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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-29367
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VANTAGEMED CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 68-0383530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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3017 KILGORE ROAD, SUITE 195, RANCHO CORDOVA, CALIFORNIA 95670
(916) 638-4744
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required the file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (220.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
As of March 23, 2000, the aggregate market value of the outstanding shares
of our common stock, held by non-affiliates was approximately $22,850,000, based
upon $3.75, the average bid and ask price of our common stock as reported by the
Nasdaq National Market on March 23, 2000. Determination of affiliate status for
this purpose is not a determination of affiliate status for any other purpose.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the most recent practicable date.
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OUTSTANDING AT
CLASS MARCH 23, 2000
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Common stock............................................... 8,585,435
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VANTAGEMED CORPORATION
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INDEX AND CROSS REFERENCE
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ITEM NUMBER PAGE
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PART I
Item. 1 Business.................................................... 3
Item. 2 Properties.................................................. 12
Item. 3 Legal Proceedings........................................... 13
Item. 4 Submission of Matters to a Vote of Security Holders......... 13
PART II
Market for Registrant's Common Equity and Related
Item. 5 Stockholders Matters...................................... 14
Item. 6 Selected Financial Data..................................... 18
Item. 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Forward-Looking Statements and Risk Factors................. 29
Quantitative and Qualitative Disclosures About Market
Item. 7A Risk...................................................... 35
Item. 8 Financial Statements........................................ 36
Item. 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 66
PART III
Item. 10 Directors and Executive Officers of VantageMed.............. 66
Item. 11 Executive Compensation...................................... 68
Security Ownership of Certain Beneficial Owners and
Item. 12 Management................................................ 75
Item. 13 Certain Relationships and Related Transactions.............. 76
PART IV
Exhibits, Financial Statement Schedules, and Reports on
Item. 14 Form 8-K.................................................. 77
Signatures.................................................. 79
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PART I
ITEM 1. BUSINESS
THE COMPANY
VantageMed Corporation is a national provider of healthcare information
systems and services distributed to over 10,000 customer sites through a network
of 15 regional offices. Our suite of software products and services automates
administrative, financial, clinical and management functions for physicians,
dentists, other healthcare providers and provider organizations. Our software
manages the patient data necessary to effectively integrate Internet-based
solutions with the functions performed by our systems. Because of our existing
relationships with our customers, we are uniquely positioned to manage their
transition from legacy products to our Internet-enabled products and services.
With the addition of Internet capabilities to our Windows-based products, we
will increase our customers' access to information and their ability to
communicate with numerous healthcare participants such as their patients,
providers, third-party insurance payers, managed care organizations, pharmacies,
and other ancillary service providers.
We have acquired 26 healthcare information systems companies. We plan to
strengthen our market position through the continued acquisition of established
healthcare information systems companies. For the year ended December 31, 1999,
79% of our revenues were recurring, which we define as any revenues derived from
an existing or acquired customer after the initial installation of the product,
including revenues from sales of new products to existing customers. To increase
recurring revenues, we are expanding our service offerings and migrating
existing customers to our Windows-based, Internet-enabled products and services.
Our installed customer base, software products and services, and Internet
strategy have positioned us to address the information needs of healthcare
providers through the development of an integrated technology solution.
THE VANTAGEMED SOLUTION
We offer integrated Windows-based, Internet-enabled healthcare information
systems that reduce the impact of growing economic pressures, administrative
burdens and increased information requirements now faced by healthcare providers
and physician organizations. Our products enable our customers to access and
process information more efficiently and reliably, reduce staff time, and more
effectively meet the challenges of healthcare cost containment. With our
established distribution network, we are well-positioned to take advantage of
the opportunities that result from the increasingly complex needs of the
healthcare industry.
Our objective is to expand our market share and increase our recurring
revenues in order to strengthen our position as one of the leading suppliers of
information systems and services to healthcare providers. We intend to increase
our revenues and market share through growth strategies that focus on:
- OFFERING WINDOWS-BASED, INTERNET-ENABLED PRODUCTS AND SERVICES. These
products and services are designed to meet the changing and expanding
needs of our customers and to enable them to meet the increasingly complex
demands of the healthcare market.
- OFFERING PRODUCT MIGRATION ALTERNATIVES. We enable our current and future
customers to move from their existing legacy technology products to our
Windows-based, Internet-enabled products and services.
- STRENGTHENING OUR NATIONAL DISTRIBUTION NETWORK. Through the continued
acquisition of established healthcare information systems companies in
regional markets where we can gain critical mass, we are expanding our
customer base and broadening our market reach.
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- CROSS-SELLING OUR PRODUCTS AND SERVICES TO EXISTING CUSTOMERS AND PURSUING
NEW CUSTOMERS. With over 10,000 customer sites, we have the ability to
generate significant growth by cross-selling additional products and
services, including ongoing maintenance support and electronic transaction
services, to our installed customer base. These services are important
sources of recurring revenues. We believe that our strong relationships
with our customers position us to be the vendor of choice within our
client base and to obtain access to new customers through referrals.
- FORMING INTERNET AFFILIATIONS. By leveraging the systems capabilities of
our Internet-enabled products, we intend to provide the primary interface
to the Internet for our customers. We have developed affiliations with
on-line drugstores, medical and office supply companies and an Internet
service provider. We intend to form additional affiliations to provide a
full range of services for clinical, administrative and electronic
commerce functions.
PRINCIPAL PRODUCTS
We classify our software products as either "Windows-based" or "legacy." Our
Windows-based products are the primary products currently offered to our new
customers and are the focus of our on-going product development efforts. Our
suite of Windows-based products includes Ridgemark, eMCee, eMCee Connect,
ChartKeeper, Therapist Helper and DentalMate. With the exception of DentalMate
and ChartKeeper, each of these products is Internet-enabled. Our Windows-based
products provide our customers with software designed to automate
administrative, financial, clinical and other practice management and managed
care functions. These products offer advanced functionality and are compatible
with the latest generation of operating systems and hardware platforms. These
products can accommodate from one to hundreds of healthcare providers and users.
As a result of our acquisitions, we support a number of legacy systems.
These systems operate on variations of UNIX or DOS-based platforms and generally
lack the most advanced features of our Windows-based products. We currently have
30 legacy products. Although we do not actively market our legacy products,
these systems provide on-going revenues derived from support services, software
and hardware upgrades, electronic transaction services and new system sales.
Approximately 59% of our customer sites use our Windows-based products, while
approximately 41% use one or more of our legacy products. We are in the process
of migrating customers from the legacy systems to our Windows-based products and
believe this represents a significant sales and marketing opportunity.
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We have designed our products to enable our customers to easily transition
from their legacy systems to Windows-based products and services. The features,
functions and targeted customers of our Windows-based products and services are
described below.
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INTERNET- FEATURES AND FUNCTIONS
PRODUCTS AND SERVICES ENABLED TYPE OF PRACTICE OR ORGANIZATION PRIMARY CUSTOMER
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Ridgemark Yes Scheduling, billing, patient Primary and specialty medical
registration, electronic claims, practices.
reporting.
eMCee Yes Member tracking, patient Managed healthcare
eligibility and authorizations, organizations and physician
referral tracking, claims associations contracted with
adjudication, utilization third-party payers,
review, risk and contracting traditionally referred to as
analysis. Management Services
Organizations (MSOs),
Independent Physician
Associations (IPAs) and
Physician Hospital
Organizations (PHOs).
eMCee Connect Yes Internet access to member MSOs, IPAs and PHOs.
demographics, patient
eligibility and referrals,
authorization and claim payment
status.
ChartKeeper Under Electronic storage and tracking Medium to large medical
development of patient charts, transcription groups.
notes, document imaging,
security and authentication and
electronic chart distribution.
Therapist Helper Yes Patient registration, Psychologists and behavioral
scheduling, billing, managed health practitioners.
care tracking, electronic claims
and reporting. Palm
Pilot-enabled.
DentalMate Under Scheduling, billing, General dental practices.
development registration, electronic claims,
charting, digital camera and
x-ray.
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The Internet is emerging as a means of delivering management information
services to customers from off-site computer operation centers, known as an
Application Service Providers, or ASPs. Although our products are primarily
installed at customer sites, we intend to offer our customers the opportunity to
outsource the maintenance and operation of our products and services through an
ASP operated by us. Customers will be able to use our ASP for all or a portion
of their information technology and related business service needs. Our ASP
alternative will expand the type of information services we can offer our
customers. We already offer an ASP alternative over private communications
networks with our on-line service business. This experience, combined with the
capabilities of Internet-enabled products under development, will enable us to
quickly develop an Internet-based ASP.
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OUR INTERNET STRATEGY
We believe that most of the clinical and financial problems facing
healthcare providers require solutions that integrate Internet functionality
with software systems that support the management of healthcare practices. Our
Internet strategy is to provide a full range of Windows-based, Internet-enabled
products and services that reduce inefficiencies and expand the quality and
scope of information exchanged between healthcare participants. This strategy is
designed to:
- link information systems in medical offices with third-party insurance
payers and other healthcare management organizations to improve the flow
of information;
- provide integrated Internet access for healthcare providers through our
suite of software products;
- enhance the value of information collected and managed by our customers;
- expand access to our information systems through our ASP;
- allow healthcare providers to deliver information and services to patients
over the Internet; and
- facilitate electronic commerce for both commercial and consumer use within
the healthcare delivery system.
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As described in the following table, many clinical and administrative
functions are poorly automated and require manual processing. The following
table describes the Internet opportunities we are pursuing which will enable
healthcare providers to communicate interactively with their patients and
related healthcare entities through the Internet.
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CURRENT DELIVERY SERVICE PROBLEMS INTERNET STRATEGY VALUE-ADDED
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CLINICAL FUNCTIONS
Prescription Ordering Paper and telephone Time consuming, E-mail or access Access to patient
accuracy, patient pharmacy order system education site and
satisfaction, drug improved accuracy
interaction
Patient Chart Handheld recorder Time consuming, labor Browser-based Wireless hand-held
Dictation with transcriber intensive recorder with browser
internet
transcription service
Laboratory Orders and Paper, fax or printer Time consuming, Access laboratory and Patient and hospital
Results errors, misplaced store data on patient system Internet
documents chart system access
Patient Education Paper Accuracy, manual Internet search and Query system database
storages, maintenance health-related web to identify patients
sites by disease,
prescriptions,
demographics, etc.
Doctor On-Call Telephone or paper Lack of familiarity Remote access to Access from hand-held
with patient patient chart or portable devices
ADMINISTRATIVE FUNCTIONS
Patient Appointment Telephone or none Time consuming, Send e-mail to Attach patient
Reminder missed appointments patients through the education or visit
scheduling system as instructions and
a reminder of future forms; patient
appointments directed access to
scheduler
Patient Billing and Mail Time consuming, Send e-mail with Enable consumer
Statements potential errors, billing statements to payment of
cash management patients from the outstanding bills via
delays billing system credit card
acceptance
Billing to Insurance Telephone, electronic Time consuming, data Access electronic Provide patient and
or paper errors, patient claims clearinghouse; doctor access to
eligibility and access benefit claim status
benefits not verified systems to determine
benefit status
Insurance Remittance Check or paper Delays in payment and Receive electronic Electronically
Advice time consuming to file and post to receive and post
post payments accounts receivable funds
system
Verification of Telephone Ineligible patients Access benefit plans Verify through the
Patient Eligibility scheduled and before patient visit Internet at time of
and Benefits services are rendered appointment
without knowing
benefits
Authorization of Telephone, fax or Delays in patient Electronically send Automatic approval of
Additional Medical mail care, time consuming and receive standard
Services authorizations authorization
requests
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CURRENT DELIVERY SERVICE PROBLEMS INTERNET STRATEGY VALUE-ADDED
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ELECTRONIC COMMERCE AND
OTHER FUNCTIONS
Prescription Refill Paper or telephone Time consuming, E-mail or access Access to patient
accuracy, and drug pharmacy order system education site
interaction
Medical Supplies Telephone or fax Time consuming, Access supplier Web Search for low cost
Ordering costly sites to order products, volume
supplies purchasing
opportunities
Office Supplies and Telephone or fax Time consuming and Access supplier web Search for low cost
Services costly sites to order products and volume
supplies purchases
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ELECTRONIC SERVICES
Our products enable electronic data interchange, or EDI functions. EDI can
improve a healthcare practice's cash flow by enabling more cost-efficient
processing of patient statements, accurate and timely submission of claims to
third-party payers, and more rapid receipt of payer reimbursements. Our EDI
services currently include the following:
ELECTRONIC CLAIMS SUBMISSION. Electronically submits insurance claims from
practices to payers, either directly or through an independent national
clearinghouse.
ELECTRONIC PATIENT BILLING. Electronically submits patient billing
information from practices by dial-up modem to either our printing center or
to an independent national clearinghouse which processes, prints and mails
invoices and provides billing reports to the practice.
ELECTRONIC PAYMENT REMITTANCE. Electronically remits insurance payments and
automatically posts explanation of benefits into the practice management
system.
PATIENT INSURANCE VERIFICATION. Electronically accesses insurance and
managed care plans to determine a patient's eligibility and benefits.
We generate revenues by providing these electronic services on a per
transaction or flat monthly fee basis. With the implementation of our central
claims clearinghouse service, we have added nearly 400 customers in less than
one year who submit claims on a recurring basis and are charged transaction
and/or flat fees for these electronic services. We have started to convert our
customers to our internal clearinghouse service to improve the quality of
information, increase the level of customer service, and generate additional
revenues. We offer additional EDI services such as eligibility verification,
referral authorization, and claims status services through our Internet-enabled
product eMCee Connect.
SUPPORT SERVICES
We believe that customer satisfaction with support and services is critical
to our on-going success. The scope of our support services includes software and
hardware installation, training, software maintenance, data conversion, network
support and hardware maintenance. To achieve a higher level of customer
satisfaction, many of these services are performed at the customer's site. Our
technical service is organized by regional office, product, and practice
specialty. In addition to providing on-site training for certain of our product
lines, we maintain classroom-based training facilities in 10 locations
throughout the U.S. We publish periodic newsletters and sponsor user group
conferences. These forums provide the user with current information and provide
us with an opportunity to demonstrate new products.
We provide our customers with on-going software support and services under
monthly and annual agreements that typically have automatically renewable terms.
These agreements provide for help desk
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support, software maintenance, and remote diagnostics. We plan to provide
customer support and services through a wide area voice and data network which
enables automated call distribution of customer calls from any location to the
appropriate support person. As of December 31, 1999, our customer service and
support groups consisted of 198 employees, representing approximately 50% of our
total employee base.
HARDWARE AND SUPPLIES
In many cases, the sale of our software products is combined with the sale
of hardware systems and installation services. In addition, because many medical
practices require additional hardware as their practices grow, we sell computers
and other peripherals as part of our product offerings. We typically receive
installation and on-going maintenance revenues as a result of these hardware
sales.
PRODUCT DEVELOPMENT
As of December 31, 1999, our product development organization consisted of
72 employees. We focus our product development efforts on improving the
functionality and performance of our Windows-based products and on developing
new products that operate on a common architecture. This common architecture,
based upon the latest Microsoft tools, gives our products the capability to
simultaneously operate on different systems such as standard desktop computers
or less sophisticated and lower cost workstations using standard Internet
browsers.
Our development teams are organized by product. Each product team has a
product manager, a project manager and various developers. Our quality assurance
and testing teams follow established guidelines in all phases of development.
Subject matter experts and analysts contribute to work flow design, content and
business rule development. A formalized process for software enhancement
requests provides feedback from end users and our sales teams. Project
management tools, project scheduling and distribution of technical and training
notes are managed through our corporate intranet.
PRIVACY ISSUES
Because our products and services are utilized to transmit and manage highly
sensitive and confidential medical information, we must address the security and
confidentiality concerns of our customers and of patients and consumers. To
enable the use of our products and services for the transmission of sensitive
and confidential medical information, we utilize advanced technology designed to
ensure a high degree of security. This technology includes:
- password security that requires a password to access our software;
- user access restrictions that allow our customers to determine the
individuals who will have access to data and what level of access such
individual will have;
- encryption of data transmitted over private networks, where we control
access to the network and public networks where use is shared with the
public, including over the Internet; and
- use of a mechanism for preventing outsiders from improperly accessing
private data resources on our network, commonly referred to as a
"firewall".
The level of data encryption utilized by our products is in compliance with
the encryption guidelines set forth in the federal Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"). We also encourage each of our
customers to implement their own firewall to protect the confidentiality of
information being transferred into and out of their computer network.
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Internally, we work to ensure the safe handling of confidential data by
employees in our electronic services department by:
- providing each employee with an employee handbook explaining practices and
procedures for handling confidential medical information;
- monitoring employee activities to ensure compliance with the standards set
forth in our employee handbook;
- using individual user names and passwords for each employee handling
electronic data; and
- requiring employees who handle confidential data to sign confidentiality
agreements.
We monitor proposed regulations that might effect our software products and
services, in order to ensure that we are in compliance with such regulations
when and if they are affected.
SALES AND MARKETING STRATEGY
Although we are a national company, we manage our sales and marketing
efforts to serve our customers on both a regional and national basis. This
allows us to meet the unique needs and expectations of each customer. Organized
by specialty practice area and product line, the members of our sales force
focus on maintaining strong customer relationships within regional markets to
build recurring revenues. Within our existing customer base, we promote and sell
system upgrades, maintenance services, add-on software modules and electronic
data interchange services. Our sales force focuses on cross-selling to existing
customers as well as attracting new customers.
As a result of our acquisition strategy, we have acquired a number of
qualified sales personnel with strong experience and customer relationships in
the regions they serve. As of December 31, 1999, we had 47 sales and marketing
personnel, including national sales managers, regional sales specialists and
direct sales representatives.
ACQUISITION INTEGRATION
Our infrastructure has been designed to support the acquisition and
integration of targeted businesses. An acquisition team, which includes key
members of our management and technical staff, identifies acquisition targets,
performs due diligence investigations and negotiates the terms of each
acquisition. An integration team, which includes key operational personnel,
works with each acquired company to identify and complete the various
post-acquisition tasks of integration, including incorporation of desired
product features into our products and consolidation of administrative and
financial functions.
Operating systems and procedures are typically integrated within 30 days of
the close of an acquisition. We rapidly standardize the reporting of newly
acquired companies to minimize the time and expense associated with financial
integration.
As part of our integration process, we facilitate communications with
acquired businesses through our corporate intranet and software systems. Our
corporate intranet connects our regional offices and provides up-to-date and
complete information on our policies and procedures, product descriptions, and
administrative functions along with full e-mail and contact management.
We believe that our existing infrastructure and our integration practices
and procedures effectively position us to continue the acquisition of new
companies as such opportunities arise.
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COMPETITION
The healthcare information systems market is highly competitive on both a
regional and a national level. We believe that the primary competitive factors
in this market are:
- service and support;
- price;
- product features, functionality and ease of use;
- ongoing product enhancements; and
- reputation and stability of the seller.
We believe that our principal competitive advantage stems from our offerings
of feature-rich products based on an open system architecture designed to meet
our customers' needs, our substantial installed customer base, our focus on
customer support and training programs and our network of offices.
Our principal competitors include practice management systems and Internet
companies. Industry competitors include organizations such as Medical Manager
Corporation, Physician Computer Network, Inc., Infocure Corporation, Medic
Computer Systems, Inc., IDX Systems Corporation, CyCare, a division of
McKessonHBOC, Quality Systems, Inc., Dentrix Dental Systems, Inc., and National
Data Corporation. Additionally, within each regional market there are several
smaller competitors who have developed technologically advanced niche products
offered at lower prices. Finally, with the integration of clinical information
systems into practice management systems, several well-funded pharmaceutical,
medical supply and biotech companies have entered the practice management
systems market. Many of our competitors have greater financial, development,
technical, marketing and sales resources than we do. These competitors may be
able to respond more rapidly to new or emerging technologies and changes in
customer requirements than we can. In addition, as the market for our products
develops, additional competitors may enter the market and competition may
intensify, requiring us to lower the prices of our products and services.
INTELLECTUAL PROPERTY
Our success is dependent, in part, on our ability to protect our proprietary
software and confidential information from unauthorized use and disclosure. We
rely on a combination of trade secrets, common law intellectual property rights,
license agreements, nondisclosure and other contractual provisions and technical
measures to establish and protect our proprietary rights in our intellectual
property and confidential information. We do not own any patents on our
products. Employees and technical consultants and contractors are required to
execute agreements with us providing for the confidentiality of information and
the assignment to us of all proprietary rights. The legal protections afforded
to us or the steps taken by us may not be adequate to prevent misappropriation
of our technology and confidential information. In addition, these protections
do not prevent independent third-party development of competitive products or
services. We believe that our proprietary rights do not infringe upon the
proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future and any such assertion may require
us to enter into a license agreement or royalty arrangement with the party
asserting the claim. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or trade
secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and could seriously harm our business.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such information may be used or released are subject to substantial regulation
by state and federal laws and regulations. Regulations
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governing the electronic transmission of patient medical information are
evolving rapidly and are often unclear and difficult to apply.
HIPAA was enacted on August 21, 1996 and required the Secretary of Health
and Human Services to adopt national standards for the transmission of certain
types of patient medical information and the data elements used in such
transmissions, and to adopt standards to ensure the integrity and
confidentiality of such information.
On November 3, 1999, the Secretary promulgated proposed regulations designed
to protect the privacy of electronically transmitted or maintained, individually
identifiable health information. We do not know if these regulations will be
adopted in their present form, a different form, or at all. However, if these
regulations are adopted, authorization may be required before identifiable
patient information could be electronically transmitted to third parties for any
purpose other than treatment, payment or health care operations which include
such activities as quality assessment, verification of a healthcare providers
credentials, insurance rating, peer review, fraud and abuse compliance review
and document production for use in civil or criminal legal proceedings. These
regulations also would require that we enter into agreements with certain of our
customers governing the dissemination of such information and would require that
holders or users of such information implement specified security measures. We
continue to monitor HIPAA activity and are prepared to incorporate any changes
to our software products or our operations that are necessary to ensure
compliance.
The U.S. Food and Drug Administration (the "FDA") has jurisdiction under the
1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act to
regulate computer products and software as medical devices if they are intended
for use in the diagnosis, cure, mitigation, treatment or prevention of disease
in humans. We believe that our healthcare information systems products are not
medical devices currently subject to FDA regulation. However, FDA regulations
are constantly changing and the FDA may promulgate regulations, or interpret
current regulations in a way that would cover our products. In addition, we may
develop products that subject us to FDA regulation. Compliance with FDA
regulations could substantially increase our cost of doing business and may
limit the extent of our planned product development.
The Federal Drug Enforcement Agency has promulgated regulations that may
prohibit a pharmacy from the initial dispensing and/or refilling of certain
controlled substances through an electronically transmitted prescription. A
violation of these regulations may result in civil and criminal penalties. Such
regulations may limit the scope of our planned prescription ordering and refill
functions.
EMPLOYEES
As of December 31, 1999, we employed 397 persons, including 47 in sales and
marketing, 198 in customer support services, 72 in product development and 80 in
administration, finance and management. In order to augment our hiring of
ready-to-work skilled individuals, we utilize several programs to educate and
train our work force. None of our employees is represented by a labor union. We
have not experienced any work stoppages and consider relations with our
employees to be good.
ITEM 2. PROPERTIES
The Company currently lease on a month-to-month basis approximately 13,500
square feet at our principal executive and corporate headquarters at 3017
Kilgore Road, Rancho Cordova, California. Management is currently evaluating the
adequacy of its Headquarters. We also lease space at each of our regional
offices throughout the United States, with lease terms expiring at various dates
through 2005. Management believes that these regional facilities are adequate
for its current operations, and additional leased space can be obtained as
needed.
