<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 SEPTEMBER 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 November 10, 2000, there were 156,718,612 outstanding shares of our
common stock, $.001 par value per share.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
NEOFORMA.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999........................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999.................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999........................... 5
Notes to Unaudited Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 39
Item 2. Changes in Securities and Use of Proceeds................... 39
Item 3. Defaults Upon Senior Securities............................. 39
Item 4. Submission of Matters to a Vote of Security Holders......... 39
Item 5. Other Information........................................... 40
Item 6. Exhibits and Reports on Form 8-K............................ 40
SIGNATURES................................................................ 41
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOFORMA.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 25,292 $ 45,951
Short-term investments.................................... 21,483 4,527
Accounts receivable, net of allowance for doubtful
accounts of $4 and $233, respectively................... 151 1,788
Unbilled revenue.......................................... -- 943
Inventory................................................. -- 1,095
Prepaid expenses and other current assets................. 2,226 2,345
Deferred debt costs, current portion...................... 413 413
-------- ---------
Total current assets................................ 49,565 57,062
-------- ---------
LONG-TERM INVESTMENTS....................................... 2,027 2,003
PROPERTY AND EQUIPMENT, net................................. 8,771 21,822
INTANGIBLES................................................. 12,319 149,263
CAPITALIZED PARTNERSHIP COSTS............................... -- 312,584
NON-MARKETABLE INVESTMENTS.................................. 2,500 8,000
OTHER ASSETS................................................ 1,585 936
DEFERRED DEBT COSTS, less current portion................... 602 287
-------- ---------
Total assets........................................ $ 77,369 $ 551,957
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable, current portion............................ $ 3,360 $ 9,170
Accounts payable.......................................... 7,123 12,771
Accrued payroll........................................... 1,410 2,750
Other accrued liabilities................................. 685 1,105
Deferred revenue.......................................... 99 971
-------- ---------
Total current liabilities........................... 12,677 26,767
-------- ---------
NOTES PAYABLE, less current portion......................... 7,743 7,718
-------- ---------
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 September 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 September 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 September 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 September 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 September 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 September 30, 2000
Issued and outstanding: 14,407 shares at December 31,
1999 and 126,600 at September 30, 2000................. 14 127
Warrants.................................................... 3,621 27,858
Additional paid-in capital.................................. 76,216 734,442
Notes receivable from stockholders.......................... (8,245) (7,753)
Deferred compensation....................................... (47,388) (42,076)
Unrealized loss on available-for-sale securities............ (40) (11)
Accumulated deficit......................................... (56,053) (195,115)
-------- ---------
Total stockholders' equity (deficit)................ (31,863) 517,472
-------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $ 77,369 $ 551,957
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
NEOFORMA.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Sales of used equipment............................ $ -- $ 2,738 $ -- $ 3,306
Transaction fees................................... 451 633 451 1,879
Services........................................... -- 485 -- 943
Website sponsorship fees and other................. 6 870 13 2,044
-------- -------- -------- ---------
Total revenue.............................. 457 4,726 464 8,172
OPERATING EXPENSES:
Cost of used equipment sold........................ -- 2,398 -- 2,562
Cost of services(1)................................ -- 2,491 -- 3,259
Operations(2)...................................... 1,080 3,023 2,399 8,796
Product development(3)............................. 1,753 6,045 4,321 16,213
Selling and marketing(4)........................... 2,714 8,231 5,096 30,235
General and administrative(5)...................... 4,221 2,678 5,812 9,481
Amortization of intangibles........................ 230 8,149 230 17,546
Amortization of deferred compensation.............. 5,355 7,889 5,662 27,368
Amortization of partnership costs.................. -- 10,847 -- 10,847
Amortization of warrants issued to VHA and UHC..... -- 1,111 -- 1,111
Cost of warrant issued to recruiter................ 2,364 -- 2,364 --
Write off of acquired in-process research and
development..................................... -- -- -- 18,000
Abandoned acquisition costs........................ -- -- -- 2,742
Restructuring...................................... -- -- -- 2,100
-------- -------- -------- ---------
Total operating expenses................... 17,717 52,862 25,884 150,260
-------- -------- -------- ---------
Loss from operations....................... (17,260) (48,136) (25,420) (142,088)
OTHER INCOME (EXPENSE):
Interest income.................................... 45 938 173 3,904
Interest expense................................... (242) (345) (337) (896)
Other income (expense)............................. (30) 21 (30) 21
-------- -------- -------- ---------
Net loss................................... $(17,487) $(47,522) $(25,614) $(139,059)
======== ======== ======== =========
NET LOSS PER SHARE:
Basic and diluted.................................. $ (5.22) $ (0.46) $ (14.20) $ (2.05)
======== ======== ======== =========
Weighted average shares -- basic and diluted....... 3,353 103,919 1,804 67,886
======== ======== ======== =========
PRO FORMA NET LOSS PER SHARE:
Basic and diluted.................................. $ (0.57) $ (0.46) $ (0.94) $ (1.95)
======== ======== ======== =========
Weighted-average shares -- basic and diluted....... 30,474 103,919 27,225 71,402
======== ======== ======== =========
</TABLE>
---------------
(1) Excludes amortization of stock-based compensation of none, $268, none and
$398 for the quarters and nine months ended September 30, 1999 and 2000,
respectively.
(2) Excludes amortization of stock-based compensation of $156, $146, $164 and
$1,464 for the quarters and nine months ended September 30, 1999 and 2000,
respectively.
