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NEOFORMA-News: November 14, 2000 NEOFORMA COM INC (NEOF) Quarterly Report (SEC form 10-Q) MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those discussed in " Factors That May Affect Operating Results" and elsewhere in this report. OVERVIEW Neoforma.com, Inc. ("Neoforma") is a leading provider of business-to-business e-commerce services in the large and highly fragmented market for medical products, supplies and equipment. Our marketplace aggregates suppliers of a wide range of new and used medical products and presents their offerings to the physicians, hospitals and other healthcare organizations that purchase these products. We believe that our services will streamline the procurement processes and extend the reach of existing sales and distribution channels, as well as reduce transaction costs for both buyers and sellers of medical products, supplies and equipment. We offer four primary services. Our Shop service provides marketplaces where purchasers can easily identify, locate and purchase new medical products and suppliers can access new customers and markets. Healthcare providers can use Shop services to purchase a wide range of products, from disposable gloves to surgical instruments and diagnostic equipment. Our Auction service creates an efficient marketplace for idle assets by enabling users to list, sell and buy used and refurbished equipment and surplus medical products. Our Plan service provides interactive content and software to healthcare facility planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities that we believe represent industry best practices, together with floor plans and information about the products in the room. This information helps reduce the complexities of planning and outfitting facilities, which we believe increases the appeal of our website to the facility planners responsible for many product purchasing decisions. Our Services Delivery service provides scalable and cost-effective implementation solutions for both purchasers and sellers of new and used medical products. We incorporated on March 4, 1996. From inception, our operating activities have related primarily to the initial planning and development of our marketplace and the building of our operating infrastructure. We first introduced the Neoforma website in 1997 and have since released a number of enhancements to provide new services and content. Initially, we provided only information for healthcare professionals. We began offering e-commerce services with the introduction of our initial Auction service, AdsOnline, in May 1999 and expanded our services with the introduction of our second Auction service, AuctionLive, in August 1999, our third Auction service, AuctionOnline, in November 1999 and Shop in August 1999. Since we introduced our Auction and Shop services, we have focused on expanding and enhancing our services, creating marketplaces establishing relationships with suppliers of medical products, expanding our purchaser base, developing strategic alliances, promoting our brand name and building our operating infrastructure. We expect that our principal source of revenue will be transaction fees paid by the sellers of medical products that use our Shop and Auction services. These transaction fees represent a negotiated percentage of the sale price of the medical products sold. We also receive revenue from the following sources: - sponsorship and subscription fees paid by sellers of medical products and services used in planning and outfitting healthcare facilities in exchange for the right to feature their brands and products on our Plan service; - license fees from the sale of software tools and related technical information for the equipping and planning of healthcare facilities; - digitization fees from participating sellers to digitize their product information for display on our website; - product revenue related to the sale of medical equipment that we purchase for resale through our live and online auction services; and - Service Delivery fees for implementation and consulting services paid by users of the Company`s marketplaces. We recognize transaction fees as revenue when the seller confirms a purchaser`s order. For live and online auction services, we recognize seller transaction fees, as well as a buyer`s premium, when the product is sold. Sponsorship and subscription fees are recognized ratably over the period of the agreement. With respect to software licenses, we generally recognize revenue upon shipment of the product and recognize revenue from related service contracts, training and customer support ratably over the period of the related contract. Digitization fees are recognized as development services are performed. Product revenue, representing the difference between the amount we pay for the equipment and the price paid on resale, is recognized when the product is shipped or delivered, depending on the shipping terms associated with each transaction. Services Delivery revenue for implementation and other services, including training and consulting, is recognized as services are performed for time and material arrangements and using the percentage of completion method based on labor input measures for fixed fee arrangements. Our operating expenses have increased significantly since our inception, and the rate of this increase has accelerated since our introduction of our Auction and Shop services. These increases are primarily due to acquisitions and additions to our staff as we have expanded all aspects of our operations. As a result of our expansion, we have grown from six employees as of December 31, 1997, to 59 full-time employees as of December 31, 1998, to 269 full-time employees as of December 31, 1999 to 241 full-time employees as of September 30, 2000. As a result of our transaction with Novation and acquisition of EquipMD, in May 2000 we streamlined our operations to focus on two key global markets, Integrated Delivery Networks and Hospitals and Physician Practices. The restructuring involved both changes in executive management and our organizational structure as well as a reduction in force of approximately 80 individuals in functions largely duplicated or unnecessary as a result of both the Novation agreement and the reorganization. On August 6, 1999, we acquired GAR, a live auction company focused on medical products. The total purchase price was approximately $9.7 million, including $1.7 million in cash, the issuance of a promissory note in the principal sum of $7.8 million, the assumption of $100,000 in liabilities and acquisition-related expenses of approximately $100,000. The promissory note is payable over five years and bears interest at 7% per annum. This acquisition was accounted for using the purchase method of accounting. As a result of this acquisition, we recorded approximately $9.7 million in goodwill beginning in the third quarter of 1999, which is being amortized on a straight-line basis over a seven-year period. In November 18, 1999, we acquired certain assets of FDI, a company in the business of developing and licensing facility planning software. Under the terms of the agreement, we acquired the rights to software and certain customer contracts. