<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 000-28715
------------------------
NEOFORMA.COM, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0424252
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
3061 ZANKER RD.
SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(408) 468-4000
(THE REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 11, 2000, there were 126,873,856 outstanding shares of our common
stock, $.001 par value per share.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
NEOFORMA.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item Financial Statements
1.
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999........... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999......................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 6
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................... 13
Item Quantitative and Qualitative Disclosures About Market
3. Risk........................................................ 33
PART II. OTHER INFORMATION
Item Legal Proceedings...........................................
1. 35
Item Changes in Securities and Use of Proceeds...................
2. 35
Item Defaults Upon Senior Securities.............................
3. 35
Item Submission of Matters to a Vote of Security Holders.........
4. 35
Item Other Information...........................................
5. 35
Item Exhibits....................................................
6. 36
SIGNATURES............................................................. 38
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOFORMA.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 25,292 $ 74,427
Short-term investments.................................... 21,483 6,734
Accounts receivable, net of allowance for doubtful
accounts of $4 and $233, respectively................... 151 1,246
Unbilled revenue.......................................... -- 458
Prepaid expenses and other current assets................. 2,226 3,319
Deferred debt costs, current portion...................... 413 413
-------- ---------
Total current assets................................ 49,565 86,597
-------- ---------
LONG-TERM INVESTMENTS....................................... 2,027 1,997
PROPERTY AND EQUIPMENT, net................................. 8,771 24,089
INTANGIBLES, net............................................ 12,319 154,032
NON-MARKETABLE INVESTMENT................................... 2,500 5,500
OTHER ASSETS................................................ 1,585 1,862
DEFERRED DEBT COSTS, less current portion................... 602 392
-------- ---------
Total assets........................................ $ 77,369 $ 274,469
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable, current portion............................ $ 3,360 $ 4,201
Accounts payable.......................................... 7,123 17,206
Accrued payroll........................................... 1,410 2,429
Other accrued liabilities................................. 685 3,105
Deferred revenue.......................................... 99 887
-------- ---------
Total current liabilities........................... 12,677 27,828
-------- ---------
NOTES PAYABLE, less current portion......................... 7,743 7,694
-------- ---------
COMMITMENTS
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series C --
Authorized -- 5,110 shares
Issued and outstanding: 5,065 shares at December 31,
1999 and none at June 30, 2000;
par value -- $0.001; liquidation preference -- $3,900
at December 31, 1999................................... 3,884 --
-------- ---------
Series D --
Authorized -- 10,573 shares
Issued and outstanding: 10,196 shares at December 31,
1999 and none at June 30, 2000;
par value $0.001; liquidation preference -- $12,032 at
December 31, 1999...................................... 11,986 --
-------- ---------
Series E and E-1 --
Authorized -- 13,204 shares
Issued and outstanding: 12,870 shares at December 31,
1999 and none at June 30, 2000;
par value -- $0.001; liquidation preference -- $73,102
at December 31, 1999................................... 72,942 --
-------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A -- convertible preferred stock
Authorized -- 9,000 shares
Issued and outstanding: 9,000 shares at December 31,
1999 and none at June 30, 2000;
par value -- $0.001; liquidation preference -- $2,250
at December 31, 1999................................... 9 --
Series B -- convertible preferred stock
Authorized -- 2,860 shares
Issued and outstanding: 2,860 shares at December 31,
1999 and none at June 30, 2000;
par value -- $0.001; liquidation preference -- $1,430
at December 31, 1999................................... 3 --
Common Stock $0.001 par value:
Authorized -- 200,000 shares at June 30, 2000
Issued and outstanding: 14,407 shares at December 31,
1999 and 69,014 at June 30, 2000....................... 14 69
Warrants.................................................... 3,621 3,688
Additional paid-in capital.................................. 76,216 442,757
Notes receivable from stockholders.......................... (8,245) (9,995)
Deferred compensation....................................... (47,388) (49,965)
Unrealized loss on available-for-sale securities............ (40) (24)
Accumulated deficit......................................... (56,053) (147,583)
-------- ---------
Total stockholders' equity (deficit)................ (31,863) 238,947
-------- ---------
Total liabilities and stockholders' equity.......... $ 77,369 $ 274,469
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
NEOFORMA.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 2000 1999 2000
------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUE:
Transaction fees................................ -- $ 789 $ -- $ 1,644
Services........................................ -- 458 -- 458
Website sponsorship fees and other.............. 7 829 7 1,180
------- -------- ------- --------
Total revenue........................... 7 2,076 7 3,282
------- -------- ------- --------
OPERATING EXPENSES:
Cost of services(1)............................. -- 768 -- 768
Operations(2)................................... 741 2,768 1,319 5,773
Product development(3).......................... 1,284 5,185 2,568 10,168
Selling and marketing(4)........................ 1,502 12,101 2,382 22,004
General and administrative(5)................... 980 3,001 1,591 6,803
Amortization of intangibles..................... -- 8,086 -- 9,397
Amortization of deferred compensation........... 307 11,013 307 19,479
Write off of acquired in-process research and
development.................................. -- 15,000 -- 18,000
Abandoned acquisition costs..................... -- 2,742 -- 2,742
Restructuring................................... -- 2,100 -- 2,100
------- -------- ------- --------
Total operating expenses................ 4,814 62,764 8,167 97,234
------- -------- ------- --------
Loss from operations.................... (4,807) (60,688) (8,160) (93,952)
OTHER INCOME (EXPENSE):
Interest income................................. 80 1,458 128 2,966
Interest expense................................ (79) (330) (95) (551)
------- -------- ------- --------
Net loss................................ $(4,806) $(59,560) $(8,127) $(91,537)
======= ======== ======= ========
NET LOSS PER SHARE:
Basic and diluted............................... $ (3.84) $ (1.02) $ (7.95) $ (1.84)
======= ======== ======= ========
Weighted average shares -- basic and diluted.... 1,251 58,219 1,022 49,870
======= ======== ======= ========
PRO FORMA NET LOSS PER SHARE:
Basic and diluted............................... $ (0.17) $ (1.02) $ (0.32) $ (1.66)
======= ======== ======= ========
Weighted-average shares -- basic and diluted.... 28,372 58,219 25,696 55,143
======= ======== ======= ========
</TABLE>
---------------
(1) Excludes amortization of stock-based compensation of none, $130, none and
$130 for the quarters and six months ended June 30, 1999 and 2000,
respectively.
(2) Excludes amortization of stock-based compensation of $7, $609, $7 and $1,318
for the quarters and six months ended June 30, 1999 and 2000, respectively.
(3) Excludes amortization of stock-based compensation of $73, $942, $73 and
$2,090 for the quarters and six months ended June 30, 1999 and 2000,
respectively.
(4) Excludes amortization of stock-based compensation of $153, $4,940, $153 and
$7,190 for the quarters and six months ended June 30, 1999 and 2000,
respectively.
(5) Excludes amortization of stock-based compensation of $74, $4,392, $74 and
$8,751 for the quarters and six months ended June 30, 1999 and 2000,
respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NEOFORMA.COM, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 2000
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(8,127) $(91,537)
Adjustment to reconcile net loss to net cash used in
operating activities:
Amortization resulting from issuance of Series E preferred
stock in connection with prepaid consulting services.... -- 670
Valuation of common stock options issued in connection
with consulting services................................ -- 212
Valuation of warrants to purchase common stock in exchange
for consulting services................................. -- 67
Write off of in process research and development.......... -- 18,000
Depreciation and amortization of property and equipment... 235 3,642
Amortization of intangibles............................... -- 9,397
Amortization of deferred compensation..................... 307 19,479
Amortization of deferred debt costs....................... 41 210
Change in assets and liabilities, net of acquisitions:
Accounts receivable, net................................ -- (833)
Unbilled revenue........................................ -- (458)
Prepaid expenses and other assets....................... (164) (673)
Accounts payable........................................ 1,026 9,614
Accrued liabilities and accrued payroll................. 10 2,806
Deferred revenue........................................ -- (13)
------- --------
Net cash used in operating activities............... (6,672) (29,417)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investments....................... -- (862)
Sale of marketable investments............................ -- 15,863
Cash paid for the acquisition of Pharos Technologies,
Inc., net of cash acquired.............................. -- (500)
Cash paid for the acquisition of US Lifeline, Inc., net of
cash acquired........................................... -- (3,219)
Cash paid for the acquisition of EquipMD, Inc., net of
cash acquired........................................... -- (3,908)
Purchase of non-marketable investment..................... -- (3,000)
Cash paid on note issued in connection with the
acquisition of General Asset Recovery, Inc.............. -- (734)
Purchases of property and equipment....................... (1,270) (18,928)
------- --------
Net cash used in investing activities............... (1,270) (15,288)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of note receivable............................... -- (1,000)
Proceeds from the issuance of notes payable............... 2,197 --
Repayments of notes payable............................... -- (524)
Proceeds from the issuance of Series D mandatorily
redeemable convertible preferred stock, net of issuance
costs................................................... 11,986 --
Cash received related to options exercised, net of
repurchases............................................. 10 26
Repayments of notes receivable from stockholders.......... -- 10
Proceeds from the issuance of common stock, net of notes
receivable issued to common stockholders and offering
costs................................................... -- 95,328
------- --------
Net cash provided by financing activities........... 14,193 93,840
------- --------
Net increase in cash and cash equivalents........... 6,251 49,135
CASH AND CASH EQUIVALENTS, beginning of period.............. 812 25,292
------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 7,063 $ 74,427
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 49 $ 341
======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of preferred stock to common stock............. $ -- $ 88,824
======= ========
Issuance of warrants to purchase common stock............. $ 10 $ --
======= ========
Issuance of warrant to purchase Series D preferred
stock................................................... $ 1,046 $ --
======= ========
Issuance of note payable to related party in connection
with acquisition of Pharos Technologies, Inc............ $ -- $ 22,000
======= ========
Issuance of common stock in connection with the
acquisition of US Lifeline, Inc......................... $ -- $ 2,769
======= ========
Issuance of common stock in connection with the
acquisition of EquipMD, Inc............................. $ -- $133,615
======= ========
Notes receivable issued to common stockholders............ $ -- $ 1,750
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE> 6
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Neoforma.com, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These financial
statements and notes should be read in conjunction with the audited financial
statements and notes thereto, included in the Company's Amended Annual Report
filed on Form 10-K/A with the Securities and Exchange Commission. In the opinion
of management, the unaudited condensed financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of financial position, results of operations and cash flows
for the periods indicated. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for future quarters
or the year ending December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries General Asset Recovery, LLC ("GAR"), FDI
Information Resources, LLC ("FDI"), Pharos Technologies, Inc. ("Pharos"), U.S.
Lifeline, Inc. ("USL") and EquipMD, Inc. ("EquipMD"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENTS
The Company had investments of $46.0 million and $74.2 million as of
December 31, 1999 and June 30, 2000, respectively. Investments classified as
cash equivalents amounted to approximately $22,476,000 and $65.4 million at
December 31, 1999 and June 30, 2000, respectively. The investments were
classified as "available-for-sale," and the difference between the cost and fair
value of these investments was immaterial and is included in other comprehensive
income.
The amortized costs, aggregate fair value, and gross unrealized holding
gains and losses by major security type were as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
--------------------------------------
UNREALIZED
AMORTIZED AGGREGATE HOLDING
COST FAIR VALUE GAIN (LOSS)
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by states of the United
States and political subdivisions of the
states........................................... $37,500 $37,500 $ --
Corporate debt securities.......................... 36,680 36,656 (24)
------- ------- ----
$74,180 $74,156 $(24)
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 2000
--------------------------------------
UNREALIZED
AMORTIZED AGGREGATE HOLDING
COST FAIR VALUE GAIN (LOSS)
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by states of the United
States and political subdivisions of the
states........................................... $ 3,500 $ 3,500 $ --
Corporate debt securities.......................... 42,526 42,486 (40)
------- ------- ----
$46,026 $45,986 $(40)
======= ======= ====
</TABLE>
6
<PAGE> 7
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLES
Intangibles consist of acquired assembled work force, customer lists,
acquired software, developed technology and goodwill, which represent the amount
of purchase price in excess of the fair value of the tangible net assets, in the
acquisitions of GAR, FDI, Pharos, USL and EquipMD. (See Note 3). The intangibles
are amortized on a straight-line basis over a period of 3 to 7 years.
Intangibles are evaluated quarterly for impairment and written down to
net-realizable value, if necessary. No impairment has been recorded to date.
Intangible assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Assembled work force........................................ $ 240 $ 340
Software.................................................... 600 600
Developed technology........................................ -- 3,000
Customer lists.............................................. -- 19,000
Goodwill.................................................... 12,194 141,204
------- --------
13,034 164,144
------- --------
Less: Accumulated amortization.............................. (715) (10,112)
------- --------
$12,319 $154,032
======= ========
</TABLE>
NON-MARKETABLE INVESTMENT
In December 1999, the Company purchased 526,250 shares of IntraMedix, LLC,
("IntraMedix") a privately held corporation, in exchange for $2.5 million.
IntraMedix is a company that provides procurement services related to the
distribution of geriatric care products to the nursing home community. At June
30, 2000, the Company's ownership represented approximately 5% of the IntraMedix
common shares outstanding. The Company accounts for this investment using the
cost method. IntraMedix, Inc. is a related party to GeriMedix, a supplier with
which the Company has an agreement to perform e-Commerce services.
In March 2000, the Company purchased 600,000 shares of the Series D
preferred stock of Pointshare, Inc. ("Pointshare"), a privately held
corporation, in exchange for $3.0 million. Pointshare is a company that provides
on-line business to business administrative services to healthcare communities.
