Neoforma Reports Preliminary Second Quarter Results and Raises Full-Year Guidance; Reviews Application of Two Accounting Principles That Could Affect Current and Previously Reported Financial Results
7/22/2002 4:30:00 PM
SAN JOSE, Calif., Jul 22, 2002 /PRNewswire-FirstCall via COMTEX/ -- Neoforma, Inc. (NEOF) today announced preliminary financial results for the second quarter ended June 30, 2002. Neoforma's marketplaces supported a record $998.9 million in total marketplace volume during the second quarter, driving revenue of $17.6 million and increased EBITDA profitability of $4.6 million. Due to the strong operational and financial progress of the Company, Neoforma is increasing its guidance for the remainder of fiscal year 2002. These results and guidance are on a preliminary basis and subject to change.
The Company is currently reviewing the application of two accounting matters, relating to shares issued to strategic partners in July 2000, that could affect current and previously reported financial results. The Company's historical financial results reflect its original interpretation of these matters, which was reached in consultation with its previous auditors. On June 5, 2002, Neoforma engaged new independent auditors. In connection with the change in auditors, the new auditors have been conducting a general review of the Company's accounting and business. Given the complex nature and structure of the Company's relationship with Novation, VHA Inc. and University HealthSystem Consortium (UHC), the Company reviewed with its new auditors its accounting treatment related to the initial transactions with these organizations. At this time, the Company has not made a determination as to whether the accounting should be changed. Based on these discussions, the Company's Audit Committee, Board of Directors and management, along with its current auditors, believe it is prudent to consult with the Securities and Exchange Commission (SEC) to assist the Company in applying the most appropriate accounting treatment.
"The application of the relevant accounting literature to our complex set of facts is subject to interpretation and judgment," explains Andrew Guggenhime, chief financial officer of Neoforma. "The SEC has been encouraging companies to consult with it on complex and evolving matters of this type, and we, along with our auditors, believe this is the right approach to take. Neoforma management has always taken full responsibility for our accounting, and we are working hard to make sure that we apply the most appropriate accounting treatment in our financial statements. We hope to have these matters resolved as soon as possible."
The unaudited preliminary financial results announced today represent the results that would be reported if the Company's financial statements continue to reflect the Company's application of the accounting literature in a manner consistent with the presentation of its past audited financial results.
Second Quarter Financial Results Detail
"Neoforma had a very strong quarter, performing extremely well operationally and financially," says Bob Zollars, chairman and chief executive officer of Neoforma. "All of our key metrics were favorable to plan during the second quarter, and we're very pleased with the underlying fundamentals of the business. In fact, based on this performance, we're significantly increasing our guidance for the remainder of the year."
Neoforma's marketplaces supported a total of $998.9 million in marketplace volume in the second quarter. Marketplace volume has two components, both reflecting data processed by Neoforma and used to populate its reporting and analytical solutions: gross transaction volume, or raw transaction data captured through the Company's NeoConnect(TM) connectivity solution, and supply chain data, or raw transaction data captured directly from Neoforma's trading partners. The gross volume of transactions processed in the second quarter was $422.8 million, an increase of 23% from the $343.4 million in the prior quarter. Supply chain data processed equaled $576.1 million, an increase of 20% over the first quarter's $479.5 million.
In the second quarter, Neoforma's preliminary net revenue was $17.6 million, increasing 21% over the first quarter's $14.5 million. Neoforma's net revenue is comprised of Marketplace Services revenue and Trading Partner Services revenue. Marketplace Services revenue increased 21% to $17.2 million from $14.2 million in the prior quarter. Trading Partner Services revenue increased 49% to $421,000 from $283,000 in the first quarter.
In the second quarter, Neoforma's preliminary cash operating expenses were $13.0 million, compared to the prior quarter's $12.2 million.
Neoforma's preliminary cash operating income, or EBITDA, was $4.6 million for the second quarter, double the $2.3 million reported in the prior quarter, when the Company first achieved EBITDA profitability.
"We believe EBITDA profitability remains the most important metric for Neoforma," says Guggenhime, "as it reflects our top-line growth, our expense management and our ability to generate increasing cash flow."
