to
approximately 392 stockholders in financings that we believe were conducted as
private placements under Section 4(2) of the Securities Act of 1933, as
amended, and did not require registration under the federal securities laws. In
conducting these private placements, we received signed representations of
accredited investor status from each actual investor and in the Series C
preferred stock financing, we retained an agent to introduce us to potential
investors. However, due to the number of persons who were offered the
opportunity to purchase our securities it is possible that the holders of these
securities may allege that the offering and sale of these securities was not a
valid private placement under Section 4(2) and was not made in accordance with
Section 5 of the Securities Act of 1933. Generally, the statute of limitations
for this type of claim is one year after the date of the alleged violation and,
if successful, would entitle the owners to rescind the issuance of the
securities to them and demand a return to them of the purchase price of those
securities. As of March 1, 2000, if we did violate Section 5 of the Securities
Act of 1933, this claim could be made for approximately 1,400 shares of the
Series B preferred stock and approximately 1,511,384 shares of Series C
preferred stock held by approximately 197 stockholders, representing a total
potential claim of approximately $7,427,500. Assuming the statute of
limitations for this type of claim is one year after the alleged violation
date, the total potential liability for such claims would be reduced to
approximately $6,949,576 at the end of March 2000, $5,562,391 at the end of
April 2000, $4,099,506 at the end of May 2000, $2,787,244 at the end of June
2000, $1,041,626 at the end of July 2000 and $5,625 at the end of August 2000.
We also believe that we have violated or may have violated the securities
laws of several states in connection with the issuance of our Series B and
Series C preferred stock. We believe the issuance of securities to a total of
five stockholders violated the securities laws of four states. Similar to the
recourse provided under the federal securities laws, holders of these
securities may be able to rescind the sale or issuance of these securities to
them and demand a return of the purchase price paid for these securities. If we
are required to rescind all of the sales of these securities, the total
liability we may face is approximately $175,850. In addition, we believe we may
have violated the securities laws in one additional state in connection with
the issuance of our Series B and Series C preferred stock. If we are held to
have issued these additional securities in violation of the securities laws of
this one additional state the holders of these securities may be granted the
right to rescind the sale of these securities which could cause us to incur an
additional liability of up to approximately $381,000. The recission rights that
may be granted to these holders under the state law is not cumulative to the
rights granted under federal law. Accordingly, if these stockholders rescind
the sale of these securities under federal law, they will not have the right to
additional payments from the Company under state law.
We are not aware of any pending claims of rescission against us. We intend
to vigorously defend any rescission or other claim by the holders of our
securities. Nevertheless, it is possible that a claim could be made by one or
more of the holders of our securities, and if a court were to hold that the
private placement exemption is not available for the sale of our securities, we
could be forced to rescind the sales of our
F-18
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
securities, requiring significant monetary payments to the claiming owners.
These claims, if successful, could significantly exceed our cash reserves and
require us to borrow funds and would materially and adversely affect our
results of operations and financial condition.
(9) Stock Option Plans
We have been authorized to issue options to purchase up to 560,000 and
827,967 shares of our common stock in connection with our 1996 and 1997 stock
option plans (the Plans) to employees, directors, and consultants. The number
of shares of common stock available for issuance under the 1997 stock option
plan automatically increases on the first business day of each calendar year
during the term of the 1997 stock option plan, beginning with the 1999 calendar
year, by an amount equal to two percent (2%) of the shares of common stock
outstanding on the last business day of the immediately preceding calendar
year. The Plans provide for the issuance of stock purchase rights, incentive
stock options, or nonstatutory stock options.
Under the Plans, the exercise price for incentive stock options is at least
100% of the stock's fair market value on the date of the grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonqualified stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning less than 10% of the
voting power of all classes of stock.
Options granted under the Plans generally expire in 10 years. However, the
term of the options may be limited to 5 years if the optionee owns stock
representing more than 10% of the voting power of all classes of stock. Vesting
periods are determined by the Board of Directors and generally provide for
shares to vest at a rate of 1/3 of the shares at the end of each subsequent
anniversary of the initial vesting date, subject to continued service as an
employee.
As of December 31, 1999, options to purchase 459,376 and 551,811 shares of
our common stock were outstanding under the 1996 and 1997 stock option plans,
respectively. As of December 31, 1999, 268,737 shares were available for grant
under the 1997 stock option plan. With the creation of the 1997 stock option
plan, no further issuance of options under the 1996 stock option plan are
allowed.
Stock-Based Compensation
We continue to apply APB Opinion No. 25 in accounting for our employee
stock-based compensation plans and use the intrinsic-value method in accounting
for options granted to employees. Accordingly, compensation cost has only been
recognized in the accompanying consolidated statements of operations for any
stock options granted to employees where the exercise price of the option was
less than the fair value of the underlying common stock as of the grant date.
Had we determined compensation cost based on the fair value at the grant date
for stock options under SFAS No. 123 for our stock-based compensation plans,
net loss and basic and diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Net loss:
As reported...................................... $(4,800) $(6,006) $ (6,163)
Pro forma........................................ (4,837) (6,116) (6,365)
Basic and diluted net loss per share:
As reported...................................... $ (1.58) $ (1.97) $ (2.00)
Pro forma........................................ (1.59) (2.00) (2.07)
</TABLE>
F-19
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These pro forma results assume that we began recording compensation expense
for option grants to employees subsequent to January 1, 1995 and may not be
indicative of pro forma results to be expected in future periods. The fair
value of each option was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected volatility..................................... 40% 40% 40%
Average life............................................ 5 years 5 years 5 years
Risk-free interest rate................................. 6.89% 5.64% 6.24%
Dividends............................................... -- -- --
</TABLE>
Compensation cost recognized in the accompanying consolidated statements of
operations for stock options granted to employees at less than the fair market
value of the underlying common stock was approximately $56,000 for the year
ended December 31, 1999.
The value of each option granted to non-employees was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Years ended
December 31,
1998 and 1999
-----------------
<S> <C> <C>
Expected volatility........................................... 40% 40%
Average life.................................................. 10 years 10 years
Risk-free interest rate....................................... 5.32% 5.94%
Dividends..................................................... -- --
</TABLE>
The weighted-average fair value of options granted to non-employees was
$1.88 and $5.52 for the years ended December 31, 1998 and 1999, respectively.
No options were granted to non-employees during the year ended 1997.
We granted options to purchase 9,594 and 24,048 shares of common stock to
non-employees for the years ended December 31, 1998 and 1999, respectively, in
exchange for contract accounting and consulting services that had been
previously rendered. Compensation cost recognized in the accompanying
consolidated statements of operations related to these option grants was
$16,597 and $67,384 for the years ended December 31, 1998 and 1999,
respectively.
We granted options to purchase 5,824 shares of common stock to stockholders
for the twelve months ended December 31, 1998 in accordance with the terms of
note agreements with those stockholders. Compensation cost recognized in the
accompanying consolidated statements of operations related to these option
grants was $12,404 for the twelve months ended December 31, 1998.
We granted options to purchase 22,719 shares of common stock to non-
employees as finders fees for our Series C financing for the year ended
December 31, 1999. The value of these options of $63,364 has been credited
against additional paid-in capital as a cost of the financing. In addition, we
granted options to purchase 112,000 shares of common stock to Superior
Consultant Holdings Corporation (Superior) in conjunction with our strategic
relationship with Superior in September 1999 (note 12).
F-20
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity within our stock option plans is as follows:
<TABLE>
<CAPTION>
Years 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 at beginning
of period.............. 330,583 $0.27 482,120 $0.75 696,506 $ 1.39
Granted................. 160,303 1.79 222,982 2.79 368,917 6.07
Exercised............... -- -- -- -- (27,086) 1.87
Canceled................ (8,766) 1.23 (8,596) 2.21 (27,151) 3.27
------- ----- ------- ----- --------- ------
Outstanding at end of
period................. 482,120 $0.75 696,506 $1.39 1,011,186 $ 3.03
======= ===== ======= ===== ========= ======
Options exercisable at
end of period.......... 131,377 $0.43 302,100 $0.82 672,487 $ 3.01
======= ===== ======= ===== ========= ======
Weighted-average fair
value of options
granted at fair value
during the period...... $0.82 $1.21 $ 3.84
===== ===== ======
Weighted-average fair
value of options
granted below fair
value during the
period................. $ -- $ -- $ 1.69
===== ===== ======
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
---------------------------------------------------------------------
Weighted- Weighted-
average Weighted-average average
exercise remaining exercise
Option price Shares price contractual life Shares price
------------ --------- --------- ---------------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.18 291,200 $ 0.18 6.3 282,800 $ 0.18
0.89 24,115 0.89 6.9 24,113 0.89
1.79 144,063 1.79 7.2 94,032 1.79
2.68 167,608 2.68 8.0 45,151 2.68
3.57 150,959 3.57 9.0 54,748 3.57
4.46 119,561 4.46 9.4 59,643 4.46
10.71 113,680 10.71 9.8 112,000 10.71
------------ --------- ------ --- ------- ------
$ 0.18-10.71 1,011,186 $ 3.03 8.8 672,487 $ 3.01
========= ====== === ======= ======
</TABLE>
(10) Employee Retirement and Savings Plan
We sponsor an employee savings plan (the Plan) pursuant to Section 401(k)
of the Internal Revenue Code. All employees who work at least 20 hours per
week with one month of service may defer a portion of their salary. The Plan
allows us to make discretionary contributions. However, we have not made any
discretionary contributions for the periods presented.
