10-Q 1 f72110e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED MARCH 31,2001 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NO. 000-28715 ------------------------ NEOFORMA.COM, INC. (EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0424252 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 3061 ZANKER RD. SAN JOSE, CA 95134 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 468-4000 (THE REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At May 15, 2001, there were 182,715,617 outstanding shares of our common stock, $.001 par value per share. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 NEOFORMA.COM, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000....................................... 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000.................. 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000.................. 5 Notes to Unaudited Condensed Consolidated Financial Statements.................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 34 Item 2. Changes in Securities and Use of Proceeds................... 34 Item 3. Defaults Upon Senior Securities............................. 34 Item 4. Submission of Matters to a Vote of Security Holders......... 34 Item 5. Other Information........................................... 34 Item 6. Exhibits and Reports on Form 8-K............................ 34 SIGNATURES................................................................ 35
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS NEOFORMA.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, MARCH 31, 2000 2001 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................. $ 22,597 $ 24,203 Short-term investments.................................... 7,163 841 Accounts receivable, net of allowance for doubtful accounts of $384 and $588, respectively................ 1,353 3,239 Unbilled revenue.......................................... 946 500 Prepaid expenses and other current assets................. 3,770 3,547 Deferred debt costs, current portion...................... 413 413 --------- --------- Total current assets.............................. 36,242 32,743 --------- --------- PROPERTY AND EQUIPMENT, net................................. 32,529 31,431 INTANGIBLES, net of amortization............................ 127,799 119,990 CAPITALIZED PARTNERSHIP COSTS, net of amortization.......... 308,330 292,266 NON-MARKETABLE INVESTMENTS.................................. 8,400 8,400 OTHER ASSETS................................................ 456 337 DEFERRED DEBT COSTS, less current portion................... 182 77 --------- --------- Total assets...................................... $ 513,938 $ 485,244 ========= ========= CURRENT LIABILITIES: Notes payable, current portion............................ $ 8,089 $ 6,554 Accounts payable.......................................... 22,744 10,862 Accrued payroll........................................... 3,106 2,286 Other accrued liabilities................................. 2,303 2,419 Deferred revenue.......................................... 947 1,195 --------- --------- Total current liabilities......................... 37,189 23,316 --------- --------- NOTES PAYABLE, less current portion......................... 7,958 6,841 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock $0.001 par value: Authorized -- 300,000 shares at March 31, 2001 Issued and outstanding: 134,935 shares at December 31, 2000 and 161,506 at March 31, 2001.................... 135 162 Warrants.................................................... 11,733 3,688 Additional paid-in capital.................................. 761,252 801,713 Notes receivable from stockholders.......................... (7,112) (7,049) Deferred compensation....................................... (32,346) (25,332) Unrealized loss on available-for-sale securities............ (3) (4) Accumulated deficit......................................... (264,868) (318,091) --------- --------- Total stockholders' equity........................ 468,791 455,087 --------- --------- Total liabilities and stockholders' equity........ $ 513,938 $ 485,244 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 NEOFORMA.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 2001 -------- -------- REVENUE: Sales of used equipment................................... $ 76 $ -- Transaction fees.......................................... 801 2,404 Services.................................................. -- 14 Website sponsorship fees and other........................ 351 394 -------- -------- Total revenue..................................... 1,228 2,812 OPERATING EXPENSES: Cost of used equipment sold............................... 22 -- Cost of services.......................................... -- 4,394 Operations................................................ 3,714 3,915 Product development....................................... 6,131 5,554 Selling and marketing..................................... 12,153 10,262 General and administrative................................ 8,161 5,009 Amortization of intangibles............................... 1,311 7,809 Amortization of partnership costs......................... -- 18,978 Write off of acquired in-process research and development............................................ 3,000 -- -------- -------- Total operating expenses.......................... 34,492 55,921 -------- -------- Loss from operations.............................. (33,264) (53,109) OTHER INCOME (EXPENSE): Interest income........................................... 1,508 321 Interest expense.......................................... (221) (303) Other income (expense).................................... -- (132) -------- -------- Net loss.......................................... (31,977) (53,223) ======== ======== NET LOSS PER SHARE: Basic and diluted......................................... $ (0.77) $ (0.36) ======== ======== Weighted average shares -- basic and diluted.............. 41,520 149,474 ======== ======== PRO FORMA NET LOSS PER SHARE: Basic and diluted......................................... $ (0.61) $ (0.36) ======== ======== Weighted average shares -- basic and diluted.............. 52,067 149,474 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 NEOFORMA.COM, INC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(31,977) $(53,223) Adjustment to reconcile net loss to net cash used in operating activities: Amortization resulting from issuance of Series E preferred stock in connection with prepaid consulting services.... 335 -- Common stock issued to employees.......................... -- 349 Valuation of common stock options issued in connection with consulting services................................ 212 -- Valuation of warrants to purchase common stock in exchange for consulting services................................. 67 -- Provision for doubtful accounts........................... -- 632 Write off of acquired in-process research and development............................................. 3,000 -- Depreciation and amortization of property and equipment... 1,727 2,648 Amortization of intangibles............................... 1,311 7,809 Amortization of partnership costs......................... -- 18,978 Amortization of deferred compensation..................... 8,466 6,330 Amortization of deferred debt costs....................... 105 105 Change in assets and liabilities, net of acquisitions: Accounts receivable..................................... (491) (2,072) Inventory............................................... -- (300) Prepaid expenses and other assets....................... (321) 639 Accounts payable........................................ 10,220 (11,882) Accrued liabilities and accrued payroll................. (217) (704) Deferred revenue........................................ (29) 248 -------- -------- Net cash used in operating activities................. (7,592) (30,443) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable investments....................... (862) (618) Sale of marketable investments............................ 10,800 6,940 Cash paid for the acquisition of Pharos Technologies, Inc, net of cash acquired.................................... (500) -- Cash paid for the acquisition of U.S. Lifeline, Inc, net of cash acquired........................................ (3,219) -- Purchase of non-marketable investments.................... (3,000) -- Cash paid on note issued in connection with the acquisition of General Asset Recovery, Inc.............. (367) (412) Purchases of property and equipment....................... (13,469) (1,550) -------- -------- Net cash provided by (used in) investing activities... (10,617) 4,360 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable............................... (229) (2,239) Repayments of notes receivable from stockholders.......... 10 -- Proceeds from the issuance of common stock under the employee stock purchase plan............................ -- 559 Common stock repurchased, net of cancellation of notes receivable issued to common stockholders................ -- (83) Proceeds from the issuance of common stock, net of issuance costs.......................................... 95,328 29,452 -------- -------- Net cash provided by financing activities............. 95,109 27,689 -------- -------- Net increase in cash and cash equivalents............. 76,900 1,606 CASH AND CASH EQUIVALENTS, beginning of period.............. 25,292 22,597 -------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $102,192 $ 24,203 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for interest.................. $ 116 $ 189 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Conversion of preferred stock to common stock............. $ 88,824 $ -- ======== ======== Issuance of note payable to related party in connection with acquisition of Pharos Technologies, Inc............ $ 22,000 $ -- ======== ======== Issuance of common stock in connection with the acquisition of U.S. Lifeline, Inc....................... $ 2,769 $ -- ======== ======== Notes receivable from common stockholders cancelled in repurchase of common shares............................. $ -- $ 63 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 NEOFORMA.COM, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by Neoforma.com, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 2000 filed on Form 10-K with the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods indicated. The results of operations for interim periods are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2001. Since inception, the Company has incurred significant losses, and, as of March 31, 2001, had an accumulated deficit of $318.1 million. Operating losses and negative cash flow are expected to continue through fiscal 2001. The Company currently anticipates that currently available funds, consisting of cash, cash equivalents and investments, combined with those funds available through lines of credit and other sources, will be sufficient to meet anticipated needs for working capital and capital expenditures through at least the next 12 months. The Company's future long-term capital needs will depend significantly on the rate of growth of its business, the timing of expanded service offerings, the success of these services once they are launched and the Company's ability to adjust its operating expenses to an appropriate level if the growth rate of its business is slower than expected. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If available funds and cash generated from operations are insufficient to satisfy its long-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain additional lines of credit, curtail expansion of its services, including reductions in its staffing levels and related expenses, or potentially liquidate selected assets. The Company cannot be certain that additional financing will be available on favorable terms when required, or at all. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, General Asset Recovery ("GAR"), Pharos Technologies, Inc. ("Pharos"), U.S. Lifeline, Inc. ("USL") and EquipMD, Inc. ("EquipMD"). All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications have been made to the historical consolidated financial statements to conform to the 2001 presentation. INVESTMENTS Investments classified as cash equivalents amounted to approximately $16.7 million and $16.4 million at December 31, 2000 and March 31, 2001, respectively. Investments with maturities greater than ninety days and less than one year are classified as short-term investments. The investments are classified as "available-for-sale," and the difference between the cost and fair value of these investments is immaterial and is included in other comprehensive income. 6 7 NEOFORMA.COM, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The amortized costs, aggregate fair value and gross unrealized holding losses by major security type were as follows (in thousands):
AS OF MARCH 31, 2001 -------------------------------------- UNREALIZED AMORTIZED AGGREGATE HOLDING COST FAIR VALUE LOSS --------- ---------- ----------- Debt securities issued by states of the United States and political subdivisions of the states........................................... $ 7,845 $ 7,845 $-- Corporate debt securities.......................... 9,438 9,434 (4) ------- ------- --- $17,283 $17,279 $(4) ======= ======= ===