The Company's ownership represents approximately 2% of the Pointshare common
shares outstanding, assuming a 1:1 conversion ratio of preferred stock to common
stock. The Company accounts for this investment using the cost method.
NOTES RECEIVABLE
In November 1999, the Company issued a note receivable to Pharos in the
amount of $500,000. Subsequent to December 31, 1999, the Company acquired Pharos
(see Note 3.) As part of its consideration for the acquisition, in accordance
with the terms of the note, the Company forgave the entire principal amount
together with any accrued interest. As of December 31, 1999, the note receivable
is included in other assets in the accompanying financial statements.
On May 26, 2000, the Company issued a 30-day note receivable to Intramedix
in the amount of $1.0 million, evidenced by a $1.0 million promissory note
bearing 8% interest per annum. The Company in its sole discretion shall have the
right to convert its loan to IntraMedix into shares of Intramedix at any time.
As
7
<PAGE> 8
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of June 30, 2000, the note receivable is included in other assets in the
accompanying financial statements. Subsequent to the reporting period this note
was converted into equity in Intramedix.
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. There were no components of
comprehensive income for the quarter ended June 30, 1999. The components of
comprehensive income for the quarter and six months ended June 30, 1999 and 2000
were as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 2000 1999 2000
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss.......................... $(4,806) $(59,560) $(8,127) $(91,537)
Net gain (loss) on
available-for-sale securities... -- 22 -- 16
------- -------- ------- --------
Comprehensive loss................ $(4,806) $(59,538) $(8,127) $(91,521)
======= ======== ======= ========
</TABLE>
SEGMENT INFORMATION
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the six months ended
June 30, 1999 and 2000, the Company operated in a single business segment
providing e-commerce content to healthcare professionals in the medical
products, supplies and equipment industry. For the six months ended June 30,
2000, the Company generated 14%, 40%, 32% and 14% of its revenues from
transaction fees and website sponsorship fees associated with Shop, Auction,
Plan and Services Delivery, respectively. Through June 30, 2000, foreign
operations have not been significant in either revenue or investment in
long-lived assets.
BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED NET LOSS
PER SHARE
Basic net loss per share on a historical basis is computed using the
weighted-average number of shares of common stock outstanding. Diluted net loss
per common share was the same as basic net loss per share for all periods
presented since the effect of any potentially dilutive security is excluded, as
they are anti-dilutive as a result of the Company's net losses. The total number
of shares excluded from the diluted loss per share calculation relating to these
securities was approximately 36.6 million and 10.0 million for the six months
ended June 30, 1999 and 2000, respectively.
Pro forma basic and diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase) plus the weighted
average number of common shares resulting from the automatic conversion of
outstanding shares of convertible preferred stock, which occurred upon the
closing of the initial public offering in January 2000.
8
<PAGE> 9
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share for the quarter and six months ended
June 30, 1999 and 2000. (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 2000 1999 2000
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss...................................... $(4,806) $(59,560) $(8,127) $(91,537)
======= ======== ======= ========
Basic and diluted:
Weighted average shares of common stock
outstanding.............................. 1,507 67,745 1,259 56,691
Less: Weighted average shares of common
stock subject to repurchase.............. (256) (9,526) (237) (9,821)
------- -------- ------- --------
Weighted average shares used in computing
basic and diluted net loss per share..... 1,251 58,219 1,022 49,870
======= ======== ======= ========
Basic and diluted net loss per common
share.................................... $ (3.84) (1.02) $ (7.95) $ (1.84)
======= ======== ======= ========
Pro forma:
Net loss.................................... $(4,806) $(59,560) $(8,127) $(91,537)
======= ======== ======= ========
Shares used above............................. 1,251 58,219 1,022 49,870
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock................. 27,121 -- 24,674 5,273
------- -------- ------- --------
Weighted average shares used in computing pro
forma basic and diluted net loss per
share....................................... 28,372 58,219 25,696 55,143
------- -------- ------- --------
Pro forma basic and diluted net loss per
share....................................... $ (0.17) $ (1.02) $ (0.32) $ (1.66)
======= ======== ======= ========
</TABLE>
3. ACQUISITIONS
In January 2000, the Company acquired Pharos, a developer of content
management software that facilitates the locating, organizing and updating of
product information in an online marketplace. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date.
The total purchase price of approximately $22.8 million, consisted of
approximately 2.0 million shares of common stock valued at $22.0 million,
forgiveness of a loan outstanding to Pharos of $500,000, estimated assumed
liabilities of approximately $94,000 and estimated acquisition-related expenses
of approximately $230,000. Of the shares issued to the previous owners of
Pharos, approximately 700,000 shares were subject to repurchase rights which
lapse over the period of the original terms of the shares, which specify a
vesting period of four years. As of June 30, 2000, approximately 573,000 of
these shares were subject to repurchase. In the initial allocation of the
purchase price, $367,000, $3.0 million, $3.0 million and $16.5 million was
allocated to tangible assets, acquired in-process research and development,
developed technology and goodwill, respectively. The acquired in-process
research and development was expensed upon consummation of the acquisition. The
developed technology will be amortized when such technology has been put into
productive use over an estimated useful life of three years. The goodwill will
be amortized over an estimated useful life of five years.
In March 2000, the Company acquired USL, a healthcare content company. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price were allocated to the intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date.
9
<PAGE> 10
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total purchase price of approximately $7.2 million, consisted of
approximately 61,000 shares of common stock valued at $2.8 million, $3.5 million
in cash and estimated assumed liabilities of approximately $912,000. In the
initial allocation of the purchase price, $682,000 and $6.5 million was
allocated to tangible assets and goodwill, respectively. The goodwill will be
amortized over an estimated useful life of five years.
In April 2000, the Company acquired EquipMD a business-to-business
procurement company serving the physician market. The acquisition was accounted
for as a purchase. Accordingly, the purchase price was allocated to the
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the date of the acquisition.
The total purchase price of approximately $141.7 million consisted of
approximately 4.4 million shares of the Company common stock valued at
approximately $126.4 million, 269,000 vested options valued at approximately
$7.2 million and estimated assumed liabilities and acquisition costs of $8.1
million. In addition, the Company assumed approximately 807,000 unvested options
(See Note 8). In the initial allocation of the purchase price, $1.5 million,
$100,000, $19.0 million $106.1 million and $15.0 million was allocated to
tangible assets, assembled workforce, customer lists, goodwill and acquired in
process research and development, respectively. The intangible assets will be
amortized over an estimated useful life of five years.
The unaudited pro forma results of operations of the Company, GAR, FDI,
Pharos, USL and EquipMD for the six months ended June 30, 1999 and 2000,
assuming the acquisitions took place at the beginning of the period, are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
---------- -----------
<S> <C> <C>
Revenue..................................................... $ 1,132 $ 3,567
======== =========
Net loss.................................................... $(29,204) $(101,490)
======== =========
Basic and diluted net loss per share........................ $ (3.75) $ (1.99)
======== =========
</TABLE>
4. LOANS AND NOTES PAYABLE
In June 1998, the Company entered into a $750,000 secured credit facility
with a bank. This facility included a $225,000 term loan due December 1999 and
an equipment loan facility providing for up to $525,000 of equipment loans. In
July 1999, the Company converted $433,000 of outstanding equipment loans into a
term loan due July 2000, which bears interest at the lender's prime rate (9% as
of June 30, 1999). In December 1999, the Company repaid the term loan, in full.
At June 30, 2000, there were borrowings of approximately $404,000 under the
equipment loan. This facility is secured by substantially all of the Company's
assets other than equipment. In consideration for this credit facility, the
Company granted the bank a warrant to purchase 45,000 shares of Series C
preferred stock at an exercise price of $0.77 per share. In July 1999, in
consideration for the conversion of the equipment loan to a term loan and the
release of the security interest in equipment, the Company granted the bank a
warrant to purchase 10,000 shares of Series D preferred stock at an exercise
price of $1.18 per share.
In May 1999, the Company entered into a subordinated loan agreement (the
"loan agreement") with a lender under which it can borrow up to $2.0 million.
The loan agreement bears interest at 12.5% and expires in July 2002. At June 30,
2000 there were borrowings of approximately $1.4 million outstanding under the
loan agreement. The loan agreement is collateralized by all of the assets of the
Company. In addition, a warrant to purchase 228,813 shares of Series D preferred
stock at an exercise price of $1.18 per share was issued in conjunction with the
loan agreement.
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NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 1999, the Company entered into a $2.5 million loan/lease facility
with a lender to finance computer hardware and software equipment. Hardware
amounts bear interest at 9% per annum and are payable in 48 monthly installments
consisting of interest-only payments for the first nine months and principal and
interest payments for the remaining 39 months, with a balloon payment of the
remaining principal payable at maturity. Software amounts bear interest at 8%
per annum and are payable in 30 monthly installments consisting of interest-only
for the first four months and principal and interest for the remaining 26
months, with a balloon payment of the remaining principal payable at maturity.
The computer equipment purchased secures this facility. In connection with this
facility, the Company issued the lender a warrant to purchase 137,711 shares of
our Series D preferred stock at $1.18 per share. At June 30, 2000, the principal
balance outstanding under the facility was $2.1 million.
As part of the purchase price of GAR, the Company issued in August 1999 a
promissory note payable to an owner of GAR in the amount of $7.8 million. The
note bears interest at 7% per annum and is payable in 60 monthly installments of
scheduled principal amounts plus interest. At June 30, 2000 the remaining
principal balance was approximately $6.0 million.
As part of the purchase of EquipMD, Inc., the Company assumed the balance
on a line of credit. The maximum borrowings allowed under the agreement are
$300,000 of which none was available at June 30, 2000.
As part of the purchase of EquipMD, the Company assumed a note payable in
the amount of $1.7 million which is related to EquipMD's purchase of Central
Point Services, LLC. The note bears interest at 7.5% per annum and is payable in
eight quarterly installments of $62,578, at which time the unpaid principal
balance and accrued interest become due and payable. At June 30, 2000, the
remaining principal balance was $1.7. According to the provisions of the note, a
payment amounting to $250,000 on the note is due upon change of control. As a
result of the purchase of EquipMD by the Company (see Note 10), under the change
of control provisions, the Company included this $250,000 payment in the current
portion of notes payable at June 30, 2000.
5. LITIGATION
On January 14, 2000, Forma Scientific, Inc. notified us that it believes
our use of "Neoforma" and "Neoforma.com" violates its trademark rights in
"Forma" and "Forma Scientific" and that it had filed complaint in federal court.
On May 11, 2000, we were formally served with the complaint entitled Forma
Scientific, Inc. v. Neoforma.com, Inc., Docket No. C200-0045, U.S. District
Court, Southern District of Ohio, Eastern Division of Columbus, alleging
trademark infringement. Based on our investigation, we believe that we have
meritorious defenses to Forma Scientific's claims and intend to vigorously
defend ourselves in this litigation.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In January 2000, the Company completed its initial public offering of
8,050,000 shares of its common stock, which raised $104.7 million. Proceeds, net
of underwriters' discounts and commissions of $7.3 million and offering costs of
$2.0 million, amounted to $95.4 million.
PREFERRED STOCK AND MANDATORILY REDEEMABLE PREFERRED STOCK
Upon the Company's initial public offering in January 2000, all outstanding
shares of convertible preferred stock were converted into common stock.
11
<PAGE> 12
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. WARRANTS
In January 2000, the Company issued to consultants warrants to purchase
40,000 shares of the Company's common stock. One warrant for the purchase of
20,000 shares was issued with an exercise price of $7.00 per share and another
was issued for the purchase of 20,000 shares with an exercise price of $20.00
per share. The warrants are immediately exercisable and expire in January 2010.
The fair value of the warrants was determined to be approximately $65,000 and
was estimated using the Black-Scholes valuation model with the following
assumptions: risk-free interest rate of 6%; expected life of six months; and
expected volatility of 70%.
8. DEFERRED COMPENSATION
In connection with the grant of certain stock options to employees during
fiscal 1998, 1999 and 2000, the Company recorded deferred compensation of
approximately $65.2 million, representing the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price of these options at the date of grant. Such amount is presented as a
reduction of stockholders' equity and amortized over the vesting period of the
applicable options using an accelerated method of amortization. Under the
accelerated method, each vested tranche of options is accounted for as a
separate option grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services have been
provided; however, the method results in a front-loading of the compensation
expense. Based on the above assumptions, the weighted-average fair values per
share of options granted were $0.29, $3.81 and $9.15 for the years ended
December 31, 1998 and 1999 and for the period from January 1, 2000 to January
24, 2000 (the date of the Company's initial public offering), respectively. In
May 2000, the Company decreased deferred compensation by approximately $5.1
million as a result of a reduction in workforce related to restructuring
activities. The Company recorded amortization of deferred compensation of $8.5
million during the quarter ended June 30, 2000.
In connection with the assumption of certain stock options granted to
employees of EquipMD prior to the acquisition of EquipMD, the Company recorded
deferred compensation of approximately $23.1 million, representing the
difference between the estimated fair value of the common stock for accounting
purposes and the option exercise price of these options at the date of
announcement of the acquisition. Such amount is presented as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options using an accelerated method of amortization. Based on the above
assumptions, the weighted-average fair values per share of options assumed was
$31.50. The Company recorded amortization of deferred compensation of $3.0
million during the quarter ended June 30, 2000.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
You should read the following discussion of our financial condition and
results of operations in conjunction with our consolidated financial statements
and related notes. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those discussed in "-- Factors That May Affect Operating
Results" and elsewhere in this report.