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition date. The total purchase price of approximately $3.4 million consisted of 350,000 shares of common stock valued at approximately $3.2 million, estimated assumed liabilities of approximately $97,000 and estimated acquisition-related expenses of approximately $112,000. In the initial allocation of the purchase price, $240,000, $600,000 and $2.5 million were allocated to acquired software, assembled workforce and trade names and goodwill, respectively. The acquired software, assembled workforce and trade names and goodwill are being amortized over estimated useful lives of three years. In order to acquire certain software and technology for use in our Shop, Auction and Plan services, on January 18, 2000 we acquired Pharos, a developer of content management software that facilitates the locating, organizing and updating of product information in an online marketplace. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The total purchase price of approximately $22.8 million consisted of approximately 2.0 million shares of common stock valued at approximately $22.0 million, forgiveness of a loan outstanding to Pharos of $500,000, estimated assumed liabilities of approximately $94,000 and estimated acquisition-related expenses of approximately $230,000. Of the shares issued to the previous owners of Pharos, approximately 700,000 shares were subject to repurchase rights which lapse over the original vesting period of the shares, which is four years. In the initial allocation of the purchase price, $367,000, $3.0 million, $3.0 million and $16.5 million were allocated to tangible assets, acquired in-process research and development, developed technology and goodwill, respectively. The acquired in-process research and development was charged to expense during the first quarter of 2000. The developed technology will be amortized when such technology has been put into productive use over an estimated useful life of three years. The goodwill is being amortized over an estimated useful life of five years. In connection with the acquisition of Pharos, we have allocated $3.0 million of the purchase price to in-process research and development, or IPR&D projects. These allocations represent the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. We allocated values to the IPR&D based on an assessment of the research and development projects. The value assigned to these assets was limited to significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the Pharos` next-generation technologies. The value assigned to IPR&D was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the IPR&D was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by Pharos and its competitors. The nature of the efforts to develop the acquired in-process technology into commercially viable products and services principally related to the completion of certain planning, designing, coding, prototyping, and testing activities that were necessary to establish that the developmental Pharos technologies met their design specifications including functional, technical, and economic performance requirements. Anticipated completion dates ranged from six to nine months, at which times Pharos expected to begin selling the developed products. Development costs to complete the research and development were estimated at approximately $2.0 million. Pharos` primary IPR&D projects involved designing new technologies and an application platform for a next generation content syndication solution, including enterprise application integration. The estimated revenues for the in-process projects are expected to peak within three years of acquisition and then decline as other new products and technologies are expected to enter the market. Operating expenses were estimated based on historical results and management`s estimates regarding anticipated profit margin improvements. Due to purchasing power increases and general economies of scale, estimated operating expense as a percentage of revenues were expected to decrease after the acquisition. The rates utilized to discount the net cash flows to their present value were based on the estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, discount rates of 35 to 40 percent were appropriate for the IPR&D, and discount rates of 25 percent were appropriate for the existing products and technology. These discount rates were commensurate with the Pharos` stage of development and the uncertainties in the economic estimates described above. The estimates used by us in valuing IPR&D were based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Our assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results. Any such variance may result in a material adverse effect on our financial condition and results of operations. On March 17, 2000, we acquired USL, a healthcare content company. USL provides supply chain information to senior-level executives in the manufacturing, distribution, provider and GPO communities through web-based subscription products, industry newsletters and research. The total purchase price of $7.2 million consisted of 61,283 shares of our common stock valued at approximately $2.8 million and $3.5 million in cash and assumed liabilities of $912,000. This acquisition was accounted for using the purchase method of accounting. On April 28, 2000, we acquired all of the outstanding capital stock of EquipMD, Inc., a business-to-business procurement company serving the physician market. The total purchase price of $141.7 million consisted of approximately 5.5 million shares of our common stock valued at approximately $126.4 million, 269,000 vested options valued at approximately $7.2 million and assumed liabilities and acquisition costs of $8.1 million. The acquisition was accounted for as a purchase transaction. In connection with the acquisition of the EquipMD, we allocated approximately $15.0 million of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. At the acquisition date, EquipMD was conducting design, development, engineering and testing activities associated with the completion of a real-time commerce engine. The projects under development at the valuation date represent next-generation technologies that are expected to address emerging market demands for healthcare related business-to-business e-commerce. At the acquisition date, the technologies under development were approximately 60% complete based on engineering man-month data and technological progress. EquipMD had spent approximately $1.2 million on the in-process projects, and expected to spend approximately $1.0 million to complete all phases of the research and development. Anticipated completion dates ranged from three to nine months, at which time we expect to begin benefiting from the developed technologies. In making its purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects are based on management`s estimates of cost of sales, operating expenses, and income taxes from such projects. Aggregate revenues for the developmental EquipMD products were estimated to grow at a compounded annual growth rate of approximately 100% for the five years following introduction, assuming the successful completion and market acceptance of the major research and development programs. The estimated revenues for the in-process projects are expected to peak within three years of acquisition and then decline sharply as other new products and technologies are expected to enter the market. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 35% was considered appropriate for the in-process research and development. These discount rates were commensurate with EquipMD`s stage of development and the uncertainties in the economic estimates described above. If these projects are not successfully developed, our sales and profitability may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. On July 14, 2000, we acquired certain assets of NCL, an asset management company focused on healthcare facility liquidations and the resale of used medical products. The acquisition was accounted for as a purchase transaction. The total purchase price of approximately $3.2 million consisted of 300,000 shares of common stock valued at $2.2 million, $500,000 in cash and $500,000 in Notes Payable to the principals of NCL. In the initial allocation of the purchase price, the full $3.2 million was allocated to goodwill, which will be amortized over the estimated useful life of 7 years. On March 30, 2000, we entered into agreements to acquire Eclipsys Corporation ("Eclipsys") and HEALTHvision, Inc., ("HEALTHvision") entered into an outsourcing and operating agreement with Novation and entered into agreements to issue our common stock and warrants to the owners of Novation. On May 25, 2000, we agreed by mutual consent to terminate the proposed mergers announced on March 30, 2000. Instead, we entered into a strategic commercial relationship with Eclipsys and HEALTHvision that includes a co-marketing and distribution arrangement between us and HEALTHvision. The arrangement includes the use of Eclipsys` eWebIT(TM) enterprise application integration technology and professional services to enhance the integration of legacy applications with our e-commerce platform. In addition, we modified the structure and terms of our stock and warrant transactions with VHA and UHC the national healthcare alliances that own Novation. Under the terms of the modified Novation agreements, which were approved by our stockholders on July 26, 2000, VHA received 46.3 million shares of our common stock, representing approximately 36% of our outstanding common stock, and UHC received 11.3 million shares, representing approximately 9% of our outstanding common stock. We also issued warrants to VHA and UHC, allowing VHA and UHC the opportunity to earn up to 30.8 million and 7.5 million additional shares of our common stock, respectively, over a four-year period by meeting specified performance targets. These targets are based upon the historical purchasing volume of VHA- and UHC-member healthcare organizations that sign up to use our online marketplace. The targets increase annually to a level equivalent to total healthcare organizations representing approximately $22 billion of combined purchasing volume at the end of the fourth year. Under our outsourcing and operating agreement with Novation, we have agreed to provide specific functionality to Marketplace@Novation, the online marketplace only available to the patrons and members of the owners of Novation, VHA and UHC, and an affiliated entity, HPPI. Novation has agreed to act as our exclusive agent to negotiate agreements with suppliers to offer their equipment, products, supplies and services through our online marketplace, subject to some exceptions. VHA, UHC, HPPI and Novation have each agreed not to develop or promote any other Internet-based exchange for the acquisition or disposal of products, supplies, equipment or services by healthcare organizations. On October 18, 2000 we and VHA agreed to amend our common stock and warrant agreement to provide for the cancellation of the performance warrant to purchase 30.8 million shares of our common stock. In substitution for the warrant, we issued to VHA 30.8 million shares of our restricted common stock, which shares are subject to forfeiture by VHA if the same performance targets that were contained in the warrant are not met. The outsourcing and operating agreement provides that, subject to certain conditions, we will share transaction fees we receive from suppliers for products and services sold through our Shop service with Novation in varying proportions depending on the type of transaction and the purchaser. For sales of products and services under Novation contracts, we will share transaction fees with Novation to the extent they exceed a specified minimum percentage. For an initial period of the agreement, Novation has agreed to pay us this specified minimum percentage if the fees generated from suppliers are less than the specified minimum percentage. We will also share a percentage of transaction fees generated from sales of non-contracted products and services to the patrons and members of VHA, UHC and HPPI and will share a smaller percentage of transaction fees generated from sales of non-contracted products and services to other parties, subject to limited exceptions. We will not share with Novation any transaction fees generated from the sale of products or services under contracts with another group purchasing organization. Through a specified date, we will not be required to share any fees with Novation in any quarter until minimum aggregate transaction fee levels for that quarter have been met. We have also agreed to share a portion of specified revenues from our Plan and Auction services generated as a result of the Novation relationship. Since inception, we have incurred significant losses and, as of September 30, 2000, had an accumulated deficit of $195.1 million. We expect operating losses and negative cash flow to continue for the foreseeable future. We anticipate our losses will increase significantly due to substantial increases in our expenses for sales and marketing, product development, operating infrastructure, general and administrative staff and development of strategic alliances. We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as the online market for the purchase and sale of new and used medical products, supplies and equipment. To address these risks, we must, among other things, expand the number of users of our online services, enter into new strategic alliances, increase the functionality of our services, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business. Further, our inability to address these risks could necessitate the reduction in our operations relating to any of the acquired businesses. Such a reduction could potentially result in an impairment of the intangible assets associated with those businesses, and any such impairment could result in our being required to write down, or even write-off the related intangible assets. Given the volume of intangible assets the company has associated with its acquired businesses, it is possible that such a write off could be significant. RESULTS OF OPERATIONS Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as an indication of future performance. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenue. We had total revenue of $4.7 million for the quarter ended September 30, 2000 primarily from sales of equipment, transaction fees paid by the sellers of medical products that use our Shop and live and online Auction services, sponsorship and license fees for the use of our Plan software and services, catalog set-up fees billed to Novation for categorizing, consolidating and validating the products contained in the Novation contract portfolio as well as revenues generated by our Services Delivery implementation services. Revenue for the quarter ended September 30, 1999 was $457,000. For the quarter ended September 30, 2000, the gross value of transactions was approximately $22.7 million including approximately $9.8 million related to purchases made under contracts for which EquipMD earns administrative fees, which resulted in net revenue for our Shop, Auction, Plan and Services Delivery of $753,000, $2.9 million, $581,000 and $485,000, respectively. Cost of Used Equipment Sold. Cost of used equipment sold consists primarily of the costs of used equipment we purchase and resell to customers. Cost of used equipment sold was $2.4 million for the quarter ended September 30, 2000. The Auction business generated significant revenues from liquidation sales resulting from the purchase of hospital equipment due to their closures. Unlike traditional Auction revenues, which are primarily commissions received on the sales of consigned equipment, liquidation revenues are generated on sales where we have taken title to the equipment. Cost of Services. Cost of services consists primarily of costs incurred in delivering our implementation and consulting services. These costs consist primarily of fees for independent consultants and personnel expenses for our implementation and consulting personnel. Cost of services was $2.5 million for the quarter ended September 30, 2000. Providing a scalable and cost effective implementation solution to both buyers and sellers of new and used medical products is critical to attaining our strategic objectives and, as a result, we expect cost of services to increase significantly in future periods as we continue to implement our services to our customers, including the required services to be provided under our outsourcing and operating agreement with Novation. Operations. Operations expenses consist primarily of expenditures for digitizing and inputting content and for the operation and maintenance of our website. These expenditures consist primarily of fees for independent contractors and personnel expenses for our customer support and site operations personnel. Operations expenses increased from approximately $1.1 million for the quarter ended September 30, 1999 to $3.0 million for the quarter ended September 30, 2000. The increase was primarily due to an increase in operations personnel costs, and an increase in payments to third party consultants. These increases were primarily due to a larger personnel base and increased expenditures for digitizing and inputting content and for the enhancement of the infrastructure of our website. We expect our operations expenses to continue to increase as we expand our operating infrastructure, add content and functionality to our website and integrate the systems of healthcare organizations and suppliers with our services. Product Development. Product development expenses consist primarily of personnel expenses and consulting fees associated with the development and enhancement of our marketplace and services. Product development expenses increased from $1.8 million for the quarter ended September 30, 1999 to $6.0 million for the quarter ended September 30, 2000. The increase was primarily due to an increase in personnel cost and an increase in fees paid to third parties. These increases were primarily due to a larger personnel base and increased expenses incurred in the continued development of our Shop, Auction and Plan services including adding additional functionality in anticipation of the needs of large healthcare organizations. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, product development expenses may increase significantly in future periods as we add functionality to our services, including functionality required to be provided under our outsourcing and operating agreement with Novation. We expense product development costs as they are incurred. Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses increased from approximately $2.7 million for the quarter ended September 30, 1999 to $8.2 million for the quarter ended September 30, 2000. The increase was primarily due to an increase in sales and marketing personnel costs, an increase in expenses related to travel, an increase in expenses related to advertising and attendance at trade shows and expenses incurred in connection with our strategic alliances. Selling and marketing expenses may continue to increase as we continue our efforts to bring buyers and sellers to our marketplace. In addition, we expect to continue to make significant payments in connection with our strategic alliances, which will increase our selling and marketing expenses in the periods in which these payments are made. See " Liquidity and Capital Resources." General and Administrative. General and administrative expenses consist primarily of expenses for executive and administrative personnel, professional services and other general corporate activities. General and administrative expenses decreased from approximately $4.2 million for the quarter ended September 30, 1999 to $2.7 million for the quarter ended September 30, 2000. The decrease was primarily due to recruiting, legal, litigation settlement and consulting expenses incurred during the quarter ended September 30, 1999 which were not repeated during the quarter ended September 30, 2000. General and administrative expenses may increase as we continue to incur additional costs to support the growth of our business. Amortization of Intangibles. Intangibles include goodwill and the value of software purchased in acquisitions. Intangibles are amortized on a straight-line basis over a period of three to seven years. Amortization of intangibles increased from $230,000 in the quarter ended September 30, 1999 to $8.1 million for the quarter ended September 30, 2000. The increase was a result of the acquisition of GAR in August 1999, FDI in November 1999, Pharos in January 2000, USL in March 2000, EquipMD in April 2000 and NCL in July 2000. Amortization of Deferred Compensation. Deferred compensation represents the aggregate difference, at the date of grant, between the exercise price of stock options and the estimated fair value for accounting purposes of the underlying stock. Deferred compensation is amortized over the vesting period of the underlying options, generally four years, based on an accelerated vesting method. In connection with the grant of stock options to employees during fiscal 1998, 1999 and for the period from January 1, 2000 to January 24, 2000, we recorded deferred compensation of $65.2 million. During the second quarter of fiscal 2000, we decreased deferred compensation by $5.1 million as a result of a reduction in force of approximately 80 individuals. For the quarter ended September 30, 2000, we recognized amortization of deferred compensation of $7.9 million. At September 30, 2000, the remaining deferred compensation of approximately $42.1 million will be amortized as follows: $7.2 million during fiscal 2000, $20.1 million during fiscal 2001, $10.4 million during fiscal 2002, $4.0 million during fiscal 2003 and $360,000 during fiscal 2004. The amortization expense relates to options awarded to employees in all operating expense categories. The amount of deferred compensation has not been separately allocated to these categories. The amount of deferred compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. Amortization of Partnership Costs. Partnership costs consist primarily of the value of the shares issued to VHA and UHC and the legal, accounting and banker fees associated with the Novation transaction. Partnership costs are amortized on a straight line basis over a period of five years. Amortization of partnership costs was $10.9 million for the quarter ended September 30, 2000. Amortization of Partnership Warrant Valuation. Partnership warrant valuation consists primarily of the estimated value of the warrants issued to VHA and UHC for meeting certain performance targets. Partnership warrant valuation is amortized on a straight line basis over a period of four years. Amortization of partnership warrant valuation was $1.1 million for the quarter ended September 30, 2000. Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income for the quarter ended September 30, 2000 was $938,000 compared to $45,000 for the quarter ended September 30, 1999. The increase in interest income was due to an increase in our average net cash and cash equivalents balance as a result of our issuance of preferred stock in October 1999 and the completion of our initial public offering in January 2000. Interest expense increased from $242,000 for the quarter ended September 30, 1999 to $345,000 for the quarter ended September 30, 2000, primarily as a result of the assumption of debt from the EquipMD acquisition. Income Taxes. As of December 31, 1999, we had federal and state net operating loss carryforwards of approximately $31.5 million, which will be available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2013 through 2018. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant restrictions on the amount of the net operating loss carryforwards that we may utilize in a given year. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, Revenue. We had total revenue of $8.2 million for the nine months ended September 30, 2000 primarily from sales of equipment, transaction fees paid by the sellers of medical products that use our Shop and live and online Auction services, sponsorship and license fees for the use of our Plan software and services as well as revenues generated by our Services Delivery implementation services. Revenue for the nine months ended September 30, 1999 was $464,000. For the nine months ended September 30, 2000, the gross value of transactions was approximately $43.5 million, including approximately $18.3 million related to purchases made under contracts for which EquipMD earns administrative fees, which resulted in net revenue for our Shop, Auction, Plan and Services Delivery of $1.2 million, $1.8 million, $1.6 million and $0.9 million, respectively. Operating Expenses. Operating expenses consists of cost of equipment sold, cost of services, operations, product development, selling and marketing, general and administrative, amortization of intangibles, amortization of deferred compensation, amortization of partnership costs, amortization of partnership warrant valuation, cost of warrant issued to recruiter, write off of acquired in-process research and development, abandoned acquisition costs, and restructuring. Operating expenses increased from approximately $25.9 mil- lion for the nine months ended September 30, 1999 to $150.3 million for the nine months ended September 30, 2000, primarily as a result of increases as described below. Cost of equipment sold and cost of services were $2.6 million and $3.3 million for the nine months ended September 30, 2000, respectively. Operations expenses increased from approximately $2.4 million for the nine months ended September 30, 1999 to $8.8 million for the nine months ended September 30, 2000. Product development expenses increased from $4.3 million for the nine months ended September 30, 1999 to $16.2 million for the nine months ended September 30, 2000. Selling and marketing expenses increased from approximately $5.1 million for the nine months ended September 30, 1999 to $30.2 million for the nine months ended September 30, 2000. General and administrative expenses increased from approximately $5.8 million for the nine months ended September 30, 1999 to $9.5 million for the nine months ended September 30, 2000. Amortization of intangibles increased from $230,000 for the nine months ended September 30, 1999 to $17.5 million for the nine months ended September 30, 2000. For the nine months ended September 30, 1999 and 2000, we recognized amortization of deferred compensation of $5.7 million and $27.4 million, respectively. Amortization of partnership costs and amortization of partnership warrant valuation were $10.9 million and $1.1 million, respectively for the nine months ended September 30, 2000. For the nine months ended September 30, 2000, we expensed $18.0 million related to the write off of acquired in-process research and development in connection with the Pharos acquisition in January 2000 and EquipMD acquisition in April 2000. Abandoned acquisition costs were $2.7 million for the nine months ended September 30, 2000. Restructuring costs, which were $2.1 million for the nine months ended September 30, 2000, consisted almost entirely of accrued severance and other related costs. As of September 30, 2000 the accrual related to the restructuring costs had been reduced to $140,000. Other Income (Expense). Interest income for the nine months ended September 30, 2000 was $3.0 million compared to $128,000 for the nine months ended September 30, 1999. Interest expense increased from $95,000 for the nine months ended September 30, 1999 to $551,000 for the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES In January 2000, we completed our initial public offering and issued 8,050,000 shares of our common stock at an initial public offering price of $13.00 per share. Net cash proceeds to us from the initial public offering were approximately $95.4 million. From our inception until our initial public offering, we financed our operations primarily through private sales of preferred stock through which we raised net proceeds of $89.0 million. We have also financed our operations through an equipment loan and lease financing and bank and other borrowings. As of September 30, 2000, we had outstanding bank, other borrowings and notes payable of $16.9 million. As of September 30, 2000, we had approximately $50.5 million of cash and cash equivalents and short-term investments. In September 1998, we entered into a $750,000 secured credit facility with Silicon Valley Bank. This facility included a $225,000 term loan due December 1999 and an equipment loan facility providing for up to $525,000 of equipment loans. In July 1999, we converted the $433,000 of outstanding equipment loans into a term loan due July 2000. At September 30, 2000, there were no borrowings outstanding under the term loan or under the equipment loan. In consideration for this credit facility, we granted Silicon Valley Bank a warrant to purchase 45,000 shares of common stock at an exercise price of $0.77 per share. In consideration for the conversion of our equipment loan to a term loan and the release of its