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ITEM 3. LEGAL PROCEEDINGS
Beginning on March 13, 2000, a series of similar securities class action
lawsuits were filed alleging that VantageMed and certain directors and officers
violated the Securities Act of 1933. As of this date, VantageMed is aware of
four virtually identical actions, all filed in the United States District Court
for the Eastern District of California, the first of which is entitled Zinno v.
The VantageMed Corporation, et. al., No. CIV.S-00-0523 MLS DAD. The Company
expects that all will be consolidated into a single action.
Plaintiffs in the four actions purport to represent a class of all persons
who purchased the Company's common stock pursuant to its February 15, 2000
initial public offering. The complaints allege that VantageMed's S-1
Registration Statement and Prospectus contained materially false and misleading
statements and it did not state that the Company would be delayed in introducing
a new version of its Ridgemark product, and did not state that sales of its
eMCee product would be lower than expected.
The proceeds are in the early stages, and no prediction can be made as to
the outcome. The Company believes these actions are without merit and intends to
defend them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about December 30, 1999, in preparation of the Company's initial
public offering, shareholders of record at the close of business on
November 22, 1999 were entitled to vote, by Written Consent, for the approval of
the following proposals:
1. To restate the Company's Certificate of Incorporation to effectuate a 1
for 3 reverse stock split and to implement various anti-takeover
defenses;
2. To amend and restate the Company's Bylaws;
3. To approve an amendment to the Company's 1998 Stock Option/Stock
Issuance Plan and to increase the number of shares available for grant
under the Plan from 800,000 to 1,000,000 shares;
4. To approve the adoption of the form of indemnity agreement to be
executed by the Company and its directors, officers and key employees.
These share votes represent pre-split shares.
Votes for: 8,388,042
Votes against: -0-
Abstentions: 6,846,110
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
VantageMed's common stock has been quoted on the Nasdaq National Market
since February 15, 2000 and currently trades under the symbol "VMDC." The
following table sets forth the high and low of the average daily bid and asks
prices for our common stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
PERIOD HIGH ($) LOW ($)
- ------ -------- --------
<S> <C> <C>
2000--First Quarter
(from February 15 through March 23, 2000)................ $15.00 $3.50
</TABLE>
The number of record holders of our common stock as of March 23, 2000 is
approximately 2,719. We believe that the number of beneficial owners of our
common stock at that date was substantially greater since many such shares are
held by brokers and other institutions on behalf of stockholders.
We have not declared any cash dividends on our common stock since our
inception in 1995. We currently intend to retain our earnings for future growth
and, therefore, do not anticipate paying cash dividends in the foreseeable
future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions during 1999 involving sales of
our securities that were not registered under the Securities Act.
(1) In April 1999, we acquired the assets of Acrotrex Corporation in exchange
for the issuance of 53,958 shares of its Common Stock to Acrotrex at a
value of $9.60 per share, plus a promissory note in principal amount of
$73,000. These shares were issued in a transaction not involving a public
offering pursuant to the exemption from registration afforded by
Section 3(b) and Rule 504 under the Securities Act.
(2) In April 1999, we acquired the outstanding shares of Civitec Healthcare
Computers, Inc. in exchange for the issuance of 88,667 shares of its Common
Stock to the stockholders of Civitec at a value of $9.60 per share, plus
promissory notes in aggregate principal amount of $408,000 and
approximately $127,000 in cash. These shares were issued in a transaction
not involving a public offering pursuant to the exemption from registration
afforded by Section 4(2) under the Securities Act.
(3) In May 1999, we acquired the outstanding shares of Medical Software
Solutions, Inc. in exchange for the issuance of 85,156 shares of its Common
Stock to the stockholders of Medical Software Solutions at a value of $9.60
per share, plus a promissory note in the principal amount of $460,000. The
shares were issued in a transaction not involving a public offering
pursuant to the exemption from registration afforded by Section 3(b) and
Rule 504 under the Securities Act.
(4) In June 1999, we acquired the assets of Metropolitan Information
Systems, Inc. in exchange for the issuance of 17,605 shares of its Common
Stock to Metropolitan Information Systems at a value of $9.60 per share,
plus a promissory note in the principal amount of $33,000. These shares
were issued in a transaction not involving a public offering pursuant to
the exemption from registration afforded by Section 3(b) and Rule 504 under
the Securities Act.
(5) In July 1999, we acquired the outstanding shares of Care Information
Systems, Inc. in exchange for the issuance of an aggregate of 47,751 shares
of its Common Stock a value of $9.60 per share and promissory notes in the
aggregate of $142,096 to the stockholders of Care Information Systems.
These shares were issued in a transaction not involving a public offering
pursuant to the exemption from registration afforded by Section 3(b) and
Rule 504 under the Securities Act.
14
<PAGE>
(6) In July 1999, we acquired the assets of Brand Software, Inc. in exchange
for the issuance of 20,000 shares of Series B Preferred Stock and 160,804
shares of Common Stock to Brand Software, Inc., an accredited investor. The
Common shares were valued at $9.60 per share and the Series B Preferred
shares were valued at $12.00 per share. In addition, fully vested
outstanding options of Brand Software, Inc were converted into fully vested
25,837 VantageMed stock options and 41,669 additional VantageMed stock
options were issued. These shares were issued under Section 4(2) of and
Regulation D under the Securities Act in a transaction not involving a
public offering.
(7) In August 1999, we acquired the outstanding shares of Mariner
Systems, Inc. in exchange for the issuance of an aggregate of 857,554
shares of its Common Stock to the stockholders of Mariner Systems at a
value of $11.10 per share, plus a promissory note in the principal amount
of $190,000, a designee of Friedle Corporate Finance, an accredited
investor, and options to purchase an additional 80,611 shares of its common
stock to the employees and directors of Mariner Systems. These shares were
issued in a transaction not involving a public offering pursuant to the
exemption from registration afforded by Section 4(2) under the Securities
Act. We also issued warrants for 30,000 shares exercisable at a price of
$11.10 per share to Pine, Inc. in consideration for assistance with the
acquisition of Mariner Systems, Inc. The warrents were issued to an
accredited investor pursuant to Section 4(2) of the Securities Act.
(8) In August 1999, we acquired the assets of Logos Systems, Inc. in exchange
for the issuance of an aggregate of 83,645 shares of its Common Stock to
Logos Systems at $9.60 per share and the assumption of $741,000 of
liabilities of Logos Systems. These shares were issued in a transaction not
involving a public offering pursuant to the exemption from registration
afforded by Section 4(2) under the Securities Act.
(9) In September 1999, we acquired the assets of Health Information Network in
exchange for the issuance of an aggregate of 10,417 shares of its Common
Stock to stockholders of Health Information Network at a value of $9.60 per
share plus a promissory note for $300,000 to Health Information Network.
These shares were issued in a transaction not involving a public offering
pursuant to the exemption from registration afforded by Section 4(2) under
the Securities Act.
(10) In October 1999, we issued a convertible promissory note in an aggregate
principal amount of $180,000 to a designee of Friedli Corporate Finance.
The note was issued to an accredited investor pursuant to Section 4(2) of
the Securities Act.
(11) In October 1999, we issued a secured convertible promissory note through
Friedli Corporate Finance, an accredited investor, in an aggregate
principal amount of $3,000,000 and warrants for 13,333 shares exercisable
at a price equal to 60% of the initial price of shares of the Company's
common stock sold in the IPO. The notes and warrants were issued pursuant
to Section 4(2) of the Securities Act.
(12) In October 1999, we acquired the assets of Pepware Software, Inc. in
exchange for the issuance of an aggregate of 20,000 shares of its Common
Stock at a value of $15.75 per share and a promissory note for $50,000 to
Pepware Software. These shares were issued in a transaction not involving
a public offering pursuant to the exemption from registration afforded by
Section 4(2) under the Securities Act.
(13) In October 1999, we acquired the assets of CSS, Inc. in exchange for the
issuance of an aggregate of 71,089 shares of its Common Stock at a value
of $15.75 per share and $230,000 cash to the stockholders of CSS. These
shares were issued in a transaction not involving a public offering
pursuant to the exemption from registration afforded by Section 4(2) under
the Securities Act.
(14) In October 1999, we acquired the assets of Data Decisions, Inc. in
exchange for the issuance of an aggregate of 138,958 shares of its Common
Stock at a value of $15.75 per share, $78,000 in cash and promissory notes
in principal amount of $222,000 to the stockholders of Data Decisions.
These
15
<PAGE>
shares were issued in a transaction not involving a public offering
pursuant to the exemption from registration afforded by Section 4(2) under
the Securities Act.
(15) In October 1999, we acquired the assets of Computerized Doctors
Systems, Inc. in exchange for the issuance of 113,413 shares of its Common
Stock, 17,756 of stock options, and $500,000 in cash to the stockholder of
Computerized Doctors Systems. These shares were issued in a transaction
not involving a public offering pursuant to the exemption from
registration afforded by Section 4(2) under the Securities Act.
(16) In October 1999, we acquired the assets of Medical Digital
Technologies, Inc. in exchange for the issuance of 96,491 shares of its
Common Stock at as value of $15.75 per share, $600,000 in cash and a
promissory note for $500,000 to the stockholders of Medical Digital
Technologies. These shares were issued in a transaction not involving a
public offering pursuant to the exemption from registration afforded by
Section 4(2) under the Securities Act.
(17) In 1999, we granted options to purchase an aggregate of 206,296 shares of
Common Stock to directors, employees and consultants with exercise prices
ranging from $7.50 to $9.99 per share pursuant to VantageMed's 1998 Stock
Option/Stock Issuance Plan. These options were issued without registration
under the Securities Act pursuant to the exemption afforded by Rule 701
under the Securities Act.
(18) From January 1999 through August 1999, we issued a net aggregate of 73,317
shares of its Common Stock to accredited investors at $7.50 per share for
a total of $654,000 in cash. These shares were issued under Section 4(2)
of and Regulation D under the Securities Act solely to accredited
investors in transactions not involving a public offering.
(19) In December 1999, a convertible promissory note in the aggregate principal
amount of $180,000 through Friedli Corporate Finance was converted into
16,216 shares of VantageMed common stock, valued at $11.10 per share.
(20) On November 22, 1999, Registrant's Board of directors approved a 1-for-3
reverse stock split of its outstanding Common Stock, which is reflected in
items (1) through (19) above.
In the acquisitions discussed above we issued Common Stock to the
stockholders of the acquired companies in isolated, private transactions
structured with various combinations of common stock, preferred stock,
promissory notes and cash following meaningful negotiations. We provided
potential stockholders with a then current 40-page disclosure statement that
included among other things a complete description of the Registrant's business,
risk factors, financial statements and management's discussion and analysis of
financial conditions and results of operations. Neither the Company nor any
person acting on the Company's behalf offered or sold such Common Stock by any
form of general solicitation or general advertising.
We took reasonable care to assure, including through the use of investor
questionnaires and subscription agreements, (i) that purchasers were acquiring
the capital stock for their own account, for investment purposes only, and not
with a view to resale, (ii) that purchasers received written disclosure that
such capital stock was not registered under the Securities Act and could not be
resold without registration (or an available exemption therefrom), and
(iii) that all certificates representing shares of Registrant's capital stock
included a legend setting forth the above restrictions on transfer.
USE OF PROCEEDS
In February 2000, VantageMed Corp. completed an initial public offering
("IPO") of 3 million shares of its common stock. Advest, Inc. and J.C.
Bradford & Co. acted as managing underwriters. The shares of common stock sold
in the IPO were registered under the Securities Act of 1933, as amended, on a
registration statement on Form S-1 (Registration No. 333-91657) that was
declared effective by the
16
<PAGE>
Securities and Exchange Commission on February 14, 2000. The IPO commenced on
February 15, 2000. All 3 million shares of common stock registered were sold at
a price of $12 per share. The aggregate offering price of the shares of common
stock registered and sold was $36 million. We paid an aggregate of approximately
$2,520,000 in underwriting discounts and commissions. In addition, the following
table itemizes the expenses incurred in connection with the offering:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Securities and Exchange Commission registration fee......... $ 11
National Association of Securities Dealers, Inc. filing
fee....................................................... 4
Nasdaq National Market listing fee.......................... 73
Accountants' fees and expenses.............................. 1,250
Legal fees and expenses..................................... 575
Transfer Agent's fees and expenses.......................... 10
Printing and engraving expenses............................. 332
Miscellaneous............................................... 203
------
Total Expenses.......................................... $2,458
======
</TABLE>
None of the amounts shown were paid directly or indirectly to any director
or officer of VantageMed or their associates, persons owning 10 percent or more
of any class of equity securities of VantageMed or an affiliate of VantageMed.
After deducting the underwriter's discounts and commissions and the offering
expenses, the net proceeds to us from the offering were approximately
$33.48 million. In February, 2000 we used $3,539,000 of these net proceeds to
repay outstanding principal and interest due on 20 promissory notes. Also in
February, 2000 we used $67,000 of net proceeds to repay deferred compensation
and applicable bonuses for our executive officers through December 31, 1999.
Additionally, out of working capital, we paid $61,000 of deferred compensation
and applicable bonuses for January 2000 for our executive officers and $93,000
of deferred compensation for other management members who elected to defer
payment during the time period from December 1999 through January 2000.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
For potential acquisitions.................................. $ 8,000
For increased product development activities................ 3,000
For increased sales and marketing activities................ 3,000
For working capital and other general corporate purposes.... 13,262
-------
27,262
=======
</TABLE>
Final allocation of proceeds depends on numerous factors, including amounts
spent on acquisitions, growth of our business and the need for additional
marketing and development activities. A substantial portion of the net proceeds
have not been allocated to any specific use. We will continue to retain broad
discretion over actual use of these proceeds.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from
our audited financial statements and should be read in conjunction with our
consolidated financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included in this Form 10-K. The consolidated statement of operations for the
years ended December 31, 1997, 1998, and 1999, and the consolidated balance
sheets at December 31, 1998, and 1999 have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this document.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- ----------- --------
RESTATED(2)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software and systems.......................... $2,051 $2,056 $2,800 $ 3,943 $ 9,429
Customer support and electronic services...... 1,623 1,874 2,448 5,430 9,983
------ ------ ------ ------- --------
Total revenues.............................. 3,674 3,930 5,248 9,373 19,412
Operating Costs and Expenses:
Software and systems.......................... 1,060 1,181 1,274 2,146 4,078
Customer support and electronic services...... 796 981 1,200 3,606 6,226
Selling, general and administrative........... 1,250 1,209 2,566 4,706 10,382
Product development........................... 280 287 441 1,500 4,120
Depreciation and amortization................. 50 141 376 1,445 3,873
------ ------ ------ ------- --------
Total operating costs and expenses.......... 3,436 3,799 5,857 13,403 28,679
Income (Loss) From Operations................... 238 131 (609) (4,030) (9,267)
Interest income (expense), net.................. 40 16 (20) (207) (948)
Income (Loss) Before Income Taxes............... 278 147 (629) (4,237) (10,215)
Provision (benefit) for income taxes............ 58 64 (195) -- --
NET INCOME (LOSS)............................... $ 220 $ 83 $ (434) $(4,237) $(10,215)
Basic earnings (loss) per share................. $ 1.05 $ 0.07 $(0.27) $ (1.96) $ (3.13)
Diluted earnings (loss) per share(1)............ $ 0.97 $ 0.07 $(0.27) $ (1.96) $ (3.13)
Weighted-average shares-basic................... 210 1,255 1,620 2,158 3,262
Weighted-average shares-diluted(1).............. 227 1,272 1,620 2,158 3,262
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- ----------- --------
RESTATED(2)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital................................ $ 83 $ 251 $ 106 $(4,563) $(8,012)
Total assets....................................... 923 993 5,165 11,051 36,464
Long-term debt, net of current portion............. -- -- 1,501 1,721 2,639
Series A-1 preferred stock......................... -- -- -- -- 2
Series B preferred stock........................... -- -- -- -- --
Accumulated earnings (deficit)..................... 116 199 (267) (4,578) (14,793)
Total stockholders' equity (deficit)............... 183 (293) 2,242 2,918 20,492
</TABLE>
- ------------------------
(1) Common equivalent shares from preferred stock, stock options, warrants and
convertible notes have been excluded from the computation of diluted
earnings (loss) per share in all loss periods, as their effect is
antidilutive.
(2) Restated, see Note 3 of Notes to Consolidated Financial Statements.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS
BY WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS. BECAUSE THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS
FOR A NUMBER OF REASONS, INCLUDING THOSE DISCUSSED UNDER "FORWARD-LOOKING
STATEMENTS AND RISK FACTORS" AND ELSEWHERE IN THIS DOCUMENT.
YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY
DISCUSS OUR EXPECTATIONS ABOUT OUR FUTURE PERFORMANCE, CONTAIN PROJECTIONS OF
OUR FUTURE OPERATING RESULTS OR OUR FUTURE FINANCIAL CONDITION, OR STATE OTHER
"FORWARD-LOOKING" INFORMATION. YOU SHOULD CAREFULLY REVIEW THE RISKS DECLARED IN
THE PROSPECTUS FILED ON FEBRUARY 15, 2000. YOU ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING, STATEMENTS, WHICH SPEAK ONLY AS OF DATE OF THIS
ANNUAL REPORT ON FORM 10-K. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE ANY
REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE OF THIS DOCUMENT.
OVERVIEW
VantageMed is a national provider of healthcare information systems and
services. Our strategy is to continue to expand our national distribution
network through the acquisition of established regional healthcare products and
managed care systems companies who will sell and support our new software
products and services to an existing and expanding customer base. We plan to
continue to grow our recurring revenues through additional acquisitions and the
migration of current customers from legacy systems to our Windows-based,
Internet-enabled software products and Internet and electronic services, while
at the same time continuing to expand both our market penetration and product
offerings.
Of the 26 business combinations we have completed to date, Healthcare
Information Systems, Inc. and Northern Health Solutions, Inc. were accounted for
as pooling of interests, and therefore, our financial statements include them as
a part of our operations for all periods presented. We acquired four established
regional healthcare information systems companies in 1997, with the first
occurring in July 1997, eight companies in 1998 and fourteen companies in 1999.
We have financed our 26 business combinations to date through the issuance of
approximately 3.1 million shares of common stock, 120,000 shares of Series B
preferred stock, $1.2 million in stock options, $4.3 million in promissory notes
and $1.9 million in cash.
We derive revenues from two sources: software and systems; and customer
support and electronic services. Software and systems revenues result from the
licensing of our proprietary software, as well as third-party software, computer
hardware and supplies. The third-party software is primarily desktop operating
systems and standard communication/security software. Customer support revenues
are derived from software maintenance and customer service, network and computer
hardware support, training, data conversion and system installation. Electronic
services revenues are generated by electronic insurance claims processing,
electronic statement printing and mailing.
Our revenues include both recurring and non-recurring revenues. We define
recurring revenues as any revenues derived from an existing or acquired customer
after the initial installation of the product and revenues generated from sales
of new products to existing customers. We consider our non-recurring revenues to
be revenues generated on sales to new customers. We expect the mix of recurring
and non-recurring revenues to fluctuate because of our acquisition activities
and our ability to sell our products to new customers. Over time, we believe
that recurring revenues will continue to represent a large portion of our
overall revenues. Recurring revenue is not a measurement defined by generally
accepted accounting principles (GAAP) and should not be considered an
alternative to, or more meaningful than, revenues as defined by GAAP. All
companies do not calculate recurring revenues in the same manner or at all.
Accordingly, our recurring revenue data may not be comparable with that of other
companies. We have
19
<PAGE>
included information concerning recurring revenues because we believe recurring
revenues provides useful information regarding our overall revenue mix.
Cost of revenues consists primarily of the costs of software and computer
hardware products sold to customers and associated shipping costs, third-party
costs for supplies and electronic services and salary and benefit costs for
employees performing customer support. Selling, general and administrative
expenses include the salaries, commissions and benefits of sales staff,
executive and administrative personnel costs, advertising and promotional
materials costs and travel, communications, facilities, insurance and other
administrative expenses. Product development expenses are primarily payroll and
related costs to develop new products and enhance existing products.
BUSINESS SEGMENT GROSS PROFIT DATA
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SOFTWARE AND SYSTEMS:
Revenues.................................. $2,056 $2,800 $3,943 $9,429
Cost of revenues.......................... 1,181 1,274 2,146 4,078
------ ------ ------ ------
Gross profit.............................. $ 875 $1,526 $1,797 $5,351
====== ====== ====== ======
Gross profit percentage................... 42.6% 54.5% 45.6% 56.8%
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CUSTOMER SUPPORT AND ELECTRONIC SERVICES:
Revenues.................................. $1,874 $2,448 $5,430 $9,983
Cost of revenues.......................... 981 1,200 3,606 6,226
------ ------ ------ ------
Gross profit.............................. $ 893 $1,248 $1,824 $3,757
====== ====== ====== ======
Gross profit percentage................... 47.7% 51.0% 33.6% 37.6%
</TABLE>
Our acquisitions have resulted in significant intangibles and related
amortization. Amortization expenses result from the amortization of intangible
assets. Intangible assets acquired include acquired software, covenants not to
compete, customer lists, assembled workforce and goodwill and has averaged 94.3%
of the consideration paid by VantageMed for an acquisition. Acquired software is
amortized over two to four years depending on the estimated continued use of the
software product acquired. Covenants not to compete are amortized over two to
five years, representing the life of such agreements. Customer lists are
amortized over two to ten years, representing the estimated future life of
customer relationships. Assembled workforce is amortized over one to ten years,
depending upon the average length of employment for the employees of those
companies we have acquired. Goodwill is amortized over two to ten years
depending upon whether the acquisition is established as a new regional office
or is consolidated into an existing regional office; and whether or not there is
continuing sales of the software purchased in the acquisition.
Depreciation expenses also include depreciation of tangible property and
equipment over their useful lives, which range from three to seven years.
Depreciation expenses are not material to our operating results. Depreciation
and amortization expenses have resulted in sizeable non-cash charges to our
historical operating results and are expected to continue to generate
significant operating expenses in the near term due to our acquisition strategy.
20
<PAGE>
We have invested approximately $6.6 million in product development since our
inception. These funds have been primarily invested in our medical and dental
products and to a lesser extent into our electronic claims processing systems
and a clinical information management system.
As of December 31, 1999, we had a post-acquisition federal and state net
operating loss carry forward benefit of approximately $6.3 million available to
offset future income tax, if any. These benefits will begin to expire
incrementally at various dates ending in 2020.
For the next 12 months we expect our revenues to increase through both
acquisitions and internal growth. We believe that migration of current and
acquired customers to our Windows-based, Internet-enabled products and the
development and marketing of these products to new and existing customers are
the keys to our internal growth strategy. Our internal growth model is therefore
focused on increasing revenues from software licensing and electronic
transaction services, as well as maintaining recurring support revenues. We
recognize revenues from software license fees in accordance with American
Institute of Certified Public Accountants Statement of Position 97-2. Software
license fees are recognized as revenues upon delivery of our software products
to our customers, as long as evidence of an arrangement exists, the amounts of
fees are fixed and determinable and the collection of the resulting receivable
is probable. Computer hardware and supplies revenues are recognized upon product
shipment. Revenues from support and maintenance contracts are recognized ratably
over the life of the contract. Revenues from other services are recognized as
the services are provided.