OVERVIEW
Neoforma.com is a leading provider of business-to-business e-commerce
services in the large and highly fragmented market for medical products,
supplies and equipment. Our marketplace aggregates suppliers of a wide range of
new and used medical products and presents their offerings to the physicians,
hospitals and other healthcare organizations that purchase these products. We
believe that our services will streamline the procurement processes and extend
the reach of existing sales and distribution channels, as well as reduce
transaction costs for both buyers and sellers of medical products, supplies and
equipment.
We offer four primary services. Our Shop service provides marketplaces
where purchasers can easily identify, locate and purchase new medical products
and suppliers can access new customers and markets. Healthcare providers can use
Shop services to purchase a wide range of products, from disposable gloves to
surgical instruments and diagnostic equipment. Our Auction service creates an
efficient marketplace for idle assets by enabling users to list, sell and buy
used and refurbished equipment and surplus medical products. Our Plan service
provides interactive content and software to healthcare facility planners and
designers, including 360 degree interactive photographs of rooms and suites in
medical facilities that we believe represent industry best practices, together
with floor plans and information about the products in the room. This
information helps reduce the complexities of planning and outfitting facilities,
which we believe increases the appeal of our website to the facility planners
responsible for many product purchasing decisions. Our Services Delivery service
provides scalable and cost-effective implementation solutions for both
purchasers and sellers of new and used medical products.
We incorporated on March 4, 1996. From inception, our operating activities
have related primarily to the initial planning and development of our
marketplace and the building of our operating infrastructure. We first
introduced the Neoforma.com website in 1997 and have since released a number of
enhancements to provide new services and content. Initially, our website
provided only information for healthcare professionals. We began offering
e-commerce services with the introduction of our initial Auction service,
AdsOnline, in May 1999 and expanded our services with the introduction of our
second Auction service, AuctionLive, in August 1999, our third Auction service,
AuctionOnline, in November 1999 and Shop in August 1999. Since we introduced our
Auction and Shop services, we have focused on expanding and enhancing our
services, establishing relationships with suppliers of medical products,
expanding our purchaser base, developing strategic alliances, promoting our
brand name and building our operating infrastructure.
We have recognized limited revenue to date from our online services. We
expect that our principal source of revenue will be transaction fees paid by the
sellers of medical products that use our Shop and Auction services. These
transaction fees represent a negotiated percentage of the sale price of the
medical products sold. We recognize transaction fees as revenue when the seller
confirms a purchaser's order. For live and online auction services, we recognize
seller transaction fees, as well as a buyer's premium, when the product is sold.
We also receive revenue from the following sources:
- sponsorship fees paid by sellers of medical products and services used in
planning and outfitting healthcare facilities in exchange for the right
to feature their brands and products on our Plan service;
- license fees from the sale of software tools and related technical
information for the equipping and planning of healthcare facilities;
- digitization fees from participating sellers to digitize their product
information for display on our website; and
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<PAGE> 14
- product revenue related to the sale of medical equipment that we purchase
for resale through our live and online auction services.
Sponsorship and subscription fees will be recognized ratably over the
period of the agreement. With respect to software licenses, we generally
recognize revenue upon shipment of the product and recognize revenue from
related service contracts, training and customer support ratably over the period
of the related contract. Digitization fees are recognized as development
services are performed. Product revenue, representing the difference between the
amount we pay for the equipment and the price paid on resale, is recognized when
the product is shipped or delivered, depending on the shipping terms associated
with each transaction. Implementation revenue and other services, including
training and consulting are recognized as services are performed for time and
material arrangements and using the percentage of completion method based on
labor input measures for fixed fee arrangements.
Our operating expenses have increased significantly since our inception,
and the rate of this increase has accelerated since our introduction of our
Auction and Shop services. These increases are primarily due to additions to our
staff as we have expanded all aspects of our operations. As a result of our
expansion, we have grown from six employees as of December 31, 1997, to 59
full-time employees as of December 31, 1998, to 269 full-time employees as of
December 31, 1999 to 249 full-time employees as of June 30, 2000.
As a result of our transaction with Novation and acquisition of EquipMD, we
streamlined our operations to focus on two key global markets, Integrated
Delivery Networks (IDNs)and Hospitals and Physician Practices. The restructuring
involved both changes in executive management and the company's organizational
structure as well as a reduction in force of approximately 80 individuals in
functions largely duplicated or unnecessary as a result of both the new Novation
agreement and the reorganization.
On August 6, 1999, we acquired GAR, a live auction company focused on
medical products. The total purchase price was approximately $9.7 million,
including $1.7 million in cash, the issuance of a promissory note in the
principal sum of $7.8 million, the assumption of $100,000 in liabilities and
acquisition-related expenses of approximately $100,000. The promissory note is
payable over five years and bears interest at 7% per annum. This acquisition was
accounted for using the purchase method of accounting. As a result of this
acquisition, we recorded approximately $9.7 million in goodwill beginning in the
third quarter of fiscal year 1999, which is being amortized on a straight-line
basis over a seven-year period.
In November 1999, we acquired certain assets of FDI, a company in the
business of developing and licensing facility planning software. Under the terms
of the agreement, we acquired the rights to software and certain customer
contracts. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the intangible
assets acquired and liabilities assumed on the basis of their fair values on the
acquisition date. The total purchase price of approximately $3.4 million
consisted of 350,000 shares of common stock valued at approximately $3.2
million, estimated assumed liabilities of approximately $97,000 and estimated
acquisition-related expenses of approximately $112,000. In the initial
allocation of the purchase price, $240,000, $600,000 and $2.5 million were
allocated to acquired software, assembled workforce and trade names and
goodwill, respectively. The acquired software, assembled workforce and trade
names and goodwill is being amortized over an estimate useful life of three
years.
In order to acquire certain software and technology for use in our Shop,
Auction and Plan services, on January 18, 2000 we acquired Pharos, a developer
of content management software that facilitates the locating, organizing and
updating of product information in an online marketplace. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the intangible assets acquired and liabilities assumed on
the basis of their respective fair values on the acquisition date. The total
purchase price of approximately $22.8 million consisted of approximately 2.0
million shares of common stock valued at approximately $22.0 million,
forgiveness of a loan outstanding to Pharos of $500,000, estimated assumed
liabilities of approximately $94,000 and estimated acquisition-related expenses
of approximately $230,000. Of the shares issued to the previous owners of
Pharos, approximately 700,000 shares were subject to repurchase rights which
lapse over a period of the original vesting term of the shares, which specify a
vesting period of four years. In the initial allocation of the purchase price,
$367,000, $3.0 million, $3.0 million and $16.5 million were allocated to
tangible assets, acquired in-process research and development,
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<PAGE> 15
developed technology and goodwill, respectively. The acquired in-process
research and development was charged to expense during the first quarter of
2000. The developed technology will be amortized when such technology has been
put into productive use over an estimated useful life of three years. The
goodwill is being amortized over an estimated useful life of five years.
In connection with the acquisition of Pharos, we have allocated $3.0
million of the purchase price to in-process research and development ("IPR&D")
projects. These allocations represent the estimated fair value based on
risk-adjusted cash flows related to the incomplete research and development
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.
We allocated values to the IPR&D based on an assessment of the R&D
projects. The value assigned to these assets were limited to significant
research projects for which technological feasibility had not been established,
including development, engineering and testing activities associated with the
introduction of the Pharos' next-generation technologies.
The value assigned to IPR&D was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from the projects and discounting the
net cash flows to their present value. The revenue projection used to value the
IPR&D was based on estimates of relevant market sizes and growth factors,
expected trends in technology, and the nature and expected timing of new product
introductions by Pharos and its competitors.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental Pharos
technologies met their design specification including functional, technical, and
economic performance requirements. Anticipated completion dates ranged from 6 to
9 months, at which times Pharos expected to begin selling the developed
products. Development costs to complete the research and development were
estimated at approximately $2.0 million.
Pharos' primary IPR&D projects involved designing new technologies and an
application platform for a next generation content syndication solution,
including enterprise application integration. The estimated revenues for the
in-process projects were expected to peak within three years of acquisition and
then decline as other new products and technologies are expected to enter the
market.
Operating expenses were estimated based on historical results and
management's estimates regarding anticipated profit margin improvements. Due to
purchasing power increases and general economies of scale, estimated operating
expense as a percentage of revenues were expected to decrease after the
acquisition.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 35 to 40 percent were appropriate for
the IPR&D, and discount rates of 25 percent were appropriate for the existing
products and technology. These discount rates were commensurate with the Pharos'
stage of development and the uncertainties in the economic estimates described
above.
The estimates used by us in valuing IPR&D were based upon assumptions we
believes to be reasonable, but which are inherently uncertain and unpredictable.
Our assumptions may be incomplete or inaccurate, and no assurance can be given
that unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on our the financial condition and results of
operations.
On March 17, 2000, we acquired USL, a healthcare content company. USL
provides supply chain information to senior-level executives in the
manufacturing, distribution, provider and GPO communities through web-based
subscription products, industry newsletters and research. The total purchase
price of $7.2 million consisted of 61,283 shares of our common stock valued at
approximately $2.8 million and $3.5 million in cash. This acquisition was
accounted for using the purchase method of accounting.
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On April 28, 2000, we acquired all of the outstanding capital stock of
EquipMD, Inc., a privately held business-to-business procurement company serving
the physician market. The total purchase price of $141.7 million consisted of
approximately 5.45 million shares of our common stock. The acquisition was
accounted for as a purchase transaction.
In connection with the acquisition of the EquipMD, we allocated
approximately $15.0 million of the purchase price to in-process research and
development projects. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to the incomplete research and development
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.
At the acquisition date, EquipMD was conducting design, development,
engineering and testing activities associated with the completion of a real-time
commerce engine. The projects under development at the valuation date represent
next-generation technologies that are expected to address emerging market
demands for healthcare related business-to-business e-commerce.
At the acquisition date, the technologies under development were
approximately 60% complete based on engineering man-month data and technological
progress. EquipMD had spent approximately $1.2 million on the in-process
projects, and expected to spend approximately $1.0 million to complete all
phases of the research and development. Anticipated completion dates ranged from
three to nine months, at which time we expect to begin benefiting from the
developed technologies.
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
us and our competitors. The resulting net cash flows from such projects are
based on management's estimates of cost of sales, operating expenses, and income
taxes from such projects.
Aggregate revenues for the developmental EquipMD products were estimated to
grow at a compounded annual growth rate of approximately 100% for the five years
following introduction, assuming the successful completion and market acceptance
of the major research and development programs. The estimated revenues for the
in-process projects were expected to peak within three years of acquisition and
then decline sharply as other new products and technologies are expected to
enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 35% was considered appropriate
for the in-process research and development. These discount rates were
commensurate with the EquipMD's stage of development and the uncertainties in
the economic estimates described above.
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
On March 30, 2000, Neoforma entered into agreements to acquire Eclipsys
Corporation and HEALTHvision, Inc., entered into an outsourcing and operating
agreement with Novation LLC and entered into agreements to issue Neoforma common
stock and warrants to the owners of Novation.
On May 25, 2000, we agreed by mutual consent to terminate the proposed
mergers announced on March 30, 2000. Instead, we entered into a strategic
commercial relationship with Eclipsys and HEALTHvision that include a
co-marketing and distribution arrangement between us and HEALTHvision. The
arrangement includes the use of Eclipsys' eWebIT(TM) enterprise application
integration technology and
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<PAGE> 17
professional services to enhance the integration of legacy applications with our
e-commerce platform. In addition, we modified the structure and terms of our
stock and warrant transactions with VHA Inc. and University HealthSystem
Consortium, or UHC, the national healthcare alliances that own Novation.
Under the terms of the modified Novation agreements, VHA received 46.3
million shares of our common stock, representing approximately 36% of our
outstanding common stock, and UHC received 11.3 million shares, representing
approximately 9% of Neoforma. Under new warrants to be issued to VHA and UHC,
VHA and UHC will have the opportunity to earn up to 30.8 million and 7.5 million
additional shares of our common stock, respectively, over a four-year period by
meeting certain performance targets. These targets are based upon the historical
purchasing volume of VHA- and UHC-member healthcare organizations that sign up
to use our online marketplace. The targets increase annually to total healthcare
organizations representing approximately $22 billion of combined purchasing
volume at the end of the fourth year.
Under our outsourcing and operating agreement with Novation, we have agreed
to provide specific functionality to our online marketplace, and to develop
marketplaces that are only available to the patrons and members of the owners of
Novation, VHA, Inc. and UHC, and an affiliated entity, Healthcare Purchasing
Partners International, LLC, or HPPI. Novation has agreed to act as our
exclusive agent to negotiate agreements with suppliers to offer their equipment,
products, supplies and services through our online marketplace, subject to some
exceptions. VHA, UHC, HPPI and Novation have each agreed not to develop or
promote any other Internet-based exchange for the acquisition or disposal of
products, supplies, equipment or services by healthcare organizations.
The outsourcing and operating agreement provides that, subject to certain
conditions, we will share transaction fees we receive from suppliers for
products and services sold through our Shop service with Novation in varying
proportions depending on the type of transaction and the purchaser. For sales of
products and services under Novation contracts, we will share transaction fees
with Novation to the extent they exceed a specified minimum percentage. For an
initial period of the agreement, Novation has agreed to pay us this specified
minimum percentage if the fees generated from suppliers are less than the
specified minimum percentage. We will also share a percentage of transaction
fees generated from sales of non-contracted products and services to the patrons
and members of VHA, UHC and HPPI and will share a smaller percentage of
transaction fees generated from sales of non-contracted products and services to
other parties, subject to limited exceptions. We will not share with Novation
any transaction fees generated from the sale of products or services under
contracts with another group purchasing organization. Through a specified date,
we will not be required to share any fees with Novation in any quarter until
minimum aggregate transaction fee levels for that quarter have been met. We have
also agreed to share a portion of specified revenues from our Plan and Auction
services generated as a result of the Novation relationship.