AS OF DECEMBER 31, 2000 ------------------------------------- UNREALIZED AMORTIZED AGGREGATE HOLDING COST FAIR VALUE LOSS --------- ---------- ---------- Debt securities issued by states of the United States and political subdivisions of the states........................................... $ 8,350 $ 8,350 $ -- Corporate debt securities.......................... 15,527 15,524 (3) ------- ------- ---- $23,877 $23,874 $ (3) ======= ======= ====
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. The components of comprehensive loss for the three months ended March 31, 2000 and 2001 were as follows (in thousands):
THREE MONTHS ENDED MARCH 31, -------------------- 2000 2001 -------- -------- Net loss............................................... $(31,977) $(53,223) Net loss on available-for-sale securities.............. (6) (1) -------- -------- Comprehensive loss..................................... $(31,983) $(53,224) ======== ========
SEGMENT INFORMATION Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company identifies its operating segments based on business activities, management responsibility and geographical location. During the three months ended March 31, 2000 and 2001, the Company operated in a single business segment building and operating e-commerce marketplaces for healthcare providers and suppliers in the medical products, supplies and equipment industry. BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE Basic net loss per share on a historical basis is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share was the same as basic net loss per share for all periods presented since the effect of any potentially dilutive securities are excluded, as they are anti-dilutive as a result of the Company's net losses. The total number of shares excluded from the diluted loss per share calculation 7 8 NEOFORMA.COM, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) relating to these securities was approximately none and 48.4 million for the three months ended March 31, 2000 and 2001, respectively. Pro forma basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the appropriate period (excluding shares subject to repurchase) plus the weighted average number of common shares that resulted from the automatic conversion of outstanding shares of convertible preferred stock, which occurred upon the closing of the Company's initial public offering in January 2000. The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share for the three months ended March 31, 2000 and 2001 (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, -------------------- 2000 2001 -------- -------- Net loss.................................................... $(31,977) $(53,223) ======== ======== Basic and diluted: Weighted average shares of common stock outstanding....... 51,637 154,011 Less: Weighted average shares of common stock subject to repurchase............................................. (10,117) (4,537) -------- -------- Weighted average shares used in computing basic and diluted net loss per share............................. 41,520 149,474 ======== ======== Basic and diluted net loss per common share............... $ (0.77) $ (0.36) ======== ======== Pro forma: Net loss.................................................. $(31,977) $(53,223) ======== ======== Shares used above........................................... 41,520 149,474 Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred stock......... 10,547 -- -------- -------- Weighted average shares used in computing pro forma basic and diluted net loss per share............................ 52,067 149,474 -------- -------- Pro forma basic and diluted net loss per share.............. $ (0.61) $ (0.36) ======== ========
3. RELATED PARTY TRANSACTIONS On July 26, 2000, the Company's stockholders voted to approve the amended Outsourcing and Operating Agreement (the "Agreement") entered into among the Company and Novation, LLC ("Novation"), VHA Inc. ("VHA"), University HealthSystem Consortium ("UHC") and Healthcare Purchasing Partners International LLC ("HPPI") on May 24, 2000. Under the terms of the Agreement, the Company agreed to develop and manage an e-commerce marketplace (the "Marketplace") to be used by VHA, UHC and HPPI member healthcare organizations as their primary purchasing tool for medical equipment and supplies. Novation agreed to serve as a contracting agent for the Company by recruiting, contracting and managing relationships with healthcare equipment manufacturers and service suppliers on the Company's behalf. VHA and UHC agreed to provide marketing support for the Marketplace, guarantee Novation's obligations under the Agreement and agreed to enter into certain exclusivity provisions contained in the Agreement. In consideration for the services agreed to be rendered, the Company issued warrants to VHA and UHC to purchase up to 30,845,020 shares and 7,519,436 shares, respectively, of the Company's common stock, at an exercise price of $0.01 per share. Vesting on the warrants was performance based, and was driven by historical gross purchasing levels of VHA and UHC member healthcare organizations that enter into commerce agreements with the Company to use the Marketplace. Additionally, the Company issued to VHA and UHC 8 9 NEOFORMA.COM, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 46,267,530 shares and 11,279,150 shares, respectively, of the Company's common stock, which are subject to certain voting restrictions. On July 26, 2000, upon obtaining stockholder approval for the Agreement and the related issuance of shares, the Company issued the common stock discussed above to VHA and UHC. The common stock was issued in consideration for VHA and UHC entering into the Agreement, and the total valuation of those shares of $291.3 million was capitalized. In addition, approximately $9.4 million of deal costs, comprised primarily of attorneys, lawyers and bankers fees, was capitalized. These amounts have been recorded in Capitalized Partnership Costs in the accompanying condensed consolidated balance sheets and are being amortized over the estimated beneficial life of the Agreement of five years. Due to the performance criteria on the warrants, the valuation of the warrants was not calculated until earned. The valuation of warrants earned was calculated using the Black-Scholes pricing model using a risk free interest rate of 5.8%, expected dividend yield of zero, an average life equal to the remaining term of the outsourcing agreement and volatility of 70%. These amounts have also been recorded in the Capitalized Partnership Costs account in the accompanying consolidated balance sheets. The portion of the charge that relates to the warrant shares earned for each healthcare organization are being amortized over the life of the commerce agreement signed between the Company and that healthcare organization (between two to three years). As of March 31, 2001, the Company has recorded total Capitalized Partnership Costs relating to these shares of $41.1 million and total amortization against the Capitalized Partnership Costs of $49.5 million. On October 18, 2000, the Company entered into an agreement with VHA to replace the warrant issued to VHA to purchase up to 30,845,020 shares of its common stock with 30,845,020 shares of restricted common stock. On January 25, 2001, the Company entered into an agreement with UHC to replace the warrant issued to UHC to purchase up to 5,639,577 shares of its common stock with 5,639,577 shares of restricted common stock. In each case, the restrictions on the stock are identical to the vesting performance criteria that were in place on the warrant, and thus there will be no change in the accounting treatment relating to the restricted common stock versus the warrant. On December 31, 2000, the Company entered into a three-year software license agreement and a series of related agreements regarding maintenance, consulting and services with i2 Technologies, Inc. ("i2"). Under these agreements, the Company and i2 will collaborate on product development, marketing, sales and service activities. These agreements also provide for revenue sharing from the Company to i2 commencing immediately on services and applications sales, and commencing in 2002 on other marketplace related revenue. Additionally, the agreements contain revenue sharing provisions under which i2 will share revenue with the Company for products and services it sells in the healthcare vertical market. On January 25, 2001, the Company entered into stock purchase agreements with VHA and UHC to purchase shares of the Company's common stock. VHA and UHC acquired 11,834,320 and 3,254,438 shares, respectively, at a purchase price of $1.69 per share. Including i2, which participated in the strategic financing, acquiring 2,958,580 shares, the Company raised a total of approximately $30.5 million prior to costs associated with the sale of the shares, which were $1.1 million. After the closing of the financing, VHA and UHC owned approximately 48.8% and 12.1%, respectively, of the total shares of outstanding common stock assuming conversion of all outstanding common stock equivalents. Concurrent with the financing, the Company also further amended the Outsourcing and Operating Agreement (the "Amendment"), which it had originally entered into with Novation, VHA, UHC and HPPI on May 24, 2000. Under the terms of the Amendment, which was effective January 1, 2001, Novation agreed to guarantee a minimum fee level to the Company, which is directly derived from the gross transaction volume processed through the private marketplace which the Company maintains for Novation member health care organizations. The Amendment also included modifications to certain revenue sharing, supplier recruitment and supplier implementation provisions of the original agreement. 9 10 NEOFORMA.COM, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SUBSEQUENT EVENTS SALE OF US LIFELINE In April 2001, the Company entered into an agreement with Medical Distribution Solutions, Inc. ("MDSI") to sell substantially all of the assets of USL, the Company's healthcare content subsidiary, for $1.25 million. The purchase price was comprised of $500,000 of cash delivered to the Company upon the closing, and a $750,000 promissory note payable to the Company over five years. LINE OF CREDIT In April 2001, the Company entered into a $25 million revolving credit agreement with VHA. Under the credit agreement, until May 31, 2002, the Company can borrow funds up to an amount based on a specified formula based on the gross volume of transactions through the Marketplace. Any funds borrowed under this credit agreement will bear interest at a rate of 10% per annum and will be secured by substantially all of the Company's assets. In the event that the Company (1) sells any stock as part of an equity financing, (2) obtains funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (3) enters into a debt financing or other lending transaction secured by owned assets as of the effective date of the credit agreement, then the maximum of $25 million potentially available under the credit agreement will be reduced by an amount equal to the cash proceeds received from any of these transactions. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION You should read the following discussion of our financial condition and results of operations in conjunction with our condensed 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 is a leading healthcare supply chain solutions company. We build and operate Internet marketplaces that empower healthcare trading partners to optimize supply chain performance. The healthcare market has a number of characteristics that make it suited for an Internet-based marketplace solution, including its large size, high degree of fragmentation, significant inefficiencies, industry cost pressures and highly complex supply chain. Our solutions enable the participants in the healthcare supply chain market, principally healthcare providers, manufacturers, distributors, group purchasing organizations, or GPOs and integrated delivery networks, or IDNs, to significantly improve business processes within their organizations and among their trading partners. Using our products and services, these organizations can improve efficiencies, increase revenue, reduce costs and improve capital allocation. Our solutions consist of web-based products and services for our customers, or trading partners, as well as other services that are designed to accelerate and optimize their use of the marketplaces that we build for them. Our trading partners include both acute care and alternate site healthcare providers, manufacturers and distributors to these healthcare providers, GPOs and IDNs. Our primary business objectives are aligned with those of our trading partner customers. We seek to enable our customers to reallocate and redirect to their strategic priorities the excess costs that adversely affect their supply chain, reduce the time our trading partners' employees spend on non-productive activities and offset a significant portion of the capital investment our trading partners currently make in redundant and isolated supply chain-related technologies. Our strategies to achieve these objectives are to increase the number of custom marketplaces we build and operate, increase the number of trading partners that utilize our marketplaces, enhance the functionality of our product and service offerings and continue to form key strategic relationships. Historically, we have offered