(11) Internet Hosting Agreements
In fiscal year 1999, we have entered into several agreements with Conxion
Corporation under which it will supply us with application hosting services
and Internet infrastructure for our ASP software applications. These
agreements typically have terms of one year. Conxion has agreed to enter into
extensions of these agreements and to enter into supplemental service
agreements, as required by us on terms not less favorable to us as they offer
to any of their customers. In addition, they have agreed not to terminate or
suspend the services provided under these agreements in the event of a bona
fide dispute so long as undisputed payments are not withheld. In connection
with these agreements, Conxion invested $550,000 in exchange for 112,000
shares of our Series C preferred stock.
F-21
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Superior Consultant Holdings Corporation
In September 1999, we entered into a Distribution and Services Agreement, as
amended, with Superior under which Superior agreed to market our product as a
preferred ASP application for healthcare organizations. We agreed to market
Superior's healthcare consulting services and business integration services. In
conjunction with this agreement we granted a fully vested, nonforfeitable, non-
statutory stock option grant exercisable for 112,000 shares of our common stock
at an exercise price of $10.71 per share. The option was valued at $3.49 per
share using the Black-Scholes option pricing model and $391,400 was initially
recorded as prepaid distribution services. This amount is being amortized over
the term of the agreement. The initial term of the agreement runs through
August 31, 2002 and may be renewed by Superior for up to two additional two-
year terms.
(13) Income Taxes
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current portion:
Federal............................................... $ -- $ -- $ --
State................................................. 6,400 4,000 4,800
Deferred portion........................................ -- -- --
------ ------ ------
$6,400 $4,000 $4,800
====== ====== ======
</TABLE>
A reconciliation from the federal tax assuming the statutory rate to the
total provision for the income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate............... $(1,629,828) $(2,040,578) $(2,093,796)
State income taxes, net of federal
taxes.............................. 4,224 2,640 3,168
Permanent differences, including
goodwill........................... 35,449 59,310 124,283
Net operating losses not benefited.. 1,596,555 1,982,628 1,971,145
----------- ----------- -----------
$ 6,400 $ 4,000 $ 4,800
=========== =========== ===========
</TABLE>
F-22
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of our net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment............................. $ 26,617 $ 31,912
Intangibles........................................ 48,982 --
State taxes........................................ 253,107 373,850
----------- -----------
Total deferred tax liabilities................... 328,706 405,762
----------- -----------
Deferred tax assets:
Various accruals and reserves not deductible for
tax purposes...................................... 790,659 1,002,012
Intangibles........................................ -- 71,801
Net operating loss carryforwards................... 4,696,158 7,202,618
Tax credit carryforwards........................... 16,073 32,146
----------- -----------
Total deferred tax assets........................ 5,502,890 8,308,577
----------- -----------
Net deferred tax assets............................ 5,174,184 7,902,815
Valuation allowance................................ (5,174,184) (7,902,815)
----------- -----------
Net deferred tax assets after valuation
allowance....................................... $ -- $ --
=========== ===========
</TABLE>
The net changes in the valuation allowance for the years ended December 31,
1997, 1998 and 1999 were increases of $1,950,719, $2,205,070 and $2,728,631,
respectively. We believe sufficient uncertainty exists regarding our ability to
realize our deferred tax assets and, accordingly, a valuation allowance has
been established against the net deferred tax assets.
As of December 31, 1999, we had approximately $18,568,400 and $10,060,657 of
net operating loss carryforwards for federal and state purposes, respectively.
The federal net operating loss carryforwards expire between 2010 and 2019 and
the state net operating loss carryforwards expire primarily in 2003. The
difference between the federal and state net operating loss carryforwards is
due primarily to a 50% limitation on net operating loss carryforwards for
California income tax purposes.
Federal and state laws impose substantial restrictions on the utilization of
net operating loss carryforwards in the event of an "ownership change," as
defined in Section 382 of the Internal Revenue Code. We have not yet determined
whether an ownership change occurred due to significant stock transactions in
each of the reported years. If an ownership change has occurred, utilization of
the net operating loss carryforwards could be significantly reduced.
Additionally, the utilization of the net operating loss carryforwards of
approximately $2.4 million acquired in the acquisition of Healthcheck and PSI-
Med is limited to the taxable income generated by the operations of the two
entities.
(14) Segment Information
We have adopted the provisions of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards
for the reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers.
Our chief operating decision maker is considered to be the Company's
President. The President reviews discrete financial information regarding
profitability of our six segments: Corporate Headquarters, Healthcheck,
Velocity Healthcare, PSI-Med, LINC, and Res-Q. The corporate headquarters
manages the corporate business,
F-23
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provides a minimal amount of services to customers, oversees all of the
segments and performs research and development for our organic product.
Healthcheck specializes in a service that researches the history and
credentials of healthcare professionals. LINC offers software used by hospitals
to monitor costs of patient care and offers expert testimony services related
to management of medical cases. Velocity Healthcare provides services that
survey and track the effectiveness of medical procedures as well as services
related to development of customized software and patient satisfaction surveys.
Res-Q offers scheduling software to hospitals. We do substantially all of our
business in the United States. PSI-Med Corporation sells and services practice
management software and is engaged as a full service provider of medical
insurance billing and accounts receivable collection services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in note 1 to these consolidated
financial statements. Information about our segments as of and for the years
ended December 31, 1997, 1998, and 1999 is as follows:
<TABLE>
<CAPTION>
Corporate Velocity
Headquarters Healthcare Healthcheck PSI-Med Res-Q LINC Consolidated
------------ ---------- ----------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Revenue from external
customers:
License............... $ -- $ 15,693 $ -- $ -- $ 347,166 $ 61,481 $ 424,340
Product development... -- 1,375,000 -- -- -- -- 1,375,000
Service............... -- 353,518 171,721 -- 497,597 149,309 1,172,145
Depreciation and
amortization........... 133,161 60,159 40,326 -- 135,797 153,063 522,506
Interest expense........ 18,605 -- 1,147 -- -- -- 19,752
Income tax expense...... 6,400 -- -- -- -- -- 6,400
Net loss................ (4,037,950) 289,569 (308,826) -- (284,200) (458,605) (4,800,012)
Total assets............ 673,289 354,953 649,612 -- 736,730 489,757 2,904,341
1998
Revenue from external
customers:
License............... $ -- $ 25,460 $ -- $ -- $ 421,395 $ 123,839 $ 570,694
Product development... -- 564,560 -- -- -- -- 564,560
Service............... 73,000 637,067 1,022,937 -- 1,024,324 731,069 3,488,397
Depreciation and
amortization........... 219,489 65,453 17,155 -- 216,176 234,638 752,911
Interest expense........ 90,344 -- -- -- 2,611 -- 92,955
Income tax expense...... 4,000 -- -- -- -- -- 4,000
Net loss................ (4,674,652) (443,703) (113,242) -- (372,191) (401,913) (6,005,701)
Total assets............ 380,061 450,414 558,704 -- 465,208 360,661 2,215,048
1999
Revenue from external
customers:
Licenses.............. $ 3,687 $ 39,648 $ -- $ 7,000 $ 757,239 $ 155,725 $ 963,299
Product development... -- 336,519 -- -- -- -- 336,519
Services.............. 43,500 780,436 1,376,665 605,320 942,435 666,576 4,414,932
Depreciation and
amortization........... 340,180 70,906 28,387 12,775 233,135 237,232 922,615
Interest expense........ (130,600) -- (10,113) -- -- -- (140,713)
Income tax expense...... 4,800 -- -- -- -- -- 4,800
Net (loss).............. (5,338,041) (322,931) 92,195 (32,527) (274,137) (287,582) (6,163,023)
Total assets............ 5,232,234 156,005 222,057 339,734 538,979 74,445 6,563,454
</TABLE>
The information for Healthcheck reflects the combined operations of
Healthcheck and CPCS in 1997 and 1998 as those operations were combined in
early 1998. CPCS was also in the business of providing credentialing services.
F-24
<PAGE>
Velocity.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Board Resolutions
On November 23, 1999, our Board of Directors approved, subject to
stockholder approval, and effective upon the closing of our proposed IPO, the
following resolutions:
. An amendment to our Articles of Incorporation to increase the number of
authorized shares of common stock to 100,000,000.