(3) Excludes amortization of stock-based compensation of $343, $358, $416 and
$2,448 for the quarters and nine months ended September 30, 1999 and 2000,
respectively.
(4) Excludes amortization of stock-based compensation of $743, $4,519, $896 and
$11,709 for the quarters and nine months ended September 30, 1999 and 2000,
respectively.
(5) Excludes amortization of stock-based compensation of $4,113, $2,598, $4,186
and $11,349 for the quarters and nine months ended September 30, 1999 and
2000, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NEOFORMA.COM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(25,614) $(139,059)
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
Common stock issued in connection with consulting
services................................................ 7 --
Valuation of common stock options issued in connection
with consulting services................................ 644 212
Valuation of warrants to purchase common stock in exchange
for consulting services................................. -- 67
Write off of acquired in-process research and
development............................................. -- 18,000
Depreciation and amortization of property and equipment... 417 5,936
Amortization of intangibles............................... 230 17,546
Amortization of partnership costs......................... -- 10,847
Amortization of warrants issued to VHA and UHC............ -- 1,111
Amortization of deferred compensation..................... 5,662 27,368
Cost of warrant issued to recruiter....................... 2,364 --
Amortization of deferred debt costs....................... 133 315
Change in assets and liabilities, net of acquisitions:
Accounts receivable, net................................ (277) (1,375)
Unbilled revenue........................................ -- (943)
Inventory............................................... -- (1,095)
Prepaid expenses and other assets....................... (650) 166
Accounts payable........................................ 3,866 5,179
Accrued liabilities and accrued payroll................. 2,794 1,127
Deferred revenue........................................ -- 71
-------- ---------
Net cash used in operating activities................. (10,424) (53,857)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investments....................... -- (1,658)
Sale of marketable investments............................ -- 18,873
Cash paid for the acquisition of Pharos Technologies, Inc,
net of cash acquired.................................... -- (669)
Cash paid for the acquisition of US Lifeline, Inc, net of
cash acquired........................................... -- (3,772)
Cash paid for the acquisition of EquipMD, Inc, net of cash
acquired................................................ -- (3,908)
Cash paid for the acquisition of General Asset Recovery,
LLC, net of cash acquired............................... (1,800) --
Purchase of non-marketable investments.................... -- (5,500)
Cash paid for costs related to establishing
partnerships............................................ -- (9,000)
Cash paid on note issued in connection with the
acquisition of General Asset Recovery, Inc.............. (184) (1,238)
Purchases of property and equipment....................... (3,411) (18,955)
-------- ---------
Net cash used in investing activities................. (5,395) (25,827)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of notes payable............... 3,741 6,000
Repayments of notes payable............................... (146) (1,505)
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 98
Repayments of notes receivable from stockholders.......... -- 75
Proceeds from the issuance of common stock under the
employee stock purchase plan............................ -- 641
Common stock repurchased, net of cancellation of notes
receivable issued to common stockholders................ -- (294)
Proceeds from the issuance of common stock, net of notes
receivable issued to common stockholders................ 71 95,328
-------- ---------
Net cash provided by financing activities............. 15,662 100,343
-------- ---------
Net increase in cash and cash equivalents............. (157) 20,659
CASH AND CASH EQUIVALENTS, beginning of period.............. 812 25,292
-------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 655 $ 45,951
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for interest.................. $ 204 $ 601
======== =========
</TABLE>
5
<PAGE> 6
NEOFORMA.COM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
-------- ---------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of preferred stock to common stock............. $ -- $ 88,824
======== =========
Issuance of warrants to purchase common stock............. $ 2,364 $ 24,170
======== =========
Issuance of warrants to purchase mandatorily redeemable
convertible preferred stock............................. $ 1,240 $ --
======== =========
Issuance of note payable to related party in connection
with acquisition of General Asset Recovery, LLC......... $ 7,800 $ --
======== =========
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 from common stockholders................. $ -- $ 1,750
======== =========
Notes receivable from common stockholders cancelled in
repurchase of common shares............................. $ -- $ (2,242)
======== =========
Issuance of common stock in connection with partnership
agreements.............................................. $ -- $ 291,330
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE> 7
NEOFORMA.COM, INC.
NOTES TO UNAUDITED 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 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"), 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 $46.2 million as of
December 31, 1999 and September 30, 2000, respectively. Investments classified
as cash equivalents amounted to approximately $22.5 million and $39.6 million at
December 31, 1999 and September 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
losses by major security type were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
--------------------------------------
UNREALIZED
AMORTIZED AGGREGATE HOLDING
COST FAIR VALUE LOSS
--------- ---------- -----------
<S> <C> <C> <C>
Debt securities issued by states of the United
States and political subdivisions of the
states........................................... $14,200 $14,200 $ --
Corporate debt securities.......................... 31,966 31,955 (11)
------- ------- ----
$46,166 $46,155 $(11)
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------
UNREALIZED
AMORTIZED AGGREGATE HOLDING
COST FAIR VALUE LOSS
--------- ---------- -----------
<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>
7
<PAGE> 8
NEOFORMA.COM, INC.