Since inception, we have incurred significant losses and, as of June 30,
2000, had an accumulated deficit of $147.6 million. We expect operating losses
and negative cash flow to continue for the foreseeable future. We anticipate our
losses will increase significantly due to substantial increases in our expenses
for sales and marketing, product development, operating infrastructure, general
and administrative staff and development of strategic alliances.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as the online market for the purchase and sale of new and used medical
products, supplies and equipment. To address these risks, we must, among other
things, expand the number of users of our online services, enter into new
strategic alliances, increase the functionality of our services, implement and
successfully execute our business and marketing strategy, respond to competitive
developments and attract, retain and motivate qualified personnel. We may not be
successful in addressing these risks, and our failure to do so could seriously
harm our business.
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RESULTS OF OPERATIONS
Due to our limited operating history, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as an indication of future performance.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenue. We had total revenue of $2.1 million for the quarter ended June
30, 2000 primarily from transaction fees paid by the sellers of medical products
that use our Shop and live and online Auction services, sponsorship and license
fees for the use of our Plan software and services as well as revenues generated
by our Services Delivery implementation services. Revenue for the quarter ended
June 30, 1999 was $7,000. For the quarter ended June 30, 2000, the gross value
of transactions was approximately $16.2 million including approximately $8.5
million related to purchases made under contracts for which EquipMD earns
administrative fees, which resulted in net revenue for our Shop, Auction, Plan
and Services Delivery of $323,000, $577,000, $718,000 and $458,000,
respectively.
Cost of Services. Cost of services consists primarily of costs incurred in
delivering our implementation and consulting services. These costs consist
primarily of fees for independent consultants and personnel expenses for our
implementation and consulting personnel. Cost of services was $768,000 for the
quarter ended June 30, 2000. Providing a scalable and cost effective
implementation solution to both buyers and sellers of new and used medical
products is critical to attaining our strategic objectives and, as a result, we
expect cost of services to increase significantly in future periods as we
continue to implement our services to our customers, including the required
services to be provided under our outsourcing and operating agreement with
Novation.
Operations. Operations expenses consist primarily of expenditures for
digitizing and inputting content and for the operation and maintenance of our
website. These expenditures consist primarily of fees for independent
contractors and personnel expenses for our customer support and site operations
personnel. Operations expenses increased from approximately $741,000 for the
quarter ended June 30, 1999 to $2.8 million for the quarter ended June 30, 2000.
The increase was primarily due to an increase in operations personnel costs, and
an increase in payments to third party consultants. These increases were
primarily due to a larger personnel base and increased expenditures for
digitizing and inputting content and for the enhancement of the infrastructure
of our website. We expect our operations expenses to continue to increase as we
expand our operating infrastructure, add content and functionality to our
website and integrate the systems of healthcare organizations and suppliers with
our services.
Product Development. Product development expenses consist primarily of
personnel expenses and consulting fees associated with the development and
enhancement of our services and website. Product development expenses increased
from $1.3 million for the quarter ended June 30, 1999 to $5.2 million for the
quarter ended June 30, 2000. The increase was primarily due to an increase in
personnel cost and an increase in fees paid to third parties. These increases
were primarily due to a larger personnel base and increased expenses incurred in
the continued development of our Shop, Auction and Plan services including
adding additional functionality in anticipation of the needs of large healthcare
organizations. We believe that continued investment in product development is
critical to attaining our strategic objectives and, as a result, product
development expenses may increase significantly in future periods as we add
functionality to our services, including functionality required to be provided
under our outsourcing and operating agreement with Novation. We expense product
development costs as they are incurred.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions, advertising, promotions and related marketing costs.
Selling and marketing expenses increased from approximately $1.5 million for the
quarter ended June 30, 1999 to $12.1 million for the quarter ended June 30,
2000. The increase was primarily due to an increase in sales and marketing
personnel costs, an increase in expenses related to travel, an increase in
expenses related to advertising and attendance at trade shows and expenses
incurred in connection with our strategic alliances. Selling and marketing
expenses may continue to increase as we continue our efforts to bring buyers and
sellers to our marketplace. In addition, we expect to continue to make
significant payments in connection with our strategic alliances, which will
increase our selling and
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marketing expenses in the periods in which these payments are made. See
"-- Liquidity and Capital Resources."
General and Administrative. General and administrative expenses consist of
expenses for executive and administrative personnel, professional services and
other general corporate activities. General and administrative expenses
increased from approximately $980,000 for the quarter ended June 30, 1999 to
$3.0 million for the quarter ended June 30, 2000. The increase was primarily due
to an increase in executive and administrative personnel costs and additional
finance, accounting and administrative personnel, an increase in recruiting,
legal and accounting expenses, an increase in expenses related to other
consultants, and the cost of being a public company, in each case associated
with our growth. General and administrative expenses may increase as we continue
to incur additional costs to support the growth of our business. We further
expect our general and administrative expenses to increase due to the
integration of our various acquisitions and strategic relationships with our
business.
Amortization of Intangibles. Intangibles include goodwill and the value of
software purchased in acquisitions. Intangibles are amortized on a straight-line
basis over a period of three to seven years. Amortization of intangibles
increased from $0 in the quarter ended June 30, 1999 to $8.1 million for the
quarter ended June 30, 2000. The increase was a result of the acquisition of GAR
in August 1999, FDI in November 1999, Pharos in January 2000, USL in March 2000
and EquipMD in April 2000. We expect that the amortization of intangibles will
increase significantly in future periods due to our agreements with VHA and UHC.
Amortization of Deferred Compensation. Deferred compensation represents the
aggregate difference, at the date of grant, between the exercise price of stock
options and the estimated fair value for accounting purposes of the underlying
stock. Deferred compensation is amortized over the vesting period of the
underlying options, generally four years, based on an accelerated vesting
method. In connection with the grant of stock options to employees during fiscal
1998, 1999 and for the period from January 1, 2000 to January 24, 2000, we
recorded deferred compensation of $65.2 million. During the second quarter of
fiscal 2000, we decreased deferred compensation by $5.1 million as a result of a
reduction in force of approximately 80 individuals. For the quarter ended June
30, 2000, we recognized amortization of deferred compensation of $11.0 million.
In addition, we recorded $23.1 million in deferred compensation in relation to
the assumption of options as a result of the acquisition of EquipMD.
At June 30, 2000, the remaining deferred compensation of approximately
$49.9 million will be amortized as follows: $15.0 million during fiscal 2000,
$20.1 million during fiscal 2001, $10.4 million during fiscal 2002, $4.0 million
during fiscal 2003 and $6.4 million during fiscal 2004. The amortization expense
relates to options awarded to employees in all operating expense categories. The
amount of deferred compensation has not been separately allocated to these
categories. The amount of deferred compensation expense to be recorded in future
periods could decrease if options for which accrued but unvested compensation
has been recorded are forfeited.
Write Off of Acquired In-process Research and Development. For the quarter
ended June 30, 2000, we expensed $15.0 million related to the write off of
acquired in-process research and development in connection with the EquipMD
acquisition in April 2000.
Abandoned Acquisition Costs. Abandoned acquisition costs consists primarily
of legal, accounting, investment banking and other costs incurred as a result of
the termination of the Agreement and Plan of Merger, dated March 30, 2000,
between Neoforma and Eclipsys, and the Agreement and Plan of Merger, dated March
30, 2000, between Neoforma and Healthvision. Abandoned acquisition costs were
$2.7 million for the quarter ended June 30, 2000.
Restructuring. Restructuring costs consist primarily of the costs
associated with the payments to employees for severance resulting from the
company's streamlining and reorganizing its operations. As a result of our
transaction with Novation and acquisition of EquipMD, we streamlined our
operations to focus on two key global markets, Integrated Delivery Networks and
Hospitals, and Physician Practices. The restructuring involved both changes in
executive management and our organizational structure as well as a reduction in
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force of approximately 80 individuals in functions largely duplicated or
unnecessary as a result of both the new Novation agreement and the
reorganization. Restructuring costs were $2.1 million for the quarter ended June
30, 2000 of which $1.3 million was accrued and scheduled for payment through
October 2000.
Other Income (Expense). Other income (expense) consists of interest and
other income and expense. Interest income for the quarter ended June 30, 2000
was $1.5 million compared to $80,000 for the quarter ended June 30, 1999. The
increase in interest income was due to an increase in our average net cash and
cash equivalents balance as a result of our issuance of preferred stock in
October 1999 and the completion of our public offering in January 2000. Interest
expense increased from $79,000 for the quarter ended June 30, 1999 to $330,000
for the quarter ended June 30, 2000, primarily as a result of the amortization
of the fair value of warrants issued in connection with debt.
Income Taxes. As of December 31, 1999, we had federal and state net
operating loss carryforwards of approximately $31.5 million, which will be
available to reduce future taxable income. The federal net operating loss
carryforwards expire beginning in 2013 through 2018. A valuation allowance has
been recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset due to our lack of earnings history.
Federal and state tax laws impose significant restrictions on the amount of the
net operating loss carryforwards that we may utilize in a given year.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue. We had total revenue of $3.3 million for the six months ended June
30, 2000 primarily from transaction fees paid by the sellers of medical products
that use our Shop and live and online Auction services, sponsorship and license
fees for the use of our Plan software and services as well as revenues generated
by our Services Delivery implementation services. Revenue for the six months
ended June 30, 1999 was $7,000. For the six months ended June 30, 2000, the
gross value of transactions was approximately $20.8 million, including
approximately $8.5 million related to purchases made under contracts for which
EquipMD, earns administrative fees, which resulted in net revenue for our Shop,
Auction, Plan and Services Delivery of $459,000, $1.3 million, $1.1 million and
$458,000, respectively.
Operating Expenses. Operating expenses consists of cost of services,
operations, product development, selling and marketing, general and
administrative, amortization of intangibles, amortization of deferred
compensation, write off of acquired in-process research and development,
abandoned acquisition costs, and restructuring. Operating expenses increased
from approximately $8.2 million for the six months ended June 30, 1999 to $97.2
million for the six months ended June 30, 2000 primarily as a result of
increases as described below.
Cost of services was $768,000 for the six months ended June 30, 2000.
Operations expenses increased from approximately $1.3 million for the six months
ended June 30, 1999 to $5.8 million for the six months ended June 30, 2000.
Product development expenses increased from $2.6 million for the six months
ended June 30, 1999 to $10.2 million for the six months ended June 30, 2000.
Selling and marketing expenses increased from approximately $2.4 million for the
six months ended June 30, 1999 to $22.0 million for the six months ended June
30, 2000. General and administrative expenses increased from approximately $1.6
million for the six months ended June 30, 1999 to $6.8 million for the six
months ended June 30, 2000. Amortization of intangibles increased from $0 for
the six months ended June 30, 1999 to $9.4 million for the six months ended June
30, 2000. For the six months ended June 30, 2000, we recognized amortization of
deferred compensation of $19.5 million. For the six months ended June 30,
2000,we expensed $18.0 million related to the write off of acquired in-process
research and development in connection with the Pharos acquisition in January
2000 and EquipMD acquisition in April 2000. Abandoned acquisition costs were
$2.7 million for the six months ended June 30, 2000. Restructuring cost was $2.1
million for the six months ended June 30, 2000.
Other Income (Expense). Interest income for the six months ended June 30,
2000 was $3.0 million compared to $128,000 for the six months ended June 30,
1999. Interest expense increased from $95,000 for the six months ended June 30,
1999 to $551,000 for the six months ended June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
In January 2000, we completed our initial public offering and issued
8,050,000 shares of our common stock at an initial public offering price of
$13.00 per share. Net cash proceeds to us from the initial public offering were
approximately $95.4 million. From our inception until our initial public
offering, we financed our operations primarily through private sales of
preferred stock through which we raised net proceeds of $89.0 million. We have
also financed our operations through an equipment loan and lease financing and
bank and other borrowings. As of June 30, 2000, we had outstanding bank, other
borrowings and notes payable of $11.7 million. As of June 30, 2000, we had
approximately $81.2 million of cash and cash equivalents and short-term
investments.
In June 1998, we entered into a $750,000 secured credit facility with
Silicon Valley Bank. This facility included a $225,000 term loan due December
1999 and an equipment loan facility providing for up to $525,000 of equipment
loans. In July 1999, we converted the $433,000 of outstanding equipment loans
into a term loan due July 2000. Our term loans from Silicon Valley Bank bear
interest at the lender's prime rate (9.5% as of June 30, 2000). At June 30,
2000, there were no borrowings outstanding under the term loan and $404,000
outstanding under the equipment loan. This facility is secured by substantially
all of our assets other than equipment. In consideration for this credit
facility, we granted Silicon Valley Bank a warrant to purchase 45,000 shares of
common stock at an exercise price of $0.77 per share. In consideration for the
conversion of our equipment loan to a term loan and the release of its security
interest in equipment, we granted Silicon Valley Bank a warrant to purchase
10,000 shares of common stock at an exercise price of $1.18 per share.
In May 1999, Comdisco provided us with a $2.0 million subordinated loan to
provide working capital. We agreed to pay Comdisco principal and interest at a
rate of 12.5% per annum in 36 equal monthly installments, commencing July 1999.
This loan is secured by all of our assets. In connection with this loan, we
issued Comdisco a warrant to purchase 228,813 shares of common stock at $1.18
per share. As of June 30, 2000, the outstanding balance on the note was
approximately $1.4 million.