. An amendment to the Articles of Incorporation to create a new class of
preferred stock, consisting of 5,000,000 shares, and to grant the Board
of Directors the authority to issue the preferred stock in such series
and with such rights, preferences and privileges as the Board shall
determine without further stockholder approval.
1999 Equity Incentive Plan
On November 23, 1999, our board of directors adopted, subject to stockholder
approval, the 1999 Equity Incentive Plan (the 1999 Plan). A total of 2,800,000
shares of common stock of the Company have been reserved for issuance under the
1999 Plan. The initial share reserve will also include those shares which
remain available under the 1996 and 1997 Stock Option Plans upon closing of
this offering. The share reserve will be increased annually on the date of the
Company's annual meeting by the lesser of either (1) the sum of (A) 2% of the
outstanding shares on the date of the annual meeting; plus (B) the number of
shares subject to an option under either the 1996 Plan or the 1997 Plan which
expires unexercised; or (2) 5% of the shares of the Company's total outstanding
shares on the date the 1999 Plan was adopted. When a stock award expires or is
terminated before it is exercised, the shares not acquired pursuant to the
stock awards shall again become available for issuance under the 1999 Plan.
The 1999 Plan permits the grants of options to directors, officers,
employees and consultants. In addition, the 1999 Plan permits the grant of
stock bonuses and rights to purchase restricted stock. The maximum term of
options granted under the 1999 Plan is 10 years. In the case of a 10%
stockholder, the term of an ISO must not exceed five years from the date of
grant.
In general, the exercise price of an incentive stock option cannot be less
than 100% of the fair market value of the common stock on the date of grant;
provided, however, that for a person who at the time of grant owns 10% of the
total voting power of the Company, the exercise price shall be at least 110% of
the fair market value on the date of grant. The exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant.
Upon the completion of this offering, subject to certain exceptions, each
non-employee director will automatically be granted an option to purchase
10,000 shares of common stock. Any individual who becomes a non-employee
director after this offering will automatically receive this initial grant upon
being elected to the board of directors. On each annual meeting of each year,
commencing in calendar year 2001, any person who is then a non-employee
director will automatically be granted an option to purchase 2,500 shares of
common stock. Initial grants and annual grants vest and become immediately
exercisable upon grant.
No awards have been issued under the 1999 Plan.
Employee Stock Purchase Plan
On November 23, 1999, our board of directors adopted, subject to stockholder
approval, the 1999 Employee Stock Purchase Plan (the Purchase Plan). A total of
300,000 shares of common stock has been authorized for issuance under the
Purchase Plan. The share reserve will increase automatically every year,
F-25
<PAGE>
Velocity.com Inc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
starting on January 1, 2001, by 150,000 shares. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Internal Revenue Code of 1986, as amended. Under the Purchase Plan,
eligible employees will be able to purchase common stock at a discount price in
periodic offerings. The Purchase Plan will commence on the effective date of
this initial public offering.
Unless otherwise determined by the board of directors, all employees are
eligible to participate in the Purchase Plan so long as they are employed by us
for at least 20 hours per week and are customarily employed by us for at least
five months per calendar year.
Under the Purchase Plan, employees who participate in an offering may have
up to 15% of their earnings for the period of that offering withheld. The
amount withheld is used at the end of the offering period to purchase shares of
common stock. The price paid for common stock for that offering period will
equal the lower of 85% of the fair market value of the common stock at the
commencement date of that offering period or 85% of the fair market value of
the common stock on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.
(16) Subsequent Events
Notes Payable
Subsequent to December 31, 1999, we have issued approximately $1,450,000 of
promissory notes with detachable warrants. The notes are generally payable
within one year or upon closing of an initial public offering and bear interest
at a rate of 10-12% per annum.
F-26
<PAGE>
Velocity.com, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of
operations have been prepared to illustrate the effect of our acquisition of
PSI-Med Corporation for the years ended December 31, 1998 and 1999. The pro
forma condensed combined statements of operations are based on the historical
consolidated financial statements of Velocity.com, Inc. and the historical
financial statements of PSI-Med Corporation.
The unaudited pro forma condensed combined statements of operations assume
that the acquisition had been consummated as of the first day of the earliest
period presented.
F-27
<PAGE>
Velocity.com, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro forma Pro forma
Velocity.com PSI-Med adjustments combined
------------ ---------- ----------- -----------
(A)
<S> <C> <C> <C> <C>
Revenue:
License............... $ 963,299 $ 299,262 $ -- $ 1,262,561
Product development... 336,519 -- -- 336,519
Service............... 4,414,932 1,138,783 -- 5,553,715
----------- ---------- --------- -----------
Total revenue....... 5,714,750 1,438,045 -- 7,152,795
----------- ---------- --------- -----------
Cost of revenue:
License............... 845,495 44,777 -- 890,272
Product development... 78,373 -- -- 78,373
Service............... 2,879,676 873,232 -- 3,752,908
----------- ---------- --------- -----------
Total cost of
revenue............ 3,803,544 918,009 -- 4,721,553
----------- ---------- --------- -----------
Gross profit ........... 1,911,206 520,036 -- 2,431,242
Operating Expense:
Sales and marketing... 1,215,300 61,996 -- 1,277,296
Research and
development.......... 2,670,018 226,095 -- 2,896,113
General and
administrative....... 4,070,054 116,631 321,262 (B) 4,507,947
----------- ---------- --------- -----------
Total operating
expense............ 7,955,372 404,722 321,262 8,681,356
----------- ---------- --------- -----------
Operating (loss)
income................. (6,044,166) 115,314 (321,262) (6,250,114)
Interest expense........ (140,713) (9,259) -- (149,972)
Other income (expense).. 26,656 (24,248) -- 2,408
----------- ---------- --------- -----------
Net (loss) income before
income taxes........... (6,158,223) 81,807 (321,262) (6,397,678)
Provision for income
taxes.................. 4,800 800 -- 5,600
----------- ---------- --------- -----------
Net loss................ $(6,163,023) $ 81,007 $(321,262) $(6,403,278)
=========== ========== ========= ===========
Net loss per share:
Basic and diluted..... $ (2.00) $ (2.08)
=========== ===========
Weighted average shares
outstanding:
Basic and diluted..... 3,077,115 3,077,115
=========== ===========
</TABLE>
(A) Reflects the operations of PSI-Med for the eight months ended August
31, 1999 as the operations of PSI-Med are included in our statement of
operations from September 1, 1999.
(B) To reflect the expense due to the amortization of goodwill on a
straight-line basis over seven years.
F-28
<PAGE>
Velocity.com, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro forma Pro forma
Velocity.com PSI-Med adjustments combined
------------ ---------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
License............... $ 570,694 $ 516,559 $ -- $ 1,087,253
Product development... 564,560 -- -- 564,560
Service............... 3,488,397 1,694,032 -- 5,182,429
----------- ---------- --------- -----------
Total revenue....... 4,623,651 2,210,591 -- 6,834,242
----------- ---------- --------- -----------
Cost of revenue:
License............... 756,156 -- -- 756,156
Product development... 208,533 -- -- 208,533
Service............... 2,314,026 1,535,514 -- 3,849,540
----------- ---------- --------- -----------
Total cost of
revenue............ 3,278,715 1,535,514 -- 4,814,229
----------- ---------- --------- -----------
Gross profit............ 1,344,936 675,077 -- 2,020,013
----------- ---------- --------- -----------
Operating expense:
Sales and marketing... 1,643,868 168,135 -- 1,812,003
Research and
development.......... 1,832,783 237,105 -- 2,069,888
General and
administrative....... 3,768,388 587,077 321,262 (C) 4,676,727
----------- ---------- --------- -----------
Total operating
expense............ 7,245,039 992,317 321,262 8,558,618
----------- ---------- --------- -----------
Operating loss.......... (5,900,103) (317,240) (321,262) (6,538,605)
Interest expense........ (92,955) -- -- (92,955)
Other expense........... (8,643) (86,042) -- (94,685)
----------- ---------- --------- -----------
Loss before income
taxes.................. (6,001,701) (403,282) (321,262) (6,726,245)
Provision for income
taxes.................. 4,000 800 -- 4,800
----------- ---------- --------- -----------
Net loss................ $(6,005,701) $ (404,082) $(321,262) $(6,731,045)
=========== ========== ========= ===========
Net loss per share:
Basic and diluted..... $ (1.97) $ (2.21)
=========== ===========
Weighted average share
outstanding:
Basic and diluted..... 3,050,779 3,050,779
=========== ===========
</TABLE>
(C) To reflect the amortization expense due to the amortization of goodwill
on a straight-line basis over seven years.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PSI-Med Corporation:
We have audited the accompanying balance sheets of PSI-Med Corporation as
of May 31, 1998 and 1999 and the related statements of operations,
stockholders' deficit and cash flows for each of the years in the three-year
period ended May 31, 1999. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PSI-Med Corporation as of
May 31, 1998 and 1999 and the results of its operations and its cash flows for
each of the years in the three-year period ended May 31, 1999, in conformity
with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, Velocity.com, Inc.
acquired PSI-Med Corporation on September 20, 1999. As such, the PSI-Med
Corporation financial statements as of May 31, 1998 and 1999 and for each of
the years in the three-year period ended May 31, 1999 do not include any
adjustments relating to the realization and classification of assets and
liabilities that might be necessary to reflect the actions or future
intentions of Velocity.com, Inc.