Our strategy is to acquire companies with technology that will enhance our
overall product offerings or companies that build regional market penetration in
support of our national distribution channel. Since July 1997, we have acquired
over 10,000 customer sites. Our acquisitions have produced an established
distribution channel of 15 regional offices nationwide, provided us access to an
existing customer base, new product offerings, and helped us to build our
management team. As we continue to grow, we expect our operating expenses as a
percentage of sales to decrease. Our operating expenses to date have grown
faster than our revenues as a result of building our infrastructure and a
management team to execute our strategy.
RESULTS OF OPERATIONS
The following table sets forth certain data expressed as a percentage of
total revenues for the periods indicated.
SELECTED CONSOLIDATED FINANCIAL DATA PERCENTAGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software and systems...................................... 52.3% 53.4% 42.1% 48.6
Customer support and electronic services.................. 47.7 46.6 57.9 51.4
----- ----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0 100.0
Operating Costs And Expenses:
Software and systems...................................... 30.1 24.3 22.9 21.0
Customer support and electronic services.................. 25.0 22.9 38.5 32.1
Selling, general & administrative......................... 30.8 48.9 50.2 53.5
Product development....................................... 7.3 8.4 16.0 21.2
Depreciation and amortization............................. 3.6 7.2 15.4 20.0
----- ----- ----- -----
Total costs and operating expenses...................... 96.8 111.7 143.0 147.8
----- ----- ----- -----
Income (Loss) From Operations............................... 3.2 (11.7) (43.0) (47.8)
Interest Income (Expense)................................... 0.4 (0.4) (2.2) (4.9)
----- ----- ----- -----
Income (Loss) Before Income Taxes........................... 3.6 (12.1) (45.2) (52.7)
----- ----- ----- -----
Provision (benefit) for income taxes........................ 1.6 (3.7) (0.0) (0.0)
----- ----- ----- -----
Net income (loss)........................................... 2.0% (8.4)% (45.2)% (52.7)%
===== ===== ===== =====
</TABLE>
21
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1999
A majority of the variances between the year ended December 31, 1998 and the
corresponding period of 1999 is attributable to our acquisition activity. During
the year ended December 31, 1998, we completed eight business combinations, six
of which were accounted for using the purchase method of accounting and two
accounted for as poolings. Therefore, revenues and expenses from these companies
were only included for a portion of the year ended December 31, 1998, but were
included in the entire year ended December 31, 1999. In addition, fourteen
companies were acquired using purchase accounting during 1999, resulting in
additional revenues and expenses for the year ended December 31, 1999 that were
not present in the corresponding period of 1998.
REVENUES. Total revenues increased 107.1% from $9.4 million in the year ended
December 31, 1998 to $19.4 million in the corresponding period of 1999. Of this
$10.0 million increase, $8.0 million was attributable to additional revenues
from acquisitions and the remaining $2.0 million was attributable to internal
growth. Recurring revenues increased 206.4% from $5.0 million in the year ended
December 31, 1998 to $15.3 million in the corresponding period of 1999, while
non-recurring revenues increased 155.8% from $1.6 million in the year ended
December 31, 1998 to $4.1 million in the corresponding period of 1999.
SOFTWARE AND SYSTEMS. The software and systems component of total
revenues increased 139.1% from $3.9 million, or 42.1% of total revenues for
the year ended December 31, 1998 to $9.4 million, or 48.6% of total revenues
in the corresponding period of 1999. Software and systems revenues consist
of software licensing revenues and revenues from the sale of computer
hardware and supplies. Software licensing revenues were 38.0% and 50.0% and
computer hardware and supply revenues were 62.0% and 50.0% of total software
and systems revenues for the year ended December 31, 1998 and 1999,
respectively. Approximately $4.3 million of the increase in software and
systems revenues was due to acquisitions, and the remaining $1.1 million was
due to our internal growth.
Revenues from software licensing increased 214.9% from $1.5 million for
the year ended December 31, 1998 to $4.7 million for the same period in
1999. Legacy product sales were 55.4% of software licensing revenues for the
year ended December 31, 1999 compared to 85.8% in the corresponding period
of 1998. New product sales were 44.6% of software licensing revenues for the
year ended December 31, 1999 compared to 14.2% in the corresponding period
of 1999. The gross profit for software licensing revenues increased 211.3%
from $1.3 million for the year ended December 31, 1998 to $4.1 million in
the corresponding period of 1999.
Revenues from computer hardware and supplies increased 92.7% from
$2.4 million for the year ended December 31, 1998 to $4.7 million in the
corresponding period of 1999. The gross profit for computer hardware and
supplies revenues increased 160.0% from $470,000 for the year ended
December 31, 1998 to $1.2 million in for the corresponding period of 1999.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. The customer support and
electronic services component of total revenues increased 83.8% from
$5.4 million, or 57.9% of total revenues in the year ended December 31,
1998, to $10.0 million, or 51.4% of total revenues in the corresponding
period of 1999. Customer support revenues are derived from software
maintenance and customer service, network and computer hardware support,
training, data conversion and system installation. Electronic services
revenues are generated by electronic insurance claims processing, electronic
statement printing and mailing and electronic remittance advices. Customer
support revenues were 89.7% and 88.6% and electronic services revenues were
10.3% and 11.4% of total customer support and electronic services revenues
for the year ended December 31, 1998 and 1999, respectively. Approximately
$3.7 million of the increase in Customer Support and Electronic Services was
due to acquisitions. The remaining $927,000 of the increase was due to
internal growth.
Revenues from customer support increased 81.4% from $4.9 million for the
year ended December 31, 1998 to $8.8 million in the corresponding period of
1999. The gross profit for customer support
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revenues increased 101.5% from $1.5 million for the year ended December 31,
1998 to $3.0 million in the corresponding period of 1999.
Revenues from electronic services increased 104.9% from $557,000 for the
year ended December 31, 1998 to $1.1 million in the corresponding period of
1999. The gross profit for electronic services revenues increased 127.6%
from $315,000 for the year ended December 31, 1998 to $717,000 in the
corresponding period of 1999.
COST OF REVENUES. Total cost of revenues increased 79.1% from $5.8 million for
the year ended December 31, 1998 to $10.3 million in the corresponding period of
1999, but decreased as a percentage of total revenues from 61.4% for the year
ended December 31, 1998 to 53.1% in the corresponding period of 1999.
SOFTWARE AND SYSTEMS. Software and systems costs include both software
licensing costs and computer hardware and supplies. Software and systems
costs increased 90.0% from $2.1 million or 22.9% of total revenues for the
year ended December 31, 1998 to $4.1 million, or 21.0% of total revenues in
the corresponding period of 1999. Software licensing costs were 7.9% and
14.3%, and computer hardware and supplies costs were 92.1% and 85.7% of
total software and systems costs for the year ended December 31, 1998 and
1999, respectively.
Costs for software licensing increased 243.0% from $170,000, or 1.8% of
total revenues in the year ended December 31, 1998 to $583,000, or 3.0% of
total revenues in the corresponding period of 1999. The decrease as a
percent of total revenues is due to a change in the mix of products and
services sold. The gross margin percentage for new products was 95.1% and
87.6% for the year ended December 31, 1998 and 1999, respectively. The gross
margin percentage for legacy products was 87.6% and 87.7% for the year ended
December 31, 1998 and 1999, respectively.
Costs for computer hardware and supplies increased 76.8% from
$2.0 million, or 21.1% of total revenues in the year ended December 31, 1998
to $3.5 million, or 18.0% of total revenues in the corresponding period of
1999. The decrease as a percent of total revenues is due to a change in the
mix of product and services sold. Gross margin percentage for computer
hardware and supplies increased from 19.2% for the year ended December 31,
1998 to 25.9% in the corresponding period of 1999.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. Customer support and
electronic services costs increased 72.7% from $3.6 million, or 38.5% of
total revenues in the year ended December 31, 1998 to $6.2 million, or 32.1%
of total revenues in the corresponding period of 1999. Customer support
costs were 93.3% and 93.2%, and electronic services costs were 6.7% and 6.8%
of total customer support and electronic services costs for the year ended
December 31, 1998 and 1999, respectively.
Costs for customer support increased 72.5% from $3.4 million or 35.9% of
total revenues, in the year ended December 31, 1998 to $5.8 million, or
29.9% of total revenues in the corresponding period of 1999. The customer
support gross margin percentage increased from 31.0% for the year ended
December 31, 1998 to 34.4% in the corresponding period of 1999, primarily
due to acquisitions.
Costs for electronic services increased 75.8% from $242,000, or 2.6% of
total revenues, in the year ended December 31, 1998 to $425,000, or 2.2% of
total revenues, in the corresponding period of 1999. The electronic services
gross margin percentage increased from 56.7% for the year ended
December 31, 1998 to 62.8% in the corresponding period of 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 120.6% from $4.7 million, or 50.2% of total revenues for
the year ended December 31, 1998, to $10.4 million, or 53.5% of total
revenues in the corresponding period of 1999. Of the $5.7 million increase,
selling expenses, corporate administration, and regional distribution
channel expenses increased approximately $400,000, $1.1 million, and
$4.2 million, respectively. The $1.1 million increase in corporate
administration expenses resulted from increases in headcount and the
building
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of corporate staff and infrastructure. The $4.2 million increase in regional
distribution channel expenses resulted from regional operating costs
directly related to our acquired distribution channel.
PRODUCT DEVELOPMENT. Product development expenses increased from $1.5 million,
or 16.0% of total revenues for the year ended December 31, 1998, to
$4.1 million, or 21.2% of total revenues in the corresponding period of 1999.
The dollar and percentage increases were due primarily to additional staffing
and related costs necessary for development of our new products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $1.4 million, or 15.4% of total revenues, for the year ended December 31,
1998, to $3.9 million, or 20.0% of total revenues, in the corresponding period
of 1999. Of these amounts, amortization expenses were $1.3 million for the year
ended December 31, 1998 and $3.0 million in the corresponding period of 1999. At
December 31, 1999, we had intangible assets totaling $33.0 million with
accumulated amortization of $4.6 million. The weighted average life of these
intangibles was 8.5 years.
INTEREST INCOME (EXPENSE), NET. Interest expense increased from $207,000, or
2.2% of total revenues for the year ended December 31, 1998 to $948,000, or 4.9%
of total revenues in the corresponding period of 1999. The percentage and dollar
increases primarily resulted from interest expense associated with indebtedness
incurred to complete our acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. No tax benefit was recorded for the years
ended December 31, 1998 and 1999. The acquiring companies acquisition-date net
operating loss carryovers were greater than the additional deferred tax
liabilities that were recorded in connection with the purchase of intangibles
other than goodwill. In accordance with SFAS 109 "Accounting for Income Taxes,"
we recorded a valuation allowance to fully offset any potential tax benefit
associated with its post-acquisition net operating losses. The 1998 financial
statements have been restated, see Note 3 of Notes to Consolidated Financial
Statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The increase in revenues and expenses from the year ended December 31, 1997
to December 31, 1998 was primarily the result of two factors. First, the four
companies we acquired in 1997 were accounted for on a purchase accounting basis
and were acquired at various times throughout the year, representing less than a
full year's revenues and expenses as compared to a full year in 1998. Second,
two of the eight companies acquired in 1998 were accounted for as pooling of
interests. The remaining 1998 acquisitions were accounted for on a purchase
accounting basis. Therefore, revenues from these companies acquired on a
purchase accounting basis represent revenues and expenses incremental to 1997.
REVENUES. Total revenues increased 78.6% from $5.2 million for the year ended
December 31, 1997 to $9.4 million in the corresponding period of 1998. This
increase resulted primarily from acquisitions. Recurring revenues increased
74.1% from $4.3 million for the year ended December 31, 1997 to $7.5 million in
the corresponding period of 1998, while non-recurring revenues increased 100.0%
from $914,000 for the year ended December 31, 1997 to $1.8 million in the
corresponding period of 1998.
SOFTWARE AND SYSTEMS. The software and systems component of total
revenues increased 40.8% from $2.8 million, or 53.4% of total revenues, for
the year ended December 31, 1997 to $3.9 million, or 42.1% of total
revenues, in the corresponding period of 1998. Software licensing revenues
were 31.5% and 38.0% and computer hardware and supplies revenues were 68.5%
and 62.0% of total software and systems revenues for the year ended
December 31, 1997 and 1998, respectively. This increase in revenues was due
to change in product mix between legacy and new products.
Revenues from software licensing increased 69.6% from $882,200 for the
year ended December 31, 1997, to $1.5 million in the corresponding period of
1998. Legacy products were 96.1% of software licensing revenues for the year
ended December 31, 1997 as compared to 85.8% in the corresponding period of
1998. New product sales were 3.9% of software licensing revenues for the
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year ended December 31, 1997 as compared to 14.2% in the corresponding
period of 1998. The gross profit for software licensing revenues increased
65.4% from $802,000 for the year ended December 31, 1997 to $1.3 million in
the corresponding period of 1998.
Revenues from computer hardware and supplies increased 27.6% from
$1.9 million for the year ended December 31, 1997 to $2.4 million in the
corresponding period of 1998. The gross profit for computer hardware and
supplies revenues decreased 35.1% from $724,000 for the year ended
December 31, 1997 to $470,000 in the corresponding period of 1998.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. The customer support and
electronic services component of total revenues increased 121.8% from
$2.4 million, or 46.6% of total revenues for the year ended December 31,
1997 to $5.4 million, or 57.9% of total revenues in the corresponding period
of 1998. Customer support revenues were 91.8% and 89.7% and electronic
services revenues were 8.2% and 10.3% of total customer support and
electronic service revenues for the year ended December 31, 1997 and 1998,
respectively.
Revenues from customer support increased 116.8% from $2.2 million for
the year ended December 31, 1997, to $4.9 million in the corresponding
period of 1998. The gross profit for customer support revenues increased
33.4% from $1.1 million for the year ended December 31, 1997, to
$1.5 million in the corresponding period of 1998.
Revenues from electronic services increased 176.5% from $202,000 for the
year ended December 31, 1997, to $557,000 in the corresponding period of
1998. The gross profit for electronic services revenues increased 169.4%
from $117,000 for the year ended December 31, 1997, to $316,000 in the
corresponding period of 1998.
COST OF REVENUES. The total cost of revenues increased 132.5% from
$2.5 million, or 47.1% of total revenues for the year ended December 31, 1997,
to $5.8 million, or 61.4% of total revenues in the corresponding period of 1998.
This increase was primarily due to an acquisition providing a platform for
application service provider type services with historically lower margins than
our other products and services.
SOFTWARE AND SYSTEMS. Software and systems costs increased 68.4% from
$1.3 million, or 24.3% of total revenues for the year ended December 31,
1997 to $2.1 million, or 22.9% of total revenues in the corresponding period
of 1998. Software licensing costs were 6.3% and 7.9%, and computer hardware
and supplies costs were 93.7% and 92.1% of total software and systems costs
for the year ended December 31, 1997 and 1998, respectively.
Costs for software licensing increased 112.0% from $80,000, or 1.5% of
total revenues for the year ended December 31, 1997 to $170,000, or 1.8% of
total revenues in the corresponding period of 1998. Gross margin percentage
for new products was 87.5% and 95.1% for the year ended December 31, 1997
and 1998, respectively. Gross margin percentage for legacy products was
91.0% and 87.6% for the year ended December 31, 1997 and 1998, respectively.
Costs for computer hardware and supplies increased 65.6% from
$1.2 million, or 22.8% of total revenues for the year ended December 31,
1997 to $2.0 million, or 21.1% of total revenues in the corresponding period
of 1998. Gross margin percentage for computer hardware and supplies was
37.8% and 19.2% for the year ended December 31, 1997 and 1998, respectively.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. Customer support and
electronic services costs increased 200.5% from $1.2 million, or 22.9% of
total revenues for the year ended December 31, 1997 to $3.6 million, or
38.5% of total revenues in the corresponding period of 1998. Customer
support costs were 93.0% and 93.3%, and electronic services costs were 7.0%
and 6.7% of total customer support and electronic services costs for the
year ended December 31, 1997 and 1998, respectively.
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Costs for customer support increased 201.5% from $1.1 million, or 21.3%
of total revenues for the year ended December 31, 1997 to $3.4 million, or
35.9% of total revenues in the corresponding period of 1998. The customer
support gross margin percentage decreased from 50.3% for the year ended
December 31, 1997 to 31.0% in the corresponding period of 1998, primarily
due to acquisitions.
Costs for electronic services increased 186.4% from $84,000 or 1.6% of
total revenues for the year ended December 31, 1997 to $242,000, or 2.6% of
total revenues in the corresponding period of 1998. The electronic services
gross margin percentage decreased from 58.1% for the year ended
December 31, 1997 to 56.7% in the corresponding period of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.6 million, or 48.9% of total revenues for the year
ended December 31, 1997 to $4.7 million, or 50.2% of total revenues in the
corresponding period of 1998. Of this $2.1 million increase, selling expenses,
corporate administration, and regional distribution channel expenses increased
approximately $1.0 million, $500,000, and $600,000, respectively. Increased
selling expenses included approximately $500,000 of additional marketing
expense, increased corporate infrastructure to manage the rapid rate of growth
and increased regional operating expenses from acquisitions.
PRODUCT DEVELOPMENT. Product development expenses increased from $441,000, or
8.4% of total revenues for the year ended December 31, 1997 to $1.5 million, or
16.0% of total revenues, in the corresponding period of 1998. This increase was
due to the additional staffing and related expenses to develop new products and
enhancement of existing products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $376,000, or 7.2% of total revenues for the year ended December 31, 1997,
to $1.4 million, or 15.4% of total revenues in the corresponding period of 1998.
Of these amounts, amortization expenses were $292,000 for the year ended
December 31, 1997 and $1.3 million in the corresponding period of 1998. At
December 31, 1998, we had intangible assets totaling $8.5 million with
accumulated amortization of $1.6 million. The weighted average life of these
intangibles was 7.5 years.
INTEREST INCOME (EXPENSE), NET. Interest expense increased from $20,000, or 0.4%
of total revenues for the year ended December 31, 1997 to $207,000, or 2.2% of
total revenues in the corresponding period of 1998. The increase primarily
reflects increases in interest expense associated with indebtedness incurred to
complete our acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. In accordance with SFAS 109 "Accounting
for Income Taxes," we recorded a tax benefit equal to $195,000 for the year
ended December 31, 1997. The tax benefit arose from post-acquisition net
operating losses that offset deferred tax liabilities recorded in connection
with the purchase of intangibles other than goodwill. No tax benefit could be
recorded for the year ended December 31, 1998, due to the recording of a
valuation allowance to fully offset any potential tax benefit associated with
its post-acquisition net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Since 1996, we have financed our operations primarily through a combination
of indebtedness, capital leases and equity financings. Approximately 82.0% of
the consideration paid for our acquisitions was paid with our stock or stock
options. The balance of the consideration was promissory notes and cash.
In October 1999, we borrowed $3.0 million through Friedli Corporate Finance,
an entity controlled by one of our Directors. For a description of the terms of
this borrowing, see "Item 11--Executive Compensation -Compensation Committee
Interlocks and Insider Participation." This note is convertible at the option of
the holder to common stock after completion of the IPO.
In January 2000, we borrowed $700,000 through Friedli Corporate Finance, an
entity controlled by one of our Directors. For a description of the terms of
this borrowing, see "Item 11--Executive
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Compensation -Compensation Committee Interlocks and Insider Participation." The
outstanding principal plus interest on this Note was repaid in February 2000
with proceeds from our IPO.
In January 2000, we borrowed $500,000 at an interest rate of 12% from one of
our vendors with a maturity date the earlier of ten days following the
completion of the IPO or December 31, 2000. This balance was paid off in
February 2000 with proceeds from the IPO.
At December 31, 1999, we had $250,000 of cash and cash equivalents and
$424,000 in capital leases primarily for computers and office equipment, most of
which we assumed in connection with acquisitions. In addition, we had
$7.8 million in promissory notes outstanding at December 31, 1999. Of this
amount, $4.0 million was assumed debt or promissory notes issued in connection
with acquisitions, and $3.3 million were loans from an individual convertible
into 540,000 shares of common stock at the election of the holder or upon
completion of our IPO. Interest rates on the promissory notes range from
non-interest bearing to 15%. Future minimum principal payments under debt and
lease obligations (capital and operating) for 2000, 2001, 2002, 2003 and 2004
and thereafter are $5.6 million, $914,000, $636,000, $477,000, and $612,000
respectively. In February and March 2000, approximately $4.1 million of debt was
paid off with proceeds from the IPO. The remaining debt will remain outstanding
due to its favorable terms, including interest rates. Minimum principal payments
are expected to be $2.3 million, $550,000, $546,000, $382,000 and $589,000
respectively for 2000 through 2004 and thereafter.
We have operated with negative working capital and with negative cash flow
primarily due to acquisition expenses, prior debt incurred by acquired companies
and the costs of building infrastructure and product development activities. For
the years ended December 31, 1997 and 1998 and 1999, net cash used for operating
activities was $611,000, $298,000 and $9.3 million, respectively. The net cash
used for operating activities was funded by $10.5 million of investment capital
and net cash of $3.5 million received from businesses acquired. Our IPO
eliminated our negative working capital position, however, the negative cash
flow from operations is expected to continue until cross-selling of new products
and add-on services to our existing customer base produces positive cash flow.
Net cash used for investing activities for the years ended December 31, 1997
and 1998 was $499,000 and $1.4 million, respectively. Net cash provided by
investing activities for the year ended December 31, 1999 was $2.9 million.
During this 3 year period, approximately $934,000 was paid for computers and
office equipment used in our regional offices, $1.5 million was invested in
software for claims processing and $3.5 million was net cash received from
businesses acquired. During 1997, net cash paid for acquired businesses was
$228,000 compared to net cash received from acquired businesses of $270,000 in
1998 and $3.4 million for the year ended December 31, 1999.
During 1997, net cash provided by financing activities was $1.3 million. A
small group of investors purchased $414,000 of common stock, and one investor
purchased 413,018 shares of Series A preferred stock for $1.1 million and
provided a $500,000 line of credit. The Series A preferred stock, subsequently
rolled into the Series A-1 preferred stock, was convertible into common stock
upon the closing of the IPO. We issued $166,000 in long-term debt and made
payments of $290,000 on long-term debt, which was primarily incurred in
connection with the four acquisitions completed in 1997. Also, one of the pooled
companies distributed $32,000 to its shareholders.
During 1998, net cash provided by financing activities was $1.4 million.
This consisted of $588,000 in proceeds from the issuance of common stock to four
investors, the issuance of $1.3 million in long-term debt and $433,000 for
payments of long-term debt. Substantially all of the $1.3 million in new debt
came from five private lenders, one of which is a principal stockholder.
During 1999, net cash provided by financing activities was $6.2 million.
This consisted of $660,000 in proceeds from issuance of common stock,
$3.2 million in issuance of long-term debt and $3.0 million in proceeds from
issuance of preferred stock to a previous investor. This $3.0 million of
additional investment was combined with a previous investment of $1.2 million
and the conversion of a $500,000 fully drawn line
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of credit into the Series A-1 preferred stock which was convertible into common
stock upon the closing of the IPO. Payments of long-term debt totaled $696,000.