In July 1999, Comdisco provided us with a $2.5 million loan and lease
facility to finance computer hardware and software equipment. Amounts borrowed
to purchase hardware bear interest at 9% per annum and are payable in 48 monthly
installments consisting of interest only payments for the first year and
principal and interest payments for the remaining 39 months, with a balloon
payment of the remaining principal payable at maturity. Amounts borrowed to
purchase software bear interest at 8% per annum and are payable in 30 monthly
installments consisting of interest only payments for the first four months and
principal and interest payments for the remaining 26 months, with a balloon
payment of the remaining principal payable at maturity. As of June 30, 2000, we
had outstanding approximately $1.8 million in hardware loans due September 2003
and approximately $250,000 in software loans due March 2002. This facility is
secured by the computer equipment purchased with the loans. In connection with
this facility, we issued Comdisco a warrant to purchase 137,711 shares of common
stock at $1.18 per share.
In August 1999, as a result of the GAR acquisition, we issued a promissory
note in the principal amount of $7.8 million payable monthly over five years
bearing interest at a rate of 7% per annum. As of June 30, 2000, the outstanding
balance on the note was approximately $6.0 million.
As part of the purchase of EquipMD, we assumed a note payable in the amount
of $1.7 million which is related to EquipMD's purchase of Central Point
Services, LLC. The note bears interest at 7.5% per annum and is payable in eight
quarterly installments of $62,578, at which time the unpaid principal balance
and accrued interest become due and payable. According to the provisions of the
note, a payment amounting to $250,000 on the note is due upon change of control.
At June 30, 2000, the remaining principal balance was $1.7 million.
In March 2000, we entered into a Hosting Alliance Agreement with Ariba,
Inc. under which we will offer Ariba's ORMX procurement solution to users of our
marketplace. Under this agreement, we paid Ariba a substantial up-front fee for
use of the ORMX procurement solution and we will pay Ariba specified fees for
transactions occurring through Ariba's network, subject to minimum monthly
amounts. The agreement also provides for joint marketing activities and sales
planning.
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In March 2000, we purchased 600,000 shares of the Series D preferred stock
of Pointshare, Inc., a privately held corporation in exchange for $3.0 million.
Pointshare is a company that provides online business to business administrative
services to healthcare communities. Our ownership represents approximately 2% of
the Pointshare's outstanding common stock, assuming a 1:1 conversion ratio of
preferred stock to common stock. We will account for this investment using the
cost method.
Net cash used in operating activities was $6.7 million for the six months
ended June 30, 1999 and $29.4 million for the six months ended June 30, 2000.
Net cash used in operating activities for the six months ended June 30, 2000
related primarily to funding net operating losses, increases in prepaid expenses
and in accounts receivable, which were partially offset by increases in the
write off of in-process research and development, amortization of intangibles,
amortization of deferred compensation and accounts payable.
Net cash used in investing activities was 1.3 million for the six months
ended June 30, 1999 and $15.3 million for the six months ended June 30, 2000.
Net cash used in investing activities for the six months ended June 30, 2000
related primarily to the purchase of equipment to operate our website and cash
paid for the acquisition of US Lifeline, Inc. and EquipMD and the purchase of
non-marketable investments.
Net cash provided by financing activities was $14.2 million for the six
months ended June 30, 1999 and $93.8 million for the six months ended June 30,
2000. Net cash provided from financing activities for the six months ended June
30, 2000 related primarily to common stock issuances of approximately $95.4
million.
Our current operations continue to be cash flow negative. Our future
long-term capital needs will depend significantly on the rate of growth of our
business, the timing of expanded service offerings and the success of these
services once they are launched. Any projections of future long-term cash needs
and cash flows are subject to substantial uncertainty. If our available funds
and cash generated from operations, are insufficient to satisfy our long-term
liquidity requirements, we may seek to sell additional equity or debt
securities, obtain a line of credit or curtail expansion of our services. If we
issue additional securities to raise funds, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience dilution. We cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will be effective for us on
January 1, 2001. SFAS No. 133 requires certain accounting and reporting
standards for derivative financial instruments and hedging activities. Because
we do not currently hold any derivative instruments and do not engage in hedging
activities, management does not believe that the adoption of SFAS No. 133 will
have a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the fourth quarter of 2000. Management does not expect
the adoption of SAB 101 to have a material impact on our consolidated results of
operations and financial position.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25" (Interpretation No.
44). Interpretation No. 44 is effective July 1, 2000. The interpretation
clarifies the application of APB Opinion No. 25 for certain issues,
specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange or stock
compensation awards in a business combination. We do not anticipate that the
adoption of Interpretation No. 44 will have a material impact on our financial
position or the results of our operations.
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FACTORS THAT MAY AFFECT OPERATING RESULTS
The risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. Our business, financial condition or
results of operations may be seriously harmed by any of these risks.
BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR PRIMARY SERVICES AND BECAUSE WE
OPERATE IN A NEW AND RAPIDLY EVOLVING MARKET, YOU MAY HAVE DIFFICULTY ASSESSING
OUR BUSINESS AND OUR FUTURE PROSPECTS
We incorporated in March 1996. Prior to May 1999, our operations consisted
primarily of the initial planning and development of our marketplace and the
building of our operating infrastructure. We introduced our initial Auction
service, AdsOnline, in May 1999, our second Auction service, AuctionLive, in
August 1999 and our third Auction service, AuctionOnline, in November 1999 and
we introduced our Shop service in August 1999 and we introduced our Services
Delivery service in April 2000. As a result, we have generated revenues of only
$1.0 million in 1999 and $3.3 million for the six months ended June 30, 2000.
Because we have only recently introduced our services, it is difficult to
evaluate our business and our future prospects. For example, it is difficult to
predict whether the market will accept our services and the level of revenue we
can expect to derive from our services. Because we are an early stage company in
the online market for the purchase and sale of new and used medical products,
supplies and equipment, which is a new and rapidly evolving market, we cannot be
certain that our business strategy will be successful. Our business will be
seriously harmed, and may fail entirely, if we do not successfully execute our
business strategy or if we do not successfully address the risks we face. In
addition, due to our limited operating history, we believe that period-to-period
comparisons of our revenue and results of operations are not meaningful.
WE HAVE A HISTORY OF LOSSES, ANTICIPATE INCURRING LOSSES IN THE FORESEEABLE
FUTURE AND MAY NEVER ACHIEVE PROFITABILITY
We have experienced losses from operations in each period since our
inception, including net losses of $91.5 million for the six months ended June
30, 2000. In addition, as of June 30, 2000, we had an accumulated deficit of
approximately $147.6 million. We have not achieved profitability and we expect
to continue to incur substantial operating losses for the foreseeable future. We
have generated limited revenue to date. If our revenue does not increase
substantially or if our expenses increase further than we expect, we may never
become profitable.
We anticipate that our operating losses will increase in the future, as we
expect substantial increases in our costs and expenses in a number of areas,
including:
- marketing and promotion of our company and our services, including
building recognition of our brand name;
- performing our obligations under the outsourcing and operating agreement
with Novation;
- expanding our direct field sales force;
- expanding and enhancing our operating infrastructure, including hardware
and software systems and administrative personnel;
- extending the functionality of our online marketplace; and
- expanding our services.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, AND IF WE FAIL TO
MEET THE EXPECTATIONS OF INVESTORS OR SECURITIES ANALYSTS, THE MARKET PRICE OF
OUR COMMON STOCK WOULD LIKELY DECLINE SIGNIFICANTLY
Our revenue and operating results are likely to fluctuate significantly
from quarter to quarter, due to a number of factors. These factors include:
- the amount and timing of payments to our strategic partners and
technology partners;
- the timing and size of future acquisitions;
- variability in the amount of equipment that we auction in a given
quarter;
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- changes in the fees we charge users of our services;
- budgetary fluctuations of purchasers of medical products, supplies and
equipment; and
- changes in general economic and market conditions.
Fluctuations in our operating results may cause us to fail to meet the
expectations of investors or securities analysts. If this were to happen, the
market price of our common stock would likely decline significantly.
In addition, as a result of our limited operating history, the emerging
nature of our market and the evolving nature of our business model, we are
unable to accurately forecast our revenue. We incur expenses based predominantly
on operating plans and estimates of future revenue. Our expenses are to a large
extent fixed. We may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet
our revenue projections would have an immediate and negative impact on
profitability.
IF BUYERS AND SELLERS OF MEDICAL PRODUCTS DO NOT ACCEPT OUR BUSINESS MODEL OF
PROVIDING AN ONLINE MARKETPLACE FOR THE PURCHASE AND SALE OF MEDICAL PRODUCTS,
DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON STOCK WOULD
DECLINE
We offer an online marketplace that aggregates a number of suppliers and
purchasers of medical products. This business model is new and unproven and
depends upon buyers and sellers in this market adopting a new way to purchase
and sell medical products, supplies and equipment. If buyers and sellers of
medical products do not accept our business model, demand for our services may
not develop and the price of our common stock would decline. Suppliers and
purchasers of medical products could be reluctant to accept our new, unproven
approach, which involves new technologies and may not be consistent with their
existing internal organization and procurement processes. Suppliers and
purchasers may prefer to use traditional methods of selling and buying medical
products, such as using paper catalogs and interacting in person or by phone
with representatives of manufacturers or distributors. In addition, many of the
individuals responsible for purchasing medical products do not have ready access
to the Internet and may be unwilling to use the Internet to purchase medical
products. Even if suppliers and purchasers accept the Internet as a means of
selling and buying medical products, they may not accept our online marketplace
for conducting this type of business. Instead, they may choose to establish and
operate their own websites to purchase or sell new and used medical products.
For example, four large suppliers of medical products, Johnson & Johnson,
General Electric Medical Systems, Abbott Laboratories and Medtronic recently
announced that they are creating a healthcare exchange for the purchase and sale
of medical products. Five large distributors of medical products, AmeriSource
Health Corp., Cardinal Health Inc., Fischer Scientific International Inc.,
McKesson HBOC Inc. and Owens & Minor Inc., have also recently announced that
they will form a business-to-business exchange marketplace for the sales of
drugs and medical-surgical products, devices and other laboratory products and
services. Reluctance of suppliers and purchasers to use our services would
seriously harm our business.
IF WE CANNOT QUICKLY BUILD A CRITICAL MASS OF PURCHASERS AND SUPPLIERS OF
MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT, WE WILL NOT ACHIEVE A NETWORK EFFECT
AND OUR BUSINESS MAY NOT SUCCEED
To encourage suppliers to list their products on our online marketplace, we
need to increase the number of purchasers who use our services. However, to
encourage purchasers to use our marketplace, it must offer a broad range of
products from a large number of suppliers. If we are unable to quickly build a
critical mass of purchasers and suppliers, we will not be able to benefit from a
network effect, where the value of our services to each participant
significantly increases with the addition of each new participant. Our inability
to achieve a network effect would reduce the overall value of our Shop and
Auction services to purchasers and suppliers and, consequently, would harm our
business.
We expect to rely on our relationship with Novation to bring buyers and
suppliers to our marketplace. Under our outsourcing and operating agreement with
Novation, we have agreed to make Novation our exclusive agent for signing up
suppliers to participate in our online marketplace, subject to limited
exceptions.
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Accordingly, we will rely on Novation to attract suppliers to our marketplace
and, if Novation is unable to attract a sufficient number of suppliers, the
value of our online marketplace to purchasers will be substantially decreased
and our business will suffer. In addition, although our outsourcing and
operating agreement with Novation provides that Novation will exclusively offer
our online marketplace to the healthcare organization participating in its
purchasing programs, these healthcare organizations are not obligated to use our
services and may use competing services or traditional procurement methods.
Accordingly, these purchasers might not choose to use our online marketplace for
their purchasing needs. If this were to occur, the value of our online
marketplace to suppliers would be substantially decreased and our business will
suffer. If the outsourcing and operating agreement were terminated by Novation,
our business and financial results could be seriously harmed. The outsourcing
agreement may be terminated by Novation in the event of a material breach of our
obligations under the agreement or the VHA and UHC stock and warrant
transactions are terminated. If the outsourcing and operating agreement were to
be terminated by Novation, our business could be seriously harmed. In addition,
we will incur significant cost in providing functionality to our online
marketplace and in integrating healthcare organizations and suppliers to our
online marketplace prior to receiving related transaction fee revenues and may
not generate sufficient revenues to offset these costs.
IT IS IMPORTANT TO OUR SUCCESS THAT OUR SERVICES BE USED BY LARGE HEALTHCARE
ORGANIZATIONS AND WE MAY NOT ACHIEVE MARKET ACCEPTANCE WITH THESE ORGANIZATIONS
Currently, we believe that most of the registered users of our website are
relatively small healthcare providers such as physicians offices. It is
important to our success that our services be used by large healthcare
organizations, such as hospitals, integrated delivery networks and members of
large purchasing organizations. In order for these large organizations to accept
our services, we must integrate our services with their information systems. In
addition, we will need to develop customer-specific pricing capabilities before
these organizations can use our services to purchase products covered by their
negotiated agreements with suppliers. Finally, we will need to significantly
increase the number of suppliers using our services to address the needs of
these large organizations, which typically require a wide range of medical
products. Many of these large healthcare organizations have established, or may
establish, websites that enable sales of their products directly to consumers or
electronic data interchange systems designed specifically for their needs and
integrated with their existing processes and technologies. If we are unable to
extend our capabilities and expand our registered user base as described above,
we may not provide an attractive alternative to these websites or systems and
may not achieve market acceptance by these large organizations.
In addition, we believe that we must establish relationships with group
purchasing organizations in order to increase our access to these organizations.