four primary services -- Shop, Auction, Plan and Services Delivery. Our Shop service provides private marketplaces where buyers can easily identify, locate and purchase new products and suppliers can access new customers and markets. Healthcare providers can use our Shop service 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 provided interactive content to healthcare facility planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities that we believed represented industry best practices, together with floor plans and information about the products in the room. Our Services Delivery service provides scalable and cost-effective implementation solutions for both healthcare providers and suppliers. In late fiscal 2000, we decided to refocus our development efforts and internal resources to our core business of building and operating Internet marketplaces to optimize supply chain performance for our trading partners. As part of this effort, we developed a plan to eliminate any operations that are not aligned with this core strategy. As such, we intend to divest our Auction operations, as well as portions of our Plan operations. On April 2, 2001, we implemented part of this strategy by selling USL, part of our Plan operations, to MDSI. To date, our principal source of revenue has been transaction fees paid by the sellers of products that use our Shop and Auction services. These transaction fees represent a negotiated percentage of the sale price of 11 12 the products sold through Shop or Auction. During the first quarter of 2001, we also received revenue from the following sources: - subscription fees paid by healthcare providers and manufacturers and distributors of medical products for our management and disposition of their used medical equipment through our asset recovery service on Auction; - 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 our marketplaces. We recognize transaction fees as revenue when the seller confirms a buyer's order. Setup fees are recognized upon completion of the related services. For live and online auction services, we recognize seller transaction fees, as well as a buyer's premium, when the product is sold. As a result of our planned divestiture of our Auction operation, we expect to recognize significantly less revenue from our live and online auction services in 2001 and no such revenue subsequent to the completion of this divestiture. 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. Sponsorship and subscription fees are recognized ratably over the period of the agreement. With respect to software licenses, license fees are recognized when the software has been delivered and there are no other contingencies related to our performance. If license fees are contingent upon our performance subsequent to delivery, we defer recognition of such fees or the fair market value of the undelivered element requiring performance until we have completed performance. Subscription and maintenance fee revenue is recognized ratably over the period of the service agreement. 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. Both our operating expenses and our revenue have increased significantly since inception. The revenue increases resulted from growth primarily in Shop and Plan, as well as the addition of the Services Delivery revenue stream in mid-2000. The increases in the operating expenses were due to a number of factors including increases in staffing in our development and sales organizations and elsewhere in our organization, including contractors and consultants, costs of strategic partnerships entered into, costs associated with the restructuring of our organization and costs associated with being a publicly traded company such as increased reporting and regulatory oversight requirements. Additionally, our headcount increased from 269 full-time employees as of the beginning of 2000 to as many as 326 during 2000, and decreased to 249 full-time employees as of March 31, 2001 as a result of the reduction in force we announced on May 25, 2000 and normal attrition. Under the terms of our outsourcing and operating agreement with Novation, which was approved by our stockholders on July 26, 2000, VHA received approximately 46.3 million shares of our common stock, representing approximately 36% of our then outstanding common stock, and UHC received approximately 11.3 million shares, representing approximately 9% of our then outstanding common stock. We also issued warrants to VHA and UHC, allowing VHA and UHC the opportunity to earn up to approximately 30.8 million and approximately 7.5 million additional shares of our common stock, respectively, over a four-year period by meeting specified performance targets. These targets were based upon the historical purchasing volume of VHA and UHC member healthcare organizations that sign up to use Marketplace@Novation, the online marketplace only available to the patrons and members of VHA, UHC and HPPI. The targets increased 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. Novation has agreed to act as our exclusive agent to negotiate agreements with suppliers to offer their equipment, products, supplies and services through our marketplaces, subject to some exceptions. VHA, UHC, HPPI and Novation have each agreed not to develop or promote any 12 13 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 approximately 30.8 million shares of our common stock. In substitution for the warrant, we issued to VHA approximately 30.8 million shares of our restricted common stock. On January 25, 2001, we and UHC agreed to amend our common stock and warrant agreement to provide for the cancellation of the remaining unexercised portion of the performance warrant to purchase approximately 5.6 million shares of our common stock. In substitution for the warrant, we issued to UHC approximately 5.6 million shares of our restricted common stock. Both VHA's and UHC's restricted shares are subject to forfeiture if the same performance targets that were contained in their original warrants are not met. On January 25, 2001, we entered into an amendment to the outsourcing and operating agreement which we had originally entered into with Novation, VHA, UHC and HPPI on May 25, 2000. Under the terms of the amended outsourcing and operating agreement, which was effective as of January 1, 2001, Novation agreed to guarantee a minimum fee level to us, which is directly derived from the gross transaction volume processed through Marketplace@Novation. The amended outsourcing and operating agreement also includes modifications to revenue sharing provisions under which we will share specified fees we receive for products and services sold through or related to our marketplaces. We will share with Novation revenue related to transactions through Marketplace@Novation and from our other marketplaces, revenue related to our Shop and Auction services and revenue related to the distribution or licensing of software and other technology solutions. We will not share revenue related to marketplaces sponsored by other GPOs, except for specified types of purchases. For the term of the agreement, we will not share with Novation revenue related to any of the above transactions in any quarter until we have achieved specified minimum transaction fees related to Marketplace@Novation transactions. The amended outsourcing and operating agreement also includes modifications to certain supplier recruitment and supplier implementation provisions of the original agreement. On January 25, 2001, we entered into stock purchase agreements with i2 Technologies, VHA and UHC under which they purchased a total of approximately 18.0 million shares of our common stock at a purchase price of $1.69 per share. We raised a total of approximately $30.5 million prior to costs associated with the sale of the shares, which were approximately $1.1 million, including an advisory fee to our investment bankers. After the closing of the financing, VHA and UHC owned approximately 48.8% and 12.1%, respectively, of our total shares of outstanding common stock, assuming exercise of all outstanding stock options and warrants to purchase our common stock. As a result of the planned divestitures of our Auction and USL operations, at December 31, 2000, we wrote down the assets of these operations to our estimate of the net realizable disposal value of the operations based on their activity through that date. Additionally, we have recorded an accrual for the anticipated costs to sell these operations. The total impact of these planned divestitures on our statement of operations for the year ended December 31, 2000 was $14.4 million, which consisted of an approximately $13.3 million reduction in the net realizable value of the assets relating to the operations to be sold, and $1.1 million of accruals for anticipated deal costs including any severance for the employees of those operations, accrued rent relating to potentially idle facilities, as well as financial and legal advisory fees. Since inception, we have incurred significant losses and, as of March 31, 2001, had an accumulated deficit of $318.1 million. We expect operating losses and negative cash flow to continue for the remainder of the fiscal year. We anticipate our losses will increase significantly as compared to fiscal 2000 despite a projected reduction in cash operating losses, due primarily to amortization of non-cash costs associated with strategic partnerships. 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 products and services used by healthcare providers, 13 14 including medical supplies and equipment. To address these risks, we must, among other things, increase the number of custom marketplaces we build and operate, expand the number of trading partners that use our marketplaces, 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 a reduction in our operations relating to any of our 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 MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenue Sales of Used Equipment. Sales of used equipment consists of the gross revenue generated from the sales of used and refurbished medical equipment that we own as part of our Auction service. We had no revenue from the sale of used equipment during the three months ended March 31, 2001, as compared to $76,000 for the three months ended March 31, 2000, as our Auction operations in 2001 were focused solely on hospital closures and other consignment sales. As a result, we also had no cost of used equipment sold, as there were no sales of inventory that we owned during the three months ended March 31, 2001. If we succeed in selling our Auction operations, we will not recognize any future revenue from sales of used equipment. Transaction Fees. Transaction fees consist of transaction fees paid by buyers and sellers for purchases through our marketplaces, as well as buyer and seller fees paid on consigned used equipment and supplies as part of our live and online Auction services. We had total transaction fee revenue of $2.4 million for the quarter ended March 31, 2001, an increase of 200% from $0.8 million for the quarter ended March 31, 2000. The increase is due primarily to increased gross transaction volume through our marketplaces, as revenue resulting from such transactions comprised $2.3 million of the total $2.4 million in transaction fees for the three months ended March 31, 2001. If we succeed in selling our Auction operations, we will not recognize any future revenue from Auction transaction fees. Services. Services revenue is generated primarily from our e-commerce readiness services and implementation and integration services. These are services performed by our Services Delivery organization for our trading partners in order to allow them to maximize the benefit of their utilization of our marketplaces. The Services Delivery group commenced activities in the first half of fiscal 2000 and, as such, there was no activity or cost associated with this group in the first quarter of 2000. During the three months ended March 31, 2001, services revenue was $14,000, which related solely to e-commerce readiness and implementation services performed for members of our marketplaces. Website Sponsorship Fees and Other. Website sponsorship fees and other revenue consists of sponsorship setup and maintenance revenue, as well as software license and support revenue, both of which relate to our Plan service. Also included in website sponsorship fees and other are subscription revenue relating to the USL operations and setup fees relating to the digitization and categorization of data for our trading partners. Website sponsorship fees and other revenue increased 12% to $394,000 for the quarter ended March 31, 2001, from $351,000 for the quarter ended March 31, 2000. The increase in fiscal 2001 was due primarily to subscription revenue relating to the USL operations and an increase in software license and maintenance revenue. Minimal revenue was generated from USL in the first quarter of 2000, as USL was not acquired until March 2000. As a result of the sale of our USL operations in April 2001, combined with our reduced focus on 14 15 our Plan services, we do not expect to recognize any Plan revenue in future periods. Consequently, we expect website sponsorship fees and other revenue to generate nominal revenue over the next several quarters. Cost of Services. Cost of services consists primarily of the costs to perform e-commerce readiness services and buyer and