We believe that the net proceeds from the IPO, together with other available
funds, will be sufficient to meet our capital requirements through February of
2001.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 of Notes to Consolidated Financial Statements for the recent
accounting pronouncements.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
VANTAGEMED IS SUBJECT TO VARIOUS RISK FACTORS, MANY OF WHICH ARE OUTSIDE OF
OUR CONTROL, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE EXPRESSED IN
FORWARD-LOOKING STATEMENTS MADE BY US THROUGHOUT THIS REPORT AND ELSEWHERE. ALL
STATEMENTS WHICH ADDRESS OPERATING PERFORMANCE, EVENTS OR DEVELOPMENTS THAT WE
EXPECT OR ANTICIPATE WILL OCCUR IN THE FUTURE, INCLUDING STATEMENTS RELATING TO
EXPECTED FUTURE OPERATING RESULTS AND FUTURE FINANCIAL CONDITIONS OR STATEMENTS
EXPRESSING GENERAL OPTIMISM ABOUT FUTURE OPERATING RESULTS, ARE FORWARD-LOOKING
STATEMENTS. THE FOLLOWING ARE THE IMPORTANT FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS TO DIFFER FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS.
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF LOSSES, EXPECT OUR
EXPENDITURES TO INCREASE AND OUR LOSSES TO CONTINUE, AND MAY NEVER ACHIEVE
PROFITABILITY.
We have incurred operating losses since we became a Delaware corporation in
April 1997. We operate with a negative cash flow primarily due to acquisition
expenses, prior debt incurred by acquired companies and assumed by us, and the
costs of improving our operating, sales and product development infrastructure.
In our first two years of operation, we incurred aggregate net losses of
$7.3 million, of which $4.1 million was amortization and depreciation. Our
business strategies may not be successful and we may not be able to achieve or
sustain revenue growth or profitability.
IF WE FAIL TO GENERATE RECURRING REVENUES FROM OUR EXISTING CUSTOMERS, WE MAY BE
UNABLE TO ACHIEVE OR SUSTAIN REVENUE GROWTH AND PROFITABILITY
Our financial success depends upon our ability to increase revenues derived
from existing customers. To this end, we focus our marketing efforts on
upgrading existing systems, and providing new software that enables our
customers to migrate from legacy to Windows-based products. If existing
customers fail to upgrade or migrate to our newer systems, we may not be able to
increase our revenues or obtain profitability in the near term or at all.
IF WE FAIL TO INTERNET-ENABLE OUR PRODUCTS IN A TIMELY FASHION WE MAY LOSE OUR
MARKET OPPORTUNITY AND MAY BE UNABLE TO ACHIEVE OR SUSTAIN REVENUE GROWTH AND
PROFITABILITY
Not all of our Windows-based products are Internet-enabled and those that
are have not been tested in the market for any substantial length of time. If we
fail to Internet-enable our products in a timely manner we may lose market share
opportunities to competitors and may be unable to increase our revenues or to
obtain profitability in the near term or at all.
INTERNET OR TELECOMMUNICATION SERVICE OR PERFORMANCE PROBLEMS OR SOFTWARE ERRORS
ARISING AFTER THE INSTALLATION OF OUR SOFTWARE AT CUSTOMER SITES COULD DELAY
MARKET ACCEPTANCE OF OUR PRODUCTS, LEAD TO CUSTOMER DISSATISFACTION AND LOSS OF
REVENUE AND INJURE OUR BUSINESS REPUTATION
The performance of our Internet-enabled products depends upon the efficient
operation of Internet and telephone connections, web browsers and Internet
service providers and upon the reliability of our software, including
third-party software incorporated into our software. The Internet and related
equipment has experienced periodic operational problems or outages. In addition,
software errors that we fail to detect may result in software performance
problems. The occurrence of any of these problems could cause customers to
experience system delays, failures and loss of data. Such problems could lead to
customer dissatisfaction, delays in market acceptance of our products, injury to
our business reputation and a loss of revenue.
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WE MAY BECOME SUBJECT TO STATE, FEDERAL OR FOREIGN TAXES THAT COULD HARM OUR
BUSINESS
We do not currently collect sales or other similar taxes with respect to
revenues from consumers in states other than the state of origin. However, one
or more states may seek to impose sales tax collection obligations on
out-of-state companies, similar to ours. Expansion of our operations into such
states could subject revenues from these states to state sales taxes under
current laws. In addition, a federal or foreign tax may potentially be imposed
on products and services sold over the Internet. A successful assertion by one
or more states or any foreign country that we should collect sales or other
taxes on the sale of merchandise or the imposition of federal taxes could
seriously harm our business.
On October 21, 1998, The Internet Tax Freedom Act was signed into law
placing a three-year moratorium on new state and local taxes on e-commerce in
the United States. The moratorium is expected to end on October 21, 2001.
Failure to renew this legislation could result in the broad imposition of state
and local taxes on e-commerce, which could seriously harm our business.
IF SECURITY AND LEGAL LIABILITY CONCERNS MAKE CUSTOMERS UNWILLING TO UTILIZE OUR
PRODUCTS AND SERVICES TO TRANSMIT MEDICAL INFORMATION OVER THE INTERNET, THE
DEMAND FOR OUR PRODUCTS MAY DIMINISH AND WE MAY BE UNABLE TO ACHIEVE OR SUSTAIN
PROFITABILITY
Potential customers may choose not to utilize our Internet-enabled software
products because of concerns related to the transfer and management of medical
information over the Internet, including: security of the patient medical
records being transferred through the Internet; errors in the transmission of
sensitive medical data over the Internet; legal liability for data security
failures or transmission errors; and regulatory burdens imposed on healthcare
participants who use the Internet to transfer confidential patient medical
information.
If these concerns prevent potential customers from buying our products and
prevent existing customers from upgrading to our Internet-enabled products, our
revenues may not increase and we may be unable to achieve or sustain
profitability.
BREACHES OF NETWORK SECURITY COULD DAMAGE OUR BUSINESS REPUTATION, LEAD TO
CUSTOMER DISSATISFACTION, DELAY MARKET ACCEPTANCE OF OUR PRODUCTS AND RESULT IN
LEGAL AND FINANCIAL LIABILITY AND A LOSS OF REVENUE
Our electronic transaction services involve the storage and transmission of
confidential medical information through our network data centers, over the
Internet and over dedicated private data lines. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses or similar disruptive problems. In the event of such a security
breach, proprietary and confidential information could be misappropriated or our
operations could be interrupted. These problems could damage our business
reputation, lead to customer dissatisfaction and delay market acceptance of our
products. We may also incur legal and financial liability and a loss of revenue
as a result of such problems.
CONCERNS RELATED TO THE INFRASTRUCTURE, SPEED AND RELIABILITY OF THE INTERNET
COULD DIMINISH THE DEMAND FOR AND DELAY MARKET ACCEPTANCE OF OUR PRODUCTS AND
COULD KEEP US FROM BECOMING PROFITABLE
The Internet may fail to become a viable mechanism for the delivery,
exchange and management of healthcare information due to a number of factors
that are out of our control, including: communication speed; reliability of
Internet service; Internet capacity; lack of development of complementary
products, such as communication devices; and delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity.
If concerns about such factors prevent potential customers from buying our
products and/or prevent existing customers from upgrading to our
Internet-enabled products, our Internet-enabled products may
30
<PAGE>
not gain market acceptance, our sales revenues may not increase and we may be
unable to achieve or sustain profitability.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE VOLATILITY OR DECLINE
IN THE MARKET PRICE OF OUR COMMON STOCK
On March 9, 2000 we disclosed in a press release that the Company estimates
revenues for the first quarter of 2000 to be below analysts expectations. It is
possible that our revenues and operating results may continue to fall below the
expectations of securities analysts or investors in future quarters. If we fail
to meet or surpass the expectations of securities analysts or investors, the
market price of our common stock will most likely decline. We expect that our
quarterly revenue and operating results may fluctuate as a result of a number of
factors, including: future acquisitions; entry into new healthcare markets;
introduction of new products and service offerings and reductions in prices of
products by our competitors; software defects, delays in development and other
quality factors; changes in customer demand for our applications and services;
and changes within the healthcare industry.
We expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenues, and these expense levels are relatively fixed in the
short term. If we have lower revenues, we may not be able to make corresponding
reductions in our spending in the short term. Any shortfall in revenues would
have a direct impact on our results of operations. Fluctuations in our quarterly
results or the failure to meet analysts' expectations could affect the market
price of our common stock in a manner unrelated to our long-term operating
performance.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY LOSE ASSETS OR
INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and restrictions on disclosure to protect our intellectual property. We
currently have no patents and limited registered copyrights covering technology
related to our products. We have no plans to seek such legal protection and, if
we do, protection may not be granted.
Despite our efforts to protect our intellectual property, a third party or a
former employee could copy, reverse engineer or otherwise obtain and use our
intellectual property or trade secrets without authorization or could develop
software competitive to ours.
Our intellectual property may be misappropriated or infringed upon or may
infringe upon the rights of others. Consequently, litigation may be necessary in
the future to enforce our intellectual property rights, to protect our
confidential information or trade secrets, or to determine the validity or scope
of the rights of others. Litigation could result in substantial costs and
diversion of management and other resources and may not successfully protect our
intellectual property. Additionally, we may deem it advisable to enter into
royalty or licensing agreements to resolve such claims. Such agreements, if
required, may not be available on commercially reasonable or desirable terms or
at all.
THE LOSS OF EXPERIENCED PERSONNEL TO COMPETITORS OR OUR INABILITY TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS OPERATIONS
Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. The
loss of the services of any of our senior management could negatively impact our
ability to carry out our business plan. We are dependent on our ability to
attract, retain and motivate high caliber key personnel. Competition for
qualified personnel in our industry is intense, and we may not be successful in
attracting and retaining such personnel. There are a limited number of persons
with the requisite skills available to serve in these key positions and it may
become increasingly difficult to hire such persons. Our business will suffer if
we encounter delays in hiring these additional personnel. Competitors and others
have in the past and may in the future attempt to recruit our employees.
31
<PAGE>
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO RAISE
FURTHER FINANCING, IF REQUIRED
We may need to raise additional funds to respond to business contingencies
which may include the need to: cover unexpected losses; fund more rapid
expansion; fund additional marketing expenditures; enhance our operating
infrastructure; respond to competitive pressures; or acquire or develop
complementary businesses or necessary technologies.
Additional financing may not be available on terms favorable to us, or at
all. In the event that such financing requires the issuance of additional shares
of our capital stock, you will experience dilution in your ownership. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our operations, take advantage of opportunities, develop
products or services or otherwise respond to competitive pressure could be
significantly limited.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD HAVE THE
EFFECT OF DELAYING OR PREVENTING A CORPORATE TAKEOVER, EVEN IF SUCH A
TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS
Some provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable. These provisions include:
authorizing the board to issue additional preferred stock; limiting the persons
who may call special meetings of stockholders; prohibiting stockholder actions
by written consent; creating a classified board of directors pursuant to which
our directors are elected for staggered three-year terms; and establishing
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted on by stockholders at
stockholder meetings.
RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
IF WE FAIL TO IDENTIFY OR NEGOTIATE THE PURCHASE OF COMPLEMENTARY ACQUISITION
CANDIDATES OR IF COMPETITION FOR SUCH CANDIDATES INCREASES, WE MAY BE UNABLE TO
GROW OUR BUSINESS AND EXPAND OUR DISTRIBUTION NETWORK AND MAY FAIL TO ACHIEVE OR
SUSTAIN PROFITABILITY
We believe that two of our competitors, Infocure Corporation and Medical
Manager Corporation, are undertaking an acquisition strategy similar to ours. If
competition for acquisition targets increases, there may be fewer qualified
acquisition candidates available to us and the terms of such acquisitions may
become less favorable. Identifying appropriate acquisition candidates,
negotiating and consummating an acquisition can be a lengthy and costly process,
may divert management's attention and may prevent us from growing our business
and expanding our distribution network.
PROBLEMS INTEGRATING ACQUIRED COMPANIES COULD RESULT IN SUBSTANTIAL COSTS,
DIVERT THE ATTENTION OF OUR MANAGEMENT TEAM, CAUSE US TO LOSE VALUABLE CUSTOMERS
AND DILUTE THE VALUE OF OUR ACQUISITIONS
When we acquire new businesses we must cross-train existing and acquired
sales personnel; standardize accounting, operational and financial functions of
acquired businesses; retain key acquired personnel; and incorporate acquired
technology into our existing products.
Problems or delays in the integration process may result in substantial
costs and the diversion of management's attention from our existing business. In
addition, integration delays could cause us to lose key customers and employees
from the acquired company thereby diluting the value of the acquired company.
WE HAVE DISCOVERED MATERIAL WEAKNESSES IN OUR INTERNAL ACCOUNTING CONTROLS WHICH
MAY AFFECT OUR FINANCIAL REPORTING.
During the integration of our acquired companies, we discovered material
weaknesses in our internal accounting controls. These weaknesses include
inadequate monitoring of key financial processes, inconsistent application of
revenue recognition policies and procedures, difficulty in closing the books in
some of
32
<PAGE>
our offices and inadequate financial reporting. We are implementing a common
accounting software platform and closing procedures for all of our regional
offices. We have developed and implemented revenue recognition guidelines,
policies and procedures, and we are training our regional managers and
accountants. We believe that these measures will correct the noted weaknesses.
However, there can be no assurance that we will not continue to experience such
deficiencies as we continue to further expand our operations.
TECHNICAL PROBLEMS WITH ACQUIRED TECHNOLOGY OR PRODUCTS COULD HARM OUR
REPUTATION, RESULT IN UNEXPECTED COSTS AND CAUSE OUR REVENUES TO DECREASE
Although we test and examine an acquisition target's technology and products
prior to consummating an acquisition, there may be technical product problems
that we fail to discover. These problems may result in unexpected costs that
decrease our revenues and may result in customer dissatisfaction and harm to our
business reputation.
WE MAY BECOME RESPONSIBLE FOR UNKNOWN OR UNEXPECTED FINANCIAL OR LEGAL
LIABILITIES FOLLOWING AN ACQUISITION
When we purchase a target company, we generally acquire all of that
company's liabilities. Although we perform due diligence prior to an
acquisition, we may become responsible for a liability that is unknown or
greater than anticipated. Any recourse we may have against the former
shareholders of an acquired company in such a situation is limited. Such
unexpected liabilities could have a significant negative impact on our profits.
IF OUR ACQUISITION ACTIVITIES DIVERT THE ATTENTION OF OUR MANAGEMENT TEAM AWAY
FROM THE DAY-TO-DAY OPERATIONS OF OUR COMPANY, PRODUCT DEVELOPMENT, EXISTING
CUSTOMER RELATIONSHIPS AND FINANCIAL PERFORMANCE COULD SUFFER
As a part of our growth strategy, we intend to acquire additional healthcare
information systems companies. The identification and investigation of
appropriate acquisition candidates and the negotiation of acquisitions will
require a substantial investment of time on the part of our management team.
These activities could divert time and attention from our product development
and from the day-to-day operations of our company. These disruptions could in
turn harm our relationships with existing customers and have a negative effect
on our overall financial performance.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL, WHICH COULD
RESULT IN DILUTION
We intend to finance future acquisitions by issuing shares of common and/or
preferred stock for all or a substantial portion of the acquisition price. In
the event that the potential acquisition candidates are unwilling to accept
stock as part of the consideration for the sale of their businesses, we may
decide to utilize more of our cash resources, if available, in order to maintain
our acquisition program. This may result in the need to raise additional
capital. To the extent we issue shares of our capital stock to finance
acquisitions or raise capital, you will experience dilution in your ownership.
RISKS ASSOCIATED WITH OUR INDUSTRY
INTENSE COMPETITION IN THE MARKET FOR HEALTHCARE INFORMATION SYSTEMS AND
SERVICES COULD PREVENT US FROM INCREASING OR SUSTAINING REVENUES AND PREVENT US
FROM ACHIEVING OR SUSTAINING PROFITABILITY
Our competitors vary in size, geographic coverage and scope of products and
services offered. The market demand for certain products varies across
geographic territories. Industry competitors include organizations such as
Medical Manager Corporation, Physician Computer Network, Inc., Infocure
Corporation, Medic Computer Systems, Inc., IDX Systems Corporation, CyCare, a
division of McKessonHBOC, Quality Systems Inc., MedicaLogic Inc., Dentrix Dental
Systems, Inc., and National Data Corporation.
33
<PAGE>
Additionally, within each regional market there are several smaller competitors
who have developed technologically advanced products offered at lower prices.
Finally, with the integration of clinical information systems into practice
management systems, several well-funded pharmaceutical, medical supply and
biotech companies have entered the practice management systems market. New
healthcare information Internet companies may become direct competitors in the
future. Many of our competitors have greater financial, research and
development, technical, marketing and sales resources than we do. In addition,
other entities not currently offering products and services similar to ours may
enter our market. We may not be able to compete successfully with current and/or
future competitors. Failure to do so could prevent us from increasing or
sustaining revenues and achieving profitability.
ECONOMIC AND COST REDUCTION PRESSURES FACED BY HEALTHCARE PROVIDERS MAY LIMIT
THE ABILITY OF OUR CUSTOMERS TO BUY OUR PRODUCTS AND SERVICES AND COULD LIMIT
OUR PROFITABILITY
Economic and cost reduction pressures may limit the ability of healthcare
providers to make expenditures for new software systems or for upgrades to
existing software systems. A reluctance or inability on the part of healthcare
providers to make such expenditures could result in fewer sales and could limit
our ability to achieve or sustain profitability.
IF WE FAIL TO RESPOND TO THE RAPIDLY CHANGING TECHNOLOGY THAT CHARACTERIZES OUR
MARKET, OUR PRODUCTS MAY BE RENDERED OBSOLETE, WE MAY LOSE OUR MARKET
OPPORTUNITY AND FAIL TO ACHIEVE OR SUSTAIN PROFITABILITY
On March 9, 2000 we disclosed that the release of the new version of our
Ridgemark product has been delayed. This delay was among the factors which the
Company anticipates will have a negative impact on revenues for the first
quarter of our fiscal year 2000. We can make no assurances that similar delays
in product releases will not occur in the future. The market for our products is
highly competitive and changes rapidly. Therefore, timely introduction of new
products, features and services to existing customers will significantly impact
our future success. We will be required to meet rapidly changing market demands,
respond to market requirements, develop new proprietary solutions, and
successfully market new products and enhancements to new customers and our
existing customer base.
ANY FAILURE TO COMPLY WITH REGULATIONS GOVERNING THE CONFIDENTIALITY AND
INTEGRITY OF HEALTHCARE INFORMATION TRANSMITTED ELECTRONICALLY COULD RESULT IN
SEVERE LEGAL AND FINANCIAL LIABILITY, HARM OUR BUSINESS REPUTATION AND RESULT IN
A SIGNIFICANT LOSS OF CUSTOMERS
Federal regulations under the Health Insurance Portability and
Accountability Act of 1996 governing the confidentiality and integrity of
healthcare information transmitted electronically are complex and are evolving
rapidly. Although we believe that our software products meet the current
regulatory standards described more fully in the "Business" section of this
prospectus, any failure on the part of our software to comply with current or
future regulations could subject us to severe legal and financial liability.
Such failures could also result in harm to our business reputation and a
significant loss of customers.
FUTURE STATE OR FEDERAL LEGISLATION MAY IMPOSE RESTRICTIONS ON THE ABILITY TO
TRANSMIT PATIENT DATA OVER THE INTERNET WITHOUT SPECIFIC PATIENT CONSENT AND
COULD DIMINISH THE VALUE OF OUR INTERNET-ENABLED SOFTWARE PRODUCTS AND SERVICES
AND LOWER OUR REVENUES AND PROFITS
The confidentiality of patient records is the subject of substantial
regulation by state and federal governments. Although compliance with these laws
and regulations is at present principally the responsibility of healthcare
providers, additional legislation governing the dissemination of medical records
has been discussed. If such legislation imposes restrictions on the ability of
third-party processors, like us, to transmit certain patient data without
specific patient consent, the value of our Internet-enabled products and
services to our customers could be diminished, causing our revenues to decrease.
34
<PAGE>
OUR BILLING AND CLAIMS SERVICES ARE SUBJECT TO FEDERAL AND STATE REGULATION AND
ANY NON-COMPLIANCE WITH THESE REGULATIONS COULD LEAD TO CIVIL, CRIMINAL AND
FINANCIAL LIABILITY
The performance of our billing and claims services are governed by numerous
federal and state civil and criminal laws. Increased scrutiny has been placed on
the billing and collection practices of healthcare providers and related
entities. Although we believe that we are in compliance with any such
regulations that may relate to the provision of our billing and claims services,
any non-compliance could lead to civil monetary penalties, criminal fines,
imprisonment or exclusion from participation in Medicare, Medicaid and other
federally funded healthcare programs for us and the customer involved in the
non-compliance.
REGULATIONS THAT RESTRICT THE ABILITY TO DISPENSE OR REFILL CONTROLLED
SUBSTANCES THROUGH AN ELECTRONICALLY TRANSMITTED PRESCRIPTION COULD LIMIT THE
FUNCTIONALITY OF OUR INTERNET-ENABLED SOFTWARE PRODUCTS AND COULD DIMINISH THE
REVENUE GENERATED FROM THESE PRODUCTS
The Federal Drug Enforcement Agency has promulgated regulations that may
prohibit a pharmacy from dispensing and/or refilling controlled substances
through an electronically transmitted prescription. These regulations may limit
the scope of the prescription ordering and refill functions in our current and
future Internet-enabled software products and may diminish the revenues we
obtain from the sale of these products.
IF OUR SOFTWARE PRODUCTS ARE DEEMED MEDICAL DEVICES, WE WILL BE SUBJECT TO
ADDITIONAL REGULATION THAT COULD RESULT IN CRIMINAL, CIVIL AND FINANCIAL
LIABILITY, INCREASE OUR COSTS AND DELAY THE MARKETING OF OUR NEW OR EXISTING
PRODUCTS
The U.S. Food and Drug Administration has jurisdiction under the 1976
Medical Device Amendments to the Federal Food, Drug and Cosmetic Act to regulate
computer products and software as medical devices if they are intended for use
in the diagnosis, cure, mitigation, treatment or prevention of disease in
humans. We believe that our healthcare information systems are not subject to
FDA regulation. If, however, the FDA determined that our products were subject
to regulation, non-compliance with applicable requirements could result in,
among other things, fines, injunctions, civil penalties, total or partial
suspension of production, refusal by the government to approve products,
revocation of approval or clearance previously granted and criminal prosecution.
Future FDA policies, laws or regulations concerning the development or marketing
of healthcare information systems may cause our products to be subject to FDA
regulation, which could increase our costs or delay the marketing of new or
existing products.