security interest in equipment, we granted Silicon Valley Bank a warrant to purchase 10,000 shares of common stock at an exercise price of $1.18 per share. In May 1999, Comdisco provided us with a $2.0 million subordinated loan to provide working capital. We agreed to pay Comdisco principal and interest at a rate of 12.5% per annum in 36 equal monthly installments, commencing July 1999. This loan is secured by all of our assets. In connection with this loan, we issued Comdisco a warrant to purchase 228,813 shares of common stock at $1.18 per share. As of September 30, 2000, the outstanding balance on the note was approximately $1.3 million. In July 1999, Comdisco provided us with a $2.5 million loan and lease facility to finance computer hardware and software equipment. Amounts borrowed to purchase hardware bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest only payments for the first year and principal and interest payments for the remaining 39 months, with a balloon payment of the remaining principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest only payments for the first four months and principal and interest payments for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. As of September 30, 2000, we had outstanding approximately $1.4 million in hardware loans due September 2003 and approximately $250,000 in software loans due March 2002. This facility is secured by the computer equipment purchased with the loans. In connection with this facility, we issued Comdisco a warrant to purchase 137,711 shares of common stock at $1.18 per share. In August 1999, as a result of the GAR acquisition, we issued a promissory note in the principal amount of $7.8 million payable monthly over five years bearing interest at a rate of 7% per annum. As of September 30, 2000, the outstanding balance on the note was approximately $5.5 million. As part of the purchase of EquipMD, we assumed a note payable in the amount of $1.7 million which is related to EquipMD`s purchase of Central Point Services, LLC. The note bears interest at 7.5% per annum and is payable in eight quarterly installments of $62,578, at which time the unpaid principal balance and accrued interest become due and payable. According to the provisions of the note, a payment amounting to $250,000 on the note was due upon a change of control of EquipMD. At September 30, 2000, the remaining principal balance was $1.5 million. In March 2000, we entered into a Hosting Alliance Agreement with Ariba, Inc. under which we will offer Ariba`s ORMX procurement solution to users of our marketplace. Under this agreement, we paid Ariba a substantial up-front fee for use of the ORMX procurement solution and we will pay Ariba specified fees for transactions occurring through Ariba`s network, subject to minimum monthly amounts. The agreement also provides for joint marketing activities and sales planning. In March 2000, we purchased 600,000 shares of the Series D preferred stock of Pointshare, Inc., a privately held corporation in exchange for $3.0 million. Pointshare is a company that provides online business to business administrative services to healthcare communities. Our ownership represents approximately 2% of the Pointshare`s outstanding common stock, assuming a 1:1 conversion ratio of preferred stock to common stock. We will account for this investment using the cost method. In December 1999, we paid $2.5 million to purchase 526,250 shares of common stock of CarePortal formerly known as IntraMedix. CarePortal is a company that provides procurement services related to the distribution of geriatric care products to the nursing home community. The Company accounts for this investment using the cost method. CarePortal is a related party to GeriMedix, a supplier with which we have an agreement to perform e-Commerce services. On May 26, 2000, we lent $1.0 million to CarePortal under a promissory note bearing interest at a rate of 8% annually. On August 8, 2000 we exercised our option to convert the note into shares of CarePortal common stock. Additionally, we invested an additional $1.5 million in CarePortal in exchange for common stock. As of September 30, 2000, we owned a total of 983,874 shares of CarePortal common stock, representing an ownership percentage of 9.0% of the total outstanding common stock of CarePortal. In July 2000, in recognition of the advisory services rendered, we entered into a promissory note with our investment bankers in the amount of $6.0 million. The note is payable in quarterly payments of $1.5 million, commencing on January 1, 2001. At September 30, 2000 we had not made any payments under the note. In July 2000, as part of the acquisition of NCL, we issued one promissory note to each of the four principals of NCL in the amount of $62,500 each. These notes are payable in 24 equal monthly installments with the first payment due on August 15, 2000. As of September 30, 2000 the balance of all four notes in total was $229,000. In addition, as part of the acquisition we also agreed to pay $250,000 two years from the closing date of the acquisition, on July 14, 2002. This payment is to be distributed in equal amounts of $62,500 to each of the four principals of NCL. As of September 30, 2000 no payments have been made against this commitment. Net cash used in operating activities was $10.4 million for the nine months ended September 30, 1999 and $53.9 million for the nine months ended September 30, 2000. Net cash used in operating activities for the nine months ended September 30, 2000 related primarily to funding net operating losses, increases in prepaid expenses and in accounts receivable, which were partially offset by increases in the write off of in-process research and development, amortization of intangibles, amortization of deferred compensation and accounts payable. Net cash used in investing activities was $5.4 million for the nine months ended September 30, 1999 and $25.8 million for the nine months ended September 30, 2000. Net cash used in investing activities for the nine months ended September 30, 2000 related primarily to the purchase of equipment to operate our website and cash paid for the acquisition of USL and EquipMD and the purchase of non-marketable investments. Net cash provided by financing activities was $15.7 million for the nine months ended September 30, 1999 and $100.3 million for the nine months ended September 30, 2000. Net cash provided from financing activities for the nine months ended September 30, 2000 related primarily to common stock issuances of approximately $95.4 million. Our current operations continue to be cash flow negative. Our future long-term capital needs will depend significantly on the rate of growth of our business, changes in our service offerings and the success of these services. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If order to expand our operations, or to maintain operations at their current level, we expect that we will need to sell additional equity or debt securities, or obtain a line of credit. If we are unable to raise adequate capital, we will be required to significantly curtail our operations, including reductions in our staffing levels and related expenses. If we issue additional securities to raise funds, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience significant dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will be effective for us on January 1, 2001. SFAS No. 133 requires certain accounting and reporting standards for derivative financial instruments and hedging activities. Because we do not currently hold any derivative instruments and do not engage in hedging activities, management does not believe that the adoption of SFAS No. 133 will have a material impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. We will adopt SAB 101 as required in the fourth quarter of 2000. Management does not expect the adoption of SAB 101 to have a material impact on our consolidated results of operations and financial position. In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25" (Interpretation No. 44). Interpretation No. 44 is effective July 1, 2000. The interpretation clarifies the application of APB Opinion No. 25 for certain issues, specifically, (a) the definition of an employee, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange or stock compensation awards in a business combination. The adoption of Interpretation No. 44 has not had a material impact on our financial position or the results of our operations. FACTORS THAT MAY AFFECT OPERATING RESULTS The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations may be seriously harmed by any of these risks. BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR PRIMARY SERVICES AND BECAUSE WE OPERATE IN A NEW AND RAPIDLY EVOLVING MARKET, YOU MAY HAVE DIFFICULTY ASSESSING OUR BUSINESS AND OUR FUTURE PROSPECTS We incorporated in March 1996. Prior to May 1999, our operations consisted primarily of the initial planning and development of our marketplace and the building of our operating infrastructure. We introduced our initial Auction service, AdsOnline, in May 1999, our second Auction service, AuctionLive, in August 1999 and our third Auction service, AuctionOnline, in November 1999, we introduced our Shop service in August 1999, and we introduced our Services Delivery service in April 2000. As a result, we have generated revenues of only $1.0 million in 1999 and $8.2 million for the nine months ended September 30, 2000. Because we have only recently introduced our services, it is difficult to evaluate our business and our future prospects. For example, it is difficult to predict whether the market will accept our services and the level of revenue we can expect to derive from our services. Because we are an early stage company in the online market for the purchase and sale of new and used medical products, supplies and equipment, which is a new and rapidly evolving market, we cannot be certain that our business strategy will be successful. Our business will be seriously harmed, and may fail entirely, if we do not successfully execute our business strategy or if we do not successfully address the risks we face. In addition, due to our limited operating history, we believe that period-to-period comparisons of our revenue and results of operations are not meaningful. WE HAVE A HISTORY OF LOSSES, ANTICIPATE INCURRING LOSSES IN THE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY We have experienced losses from operations in each period since our inception, including net losses of $139.1 million for the nine months ended September 30, 2000. In addition, as of September 30, 2000, we had an accumulated deficit of approximately $195.1 million. We have not achieved profitability and we expect to continue to incur substantial operating losses for the foreseeable future. We have generated limited revenue to date. If our revenue does not increase substantially or if our expenses increase further than we expect, we may never become profitable. We anticipate that our operating losses will increase in the future, as we expect substantial increases in our costs and expenses in a number of areas, including: - marketing and promotion of our company and our services, including building recognition of our brand name; - performing our obligations under the outsourcing and operating agreement with Novation; - expanding our direct field sales force; - expanding and enhancing our operating infrastructure, including hardware and software systems and administrative personnel; - extending the functionality of our online marketplace; and - expanding our services. OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, AND IF WE FAIL TO MEET THE EXPECTATIONS OF INVESTORS OR SECURITIES ANALYSTS, THE MARKET PRICE OF OUR COMMON STOCK WOULD LIKELY DECLINE SIGNIFICANTLY Our revenue and operating results are likely to fluctuate significantly from quarter to quarter, due to a number of factors. These factors include: - the amount and timing of payments to our strategic partners and technology partners; - the timing and size of future acquisitions; - variability in the amount of equipment that we auction in a given quarter; - changes in the fees we charge users of our services; - budgetary fluctuations of purchasers of medical products, supplies and equipment; and - changes in general economic and market conditions. Fluctuations in our operating results may cause us to fail to meet the expectations of investors or securities analysts. If this were to happen, the market price of our common stock would likely decline significantly. In addition, as a result of our limited operating history, the emerging nature of our market and the evolving nature of our business model, we are unable to accurately forecast our revenue. We incur expenses based predominantly on operating plans and estimates of future revenue. Our expenses are to a large extent fixed. We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections would have an immediate and negative impact on profitability. IF BUYERS AND SELLERS OF MEDICAL PRODUCTS DO NOT ACCEPT OUR BUSINESS MODEL OF PROVIDING AN ONLINE MARKETPLACE FOR THE PURCHASE AND SALE OF MEDICAL PRODUCTS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON STOCK WOULD DECLINE We offer an online marketplace that aggregates a number of suppliers and purchasers of medical products. This business model is new and unproven and depends upon buyers and sellers in this market adopting a new way to purchase and sell medical products, supplies and equipment. If buyers and sellers of medical products do not accept our business model, demand for our services may not develop and the price of our common stock would decline. Suppliers and purchasers of medical products could be reluctant to accept our new, unproven approach, which involves new technologies and may not be consistent with their existing internal organization and procurement processes. Suppliers and purchasers may prefer to use traditional methods of selling and buying medical products, such as using paper catalogs and interacting in person or by phone with representatives of manufacturers or distributors. In addition, many of the individuals responsible for purchasing medical products do not have ready access to the Internet and may be unwilling to use the Internet to purchase medical products. Even if suppliers and purchasers accept the Internet as a means of selling and buying medical products, they may not accept our online marketplace for conducting this type of business. Instead, they may choose to establish and operate their own websites to purchase or sell new and used medical products. For example, a group of large