Group purchasing organizations represent groups of buyers in the negotiation of
purchasing contracts with sellers and consequently have the ability to
significantly influence the purchasing decisions of their members. Our
relationship with Novation could make it more difficult to attract other group
purchasing organizations to our online marketplace. The inability to enter into
and maintain favorable relationships with other group purchasing organizations
and the hospitals they represent could impact the breadth of our customer base
and could harm our growth and revenues. One of the largest group purchasing
organizations, Premier Purchasing Partners, has a long-term, exclusive agreement
for e-commerce services with Premier Health Exchange. One of our competitors,
medibuy.com, Inc., recently announced an agreement to acquire Premier Health
Exchange. Ventro, a business-to-business e-commerce company providing supply
chain solutions, has formed a joint venture, Broadlane, with Tenet Healthcare, a
large owner and operator of hospitals and other healthcare facilities. Broadlane
also recently announced a strategic alliance with AmeriNet, a large group
purchasing organization. In addition, Columbia/HCA Healthcare, a large owner and
operator of hospitals and other healthcare facilities, has formed
empactHealth.com to provide an online marketplace for medical products.
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IF WE DO NOT SUCCEED IN EXPANDING THE BREADTH OF THE PRODUCTS OFFERED THROUGH
OUR ONLINE MARKETPLACE, SOME PURCHASERS OF MEDICAL PRODUCTS MAY CHOOSE NOT TO
UTILIZE OUR SERVICES WHICH WOULD LIMIT OUR POTENTIAL MARKET SHARE
The future success of our Shop service depends upon our ability to offer
purchasers a wide range of medical products. The products currently listed on
our Shop service are primarily oriented to the physicians' office market. Large
healthcare organizations generally require a much broader range of products. To
increase the breadth of the products listed on Shop, we must establish
relationships with additional suppliers and expand the number and variety of
products listed by existing suppliers. If we are unable to maintain and expand
the breadth of medical products, supplies and equipment listed on Shop, the
attractiveness of our services to purchasers will be diminished, which would
limit our potential market share.
A number of factors could significantly reduce, or prevent us from
increasing, the number of suppliers and products offered on our online
marketplace, including:
- reluctance of suppliers to offer medical products in an online
marketplace that potentially includes their competitors;
- exclusive or preferential arrangements signed by suppliers with our
competitors;
- potential inability of Novation to attract suppliers to our online
marketplace;
- perceptions by suppliers that we give other suppliers preferred treatment
on our online marketplace; and
- consolidation among suppliers, which we believe is currently occurring.
WE EXPECT THAT A SIGNIFICANT PORTION OF THE MEDICAL PRODUCTS, SUPPLIES AND
EQUIPMENT SOLD THROUGH OUR SHOP SERVICE WILL COME FROM A LIMITED NUMBER OF KEY
MANUFACTURERS AND DISTRIBUTORS, AND THE LOSS OF A KEY MANUFACTURER OR
DISTRIBUTOR COULD RESULT IN A SIGNIFICANT REDUCTION IN THE REVENUE WE GENERATE
THROUGH THIS SERVICE
Although to date we have generated only minimal revenues from our Shop
service, we expect that a significant portion of the products to be sold through
and revenue to be generated from our Shop service will come from a limited
number of key manufacturers and distributors. These parties are generally not
obligated to list any medical products on our Shop service. If any of these key
manufacturers or distributors cease doing business with us or reduce the number
of products they list on our Shop service, the revenue we generate through this
service could be significantly reduced. Our supplier agreements are nonexclusive
and, accordingly, these suppliers can sell their medical products, supplies and
equipment to purchasers directly or through our competitors.
WE MAY CONTINUE TO MAKE NEW ACQUISITIONS, WHICH COULD HARM OUR PROFITABILITY,
PUT A STRAIN ON OUR RESOURCES OR CAUSE DILUTION TO OUR STOCKHOLDERS
We have acquired technologies and other companies in order to expand our
business and the services we offer, and we intend to make similar acquisitions
in the future. See "Management's Discussion and Analysis of Financial Condition
and Future Operating Results -- Overview" for a summary of our recent
acquisitions. Integrating newly acquired organizations and technologies into our
company could be expensive, time consuming and may strain our resources. In
addition, we may lose current users of our services if any acquired companies
have relationships with competitors of our users. Consequently, we may not be
successful in integrating any acquired businesses or technologies and may not
achieve anticipated revenue and cost benefits. In addition, future acquisitions
could result in potentially dilutive issuances of equity securities or the
incurrence of debt, contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could harm our business. For
example, in connection with the acquisitions of GAR, FDI, Pharos, USL and
EquipMD, we recorded approximately $9.7, $3.3, $19.5, $6.5 and $125.2 million,
respectively, which will be amortized over a period of three to seven years. In
addition, we will record significant goodwill in connection with our recent
agreement with Novation.
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IF WE DO NOT TIMELY ADD PRODUCT INFORMATION TO OUR ONLINE MARKETPLACE OR IF THAT
INFORMATION IS NOT ACCURATE, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE USERS
OF OUR ONLINE SERVICES
Currently, we are responsible for entering product information into our
database and categorizing the information for search purposes. If we do not do
so in a timely manner, we will encounter difficulties in expanding our online
marketplace. We currently have a backlog of products to be entered in our
system. We will not derive revenue from the sale of products by these suppliers
until the information is entered in our system. Timely entering of this
information in our database depends upon a number of factors, including the
format of the data provided to us by suppliers and our ability to accurately
enter the data in our product database, any of which could delay the actual
entering of the data. We use an independent company to assist us in digitizing
and inputting the data provided to us by suppliers, and we rely on this company
to accurately input the data. If this company fails to input data accurately,
our reputation could be damaged, and we could lose users of our online services.
IF SUPPLIERS DO NOT TIMELY PROVIDE US WITH ACCURATE, COMPLETE AND CURRENT
INFORMATION ABOUT THEIR PRODUCTS AND COMPLY WITH GOVERNMENT REGULATIONS, WE MAY
BE EXPOSED TO LIABILITY OR THERE MAY BE A DECREASE IN THE ADOPTION AND USE OF
OUR ONLINE MARKETPLACE
If suppliers do not provide us in a timely manner with accurate, complete
and current information about the products they offer and promptly update this
information when it changes, our database will be less useful to purchasers. We
cannot guarantee that the product information available from our services will
always be accurate, complete and current, or that it will comply with
governmental regulations. This could expose us to liability if this incorrect
information harms users of our services or result in decreased adoption and use
of our online marketplace. We also rely on suppliers using our services to
comply with all applicable governmental regulations, including packaging,
labeling, hazardous materials, health and environmental regulations and
licensing and record keeping requirements. Any failure of our suppliers to
comply with applicable regulations could expose us to civil or criminal
liability or could damage our reputation.
BECAUSE SOME OF THE PARTICIPANTS IN OUR ONLINE MARKETPLACE ARE STOCKHOLDERS OR
AFFILIATED WITH OUR STOCKHOLDERS OR HAVE STRATEGIC RELATIONSHIPS WITH US, WE MAY
FIND IT DIFFICULT TO ATTRACT COMPETING COMPANIES, WHICH COULD LIMIT THE BREADTH
OF PRODUCTS OFFERED ON AND USERS OF OUR ONLINE MARKETPLACE
Some participants in our online marketplace are our stockholders or
affiliated with our stockholders or have strategic relationships with us. For
example, General Electric Medical Systems is entitled to sponsor rooms in our
Plan service and has agreed to conduct other activities with us, and an
affiliate of General Electric Medical Systems owns shares of our common stock.
In addition, VHA and UHC, the owners of Novation, own 46.3 million and 11.3
million shares of our common stock, respectively and warrants to purchase an
additional 30.8 million, and 7.5 million shares of our common stock,
respectively. These relationships may deter other suppliers, group purchasing
organizations or users, particularly those that compete directly with these
participants, from participating in our online marketplace due to perceptions of
bias in favor of one supplier over another. This could limit the array of
products offered on our online marketplace, damage our reputation and limit our
ability to maintain or increase our user base.
IF WE FAIL TO DEVELOP THE CAPABILITY TO INTEGRATE OUR ONLINE SERVICES WITH
ENTERPRISE SOFTWARE SYSTEMS OF PURCHASERS AND SUPPLIERS OF MEDICAL PRODUCTS AND
TO ENABLE OUR SERVICES TO SUPPORT CUSTOMER-SPECIFIC PRICING, THESE ENTITIES MAY
CHOOSE NOT TO UTILIZE OUR ONLINE MARKETPLACE, WHICH WOULD HARM OUR BUSINESS
If we do not maintain and expand the functionality and reliability of our
services, purchasers and suppliers of medical products may not use our
marketplace. We believe that we must develop the capability to integrate our
online services with enterprise software systems used by many suppliers of
medical products and by many large healthcare organizations, and to enable our
services to support customer-specific pricing. We may incur significant expenses
to develop these capabilities, and may not succeed in developing them in a
timely manner. In addition, developing the capability to integrate our services
with suppliers' and purchasers' enterprise software systems will require the
cooperation of and collaboration with the companies that develop and market
these systems. Suppliers and purchasers use a variety of different enterprise
software systems provided by
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third-party vendors or developed internally. This lack of uniformity increases
the difficulty and cost of developing the capability to integrate with the
systems of a large number of suppliers and purchasers. Failure to provide these
capabilities would limit the efficiencies that our services provide, and may
deter many purchasers and suppliers from using our online marketplace,
particularly large healthcare organizations.
To realize the benefits of our outsourcing and operating agreement with
Novation, we will be required to attract, and integrate the systems of, the
healthcare organizations purchasing through Novation's programs. If the costs
required to integrate these systems are substantially higher than anticipated,
we may not realize the full benefit of the outsourcing and operating agreement.
If we are delayed or unable to integrate the systems of these organizations, our
revenues would be adversely affected. In addition, under the Novation
outsourcing and operating agreement, we will be required to meet detailed
functionality and service level requirements. If we are unable to achieve these
required levels of functionality within the required time period, we may be
required to pay significant liquidated damages or the agreement could be
terminated, which would seriously harm our business and financial results. To
the extent we are unable to or delayed in providing this functionality, we may
be unable to attract buyers and sellers to our marketplace and our revenues may
be adversely affected. We will be required to incur significant costs in
providing functionality to our online marketplace and in integrating healthcare
organizations and suppliers to our online marketplace prior to receiving any
transaction fee revenues, and we may never generate sufficient revenues to
offset these costs.
WE FACE INTENSE COMPETITION, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY
BE UNABLE TO MAINTAIN OR EXPAND THE BASE OF PURCHASERS AND SELLERS OF MEDICAL
PRODUCTS USING OUR SERVICES AND WE MAY LOSE MARKET SHARE OR BE REQUIRED TO
REDUCE PRICES
The online market for medical products, supplies and equipment is new,
rapidly evolving and intensely competitive. Our primary competition includes
e-commerce providers that have established online marketplaces for medical
products, supplies and equipment. We also face potential competition from a
number of sources. Many companies have created websites to serve the information
needs of healthcare professionals. Many of these companies are introducing
e-commerce functions that may compete with our services. In addition, providers
of online marketplaces and online auction services that currently focus on other
industries could expand the scope of their services to include medical products.
Existing suppliers of medical products may also establish online marketplaces
that offer services to suppliers and purchasers, either on their own or by
partnering with other companies. Moreover, live auction houses focusing on
medical products may establish online auction services.
Competition is likely to intensify as our market matures. As competitive
conditions intensify, competitors may:
- enter into strategic or commercial relationships with larger, more
established healthcare, medical products and Internet companies;
- secure services and products from suppliers on more favorable terms;
- devote greater resources to marketing and promotional campaigns;
- secure exclusive or preferential arrangements with purchasers or
suppliers that limit sales through our marketplace; and
- devote substantially more resources to website and systems development.
For example, one of our competitors, medibuy.com, Inc., recently announced
its agreement to acquire Premier Health Exchange, including a long-term,
exclusive agreement to provide e-commerce services for Premier Purchasing
Partners, one of the largest group purchasing organizations in the United
States. Ventro, a business-to-business e-commerce company providing supply chain
solutions, has formed a joint venture, Broadlane, with Tenet Healthcare, a large
owner and operator of hospitals and other healthcare facilities. Broadlane also
recently announced a strategic alliance with AmeriNet, a large group purchasing
organization. In addition, Columbia/HCA Healthcare, a large owner and operator
of hospitals and other healthcare facilities, has formed empactHealth.com to
provide an online marketplace for medical products. In addition,
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Johnson & Johnson, General Electric Medical Systems, Baxter International,
Abbott Laboratories and Medtronic recently announced that they are creating a
healthcare exchange for the purchase and sale of medical products. Five large
distributors of medical products, AmeriSource Health Corp., Cardinal Health
Inc., Fischer Scientific International Inc., McKesson HBOC Inc. and Owens &
Minor Inc., have also recently announced that they will form a
business-to-business exchange marketplace for the sales of drugs, and
medical-surgical products, devices and other laboratory products and services.
Many of our existing and potential competitors have longer operating
histories in the medical products market, greater name recognition, larger
customer bases and greater financial, technical and marketing resources than we
do. As a result of these factors, our competitors and potential competitors may
be able to respond more quickly to market forces, undertake more extensive
marketing campaigns for their brands and services and make more attractive
offers to purchasers and suppliers, potential employees and strategic partners.
In addition, new technologies may increase competitive pressures. We cannot be
certain that we will be able to maintain or expand our user base. We may not be
able to compete successfully against current and future competitors and
competition could result in price reductions, reduced sales, gross margins and
operating margins and loss of market share.