FUTURE REGULATIONS ENACTED BY CONGRESS OR BY STATE GOVERNMENTS MAY ADVERSELY
IMPACT THE HEALTHCARE INDUSTRY IN WAYS THAT COULD DAMAGE OUR BUSINESS
OPPORTUNITIES OR PROFITABILITY
The healthcare industry is highly regulated and has been the subject of
increasing levels of government regulation during the past several years. We
cannot predict with any certainty the types of regulations that might be imposed
or the impact that those regulations might have on our business. The adoption of
regulations currently unanticipated by us or by the healthcare industry could
impose burdensome requirements or restrictions on our products or on the
activities of healthcare providers. These restrictions could decrease the demand
for our products and could prevent us from growing our business and attaining
profitability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements are located on the pages
indicated below:
INDEX TO FINANCIAL STATEMENTS
VANTAGEMED CORPORATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... 37
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 38
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... 39
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 41
Notes to Consolidated Financial Statements.................. 42
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VantageMed Corporation:
We have audited the accompanying consolidated balance sheets of VANTAGEMED
CORPORATION (a Delaware corporation) and subsidiaries as of December 31, 1998
(as restated--see Note 3) and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VantageMed Corporation and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Sacramento, California
March 15, 2000
37
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(AS RESTATED-
SEE NOTE 3)
1998 1999
------------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 435 $ 250
Accounts receivable, net of allowance of $311 and $287,
respectively............................................ 1,206 2,463
Notes receivable, current portion......................... 0 64
Inventories............................................... 105 480
Prepaid expenses and other................................ 103 2,064
------- --------
Total current assets.................................... 1,849 5,321
NOTES RECEIVABLE, net of current portion.................... 0 128
PROPERTY AND EQUIPMENT, net................................. 2,232 2,564
INTANGIBLES, net of accumulated amortization of $1,570 and
$4,592, respectively...................................... 6,970 28,451
------- --------
Total assets............................................ $11,051 $ 36,464
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft............................................ $ 1,632 $ --
Current portion of long-term debt......................... 1,510 5,574
Accounts payable.......................................... 886 2,352
Accrued liabilities....................................... 858 2,501
Customer deposits and deferred revenue.................... 1,526 2,906
------- --------
Total current liabilities............................... 6,412 13,333
LONG-TERM DEBT, net of current portion...................... 1,721 2,639
------- --------
Total liabilities....................................... 8,133 15,972
------- --------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized
Series A-1--413,018 and 1,795,300 shares issued and
outstanding, respectively (aggregate liquidation
preference of $4,722 at December 31, 1999).............. -- 2
Series B--100,000 and 120,000 shares issued and
outstanding, respectively (aggregate liquidation
preference of $1,440 at December 31, 1999).............. -- --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 2,405,996 and 4,355,325 shares issued and
outstanding, respectively............................... 2 4
Additional paid-in capital................................ 7,494 35,357
Deferred compensation..................................... -- (78)
Accumulated deficit....................................... (4,578) (14,793)
------- --------
Total stockholders' equity.............................. 2,918 20,492
------- --------
Total liabilities and stockholders' equity.............. $11,051 $ 36,464
======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
38
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
(AS RESTATED-
SEE NOTE 3)
1997 1998 1999
---------- ------------- ----------
<S> <C> <C> <C>
REVENUES:
Software and systems................................... $ 2,800 $ 3,943 $ 9,429
Customer support and electronic services............... 2,448 5,430 9,983
---------- ---------- ----------
Total revenues....................................... 5,248 9,373 19,412
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Software and systems................................... 1,274 2,146 4,078
Customer support and electronic services............... 1,200 3,606 6,226
Selling, general and administrative.................... 2,566 4,706 10,382
Product development.................................... 441 1,500 4,120
Depreciation and amortization.......................... 376 1,445 3,873
---------- ---------- ----------
Total operating costs and expenses................... 5,857 13,403 28,679
---------- ---------- ----------
LOSS FROM OPERATIONS..................................... (609) (4,030) (9,267)
---------- ---------- ----------
INTEREST INCOME (EXPENSE):
Interest income........................................ 27 45 74
Interest expense....................................... (47) (252) (1,022)
---------- ---------- ----------
Total interest expense, net.......................... (20) (207) (948)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES................................. (629) (4,237) (10,215)
BENEFIT FOR INCOME TAXES................................. (195) -- --
---------- ---------- ----------
Net loss............................................. $ (434) $ (4,237) $ (10,215)
========== ========== ==========
Basic and diluted net loss per share..................... $ (0.27) $ (1.96) $ (3.13)
---------- ---------- ----------
Weighted-average shares--basic and diluted............... 1,620,245 2,158,314 3,261,712
---------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
39
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------
SERIES A-1 SERIES B COMMON STOCK ADDITIONAL
---------------------- --------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ---------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996......... -- $ -- $ 1,481,039 $ $ 92
Issuance of common stock to
founders....................... -- -- -- -- 10,000 -- --
Issuance of common stock......... -- -- -- -- 134,773 -- 414
Issuance of common stock in
connection with acquisition.... -- -- -- -- 193,487 -- 801
Issuance of Series A preferred
stock.......................... 413,018 -- -- -- -- -- 1,200
Distribution to shareholders of
NHS............................ -- -- -- -- -- -- --
Net loss and comprehensive
loss........................... -- -- -- -- -- -- --
--------- ---------- ------- ---------- --------- ---------- -------
BALANCE, December 31, 1997......... 413,018 -- -- -- 1,819,299 2 2,507
Issuance of common stock......... -- -- -- -- 111,753 -- 838
Issuance of common stock in
connection with acquisitions... -- -- -- -- 474,944 -- 3,149
Issuance of Series B preferred
stock in connection with
acquisition.................... -- -- 100,000 -- -- -- 1,000
Distribution to shareholders of
NHS............................ -- -- -- -- -- -- --
Net loss and comprehensive loss
(as restated, see Note 3)...... -- -- -- -- -- -- --
--------- ---------- ------- ---------- --------- ---------- -------
BALANCE, December 31, 1998 (as
restated--see
Note 3).......................... 413,018 -- 100,000 -- 2,405,996 2 7,494
Issuance of common stock......... -- -- -- -- 73,317 -- 654
Issuance of common stock in
connection with acquisitions... -- -- -- -- 1,845,508 2 21,707
Issuance of stock options and
warrants in connection with
acquitisions................... -- -- -- -- -- -- 1,237
Conversion of Series A preferred
stock to Series A-1 preferred
stock.......................... (413,018) -- -- -- -- -- (1,200)
Issuance of Series A-1 preferred
stock.......................... 1,795,300 2 -- -- -- -- 4,698
Issuance of Series B preferred
stock in connection with
acquisition.................... -- -- 20,000 -- -- -- 240
Conversion of notes payable into
common stock................... -- -- -- -- 29,549 -- 280
Exercise of stock options........ -- -- -- -- 955 -- 6
Deferred compensation............ -- -- -- -- -- -- 111
Amortization of deferred
compensation................... -- -- -- -- -- -- --
Issuance of warrants............. -- -- -- -- -- -- 130
Net loss and comprehensive
loss........................... -- -- -- -- -- -- --
--------- ---------- ------- ---------- --------- ---------- -------
BALANCE, December 31, 1999......... 1,795,300 $ 2 120,000 $ -- 4,355,325 $ 4 $35,357
========= ========== ======= ========== ========= ========== =======
<CAPTION>
ACCUMULATED
DEFERRED EARNINGS
COMPENSATION (DEFICIT) TOTAL
------------- ------------ --------
<S> <C> <C> <C>
BALANCE, December 31, 1996......... $ -- $ 199 $ 293
Issuance of common stock to
founders....................... -- -- --
Issuance of common stock......... -- -- 414
Issuance of common stock in
connection with acquisition.... -- -- 801
Issuance of Series A preferred
stock.......................... -- -- 1,200
Distribution to shareholders of
NHS............................ -- (32) (32)
Net loss and comprehensive
loss........................... -- (434) (434)
----- -------- -------
BALANCE, December 31, 1997......... -- (267) 2,242
Issuance of common stock......... -- -- 838
Issuance of common stock in
connection with acquisitions... -- -- 3,149
Issuance of Series B preferred
stock in connection with
acquisition.................... -- -- 1,000
Distribution to shareholders of
NHS............................ -- (74) (74)
Net loss and comprehensive loss
(as restated, see Note 3)...... -- (4,237) (4,237)
----- -------- -------
BALANCE, December 31, 1998 (as
restated--see
Note 3).......................... -- (4,578) 2,918
Issuance of common stock......... -- -- 654
Issuance of common stock in
connection with acquisitions... -- -- 21,709
Issuance of stock options and
warrants in connection with
acquitisions................... -- -- 1,237
Conversion of Series A preferred
stock to Series A-1 preferred
stock.......................... -- -- (1,200)
Issuance of Series A-1 preferred
stock.......................... -- -- 4,700
Issuance of Series B preferred
stock in connection with
acquisition.................... -- -- 240
Conversion of notes payable into
common stock................... -- -- 280
Exercise of stock options........ -- -- 6
Deferred compensation............ (111) -- 0
Amortization of deferred
compensation................... 33 -- 33
Issuance of warrants............. -- -- 130
Net loss and comprehensive
loss........................... -- (10,215) (10,215)
----- -------- -------
BALANCE, December 31, 1999......... $ (78) $(14,793) $20,492
===== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
40
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
(AS RESTATED-
SEE NOTE 3)
1997 1998 1999
-------- ------------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (434) $(4,237) $(10,215)
Adjustments to reconcile net loss to net cash used for
operating activities-...................................
Depreciation and amortization........................... 376 1,445 3,873
Loss on disposal of assets.............................. -- -- 14
Bad debt expense........................................ 111 344 86
Deferred tax benefit.................................... (195) -- --
Deferred compensation expense........................... -- -- 33
Amortization of warrants................................ -- -- 50
Changes in assets and liabilities, net of effects from
acquisitions-.........................................
Accounts receivable................................... (93) (436) (322)
Inventories........................................... 126 (15) (181)
Prepaid expenses and other............................ (61) 50 (1,233)
Book overdraft........................................ -- 1,632 (1,632)
Accounts payable and accrued liabilities.............. (248) 411 756
Customer deposits and deferred revenue................ (193) 508 (531)
------ ------- --------
Net cash used for operating activities.............. (611) (298) (9,302)
------ ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of effects from
acquisitions............................................ (271) (1,637) (526)
Cash (paid) received from businesses acquired, net........ (228) 270 3,423
------ ------- --------
Net cash provided by (used for) investing
activities........................................ (499) (1,367) 2,897
------ ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and options.................... 414 588 660
Issuance of preferred stock............................. 1,075 -- 3,000
Proceeds from issuance of long-term debt................ 166 1,339 3,256
Payments on long-term debt.............................. (290) (433) (696)
Distributions to shareholders of Northern Health
Solutions, Inc........................................ (32) (74) --
------ ------- --------
Net cash provided by financing activities........... 1,333 1,420 6,220
------ ------- --------
Net change in cash and cash equivalents............. 223 (245) (185)
CASH AND CASH EQUIVALENTS, beginning of year................ 457 680 435
------ ------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 680 $ 435 $ 250
====== ======= ========
</TABLE>
See Note 12 for supplemental cash flow information.
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
41
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISKS:
VantageMed Corporation (the Company) was incorporated in California on
June 11, 1995. On April 9, 1997, the Company was reincorporated in Delaware. The
basis of presentation includes Northern Health Solutions, Inc. and Healthcare
Information Systems, Inc., two business combinations effected in 1998 accounted
for as poolings and included for all periods presented. The Company is a
diversified healthcare information systems supplier headquartered in Sacramento,
California with regional offices in Walnut Creek, Van Nuys, and San Francisco,
California; Honolulu, Hawaii; Seattle, Washington; Kansas City, Missouri; Flint,
Michigan; Pompton Plains, New Jersey; Detroit, Michigan; Pittsburgh,
Pennsylvania; Boston, Massachusetts; Springfield, Illinois; Boulder, Colorado;
Salt Lake City, Utah; Houston, Texas; Birmingham, Alabama; Greensboro, North
Carolina; and Little Rock, Arkansas. The Company develops, sells, installs and
supports software products and services that assist physicians, dentists,
physician organizations and other healthcare providers in the operation of their
practices and organizations. The Company is building a national distribution
network by acquiring established regional healthcare practice management systems
companies to sell and support its new generation software and services.
The practice management software products offered by the Company provide
physicians, dentists and other healthcare professionals with comprehensive
office management software designed to automate the administrative, financial,
practice management and clinical requirements of a practice. These systems range
in capacity from one to approximately one hundred users. The Company also
provides software, network and hardware support, training, electronic claims
processing, electronic statement printing and mailing and electronic remittance
advices.
RISKS AND UNCERTAINTIES
The Company has suffered recurring losses from operations since its
inception and does not currently have substantial operating reserves. The
Company operates with a negative cash flow primarily because of acquisition
expenses, prior debt incurred by the acquired companies, and the costs of
building infrastructure for future growth. Subsequent to year end the Company
completed its initial public offering (IPO) raising net proceeds of
approximately $33,500,000.
The Company is also subject to a number of additional risks, including, but
not limited to, risks associated with acquisitions (successful integration and
operation of new products, technologies and businesses), uncertainties in the
healthcare industry, and dependence on the medical and dental market. There can
be no assurance that the Company will successfully integrate acquired entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
42
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
FINANCIAL INSTRUMENTS
The fair values of financial instruments are the amounts at which the
instruments could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying consolidated balance sheets are not
materially different from their fair values.
NOTES RECEIVABLE
The Company has two notes receivable from customers bearing interest at
6 percent per annum secured by an irrevocable letter of credit due March 31,
2003.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of supplies and new computer equipment purchased to
fill customer orders.
PREPAID EXPENSES AND OTHER
Prepaid expenses include $1,682,000 representing capitalized costs incurred
in connection with the Company's IPO in process at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three to seven years. Leasehold improvements are amortized
over the remaining lease term. Maintenance and repairs are expensed as incurred.
Software rights included in property and equipment represent software purchased
for internal use and are not intended to be resold. Such software rights are
recorded at cash cost and amortized over their estimated useful life of three
years.
INTANGIBLES
Intangibles include goodwill, acquired software, customer lists, covenants
not to compete and assembled workforces. Goodwill represents the amount of
purchase price in excess of the fair value of the identifiable assets purchased
in acquisitions completed by the Company and is amortized on a straight-line
basis over a period of two to ten years, depending upon whether the acquisition
is established as a new regional office or is consolidated into an existing one
and whether or not there are continuing sales of the software purchased in the
acquisition. Acquired software consists of software purchased in acquisitions
completed by the Company and is amortized on a straight-line basis over a period
of two to four years depending on the estimated continued use of the software
product acquired. Covenants not to compete are amortized on a straight-line
basis over two to five years, representing the life of such agreements. Customer
lists are amortized on a straight-line basis over two to ten years, representing
the estimated future life of customer relationships. Assembled workforce is
amortized on a straight-line basis over a period of one to ten years depending
upon the average length of employment for the employees of the acquired
companies.
43
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
ASSET IMPAIRMENT
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," effective for years beginning after December 15, 1995, requires that
long-lived assets and certain intangibles to be held and used by the company be
reviewed for Impairment. The Company periodically reviews whether there has been
a permanent impairment of its long-lived assets, in accordance with SFAS 121.
The measurement of possible impairment is based upon determining whether
projected undiscounted future cash flows of the acquired businesses or from the
use of the asset over the remaining amortization period is less than the
carrying amount of the asset. In the opinion of management, there has been no
such impairment.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes software development costs incurred after
technological feasibility of the software development projects has been
established. To date, all of the Company's costs for research and development of
software products have been expensed as incurred since the amount of software
development costs incurred subsequent to the establishment of technological
feasibility has been immaterial.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position 97-2
(SOP 97-2), "Software Revenue Recognition." SOP 97-2 provides guidance on
applying generally accepted accounting principles for recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's revenue. In December 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-9 (SOP 98-9), "Modification
of SOP 97-2. Software Revenue Recognition With Respect to Certain Transactions."
SOP 98-9 is effective for fiscal years beginning after March 15, 1999. The
Company believes that the adoption of SOP 98-9 will not have a material effect
on the results of their operations or financial condition.
Software and systems revenue is derived from the licensing of proprietary
software, the sale of third-party software, primarily desktop operating systems
and communication and security software and the sale of computer hardware and
supplies. Customer support and electronic services revenue is derived from
software maintenance and customer service, network and computer hardware
support, training, data conversion, system installation, electronic claims
processing, electronic statement printing, mailing and electronic remittance
advices.
The Company enters into license agreements with customers, which allow for
the use of the Company's products, usually restricted by the number of
employees, the number of users, or the license term. Fees from licenses are
recognized as revenue in accordance with SOP 97-2 when all shipment obligations
have been met, fees are fixed and determinable, collection of the sale proceeds
is deemed probable and persuasive evidence of an agreement exists. Other
customer support and electronic services are also provided to the Company's
licensees of software products. These services consists primarily of software
maintenance and customer service, network and computer hardware support and
installation of software at customer sites. The revenue from the installations
is recognized upon completion of installation. The revenue from software
maintenance, customer service and support is recognized ratably over the
44
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
term of the support period. For arrangements that include multiple elements, the
fee is allocated to the various elements based on vendor-specific objective
evidence of fair market value established by independent sale of the elements
sold separately. Revenues from other services, which include training, data
conversion, electronic claims processing, electronic statement printing, mailing
and electronic remittance advices are recognized as the services are provided.
Deferred revenue consists of revenue deferred under annual maintenance and
annual support agreements under which amounts have been received from customers
and for which the earnings process has not been completed. Customer deposits
consist of cash collections for undelivered product and related services as of
the reporting period. The Company will recognize these deferred revenues in
accordance with its revenue recognition policy, typically over a period of one
year or less.
Writeoffs of accounts receivable, net of recoveries were $78,000, $101,000
and $110,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," under which deferred income taxes are provided
based upon enacted tax laws and rates applicable to the periods in which taxes
become payable. A valuation allowance is provided against the future benefits of
deferred tax assets if it is determined that it is more likely than not that the
future tax benefits associated with the deferred tax asset will not be realized.
NET LOSS PER COMMON SHARE
The Company calculated net loss per share under the provisions of the SFAS
No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement.
Basic earnings per share is computed using the weighted-average number of
shares of common stock outstanding while diluted earnings per share reflects the
potential dilution that would have occurred if preferred stock had been
converted and stock options and warrants had been exercised. Potential common
stock equivalents consist of shares issuable upon the exercise of stock options,
warrants and shares issuable upon the conversion of Series A-1 and Series B
convertible preferred stock. As of December 31, 1999, there was 1,795,000 and
120,000 shares of Series A-1 and Series B convertible preferred stock
outstanding, respectively. In addition, there were 21,000, 195,000 and 780,687
outstanding options and warrants to purchase common shares as of December 31,
1997, 1998 and 1999 respectively, that were not included in the computation of
diluted net loss per common share as their effect would have been anti-dilutive,
thereby decreasing net loss per common share. Such securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130),"Reporting Comprehensive Income."
SFAS 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.
During 1997, 1998 and
45
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
1999, the Company had no comprehensive income components; therefore,
comprehensive loss was the same as net loss for all periods presented.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." As permitted by
SFAS 123, the Company has not changed its method of accounting for stock options
but has provided the additional required disclosures. For the years ended
December 31, 1997, 1998 and 1999, the Company recognized $0, $0 and $33,000 in
compensation expense related to stock options.
RECENT PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities," will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. This
statement is not expected to affect the Company as it currently does not engage
or plan to engage in derivative instruments or hedging activities.
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. The Company
will adopt SAB 101 as required in the second quarter of 2000 and is evaluating
the effect that such adoption may have on its consolidated results of operations
and financial position.
3. RESTATEMENT OF 1998 FINANCIAL STATEMENTS (SEE ALSO NOTES 4 AND 14):
The Company previously reported a tax benefit in 1998 of $343,000. Certain
deferred tax liabilities were recorded in connection with purchase business
combinations. These deferred tax liabilities represent the tax effect of certain
book and tax basis differences of acquired companies. Net operating losses
arising subsequent to the related acquisition were benefited against the
recorded deferred tax liabilities.
Because the Company had a valuation allowance on its deferred tax assets at
the date of the business combinations, the deferred tax liabilities should have
been used to reduce the Company's valuation allowance with a corresponding
reduction in goodwill, rather than recognizing benefits of future net
46
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTATEMENT OF 1998 FINANCIAL STATEMENTS (SEE ALSO NOTES 4 AND 14):
(CONTINUED)
operating losses as previously reported. The effect of the restatement for the
year ended December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Previously reported net loss................................ $(3,921)
Reversal of benefit for income taxes........................ (343)
Reduction of amortization of goodwill....................... 27
-------
Restated net loss........................................... $(4,237)
=======
Previously reported basic and diluted net loss per share.... $ (1.82)
Restated basic and diluted net loss per share............... $ (1.96)
</TABLE>
The information presented in Notes 4 and 14 has been restated to reflect the
effects of the adjustment. Tax benefits previously reported in interim periods
through September 30, 1999 have also been restated.
4. BUSINESS COMBINATIONS:
BUSINESS COMBINATIONS ACCOUNTED FOR AS PURCHASES
Each of the following acquisitions was accounted for under the purchase
method of accounting, applying the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations." As a result, the Company recorded the
identifiable assets and liabilities of the acquired companies at their estimated
fair values with the excess of the purchase price over these amounts being
recorded as goodwill. Intangibles including acquired software, customer lists,
covenants not to compete and assembled workforce are valued based upon
discounted future cash flows associated with the related intangible asset and
its economic life. The acquired deferred revenues were recorded at values which
approximate the present value of cost that will be incurred to fulfill
maintenance and support obligations plus a normal profit. The financial
statements reflect the operations of the acquired businesses for the periods
after their respective dates of acquisition. All purchase price allocations
reported in historical financial statements are substantially final and any
final adjustments are not expected to be material. The consideration for the
purchases was cash, notes and company stock. The value of the Company's stock
given in consideration was determined through a combination of negotiation
between the buyer and the seller and by comparing the value used to other shares
issued for cash.
PURCHASES DURING THE YEAR ENDED DECEMBER 31, 1997
The Company acquired ATEK Computer Distributors, Inc. (ATEK) in July 1997.
The purchase price of $976,000 comprised $175,000 in cash and 193,487 shares of
common stock issued at $4.14 per share for a total of $801,000 in common stock.
Goodwill is being amortized over ten years, customer lists over five years,
covenants not to compete and acquired software over two years, and assembled
workforce over four years.
The Company acquired Trend Sierra (Trend) in August 1997. The purchase price
of $1,600,000 comprised $75,000 in cash and $1,525,000 in notes payable.
Goodwill is being amortized over ten years, acquired software over two years,
customer lists over six years, covenants not to compete and assembled workforce
over five years.
47
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS: (CONTINUED)
The Company acquired Prophase System, Inc. and Patriot Healthcare Inc.
(Other 1997 Acquisitions) in 1997. The purchase price of $75,000 comprised
$15,000 in cash and $60,000 in notes payable. Goodwill is being amortized over
two years, customer lists over two to four years, and covenants not to compete
over three years.
The following table summarizes the fair values of the assets acquired and
liabilities assumed in connection with the foregoing acquisitions accounted for
as purchases in the year ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
OTHER 1997
ATEK TREND ACQUISITIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Cash..................................... $ 28 $ 9 $ -- $ 37
Accounts receivable...................... 242 106 -- 348
Inventories.............................. 91 22 -- 113
Property and equipment................... 72 23 -- 95
Goodwill................................. 1,225 530 20 1,775
Other intangibles........................ 528 1,092 66 1,686
Account payable.......................... (146) (26) -- (172)
Accrued liabilities...................... (103) (79) (11) (193)
Customer deposits and deferred revenue... (323) (77) -- (400)
Long-term debt........................... (443) -- -- (443)
Deferred tax liability................... (195) -- -- (195)
------ ------ ---- ------
Net assets acquired...................... $ 976 $1,600 $ 75 $2,651
====== ====== ==== ======
</TABLE>
PURCHASES DURING THE YEAR ENDED DECEMBER 31, 1998
The Company acquired Pacific Software, Inc. (Pacific) in April 1998. The
purchase price of $1,254,000 comprised 264,517 shares of common stock issued at
$4.74 per share. Goodwill and customer lists are being amortized over ten years,
acquired software and covenants not to compete over two years, and assembled
workforce over four years.
The Company acquired Medicom Corporation (Medicom) in July 1998. The
purchase price of $1,000,000 comprised 100,000 shares of Series B preferred
stock issued at $10.00 per share. Goodwill and customer lists are being
amortized over ten years, covenants not to compete over three years, and
assembled workforce over four years.