NOTES TO UNAUDITED 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 the purchase price in excess of the fair value of the tangible net assets, in
the acquisitions of GAR, FDI Information Resources, LLC ("FDI"), Pharos, USL,
EquipMD and NCL. (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 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Assembled work force....................................... $ 240 $ 340
Software................................................... 600 600
Developed technology....................................... -- 3,000
Customer lists............................................. -- 19,000
Goodwill................................................... 12,194 144,565
------- --------
13,034 167,505
------- --------
Less: Accumulated amortization............................. (715) (18,242)
------- --------
$12,319 $149,263
======= ========
</TABLE>
CAPITALIZED PARTNERSHIP COSTS
Capitalized Partnership Costs consists primarily of capitalized charges
related to the issuances of common stock and warrants in connection with a
partnership agreement entered into by the Company during the quarter ended
September 30, 2000. Additionally, certain direct costs associated with the
completion of that agreement have been capitalized in this account as well. See
Note 9 for further discussion of both the agreement and the related costs that
have been capitalized.
NON-MARKETABLE INVESTMENTS
In December 1999, the Company purchased 526,250 shares of common stock of
CarePortal.com, LLC ("CarePortal"), formerly known as IntraMedix, LLC
("IntraMedix"), a privately held corporation, in exchange for $2.5 million.
CarePortal is a company that provides procurement services related to the
distribution of geriatric care products to the nursing home community. The
Company accounts for this investment using the cost method. CarePortal is a
related party to GeriMedix, a supplier with which the Company has an agreement
to perform e-Commerce services. On May 26, 2000, the Company issued a 30-day
note receivable to CarePortal in the amount of $1.0 million, evidenced by a
promissory note bearing interest at a rate of 8% per annum. On August 8, 2000
the Company exercised its option to convert the promissory note into shares of
CarePortal common stock. As of that date, the Company also invested an
additional $1.5 million in CarePortal in exchange for common stock. As of
September 30, 2000, the Company owned a total of 983,874 shares of CarePortal
common stock, representing an ownership percentage of 9.0% of the total
outstanding common stock of CarePortal as of that date.
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.
8
<PAGE> 9
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
was included in other assets in the accompanying financial statements.
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 September 30, 1999. The components of
comprehensive income for the quarters and nine months ended September 30, 1999
and 2000 were as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net loss....................... $(17,487) $(47,522) $(25,614) $(139,059)
Net gain (loss) on
available-for-sale
securities................... -- (11) -- 29
-------- -------- -------- ---------
Comprehensive loss............. $(17,487) $(47,533) $(25,614) $ 139,030
======== ======== ======== =========
</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 nine months
ended September 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 nine months ended September
30, 2000, the Company generated revenues of $1.2 million, $4.4 million, $1.6
million and $0.9 million from transaction fees, sales of used equipment and
website sponsorship fees associated with Shop, Auction, Plan and Services
Delivery, respectively. The direct cost of revenues incurred by the Company over
the same period was none, $2.6 million, none and $2.8 million, respectively.
Through September 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 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
potential shares excluded from the diluted loss per share calculation relating
to these securities was approximately 2.6 million and 22.2 million for the nine
months ended September 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
9
<PAGE> 10
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of convertible preferred stock, which occurred upon the closing of the Company's
initial public offering in January 2000.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share for the quarter and nine months ended
September 30, 1999 and 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net loss....................................... $(17,847) $(47,522) $(25,614) $(139,059)
======== ======== ======== =========
Basic and diluted:
Weighted average shares of common stock
outstanding............................... 7,499 110,491 3,261 74,420
Less: Weighted average shares of common stock
subject to repurchase..................... (3,946) (6,572) (1,457) (6,534)
-------- -------- -------- ---------
Weighted average shares used in computing
basic and diluted net loss per share...... 3,553 103,919 1,804 67,886
======== ======== ======== =========
Basic and diluted net loss per common
share..................................... $ (5.22) $ (0.46) $ (14.20) $ (2.05)
======== ======== ======== =========
Pro forma:
Net loss..................................... $(17,847) $(47,522) $(25,614) $(139,059)
======== ======== ======== =========
Shares used above.............................. 3,553 103,919 1,804 67,886
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock.................. 26,921 -- 25,421 3,516
-------- -------- -------- ---------
Weighted average shares used in computing pro
forma basic and diluted net loss per share... 30,474 103,919 27,225 71,402
-------- -------- -------- ---------
Pro forma basic and diluted net loss per
share........................................ $ (0.57) $ (0.46) $ (0.94) $ (1.95)
======== ======== ======== =========
</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 were subject to repurchase rights which lapse over
the vesting period of the original terms of the shares, which specify a vesting
period of four years. As of September 30, 2000, approximately 370,000 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 was allocated to the
10
<PAGE> 11
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
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. 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.
In July 2000, the Company acquired certain assets of National Content
Liquidators, Inc. ("NCL"), an asset management company focused on healthcare
facility liquidations and the resale of used medical products. 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 $3.2 million consisted of
approximately 300,000 shares of common stock valued at $2.2 million, $500,000 in
cash and $500,000 in notes payable to the principals of NCL. In the initial
allocation of the purchase price, the full $3.2 million was allocated to
goodwill as there were no material tangible assets acquired. The goodwill will
be amortized over an estimate useful life of 7 years.
The unaudited pro forma results of operations of the Company, GAR, FDI,
Pharos, USL, EquipMD and NCL for the nine months ended September 30, 1999 and
2000, assuming the acquisitions took place at the beginning of the respective
period, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
-------- ---------
<S> <C> <C>
Revenue..................................................... $ 3,807 $ 10,000
======== =========
Net loss.................................................... $(52,712) $(149,039)
======== =========
Basic and diluted net loss per share........................ $ (5.91) $ (2.12)
======== =========
</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. In December 1999, the Company repaid the $225,000 term
loan. In July 2000, the Company repaid the borrowings of approximately $404,000
under the equipment loan in full. 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
11
<PAGE> 12
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
September 30, 2000, there were borrowings of approximately $1.3 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.