IF WE ARE NOT ABLE TO INCREASE RECOGNITION OF, OR LOSE THE RIGHT TO USE, THE
NEOFORMA.COM BRAND NAME, OUR ABILITY TO ATTRACT USERS TO OUR ONLINE MARKETPLACE
WILL BE LIMITED
We believe that recognition and positive perception of the Neoforma.com
brand name in the healthcare industry are important to our success. We intend to
significantly expand our advertising and publicity efforts in the near future.
However, we may not achieve our desired goal of increasing the awareness of the
Neoforma.com brand name. Even if recognition of our name increases, it may not
lead to an increase in the number of visitors to our online marketplace or
increase the number of users of our services.
Furthermore, in a letter dated January 14, 2000, Forma Scientific, Inc.
notified us that it believes our use of "Neoforma" and "Neoforma.com" violates
its trademark rights in "Forma" and "Forma Scientific" and that it had filed a
complaint in Federal court. On May 11, 2000 we were formally served with the
complaint. We believe that we have meritorious defenses to Forma Scientific's
claims and intend to vigorously defend ourselves in this litigation. However, if
any litigation were to be decided adversely to us, we could be enjoined from
future use of the names Neoforma and Neoforma.com. The loss of the use of the
Neoforma.com brand would seriously harm our business.
IF PARTICIPATING SELLERS ON OUR SHOP AND AUCTION SERVICES DO NOT PROVIDE TIMELY
AND PROFESSIONAL DELIVERY OF MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT,
PURCHASERS MAY NOT CONTINUE USING OUR SERVICES
We rely on suppliers to deliver the medical products, supplies and
equipment sold through our Shop service to purchasers. We also often rely on
sellers to deliver products sold through our Auction service. In addition,
suppliers do not guarantee the availability or timely delivery of products
listed on to Shop. If these sellers fail to make delivery in a professional,
safe and timely manner, then our services will not meet the expectations of
purchasers, and our reputation and brand will be damaged. In addition,
deliveries that are non-conforming, late or are not accompanied by information
required by applicable law or regulations could expose us to liability or result
in decreased adoption and use of our services.
WE MAY BE SUBJECT TO LITIGATION FOR DEFECTS IN PRODUCTS SUPPLIED BY SELLERS
USING OUR SERVICES, AND THIS TYPE OF LITIGATION MAY BE COSTLY AND TIME-CONSUMING
TO DEFEND
Because we facilitate the sale of new and used medical products by sellers
using our services, we may become subject to legal proceedings regarding defects
in these medical products, even though we generally do not take title to these
products. Any claims, with or without merit, could:
- be time-consuming to defend;
- result in costly litigation; or
- divert management's attention and resources.
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IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR
INDUSTRY
Our success depends on our ability to attract and retain qualified,
experienced employees. Competition for qualified, experienced employees in both
the Internet and the healthcare industry, particularly in the San Francisco Bay
Area, is intense, and we may not be able to compete effectively to retain and
attract employees. Should we fail to retain or attract qualified personnel, we
may not be able to compete successfully in our industry, and our business would
be harmed.
We believe that our success will depend on the continued services of
executive officers and other key employees. Other than initial offer letters
containing information regarding compensation, we currently have employment
agreements with only two members of our senior management. However, these
agreements do not prevent these executives from terminating their employment at
any time. As a result, our employees, including these executives, serve at-will
and may elect to pursue other opportunities at any time. The loss of any of our
executive officers or other key employees could harm our business.
Other than the limited key person life insurance policies we have with our
founders, Jeffrey H. Kleck and Wayne D. McVicker, we do not maintain any key
person life insurance.
OUR STRATEGY TO EXPAND OUR SERVICES INTERNATIONALLY IN ORDER TO INCREASE THE USE
OF OUR ONLINE MARKETPLACE BY SUPPLIERS AND PURCHASERS OF MEDICAL PRODUCTS MAY
REQUIRE SIGNIFICANT MANAGEMENT ATTENTION AND FINANCIAL RESOURCES, AND IF WE ARE
UNABLE TO EXECUTE THIS STRATEGY, OUR GROWTH WILL BE LIMITED AND OUR OPERATING
RESULTS MAY BE HARMED
In order to increase the market awareness and the use of our online
marketplace by suppliers of medical products, we intend to expand our services
internationally. If we fail to execute this strategy, our growth will be limited
and our operating results may be harmed. We have limited experience with the
healthcare industry outside the U.S. and with marketing our services
internationally. Our entry into international markets may require significant
management attention and financial resources, which may harm our ability to
effectively manage our existing business. Furthermore, entry into some
international markets would require us to develop foreign language versions of
our services. Accordingly, our planned international expansion may not be
successful. We cannot be sure that we will be able to attract purchasers and
sellers of medical products in foreign jurisdictions to our online marketplace.
In addition, the market for the purchase and sale of medical products in many
foreign countries is different from that in the U.S. For example, in many
foreign countries, the government or a government-controlled entity is the
principal purchaser of medical products. Competitors which have greater local
market knowledge may exist or arise in these international markets and impede
our ability to successfully expand in these markets. In addition, under our
outsourcing and operating agreement with Novation, we and Novation have each
agreed that if we want to undertake a new Internet venture in a country other
than the United States or in a market not then served by our online marketplace,
that each of us will provide the other with advance notice and first offer the
other the right to participate in that venture or market in a similar role to
that party's role under the outsourcing agreement. Accordingly, we may be unable
to quickly enter new countries or markets and we may be limited in our ability
to choose a partner other than Novation to serve as a supplier contracting agent
in new countries or markets.
IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC ALLIANCES OR ENTER INTO NEW
ALLIANCES, WE MAY BE UNABLE TO INCREASE THE ATTRACTIVENESS OF OUR ONLINE
MARKETPLACE OR PROVIDE SATISFACTORY SERVICES TO USERS OF OUR SERVICES
Our business strategy includes entering into strategic alliances with
leading technology and healthcare-related companies to increase users of our
online marketplace, increase the number and variety of products that we offer
and provide additional services and content to our users. We may not achieve our
objectives through these alliances. These agreements do not, and future
relationships may not, afford us any exclusive marketing or distribution rights.
Many of these companies have multiple relationships and they may not regard us
as significant for their business. These companies may pursue relationships with
our competitors or develop or acquire services that compete with our services.
In addition, in many cases these companies may terminate these relationships
with little or no notice. If any existing alliance is terminated or we are
unable to enter into
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alliances with leading technology and healthcare-related companies, we may be
unable to increase the attractiveness of our online marketplace or provide
satisfactory services to purchasers and suppliers of medical products.
OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES, AND IF WE FAIL TO SUCCESSFULLY MANAGE FUTURE GROWTH, WE MAY NOT BE
ABLE TO MANAGE OUR BUSINESS EFFICIENTLY AND MAY BE UNABLE TO EXECUTE OUR
BUSINESS PLAN
We have grown rapidly and will need to continue to grow to execute our
business strategy. Our total number of employees grew from six as of December
31, 1997, to 59 as of December 31, 1998, 269 as of December 31, 1999, and 249 as
of June 30, 2000. Our growth has placed significant demands on management as
well as on our administrative, operational and financial resources and controls.
We expect our future growth to cause similar, and perhaps increased, strain on
our systems and controls. In addition, we are in the process of substantially
upgrading our information systems including our accounting system. We also need
to institute new systems such as an auction inventory tracking system. Any
failure to successfully upgrade our systems and controls could result in
inefficiencies in our business and could cause us to be unable to implement our
business plan.
IF OUR SYSTEMS ARE UNABLE TO PROVIDE ACCEPTABLE PERFORMANCE AS THE USE OF OUR
SERVICES INCREASES, WE COULD LOSE USERS OF OUR SERVICES AND WE WOULD HAVE TO
SPEND CAPITAL TO EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE, EITHER OF WHICH
COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS
We introduced our Shop service in August 1999, the AdsOnline component of
our Auction service in August 1999 and the AuctionOnline component of our
Auction service in November 1999. Accordingly, we have processed a limited
number and variety of transactions on our website. To date, these transactions
have consisted of sales of new medical products through Shop and sales of used
and refurbished medical products on AdsOnline. Our systems may not accommodate
increased use while providing acceptable overall performance. We must continue
to expand and adapt our network infrastructure to accommodate additional users
and increased transaction volumes. This expansion and adaptation will be
expensive and will divert our attention from other activities. If our systems do
not continue to provide acceptable performance as use of our services increases,
our reputation may be damaged and we may lose users of our services.
OUR INFRASTRUCTURE AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED EVENTS, AND IF ANY OF THESE EVENTS OF A SIGNIFICANT MAGNITUDE WERE TO
OCCUR, THE EXTENT OF OUR LOSSES COULD EXCEED THE AMOUNT OF INSURANCE WE CARRY TO
COMPENSATE US FOR ANY LOSSES
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
process transactions, provide high quality customer service and attract and
retain users of our services. Currently, our infrastructure and systems are
located at one site at Exodus Communications in Sunnyvale, California, which is
an area susceptible to earthquakes. We depend on our single-site infrastructure
and any disruption to this infrastructure resulting from a natural disaster or
other event could result in an interruption in our service, reduce the number of
transactions we are able to process and, if sustained or repeated, could impair
our reputation and the attractiveness of our services or prevent us from
providing our services entirely.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan or alternative provider
of hosting services. In addition, we may not carry sufficient business
interruption insurance to compensate us for losses that could occur. Any failure
on our part to expand our system or Internet infrastructure to keep up with the
demands of our users, or any system failure that causes an interruption in
service or a decrease in responsiveness of our online services or website, could
result in fewer transactions and, if sustained or repeated, could impair our
reputation and the attractiveness of our services or prevent us from providing
our services entirely.
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IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF THE CONFIDENTIAL
INFORMATION OF THE USERS OF OUR ONLINE MARKETPLACE, THESE USERS MAY DISCONTINUE
USING OUR SERVICES
A significant barrier to the widespread adoption of e-commerce is the
secure transmission of personally identifiable information of Internet users as
well as other confidential information over public networks. If any compromise
or breach of security were to occur, it could harm our reputation and expose us
to possible liability. We use SSL, or secure sockets layer, an Internet security
technology, at appropriate points in the transaction flow and encrypt
information on our servers to protect user information during transactions, and
we employ a security consulting firm that periodically tests our security
measures. Despite these efforts, a party may be able to circumvent our security
measures and could misappropriate proprietary information or cause interruptions
in our operations. We may be required to make significant expenditures to
protect against security breaches or to alleviate problems caused by any
breaches.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS MAY GAIN
ACCESS TO OUR TECHNOLOGY, WHICH COULD HARM OUR BUSINESS
We regard our intellectual property as critical to our success. If we are
unable to protect our intellectual property rights, our business would be
harmed. We rely on trademark, copyright and trade secret laws to protect our
proprietary rights. We have applied for registration of several marks including
the Neoforma.com logo. Our trademark registration applications may not be
approved or granted, or, if granted, may be successfully challenged by others or
invalidated through administrative process or litigation.
WE HAVE RECEIVED NOTICE OF A TRADEMARK INFRINGEMENT CLAIM BROUGHT BY A THIRD
PARTY AND WE MAY BE SUBJECT TO FURTHER INTELLECTUAL PROPERTY CLAIMS AND IF WE
WERE TO SUBSEQUENTLY LOSE OUR INTELLECTUAL PROPERTY RIGHTS, WE COULD BE UNABLE
TO OPERATE OUR CURRENT BUSINESS
We may from time to time be subject to claims of infringement of other
parties' proprietary rights or claims that our own trademarks, patents or other
intellectual property rights are invalid. For example, in a letter dated January
14, 2000, Forma Scientific, Inc. notified us that it believes our use of the
"Neoforma" and "Neoforma.com" trademarks violates its trademark rights in
"Forma" and "Forma Scientific", and that it had filed a complaint in federal
court. On May 11, 2000 we were formally served with this complaint. We believe
that we have meritorious defenses to Forma Scientific's claims and intend to
vigorously defend ourselves in this litigation. If any litigation were to be
decided adversely to us, we could be enjoined from future use of the names
Neoforma and Neoforma.com and we might be required to pay damages to Forma
Scientific.
Any claims regarding our intellectual property, with or without merit,
could be time consuming and costly to defend, divert management attention and
resources or require us to enter into royalty or license agreements. License
agreements may not be available on commercially reasonable terms, if at all. In
addition, there has been a recent increase in the number of patent applications
related to the use of the Internet to perform business processes. Enforcement of
intellectual property rights in the Internet sector will become a greater source
of risk as the number of business process patents increases. The loss of access
to any key intellectual property right, including use of the Neoforma.com brand
name, could result in our inability to operate our current business. See "-- If
we are not able to increase recognition of, or lose the right to use, the
Neoforma.com brand name, our ability to attract users to our online marketplace
will be limited."