KPMG LLP
Orange County, California
August 4, 1999, except
as to note 9, which is as of
September 20, 1999
F-30
<PAGE>
PSI-Med Corporation
BALANCE SHEETS
May 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 17,158 $ 38,850
Accounts receivable, net of allowances for doubtful
accounts of $182,518 and $56,607 for 1998 and 1999,
respectively....................................... 112,417 126,720
Prepaid expenses.................................... 2,145 10,801
----------- -----------
Total current assets............................. 131,720 176,371
Furniture, fixtures and equipment, net............... 102,902 85,214
Goodwill, net of accumulated amortization of $12,413
as of May 31, 1999.................................. -- 53,713
Other assets......................................... 11,588 9,738
----------- -----------
$ 246,210 $ 325,036
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 491,142 $ 395,762
Accrued liabilities................................. 141,851 140,680
Advances from affiliate............................. 8,000 22,000
Current portion of notes payable to related
parties............................................ 353,057 576,673
Notes payable....................................... 67,639 46,459
Deferred compensation payable to related parties.... 300,000 300,000
Unearned revenue.................................... 68,487 66,807
Sales taxes payable................................. 133,926 130,988
Current portion of capital lease obligations........ 15,673 17,021
----------- -----------
Total current liabilities........................ 1,579,775 1,696,390
Capital lease obligations, excluding current
portion............................................. 44,110 28,880
Notes payable to related parties, less current
maturities.......................................... 299,329 123,408
----------- -----------
Total liabilities................................ 1,923,214 1,848,678
----------- -----------
Commitments and subsequent events
Stockholders' deficit:
Common stock, no par value, 200,000 shares
authorized; 84,693 shares issued and outstanding as
of May 31, 1998 and 1999........................... 367,204 367,204
Additional paid-in capital.......................... -- 90,000
Accumulated deficit................................. (2,044,208) (1,980,846)
----------- -----------
Total stockholders' deficit...................... (1,677,004) (1,523,642)
----------- -----------
$ 246,210 $ 325,036
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
PSI-Med Corporation
STATEMENTS OF OPERATIONS
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Software................................ $ 651,119 $ 122,199 $ 102,500
Service and support..................... 1,939,766 2,128,828 2,151,167
---------- ---------- ----------
Total revenue......................... 2,590,885 2,251,027 2,253,667
---------- ---------- ----------
Cost of revenue:
Software................................ 162,465 118,812 179,721
Service and support..................... 1,602,554 1,188,153 1,241,428
---------- ---------- ----------
Total cost of revenue................. 1,765,019 1,306,965 1,421,149
---------- ---------- ----------
Gross profit.............................. 825,866 944,062 832,518
Operating expense--selling, general and
administrative........................... 1,676,594 1,459,107 743,457
---------- ---------- ----------
Operating income (loss)................... (850,728) (515,045) 89,061
Other income (expense), net............... (61,106) 63,604 (24,899)
---------- ---------- ----------
Earnings (loss) before income taxes....... (911,834) (451,441) 64,162
Income tax expense........................ 800 800 800
---------- ---------- ----------
Net earnings (loss)....................... $ (912,634) $ (452,241) $ 63,362
========== ========== ==========
Basic net earnings (loss) per share....... $ (11.88) $ (5.34) $ 0.75
========== ========== ==========
Weighted average number of shares
outstanding.............................. 76,813 84,693 84,693
========== ========== ==========
Diluted net earnings (loss) per share..... $ (11.88) $ (5.34) $ 0.70
========== ========== ==========
Weighted average number of shares
outstanding.............................. 76,813 84,693 90,884
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
PSI-Med Corporation
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Common stock Additional
--------------- paid-in Accumulated
Shares Amount capital deficit Total
------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at May 31,
1996.................... 54,118 $ 5,086 $ -- $ (679,333) $ (674,247)
Issuance of common
stock................... 30,575 362,118 -- -- 362,118
Net loss................. -- -- -- (912,634) (912,634)
------ -------- ------- ----------- -----------
Balances at May 31,
1997.................... 84,693 367,204 -- (1,591,967) (1,224,763)
Net loss................. -- -- -- (452,241) (452,241)
------ -------- ------- ----------- -----------
Balances at May 31,
1998.................... 84,693 367,204 -- (2,044,208) (1,677,004)
Contribution of executive
compensation ........... -- -- 90,000 -- 90,000
Net earnings............. -- -- -- 63,362 63,362
------ -------- ------- ----------- -----------
Balances at May 31,
1999.................... 84,693 $367,204 $90,000 $(1,980,846) $(1,523,642)
====== ======== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
PSI-Med Corporation
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $(912,634) $(452,241) $ 63,362
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization................ 47,871 45,677 59,414
Contribution of executive compensation....... -- -- 90,000
Provision for deferred employee
compensation................................ 45,756 -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (23,016) 67,943 (14,303)
Other assets................................ (7,621) 3,118 (6,806)
Accounts payable............................ 347,015 39,118 (95,380)
Accrued liabilities......................... 230,655 (88,804) (1,171)
Advance from affiliates..................... -- 8,000 14,000
Unearned revenue............................ 58,702 9,785 (1,680)
Sales taxes payable......................... 168,182 (160,529) (2,938)
--------- --------- --------
Net cash (used in) provided by operating
activities................................ (45,090) (527,933) 104,498
--------- --------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment.................................... (134,483) (30,371) (29,313)
Acquisition of Physicians Management Services,
Inc.......................................... -- -- (6,000)
--------- --------- --------
Net cash used in investing activities...... (134,483) (30,371) (35,313)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of capital stock....... 362,118 -- --
Increase in borrowings from related parties... (48,306) 320,264 (12,431)
Net increase in borrowings.................... 60,050 (31,911) (21,180)
Principal payments on lease obligations....... 10,077 47,493 (13,882)
--------- --------- --------
Net cash provided by (used in) financing
activities................................ 383,939 335,846 (47,493)
--------- --------- --------
Increase (decrease) in cash and cash
equivalents............................... 204,366 (222,458) 21,692
--------- --------- --------
Cash and cash equivalents at beginning of
year.......................................... 35,250 239,616 17,158
--------- --------- --------
Cash and cash equivalents at end of year....... $ 239,616 $ 17,158 $ 38,850
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid for income taxes.................... $ 800 $ 800 $ 800
Cash paid for interest........................ 29,952 24,286 37,234
========= ========= ========
Supplemental disclosure of noncash investing
activities:
Promissory note issued in exchange for the
acquisition of Physical Management Services,
Inc.......................................... $ -- $ -- $ 77,116
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS
May 31, 1997, 1998 and 1999
(1) Organization and Summary of Significant Accounting Policies
Business Description
We are a California corporation which develops and distributes medical
accounting software for medical facilities such as health maintenance
organizations, independent physicians associations, medical groups, and
medical accounting service bureaus located throughout the United States. The
software has been sold as stand alone systems with customers maintaining the
HP3000 hardware required to run the software at their site.
We also maintain our own computer system at our corporate offices in order
to service physicians requiring complete accounts receivable management and
collection services. Additionally, we offer local clients the use of our
medical accounting software through our computer system in a time share mode.
These models have been the prevailing methods because of the high cost of
communication lines and equipment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks with original
maturities of three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation of
furniture, fixtures and equipment is provided using the straight-line method
over the estimated useful lives of the assets of three to five years.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
"Software Revenue Recognition." Under SOP 97-2, if a software sales
arrangement does not require significant modification or customization of the
software, revenue from the sale of the software is recognized when evidence of
an arrangement exists, the fee is fixed and determinable, the license
agreement has been delivered and collection of any resulting receivable is
probable.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued an SOP which delayed for one year the effective date of
certain provisions of SOP 97-2 with respect to what constitutes vendor-
specific objective evidence of fair value of the delivered software element in
certain multiple-element arrangements that include service elements entered
into by entities that never sell the software elements separately. In December
1998, the AICPA issued SOP 98-9, which amended certain paragraphs of SOP 97-2
to require recognition of revenue using the residual method under certain
circumstances, and is effective for fiscal years beginning after March 15,
1999. We do not expect the adoption of this SOP to have a material impact on
our financial statements.