In the second quarter, Neoforma's total non-cash expenses were $24.9 million. These non-cash expenses consist of depreciation, amortization of deferred compensation and amortization of partnership costs. The previous quarter's total non-cash expenses were $25.1 million.
Net income for the second quarter, on a pro forma basis excluding non-cash expenses and non-recurring items, was $4.1 million. In the prior quarter, the Company reported pro forma net income of $1.9 million on the same basis. The total net loss for the second quarter, including non-cash expenses and non- recurring items, was $20.8 million, or $1.25 per share, compared to a total net loss on the same basis of $23.2 million, or $1.41 per share, for the first quarter. Weighted average shares outstanding for EPS purposes were 16.6 million in the second quarter of 2002, and 16.4 million in the prior quarter, respectively.
As of June 30, 2002, Neoforma's cash, cash equivalents and investments totaled $17.6 million. Neoforma has not drawn on its line of credit with VHA during 2002, leaving available funds of $6 million under the line and an outstanding principal balance of $19 million from borrowings in 2001. Total assets were $261.2 million and total stockholders' equity was $220.0 million as of the end of the second quarter.
Operational and Strategic Milestones
Recently, Neoforma achieved several operational and strategic milestones, including:
"The underlying story of our business is growth," states Zollars. "We've grown our business significantly by working closely with our customers, helping them to streamline their supply chains. We expect this growth to continue as we enhance our products and services, delivering value to all constituents of the healthcare supply chain."
Accounting Matters
EITF No. 96-18: Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
The first of the accounting matters relates to the timing of the capitalization of a portion of the stock issued to VHA in connection with the strategic relationship announced on May 25, 2000, and approved by Neoforma stockholders on July 26, 2000. Emerging Issues Task Force Abstract No. 96-18 (EITF No. 96-18) addresses the measurement date for valuing equity issued in this type of transaction.
As part of that original transaction, 3.1 million of the shares issued to VHA were made subject to certain performance criteria based on the signing up of their member hospitals to participate in Marketplace@Novation(TM). Based on the Company's view, Neoforma, after close consultation with its previous auditors, determined that the immediate capitalization of shares as of July 26, 2000, the date of stockholder approval of the transaction, was the appropriate accounting treatment under EITF No. 96-18. As a result, on July 26, 2000, the Company capitalized the full value of these shares, $156.9 million, based on their market value as of that date. These shares were capitalized as Capitalized Partnership Costs on the balance sheet, and they are being amortized at a rate of approximately $7.8 million per quarter. The amortization of these shares results in a non-cash operating expense, which is reflected in the statement of operations as Amortization of Partnership Costs.
Under the alternative treatment being considered for these shares, the Company would not have valued and capitalized these shares subject to performance criteria until these criteria were substantially met. Due to the complexity of the facts of the situation and the judgmental nature of the application of EITF No. 96-18, Neoforma has determined that it is prudent to consult with the SEC to ensure that the Company accounts for the shares issued to VHA in the most appropriate manner.
"We've received advice from several sources on this issue," states Guggenhime, "and there are alternative interpretations of this issue. As we are ultimately responsible for the accuracy of our financial statements, and because we want to make sure that those financial statements provide a clear and responsible view of the Company's results, we have decided to proactively seek consultation with the SEC in order to resolve the matter in the most suitable manner."
If Neoforma were to determine that the alternative interpretation of EITF No. 96-18 is more appropriate, which is the preliminary conclusion of its current auditors based on their analysis to date, the impact on the Company's current and historical financial statements, which would be limited to the Capitalized Partnership Costs, the related amortization expense and the shares outstanding for earnings per share purposes would be:
In summary, the adoption of the alternative interpretation of this accounting matter would reduce the Company's operating expenses, net losses and shares outstanding for earnings per share purposes on a historical basis back to the third quarter of fiscal 2000. Neither EBITDA nor cash flows for any periods would be impacted. Additionally, due to the potential reduction in total non-cash expenses, Neoforma would be positioned to achieve GAAP profitability sooner than the Company would have expected under the current accounting treatment. If Neoforma determines that this alternative interpretation should be adopted, the Company would be required to restate its financial results for all periods beginning in the third quarter of fiscal 2000 to reflect these differences.