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 September 30, 2000, the
principal balance outstanding under the facility was $1.6 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 September 30, 2000 the remaining
principal balance was approximately $5.5 million.
As part of the purchase of EquipMD, 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 September 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 September 30, 2000, the
remaining principal balance was $1.5 million. According to the provisions of the
note, a payment amounting to $250,000 on the note was due upon change of
control. As a result of the purchase of EquipMD by the Company (see Note 3),
under the change of control provisions, the Company made a $250,000 payment in
July 2000.
In July 2000, the Company entered into a promissory note with its
investment bankers in the amount of $6.0 million. The note is payable in 4
quarterly payments of $1.5 million, commencing on January 1, 2001. At September
30, 2000 the remaining balance on the note was $6.0 million.
In July 2000, as part of the acquisition of NCL, the Company issued a
promissory note to each of the four principals of NCL in the amount of $62,500
each. The notes are payable in 24 equal monthly installments, commencing on
August 15, 2000. As of September 30, 2000, the balance of these notes in total
was $229,000. In addition, the Company also agreed to pay $250,000 two years
from the closing date of the acquisition, on July 14, 2002. This payment is to
be distributed in equal amounts of $62,500 to each of the four principals of
NCL. As of September 30, 2000, no payments have been made against this
commitment.
5. LITIGATION
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
12
<PAGE> 13
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. On
September 12, 2000, the Company entered into a settlement agreement under which
the Company agreed to modify its logo so that the mark NEOFORMA is presented to
viewers as one word without any form of distinction separating the NEO portion
of the mark from the FORMA portion of the mark.
On October 30, 2000, the Company was formally served with a complaint
entitled Healthworks, Inc. against Neoforma.com, Inc., and Jeffrey H. Kleck,
Index No. 604682-00, Supreme Court of the State of New York, County of New York.
The complaint indicated that Healthworks, Inc. ("Healthworks") had filed suit
against the Company seeking relief of its obligations under two contracts
between itself and the Company. Healthworks alleges that the Company failed to
fulfill its obligations under the Basic Commerce Agreement and Letter of Intent
(the "Basic Agreement"), and is thus in breach of the agreement. Further,
Healthworks is claiming that the Consulting Services and Capital Equipment
Purchasing Agreement (the "Consulting Agreement") was obtained via fraudulent
means, and, as a result, should be rescinded. The Company believes that
Healthworks' case is without merit, and plans to vigorously defend this action.
The Company does not believe this litigation will have a material impact on its
financial statements.
On October 30, 2000 the Company filed a complaint for breach of contract
entitled Neoforma.com, Inc. v. Continuum Health Partners, Inc. and Healthworks,
Inc., in the Superior Court of the State of California, County of Santa Clara.
The complaint indicates that Healthworks and Continuum Health Partners, Inc.
("Continuum") are in breach of both the Basic Agreement and the Consulting
Agreement, both of which were entered into by Healthworks acting as an agent for
Continuum. The Complaint indicates that the breach was created by Healthworks'
and Continuum's refusal to pay amounts due to the Company under the agreements,
despite the fact that the Company had performed on its obligations under those
agreements. The Company is seeking compensatory damages in excess of $1.0
million.
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 completion of the Company's initial public offering in January 2000,
all outstanding shares of convertible preferred stock were converted into common
stock.
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%.
13
<PAGE> 14
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $4.9
million during the quarter ended September 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 related to
these options of $3.0 million during the quarter ended September 30, 2000.
9. RELATED PARTY TRANSACTIONS
On July 26, 2000 the Company's shareholders voted to approve the amended
"Outsourcing and Operating Agreement" (the "Agreement") entered into between the
Company and Novation LLC ("Novation"), VHA Inc. ("VHA"), University HealthSystem
Consortium ("UHC"), and Healthcare Purchasing Partners International LLC
("HPPI") on May 24, 2000. Under the terms of the Agreement, the Company will
develop and manage an e-commerce marketplace (the "Marketplace") to be used by
VHA, UHC and HPPI member healthcare organizations as their primary purchasing
tool for medical equipment and supplies. Novation will serve as a contracting
agent for the Company by recruiting, contracting and managing relationships with
healthcare equipment manufacturers and service suppliers on the Company's
behalf. VHA and UHC will provide marketing support for the Marketplace,
guarantee Novation's obligations under the Agreement and will enter into certain
exclusivity provisions contained in the Agreement.
In consideration for the services to be rendered, the Company issued
Warrants to VHA and UHC to purchase up to 30,845,020 shares and 7,519,436
shares, respectively, of the Company's common stock, at an exercise price of
$0.01 per share. Vesting on the warrants is performance based, and is driven by
historical gross purchasing levels of VHA and UHC member healthcare
organizations, which enter into commerce agreements with the Company to use the
Marketplace. Additionally, Neoforma issued to VHA and UHC 42,267,530 shares and
11,279,150 shares, respectively, of the Company's common stock subject to
certain voting restrictions.