supplier implementation activities for our marketplaces. These expenditures consist primarily of fees for independent contractors, technology costs, software licenses and salaries and other personnel expenses for our Services Delivery personnel. Cost of services for the first quarter of 2001 was approximately $4.4 million as compared to none for the first quarter of 2000. The increase was due to the fact that the Services Delivery group was not created until after the first quarter of 2000, and thus there were no costs for that period. We expect our cost of services to continue at these levels in future periods as we continue to perform e-commerce readiness services and implement both buyers and sellers in order to expand the number of users connected and utilizing our marketplaces. Operations. Operations expenses consist primarily of expenditures for the operation and maintenance of our website and our marketplace technology infrastructure. These expenditures consist primarily of fees for independent contractors, technology costs and software licenses and salaries and other personnel expenses for our site operations personnel. Operations expenses increased from approximately $3.7 million for the three months ended March 31, 2000 to $3.9 million for the three months ended March 31, 2001. The increase was primarily due to an increase in operations personnel related costs, an increase in payments to third party consultants and increased expenditures for additional technology costs such as software licenses and hardware costs associated with the enhancement of the infrastructure of our marketplaces. We expect our operations expenses to continue to increase as we expand our operating infrastructure and add content and functionality to our marketplace platforms. Product Development. Product development expenses consist primarily of personnel expenses and consulting fees associated with the development and enhancement of our marketplace services and functionality. Product development expenses decreased from $6.2 million for the quarter ended March 31, 2000 to $5.6 million for the same quarter in 2001. The decrease was primarily due to reduced costs relating to contractors and consultants. We believe that continued investment in product development is critical to attaining our strategic objectives and, as such, we intend to continue to invest in this area. As a result, we expect product development expenses to increase slightly in future periods. 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 decreased from approximately $12.2 million for the three months ended March 31, 2000 to $10.3 million for the three months ended March 31, 2001. The decrease was primarily due to reduced sales and marketing personnel costs and a resulting reduction in expenses related to travel and attendance at trade shows. As part of our realignment of resources to focus on our core business model, we will be focusing the majority of our resources on product development and marketplace implementation and integration efforts. As such, while we intend to continue to invest in marketing activities and sell our marketplace services into the channels we have established, we do not expect selling and marketing expenses to continue to increase in the next several quarters. General and Administrative. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses decreased from approximately $8.2 million for the quarter ended March 31, 2000 to $5.0 million for the quarter ended March 31, 2001. The decrease was primarily due to reduced administrative personnel costs, including finance, accounting and administrative personnel, as well as a decrease in recruiting, legal and accounting expenses. These reductions were the result of the fact that in 2001, we did not incur the administrative costs associated with acquisitions that were in process during the first quarter of fiscal 2000, as well as those costs resulting from preparations for our initial public offering which occurred in January 2000. Given the streamlining we are undertaking in focusing on our core strategy, we expect general and administrative expenses to continue to decrease during the coming periods as we continue to divest ourselves of operations that are not aligned with our core strategy, and the general and administrative costs associated with those operations. 15 16 Amortization of Intangibles. Intangibles include goodwill and the value of software and other intangibles purchased in acquisitions. Intangibles are amortized on a straight-line basis over a period of three to seven years. Amortization of intangibles increased to $7.8 million for the quarter ended March 31, 2001, as compared to $1.3 million for the quarter ended March 31, 2000. The increase was primarily a result of a full quarter of amortization being taken in the first quarter of 2001 on the intangibles associated with the acquisition of Pharos in January 2000, as well as additional amortization related to the intangibles recorded as part of our acquisitions of USL in March 2000, EquipMD in April 2000 and certain assets of NCL in July 2000. We expect the amortization of intangibles to decrease in future periods as a significant portion of the intangibles relating to the operations to be divested, specifically GAR, NCL and USL, will be eliminated as part of the divestitures of those operations. Amortization of Partnership Costs. Amortization of capitalized partnership costs represents the amortization of the capitalized valuation of consideration given to our strategic partners as part of entering into our operating relationships with those partners. As of March 31, 2001, capitalized partnership costs represent consideration given to VHA and UHC as part of our entering into our outsourcing and operating agreement with those entities and with their purchasing division, Novation, as well as certain legal and accounting fees relating to the agreement. The consideration consisted of common stock and warrants, which were subsequently converted to restricted common stock. The value of the common stock issued is being amortized over a five year estimated useful life. The restricted common stock is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted stock are being amortized over the term of the agreement with the healthcare organizations which resulted in the shares being earned, which is generally two to three years. For the quarter ended March 31, 2001, total amortization of partnership costs was $19.0 million. As the outsourcing and operating agreement did not close until July of 2000, there was no amortization of partnership costs in the quarter ended March 31, 2000. Write Off of Acquired In-process Research and Development. For the quarter ended March 31, 2000, we expensed $3.0 million related to the write off of acquired in-process research and development in connection with the Pharos acquisition in January 2000. Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income for the quarter ended March 31, 2001 was $321,000 compared to $1.5 million for the quarter ended March 31, 2000. The decrease in interest income was due to the decrease in our average net cash and cash equivalents balance as a result of our utilization of cash to fund our operations in fiscal 2000. Interest expense increased from $221,000 for the quarter ended March 31, 2000 to $303,000 for the same period in 2001, primarily as a result of the interest associated with significantly higher levels of leases and notes payable outstanding throughout the period. Income Taxes. As of December 31, 2000, we had federal and state net operating loss carryforwards of approximately $153.1 million and $105.7 million, respectively, which will be available to reduce future taxable income, and which expire at various dates through 2020. 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. 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 $95.3 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 March 31, 2001, we had outstanding bank, other borrowings and notes payable of $13.4 million, and we had approximately $25.0 million of cash and cash equivalents and short-term investments. 16 17 In January 2001, we completed a $30.5 million private round of financing in which we sold 18,047,388 shares of our common stock at $1.69 per share to three strategic investors, i2, VHA and UHC. In April 2001, we entered into a $25 million revolving credit agreement with VHA. Under the credit agreement, until May 31, 2002, we are able to borrow funds up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation. Any funds that we borrow under this credit agreement will bear interest at a rate of 10% per annum and will be secured by substantially all of our assets. In the event that we (1) sell any of our stock as part of an equity financing, (2) obtain funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (3) enter into a debt financing or other lending transaction secured by assets we owned as of the date we entered into the credit agreement, then the maximum of $25 million we could potentially borrow under the credit agreement will be reduced by an amount equal to the cash proceeds we receive from any of these transactions. 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 in July 1999. This loan was secured by all of our assets at the time the loan was made. 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 March 31, 2001, the outstanding balance on the loan was approximately $926,000. 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 March 31, 2001, we had outstanding approximately $1.8 million in total loans due under this facility. This facility is secured by the computer equipment purchased with the loans. 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 March 31, 2001, the outstanding balance on the note was approximately $4.6 million. As part of the acquisition of EquipMD, we assumed the balance on an unsecured line of credit. The maximum borrowings allowed under the agreement are $300,000, of which none was available at March 31, 2001. Additionally, as part of the purchase of EquipMD, we assumed a note payable in the amount of $1.8 million which is related to EquipMD's purchase of Central Point Services LLC. The note bears interest at a rate of 7.5% per annum and is payable in eight quarterly installments, after which the unpaid principal balance and accrued interest become due and payable through January 2002. At March 31, 2001, the remaining principal balance was $1.2 million. According to the provisions of the note, a payment of $250,000 was due upon a change of control of EquipMD. As a result of our purchase of EquipMD, we made a $250,000 payment as a result of this provision. In connection with our operating lease on our corporate headquarters in San Jose, California, we established a letter of credit in the amount of $2.0 million payable to our landlord to secure our obligations under the lease. Under the terms of the lease, which allow for reductions in the amount of the letter of credit over time as we fulfill our obligations under the lease, we are in the process of reducing the letter of credit to $1.5 million. In March 2000, we entered into a Hosting Alliance Agreement with Ariba, Inc. under which we have the right to 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. 17 18 In July 2000, in recognition of the advisory services rendered in connection with the terminated Healthvision and Eclipsys mergers, our outsourcing and operating agreement and our acquisition of EquipMD, we entered into a promissory note with our investment bankers in the amount of $6.0 million. The note was payable in quarterly payments of $1.5 million, commencing on January 1, 2001. At March 31, 2001, the remaining balance on the note was $4.5 million. In April 2001, we amended the terms of the note such that the remaining balance was payable in two installments: the first $2.0 million payable in May 2001 and the remaining $2.5 million payable in April 2002. In July 2000, as part of the acquisition of certain assets 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 March 31, 2001, the balance of all four notes in total was $156,000. In addition, as part of the acquisition, we also agreed to pay $250,000 on July 14, 2002, two years from the closing date of the acquisition. This payment is to be distributed in equal amounts of $62,500 to each of the four principals of NCL. As of March 31, 2001, no payments have been made against this commitment. In December 2000, we entered into a three-year software license agreement and a series of related agreements regarding maintenance, consulting and services with i2 under which we will collaborate with i2 on product development, marketing, sales and service activities. In connection with the license agreement, we paid i2 a substantial upfront fee to license certain software for use in our marketplaces. Pursuant to these agreements, we will share specified revenues with i2 related to specified services and applications commencing immediately, and on other marketplace related revenues commencing in fiscal 2002. Additionally, we will receive a revenue share from i2 under the agreements for specified products and services sold in the healthcare vertical market. Net cash used in operating activities was $7.6 million for the three months ended March 31, 2000 and $30.4 million for the three months ended March 31, 2001. Net cash used in operating activities for the three months ended March 31, 2001 related primarily to funding net operating losses, a $2.1 million increase in accounts receivable and an $11.9 million decrease in accounts payable. Net cash used in investing activities for the three months ended March 31, 2000 was $10.6 million consisting primarily of $13.5 million paid for the purchase of property and equipment, $3.0 million paid for non-marketable investments and $3.2 million paid for the acquisition of USL, partially offset by $10.8 million received from the sale of marketable securities. For the three months ended March 31, 2001, net cash provided by investing activities was $4.4 million, primarily resulting from $6.9 million of proceeds from the sale of marketable investments, partially offset by $1.6 million in cash paid for the purchase of property and equipment to continue to develop our marketplace infrastructure. Net cash provided by financing activities was $95.1 million for the three months ended March 31, 2000 and $27.7 million for the three months ended March 31, 2001. Net cash provided from financing activities for the three months ended March 31, 2001 resulted primarily from proceeds of common stock issuances of approximately $29.5 million, net of expenses. We currently anticipate that our available funds, consisting of cash, cash equivalents and investments, combined with those funds available to us through our lines of credit and other sources, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of expanded service offerings, the success of these services once they are launched and our ability to adjust our operating expenses to an appropriate level if the growth rate of our business is slower than expected. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If our available funds and cash generated from operations are insufficient to satisfy our long-term liquidity requirements, we may seek to sell additional equity or debt securities, obtain additional lines of credit, curtail expansion of our services including reductions in our staffing levels and related expenses or potentially liquidate selected assets. 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 18 19 experience dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amended or modified certain issues discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statements also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 and SFAS No. 138 did not have a material impact on our financial statements. 19 20 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The risks described below are not the only ones we face. 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 RECENTLY DECIDED TO REFOCUS OUR DEVELOPMENT EFFORTS AND INTERNAL RESOURCES TO BUILDING AND OPERATING INTERNET MARKETPLACES 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 public marketplace and the building of our operating infrastructure. We introduced our Shop and Auction services in mid-1999, and as a result, we have generated revenues of only $14.3 million from our inception through March 2001. In late 2000, we decided to refocus our development efforts and internal resources to our core business of building and operating Internet marketplaces for our trading partners. Because we have refocused our business efforts in this manner, it is difficult to evaluate our business and our future prospects. For example, it is difficult to predict whether we will succeed in increasing the number of marketplaces that we operate, the number of trading partners that utilize our marketplaces or the revenue we will derive from our marketplaces. 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, NO SIGNIFICANT REVENUE AND 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 a net loss of $53.2 million for the three months ended March 31, 2001. In addition, as of March 31, 2001, we had an accumulated deficit of approximately $318.1 million. We have not achieved profitability, and we expect to continue to incur substantial operating losses through at least 2001, primarily as a result of increases in costs and expenses relating to executing on our strategy of building and operating Internet marketplaces for our trading partners. To achieve positive cash flow from operations by the first quarter of 2002, we must reduce our operating expenses and generate significantly increased revenue from our marketplaces. We have taken measures to reduce our operating expenses by reducing headcount through our restructuring in May 2000 and divestiture of USL in April 2001, and intend to further reduce operating expenses by divesting our Auction operations, including GAR and the assets acquired from NCL. If our revenue does not increase substantially or if we do not succeed in reducing expenses to the degree we expect, we will not achieve positive cash flow from operations by the first quarter of 2002, and we may never become profitable. 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 CONTINUE TO DECLINE 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; - the timing of and expenses incurred in building and operating new marketplaces; - the number of new trading partners that sign up to use our marketplaces and our ability to connect them to our marketplaces; - 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. 20 21 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 continue to decline. 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 have been 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 operating results. IF OUR TRADING PARTNERS DO NOT ACCEPT OUR BUSINESS MODEL OF PROVIDING ONLINE MARKETPLACES FOR THE PURCHASE AND SALE OF PRODUCTS AND SERVICES USED BY HEALTHCARE PROVIDERS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON STOCK MAY CONTINUE TO DECLINE We have recently refocused our efforts on building and operating Internet marketplaces that aggregate buyers and suppliers of products and services used by healthcare providers, including medical supplies and equipment. This business model is new and unproven and depends upon buyers and sellers in this market adopting a new way to purchase and sell products and services. If buyers and sellers of products and services used by healthcare providers do not accept our business model, demand for our services may not develop and the price of our common stock would decline. Buyers and suppliers could be reluctant to accept our relatively new and unproven approach, which involves new technologies and may not be consistent with their existing internal organization and procurement processes. Buyers and suppliers may prefer to use traditional methods of buying and selling products and services, 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 products and services do not have ready access to the Internet and may be unwilling to use the Internet to purchase products and services. Even if buyers and suppliers accept the Internet as a means of buying and selling products, they may not accept our online marketplaces for conducting this type of business. Instead, they may choose to establish and operate their own websites to buy or sell products and services. For example, a group of large suppliers of medical products, including Johnson & Johnson, General Electric Medical Systems, Abbott Laboratories and Medtronic, have created 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 formed a business-to-business exchange for the sales of drugs and medical-surgical products, devices and other laboratory products and services. Reluctance of buyers and suppliers to use our marketplaces would seriously harm our business. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING FOR OUR FUTURE CAPITAL NEEDS, WE MAY BE UNABLE TO DEVELOP NEW ONLINE MARKETPLACES OR ENHANCE THE FUNCTIONALITY OF OUR EXISTING MARKETPLACES, EXPAND OUR OPERATIONS, RESPOND TO COMPETITIVE PRESSURES OR CONTINUE OUR OPERATIONS We currently anticipate that our cash, cash equivalents and investments and our lines of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We may need to raise additional funds prior to the expiration of this period if, for example, we do not generate significantly increased revenue from our online marketplaces, experience operating losses that exceed our current expectations or pursue additional acquisitions. We believe that it would be difficult to obtain additional financing on favorable terms, if at all. We may try to obtain additional financing by issuing shares of our common stock, which could dilute our existing stockholders. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop new marketplaces or enhance our existing online marketplaces, expand our operations, respond appropriately to competitive pressures or continue our operations. 21 22 IF WE CANNOT QUICKLY BUILD A CRITICAL MASS OF BUYERS AND SUPPLIERS OF PRODUCTS AND SERVICES USED BY HEALTHCARE PROVIDERS, WE MAY NOT ACHIEVE A NETWORK EFFECT AND OUR BUSINESS MAY NOT SUCCEED To encourage suppliers to list their products and services on our online marketplaces, we need to increase the number of buyers who use our marketplaces. However, to encourage buyers to use our marketplaces, we must offer a broad range of products from a large number of suppliers. If we are unable to quickly build a critical mass of buyers and suppliers, we will not be able to benefit from a network effect, where the value of our marketplaces to each participant significantly increases with the addition of each new participant. We expect to rely in part on our relationships with Novation and Medbuy, along with future strategic partners, to bring buyers and suppliers to our marketplaces. Under our outsourcing and operating agreement with Novation, Novation is our exclusive agent for signing up suppliers to participate in Marketplace@Novation, subject to limited exceptions. Under our agreement with Medbuy, Medbuy is our exclusive agent for signing up suppliers to participate in Canadian Health Marketplace, subject to limited exceptions. Accordingly, we rely in part on Novation and Medbuy to attract suppliers to our marketplaces and, if they are unable to attract a sufficient number of suppliers, the value of our online marketplaces to buyers will be substantially decreased and our business will suffer. In addition, although our agreements with Novation and Medbuy, respectively, provide that Novation and Medbuy will exclusively offer Marketplace@Novation and Canadian Health Marketplace, respectively, to the healthcare organizations participating in their purchasing programs, these healthcare organizations are not obligated to use our marketplaces and may use competing marketplaces or traditional procurement methods. Accordingly, these buyers might not choose to use our marketplaces for their purchasing needs. If this were to occur, the value of our marketplaces 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 and operating agreement may be terminated by Novation in the event of a material breach of our obligations under the agreement or if the VHA and UHC stock agreements are terminated. In addition, we will continue to incur significant costs in providing functionality to our online marketplaces and in integrating healthcare organizations and suppliers to our online marketplaces prior to receiving related transaction fee revenue, and we may not generate sufficient revenue to offset these costs. IT IS IMPORTANT TO OUR SUCCESS THAT OUR MARKETPLACES BE USED BY LARGE HEALTHCARE ORGANIZATIONS AND WE MAY NOT ACHIEVE MARKET ACCEPTANCE WITH THESE ORGANIZATIONS It is important to our success that our marketplaces be used by large healthcare organizations, such as hospitals, IDNs and members of large GPOs. For these large organizations to accept our marketplaces, we must integrate our marketplaces with their information systems. For example, although 356 healthcare organizations have signed up to use Marketplace@Novation as of March 27, 2001, we had only completed implementations for 120 of these healthcare organizations to connect them to Marketplace@Novation. We have not completed any implementations of Medbuy healthcare organizations. 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 marketplaces to address the needs of these large organizations, which typically require a wide range of products. 