The Company acquired CM Healthcare Technologies, Inc. (CMHT) in
August 1998. The purchase price of $1,671,000 comprised 174,095 shares of common
stock issued at $9.60 per share. Goodwill is being amortized over ten years,
acquired software and customer lists over two years, and assembled workforce
over seven years.
48
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS: (CONTINUED)
The Company acquired Medsoft, Inc., American Voice Computer, Inc., and DOT
Medical, Inc. (Other 1998 Acquisitions) in 1998. The purchase price of $599,000
comprised $25,000 in cash, $350,000 in notes payable and 36,332 shares of common
stock issued at a weighted-average price of $6.17 per share for a total of
$224,000 in common stock. Goodwill is being amortized over two to five years,
acquired software over two years, customer lists over two to eight years,
assembled workforce over three years and covenants not to compete over two to
three years.
The following table summarizes the fair values of the assets acquired and
liabilities assumed in connection with the foregoing acquisitions accounted for
as purchases in the year ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
OTHER 1998
PACIFIC MEDICOM CMHT ACQUISITIONS TOTAL
-------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash............................ $ 23 $ 41 $ 210 $ 21 $ 295
Accounts receivable............. 120 133 112 18 383
Inventories..................... 31 5 4 -- 40
Prepaid expenses and other...... 5 1 74 6 86
Property and equipment.......... 358 69 83 53 563
Goodwill........................ 1,039 712 1,286 591 3,628
Other intangibles............... 172 185 607 561 1,525
Account payable................. (30) (28) (71) (193) (322)
Accrued liabilities............. (27) (43) (391) (107) (568)
Customer deposits and deferred
revenue....................... (110) -- -- (212) (322)
Long-term debt.................. (258) (1) (95) (87) (441)
Deferred tax liability.......... (69) (74) (148) (52) (343)
------ ------ ------ ----- ------
Net assets acquired............. $1,254 $1,000 $1,671 $ 599 $4,524
====== ====== ====== ===== ======
</TABLE>
PURCHASES DURING THE YEAR ENDED DECEMBER 31, 1999
The Company acquired Civitec Healthcare Computers, Inc. (Civitec) in
April 1999. The purchase price of $1,386,000 comprised $127,000 in cash,
$408,000 in notes payable and 88,667 shares of common stock issued at $9.60 per
share for a total of $851,000 in common stock. Goodwill and customer lists are
being amortized over ten years, acquired software over two years, covenants not
to compete over three years, and assembled workforce over eight years.
The Company acquired Medical Software Solutions, Inc. (MSS) in May 1999. The
purchase price of $1,278,000 comprised $460,000 in notes payable and 85,156
shares of common stock issued at $9.60 per share for a total of $818,000 in
common stock. Goodwill and customer lists are being amortized over ten years,
acquired software over two years, covenants not to compete over three years, and
assembled workforce over seven years.
The Company acquired Brand Software, Inc. (Brand) in July 1999. The purchase
price of $2,207,000 comprised 160,804 shares of common stock issued at $9.60 per
share for a total of $1,544,000 in common stock, 20,000 shares of Series B
preferred stock issued at $12.00 per share for a total of $240,000 in preferred
stock and 25,837 stock options were assumed and 41,669 stock options were
granted in
49
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS: (CONTINUED)
connection with the acquisition with exercise prices ranging from $1.89 to $9.60
per share for a total of $423,000 in stock options. The fair value of the
options granted and assumed was determined using the Black-Scholes option
pricing model. Goodwill is being amortized over ten years, acquired software
over four years, customer lists and covenants not to compete over three years
and assembled workforce over two years.
The Company acquired Mariner Systems, Inc. (Mariner) in August 1999. The
purchase price of $10,397,000 comprised $190,000 in notes payable, 857,554
shares of common stock issued at $11.10 per share for a total of $9,519,000 in
common stock, 80,611 stock options with exercise prices ranging from $.06 to
$62.81 per share and 30,000 warrants issued for services rendered in connection
with the acquisition for a total of $688,000 in stock options and warrants. The
fair value of the options granted and assumed was determined using the
Black-Scholes option pricing model. Goodwill and customer lists are being
amortized over ten years, acquired software over four years, and covenants not
to compete and assembled workforce over three years.
The Company acquired CSS, Inc. (CSS) in October 1999. The purchase price of
$1,350,000 comprised $230,000 in cash and 71,089 shares of common stock issued
at $15.75 per share for a total of $1,120,000 in common stock. Goodwill and
customer lists are being amortized over ten years, acquired software over two
years, covenants not to compete over three years and assembled workforce over
eight years.
The Company acquired Computerized Doctors Systems, Inc. (CDS) in
October 1999. The purchase price of $2,412,000 comprised $500,000 in cash,
113,413 shares of common stock issued at $15.75 per share for a total of
$1,786,000 in common stock and 17,756 stock options with an exercise price of
$15.75 for a total of $126,000 in stock options. The fair value of the options
granted and assumed was determined using the Black-Scholes option pricing model.
Goodwill and customer lists are being amortized over ten years, acquired
software over two years, covenants not to compete over two years and assembled
workforce over six years.
The Company acquired Medical Digital Technologies, Inc. (MDT) in
October 1999. The purchase price of $2,620,000 comprised $600,000 in cash,
$500,000 in notes payable and 96,491 shares of common stock issued at $15.75 per
share for a total of $1,520,000 in common stock. Goodwill and customer lists are
being amortized over ten years, acquired software over two years, covenants not
to compete over three years and assembled workforce over four years.
The Company acquired Data Decisions, Inc. (Data Decisions) in October 1999.
The purchase price of $2,488,000 comprised $78,000 in cash, $222,000 in notes
payable and 138,958 shares of common stock issued at $15.75 per share for a
total of $2,188,000 in common stock. Goodwill and customer lists are being
amortized over ten years, acquired software over two years, covenants not to
compete over three years and assembled workforce over four years.
The Company acquired Acrotrex Corporation, Metropolitan Information
Systems, Inc., Care Information Systems, Inc., Logos Systems, Inc., Health
Information Network and Pepware Software, Inc. (Other 1999 Acquisitions) in
1999. The purchase price of $2,986,000 comprised $25,000 in cash, $598,000 in
notes payable and 233,376 shares of common stock issued at prices ranging from
$9.60 to $15.75 per share for a total of $2,363,000 in common stock. Goodwill is
being amortized over two to ten years, acquired software over two to four years,
customer lists over four to ten years, covenants not to compete over three years
and assembled workforce over one to ten years.
50
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS: (CONTINUED)
The following table summarizes the fair values of the assets acquired and
liabilities assumed in connection with the foregoing acquisitions accounted for
as purchases in the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
DATA
CIVITEC MSS BRAND MARINER CSS CDS MDT DECISIONS
-------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash.............................. $ 234 $ 18 $ 56 $ 3,962 $ 13 $ 277 $ 321 $ 16
Accounts receivable............... 18 92 -- 177 57 171 132 126
Inventories....................... 3 -- -- 3 102 6 28 41
Prepaid expenses and other........ 7 225 -- 390 4 14 89 --
Property and equipment............ 24 -- 115 324 11 20 37 83
Goodwill.......................... 735 493 2,214 6,607 850 1,661 1,788 1,924
Other intangibles................. 1,246 1,114 1,096 1,302 713 1,001 1,265 994
Account payable................... (56) (34) (130) (68) (41) (28) (139) (85)
Accrued liabilities............... (38) (81) (110) (799) (12) (89) (178) (41)
Customer deposits and
deferred revenue................ (289) (64) (546) (379) (62) (202) (217) (43)
Long-term debt.................... -- (13) (50) (166) -- (19) -- (116)
Deferred tax liability............ (498) (472) (438) (956) (285) (400) (506) (411)
------ ------ ------ ------- ------ ------ ------ ------
Net assets acquired............... $1,386 $1,278 $2,207 $10,397 $1,350 $2,412 $2,620 $2,488
====== ====== ====== ======= ====== ====== ====== ======
<CAPTION>
OTHER 1999
ACQUISITIONS TOTAL
------------ --------
<S> <C> <C>
Cash.............................. $ 86 $ 4,983
Accounts receivable............... 248 1,021
Inventories....................... 11 194
Prepaid expenses and other........ 111 840
Property and equipment............ 57 671
Goodwill.......................... 2,113 18,385
Other intangibles................. 2,255 10,986
Account payable................... (145) (726)
Accrued liabilities............... (279) (1,627)
Customer deposits and
deferred revenue................ (109) (1,911)
Long-term debt.................... (460) (824)
Deferred tax liability............ (902) (4,868)
------ -------
Net assets acquired............... $2,986 $27,124
====== =======
</TABLE>
As discussed in Note 3, the Company had recorded certain deferred tax assets
on which it had valuation allowances at the dates of the various acquisitions.
Accordingly, the goodwill reported in the business combinations tables above and
the valuation allowance of the Company at the acquisition date has been reduced
by $343,000 and $4,868,000 at December 31, 1998 and 1999, respectively.
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if all of the acquisitions had occurred
as of the beginning of 1998. The unaudited pro forma results of operations are
presented after giving effect to certain adjustments for depreciation,
amortization, and interest expense on the acquisition financing. The Company
believes the assumptions used in the unaudited pro forma results of operations
were reasonable. The unaudited pro forma information is not necessarily
indicative of what would have occurred had the acquisitions been made as of
January 1, 1998, nor is it indicative of future results of operations (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue............................................... $ 23,388 $ 27,463
Depreciation and amortization......................... 5,956 6,369
Loss available to common stockholders................. (11,164) (13,059)
Basic and diluted loss per share...................... $ (2.98) $ (3.04)
</TABLE>
51
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS: (CONTINUED)
BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLING OF INTERESTS
In April 1998, the Company acquired all of the outstanding capital stock and
options of Healthcare Information Systems, Inc. (HIS), based in Kansas City,
Missouri, for 384,695 shares of VantageMed common stock and 17,022 options. Upon
closing the acquisition, the assets and liabilities of HIS were recorded at net
book value. Assets consisted primarily of cash, accounts receivable, inventory
and fixed assets. Liabilities consisted primarily of vendor payables, accrued
liabilities and deferred revenue. The accompanying consolidated financial
statements reflect the acquisition of HIS as a pooling of interests.
In December 1998, the Company acquired all of the outstanding capital stock
of Northern Health Solutions, Inc. (NHS), based in Pittsburgh, Pennsylvania, for
210,416 shares of VantageMed common stock and assumption of 17,022 stock
options. Upon closing the acquisition, the assets and liabilities of NHS were
recorded at net book value. Assets consisted primarily of cash, accounts
receivable and fixed assets. Liabilities consisted primarily of vendor payables
and accrued liabilities. The accompanying consolidated financial statements
reflect the acquisition of NHS as a pooling of interests.
The accompanying consolidated financial statements have been restated to
include the accounts of HIS and NHS as if the companies had combined at the
beginning of the first period presented.
There were no transactions between the Company and HIS or between the
Company and NHS prior to the combination and no adjustments were necessary to
conform either HIS' or NHS' accounting policies. The results of operations for
the separate companies prior to the date the combination was consummated and the
combined amounts presented in the consolidated statements of operations are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Revenue
The Company................................................ $1,402 $ 5,398
HIS........................................................ 2,577 2,515
NHS........................................................ 1,269 1,460
------ -------
$5,248 $ 9,373
====== =======
Net income (loss)
The Company................................................ $ (574) $(3,928)
HIS........................................................ 179 (81)
NHS........................................................ (39) (228)
------ -------
$ (434) $(4,237)
====== =======
</TABLE>
52
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Software rights............................................ $1,500 $ 1,500
Office and computer equipment.............................. 409 1,210
Furniture and fixtures..................................... 319 476
Vehicles................................................... 41 43
Leasehold improvements..................................... 399 433
------ -------
2,668 3,662
Less: accumulated amortization and depreciation............ (436) (1,098)
------ -------
$2,232 $ 2,564
====== =======
</TABLE>
Depreciation expense was approximately $85,000, $164,000 and $851,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
6. INTANGIBLES:
Intangibles consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Goodwill.................................................. $ 5,059 $18,577
Acquired software......................................... 1,439 4,794
Customer lists............................................ 1,909 9,258
Covenants not to compete.................................. 36 179
Assembled workforce....................................... 97 235
------- -------
8,540 33,043
Less: accumulated amortization............................ (1,570) (4,592)
------- -------
$ 6,970 $28,451
======= =======
</TABLE>
Amortization expense related to intangibles was approximately $291,000,
$1,281,000 and $3,022,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
53
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT:
The Company's long-term debt consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Promissory note, owner of acquired company, interest at
prime plus 1.5%, not to exceed 10.5% per annum (10.0% at
December 31, 1999), monthly principal payments of $18,750
plus accrued interest commencing August 1999, due in full
by August 2002, unsecured................................. $ 1,400 $ 1,294
Promissory notes, stockholders, various fixed interest rates
between 8% and 12%, monthly principal and interest
payments between $300 and $7,000, principal ranges from
due on demand to due June 2004, principal secured by
assets of the Company..................................... 253 762
Promissory notes, stockholders, various fixed interest rates
between 7% and 12%, monthly principal and interest
payments between $3,000 and $10,000, principal ranges from
due in December 1999 to due in May 2000 unless an IPO is
completed, at which time the principal is due on demand,
principal secured by assets of the Company................ -- 28
Promissory notes, stockholders, bearing interest at 8%,
monthly payments ranging from $700 to $10,000 beginning
January 2000 through December 2000 unless an IPO is
completed, at which time the principal is due on demand,
secured by certain assets of the Company.................. -- 174
Promissory note, stockholder, bearing interest at 15%,
monthly principal and interest payments of $30,000 from
April 1999 through May 2000, due in full June 2000 unless
an IPO is completed, at which time the principal is due on
demand, secured by certain assets of the Company.......... -- 280
Promissory note, stockholder, fixed interest rate of 10%,
monthly payments consist of accrued interest only,
principal is due on demand, secured by certain assets of
the Company............................................... 42 3
Promissory note, stockholder, various fixed interest rates
between 6% and 10%, monthly payments consist of accrued
interest only, principal is due in March 2000 to June 2000
unless an IPO is completed, at which time the principal is
due on demand, secured by certain assets of the
Company................................................... 138 238
Promissory note, stockholder, bearing interest at 10%,
monthly payments consist of accrued interest only,
principal due in March 2000 unless an IPO is completed, at
which time the principal is due on demand, secured by
certain assets of the Company............................. 350 250
Promissory notes, financial institution, bearing interest at
9.5%, monthly principal and interest payments between $300
and $500 through February 2003, secured by Company
vehicles.................................................. -- 27
Convertible promissory notes, stockholders, bearing interest
at 10% per annum, convertible into 40,000 shares of the
Company's common stock at $7.50 per share, subject to a
conversion provision upon completion of a public offering,
principal and interest due December 1999, unsecured....... 300 300
</TABLE>
54
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Promissory notes, stockholder, non-interest bearing, $20,000
paid in January 1998 and the balance paid in January 1999,
secured by stock in the Company........................... 20 --
Promissory note, stockholder, non-interest bearing, monthly
payments of $2,000, due on demand, personally guaranteed
by Chairman of the Company................................ 52 28
Line of credit, stockholder, maximum borrowing of $500,000,
bearing interest at 8%. In January 1999 the note was
converted into shares of Series A-1 preferred stock of the
Company................................................... 500 --
Promissory note, stockholder, bearing interest at 12%,
principal payments of $3,900 beginning January 2001
through 2003, principal secured by assets of the
Company................................................... -- 142
Convertible promissory note, stockholder, bearing interest
at 6%, principal balance due July 2000 unless an IPO is
completed, at which time the principal is due on demand or
can be converted into shares of the Company's common stock
at 50% of the IPO price, principal secured by assets of
the Company............................................... -- 3,000
Convertible promissory note, stockholder, bearing interest
at 10%, principal balance due August 2002 unless an IPO is
completed, at which time the principal is due on demand or
can be converted into 51,351 shares of the Company's
common stock at a price not to exceed $7.00 per share,
principal secured by assets of the Company................ -- 190
Promissory note, stockholder, bearing interest at 10%,
principal payments of $8,300 beginning June 2001 through
2004, principal secured by assets of the Company.......... -- 300
Promissory note, stockholder, bearing interest at 10%
principal payments of $8,300 beginning January 2000
through May 2000, principal secured by assets of the
Company................................................... -- 50
Promissory note, stockholder, bearing interest at 10%,
principal payments of $27,800 beginning October 1999
through October 2001, principal secured by assets of the
Company................................................... -- 500
Line of credit, financial institution, maximum borrowing of
$50,000, bearing interest at prime plus 4% (12.5% at
December 31, 1999), principal secured by assets of the
Company................................................... -- 40
Promissory note, financial institution, bearing interest at
3.9%, principal payments of $320 to $370 through December
2000, principal secured by assets of the Company.......... -- 18
Promissory note, financial institution, bearing interest at
9.75%, principal payments of $3,900 to $4,500 through
February 2000, principal secured by assets of the
Company................................................... -- 113
Promissory note, vendor for purchase of assets, bearing
interest at 8.00%, principal payments of $1,600 to $1,700
through November 2000, principal secured by assets........ -- 18
Line of credit, financial institution, maximum borrowing of
$50,000, bearing interest at lender's base rate plus 3.1%
(12.5% at December 31, 1999), personally guaranteed by a
stockholder............................................... 50 34
Capital lease obligations................................... 126 424
------- -------
3,231 8,213
Less: current portion....................................... (1,510) (5,574)
------- -------
$ 1,721 $ 2,639
======= =======
</TABLE>
55
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT: (CONTINUED)
Future minimum payments under all debt obligations excluding capital lease
obligations subsequent to December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $5,365
2001........................................................ 803
2002........................................................ 589
2003........................................................ 457
2004........................................................ 382
Thereafter.................................................. 193
------
$7,789
======
</TABLE>
8. CAPITAL AND OPERATING LEASE OBLIGATIONS:
The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
2000............................................ $ 256 $1,065
2001............................................ 132 911
2002............................................ 57 630
2003............................................ 22 434
2004............................................ 8 348
Thereafter...................................... 29 179
----- ------
Total minimum payments........................ $ 504 $3,567
------
Less: interest on capital lease obligations at
rates of 8.13% to 27.00%...................... 80
-----
Net minimum principal payments.................. 424
Less: current maturities........................ (209)
-----
Long-term portion............................... $ 215
=====
</TABLE>
Rent expense was approximately $204,000, $509,000 and $866,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
56
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY:
COMMON STOCK
As of December 31, 1999, the Company is authorized to issue 20,000,000
shares of common stock with a par value of $0.001 per share.
During 1999, the Board of Directors approved a one-for-three reverse stock
split. The split was effective shortly before the completion of the IPO on
February 14, 2000, and affected all outstanding shares of common stock. All
common share and per share data in these financial statements have been
retroactively adjusted to give effect to the reverse stock split. In addition,
the conversion and exercise provisions of the outstanding shares of preferred
stock, stock options and warrants have been adjusted accordingly.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock with
a par value of $0.001 per share, of which 1,850,000 shares are designated for
Series A-1 preferred stock (Series A-1), 1,795,300 of which are issued and
outstanding as of December 31, 1999 and 500,000 are designated for Series B
preferred stock (Series B), 120,000 of which are issued and outstanding as of
December 31, 1999. As of January 1, 1999, 413,018 shares of previously issued
Series A preferred stock was re-designated as Series A-1 in conjunction with the
issuance of an additional 1,382,282 shares of Series A-1 to the same investor.
Significant terms of the preferred stock are as follows:
- - Each share of Series A-1 is convertible at the option of the holder into
shares of common stock as determined by a conversion ratio applicable to the
Series A-1 preferred stock. There is no stated conversion ratio, only a
formula for deriving the ratio. Shares of Series A-1 and B will automatically
be converted into common stock upon the closing of a public offering in excess
of $12,500,000 and $10,000,000, respectively, and at a price equal to or
greater than $27.00 per share for Series A-1. During 1999, the Company has
received a commitment from the Series A-1 preferred shareholder to convert
their preferred stock upon the closing of a public offering.
- - Each share has the same voting rights as the number of shares of common stock
to which it could be converted.
- - In the event of liquidation, dissolution or winding up of the Company, the
preferred shareholders of Series A-1 and B shall receive an amount equal to
$2.63 and $10.00 per share, respectively, plus an amount equal to all declared
but unpaid dividends on each share. During 1999, the amount that Series B
shareholders would receive in the event of a liquidation was increased to
$12.00 per share. In the event available assets are insufficient to pay the
full liquidation preference amount, any remaining assets will be distributed
ratably among the holders of Series A-1 and B preferred stock in proportion to
the amount of stock owned by each holder.
- - Holders of preferred stock are entitled to annual non-cumulative dividends of
$2.63 per share for Series A-1 and $0.08 for Series B, as declared by the
Board of Directors, before any dividend declared on common stock. No dividends
have been declared since inception through December 31, 1999.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $0, $0 and $111,000 for the
years ended December 31, 1997, 1998 and 1999, respectively. The amounts recorded
represent the difference between the
57
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY: (CONTINUED)
grant price and the deemed fair value of the Company's common stock for the
shares subject to options granted. The amortization of the deferred compensation
will be charged to operations over the vesting period of the options. Total
amortization expense recognized was $0, $0 and $33,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
10. STOCK OPTION PLANS AND WARRANTS:
The Company has two stock option plans, the Healthcare Information Systems
Plan (HIS Plan) and the 1998 Stock Option/Stock Issuance Plan (1998 Plan). No
further options may be granted under the HIS Plan, and all 17,022 options
previously granted and outstanding under the HIS Plan have been converted into
options of the Company's common stock. Each HIS option was converted into
0.13055 of the Company's options at an exercise price of $1.89 per share. Under
the 1998 Plan, the Board of Directors is authorized to grant options for up to
1,000,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at date of grant for incentive stock
options and not less than 85% of fair market value for non-statutory stock
options. The 1998 Plan is divided into two separate equity programs: the Option
Grant Program under which eligible persons may be granted options to purchase
shares of common stock and the Stock Issuance Program under which eligible
persons may be issued shares of common stock directly, either through the
immediate purchase of shares or as a bonus for services rendered the Company.
The stock options generally vest 25% in the first year and ratably over the
following three-year period and expire ten years from the date of grant. The
1998 Plan permits the exercise of unvested options. Unvested common stock
purchased under the 1998 Plan is subject to repurchase by the Company at the
option exercise price.
As permitted by SFAS 123, the Company has elected to account for its
stock-based compensation plans under the intrinsic value method as outlined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Had compensation cost for the Company's
option plan been determined based on the fair value at the grant dates for the
awards, calculated in accordance with the method prescribed by SFAS 123, the
Company's pro forma net income (loss) would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) available to common stockholders
As reported..................................... $ (434) $(4,237) $(10,215)
Pro forma....................................... (438) (4,362) (11,632)
Basic and diluted earnings (loss) per share
As reported..................................... $(0.27) $ (1.96) $ (3.13)
Pro forma....................................... (0.27) (2.02) (3.57)
</TABLE>
58
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS AND WARRANTS: (CONTINUED)
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Dividend yield............................................. 0% 0%
Risk-free interest rate.................................... 4.5% 6.3%
Stock price volatility..................................... 50% 70%
Expected life.............................................. 6 years 6 years
</TABLE>
The resulting pro forma compensation cost may not be representative of that
to be expected in future years.