suppliers of medical products including Johnson & Johnson, General Electric Medical Systems, Abbott Laboratories and Medtronic announced that they are creating a healthcare exchange for the purchase and sale of medical products. In addition, four large distributors of medical products, AmeriSource Health Corp., Cardinal Health Inc., Fischer Scientific International Inc. and McKesson HBOC Inc. have also announced that they will form a business-to-business exchange marketplace for the sales of drugs and medical-surgical products, devices and other laboratory products and services. Reluctance of suppliers and purchasers to use our services would seriously harm our business. IF WE CANNOT QUICKLY BUILD A CRITICAL MASS OF PURCHASERS AND SUPPLIERS OF MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT, WE WILL NOT ACHIEVE A NETWORK EFFECT AND OUR BUSINESS MAY NOT SUCCEED To encourage suppliers to list their products on our online marketplace, we need to increase the number of purchasers who use our services. However, to encourage purchasers to use our marketplace, it must offer a broad range of products from a large number of suppliers. If we are unable to quickly build a critical mass of purchasers and suppliers, we will not be able to benefit from a network effect, where the value of our services to each participant significantly increases with the addition of each new participant. Our inability to achieve a network effect would reduce the overall value of our Shop and Auction services to purchasers and suppliers and, consequently, would harm our business. We expect to rely in part on our relationship with Novation to bring buyers and suppliers to our marketplace. Under our outsourcing and operating agreement with Novation, Novation is our exclusive agent for signing up suppliers to participate in our online marketplace, subject to limited exceptions. Accordingly, we rely in part, on Novation to attract suppliers to our marketplace and, if Novation is unable to attract a sufficient number of suppliers, the value of our online marketplace to purchasers will be substantially decreased and our business will suffer. In addition, although our outsourcing and operating agreement with Novation provides that Novation will exclusively offer our online marketplace to the healthcare organization participating in its purchasing programs, these healthcare organizations are not obligated to use our services and may use competing services or traditional procurement methods. Accordingly, these purchasers might not choose to use our online marketplace for their purchasing needs. If this were to occur, the value of our online marketplace to suppliers would be substantially decreased and our business will suffer. If the outsourcing and operating agreement were terminated by Novation, our business and financial results could be seriously harmed. The outsourcing agreement may be terminated by Novation in the event of a material breach of our obligations under the agreement or the VHA and UHC stock and warrant transactions are terminated. In addition, we will incur significant cost in providing functionality to our online marketplace and in integrating healthcare organizations and suppliers to our online marketplace prior to receiving related transaction fee revenues and may not generate sufficient revenues to offset these costs. IT IS IMPORTANT TO OUR SUCCESS THAT OUR SERVICES BE USED BY LARGE HEALTHCARE ORGANIZATIONS AND WE MAY NOT ACHIEVE MARKET ACCEPTANCE WITH THESE ORGANIZATIONS Currently, we believe that most of the registered users of our website are relatively small healthcare providers such as physicians offices. It is important to our success that our services be used by large healthcare organizations, such as hospitals, integrated delivery networks and members of large purchasing organizations. In order for these large organizations to accept our services, we must integrate our services with their information systems. In addition, we will need to develop customer-specific pricing capabilities before these organizations can use our services to purchase products covered by their negotiated agreements with suppliers. Finally, we will need to significantly increase the number of suppliers using our services to address the needs of these large organizations, which typically require a wide range of medical products. Many of these large healthcare organizations have established, or may establish, websites that enable sales of their products directly to consumers or electronic data interchange systems designed specifically for their needs and integrated with their existing processes and technologies. If we are unable to extend our capabilities and expand our registered user base as described above, we may not provide an attractive alternative to these websites or systems and may not achieve market acceptance by these large organizations. In addition, we believe that we must establish relationships with group purchasing organizations in order to increase our access to these organizations. Group purchasing organizations represent groups of buyers in the negotiation of purchasing contracts with sellers and consequently have the ability to significantly influence the purchasing decisions of their members. Our relationship with Novation could make it more difficult to attract other group purchasing organizations to our online marketplace. The inability to enter into and maintain favorable relationships with other group purchasing organizations and the hospitals they represent could impact the breadth of our customer base and could harm our growth and revenues. One of the largest group purchasing organizations, Premier Purchasing Partners, has a long-term, exclusive agreement for e-commerce services with Premier Health Exchange. One of our competitors, medibuy.com, Inc., announced an agreement to acquire Premier Health Exchange. Medibuy also recently announced a proposed acquisition of empactHealth.com, an online marketplace for medical products formed by Columbia/HCA Healthcare, a large owner and operator of hospitals and other healthcare facilities. Ventro, a business-to-business e-commerce company providing supply chain solutions, has formed a joint venture, Broadlane, with Tenet Healthcare, a large owner and operator of hospitals and other healthcare facilities. Broadlane also recently announced a strategic alliance with AmeriNet, a large group purchasing organization. IF WE DO NOT SUCCEED IN EXPANDING THE BREADTH OF THE PRODUCTS OFFERED THROUGH OUR ONLINE MARKETPLACE, SOME PURCHASERS OF MEDICAL PRODUCTS MAY CHOOSE NOT TO UTILIZE OUR SERVICES WHICH WOULD LIMIT OUR POTENTIAL MARKET SHARE The future success of our Shop service depends upon our ability to offer purchasers a wide range of medical products. The products currently listed on our Shop service are primarily oriented to the physicians` office market. Large healthcare organizations generally require a much broader range of products. To increase the breadth of the products listed on Shop, we must establish relationships with additional suppliers and expand the number and variety of products listed by existing suppliers
aus der Diskussion:	Wer hat Infos zu NEOFORMA ??
Autor (Datum des Eintrages):	Schachtmann  (15.11.00 16:18:34)
Beitrag:	14 von 14 (ID:2355970)
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