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 GPOs to increase our access to these organizations. GPOs 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 relationships with Novation and Medbuy could make it more difficult to attract other GPOs to our online marketplaces. The inability to enter into and maintain favorable relationships with other GPOs and the hospitals they represent could impact the breadth of our customer base and could harm our growth and revenue. One of the largest GPOs, Premier Inc., has a long-term, exclusive agreement for e-commerce 22 23 services with one of our competitors, medibuy.com, Inc. Medibuy also recently acquired empactHealth.com, an online marketplace for medical products formed by HCA-Healthcare Corp., 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. IF WE DO NOT SUCCEED IN EXPANDING THE BREADTH OF THE PRODUCTS AND SERVICES OFFERED THROUGH OUR ONLINE MARKETPLACES, SOME BUYERS OF PRODUCTS AND SERVICES MAY CHOOSE NOT TO UTILIZE OUR MARKETPLACES WHICH WOULD LIMIT OUR POTENTIAL MARKET SHARE The future success of our marketplaces depends upon our ability to offer buyers a wide range of products and services. Large healthcare organizations generally require a much broader range of products and services. To increase the breadth of the products and services listed on our marketplaces, we have recently established relationships with a number of suppliers, including Owens & Minor, McKesson HBOC, Allegiance Healthcare, Kimberly Clark and Kodak, and we must continue to establish relationships with additional suppliers and expand the number and variety of products listed by existing suppliers. If we are unable to maintain and expand the breadth of products and services listed on our marketplaces, the attractiveness of our marketplaces to buyers will be diminished, which would limit our potential market share. A number of factors could significantly reduce, or prevent us from increasing, the number of suppliers and products offered on our online marketplaces, including: - reluctance of suppliers to offer products in an online marketplace that potentially includes their competitors; - the fees charged to suppliers; - the ability to easily compare suppliers' products to those of other suppliers; - exclusive or preferential arrangements signed by suppliers with our competitors; - potential inability of Novation and Medbuy to attract suppliers to our online marketplaces; - perceptions by suppliers that we give other suppliers preferred treatment on our online marketplaces; and - consolidation among suppliers, which we believe is currently occurring. THE SUCCESS OF OUR BUSINESS DEPENDS ON THE PARTICIPANTS IN THE HEALTHCARE MARKET FOR PRODUCTS AND SERVICES ACCEPTING THE INTERNET FOR DISTRIBUTION AND PROCUREMENT Business-to-business e-commerce is currently not a significant sector of the healthcare market for products and services. The Internet may not be adopted by buyers and suppliers in the healthcare market for products and services for many reasons, including: - reluctance by the healthcare industry to adopt the technology necessary to engage in the online purchase and sale of products and services; - failure of the market to develop the necessary infrastructure for Internet-based communications, such as wide-spread Internet access, high-speed modems, high-speed communication lines and computer availability; - their comfort with existing purchasing habits, such as ordering through paper-based catalogs and representatives of manufacturers and distributors; - their concern with respect to security and confidentiality; and - their investment in existing purchasing and distribution methods and the costs required to switch methods. 23 24 Should healthcare providers and suppliers of products and services to healthcare organizations choose not to utilize or accept the Internet as a means of buying and selling products and services, our business model would not be viable. IF WE FAIL TO DEVELOP THE CAPABILITY TO INTEGRATE OUR MARKETPLACES WITH ENTERPRISE SOFTWARE SYSTEMS OF BUYERS AND SUPPLIERS OF PRODUCTS AND SERVICES USED BY HEALTHCARE ORGANIZATIONS AND TO ENABLE OUR MARKETPLACES TO SUPPORT CUSTOMER-SPECIFIC PRICING, THESE ENTITIES MAY CHOOSE NOT TO UTILIZE OUR MARKETPLACES, WHICH WOULD HARM OUR BUSINESS If we do not maintain and expand the functionality and reliability of our marketplaces, buyers and suppliers of products may not use our marketplaces. We believe that we must develop the capability to integrate our marketplaces with enterprise software systems used by many suppliers of products and by many large healthcare organizations, and to enable our marketplaces to support customer-specific pricing. We may incur significant expenses to develop these capabilities, and may not succeed in developing them in a timely manner. In addition, developing the capability to integrate our marketplaces with suppliers' and buyers' enterprise software systems will require the cooperation of and collaboration with the companies that develop and market these systems. Suppliers and buyers use a variety of different enterprise software systems provided by third-party vendors or developed internally. This lack of uniformity increases the difficulty and cost of developing the capability to integrate with the systems of a large number of suppliers and buyers. Failure to provide these capabilities would limit the efficiencies that our marketplaces provide, and may deter many buyers and suppliers from using our marketplaces, particularly large healthcare organizations. To realize the benefits of our agreements with Novation and Medbuy, we will be required to integrate the systems of the healthcare organizations purchasing through Novation's and Medbuy's programs. For example, although 356 healthcare organizations had signed up to use Marketplace@Novation as of March 27, 2001, we had only completed implementations for 120 of these healthcare organizations to connect them to Marketplace@Novation. We have not completed any implementations of Medbuy healthcare organizations. If the costs required to integrate these systems are substantially higher than anticipated, we may not realize the full benefit of these agreements. If we are delayed or unable to integrate the systems of these organizations, our revenue would be adversely affected. In addition, under the Novation and Medbuy agreements, we must meet detailed functionality and service level requirements. In our agreement with Novation, if we are unable to achieve these required levels of functionality within the required time period, we may be required to pay significant liquidated damages or the agreement could be terminated, which would seriously harm our business and financial results. To the extent we are unable to or delayed in providing this functionality, we may be unable to attract buyers and sellers to our marketplaces and our revenue may be adversely affected. We will be required to incur significant costs in providing functionality to our online marketplaces and in integrating buyers and suppliers to our online marketplaces prior to receiving any transaction fee revenue, and we may never generate sufficient revenue to offset these costs. IF OUR SYSTEMS ARE UNABLE TO PROVIDE ACCEPTABLE PERFORMANCE AS THE USE OF OUR MARKETPLACES INCREASES, WE COULD LOSE TRADING PARTNERS THAT USE OUR MARKETPLACES, AND WE WOULD HAVE TO SPEND CAPITAL TO EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE, EITHER OF WHICH COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS We have processed a limited number and variety of transactions on our marketplaces compared to the number and variety we expect to process in the future. Our systems may not accommodate increased use while providing acceptable overall performance. We must continue to expand and adapt our network infrastructure to accommodate additional trading partners and increased transaction volumes. This expansion and adaptation will be expensive and will divert our attention from other activities. If our systems do not continue to provide acceptable performance as use of our marketplaces increases, our reputation may be damaged and we may lose trading partners that use our marketplaces. 24 25 WE EXPECT THAT A SIGNIFICANT PORTION OF THE PRODUCTS AND SERVICES USED BY HEALTHCARE PROVIDERS THAT ARE SOLD THROUGH OUR MARKETPLACES WILL COME FROM A LIMITED NUMBER OF KEY MANUFACTURERS AND DISTRIBUTORS, AND THE LOSS OF A KEY MANUFACTURER OR DISTRIBUTOR COULD RESULT IN A SIGNIFICANT REDUCTION IN THE REVENUE WE GENERATE THROUGH THIS SERVICE Although to date we have generated only limited revenue from our marketplaces, we expect that a significant portion of the products to be sold through and revenue to be generated from our marketplaces will come from a limited number of key manufacturers and distributors or as a result of purchases made from these manufacturers and distributors. These parties are generally not obligated to list any products on our marketplaces. If any of these key manufacturers or distributors cease doing business with us or reduce the number of products they list on our marketplaces, the revenue we generate through this service could be significantly reduced. Our supplier agreements are nonexclusive and, accordingly, these suppliers can sell their products, supplies and equipment to buyers directly or through our competitors. WE MAY CONTINUE TO MAKE NEW ACQUISITIONS, WHICH COULD HARM OUR PROFITABILITY, PUT A STRAIN ON OUR RESOURCES OR CAUSE DILUTION TO OUR STOCKHOLDERS We have acquired technologies and other companies to expand our business and the services we offer, and we may make similar acquisitions in the future. See "Management's Discussion and Analysis of Financial Condition and Future Operating Results -- Overview" for a summary of our recent acquisitions. Integrating newly acquired organizations and technologies into our company could be expensive, time consuming and may strain our resources. In addition, we may lose current users of our marketplaces if any acquired companies have relationships with competitors of our users. Consequently, we may not be successful in integrating any acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. For example, in connection with the acquisitions of GAR, FDI, Pharos, USL, EquipMD and some assets of NCL, we recorded approximately $9.7 million, $3.3 million, $19.5 million, $6.5 million, $125.2 million and $3.2 million of intangibles, respectively, which will be amortized over a period of three to seven years. In addition, in connection with our recent agreement with Novation, we recorded approximately $339 million of capitalized partnership costs relating to stock and warrants issued to VHA and UHC as part of the outsourcing and operating agreement. IF WE DO NOT TIMELY ADD PRODUCT INFORMATION TO OUR ONLINE MARKETPLACES OR IF THAT INFORMATION IS NOT ACCURATE, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE USERS OF OUR MARKETPLACES Currently, we are responsible for entering product information into our database and categorizing the information for search purposes. If we do not do so in a timely manner, we will encounter difficulties in expanding our online marketplaces. We currently have a backlog of products to be entered in our system. We will not derive revenue from the sale of products by these suppliers until the information is entered in our system. Timely entering of this information in our database depends upon a number of factors, including the format of the data provided to us by suppliers and our ability to accurately enter the data in our product database, any of which could delay the actual entering of the data. We use an independent company to assist us in digitizing and inputting the data provided to us by suppliers, and we rely on this company to accurately input the data. If this company fails to input data accurately, our reputation could be damaged, and we could lose users of our marketplaces. Additionally, we must cross-reference our product information with appropriate vendor and contract identifiers to ensure that we can properly track the transactions we process. Failure to adequately develop this cross-reference over time could impede our ability to grow our transaction volume and collect fees from suppliers. 25 26 WE FACE SIGNIFICANT COMPETITION, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY BE UNABLE TO MAINTAIN OR EXPAND THE BASE OF BUYERS AND SELLERS OF PRODUCTS USING OUR MARKETPLACES AND WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES The healthcare supply chain market is new, rapidly evolving and highly competitive. Our competitors are diverse and offer a variety of solutions directed at various segments of the healthcare supply chain. Competitors include: - e-commerce providers that currently have or have announced plans for online marketplaces targeted at the healthcare supply chain, including medibuy, Broadlane, MedAssets, MedChannel and Medpool; - healthcare exchanges that have been formed by suppliers, namely Global Health Exchange, which was founded by five healthcare manufacturers, Abbott Laboratories, Baxter International, General Electric Medical Systems, Johnson & Johnson and Medtronic, and HealthNexis, which was formed by four healthcare distributors, Amerisource, Cardinal Health, Fisher Scientific and McKesson HBOC; - suppliers that have created their own websites that offer e-commerce functions to their customers for the sale of their products and services; - enterprise resource application software vendors that offer solutions in the healthcare market, such as SAP, Oracle, PeopleSoft, Lawson and McKesson HBOC; - vendors establishing electronic marketplaces and procurement capabilities, including Ariba and Commerce One; and - supply chain software vendors, including Manugistics and Logility. We believe that companies in our market compete to provide services to suppliers based on: - brand recognition; - number of buyers using their services and the volume of their purchases; - level of bias, or perceived bias, towards particular suppliers; - existing relationships; - compatibility with suppliers' existing distribution methods; - the amount of the fees charged to suppliers; - functionality, ease of use and convenience; - ability to integrate their services with suppliers' existing systems and software; and - quality and reliability of their services. In addition, we believe that companies in our market compete to provide services to buyers based on: - brand recognition; - breadth, depth and quality of product offerings; - ease of use and convenience; - number of suppliers available through their marketplace; - ability to integrate their services with buyers' existing systems and software; - quality and reliability of their services; and - customer service. 