A summary of stock option activity and related information is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
NUMBER OF PRICE PER NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of
period.................. 17 $1.89 17 $1.89 186 $ 7.14
Granted................. -- -- 169 7.65 249 9.74
Assumed................. -- -- -- -- 124 7.10
Exercised............... -- -- -- -- (1) 6.18
Forfeited or canceled... -- -- -- -- (21) 16.07
-- ----- --- ----- --- ------
Balance, end of period.... 17 $1.89 186 $7.14 537 $ 8.00
== ===== === ===== === ======
Vested, end of period..... 9 16 198
== === ===
</TABLE>
During 1999, the Company assumed 124,204 stock options from Brand, Mariner
and CDS at exercise prices between $0.06 and $62.81 per share. All assumed stock
options were rolled into the Company's 1998 Plan with no change in option terms
from the original grant.
The following table summarizes information about the Company's outstanding
stock options at December 31, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------- -------------------------
WTD. AVG. # OF
RANGE OF EXERCISE # OF SHARES CONTRACT LIFE WTD. AVG. SHARES WTD. AVG.
PRICE OUTSTANDING REMAINING EXERCISE PRICE VESTED EXERCISE PRICE
- ----------------- ----------- ------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$.06 - $1.74....... 45 5.87 $ 0.11 44 $ 0.09
$1.82 - $4.50...... 50 6.60 $ 2.42 48 $ 2.37
$6.50 - $8.34...... 231 8.56 $ 7.46 61 $ 7.13
$9.60 - $11.10..... 188 9.56 $10.41 42 $ 9.60
$12.56 - $62.81.... 23 8.97 $21.16 3 $29.38
--- ---- ------ --- ------
$.06 - $62.81...... 537 8.52 $ 8.00 198 $ 5.21
=== ==== ====== === ======
</TABLE>
59
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS AND WARRANTS: (CONTINUED)
During 1997, the Company issued options to purchase up to 1,437 shares of
the Company's common stock at a price of $1.74 per share, 2,283 shares at a
price of $4.50 per share and 3,786 shares at a price of $7.50 per share to a
consultant in connection with raising capital for the Company. The exercise
price approximates the stock price on the issuance dates and the options were
fully vested at issuance. The fair value of the options of approximately $25,000
was calculated using the Black-Scholes option pricing model and is netted
against proceeds from common stock issued.
During 1999, the Company issued options to purchase up to 2,166 shares of
the Company's common stock at a price of $7.50 per share to a consultant in
connection with raising capital for the Company. The fair value of the options
of approximately $12,000 was calculated using the Black-Scholes option pricing
model and is netted against the proceeds from common stock issued.
WARRANTS
During 1999, in connection with the issuance of a convertible promissory
note, the Company issued warrants to purchase up to 66,666 shares of the
Company's common stock at a price of $7.50 per share, the fair value on the date
of issuance, and the right to purchase another 50,000 shares of the Company's
common stock at the price of $10.50 per share. The warrants became immediately
exercisable upon the conversion of the note to common stock and all unexercised
warrants were to expire on August 31, 1999. The fair value of the warrants of
approximately $50,000 was calculated using the Black-Scholes option pricing
model and was amortized to interest expense over the two month term of the note.
Subsequently the note was converted to 13,333 shares of common stock at $7.50
per share, and 6,666 warrants were exercised at $7.50 per share. The remaining
warrants expired on August 31, 1999.
In August 1999, the Company issued 30,000 warrants at an exercise price of
$11.10 per share in connection with the acquisition of Mariner. The fair value
of these warrants was recorded as additional purchase price in the Mariner
acquisition. In October 1999, in connection with the issuance of a convertible
promissory note, the Company issued warrants for 13,333 shares exercisable at a
price equal to 60% of the initial price of shares of the Company's common stock
sold in the IPO. This warrant may be exercised at any time following the
completion of the offering and terminates on October 6, 2002. The fair value of
the warrants of approximately $80,000 was calculated using the Black-Sholes
option pricing model and is being amortized to interest expense over the term of
the note.
11. RELATED PARTY TRANSACTIONS:
The Company had receivables from related parties included in prepaid
expenses and other of $26,000 and $6,000 at December 31, 1998 and 1999,
respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest amounted to approximately $47,000, $220,000 and
$922,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The
Company made cash payments for income taxes of approximately $800, $800 and $0
for the years ended December 31, 1997, 1998 and 1999, respectively.
During the year ended December 31, 1997, the Company acquired ATEK Computer
Distributors, Inc., Trend Sierra, Prophase System, Inc. and Patriot
Healthcare, Inc. Aggregate consideration for these acquisitions completed in
1997 were 193,487 shares of common stock, $265,000 in cash, and
60
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION: (CONTINUED)
$1,585,000 in notes payable for an approximate aggregate value of $2,651,000.
Additionally, the Company financed the purchase of property and equipment under
capital leases of approximately $61,000, purchased software for a $120,000 note
payable, and converted a $125,000 note into preferred stock.
During the year ended December 31, 1998, the Company acquired
Medsoft, Inc., American Voice Computer, Inc., Pacific Software, Inc., DOT
Medical, Inc., Medicom Corporation and CM Healthcare Technologies, Inc.
Aggregate consideration for these acquisitions completed in 1998 was 474,944
common shares, 100,000 shares of Series B preferred stock, $25,000 in cash, and
$350,000 in notes payable for an approximate aggregate value for $4,524,000. The
Company issued stock warrants with an aggregate fair value of approximately
$50,000 for services rendered to the Company. Additionally, the Company financed
the purchase of property and equipment under capital leases of approximately
$114,000 and converted a note payable for $250,000 into common stock.
During the year ended December 31, 1999, the Company acquired Civitec
Healthcare Computers, Inc., Acrotrex Corporation, Medical Software
Solutions, Inc. and Metropolitan Information Services, Inc., Brand
Software, Inc., Care Information Systems, Inc., Mariner Systems, Inc., Health
Information Network, Logos Systems, Inc., CSS, Inc., Pepware Software, Inc.,
Computerized Doctors Systems, Inc., Medical Digital Technologies, Inc., and Data
Decisions, Inc. Aggregate consideration for these acquisitions completed in 1999
was 1,845,508 common shares for a total of $21,709,000 in common stock, 20,000
shares of preferred stock for a total of $240,000 in preferred stock, $1,560,000
in cash, $2,378,000 in notes payable, and $1,237,000 in stock options for an
approximate aggregate value of $27,124,000. Additionally, the Company converted
a $500,000 line of credit to 197,628 shares of Series A-1 preferred stock and
financed the purchase of property and equipment under capital leases of
approximately $82,000.
13. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) Savings Plan (the Plan). Under the terms of
the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. Employee contributions are 100% vested at all times.
The Company may make discretionary contributions to the Plan, which vest
annually over a six-year period. Discretionary contributions made to the Plan
were approximately $0, $4,000 and $2,500 for the years ended December 31, 1997,
1998 and 1999, respectively.
61
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES:
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State............................................ -- -- --
----- ------- -------
Total current.................................. -- -- --
Deferred:
Federal.......................................... (307) (1,165) (2,895)
State............................................ (61) (257) (642)
----- ------- -------
Total deferred................................. (368) (1,422) (3,537)
----- ------- -------
Change in valuation allowance...................... 173 1,422 3,537
----- ------- -------
Net income tax provision (benefit)............. $(195) $ -- $ --
===== ======= =======
</TABLE>
62
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES: (CONTINUED)
Deferred taxes result from temporary differences between the bases of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. At December 31, 1999, the Company had potential tax
benefits from net operating loss carryforwards of approximately $5,352,000 and
$918,000 available to offset future federal and state taxable income,
respectively. Such federal and state carryforwards expire through 2020. The
extent to which the loss carryforwards can be used to offset future taxable
income may be limited. The sources of the temporary differences and their effect
on deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 967 $ 6,270
Accruals and reserves................................... 416 468
Depreciation............................................ 31 --
Difference between book and tax basis of intangibles.... 100 159
------- -------
1,514 6,897
Deferred tax liabilities:
Difference between book and tax amortization related to
acquired identifiable intangibles other than
goodwill.............................................. (166) (3,993)
------- -------
Net deferred tax asset before allowance................... 1,348 2,904
------- -------
Valuation allowance....................................... (1,348) (2,904)
------- -------
Net deferred tax asset................................ $ -- $ --
======= =======
</TABLE>
The change in the valuation allowance above is attributed primarily to the
results of operations and the effects of purchase accounting on the valuation
allowance.
The following table accounts for the differences between the actual tax
benefit and amounts obtained by applying the Statutory U.S. Federal rate to the
loss before income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected tax benefit............................... $(214) $(1,441) $(3,473)
Decrease in income taxes resulting from:
State income benefit............................. (38) (254) (613)
Increase in deferred tax asset valuation
allowance, resulting primarily from current
year operations................................ 40 1,422 3,537
Nondeductible expenses........................... -- 77 --
Other, net....................................... 17 196 549
----- ------- -------
Net income tax benefit............................. $(195) $ -- $ --
===== ======= =======
</TABLE>
63
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. CONTINGENCIES
Beginning on March 13, 2000 a series of securities class action lawsuits
have been filed against the Company alleging that the Company's S-1 Registration
Statement and prospectus contained false and misleading statements. The lawsuits
allege that the Company failed to describe that the Company would be delayed in
introducing a new version of one of its software products, which delay would
adversely effect the Company's future results. The Company believes these
actions are without merit and it intends to vigorously defend itself against
them. However, depending on the amount and timing, ultimate resolution of some
or all of these matters could materially affect future operations.
16. SEGMENT REPORTING:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which was adopted by the Company for
the fiscal year ended December 31, 1998. This statement establishes standards
for reporting selected segment services, geographic areas and major customers.
The Company reported on two operating segments in 1998 and 1999--the software
and systems sales and customer support and electronic services groups. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on margin level before selling general and administrative and other
operating costs. The Company does not manage costs below gross margin by
segment. The Company does not track long-lived assets by segment and therefore
related disclosures are not relevant and are not presented. The software and
systems sales group sells and licenses practice management software products to
physicians, dentists and other professionals with comprehensive office
management software designed to automate the administrative, financial, practice
management and clinical requirements of a practice. The customer support and
electronic services group provides software, network and hardware support,
training, electronic claims processing, electronic statement printing and
mailing and electronic remittance advices. The Company's reportable segments
offer different products and services, which are sold and serviced by the same
selling and support personnel.
For the year ended December 31, 1998, the following table reports selected
segment information (in thousands):
<TABLE>
<CAPTION>
CUSTOMER
SUPPORT AND
SOFTWARE AND ELECTRONIC
SYSTEMS SALES SERVICES TOTAL
------------- ----------- --------
<S> <C> <C> <C>
Revenues.................................... $3,943 $5,430 $9,373
Cost of revenues............................ 2,146 3,606 5,752
------ ------ ------
Gross margin.............................. $1,797 $1,824 $3,621
====== ====== ======
</TABLE>
64
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT REPORTING: (CONTINUED)
For the year ended December 31, 1999, the following table reports selected
segment information (in thousands):
<TABLE>
<CAPTION>
CUSTOMER
SUPPORT AND
SOFTWARE AND ELECTRONIC
SYSTEMS SALES SERVICES TOTAL
------------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $9,429 $9,983 $19,412
Cost of revenues........................... 4,078 6,226 10,304
------ ------ -------
Gross margin............................. $5,351 $3,757 $ 9,108
====== ====== =======
</TABLE>
17. SUBSEQUENT EVENTS:
The Company's Registration Statement on Form S-1 was declared effective by
the SEC on February 14, 2000. The Company sold 3,000,000 shares of common stock
to the public and realized net proceeds of approximately $33,500,000. Subsequent
to the IPO, the Company paid off approximately $3.5 million in notes payable and
accrued interest. The remainder of the net proceeds will be used for future
acquisitions, product development, working capital and other general corporate
purposes.
On February 15, 2000, a convertible promissory note and accrued interest
held by a member of the Board of Directors of the Company were converted into
510,685 shares of common stock. The beneficial conversion feature of the note is
$3 million and was recognized as interest expense on the date of conversion.
During 1999, the Board of Directors approved a one-for-three reverse stock
split. The split occurred upon the effectiveness of the Company's Registration
Statement, on February 14, 2000, and affected all outstanding shares of common
stock. All common share and per share data in these financial statements have
been retroactively adjusted to give effect to the reverse stock split. In
addition, the conversion and exercise provisions of the outstanding shares of
preferred stock, stock options and warrants have been adjusted accordingly.
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our executive officers and directors and their ages as of March 23, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
James L. Seiler(1)........................ 53 Chief Executive Officer and Chairman of
the Board
Joel M. Harris(1)......................... 45 President and Director
Richard W. Pendleton(1)................... 53 Senior Vice President--Mergers and
Acquisitions and Director
Thomas A. McCreery........................ 46 Chief Financial Officer
Larry W. LeGate........................... 57 Senior Vice President--Sales
Gregory F. Vap............................ 47 Senior Vice President--Operations
Peter Friedli(2)(3)....................... 46 Director
John R. Stevens(2)(3)..................... 78 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Board of Directors is divided into three classes. Class I will consist of
Messrs. Pendleton and Friedli, Class II will consist of Messrs. Seiler and
Stevens and Class III will consist of Mr. Harris. See "Description of Capital
Stock--Anti-takeover Provisions of the Certificate of Incorporation and Bylaws."
JAMES L. SEILER has served as our Chief Executive Officer since our
acquisition of Mariner Systems, Inc. in August 1999 and became the Chairman of
our Board of Directors in January 2000. Prior to joining us, Mr. Seiler served
as President and Chief Executive Officer of Mariner Systems Inc., a managed care
software company, from September 1993 to August 1999, and also as Chairman of
the Board from November 1997 to August 1999. Before joining Mariner, Mr. Seiler
served first as Chief Financial Officer and then as President and Chief
Executive Officer of Destron/IDI, Inc., a public radio frequency technology
company. Mr. Seiler is a Certified Public Accountant and received a Bachelor of
Science degree in Accounting from the University of Akron.
JOEL M. HARRIS was a co-founder of VantageMed since May 1996 and has served
as our President since May 1997. Mr Harris also served concurrently as our Chief
Executive Officer from May 1997 through August 1999. From October 1994 through
April 1996, Mr. Harris served as Chief Operating Officer of Insurance Benefit
Spot Check, Inc., a provider of electronic data interchange services for
healthcare providers. Previously, Mr. Harris co-founded the Stratum Group, a
software development and consulting firm. Mr. Harris received a Bachelor of
Science degree in Business Administration from California State University,
Northridge.
RICHARD W. PENDLETON was a co-founder of VantageMed and served as Chairman
of the Board from our inception in April 1995 until January 2000. Mr. Pendleton
has also served concurrently as Senior Vice President--Mergers and Acquisitions
since April 1997. From October 1993 to February 1995,
66
<PAGE>
Mr. Pendleton served as Senior Vice President and Director of Software
Development for QuadraMed Corporation, a healthcare information technology
company. Prior to his work with QuadraMed, Mr. Pendleton served as President of
Coast Micro, Inc., a medical software company, and founded and served as Chief
Executive Officer of Cost Containment Systems, Inc., a healthcare software
company. Mr. Pendleton has also held senior administrative positions at several
medical centers. Mr. Pendleton received a Master of Business Administration in
Hospital Administration from the University of Chicago and a Bachelor of Science
degree in Business Administration from the University of Illinois--Chicago.
THOMAS A. MCCREERY joined VantageMed as our Chief Financial Officer in
August 1998. From September 1997 through July 1998, Mr. McCreery was an
independent consultant. From April 1997 to August 1997, Mr. McCreery served as
the Chief Financial Officer and negotiated the sale of Falcon Systems, a
computer storage systems company. From May 1989 through March 1997,
Mr. McCreery held a number of executive positions with several affiliates of
Wickland Oil Company, an international petroleum company. Mr. McCreery is a
certified public accountant and received a Master of Business Administration
from the University of Chicago and a Bachelor of Arts degree in Economics from
the University of California at Davis.
LARRY W. LEGATE was a co-founder of VantageMed and has served as our Senior
Vice President--Sales since inception in April 1995. Mr. LeGate also served as a
member of our Board of Directors from April 1997 through August 1999. From
January 1994 through June 1995, Mr. LeGate was the Senior Vice President of
Sales and Marketing for QuadraMed Corporation. Prior to joining QuadraMed,
Mr. LeGate served as Vice President of Sales and Customer Service for DATIS
Corporation, a database software products company. Mr. LeGate received a
Bachelor of Science degree in Architectural Engineering from Oklahoma State
University.
GREGORY F. VAP has served as our Senior Vice President--Operations since
December 1998 and served as our Senior Vice President from April 1998 through
December 1998. Prior to joining us, Mr. Vap founded Heathcare Information
Systems, Inc., a provider of medical practice management products, and served as
President and Chief Executive Officer from 1984 until our acquisition of
Healthcare Information Systems in April 1998. Mr. Vap received a Bachelor of
Science degree in Electronic Engineering from the Missouri Institute of
Technology.
PETER FRIEDLI has served as director of VantageMed since September 1999.
Mr. Friedli has been the principal of Friedli Corporate Finance, Inc., a venture
capital firm, since its inception in 1986. Prior to joining Friedli Corporate
Finance, Mr. Friedli worked as an international management consultant for
service and industrial companies in Europe and the U.S. Mr. Friedli has over a
decade of experience as an independent investment manager for venture capital
and has managed various venture investment companies in the U.S.
JOHN R. STEVENS has served as a director of VantageMed since May 1997. Since
1987, Mr. Stevens has served as the Chief Executive Officer and Chairman of the
Board of StellarNet, Inc., a software and communications company, which he
founded. Mr. Stevens received a Bachelor of Science degree in Military Science
from the University of Maryland.
Our Board has been divided into three classes. After an initial transition
period, directors of each class will be elected to serve for three-year terms
and until their successors are elected and qualified. Class I consists of
Messrs. Pendleton and Friedli, Class II consists of Messrs. Seiler and Stevens
and Class III consists of Mr. Harris. Class I directors will stand for election
at our fiscal year 2000 Annual Shareholder Meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review of the Company's records, the Company is aware that the
following officers, directors or 10% holders of shares of common stock of the
Company, failed to timely file the initial report
67
<PAGE>
disclosing beneficial ownership of securities of the Company as required under
Section 16(a) of the Securities Exchange Act of 1934, as amended, immediately
after the effectiveness of the initial public offering. Each of Peter Friedli,
Joel M. Harris, Larry W. LeGate, Thomas A. McCreery, Richard W. Pendleton,
James L. Seiler, John R. Stevens and Gregory F. Vap failed to timely file their
respective Form 3 reporting their initial statement of beneficial ownership of
securities upon the Company registering its Common Stock with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, in February 2000.
The Form 3's were filed with the Securities and Exchange Commission on
February 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by us
for the fiscal year ended December 31, 1998 and 1999 for our Chief Executive
Officer and our other four most highly compensated executive officers who were
serving as executive officers at the end of the last completed fiscal year and
whose total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(#) COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
James L. Seiler ............................. 1998 $ -- $ -- -- --
Chief Executive Officer and Chairman 1999 50,000(1) 2,000 100,000 --
of the Board
Joel M. Harris .............................. 1998 120,000(2) -- -- --
President and Director 1999 120,000(3) 3,000 -- --
Richard W. Pendleton ........................ 1998 120,000 -- -- --
Senior Vice President--Mergers and 1999 120,000(4) 2,000 -- --
Acquisitions and Director
Thomas A. McCreery .......................... 1998 52,500 -- 66,666 --
Chief Financial Officer 1999 120,000 -- -- --
Gregory F. Vap .............................. 1998 83,333 -- -- $7,689(5)
Senior Vice President--Operations 1999 125,000(6) 2,083 -- --
</TABLE>
- --------------------------
(1) Includes $10,000 of compensation deferred until 2000 at the election of
Mr. Seiler. On an annual basis, Mr. Seiler's salary would have been
$120,000.
(2) Includes $20,000 of compensation deferred until 1999 at the election of
Mr. Harris.
(3) Includes $15,000 of compensation deferred until 2000 at the election of
Mr. Harris.
(4) Includes $10,000 of compensation deferred until 2000 at the election of
Mr. Pendleton.
(5) The $7,689 in "Other Compensation" was a one-time payment for benefits
surrendered by Mr. Vap upon his joining us.
(6) Includes $10,417 of compensation deferred until 2000 at the election of
Mr. Vap.
All bonuses shown on the above table represent obligated amounts equal to
20% of the salary deferments. These deferred salary and bonus amounts were
repaid from the proceeds of the initial public offering in February, 2000.
68
<PAGE>
Mr. Harris, our President, also served as our Chief Executive Officer until
August 5, 1999, at which time Mr. Seiler became our Chief Executive Officer. On
an annual basis, Mr. Seiler's salary for 1999 would have been $120,000.
Mr. McCreery became our Chief Financial Officer on July 28, 1998. On an annual
basis, his salary for 1998 would have been $120,000. Mr. Vap became our Senior
Vice President--Operations on May 1, 1998. On an annual basis, his salary for
1998 would have been $125,000.
OPTION GRANTS IN FISCAL YEARS 1998 AND 1999
The following table sets forth option grants for the years ended
December 31, 1998 and 1999 to each of the Named Executive Officers who received
options:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERSENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION
NUMBER OF SHARES GRANTED TO FOR OPTION TERM
FISCAL UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME YEAR END OPTIONS GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- -------- ---------------- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Seiler........... 1999 100,000 37% $11.10 8/06/09 $698,073 $1,769,054
Joel M. Harris............ -- -- -- -- -- -- --
Richard W. Pendleton...... -- -- -- -- -- -- --
Thomas A. McCreery........ 1998 38,333 21% $ 7.50 12/02/08 $180,807 $ 458,198
1998 13,333(1) 7% $ 7.50 12/02/08 $ 62,888 $ 159,370
1998 15,000(2) 8% $ 7.50 12/02/08 $ 70,751 $ 179,296
Gregory F. Vap............ -- -- -- -- -- -- --
</TABLE>
- --------------------------
(1) 6,250 shares of Mr. McCreery's 13,333 share option vested upon the close of
the IPO.
(2) 833 shares of Mr. McCreery's 15,000 share option vested upon the close of
the IPO.
The percentages listed in the "Percent of Total Options Granted to Employees
in Fiscal Year" column in the above table are based on an aggregate of 178,037
options granted during fiscal year 1998 and 269,354 options granted during
fiscal year 1999 to employees.
The exercise price per share of each option shown in the above table was
equal to the fair market value of the common stock on the date of grant as
determined by the Board of Directors after consideration of a number of factors,
including, but not limited to, our financial performance, market conditions, and
the price and preferred rights and privileges of shares of equity securities
sold to or purchased by outside investors.
The potential realizable values shown in the above table were calculated
based on the term of each option at its time of grant, which is ten years. These
values are calculated assuming that the fair market value of our common stock on
the date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price.
69
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR END 1999 OPTION
VALUES
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1999 with respect to the Named
Executive Officers. Except as set forth below, no options or stock appreciation
rights were exercised by any such individual during such year, and no stock
appreciation rights were outstanding on December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Seiler...... -- 100,000(1) -- $ 90,000(2) --
36,321 -- 348,570(3) --
Joel M. Harris....... -- -- -- --
Richard W. -- -- -- --
Pendleton..........
Thomas A. McCreery... 26,146 40,521 117,657(4) 182,345(4)
</TABLE>
- ------------------------
(1) These options are immediately exercisable and are subject to a repurchase
right held by VantageMed which lapses in equal monthly installments over a
period of 36 months.