Revenue from the sales of software is recognized when delivery has
occurred, the fee is fixed and determinable and collection of any resulting
receivable is probable. Revenue from servicing and support is recognized as
the related services are performed.
F-35
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 130 and SFAS No. 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information," respectively (collectively, the Statements). The
Statements are effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting of comprehensive income and
its components in annual financial statements. SFAS No. 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. For the years ended May 31, 1997, 1998 and 1999, comprehensive
income (loss) is equal to our net earnings (loss). The Company operates in one
segment and all operations and customers are within the United States.
Application of the Statements' requirements did not have a material impact on
our financial position or results of operations.
In 1998, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee ("AcSEC) issued SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires certain costs incurred in connection with developing or obtaining
internal-use software to be capitalized and other costs to be expensed.
Application of this SOP's requirements did not have a material impact on our
financial position or results of operations.
Stock-Based Compensation
We adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the service period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, and provide pro forma net income
(loss) disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. We have elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying amounts of cash and
cash equivalents, accounts receivable, unbilled accounts receivable, other
assets, notes payable, notes payable to related parties, advances from
affiliate, accounts payable and accrued expenses, approximate fair value
because of the short maturity of these instruments. We use market prices, when
available, or discounted cash flows to calculate these fair values. The fair
value of our notes payable is estimated based on the current rates offered to
us for notes payable of the same remaining maturities and approximates its
carrying value.
Year 2000
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. We are addressing this risk to the availability and integrity of
financial systems and products and the reliability of operational systems. We
have tested our Integrated Provider Network System and have completed the Year
2000 conversion of this system. We are in the process of assessing the system's
F-36
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year 2000 compliance identifying Year 2000 remaining compliance issues in its
other systems, equipment and processes. In addition to a review of internal
systems, we have initiated formal communications with third parties with which
we do business in order to determine whether or not they are Year 2000
compliant and the extent to which we may be vulnerable to third parties'
failure to become Year 2000 compliant. Additionally, we are making changes to
such systems, updating or replacing such equipment and modifying such processes
to make them Year 2000 compliant. The total cost of compliance and its effect
on our future results of operations are not expected to be material. However,
due to the complexities of estimating the cost of modifying applications to
become Year 2000 compliant and the difficulties in assessing third parties'
ability to become Year 2000 compliant, estimates may be subject to change.
We have not developed a Year 2000 contingency plan and believe that our
information systems will be Year 2000 compliant; however, there can be no
assurance that all of our systems will be Year 2000 compliant, that the costs
to be Year 2000 compliant will not exceed our current expectations, or that the
failure of such systems to be Year 2000 compliant will not have a material
adverse effect on our business.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles (including goodwill)
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Capitalized Software Development Costs
Software development costs incurred after the establishment of technological
feasibility are capitalized and later amortized using the greater of the
straight-line method or based on the estimated revenue distribution over the
remaining estimated economic life of the products. Such policy results in our
amortizing our capitalized software development costs over an estimated
economic life of three to seven years. Software development costs were fully
amortized as of May 31, 1996.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the
net assets of the acquired company at the date of acquisition. Goodwill is
amortized on a straight-line basis over two years. The Company periodically
assesses the recoverability of goodwill based on an analysis of the cash flows
generated by the underlying assets. In the opinion of management, no impairment
of goodwill has occurred as of May 31, 1999.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The impact on deferred taxes of changes in tax rates and
laws, if any, are applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements in the period
enacted.
F-37
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable. Revenue from one
customer accounted for 19% and 13% of total revenues for the year ended May 31,
1998 and 1999, respectively.
Net Earnings (loss) Per Share
We compute net earnings (loss) per share based upon SFAS No. 128, "Earnings
per Share." The basic net earnings (loss) per share is computed by dividing the
net earnings (loss) available to common stockholders by the weighted-average
number of common shares outstanding. Potential common shares relating to stock
options have been included in the calculation of diluted net earnings per share
in the year ended May 31, 1999. Potential common shares relating to stock
options in each of the years ended May 31, 1997 and 1998 are anti-dilutive,
thus the diluted net earnings (loss) per share in these years is the same as
the basic net earnings (loss) per share.
(2) Acquisition of Physician Management Services, Inc.
On January 15, 1999, we acquired the fixed assets and customer base of
Physician Management Services, Inc. (PMS). The PMS purchase price totaled
$83,116, payable in $6,000 in cash and $77,116 evidenced by an unsecured
promissory note. The acquisition was accounted for as a purchase. PMS is an
accounts receivable management company which performs the total collection
process for doctors and medical groups. The primary client's of PMS are the
University of California, Irvine (UCI) departments and doctors affiliated with
UCI. The purchase price of $83,116 will be reduced if 12% of the collections
for 24 months, related to the acquired customer base, are less than $83,116.
The goodwill recorded in conjunction with the purchase is being amortized over
two years, the life of the purchase contract.
Select unaudited pro forma financial data for the years ended May 31, 1998
and 1999, assuming the PMS acquisition occurred on June 1, 1997, are presented
as follows:
<TABLE>
<CAPTION>
Unaudited
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenue............................................ $ 2,761,306 $ 2,564,768
=========== ===========
Net earnings (loss)................................ $ (392,102) $ 159,785
=========== ===========
Stockholders' deficit.............................. $(1,634,516) $(1,474,832)
=========== ===========
</TABLE>
These pro forma results of operations and equity have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations and equity which actually would have resulted had the acquisition
occurred on the date indicated, or which may result in the future.
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Furniture and fixtures................................. $ 70,004 $ 78,320
Computer equipment..................................... 375,489 393,911
Office equipment....................................... 1,177 3,752
--------- ---------
446,670 475,983
Accumulated depreciation............................... (343,768) (390,769)
--------- ---------
$ 102,902 $ 85,214
========= =========
</TABLE>
F-38
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Commitments
We lease office space and equipment under noncancelable operating and
capital leases with various expiration dates through the year 2002.
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Period ending May 31:
2000................................................. $ 26,834 $117,877
2001................................................. 20,460 4,009
2002................................................. 7,994 --
-------- --------
Total minimum lease payments....................... 55,288 $121,886
========
Less amounts representing interest..................... (9,387)
--------
Present value of minimum lease payments............ 45,901
Less current portion of obligations under capital
leases................................................ (17,021)
--------
Obligations under capital leases, excluding current
portion............................................... $ 28,880
========
</TABLE>
Rent expense for the years ended May 31, 1997, 1998 and 1999 was $169,196,
$143,487 and $130,967, respectively.
F-39
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Notes Payable
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Notes payable to related parties consist of the
following (see note 10):
Note payable to stockholder for $25,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... $ 29,166 $ 32,864
Note payable to affiliate for $14,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... 14,317 16,014
Note payable to affiliate for $32,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... 32,483 36,240
Notes payable to related party for $90,000; bearing
interest rate of 8% until December 31, 1997 and 12%
thereafter; principal and interest payable at
maturity; due on demand.............................. 106,155 119,618
Note payable to related party for $30,000; bearing
fixed interest rate of 12%; interest payable monthly;
due on demand........................................ 30,000 30,000
Note payable to majority stockholder for $147,284;
bearing fixed interest rate of 11%; interest payable
quarterly; due June 1, 2000.......................... 85,629 60,506
Note payable to related party for $162,996; bearing
fixed interest rate of 10%; principal and interest
due monthly; due February 16, 2004................... 159,699 138,725
Unsecured note payable to PMS for $77,116; bearing no
interest rate; principal payable monthly calculated
as 12% of gross billings collected; due January 15,
2001................................................. -- 66,684
Note payable to related party for $150,000; bearing no
interest; due October 11, 1999....................... 150,000 150,000
-------- --------
Note payable to stockholder for $15,000; bearing fixed
interest rate of 10%; interest and principal payable
at maturity; due on demand........................... 44,937 49,430
Note payable to a bank secured by the Company's assets
and a personal guarantee by an officer of the Company;
bearing interest rate of prime plus 6.25% (14% at May
31, 1999); principal and interest due monthly; due
June 15, 2000......................................... 67,639 46,459
-------- --------
720,025 746,540
Less current portion................................... (420,696) (623,132)
-------- --------
Total notes payable, less current maturities......... $299,329 $123,408
======== ========
</TABLE>
Total notes payable to related parties............. 652,386 700,081
Principal maturities of the notes payable at May 31, 1999 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $623,132
2000.............................................................. 56,684
2001.............................................................. 36,000
2002.............................................................. 30,724
--------
$746,540
========
</TABLE>
F-40
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Related Party Transactions
Accounts Payable to Related Parties
At May 31, 1998 and 1999, we had the following accounts payable to related
parties recorded within accounts payable in the accompanying balance sheet:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Accounts payable to related parties...................... $116,595 $73,129
======== =======
</TABLE>
Deferred Compensation Payable to Related Parties
At May 31, 1998 and 1999, we had the following deferred compensation payable
to related parties:
<TABLE>
<S> <C> <C>
Deferred compensation payable to related parties........ $300,000 $300,000
======== ========
</TABLE>
Executive Compensation
Since June 7, 1998, Velocity.com, Inc. has committed to fund the salary of
PSI-Med's President and majority shareholder. The portion of the President's
salary attributable to the Company's business totals $90,000 and has been
charged to expense in the accompanying 1999 financial statements and credited
to additional paid-in capital.