26 27 Competition is likely to intensify as our market matures. As competitive conditions intensify, competitors may: - enter into strategic or commercial relationships with larger, more established healthcare, medical products and Internet companies; - secure services and products from suppliers on more favorable terms; - devote greater resources to marketing and promotional campaigns; - secure exclusive arrangements with buyers that impede our sales; and - devote substantially more resources to website and systems development. Our current and potential competitors' services may achieve greater market acceptance than ours. Our existing and potential competitors may have longer operating histories in the healthcare supply chain market, greater name recognition, larger customer bases or greater financial, technical and marketing resources than we do. As a result of these factors, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands and services and make more attractive offers to buyers and suppliers, potential employees and strategic partners. In addition, new technologies may increase competitive pressures. We cannot be certain that we will be able to expand our buyer and supplier base or retain our current buyers and suppliers. We may not be able to compete successfully against our competitors, and competition could seriously harm our revenue, gross margins and market share. IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC ALLIANCES OR ENTER INTO NEW ALLIANCES, WE MAY BE UNABLE TO INCREASE THE ATTRACTIVENESS OF OUR MARKETPLACES OR PROVIDE SATISFACTORY SERVICES TO USERS OF OUR MARKETPLACES Our business strategy includes entering into strategic alliances with leading technology and healthcare-related companies to increase the number of marketplaces we build and operate, increase the number of trading partners that utilize our marketplaces, increase the number and variety of products and services that we offer and provide additional functionality, services and content to our trading partners. We may not succeed in entering into new strategic alliances, and even if we do succeed, we may not achieve our objectives through these alliances. These agreements do not, and future relationships may not, afford us any exclusive marketing or distribution rights. Many of these companies have multiple relationships and they may not regard us as significant for their business. These companies may pursue relationships with our competitors or develop or acquire services that compete with our services. In addition, in many cases these companies may terminate these relationships with little or no notice. If any existing alliance is terminated or we are unable to enter into alliances with leading technology and healthcare-related companies, we may be unable to increase the attractiveness of our marketplaces or provide satisfactory services to buyers and suppliers of products and services. IF WE ARE NOT ABLE TO INCREASE RECOGNITION OF THE NEOFORMA BRAND NAME, OUR ABILITY TO ATTRACT USERS TO OUR MARKETPLACES WILL BE LIMITED We believe that recognition and positive perception of the Neoforma brand name in the healthcare industry are important to our success. We intend to continue to invest in advertising and publicity efforts in the future. However, we may not achieve our desired goal of increasing the awareness of the Neoforma brand name. Even if recognition of our name increases, it may not lead to an increase in the number of users of our marketplaces or an increase the number of our trading partners. IF PARTICIPATING SELLERS ON OUR MARKETPLACES DO NOT PROVIDE TIMELY AND PROFESSIONAL DELIVERY OF PRODUCTS AND SERVICES, BUYERS MAY NOT CONTINUE USING OUR MARKETPLACES Suppliers deliver the products and services sold through our marketplaces to buyers. If these sellers fail to make delivery in a professional, safe and timely manner, then our marketplaces will not meet the expectations 27 28 of buyers, and our reputation and brand will be damaged. In addition, deliveries that are non-conforming, late or are not accompanied by information required by applicable law or regulations could expose us to liability or result in decreased adoption and use of our marketplaces. IF SUPPLIERS DO NOT PROVIDE US WITH TIMELY, ACCURATE, COMPLETE AND CURRENT INFORMATION ABOUT THEIR PRODUCTS AND COMPLY WITH GOVERNMENT REGULATIONS, WE MAY BE EXPOSED TO LIABILITY OR THERE MAY BE A DECREASE IN THE ADOPTION AND USE OF OUR MARKETPLACES If suppliers do not provide us in a timely manner with accurate, complete and current information about the products they offer and promptly update this information when it changes, our database will be less useful to buyers. We cannot guarantee that the product information available from our marketplaces will always be accurate, complete and current, or that it will comply with governmental regulations. This could expose us to liability if this incorrect information harms users of our services or result in decreased adoption and use of our marketplaces. We also rely on suppliers using our marketplaces to comply with all applicable governmental regulations, including packaging, labeling, hazardous materials, health and environmental regulations and licensing and record keeping requirements. Any failure of our suppliers to comply with applicable regulations could expose us to civil or criminal liability or could damage our reputation. BECAUSE SOME OF THE PARTICIPANTS IN OUR MARKETPLACES ARE STOCKHOLDERS OR ARE AFFILIATED WITH OUR STOCKHOLDERS OR HAVE STRATEGIC RELATIONSHIPS WITH US, WE MAY FIND IT DIFFICULT TO ATTRACT COMPETING COMPANIES, WHICH COULD LIMIT THE BREADTH OF PRODUCTS OFFERED ON AND USERS OF OUR MARKETPLACES Some participants in our marketplaces are our stockholders or are affiliated with our stockholders or have strategic relationships with us. For example, General Electric Medical Systems has agreed to conduct certain activities with us, and an affiliate of General Electric Medical Systems owns shares of our common stock. In addition, VHA and UHC, the owners of Novation, own approximately 58.1 million and 16.5 million shares of our common stock, respectively. In addition, VHA owns approximately 30.8 million shares of restricted common stock and UHC owns approximately 5.6 million shares of restricted common stock. These relationships may deter other suppliers, GPOs or users, particularly those that compete directly with these participants, from participating in our marketplaces due to perceptions of bias in favor of one party over another. This could limit the array of products offered on our marketplaces, damage our reputation and limit our ability to maintain or increase the number of our trading partners. WE MAY BE SUBJECT TO LITIGATION FOR DEFECTS IN PRODUCTS SUPPLIED BY SELLERS USING OUR MARKETPLACES, AND THIS TYPE OF LITIGATION MAY BE COSTLY AND TIME-CONSUMING TO DEFEND Because we facilitate the sale products by sellers using our marketplaces, we may become subject to legal proceedings regarding defects in these products, even though we generally do not take title to these products. Any claims, with or without merit, could: - be time-consuming to defend; - result in costly litigation; or - divert management's attention and resources. IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR INDUSTRY Our success depends on our ability to attract and retain qualified, experienced employees. Competition for qualified, experienced employees in both the Internet and the healthcare industry, particularly in the San Francisco Bay Area, is intense, and we may not be able to compete effectively to retain and attract employees, especially in light of the decline in our stock price in the last year which has decreased the value of the stock options held by our employees. As a result, our employees may seek employment with larger, more established companies or companies they perceive to have better prospects. Should we fail to retain or attract qualified personnel, we may not be able to compete successfully in our industry, and our business would be harmed. 28 29 We believe that our ability to successfully execute our business strategy will depend on the continued services of executive officers and other key employees. Our executive employment agreements do not prevent these executives from terminating their employment at any time. As a result, our employees, including these executives, serve at-will and may elect to pursue other opportunities at any time. The loss of any of our executive officers or other key employees could harm our business. OUR GROWTH AND ORGANIZATIONAL CHANGES HAVE PLACED A STRAIN ON OUR SYSTEMS AND RESOURCES, AND IF WE FAIL TO SUCCESSFULLY MANAGE FUTURE GROWTH AND ORGANIZATIONAL CHANGES, WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFICIENTLY AND MAY BE UNABLE TO EXECUTE OUR BUSINESS PLAN We have grown rapidly and will need to continue to grow our business to execute our strategy. Our total number of employees grew from six as of December 31, 1997, to 59 as of December 31, 1998 and 269 as of December 31, 1999. In May 2000, we reduced the number of our employees from approximately 330 to approximately 250. As of March 31, 2001, we had 249 employees. With the divestiture of USL and the intended divestitures of our Auction operations, including GAR and the assets acquired from NCL, we expect to reduce our headcount by approximately 40 employees. These changes, and the growth in the number of our trading partners and transaction volume through our marketplaces, have placed significant demands on management as well as on our administrative, operational and financial resources and controls. Any future growth would likely cause similar, and perhaps increased, strain on our systems and controls. OUR INFRASTRUCTURE AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER UNEXPECTED EVENTS, AND IF ANY OF THESE EVENTS OF A SIGNIFICANT MAGNITUDE WERE TO OCCUR, THE EXTENT OF OUR LOSSES COULD EXCEED THE AMOUNT OF INSURANCE WE CARRY TO COMPENSATE US FOR ANY LOSSES The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to process transactions, provide high quality customer service and attract and retain users of our services. Currently, our infrastructure and systems are located at one site at Exodus Communications in Sunnyvale, California, which is an area susceptible to earthquakes and currently experiencing an energy shortage. We depend on our single-site infrastructure and any disruption to this infrastructure resulting from a natural disaster, power outages or other event could result in an interruption in our service, reduce the number of transactions we are able to process and, if sustained or repeated, could impair our reputation and the attractiveness of our services or prevent us from providing our services entirely. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunications failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have a formal disaster recovery plan or alternative provider of hosting services. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that could occur. Any failure on our part to expand our system or Internet infrastructure to keep up with the demands of our users, or any system failure that causes an interruption in service or a decrease in responsiveness of our online services or website, could result in fewer transactions and, if sustained or repeated, could impair our reputation and the attractiveness of our marketplaces or prevent us from providing our services entirely. IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF THE CONFIDENTIAL INFORMATION OF THE TRADING PARTNERS THAT USE OUR MARKETPLACES, THESE USERS MAY DISCONTINUE USING OUR MARKETPLACES A significant barrier to the widespread adoption of e-commerce is the secure transmission of personally identifiable information of Internet users as well as other confidential information over public networks. If any compromise or breach of security were to occur, it could harm our reputation and expose us to possible liability. We use SSL, or secure sockets layer, an Internet security technology, at appropriate points in the transaction flow and encrypt information on our servers to protect user information during transactions, and we employ a security consulting firm that periodically tests our security measures. Despite these efforts, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations. We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches. 29 30 IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, WHICH COULD HARM OUR BUSINESS We regard our intellectual property as critical to our success. If we are unable to protect our intellectual property rights, our business would be harmed. We rely on trademark, copyright and trade secret laws to protect our proprietary rights. We have applied for registration of several marks including Neoforma, Neoforma.com and associated logos. Our trademark registration applications may not be approved or granted, or, if granted, may be successfully challenged by others or invalidated through administrative process or litigation. WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS AND IF WE WERE TO SUBSEQUENTLY LOSE OUR INTELLECTUAL PROPERTY RIGHTS, WE COULD BE UNABLE TO OPERATE OUR CURRENT BUSINESS We may from time to time be subject to claims of infringement of other parties' proprietary rights or claims that our own trademarks, patents or other intellectual property rights are invalid. For example, in a letter dated January 14, 2000, Forma Scientific, Inc. notified us that it believed our use of the "Neoforma" and "Neoforma.com" trademarks