On July 26, 2000, once shareholder approval was obtained for the Agreement
and the related issuance of shares, the common stock discussed above was issued
to VHA and UHC. The common stock was issued in consideration for their entering
into the Agreement, and the total valuation of those shares of $291.3 million
was capitalized. This amount has been recorded in Capitalized Partnership Costs
in the accompanying balance sheets, and will be amortized over the estimated
useful life of the Agreement of 5 years. Due to the
14
<PAGE> 15
NEOFORMA.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
performance criteria on the warrants, the valuation of the warrants will not be
calculated until earned. During the quarter ended September 30, 2000, VHA and
UHC earned a total of 5,115,656 shares of the warrants resulting in $24.2
million of additional consideration being capitalized on the Company's books.
This amount has also been recorded in the Capitalized Partnership Costs account
in the accompanying balance sheets. The portion of the charge that relates to
the warrant shares earned for each healthcare organization will be amortized
over the life of the commerce agreement signed between the Company and that
healthcare organization (between 2 - 3 years). As of September 30, 2000, the
Company has recorded amortization against these Capitalized Partnership Costs of
$12.0 million.
Subsequent to September 30, 2000, the Company entered into an agreement
with VHA to replace the warrant issued to VHA to purchase 30,845,020 shares of
the Company's common stock with 30,845,020 shares of restricted common stock.
The restrictions on the stock are identical to the vesting performance criteria
that were in place on the warrant, and thus there will be no change in the
accounting for the asset relating to the restricted common stock versus the
warrant.
15
<PAGE> 16
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, Inc. ("Neoforma") 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 website in 1997 and have since released a number of
enhancements to provide new services and content. Initially, we 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, creating
marketplaces establishing relationships with suppliers of medical products,
expanding our purchaser base, developing strategic alliances, promoting our
brand name and building our operating infrastructure.
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 also receive revenue from the following sources:
- sponsorship and subscription 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;
- product revenue related to the sale of medical equipment that we purchase
for resale through our live and online auction services; and
16
<PAGE> 17
- Service Delivery fees for implementation and consulting services paid by
users of the Company's marketplaces.
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.
Sponsorship and subscription fees are 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. Services Delivery revenue for implementation and other
services, including training and consulting, is 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 acquisitions and
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 241 full-time employees as of September 30,
2000.
As a result of our transaction with Novation and acquisition of EquipMD, in
May 2000 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 force of approximately 80
individuals in functions largely duplicated or unnecessary as a result of both
the 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 1999, which is being amortized on a straight-line basis over a
seven-year period.
In November 18, 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 are being amortized over estimated useful lives 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
17
<PAGE> 18
subject to repurchase rights which lapse over the original vesting period of the
shares, which is 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, 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, or 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 research and
development projects. The value assigned to these assets was 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 specifications including functional, technical,
and economic performance requirements. Anticipated completion dates ranged from
six to nine 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 are 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 the 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
believe 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 financial condition and results of operations.
18
<PAGE> 19
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 and assumed liabilities of
$912,000. This acquisition was accounted for using the purchase method of
accounting.
On April 28, 2000, we acquired all of the outstanding capital stock of
EquipMD, Inc., a business-to-business procurement company serving the physician
market. The total purchase price of $141.7 million consisted of approximately
5.5 million shares of our common stock valued at approximately $126.4 million,
269,000 vested options valued at approximately $7.2 million and assumed
liabilities and acquisition costs of $8.1 million. 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 are 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 EquipMD's stage of development and the uncertainties in the
economic estimates described above.
If these projects are not successfully developed, our sales and
profitability may be adversely affected in future periods. Additionally, the
value of other acquired intangible assets may become impaired.
19
<PAGE> 20
On July 14, 2000, we acquired certain assets of NCL, an asset management
company focused on healthcare facility liquidations and the resale of used
medical products. The acquisition was accounted for as a purchase transaction.
The total purchase price of approximately $3.2 million consisted of 300,000
shares of common stock valued at $2.2 million, $500,000 in cash and $500,000 in
Notes Payable to the principals of NCL. In the initial allocation of the
purchase price, the full $3.2 million was allocated to goodwill, which will be
amortized over the estimated useful life of 7 years.
On March 30, 2000, we entered into agreements to acquire Eclipsys
Corporation ("Eclipsys") and HEALTHvision, Inc., ("HEALTHvision") entered into
an outsourcing and operating agreement with Novation and entered into agreements
to issue our 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 includes a
co-marketing and distribution arrangement between us and HEALTHvision. The
arrangement includes the use of Eclipsys' eWebIT(TM) enterprise application
integration technology and 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 and UHC the
national healthcare alliances that own Novation.
Under the terms of the modified Novation agreements, which were approved by
our stockholders on July 26, 2000, 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 our
outstanding common stock. We also issued warrants to VHA and UHC, allowing VHA
and UHC 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
specified 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 a level
equivalent 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 Marketplace@Novation, the online
marketplace only available to the patrons and members of the owners of Novation,
VHA and UHC, and an affiliated entity, 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.
On October 18, 2000 we and VHA agreed to amend our common stock and warrant
agreement to provide for the cancellation of the performance warrant to purchase
30.8 million shares of our common stock. In substitution for the warrant, we
issued to VHA 30.8 million shares of our restricted common stock, which shares
are subject to forfeiture by VHA if the same performance targets that were
contained in the warrant are not met.
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
20
<PAGE> 21
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 September
30, 2000, had an accumulated deficit of $195.1 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. Further, our inability to address these risks could
necessitate the reduction in our operations relating to any of the acquired
businesses. Such a reduction could potentially result in an impairment of the
intangible assets associated with those businesses, and any such impairment
could result in our being required to write down, or even write-off the related
intangible assets. Given the volume of intangible assets the company has
associated with its acquired businesses, it is possible that such a write off
could be significant.