IF WE LOSE ACCESS TO THIRD-PARTY SOFTWARE INCORPORATED IN OUR SERVICES, WE MAY
NOT BE ABLE TO OPERATE OUR ONLINE MARKETPLACE
We currently rely on software that we have licensed from a number of
suppliers. For example, we use software that we license from NetDynamics, Inc.,
a subsidiary of Sun Microsystems, to provide part of our website infrastructure,
we use information retrieval software that we license from SearchCafe
Development Corporation to provide part of our search capabilities, we use
software that we license from Moai, Inc. to provide a substantial part of the
functionality of our AuctionOnline service, we use software that we license from
SAP to further automate the order management and transaction routing process
within our marketplace, we will use software that we license from Ariba to
further enable us to offer our purchasing customers a
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mechanism to automate and streamline the procurement process and we use software
that we license from CrossWorlds, TIBCO and STC to integrate our marketplace
applications and services with purchasers' and suppliers' systems. These
licenses may not continue to be available to us on commercially reasonable
terms, or at all. In addition, the licensors may not continue to support or
enhance the licensed software. In the future, we expect to license other third
party technologies to enhance our services, to meet evolving user needs or to
adapt to changing technology standards. Failure to license, or the loss of any
licenses of, necessary technologies could impair our ability to operate our
online marketplace until equivalent software is identified, licensed and
integrated or developed by us. In addition, we may fail to successfully
integrate licensed technology into our services, which could similarly harm
development and market acceptance of our services.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE PARTICIPANTS IN THE MARKET FOR
MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT ACCEPTING THE INTERNET FOR DISTRIBUTION
AND PROCUREMENT
Business-to-business e-commerce is currently not a significant sector of
the market for medical products, supplies and equipment. The Internet may not be
adopted by purchasers and suppliers in the medical products, supplies and
equipment market for many reasons, including:
- reluctance by the healthcare industry to adopt the technology necessary
to engage in the online purchase and sale of medical products;
- failure of the market to develop the necessary infrastructure for
Internet-based communications, such as wide-spread Internet access,
high-speed modems, high-speed communication lines and computer
availability;
- their comfort with existing purchasing habits, such as ordering through
paper-based catalogs and representatives of medical manufacturers and
distributors;
- their concern with respect to security and confidentiality; and
- their investment in existing purchasing and distribution methods and the
costs required to switch methods.
Should healthcare providers and suppliers of medical products choose not
utilize or accept the Internet as a means of purchasing and selling medical
products, our business model would not be viable.
REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD INHIBIT HE
GROWTH OF E-COMMERCE AND LIMIT THE MARKET FOR OUR SERVICES
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, such as user privacy,
taxation of goods and services provided over the Internet and the pricing,
content and quality of services. Legislation could dampen the growth in Internet
usage and decrease or limit its acceptance as a communications and commercial
medium. If enacted, these laws and regulations could limit the market for our
services. In addition, existing laws could be applied to the Internet, including
consumer privacy laws. Legislation or application of existing laws could expose
companies involved in e-commerce to increased liability, which could limit the
growth of e-commerce.
IF REGULATIONS WITH RESPECT TO HOW AUCTIONS MAY BE CONDUCTED ARE IMPOSED BY
STATES, OUR BUSINESS COSTS MAY INCREASE, WHICH WOULD HARM OUR RESULTS OF
OPERATIONS
Numerous states, including the State of California, where our headquarters
are located, have regulations regarding how auctions may be conducted and the
liability of auctioneers in conducting these auctions. No legal determination
has been made with respect to the applicability of these regulations to our
online business to date and little precedent exists in this area. One or more
states may attempt to impose these regulations upon us in the future, which
could increase our cost of doing business.
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IF THERE ARE CHANGES IN THE POLITICAL, ECONOMIC OR REGULATORY HEALTHCARE
ENVIRONMENT THAT AFFECT THE PURCHASING PRACTICE OR OPERATION OF HEALTHCARE
ORGANIZATIONS, OR IF THERE IS CONSOLIDATION IN THE HEALTHCARE INDUSTRY, WE COULD
BE REQUIRED TO MODIFY OUR SERVICES OR TO INTERRUPT DELIVERY OF OUR SERVICES
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Regulation of the healthcare
organizations with which we do business could impact the way in which we are
able to do business with these organizations. In addition, factors such as
changes in reimbursement policies for healthcare expenses, consolidation in the
healthcare industry and general economic conditions affect the purchasing
practices and operation of healthcare organizations. Changes in regulations
affecting the healthcare industry, such as any increased regulation by the Food
and Drug Administration of the purchase and sale of medical products, could
require us to make unplanned enhancements of our services, or result in delays
or cancellations of orders or reduce demand for our services. 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 providers operate. We do not know what effect any 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 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 fee reductions of
our services. If we were forced to reduce our fees, our operating results could
suffer if we cannot achieve corresponding reductions in our expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk:
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We invest in high-credit quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. As stated in its
policy, we ensure the safety and preservation of our invested principal funds by
limiting default risk, market risk and reinvestment risk. We mitigate default
risk by investing in safe and high-credit quality securities and by constantly
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer, guarantor or depository. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for our investment portfolio (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------
2000 2001 2002 2003 2004
------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash equivalents and short-term
investments:
Fixed rate short-term
investments................... $72,159 $1,997
Average interest rate............ 6.55% 6.47%
</TABLE>
34
<PAGE> 35
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 14, 2000, Forma Scientific, Inc. notified the Company that it
believes the Company's use of "Neoforma" and "Neoforma.com" violates its
trademark rights in "Forma" and "Forma Scientific" and that it had filed
complaint in federal court. On May 11, 2000, the Company was formally served
with the complaint entitled Forma Scientific, Inc. v. Neoforma.com, Inc., Docket
No. C200-0045, U.S. District Court, Southern District of Ohio, Eastern Division
of Columbus, alleging trademark infringement. Based on the Company's
investigation, the Company believes that it has meritorious defenses to Forma
Scientific's claims and intend to vigorously defend this litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) UNREGISTERED ISSUANCES OF SECURITIES
We issued 4,374,066 shares of our common stock on April 28, 2000 in
connection with the acquisition of EquipMD, Inc. No underwriters were used in
the transaction and the recipients of our common stock were the shareholders of
the acquired company. The shares of common stock were issued in reliance upon an
exemption from the registration requirements of the Securities Act provided by
Rule 506 of Regulation D promulgates under the Securities Act. The shareholders
of the acquired companies made certain representations to the Company as to
investment intent, that they possessed a sufficient level of financial
sophistication and that they received information about the Company. The shares
issued in the transactions were subject to restrictions on transfer absent
registration under the Securities Act, and no offers to sell the securities were
made by any form of general solicitation or general advertisement.
(d) USE OF PROCEEDS
The Company sold 8,050,000 shares of its common stock on January 24, 2000,
pursuant to a Registration Statement on Form S-1 (Registration No. 333-89077),
which was declared effective by the Securities and Exchange Commission on
January 24, 2000 (the "Effective Date"). The managing underwriters of the
offering were Merrill Lynch & Co., Bear, Stearns & Co. Inc., Robertson Stephens
and William Blair & Company. The aggregate gross proceeds of the offering were
$104.7 million. The Company's total expenses in connection with the offering
were approximately $9.3 million, of which approximately $7.3 million was for
underwriting discounts and commissions and approximately $2.0 million was for
other expenses paid to persons other than directors or officers of the Company
or persons owning more than 10 percent of any class of equity securities of
Neoforma. The Company's net proceeds from the offering were approximately $95.4
million. From the Effective Date through June 30, 2000, the Company used
approximately $55.0 million of the net proceeds primarily to fund operating
losses and working capital requirements. As of June 30, 2000, the Company had
approximately $40.4 million of net proceeds remaining, and pending use of the
proceeds, the Company intends to invest such proceeds primarily in high-quality
corporate and government debt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
35
<PAGE> 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<S> <C> <C>
27.1 -- Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
The Company filed a Form 8-K on April 3, 2000 to report that on March 24,
2000 it had entered into an Agreement and Plan of Merger to acquire all of the
outstanding capital stock and options of EquipMD, Inc. for approximately 5.4
million shares of the Company's common stock.
The Company filed a Form 8-K on April 4, 2000 to report the following:
(i) That on March 30, 2000 it had entered into an Agreement and Plan
of Merger to merge with and into Eclipsys Corporation. In the Eclipsys
merger, each outstanding share of Eclipsys common stock was to be exchanged
for 1.344 shares of Neoforma common stock, and options to purchase Eclipsys
common stock were to be exchanged for options to purchase shares of
Neoforma common stock according to the exchange ratio;
(ii) That on March 30, 2000 it had entered into an Agreement and Plan
of Merger with HEALTHvision, Inc. Subject to the terms and conditions of
the merger agreement, immediately following the consummation of the
Eclipsys merger, HEALTHvision would merge with and into Eclipsys, which
would then be a wholly-owned subsidiary of Neoforma. In the HEALTHvision
merger, each outstanding share of HEALTHvision Series A Convertible
Participating Preferred Stock would be exchanged for 2.0801825 shares of
Neoforma common stock, each outstanding share of HEALTHvision Series B
Convertible Preferred Stock will be exchanged for 1.776 shares of Neoforma
common stock, each outstanding share of HEALTHvision common stock will be
exchanged for 0.444 shares of Neoforma common stock, and options to
purchase HEALTHvision common stock would be exchanged for options to
purchase shares of Neoforma common stock according to the common stock
exchange ratio;
(iii) That on March 30, 2000, Neoforma, Novation LLC, VHA Inc.,
University Healthsystem Consortium ("UHC"), and Healthcare Purchasing
Partners International, LLC ("HPPI"), entered into an Outsourcing and
Operating Agreement (the "Novation Operating Agreement"), under which,
subject to the terms and conditions of the Novation Operating Agreement,
each of Novation, VHA, UHC and HPPI agree to exclusively use and promote to
their member healthcare organizations Neoforma's internet-based exchange
for the purchase and sale of medical equipment, supplies and other products
and services. The term of the Novation Operating Agreement is ten years,
subject to termination or extension in accordance with its terms. Under the
Novation Operating Agreement, Neoforma will appoint Novation as Neoforma's
exclusive agent for soliciting suppliers of such products and services on
Neoforma's behalf. In connection with the Novation Operating Agreement,
Neoforma entered into Common Stock and Warrant Agreements (the "VHA Stock
and Warrant Agreement" and "UHC Stock and Warrant Agreement," respectively,
and together with the Novation Operating Agreement, the "Novation
Documents") with each of VHA and UHC, Novation's member organizations,
pursuant to which, and subject to the terms and conditions of such
agreements, Neoforma would issue to VHA 38.3 million shares and warrants to
purchase an additional 14.2 million shares of Neoforma common stock, and
Neoforma would issue to UHC 9.2 million shares and a warrant to purchase an
additional 1.5 million shares of Neoforma common stock.
(iv) That upon consummation of the Eclipsys Merger, the Healthvision
Merger and the transactions contemplated by the Novation Documents,
Neoforma would take all action necessary to increase the size of the
Neoforma board of directors to nine, and appoint three directors nominated
by Eclipsys, including Harvey J. Wilson, the Chairman and CEO of Eclipsys,
one director nominated by HEALTHvision, and one director nominated by VHA
to the Neoforma board. Following consummation of the transactions, Harvey
J. Wilson would become Chairman of the Neoforma board of directors and
Robert Zollars would continue as Chief Executive Officer and President of
Neoforma.
36
<PAGE> 37
The Company filed a Form 8-K on May 3, 2000 to report that on April 28,
2000, it had completed the acquisition of EquipMD, Inc. Under the terms of the
acquisition agreement, EquipMD's shareholders received an aggregate of 4,374,066
shares of the Company's common stock, and EquipMD's optionholders received the
right to purchase 1,075,502 shares of the Company's common stock pursuant to the
EquipMD options that were assumed.
The Company filed a Form 8-K on May 31, 2000 to report the following:
(i) That on May 24, 2000, the Company, Eclipsys Corporation
("Eclipsys"), HEALTHvision, Inc. ("Healthvision"), Novation LLC
("Novation"), VHA Inc. ("VHA"), University HealthSystem Consortium ("UHC")
and Healthcare Purchasing Partners International, LLC ("HPPI") entered into
a Termination Agreement, that, among other things, terminated the Agreement
and Plan of Merger, dated March 30, 2000, among Neoforma, Merger Sub and
Eclipsys, and the Agreement and Plan of Merger, dated March 30, 2000,
between Neoforma and HEALTHvision.
(ii) That on May 24, 2000, Neoforma, Novation, VHA, UHC and HPPI
agreed to amend and restate the Outsourcing and Operating Agreement among
them dated March 30, 2000 to, among other things, reflect the termination
of Neoforma's prospective mergers with Eclipsys and HEALTHvision.
(iii) That on May 24, 2000, in connection with the amendment and
restatement of the Outsourcing and Operating Agreement and the termination
of the mergers, Neoforma and VHA, and Neoforma and UHC, respectively,
agreed to amend and restate the Common Stock and Warrant Agreements between
them dated March 30, 2000. Under the terms of the amended and restated
agreement with VHA, Neoforma will issue to VHA 46,267,530 shares of
Neoforma common stock, and a warrant to purchase an additional 30,845,020
shares of Neoforma common stock subject to vesting upon the achievement of
performance criteria. Under the terms of the amended and restated agreement
with UHC, Neoforma will issue to UHC 11,279,150 shares of Neoforma common
stock, and a warrant to purchase an additional 7,519,436 shares of Neoforma
common stock subject to vesting upon the achievement of performance
criteria. The exercise price of the warrants is $0.01. The amended and
restated stock and warrant agreements also provide for VHA designees to
fill two of the seven seats on Neoforma's Board of Directors, and require
that, subject to exceptions, VHA will vote any Neoforma stock it owns in
excess of 20% of outstanding Neoforma stock in the same proportion as all
other stockholders, and UHC will vote any Neoforma stock it owns in excess
of 9% of outstanding Neoforma stock in the same proportion as all other
stockholders. In the amended and restated stock and warrant agreements, VHA
and UHC also agreed to other restrictions on their acquisition and transfer
of Neoforma stock.
(iv) That on May 25, 2000, Neoforma also announced a reorganization of
its operating structure, changes in its executive management and a
reduction in workforce of approximately 80 individuals.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOFORMA.COM, INC.
By /s/ FREDERICK J. RUEGSEGGER
------------------------------------
Frederick J. Ruegsegger
Chief Financial Officer and
Secretary
Date: August 14, 2000
38
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
27.1 -- Financial Data Schedule
</TABLE>