violated its trademark rights in "Forma" and "Forma Scientific. On September 12, 2000, we entered into a settlement agreement under which we agreed to modify our logo so that the mark "Neoforma" is presented to viewers as one word without any form of distinction separating the "Neo" portion of the mark from the "Forma" portion of the mark. Any claims regarding our intellectual property, with or without merit, could be time consuming and costly to defend, divert management attention and resources or require us to pay significant damages. License agreements may not be available on commercially reasonable terms, if at all. In addition, there has been an increase in the number of patent applications related to the use of the Internet to perform business processes. Enforcement of intellectual property rights in the Internet sector will become a greater source of risk as the number of business process patents increases. The loss of access to any key intellectual property right, including use of the Neoforma brand name, could result in our inability to operate our current business. IF WE LOSE ACCESS TO THIRD-PARTY SOFTWARE INCORPORATED IN OUR MARKETPLACES, WE MAY NOT BE ABLE TO OPERATE OUR MARKETPLACES We currently rely on software that we have licensed from a number of suppliers. For example, we use software that we license from iPlanet, Inc., a subsidiary of Sun Microsystems, to provide part of our website infrastructure, we use information retrieval software that we license from SearchCafe Development Corporation to provide part of our search capabilities, we use software that we license from Oracle to further automate the order management and transaction routing process within our marketplaces, we will use software that we license from i2 to further enable us to offer our trading partners the ability to automate and streamline the procurement process and we use software that we license from CrossWorlds and TIBCO to integrate our marketplace applications and services with buyers' and suppliers' systems. We license TradeMatrix software from i2 to offer procurement, order management and supply chain management functions. We also license Gentran software from Sterling Commerce for the processing of order transactions from our customers. These licenses may not continue to be available to us on commercially reasonable terms, or at all. In addition, the licensors may not continue to support or enhance the licensed software. In the future, we expect to license other third party technologies to enhance our services, to meet evolving user needs or to adapt to changing technology standards. Failure to license, or the loss of any licenses of, necessary technologies could impair our ability to operate our online marketplaces until equivalent software is identified, licensed and integrated or developed by us. In addition, we may fail to successfully integrate licensed technology into our services or to adapt licensed technology to support our specific needs which could similarly harm development and market acceptance of our services. 30 31 REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD INHIBIT THE GROWTH OF E-COMMERCE AND LIMIT THE MARKET FOR OUR SERVICES A number of legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet, such as user privacy, taxation of goods and services provided over the Internet and the pricing, content and quality of services. The federal government has instituted a moratorium on Internet taxation that applies to sales and access charges. Recently, Congress proposed to extend the moratorium until 2006; however, it is possible that Congress or state legislators will instead seek to impose taxes on Internet transactions that would apply to us. Legislation could dampen the growth in Internet usage and decrease or limit its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit the market for our services. In addition, existing laws could be applied to the Internet, including consumer privacy laws. Legislation or application of existing laws could expose companies involved in e-commerce to increased liability, which could limit the growth of e-commerce. FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS We are subject to federal and state legislation and regulation affecting the healthcare industry. Existing and new laws and regulations applicable to the healthcare industry could have a material adverse effect on our ability to operate our business. Legislation governing the distribution of health information has been proposed at both the federal and state level. Some of the transactions at our marketplaces may involve surgical case kits or purchases of products for patient home delivery; these products may contain patient names and other health information subject laws governing the distribution of health information. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or prevented from delivering health information electronically. Other legislation currently being considered at the federal level could also negatively affect our business. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within two years after the adoption of final regulations by the Department of Health and Human Services. Because we represent that our marketplaces meet these regulatory requirements, our success will also depend on other healthcare participants complying with these regulations. A federal law commonly known as the Medicare/Medicaid antikickback law, and several similar state laws, prohibit payments that are intended to induce the acquisition, arrangement for or recommendation of the acquisition of healthcare products or services. The application and interpretation of these laws are complex and difficult to predict and could constrain our financial and marketing relationships, including but not limited to our fee arrangements with suppliers or our ability to obtain supplier company sponsorship for our products. IF THERE ARE CHANGES IN THE POLITICAL, ECONOMIC OR REGULATORY HEALTHCARE ENVIRONMENT THAT AFFECT THE PURCHASING PRACTICE OR OPERATION OF HEALTHCARE ORGANIZATIONS, OR IF THERE IS CONSOLIDATION IN THE HEALTHCARE INDUSTRY, WE COULD BE REQUIRED TO MODIFY OUR SERVICES OR TO INTERRUPT DELIVERY OF OUR SERVICES The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Regulation of the healthcare organizations with which we do business could impact the way in which we are able to do business with these organizations. In addition, factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry and general economic conditions affect the purchasing practices and operation of healthcare organizations. Changes in regulations affecting the healthcare industry, such as any increased regulation by the Food and Drug Administration of the purchase and sale of medical products, could require us to make unplanned enhancements of our services, or result in delays or cancellations of orders or reduce demand for our services. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry providers operate. We do not know what effect any proposals would have on our business. 31 32 Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide services to industry participants will become more intense and the importance of establishing a relationship with each industry participant will become greater. These industry participants may try to use their market power to negotiate fee reductions of our services. If we were forced to reduce our fees, our operating results could suffer if we cannot achieve corresponding reductions in our expenses. OUR STOCK PRICE AND THOSE OF OTHER TECHNOLOGY COMPANIES HAVE EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS, AND, ACCORDINGLY, OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT The trading price of our common stock has fluctuated significantly since our initial public offering in January 2000 and is significantly below the original offering price of $13 per share. An active public market for our common stock may not be sustained in the future. Many factors could cause the market price of our common stock to fluctuate, including: - variations in our quarterly operating results; - announcements of technological innovations by us or by our competitors; - introductions of new services by us or by our competitors; - departure of key personnel; - the gain or loss of significant strategic relationships or trading partners; - changes in the estimates of our operating performance or changes in recommendations by securities analysts; and - market conditions in our industry and the economy as a whole. In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies' operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these companies. These fluctuations could lower the market price of our common stock regardless of our actual operating performance. In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our operating results and our business. IF OUR COMMON STOCK PRICE FALLS BELOW AND REMAINS UNDER $1.00, OR IF WE OTHERWISE FAIL TO COMPLY WITH NASDAQ RULES, OUR COMMON STOCK IS LIKELY TO BE DELISTED FROM THE NASDAQ NATIONAL MARKET, WHICH COULD ELIMINATE THE TRADING MARKET FOR OUR COMMON STOCK If the market price for our common stock falls and remains below $1.00 per share or we otherwise fail to meet the criteria for continued listing on the Nasdaq National Market, our common stock may be deemed to be penny stock. During 2000 and 2001, our common stock traded, at times, below $1.00 per share, and on May 14, 2001 the closing price was $0.76. If our common stock is considered penny stock, it would be subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may be unwilling to effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock and your ability to sell the common stock. 32 33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk: Our exposure to market risk for changes in interest rates relate primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We invest in high-credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. As stated in its policy, we ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in safe and high-credit quality securities and by constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The table below presents principal amounts and related weighted average interest rates by date of maturity for our investment portfolio (in thousands):
FISCAL YEARS ------------------------------------------------- 2001 2002 2003 2004 2005 ------- ------ -------- -------- -------- Cash equivalents and short-term investments: Fixed rate short-term investments................... $17,279 -- -- -- -- Average interest rate............ 6.71% -- -- -- --
33 34 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Recent Sales of Unregistered Securities In January 2001, we completed a $30.5 million private round of financing in which we sold 18,047,388 shares of our common stock at $1.69 per share to three strategic investors, i2 Technologies, VHA and UHC. No underwriters were used in the transaction. The shares of common stock were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) of the Securities Act, or Rule 506 of Regulation D promulgated thereunder. Both VHA and UHC made certain representations as to investment intent, that they possessed a sufficient level of financial sophistication and that they received information about us. The shares issued in the transactions were subject to restrictions on transfer absent registration under the Securities Act, and no offers to sell the securities were made by any form of general solicitation or general advertisement. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS
EXHIBIT NUMBER EXHIBIT ------- ------- 10.1 Common Stock Purchase Agreement, dated as of January 25, 2001, by and between Neoforma.com, Inc. and VHA Inc. 10.2 Common Stock Purchase Agreement, dated as of January 25, 2001, by and between Neoforma.com, Inc. and University Healthsystem Consortium 10.3 Amendment to Amended and Restated Common Stock and Warrant Agreement, dated as of January 25, 2001, by and between Neoforma.com, Inc. and University Healthsystem Consortium 10.4* Second Amended and Restated Outsourcing and Operating Agreement, dated as of January 1, 2001, by and among Neoforma.com, Inc., Novation LLC, VHA Inc., University Healthsystem Consortium and Healthcare Purchasing Partners International, LLC
--------------- * Confidential treatment has been requested for portions of this agreement B. REPORTS ON FORM 8-K None 34 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEOFORMA.COM, INC. By /s/ ANDREW L. GUGGENHIME ------------------------------------ Andrew L. Guggenhime Chief Financial Officer and Assistant Secretary Date: May 15, 2001 35 36 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBITS ------- -------- 10.1 Common Stock Purchase Agreement, dated as of January 25, 2001, by and between Neoforma.com, Inc. and VHA Inc. 10.2 Common Stock Purchase Agreement, dated as of January 25, 2001, by and between Neoforma.com, Inc. and University Healthsystem Consortium 10.3 Amendment to Amended and Restated Common Stock and Warrant Agreements, dated as of January 25, 2001, by and between Neoforma.com, Inc. and University Healthsystem Consortium 10.4* Second Amended and Restated Outsourcing and Operating Agreement, dated as of January 1, 2001, by and among Neoforma.com, Inc., Novation LLC, VHA Inc., University Healthsystem Consortium and Healthcare Purchasing Partners International, LLC
--------------- * Confidential treatment has been requested for portions of this agreement. 36