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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenue. We had total revenue of $4.7 million for the quarter ended
September 30, 2000 primarily from sales of equipment, 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, catalog set-up fees billed to Novation for categorizing, consolidating
and validating the products contained in the Novation contract portfolio as well
as revenues generated by our Services Delivery implementation services. Revenue
for the quarter ended September 30, 1999 was $457,000. For the quarter ended
September 30, 2000, the gross value of transactions was approximately $22.7
million including approximately $9.8 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 $753,000, $2.9
million, $581,000 and $485,000, respectively.
Cost of Used Equipment Sold. Cost of used equipment sold consists primarily
of the costs of used equipment we purchase and resell to customers. Cost of used
equipment sold was $2.4 million for the quarter ended September 30, 2000. The
Auction business generated significant revenues from liquidation sales resulting
from the purchase of hospital equipment due to their closures. Unlike
traditional Auction revenues, which are primarily commissions received on the
sales of consigned equipment, liquidation revenues are generated on sales where
we have taken title to the equipment.
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 $2.5 million for
the quarter ended September 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
21
<PAGE> 22
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 $1.1 million for the
quarter ended September 30, 1999 to $3.0 million for the quarter ended September
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 marketplace and services. Product development expenses
increased from $1.8 million for the quarter ended September 30, 1999 to $6.0
million for the quarter ended September 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 $2.7 million for the
quarter ended September 30, 1999 to $8.2 million for the quarter ended September
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 marketing expenses in the periods in which these
payments are made. See "-- Liquidity and Capital Resources."
General and Administrative. General and administrative expenses consist
primarily of expenses for executive and administrative personnel, professional
services and other general corporate activities. General and administrative
expenses decreased from approximately $4.2 million for the quarter ended
September 30, 1999 to $2.7 million for the quarter ended September 30, 2000. The
decrease was primarily due to recruiting, legal, litigation settlement and
consulting expenses incurred during the quarter ended September 30, 1999 which
were not repeated during the quarter ended September 30, 2000. General and
administrative expenses may increase as we continue to incur additional costs to
support the growth of 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 $230,000 in the quarter ended September 30, 1999 to $8.1 million
for the quarter ended September 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, EquipMD in April 2000 and NCL in July 2000.
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
22
<PAGE> 23
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 September 30, 2000, we
recognized amortization of deferred compensation of $7.9 million.
At September 30, 2000, the remaining deferred compensation of approximately
$42.1 million will be amortized as follows: $7.2 million during fiscal 2000,
$20.1 million during fiscal 2001, $10.4 million during fiscal 2002, $4.0 million
during fiscal 2003 and $360,000 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.
Amortization of Partnership Costs. Partnership costs consist primarily of
the value of the shares issued to VHA and UHC and the legal, accounting and
banker fees associated with the Novation transaction. Partnership costs are
amortized on a straight line basis over a period of five years. Amortization of
partnership costs was $10.9 million for the quarter ended September 30, 2000.
Amortization of Partnership Warrant Valuation. Partnership warrant
valuation consists primarily of the estimated value of the warrants issued to
VHA and UHC for meeting certain performance targets. Partnership warrant
valuation is amortized on a straight line basis over a period of four years.
Amortization of partnership warrant valuation was $1.1 million for the quarter
ended September 30, 2000.
Other Income (Expense). Other income (expense) consists of interest and
other income and expense. Interest income for the quarter ended September 30,
2000 was $938,000 compared to $45,000 for the quarter ended September 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 initial public offering in January 2000.
Interest expense increased from $242,000 for the quarter ended September 30,
1999 to $345,000 for the quarter ended September 30, 2000, primarily as a result
of the assumption of debt from the EquipMD acquisition.
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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue. We had total revenue of $8.2 million for the nine months ended
September 30, 2000 primarily from sales of equipment, 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 nine months ended September 30, 1999 was $464,000. For
the nine months ended September 30, 2000, the gross value of transactions was
approximately $43.5 million, including approximately $18.3 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 $1.2 million, $1.8 million, $1.6 million and $0.9 million, respectively.
Operating Expenses. Operating expenses consists of cost of equipment sold,
cost of services, operations, product development, selling and marketing,
general and administrative, amortization of intangibles, amortization of
deferred compensation, amortization of partnership costs, amortization of
partnership warrant valuation, cost of warrant issued to recruiter, write off of
acquired in-process research and development, abandoned acquisition costs, and
restructuring. Operating expenses increased from approximately $25.9 mil-
23
<PAGE> 24
lion for the nine months ended September 30, 1999 to $150.3 million for the nine
months ended September 30, 2000, primarily as a result of increases as described
below.
Cost of equipment sold and cost of services were $2.6 million and $3.3
million for the nine months ended September 30, 2000, respectively. Operations
expenses increased from approximately $2.4 million for the nine months ended
September 30, 1999 to $8.8 million for the nine months ended September 30, 2000.
Product development expenses increased from $4.3 million for the nine months
ended September 30, 1999 to $16.2 million for the nine months ended September
30, 2000. Selling and marketing expenses increased from approximately $5.1
million for the nine months ended September 30, 1999 to $30.2 million for the
nine months ended September 30, 2000. General and administrative expenses
increased from approximately $5.8 million for the nine months ended September
30, 1999 to $9.5 million for the nine months ended September 30, 2000.