(7) Income Taxes
Income tax expense for the years ended May 31, 1997, 1998 and 1999,
respectively, consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $-- $-- $--
State and local............................................. 800 800 800
Deferred:
Federal..................................................... -- -- --
State and local............................................. -- -- --
---- ---- ----
$800 $800 $800
==== ==== ====
</TABLE>
F-41
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the tax effects of temporary differences
which give rise to significant portions of the deferred tax assets and
liabilities as of May 31, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Current assets:
Accrued liabilities and other deferred tax
assets.......................................... $ 331,645 $ 283,768
--------- ---------
Total.......................................... 331,645 283,768
Less valuation allowance for current deferred tax
assets.......................................... (331,645) (283,768)
--------- ---------
Net current deferred tax assets................ -- --
--------- ---------
Noncurrent assets:
Net operating loss carryforward.................. 402,286 386,458
Depreciation and amortization.................... 7,422 16,722
--------- ---------
Total.......................................... 409,708 403,180
Less valuation allowance for non-current deferred
tax assets........................................ (409,708) (403,180)
--------- ---------
Net noncurrent deferred tax assets................. -- --
--------- ---------
Net deferred tax assets............................ $ -- $ --
========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss carryforward.
Realization of the deferred tax assets is dependent on generating future
taxable income. For financial reporting purposes, a valuation allowance was
recorded at May 31, 1998 and 1999 to reflect the uncertainty of generating
taxable income sufficient to utilize the gross deferred tax asset. In addition,
the utilization of the net operating loss carryforwards may be limited due to
restrictions imposed under applicable Federal and state tax law due to a change
in ownership. The valuation allowance decreased by $239,809 and increased by
$54,405 for the years ended May 31, 1998 and 1999, respectively.
As of May 31, 1999, we have net operating loss carryforwards for federal and
state income tax purposes of approximately $1,038,000 and $470,000,
respectively, which are available to offset future taxable income, if any,
through 2019.
Due to the uncertainty surrounding the realization of the benefits of our
favorable tax attributes in future tax returns, we have fully reserved our
deferred tax assets as of May 31, 1998 and 1999, respectively. In assessing the
potential realization of deferred tax assets, we considered whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
F-42
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Stock Options
A summary of the activity of our stock options are as follows:
<TABLE>
<CAPTION>
Weighted-
average
Shares of exercise price
options per option
--------- --------------
<S> <C> <C>
Outstanding as of May 31, 1996...................... 3,000 $ 20.00
Granted during the year ended May 31, 1997.......... 5,278 44.47
----- -------
Outstanding at May 31, 1997......................... 8,278 35.60
Granted during the year ended May 31, 1998.......... -- --
----- -------
Outstanding at May 31, 1998......................... 8,278 35.60
Granted during the year ended May 31, 1999.......... -- --
----- -------
Outstanding at May 31, 1999......................... 8,278 $ 35.60
===== =======
</TABLE>
The following table summarizes information about stock options exercisable
at May 31, 1999:
<TABLE>
<CAPTION>
Number of Options Weighted-average Weighted-average
Range of Exercisable at exercise price remaining
exercise prices May 31, 1999 at date of grant contractual life
--------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$ 20.00 3,000 $20.00 9 yrs.
39.71 1,939 39.71 4 yrs.
47.23 3,339 47.23 4.75 yrs.
-----
8,278
=====
</TABLE>
The Company applies APB No. 25 in accounting for its employee stock based
compensation plan and uses the intrinsic value method in accounting for options
granted to employees. Accordingly, no compensation costs have been recognized
in the accompanying statements of operations for any of its stock options
granted to employees because the exercise price of each option equaled or
exceeded the fair value of the underlying common stock. Had we determined
compensation costs based on the fair value at the grant date for our stock
options under SFAS No. 123, pro forma net earnings (loss) would have been as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- -------
<S> <C> <C> <C>
Net earnings (loss):
As reported............................... $ (912,634) $(452,241) $63,362
Assumed stock compensation cost........... 119,252 -- --
----------- --------- -------
Pro forma, adjusted..................... $(1,031,886) $(452,241) $63,362
=========== ========= =======
Basic net earnings (loss) per share:
As reported............................... $ (11.88) $ (5.34) $ 0.75
----------- --------- -------
Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.75
----------- --------- -------
Diluted net earnings (loss) per share:
As reported............................... $ (11.88) $ (5.34) $ 0.70
----------- --------- -------
Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.70
=========== ========= =======
</TABLE>
The above pro forma results assume we began recording compensation expense
for options granted to employees subsequent to June 1, 1996 and may not be
indicative of pro forma results to be expected in future
F-43
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
periods. The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... 40% -- --
Average life................................................ 7 yrs. -- --
Weighted-average risk-free rate............................. 6.80% -- --
Dividends................................................... -- -- --
</TABLE>
The weighted-average fair value of options granted for the year ended May
31, 1997 was $22.59.
(9) Subsequent Events
As part of our plans to replace our debt obligations, agreements were signed
to convert obligations to common stock at $30 per share:
<TABLE>
<CAPTION>
Debt to
Contract be Shares
Date Converted of stock
-------- --------- ------------
<S> <C> <C> <C>
Accounts payable to stockholder............. 06/16/99 $ 25,000 833 shares
Note payable to stockholders................ 06/28/99 32,864 1,095 shares
Deferred compensation to related party...... 06/16/99 200,000 6,666 shares
Note payable to related party............... 08/05/99 150,000 5,000 shares
Deferred compensation to related party...... 08/16/99 50,000 1,667 shares
</TABLE>
Additionally, management negotiated the following settlements to reduce the
Company's obligations:
<TABLE>
<CAPTION>
Final
amount
paid by
Date Total the
settled obligation Company
-------- ---------- --------
<S> <C> <C> <C>
Accounts payable to vendors.................... 08/10/99 $ 66,674 $ 39,474
Accounts payable to employees.................. 08/25/99 52,083 27,415
Note payable to related party.................. 09/13/99 133,147 70,151
-------- --------
$251,904 $137,040
======== ========
</TABLE>
On September 20, 1999, Velocity.com, Inc. acquired us. Our shareholders
exchanged all of their shares of our common stock for 9,322 shares of Series A-
II preferred stock of Velocity.com, Inc. making Velocity.com, Inc. our sole
shareholder.
F-44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as underwriter and with respect to its unsold allotments or
subscriptions.
3,000,000 Shares
[VELOCITY.COM LOGO]
Common Stock
-----------------------------
Preliminary Prospectus
-----------------------------
Needham & Company, Inc. Punk, Ziegel & Company
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 14,387
NASD filing fee................................................... 5,675
Nasdaq National Market listing fee................................ 94,000
Printing and engraving............................................ 260,000
Legal fees and expenses........................................... 500,000
Accounting fees and expenses...................................... 950,000
Transfer agent fees............................................... 10,000
Blue sky fees and expenses........................................ 10,000
Miscellaneous..................................................... *
---------
Total........................................................... 1,844,062
=========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI of the Registrant's Amended and Restated
Certificate of Incorporation provides for indemnification of its directors to
the maximum extent permitted by the Delaware General Corporation Law and
Section 43 of Article XI of the Registrant's Bylaws provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
the Registrant intends to enter into Indemnification Agreements with each
director and certain officers containing provisions which are in some respects
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements may require the
Company, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. Reference is also made to indemnifying officers
and directors of the Company against certain liabilities. Reference is made to
the following documents filed as exhibits to this Registration Statement
regarding relevant indemnification provisions described above and elsewhere
herein: (1) the form of Underwriting Agreement, filed as Exhibit 1.1; (2) the
Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1; (3)
the Bylaws of the Registrant, filed as Exhibit 3.2; (4) the form of
Indemnification Agreement entered into by the Registrant with each of its
directors and executive officers, filed as Exhibit 10.25; and (5) the
Indemnity and Subrogation Agreement, filed as Exhibit 10.7.
Item 15. Recent Sales of Unregistered Securities
Since August 1996, the Registrant issued and sold the following
unregistered securities:
(1) During the period, the Company granted stock options covering an
aggregate of 1,314,731 shares of common stock to employees, directors and
consultants of the Company, at a weighted average exercise price of $5.14 per
share. The Company sold an aggregate of 27,456 shares of its common stock for
consideration in the aggregate amount of $51,676 pursuant to the exercise of
stock options granted under the Company's stock option
II-1
<PAGE>
plans. The issuances of common stock under the Company's stock option plans
were deemed exempt from registration under the Securities Act in reliance on
Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation.