EITF No. 01-9: Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)
The second accounting matter on which the Company is seeking SEC consultation relates to the income statement classification of the amortization of the equity consideration issued to VHA and UHC. EITF No. 01-9, which became effective for the Company in the first quarter 2002, specifically addresses the income statement classification of expenses relating to consideration provided by a vendor to a customer, and whether those expenses should be presented in the vendor's income statement as an operating expense or netted against revenue from that customer. This EITF addresses the income statement classification of consideration paid, not the timing of recognizing revenue.
For the first quarter of 2002, Neoforma, after consulting with the Company's previous auditors, concluded that EITF No. 01-9 was applicable only to the Company's revenue generated from hospital implementations as they related to the restricted shares earned by VHA and UHC for these hospital signings. Therefore, the Company netted Amortization of Partnership Costs against the revenue generated from its hospital implementation services beginning in the first quarter of 2002. This effectively resulted in the reclassification of a portion of the non-cash Amortization of Partnership Costs being netted against implementation revenue, which was not material. This accounting treatment lowered operating expenses and revenue by an identical amount, thereby having no impact on operating income or net income.
"The accounting literature on this topic is not only recent, but also very complex," states Guggenhime. "We spent a great deal of time on this matter with our previous auditors, and we have done the same with our new auditors. In our judgment, the substance of our relationship with VHA, UHC, their member hospitals and Novation does not fit neatly into EITF No. 01-9. Therefore, we've determined, with the support of our auditors, that we should seek consultation with the SEC on this matter to ensure that the most appropriate accounting is being applied."
There are a number of potential interpretations and applications of EITF No. 01-9 with regard to the Company's situation. The potential application that would have the most significant impact on the Company's operating expenses and revenue is:
The impact of an interpretation different from the Company's historical interpretation would continue until the Amortization of Partnership Costs related to the Novation transaction was completed, which is expected to be in the second half of fiscal 2005. The Company and its auditors are discussing the possible alternative applications of EITF No. 01-9. If Neoforma determines that an alternative interpretation should be adopted, the Company would be required to restate its financial results for the first quarter of fiscal 2002 and reclassify prior periods for comparative purposes.
Guidance
Building on its performance to date in 2002, Neoforma expects continued financial growth throughout the remainder of the year. Neoforma anticipates strong revenue growth by continuing its strategy of contracting with and connecting additional hospitals and suppliers, driving further adoption of its solutions and delivering Trading Partner Services to its installed base of customers.
About Neoforma
Neoforma was recently named as one of Healthcare Informatics' top 100 healthcare information technology companies of 2001. Neoforma builds and operates Internet marketplaces that empower healthcare trading partners to optimize supply chain performance. Neoforma uses proven, scalable technologies to provide customized marketplace solutions and services that enable customers to maximize their existing technology and supply chain relationships. Healthcare providers, leading group purchasing organizations, manufacturers and distributors choose Neoforma as their e-commerce partner. For more information, visit the company's Web site at www.neoforma.com.
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements related to the potential impact of EITF No. 96-18 and EITF No. 01-9 on the Company's current and historical financial statements, the Company's anticipated future growth and success, and the Company's anticipated financial performance and financial results for fiscal 2002. These forward-looking statements are based on current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks include that the application of the relevant accounting literature to our complex set of facts is subject to interpretation and judgment; the volatility and unpredictability of the Company's quarterly operating results; the willingness of buyers and sellers of products and services used by healthcare providers to accept the Company's business model of providing an e-commerce marketplace for the purchase and sale of these products and services; the ability of the Company to manage its growth and related technological challenges and the ability of the Company to successfully manage its changing relationships with its strategic partners, suppliers and customers. For more information regarding the risks facing the Company, please see the Company's periodic reports filed with the SEC, including its Form 10-K for the year ended December 31, 2001, and its Form 10- Q for the quarter ended March 31, 2002. The Company assumes no obligation to update the forward-looking information contained in this news release.
NOTE: Neoforma and Neoforma.com are trademarks of Neoforma, Inc. Other Neoforma logos, product names and service names are also trademarks of Neoforma, Inc., which may be registered in other countries. Other product and brand names are trademarks of their respective owners.
SOURCE Neoforma, Inc.
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