Amortization of intangibles increased from $230,000 for the nine months ended
September 30, 1999 to $17.5 million for the nine months ended September 30,
2000. For the nine months ended September 30, 1999 and 2000, we recognized
amortization of deferred compensation of $5.7 million and $27.4 million,
respectively. Amortization of partnership costs and amortization of partnership
warrant valuation were $10.9 million and $1.1 million, respectively for the nine
months ended September 30, 2000. For the nine months ended September 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 nine months ended September 30, 2000. Restructuring costs,
which were $2.1 million for the nine months ended September 30, 2000, consisted
almost entirely of accrued severance and other related costs. As of September
30, 2000 the accrual related to the restructuring costs had been reduced to
$140,000.
Other Income (Expense). Interest income for the nine months ended September
30, 2000 was $3.0 million compared to $128,000 for the nine months ended
September 30, 1999. Interest expense increased from $95,000 for the nine months
ended September 30, 1999 to $551,000 for the nine months ended September 30,
2000.
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 September 30, 2000, we had outstanding bank,
other borrowings and notes payable of $16.9 million. As of September 30, 2000,
we had approximately $50.5 million of cash and cash equivalents and short-term
investments.
In September 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. At September 30, 2000, there were no borrowings
outstanding under the term loan or under the equipment loan. 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 September 30, 2000, the outstanding balance on the note was
approximately $1.3 million.
24
<PAGE> 25
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 September 30,
2000, we had outstanding approximately $1.4 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 September 30, 2000, the
outstanding balance on the note was approximately $5.5 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 was due upon a change of
control of EquipMD. At September 30, 2000, the remaining principal balance was
$1.5 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.
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.
In December 1999, we paid $2.5 million to purchase 526,250 shares of common
stock of CarePortal formerly known as IntraMedix. CarePortal is a company that
provides procurement services related to the distribution of geriatric care
products to the nursing home community. The Company accounts for this investment
using the cost method. CarePortal is a related party to GeriMedix, a supplier
with which we have an agreement to perform e-Commerce services. On May 26, 2000,
we lent $1.0 million to CarePortal under a promissory note bearing interest at a
rate of 8% annually. On August 8, 2000 we exercised our option to convert the
note into shares of CarePortal common stock. Additionally, we invested an
additional $1.5 million in CarePortal in exchange for common stock. As of
September 30, 2000, we owned a total of 983,874 shares of CarePortal common
stock, representing an ownership percentage of 9.0% of the total outstanding
common stock of CarePortal.
In July 2000, in recognition of the advisory services rendered, we entered
into a promissory note with our investment bankers in the amount of $6.0
million. The note is payable in quarterly payments of $1.5 million, commencing
on January 1, 2001. At September 30, 2000 we had not made any payments under the
note.
In July 2000, as part of the acquisition of NCL, we issued one promissory
note to each of the four principals of NCL in the amount of $62,500 each. These
notes are payable in 24 equal monthly installments with the first payment due on
August 15, 2000. As of September 30, 2000 the balance of all four notes in total
was $229,000. In addition, as part of the acquisition we also agreed to pay
$250,000 two years from the closing date of the acquisition, on July 14, 2002.
This payment is to be distributed in equal amounts of $62,500 to each
25
<PAGE> 26
of the four principals of NCL. As of September 30, 2000 no payments have been
made against this commitment.
Net cash used in operating activities was $10.4 million for the nine months
ended September 30, 1999 and $53.9 million for the nine months ended September
30, 2000. Net cash used in operating activities for the nine months ended
September 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 $5.4 million for the nine months
ended September 30, 1999 and $25.8 million for the nine months ended September
30, 2000. Net cash used in investing activities for the nine months ended
September 30, 2000 related primarily to the purchase of equipment to operate our
website and cash paid for the acquisition of USL and EquipMD and the purchase of
non-marketable investments.
Net cash provided by financing activities was $15.7 million for the nine
months ended September 30, 1999 and $100.3 million for the nine months ended
September 30, 2000. Net cash provided from financing activities for the nine
months ended September 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, changes in our service offerings and the success of these services.
Any projections of future long-term cash needs and cash flows are subject to
substantial uncertainty. If order to expand our operations, or to maintain
operations at their current level, we expect that we will need to sell
additional equity or debt securities, or obtain a line of credit. If we are
unable to raise adequate capital, we will be required to significantly curtail
our operations, including reductions in our staffing levels and related
expenses. 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 significant 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. The adoption of Interpretation
No. 44 has not had a material impact on our financial position or the results of
our operations.
26
<PAGE> 27
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, 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 $8.2 million for the nine months ended September 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 $139.1 million for the nine months ended
September 30, 2000. In addition, as of September 30, 2000, we had an accumulated
deficit of approximately $195.1 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;
27
<PAGE> 28
- 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, a group of large suppliers of medical products including Johnson &
Johnson, General Electric Medical Systems, Abbott Laboratories and Medtronic
announced that they are creating a healthcare exchange for the purchase and sale
of medical products. In addition, four large distributors of medical products,
AmeriSource Health Corp., Cardinal Health Inc., Fischer Scientific International
Inc. and McKesson HBOC Inc. have also 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 in part on our relationship with Novation to bring buyers
and suppliers to our marketplace. Under our outsourcing and operating agreement
with Novation, Novation is our exclusive agent for signing up suppliers to
participate in our online marketplace, subject to limited exceptions.
Accordingly, we
28
<PAGE> 29
rely in part, 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. 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., announced an agreement to acquire Premier Health Exchange.
Medibuy also recently announced a proposed acquisition of empactHealth.com, an
online marketplace for medical products formed by Columbia/HCA Healthcare, a
large owner and operator of hospitals and other healthcare facilities. 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.
