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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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--------------------------------
Commission File Number 001-12799
VitalWorks Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2248411
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
239 Ethan Allen Highway, Ridgefield, CT 06877
(Address of principal executive offices, including zip code)
(203) 894-1300
(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
--- ---
As of November 12, 2002, there were 43,298,044 shares of the registrant's common
stock, $.001 par value, outstanding.
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VitalWorks Inc.
Form 10-Q
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INDEX
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Report of Independent Certified Public Accountants.........................2
Condensed Consolidated Balance Sheets--
September 30, 2002 and December 31, 2001.................................3
Condensed Consolidated Statements of Operations--
Three and Nine Months Ended September 30, 2002 and 2001..................4
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 2002 and 2001............................5
Notes to Condensed Consolidated Financial Statements--
September 30, 2002......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........26
Item 4. Controls and Procedures .............................................26
Part II. Other Information
Item 1. Legal Proceedings....................................................26
Item 5. Other Information....................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................27
Signatures...................................................................28
Certifications ..............................................................29
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002..............................31
For further information, refer to the VitalWorks Inc. annual report on
Form 10-K filed on March 29, 2002. VitalWorks is a registered trademark of
VitalWorks Inc. All other trademarks and company names mentioned are the
property of their respective owners.
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
VitalWorks Inc.
We have reviewed the condensed consolidated balance sheet of VitalWorks
Inc. as of September 30, 2002 and the related condensed consolidated statements
of operations for the three-month and nine-month periods ended September 30,
2002 and 2001, and cash flows for the nine-month periods ended September 30,
2002 and 2001 included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended September 30, 2002. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 23, 2002, and March 11, 2002
for Note H, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2001 is fairly stated in
all material respects in relation to the consolidated balance sheet from which
it has been derived.
/s/ BDO Seidman, LLP
New York, NY
October 23, 2002,
November 12, 2002 for Note I
-2-
VitalWorks Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
September 30, December 31,
2002 2001
---------------------------
(unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 40,704 $ 12,988
Accounts receivable, net of allowances of $2,200 and $1,800 14,811 12,693
Computer hardware held for resale 897 323
Deferred income taxes, net 1,646 3,376
Prepaid expenses and other current assets 1,507 946
Headquarters buildings held for sale, at fair value 7,184
---------------------------
Total current assets 59,565 37,510
Property and equipment, at cost, less accumulated
depreciation and amortization of $8,301 and $6,294 5,069 6,435
Goodwill, less accumulated amortization of $55,898 20,256 20,256
Product development and deferred finance costs, less
accumulated amortization of $745 and $905 8,097 4,739
Deferred income taxes, net 25,088 23,358
Other assets 700 651
---------------------------
Total assets $ 118,775 $ 92,949
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 9,520 $ 10,503
Accrued employee compensation and benefits 4,426 2,862
Accrued restructuring costs 1,504 2,900
Deferred revenue, including unearned discounts of $1,403 and $1,701 8,583 8,096
Current portion of long-term debt 4,373 14,063
---------------------------
Total current liabilities 28,406 38,424
Long-term debt 15,987 16,490
Other liabilities, primarily unearned discounts re: outsourced printing
services 12,326 11,975
Commitments and contingencies - Note D
Stockholders' equity:
Common stock $.001 par value; 200,000,000 shares authorized;
44,624,136 and 39,126,771 shares issued 45 39
Additional paid-in capital 202,878 191,585
Notes receivable from former directors, net of allowance
of $6,000 in 2001 (4,632)
Accumulated deficit (140,398) (160,463)
Treasury stock, at cost, 125,000 shares (469) (469)
---------------------------
Total stockholders' equity 62,056 26,060
---------------------------
Total liabilities and stockholders' equity $ 118,775 $ 92,949
===========================
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
See accompanying notes.