(2) From August 1996 to May 1997, the Registrant issued and sold an
aggregate of 673,357 shares of Series B Preferred Stock at a price of
approximately $4.03 per share to 77 investors for an aggregate purchase price
of approximately $2,710,634. The issuance of the Series B Preferred Stock was
exempt from registration in reliance on Section 4(2) of the Securities Act as
an issuance not involving a public offering. Each of the investors who
purchased shares of Series B Preferred Stock had a pre-existing relationship
with the Company or was a sophisticated investor, and each had access to
information about the company necessary to make an investment decision. There
were no underwriting discounts or commissions paid in connection with the
issuance of the Series B Preferred Stock. 6,471 of these shares were converted
into common stock in 1999. The remaining shares of Series B Preferred Stock
will convert into 666,886 shares of common stock of the Registrant upon
completion of this offering.
(3) On December 20, 1996, the Registrant issued 3,032 shares of Series A-
II Preferred Stock and 3,032 shares of Series A-III Preferred Stock to
Velocity Healthcare Informatics, Inc. and Dean Health Systems, Inc. in
exchange for substantially all of the assets of Velocity Healthcare
Informatics, Inc. The issuance of the Series A-II Preferred Stock and Series
A-III Preferred Stock to these two entities was exempt from registration in
reliance on Section 4(2) of the Securities Act as an issuance not involving a
public offering. Each of the recipients of the Series A-II and Series A-III
Preferred Stock had a pre-existing relationship with the Company or was
sophisticated, and each had access to information about the company necessary
to make an investment decision. There were no underwriting discounts or
commissions paid in connection with this issuance. Such shares of Series A-II
and Series A-III Preferred Stock will convert into 121,280 shares of common
stock of the Registrant upon the closing of this offering.
(4) On June 4, 1997, the Registrant issued 3,734 shares of Series A-II
Preferred Stock to a group of 3 shareholders of Intedata, Inc. for the
acquisition of 100% of the voting securities of Intedata, Inc. The issuance of
the Series A-II Preferred Stock to these shareholders of Intedata was exempt
from registration in reliance on Section 4(2) of the Securities Act as an
issuance not involving a public offering. Each of these recipients of the
Series A-II Preferred Stock had a pre-existing relationship with the Company
or was sophisticated, and each had access to information about the company
necessary to make an investment decision. There were no underwriting discounts
or commissions paid in connection with this issuance. Such shares of Series A-
II preferred stock will convert into 74,680 shares of common stock of the
Registrant upon the closing of this offering.
(5) On June 23, 1997, the Registrant issued 7,466 shares of Series A-II
Preferred Stock to the sole shareholder of L.I.N.C., Inc. For the acquisition
of 100% of the voting securities of L.I.N.C., Inc. The issuance of the Series
A-II Preferred Stock to the sole shareholder of L.I.N.C was exempt from
registration in reliance on Section 4(2) of the Securities Act as an issuance
not involving a public offering. This recipient of the Series A-II Preferred
Stock had a pre-existing relationship with the Company or was sophisticated,
and had access to information about the company necessary to make an
investment decision. There were no underwriting discounts or commissions paid
in connection with this issuance. Such shares of Series A-II Preferred Stock
will convert into 149,320 shares of common stock of the Registrant upon the
closing of this offering.
(6) On May 14, 1997, the Registrant issued 13,065 shares of Series A-II
Preferred Stock to a group of five shareholders of MMS, Inc. for the
acquisition of 100% of the voting securities of MMS, Inc. The issuance of the
Series A-II Preferred Stock to these shareholders of MMS, Inc. was exempt from
registration in reliance of Section 4(2) of the Securities Act as an issuance
not involving a public offering. Each of these recipients of the Series A-II
Preferred Stock had a pre-existing relationship with the Company or was
sophisticated, and each had access to information about the company necessary
to make an investment decision. There were no underwriting discounts or
commissions paid in connection with this issuance. Such shares of Series A-II
Preferred Stock will convert into 261,300 shares of common stock of the
Registrant upon the closing of this offering.
(7) From October 1997 to August 1999, the Registrant issued and sold an
aggregate of 2,239,952 shares of Series C Preferred Stock at a price of
approximately $4.91 per share to 315 investors, including Conxion
II-2
<PAGE>
Corporation who purchased a total of 112,000 shares of Series C Preferred
Stock, for an aggregate purchase price of approximately $11,000,000. The
issuance of the Series C Preferred Stock was exempt from registration in
reliance on Section 4(2) of the Securities Act as an issuance not involving a
public offering. Each of the investors who purchased shares of Series C
Preferred Stock had a pre-existing relationship with the Company or was a
sophisticated investor, and each had access to information about the company
necessary to make an investment decision. In connection with the issuance of
the Series C Preferred Stock, the Company engaged the services of a third
party selling agent to assist in the private placement of such shares of
Series C Preferred Stock. In consideration for the services rendered by this
selling agent, the Company (i) paid a "placement fee" equaling 5% of the gross
proceeds from the sale of those shares of Series C Preferred Stock placed by
this selling agent (which equalled $36,191.85), (ii) issued options to
purchase a total of 37,628 shares of common stock of the Company to the
selling agent and (iii) reimbursed the selling agent for reasonable out-of-
pocket costs incurred in the placement of the Series C Preferred Stock. The
shares of Series C Preferred Stock will convert into 2,239,952 shares of
common stock of the Registrant upon completion of this offering.
(8) On November 14, 1997, the Registrant issued 4,828 shares of Series A-
II Preferred Stock to a group of 35 shareholders of Healthcheck, Inc. for the
acquisition of 100% of the voting securities of Healthcheck, Inc. The issuance
of the Series A-II Preferred Stock to the shareholders of Healthcheck, Inc.
was exempt from registration in reliance on Section 4(2) of the Securities Act
as an issuance not involving a public offering. Each of these recipients of
the Series A-II Preferred Stock had a pre-existing relationship with the
Company or was sophisticated, and each had access to information about the
Company necessary to make an investment decision. There were no underwriting
discounts or commissions paid in connection with this issuance. Such shares of
Series A-II Preferred Stock will convert into 96,560 shares of common stock of
the Registrant upon the closing of this offering.
(9) On September 9, 1998, the Registrant issued 21,154 shares of common
stock to a group of 8 former shareholders of Comprehensive Providers
Credentialing Services, Inc. pursuant to an adjustment provision contained in
the merger agreement by and between such shareholders and the Registrant,
dated May 23, 1996. The issuance of the common stock to the shareholders of
Comprehensive Providers Credentialing Services, Inc. was exempt from
registration in reliance on Section 4(2) of the Securities Act as an issuance
not involving a public offering. Each of these recipients of common stock were
parties to the prior merger agreement dated May 23, 1996 and thus were
existing shareholders of the Company. In addition, each of these recipients of
common stock had either a pre-existing relationship with the Company or was
sophisticated, and each had access to information about the company necessary
to make an investment decision. There were no underwriting discounts or
commissions paid in connection with this issuance.
(10) On September 20, 1999, the Registrant issued 9,322 shares of Series
A-II Preferred Stock and granted options to purchase 14,880 shares of common
stock to a group of 16 shareholders of PSI-Med Corporation for the acquisition
of 100% of the voting securities of PSI-Med. The issuance of the Series A-II
Preferred Stock to these shareholders of PSI-Med, Inc. was deemed to be exempt
from registration in reliance Rule 506 of Regulation D of the Securities Act
according to the notice on Form D filed with the SEC on December 7, 1999. The
9,322 shares of Series A-II Preferred Stock will convert into 186,440 shares
of common stock of the Registration upon completion of this offering.
(11) On November 29, 1999 the Registrant granted warrants to purchase
125,000 shares of common stock at an exercise price of $8.00 per share in
connection with a loan to the Registrant. In February 2000, the Registrant
issued warrants to three persons to purchase an aggregate of 43,750 shares of
common stock at an exercise price of $9.00 per share in connection with loans
to the Registrant. In March 2000, the Registrant issued warrants to twelve
persons to purchase an aggregate of 125,000 shares of common stock at an
exercise price of $9.00 per share in connection with loans to the Registrant.
These issuances were exempt from registration in reliance on Section 4(2) of
the Securities Act as an issuance not involving a public offering.
The recipients of securities in each of the transactions described above
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 other
instruments issued in such transactions.
II-3
<PAGE>
INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Velocity.com, Inc.:
The audits referred to in our report dated March 3, 2000 included the related
consolidated financial statement schedule for each of the years in the three-
year period ended December 31, 1999 included in the registration statement.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The audit report on the consolidated financial statements of Velocity.com, Inc.
and subsidiaries referred to above contains an explanatory paragraph that
states the Company has a significant contingent liability related to certain
sales of preferred stock as well as recurring losses from operations and a net
capital deficiency which have raised substantial doubt about the Company's
ability to continue as a going concern. The financial statement schedule
included in the registration statement does not include any adjustments that
might result from the outcome of this uncertainty.