(2) Based on the offering price of $12.00 per share, less the option exercise
price of $11.10 payable for these shares.
(3) Based on the offering price of $12.00 per share, less option exercise prices
as follows: 10,508 of these options have an exercise price of $6.28; 4,549
of these options have an exercise price of $4.40 per share; and 21,264 of
these options have an exercise price of $0.06 per share.
(4) Based on the offering price of $12.00 per share, less the option exercise
price of $7.50 payable for these shares.
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION/STOCK ISSUANCE PLAN. 1998 Stock Option/Stock Issuance
Plan (the "1998 Plan") was adopted by our Board of Directors and approved by our
stockholders in May 1998, and most recently amended and restated by our Board of
Directors in November 1999, which amendment was approved by our stockholders on
or about December 30, 1999. The 1998 Plan authorizes the grant of incentive and
non-statutory stock options and stock bonuses.
We had a total of 1,000,000 shares of our common stock reserved for issuance
under the 1998 Plan. This share reserve will automatically increase on
January 1(st) of each year, beginning with calendar year 2001, by an amount
equal to 5% of the total number of shares of our common stock outstanding on
December 31(st) of the prior year. As of December 31, 1999, there were options
to purchase a total of 536,538 shares of our common stock outstanding under the
1998 Plan.
Our 1998 Plan includes two separate programs:
- The discretionary option grant program, under which eligible employees may
be granted options to purchase shares of our common stock at an exercise
price not less than the fair market value of those shares on the grant
date.
- The stock issuance program, under which eligible employees may be issued
shares of common stock directly, upon the attainment of performance
milestones or upon the completion of a period of service or as a bonus for
past services.
70
<PAGE>
The individuals eligible to participate in our 1998 Plan include our
officers and other employees, our directors and any consultants we hire. The
discretionary stock option grant and stock issuance programs are administered by
our Compensation Committee. This committee determines which eligible individuals
are to receive option grants or stock issuance under those programs, the time or
times when the grants or issuances are to be made, the number of shares subject
to each grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding.
Our 1998 Plan provides that the exercise price for any options granted under
the 1998 Plan may be paid in cash or in shares of our common stock valued at
fair market value on the exercise date. Options may also be exercised through a
same-day sale program without any cash outlay by the option holder.
Our 1998 Plan includes the following change in control provisions, which may
result in the accelerated vesting of outstanding option grants and stock
issuance:
- In the event that we consummate a merger or asset sale of our company,
each outstanding option under the discretionary option grant program which
is not to be assumed by the successor corporation or substituted with a
substantially equivalent option, will immediately become exercisable
subject to repurchase rights with respect to those shares that we may
assign to the successor corporation.
- The Compensation Committee has complete discretion to grant one or more
options which will become fully vested and exercisable in the event those
options are assumed in an acquisition but the option's service with us or
the acquiring entity is subsequently terminated.
- The Compensation Committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with the consummation of a successful
tender offer for more than 50% of our outstanding voting stock. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
The Board of Directors may amend or modify the 1998 Plan at any time,
subject to any required stockholder approval.
401(K) PLAN. Substantially all full-time employees are covered by a defined
contribution plan. Employees are permitted to defer up to 15% of their salaries.
No matching has occurred to date.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
JAMES L. SEILER. We entered into an employment agreement with James L.
Seiler pursuant to which he is employed as our Chief Executive Officer. The
initial term of this employment agreement expires on August 1, 2002. This
employment agreement will continue on a month-to-month basis thereafter. Under
the terms of the employment agreement, Mr. Seiler is paid a monthly base salary
of $10,000, subject to increases as authorized by the Board of Directors and
subject to any company-wide compensation cap then in place. Mr. Seiler's salary
will be reviewed by the Board of Directors on February 1, 2000 and on
August 1(st) of each year thereafter to determine if an increase in salary is
appropriate. At no time shall Mr. Seiler be paid a base salary that is less than
the greater of $120,000 per annum; any compensation cap then in place; or the
base salary of our highest paid officer and/or employee. Our employment
agreement with Mr. Seiler can be terminated at any time by mutual agreement,
upon 100 days written notice on the part of Mr. Seiler, or immediately for
cause. The term "for cause" is defined to mean: an uncured material violation of
the terms of the employment agreement or proprietary information and inventions
agreement; a conviction or non-appealable judgment involving a claim of
dishonesty, willful misfeasance or nonfeasance of duty by Mr. Seiler intending
to injure or having the effect of injuring in some material fashion our
reputation, business or relationships; Mr. Seiler's conviction upon a felony
charge; or Mr. Seiler's willful or
71
<PAGE>
prolonged absence from work or his failure, neglect or refusal to perform his
duties. If, prior to the expiration of the agreement's initial three year term,
we terminate Mr. Seiler's employment without good cause or due to his death, or
if he terminates his employment for good cause, he will receive monthly payments
equal to his monthly base salary through the expiration of that initial three
year term and all options then held by him shall become fully-vested and
immediately exercisable. Mr. Seiler has agreed not to compete with us for a
period of one year following the cessation of his employment. In connection with
the signing of this employment agreement, Mr. Seiler was granted an option to
purchase 100,000 shares of our common stock.
THOMAS A. MCCREERY. We entered into an agreement with Thomas A. McCreery,
our Chief Financial Officer, pursuant to which we agreed to provide six months
notice of termination in the event of a change of control. This agreement is
described more fully under the heading "Certain Transactions and Relationships."
DIRECTOR COMPENSATION
The members of our Board of Directors currently do not receive compensation
for their services as Directors. Members of the Board of Directors are eligible
to receive option grants and stock issuance under the 1998 Plan although no
determination has been made as to the number of options, if any, each director
may be entitled to receive.
COMMITTEES OF THE BOARD OF DIRECTORS
We have the following special committees of our Board of Directors:
EXECUTIVE COMMITTEE. The Executive Committee is empowered to exercise all
authority of our Board of Directors except as limited by the Delaware General
Corporation Law. Under Delaware law, an executive committee may not approve,
adopt or recommend to stockholders actions required by Delaware law to be
approved by stockholders, or adopt, amend or repeal any bylaw of the
corporation. The Executive Committee consists of Richard W. Pendleton, James L.
Seiler and Joel M. Harris.
COMPENSATION COMMITTEE. The Compensation Committee is primarily responsible
for reviewing and approving our general compensation policies and setting
compensation levels for executive officers. The Compensation Committee also
administers and establishes the terms and conditions of all stock options
granted under the 1998 Plan. The Compensation Committee consists of Peter
Friedli and John R. Stevens.
AUDIT COMMITTEE. The Audit Committee is primarily responsible for approving
the services performed by our independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
our financial policies and control procedures and reviewing and monitoring the
provisions of non-audit services performed by our auditors. The Audit Committee
consists of Peter Friedli and John R. Stevens.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Amended and Restated Certificate of Incorporation provides that our
directors shall not be personally liable to us or our shareholders, except
liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
- the unlawful payment of a dividend or unlawful stock purchase or
redemption; and
- any transaction from which the director derives an improper personal
benefit.
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<PAGE>
Our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws also provide that we shall indemnify our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We have
also entered into indemnification agreements with each of our directors.
At present, there are a series of similar securities class lawsuits pending
against us that involve certain of our directors or officers where
indemnification is required or permitted. For a complete description of these
pending legal proceedings, please see "Item 3--Legal Proceedings."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of our Board of Directors, formed
in September 1999 are Peter Friedli and John R. Stevens. Prior to
September 1999, the functions of the Compensation Committee were performed by
the Board of Directors as a whole. Prior to the formation of the Compensation
Committee, Messrs. Seiler, Harris and Pendleton were involved in compensation
decisions.
In August 1999, we issued a $190,000 promissory note to a designee of
Friedli Corporate Finance in connection with the acquisition of Mariner Systems,
Inc. Upon closing of our IPO, this note became convertible into 17,117 shares of
our Common Stock, at the option of the holder. We also issued warrants of 30,000
shares exercisable at a price of $11.10 per share to Pine, Inc.
In October 1999, we borrowed $3.0 million through Friedli Corporate Finance
at an interest rate of 6%. Peter Friedli assisted us in securing this loan. In
connection with the borrowing of these funds we issued a secured convertible
promissory note which requires us to repay the principal sum of $3.0 million,
plus interest at an annual rate of 6%, by July 1, 2000. The outstanding
principal and any accrued interest on this note automatically converted into
shares of our common stock at a conversion ratio equal to 50% of the initial
price of shares of common stock sold in our IPO. A $240,000 cash fee was paid in
connection with this loan. In addition, we issued a convertible promissory note
in the principal amount of $180,000, due and payable on October 6, 2002. No
interest accrues or is due on this note. The $180,000 was converted into 16,216
shares of common stock in December 1999. In connection with the $3.0 million
loan, we issued a warrant to purchase 13,333 shares of our common stock at an
exercise price equal to 60% of the initial price of shares of our common stock
as sold in this offering. This warrant was exercisable at the completion of our
IPO and terminates on October 6, 2002.
In January 2000, we borrowed $700,000 through Friedli Corporate Finance.
Peter Friedli assisted us in securing this loan. In connection with the
borrowing of these funds we issued a secured promissory note which requires us
to repay the principal sum of $700,000 plus interest at an annual rate of 10%
and a premium payment equal to 7% of the outstanding principal amount of the
note at the earlier to occur of the completion of this offering or July 1, 2000.
We have entered into a consulting agreement with Friedli Corporate Finance
pursuant to which we agreed to pay Friedli Corporate Finance a $2,000 per month
consulting fee and to take action to support the election of Peter Friedli, the
principal of Friedli Corporate Finance, to our Board of Directors. In exchange,
Friedli Corporate Finance provides us with financial consulting services. We
charge the cost of the consulting arrangement to expense as the services are
used. This consulting agreement terminates on July 31, 2002 or upon 30 days
written notice by either party. If we terminate the consulting agreement without
cause, we must immediately pay Friedli Corporate Finance the full balance,
through July 31, 2002, owed under the consulting agreement.
In August 1999 we acquired Mariner Systems, Inc. In connection with this
acquisition, Mr. Seiler signed a three-year employment agreement whereby he
agreed to serve as our Chief Executive Officer. Mr. Seiler received 20,680
shares of our common stock in exchange for all of his shares of Mariner
Systems, Inc. and we assumed options held by Mr. Seiler which entitle him to
purchase an additional 36,321 shares of our common stock at a weighted-average
exercise price of $2.40. Upon the signing of his
73
<PAGE>
employment agreement with us we granted Mr. Seiler an option to purchase an
additional 100,000 shares of our common stock at an exercise price of $11.10 per
share. Venturetec, Inc., a shareholder in Mariner, became a principal
stockholder of our company and now owns 432,873 shares of our common stock. In
addition, in exchange for services rendered in connection with the acquisition
of Mariner, we issued one warrant to purchase 13,333 shares of our common stock
to a designee of Friedli Corporate Finance, and one warrant to purchase 10,000
shares of our common stock to Pine, Inc., an entity controlled by Friedli
Corporate Finance, which is controlled by Peter Friedli. Both of these warrants
were issued at an exercise price of $11.10 per share. Mr. Friedli, a principal
with Venturetec, was a member of the Board of Directors of Mariner and later
became a member of our Board of Directors.
In July 1997, we issued a promissory note to Richard Pendleton, our Senior
Vice President-Mergers and Acquisitions, for $148,000 at an interest rate of
5.25%, payable on or before July 15, 2000. Accrued interest on this note can be
paid annually on July 15th of each year beginning July 15, 1998 or upon
repayment of the principal amount. Mr. Pendleton has elected to defer the
payment of interest on this note and has not paid any of the principal. As of
December 31, 1997, Mr. Pendleton owed a total of $153,000 on the note. As of
December 31, 1998 and 1999 the total balance due on the note was $162,000 and
$170,000, respectively.
None of our executive officers serve on the Board of Directors or
Compensation Committee of any entity which has one or more executive officers
serving as a member of our Board of Directors or Compensation Committee.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL COMPENSATION PHILOSOPHY
The role of the Compensation Committee is to set the salaries and other
compensation of the executive officers and certain other key employees of
VantageMed, and to make grants under, and to administer, the stock option and
other executive officer equity and bonus plans. VantageMed's compensation
philosophy for executive officers is to relate compensation to corporate
performance and increases in stockholder value, while providing a total
compensation package that is competitive and enables VantageMed to attract,
motivate, reward and retain key executives and employees. Each executive
officer's compensation package may, in one or more years, be comprised of the
following three elements:--base salary that is designed primarily to be
competitive with base salary levels in effect at market area that are of
comparable size to VantageMed and with which Vantagemed competes for executive
personnel;--annual variable performance awards, such as bonuses, payable in cash
and tied to the achievement of performance goals, financial or otherwise,
established by the Compensation Committee; and--long-term stock-based incentive
awards which strengthen the mutuality of interests between the executive
officers and VantageMed stockholders. As of March 28, 2000 the Board
Compensation Committee has not formally met, therefore no report has been
issued.
EXECUTIVE COMPENSATION
Base salary for all executive officers and all other forms of compensation
will be administered in accordance with the general compensation philosophy.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Seiler's base salary and all other forms of compensation will be
administered in accordance with the general compensation philosophy subject only
to provisions in his employment contract. See "Item 11--Executive
Compensation--Employment and Change-In-Control Agreements."
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect
to the beneficial ownership of our common stock as of March 23, 2000, except as
noted in the footnotes below, by:
- all persons who are beneficial owners of 5% or more of our common stock;
- each director;
- our Chief Executive Officer and the Named Executive Officers; and
- all directors and executive officers as a group.
The number of shares of common stock beneficially owned and the percentage
of shares beneficially owned are based on 8,743,630 shares of common stock
outstanding as of March 23, 2000.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BENEFICIALLY
NAME AND ADDRESS(1) SHARES OWNED(2)
- ------------------- --------- ------------
<S> <C> <C>
Peter Friedli(3)............................................ 1,095,390 12.4%
QuadraMed Corporation(4) ................................... 599,425 6.9%
1003 W. Cutting Blvd., Ste. 2
Richmond, CA 94804
Friedli Corporate Finance(5) ............................... 517,127 5.9%
Freigustrasse #5
8002 Zurich, Switzerland
Venturetec, Inc.(6) ........................................ 432,873 5.0%
c/o Friedli Corporate Finance
Freigustrasse #5
8002 Zurich, Switzerland
Richard W. Pendleton........................................ 300,000 3.4%
Gregory Vap................................................. 212,774 2.4%
Joel M. Harris.............................................. 150,000 1.7%
James L. Seiler(7).......................................... 82,003 *%
Thomas A. McCreery(8)....................................... 36,412 *%
John R. Stevens............................................. 16,667 *%
Executive officers and directors as a group (8 persons)..... 2,026,579 22.8%
</TABLE>
- ------------------------
* Less than 1%
(1) Except as otherwise noted, the address of each person listed on the table is
c/o VantageMed Corporation, 3017 Kilgore Road, Suite 195, Rancho Cordova,
California 95670. Unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially
owned, subject to community property laws, where applicable.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to such shares. All shares of common stock subject to options
or warrants currently exercisable or exercisable within 60 days after
March 23, 2000, are deemed to be outstanding and to be beneficially owned by
the person holding such options or warrants for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other person.
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<PAGE>
(3) Includes: (i) 43,333 shares issuable upon the exercise of warrants;
(ii) 17,127 shares issuable upon the conversion of secured promissory note
at the option of the holder, Friedli Corporate Finance; (iii) 510,685 shares
issuable upon the conversion of a secured convertible promissory note
arranged through Friedli Corporate Finance; (iv) 432,873 shares held by
Venturetec, Inc.; and (v) 102,057 shares held by Pine, Inc. Mr. Friedli is a
control person of Venturetec, Pine and Friedli Corporate Finance.
(4) Reflects the conversion of 1,795,300 shares of Series A-1 preferred stock
into an aggregate of 599,425 shares of common stock immediately prior to the
completion of the IPO.
(5) Includes (i) 510,685 shares issuable upon the conversion of a secured
convertible promissory note arranged through by Friedli Corporate Finance;
and (ii) 17,127 shares issuable upon the conversion of a secured promissory
note at the option of the holder, Friedli Corporate Finance. Peter Friedli,
a director of VantageMed, is a control person of Friedli Corporate Finance.
The shares referenced in this footnote are also included in the shares shown
as beneficially owned by Peter Friedli.
(6) Peter Friedli, a director of VantageMed, is control person of
Venturetec, Inc. The shares referenced in this footnote are also included in
the shares shown as beneficially owned by Peter Friedli.
(7) Includes 61,323 shares underlying options granted to Mr. Seiler which are
exercisable within 60 days of March 23, 2000.
(8) Consists of 36,412 shares underlying options granted to Mr. McCreery which
are exercisable within 60 days of March 23, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SERIES A-1 PREFERRED STOCK
In January 1999, we issued 1,795,300 shares of our Series A-1 preferred
stock to QuadraMed Corporation for an aggregate purchase price of $3,500,000,
which included the repayment of the $500,000 balance on our credit facility with
QuadraMed and the exchange of 413,018 shares of Series A preferred stock held by
QuadraMed. Series A-1 preferred stock is denoted more fully in Note 9 of Notes
to Consolidated Financial Statements.
CONSULTING AGREEMENT WITH FREIDLI CORPORATE FINANCE
In connection with the acquisition of Mariner Systems, Inc., in July 1999,
we entered into a consulting agreement with Peter Friedli, now a member of our
Board of Directors. The consulting agreement is described more fully in "Item
11--Executive Compensation--Compensation Committee Interlocks and Insider
Participation."
ACQUISITION OF MARINER SYSTEMS, INC.
In connection with the acquisition of Mariner Systems, Inc., in
August 1999, James L. Seiler signed a three-year employment agreement whereby he
agreed to serve as our Chief Executive Officer. The employment agreement is
described more fully in "Item 11--Executive Compensation--Employment and Change
- - In - Control Agreements."
FINANCING ARRANGEMENT WITH FRIEDLI CORPORATE FINANCE
In October 1999, we borrowed $3.0 million through Friedli Corporate Finance.
Peter Friedli assisted us in securing this loan. The financing arrangement is
described more fully in "Item 11--Executive Compensation--Compensation Committee
Interlocks and Insider Participation."
SECURED PROMISSORY NOTE WITH FRIEDLI CORPORATE FINANCE
In January 2000, we borrowed $700,000 through Friedli Corporate Finance.
Peter Friedli assisted us in securing this loan. The promissory note is
described more fully in "Item 11--Executive Compensation--Compensation Committee
Interlocks and Insider Participation." We subsequently paid this loan off from
the net proceeds of the IPO in February, 2000.
- ------------------------
(1) Series A-1 preferred stock is described more fully in Note 9 to
consolidated financial statements.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of VantageMed Corporation
are included in Part II, Item 8 of this report.
The Company's Consolidated Financial Statements are located on the pages
indicated below:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... 37
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 38
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... 39
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) and Comprehensive Loss for the years ended
December 31, 1997, 1998, and 1999......................... 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 41
Notes to Consolidated Financial Statements.................. 42
</TABLE>
(2) Financial statement schedules.
None required.
(3) Exhibits
See listing as follows:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <C> <S>
2.1* -- Merger Agreement with Mariner Systems, Inc.
2.2* -- Assignment and Assumption Agreement (Mariner Systems, Inc.)
by and between VM1 Acquisition Corp. (Assignor) and VM4
Acquisition Corp. (Assignee).
3.1* -- Form of Registrant's Amended and Restated Form of
Certificate of Incorporation.
3.2* -- Form of Registrant's Amended and Restated Bylaws.
4.1* -- Form of Registrant's Specimen Stock Certificate.
10.1* -- Lease Agreement, dated November 1, 1996 between Registrant
and Dr. Jun Hasegawa and Noriko Hasegawa, as Trustees for
the Hasegawa Family Trust, dated June 8, 1999.
10.2* -- Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust dated
January 18, 1999.
10.3* -- Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust dated
August 20, 1999.
10.4* -- Employment Agreement dated August 6, 1999 entered into
between Registrant and James Seiler.
10.5* -- Secured Convertible Promissory Note, dated October 7, 1999,
issued to Friedli Corporate Finance.
10.6* -- Convertible Promissory Note dated October 7, 1999 issued to
Friedli Corporate Finance.
10.7* -- Secured Promissory Note, dated January 3, 2000 issued to
Friedli Corporate Finance.
10.8* -- Warrant dated August 6, 1999, issued to Pine, Inc.
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <C> <S>
10.9* -- Warrant dated August 6, 1999, issued to Pine, Inc.
10.10* -- Warrant dated October 7, 1999, issued to Peter Friedli.
10.11* -- Promissory Note dated July 15, 1997, issued to Richard
Pendleton.
10.12* -- Consulting Agreement dated July 27, 1998, entered into
between Registrant and Peter Friedli.
10.13* -- VantageMed's Amended and Restated 1998 Stock Option/Stock
Issuance Plan.
10.14* -- Form of Indemnity Agreement entered into by Registrant with
each of its officers and directors.
10.15* -- Non-Exclusive Software License Agreement, dated December 31,
1998 between Registrant and QuadraMed Corporation.
10.16* -- Change in Control Agreement dated July 23, 1998, between
Registrant and with Thomas A. McCreery.
10.17* -- Employment Agreement dated April 30, 1998, between
Registrant and with Gregory Vap.
21.1* -- Subsidiaries.
24.4* -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed
(b) Financial statement schedules.
None applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sacramento, State of California, on the 30th day of March, 2000.
<TABLE>
<S> <C> <C>
VANTAGEMED CORPORATION
By: /s/ JAMES L. SEILER
----------------------------------------
James L. Seiler,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES L. SEILER Chief Executive Officer and Chairman of the March 30, 2000
---------------------------- Board (Principal Executive Officer)
James L. Seiler
/s/ RICHARD PENDLETON Senior Vice President and Director March 30, 2000
----------------------------
Richard Pendleton
/s/ JOEL HARRIS President and Director March 30, 2000
----------------------------
Joel Harris
/s/ PETER FRIEDLI Director March 30, 2000
----------------------------
Peter Friedli
/s/ JOHN STEVENS Director March 30, 2000
----------------------------
John Stevens
/s/ THOMAS MCCREERY Chief Financial Officer March 30, 2000
---------------------------- (Principal Financial and Accounting
Thomas McCreery Officer)
</TABLE>
79
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 0 0 250
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 2,463
<ALLOWANCES> 0 0 287
<INVENTORY> 0 0 480
<CURRENT-ASSETS> 0 0 5,241
<PP&E> 0 2,232 2,564
<DEPRECIATION> 0 1,570 4,592
<TOTAL-ASSETS> 0 11,051 36,384
<CURRENT-LIABILITIES> 0 0 13,333
<BONDS> 0 0 0
0 0 0
0 0 2
<COMMON> 0 0 4
<OTHER-SE> 0 2,916 23,406
<TOTAL-LIABILITY-AND-EQUITY> 0 11,051 36,384
<SALES> 0 0 9,429
<TOTAL-REVENUES> 0 0 19,412
<CGS> 0 0 4,078
<TOTAL-COSTS> 0 0 10,304
<OTHER-EXPENSES> 0 7,651 18,375
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 948
<INCOME-PRETAX> 0 (4,237) (10,315)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 (4,237) (10,215)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 0 (4,237) (10,215)
<EPS-BASIC> 0 (1.96) (3.13)
<EPS-DILUTED> 0 (1.96) (3.13)
</TABLE>