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
29
<PAGE> 30
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 limited 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, EquipMD
and NCL, we recorded approximately $9.7, $3.3, $19.5, $6.5, $125.2 and $3.2
million of intangibles, 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.
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
30
<PAGE> 31
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, VHA owns 30.8 million shares
of restricted common stock and UHC holds a warrant to purchase an additional 7.5
million shares of our common stock. 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 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.
31
<PAGE> 32
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 must 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., 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. Medibuy also
recently announced a proposed acquisition of empact Health.com, an online
marketplace for medical products formed by Columbia/HCA Healthcare, a large
owner and operator of hospitals and other healthcare facilities. 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 announced
a strategic alliance with AmeriNet, a large group purchasing organization. In
addition, Johnson & Johnson, General Electric Medical Systems, Baxter
International, Abbott Laboratories and a group of large manufacturers including
Medtronic announced that they are creating a healthcare exchange for the
purchase and sale of medical products. Four large distributors of medical
products, AmeriSource Health Corp., Cardinal Health Inc., Fischer Scientific
International Inc., and McKesson
32
<PAGE> 33
HBOC Inc., have also 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 THE NEOFORMA BRAND NAME, OUR
ABILITY TO ATTRACT USERS TO OUR ONLINE MARKETPLACE WILL BE LIMITED
We believe that recognition and positive perception of the Neoforma 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 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.
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.
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
33
<PAGE> 34
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.
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 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 241 as
of September 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
34
<PAGE> 35
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.
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.
35
<PAGE> 36
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 MAY BE SUBJECT TO 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 believed our use of the
"Neoforma" and "Neoforma.com" trademarks violated its trademark rights in
"Forma" and "Forma Scientific. We have recently entered into a settlement
agreement with Forma Scientific to settle this dispute.
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 pay significant damages. 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.
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 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;
36
<PAGE> 37
- 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.
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
37
<PAGE> 38
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................... $44,148 $2,018 -- -- --
Average interest rate............ 6.52% 6.47% -- -- --
</TABLE>
38
<PAGE> 39
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 14, 2000, Forma Scientific, Inc. notified the Company that it
believed the Company's use of "Neoforma" and "Neoforma.com" violated 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. On September 12, 2000, we entered
into a settlement agreement under which we agreed to modify our logo so that the
mark NEOFORMA is presented to viewers as one word without any form of
distinction separating the NEO portion of the mark from the FORMA portion of the
mark.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) UNREGISTERED ISSUANCES OF SECURITIES
On July 26, 2000, we issued 42,267,530 shares and 11,279,150 shares of our
common stock to VHA and UHC. No underwriters were used in the transaction. The
shares of common stock were issued in reliance upon an exemption from the
registration requirements of the Securities Act provided by Section 4(2) of the
Securities Act, or Rule 506 of Regulation D promulgated thereunder. Both VHA and
UHC made certain representations as to investment intent, that they possessed a
sufficient level of financial sophistication and that they received information
about us. 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 September 30, 2000, the Company used
approximately $85.7 million of the net proceeds primarily to fund operating
losses and working capital requirements. As of September 30, 2000, the Company
had approximately $9.7 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
The Annual Meeting of Stockholders was held on July 26, 2000 in which our
shareholders approved all four matters voted upon at the meeting. The matters
voted upon and the number of votes cast for, against, abstain, and unvoted as to
each such matter follows:
1. To elect three (3) directors of the Company;
2. To approve the issuance of shares of our common stock and warrants to
VHA and UHC;
39
<PAGE> 40
3. To approve the amendment of our certificate of incorporation to increase
the authorized number of shares of common stock to 300,00,000; and
4. To ratify the selection of Arthur Andersen LLP as our independent public
auditors for the fiscal year ending December 31, 2000.
<TABLE>
<CAPTION>
PROPOSAL FOR AGAINST ABSTAIN UNVOTED
-------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C>
Proposal No. 1
David L. Douglass............ 38,333,094 569,074 0 30,115,422
Wayne D. McVicker............ 38,335,094 567,074 0 30,115,422
Madhavan Rangswami........... 38,335,094 567,074 0 30,115,422
Proposal No. 2................. 38,847,669 47,509 6,990 30,115,422
Proposal No. 3................. 38,225,008 263,841 413,319 30,115,422
Proposal No. 4................. 38,890,117 7,126 4,925 30,115,422
</TABLE>
The common stock and warrant agreement that we entered into with VHA
provided that if our stockholders approved the issuance of our common stock, and
warrants to purchase our common stock, to VHA and UHC as set forth in proposal 2
above, then VHA would have the right to designate two Class I directors
immediately following the adjournment of the annual meeting. Accordingly,
Messrs. McVicker and Douglass resigned from our board of directors following the
meeting, and Mr. Curt Nonomaque, the Executive Vice President and Chief
Financial Officer of VHA, and Mr. Mark McKenna, the President of Novation, were
appointed to our board.
ITEM 5. OTHER INFORMATION
None
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 report on Form 8-K/A on July 12, 2000, in which it
amended its previously filed report on Form 8-K and provided the required
financial statements relating to the acquisition of EquipMD, Inc.
40
<PAGE> 41
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/ ANDREW L. GUGGENHIME
------------------------------------
Andrew L. Guggenhime
Chief Financial Officer and
Assistant Secretary
Date: November 14, 2000
41
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
27.1 -- Financial Data Schedule
</TABLE>