KPMG LLP
San Francisco, California
March 3, 2000
II-4
<PAGE>
OrganicNet, Inc.
SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Other(1) Period
----------- ------------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended 1997:
Allowance for Doubtful
Accounts............. $ -- $113,000 $ -- $ -- $113,000
Year Ended 1998:
Allowance for Doubtful
Accounts............. $113,000 $ 15,800 $ -- $ -- $128,800
Year Ended December 31,
1999:
Allowance for Doubtful
Accounts ............ $128,800 $168,500 $(116,000) $56,600 $237,900
</TABLE>
- --------
(1) Reflects PSI-Med reserves acquired
II-5
<PAGE>
Item 16. Exhibit and Financial Statement Schedule
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1(1)** Amended and Restated Certificate of Incorporation of Registrant
3.2(1)** Bylaws of Registrant
4.1** Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant
5.1 Legal Opinion of Cooley Godward LLP
10.1** Amended and Restated Investor Rights Agreement, dated October 31,
1997, between Registrant and the Series A, B and C Investors
10.2** Indemnity and Subrogation Agreement, dated January 1, 1998, between
the registrant and Michael Meisel
10.3** 1996 Stock Option/Stock Issuance Plan
10.4** 1997 Stock Option/Stock Issuance Plan
10.5** Employment Agreement with Jack D. Anderson dated January 1, 1996
10.6** Employment Agreement with Robert L. Anderson dated January 1, 1996
10.7** Employment Agreement with William W. Shaw, III dated June 1, 1996
10.8** Employment Letter Agreement with William H. Matthews dated June 17,
1999
10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997
10.10** Employment Agreement with Michael J. Barry dated January 1, 1996
10.11** Form of Indemnification Agreement
10.12** Promissory Note, dated April 1, 1999, between Michael E. Meisel and
the Registrant
10.13** Promissory Note, dated June 1, 1997 between M. Jan Roughan and the
Registrant
10.14** Promissory Note, dated December 1, 1997 between M. Jan Roughan and
the Registrant
10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans Street
Associates, LLC and the Registrant
10.16+** Dedicated Server Agreement between Conxion and the Registrant dated
April 8, 1999
10.17+** Dedicated Server Agreement between Conxion and the Registrant dated
May 3, 1999
10.18+** T1 Service Agreement between Conxion and the Registrant dated May
23, 1999
10.19+** Dedicated Server Agreement between Conxion and the Registrant dated
June 1, 1999
10.20+** T1 Service Agreement between Conxion and the Registrant dated
September 1, 1999
10.21** Application Service Provider Agreement between Conxion and the
Registrant dated September 17, 1999
10.22** Distribution and Services Agreement between Superior Consultant
Holdings Corporation and the Registrant dated September 20, 1999
10.23** 1999 Equity Incentive Plan
10.24** Employee Stock Purchase Plan
21.1** Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
24.1** Power of Attorney (see signature page)
27.1** Financial Data Schedule
</TABLE>
- --------
(1) As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of this offering.
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately with the Commission.
II-6
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matters have been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 479(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter or
permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San
Francisco, State of California, on March 20, 2000.
VELOCITY.COM, INC.
/s/ Jack D. Anderson,
*By: ________________________________
Jack D. Anderson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack D. Anderson Chairman of the Board and March 20, 2000
______________________________________ Chief Executive Officer
Jack D. Anderson (Principal Executive
Officer)
/s/ William W. Shaw, III President March 20, 2000
______________________________________
William W. Shaw, III
* Chief Financial Officer March 20, 2000
______________________________________ (Principal Financial
William H. Matthews Officer)
* Director March 20, 2000
______________________________________
Gail E. Oldfather
* Director March 20, 2000
______________________________________
Michael A. Wilson
* Director March 20, 2000
______________________________________
Robert S. Garvie
* Director March 20, 2000
______________________________________
Robert L. Anderson
* Director March 20, 2000
______________________________________
M. Jan Roughan
* Director March 20, 2000
______________________________________
David W. McComb
Director March 20, 2000
______________________________________
James P. Clark
</TABLE>
/s/ Jack D. Anderson
*By: ________________________________
Jack D. Anderson
Attorney-in-fact
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1(1)** Amended and Restated Certificate of Incorporation of Registrant
3.2(1)** Bylaws of Registrant
4.1** Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant
5.1 Legal Opinion of Cooley Godward LLP
10.1** Amended and Restated Investor Rights Agreement, dated October 31,
1997, between Registrant and the Series A, B and C Investors
10.2** Indemnity and Subrogation Agreement, dated January 1, 1998, between
the registrant and Michael Meisel
10.3** 1996 Stock Option/Stock Issuance Plan
10.4** 1997 Stock Option/Stock Issuance Plan
10.5** Employment Agreement with Jack D. Anderson dated January 1, 1996
10.6** Employment Agreement with Robert L. Anderson dated January 1, 1996
10.7** Employment Agreement with William W. Shaw, III dated June 1, 1996
10.8** Employment Letter Agreement with William H. Matthews dated June 17,
1999
10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997
10.10** Employment Agreement with Michael J. Barry dated January 1, 1996
10.11** Form of Indemnification Agreement
10.12** Promissory Note, dated April 1, 1999, between Michael E. Meisel and
the Registrant
10.13** Promissory Note, dated June 1, 1997 between M. Jan Roughan and the
Registrant
10.14** Promissory Note, dated December 1, 1997 between M. Jan Roughan and
the Registrant
10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans Street
Associates, LLC and the Registrant
10.16+** Dedicated Server Agreement between Conxion and the Registrant dated
April 8, 1999
10.17+** Dedicated Server Agreement between Conxion and the Registrant dated
May 3, 1999
10.18+** T1 Service Agreement between Conxion and the Registrant dated May
23, 1999
10.19+** Dedicated Server Agreement between Conxion and the Registrant dated
June 1, 1999
10.20+** T1 Service Agreement between Conxion and the Registrant dated
September 1, 1999
10.21** Application Service Provider Agreement between Conxion and the
Registrant dated September 17, 1999
10.22** Distribution and Services Agreement between Superior Consultant
Holdings Corporation and the Registrant dated September 20, 1999
10.23** 1999 Equity Incentive Plan
10.24** Employee Stock Purchase Plan
21.1** Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
24.1** Power of Attorney (see signature page)
27.1** Financial Data Schedule
</TABLE>
- --------
(1) As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of this offering.
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately with the Commission.
<PAGE>
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
March 20, 2000
Velocity.com, Inc. www.cooley.com
330 Townsend Street, Suite 206
San Francisco, CA 94107 PATRICK A. POHLEN
650 843-5004
[email protected]
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Velocity.com, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") covering an underwritten public offering
of up to three million (3,000,000) shares of Common Stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Bylaws, as currently in effect, and
the originals or copies certified to our satisfaction of such records,
documents, certificates, memoranda and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below;
(ii) assumed that the Amended and Restated Certificate of Incorporation, as set
forth in Exhibit 3.1 of the Registration Statement, shall have been duly
approved and filed with the office of the Delaware Secretary of State; and (iii)
that the shares of Common Stock will be sold by the Underwriters at a price
established by the Pricing Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and non-
assessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward llp
By: /S/ Patrick A. Pohlen
--------------------------
Patrick A. Pohlen
<PAGE>
Exhibit 23.1
The Board of Directors
Velocity.com, Inc.
We consent to the use of our reports on the consolidated balance sheets of
Velocity.com, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1999,
and the related consolidated financial statement schedule, included herein and
to the reference to our firm under the headings "Experts" and "Selected
Consolidated Financial Data" in the Prospectus.
Our report dated March 3, 2000 contains an explanatory paragraph that states
that the Company has a significant contingent liability related to certain
sales of preferred stock as well as recurring losses and a net capital
deficiency which have raised substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
San Francisco, California
March 15, 2000
<PAGE>
Exhibit 23.2
The Board of Directors
PSI-Med Corporation
We consent to the use of our report on the balance sheets of PSI-Med
Corporation as of May 31, 1998 and 1999, and the related statements of
operations, stockholders' deficit and cash flows for each of the years in the
three-year period ended May 31, 1999, included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Our report dated August 4, 1999, except as to note 9, which is as of
September 20, 1999, contains an explanatory paragraph that states that
Velocity.com acquired PSI-Med Corporation on September 20, 1999. As such, the
PSI-Med Corporation financial statements as of May 31, 1998 and 1999 and for
each of the years in the three-year period ended May 31, 1999 do not include
any adjustments relating to the realization and classification of assets and
liabilities that might be necessary to reflect the actions or future
intentions of Velocity.com, Inc.
KPMG LLP
Orange County, California
March 15, 2000