-3-
VitalWorks Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------ ------------------------
Revenues
Maintenance and services $ 21,389 $ 20,969 $ 63,783 $ 62,947
Software licenses and system sales 7,267 6,290 21,983 15,914
------------------------ ------------------------
Total revenues 28,656 27,259 85,766 78,861
------------------------ ------------------------
Costs and expenses
Cost of revenues:
Maintenance and services 5,553 3,718 16,473 13,845
Software licenses and system sales, includes
amortization of product development costs
of $262 and $649 in 2002 2,204 1,788 6,005 4,586
Selling, general and administrative 12,367 12,320 36,909 41,103
Research and development 3,360 3,033 10,100 8,108
Depreciation and amortization, includes $5,784 and
$17,351 of goodwill amortization in 2001 665 6,543 1,899 19,780
Loss on headquarters building held for sale 1,250 1,250
Provision (credit) for loan losses, $6,000 charge in 2001
reversed in 2002, and other nonrecurring items in 2001 (275) (6,000) 8,127
------------------------ ------------------------
24,149 28,377 65,386 96,799
------------------------ ------------------------
Operating income (loss) 4,507 (1,118) 20,380 (17,938)
Interest income 137 289 1,356 482
Interest expense (453) (839) (1,565) (2,761)
------------------------ ------------------------
Income (loss) from continuing operations,
before income taxes 4,191 (1,668) 20,171 (20,217)
Provision for income taxes 56 106
------------------------ ------------------------
Income (loss) from continuing operations 4,135 (1,668) 20,065 (20,217)
Loss from discontinued operations (5,384)
------------------------ ------------------------
Net income (loss) $ 4,135 $ (1,668) $ 20,065 $(25,601)
======================== ========================
Earnings (loss) per share
Basic:
Continuing operations $ 0.10 $ (0.04) $ 0.49 $ (0.55)
Discontinued operations (0.14)
------------------------ ------------------------
$ 0.10 $ (0.04) $ 0.49 $ (0.69)
======================== ========================
Diluted:
Continuing operations $ 0.08 $ (0.04) $ 0.41 $ (0.55)
Discontinued operations (0.14)
------------------------ ------------------------
$ 0.08 $ (0.04) $ 0.41 $ (0.69)
======================== ========================
Average number of shares outstanding
Basic 43,284 38,327 41,110 36,979
Diluted 50,385 38,327 49,228 36,979
See accompanying notes.
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VitalWorks Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
------------------------
Operating activities
Income (loss) from continuing operations $ 20,065 $(20,217)
Adjustments to reconcile income (loss) from continuing operations
to cash provided by operating activities:
Loss on headquarters building held for sale 1,250
Provision (credit) for loan losses, $6,000 charge in 2001 reversed
in 2002, and other nonrecurring items in 2001 (6,000) 7,203
Depreciation and amortization, primarily goodwill in 2001 1,899 19,780
Provisions for bad debts, returns and discounts 1,933 2,446
Amortization of deferred finance costs, charged to interest expense 235 223
Amortization of product development costs 649
Changes in operating assets and liabilities:
Accounts receivable (4,051) (1,032)
Computer hardware held for resale, prepaid expenses and other (1,092) (220)
Accounts payable, accrued costs and expenses 658 (254)
Deferred revenue 424 (215)
Unearned discounts re: outsourced printing services (969) (1,095)
Interest payments on notes receivable from former directors 610
------------------------
Cash provided by operating activities 13,751 8,479
------------------------
Investing activities
Product development costs (3,406) (3,021)
Proceeds from sale of office buildings 7,220 800
Purchases of property and equipment (630) (1,021)
Cash received from (advanced to) PracticeWorks, Inc. 333 (344)
------------------------
Cash provided by (used in) investing activities 3,517 (3,586)
------------------------
Financing activities
Long-term debt:
(Payments) (37,178) (2,253)
Proceeds 27,450 194
Loan payments from former directors 10,991 438
Exercise of stock options and warrants 9,715 1,542
Deferred finance costs (530)
------------------------
Cash provided by (used in) financing activities 10,448 (79)
------------------------
Increase in cash and cash equivalents 27,716 4,814
Cash and cash equivalents at beginning of period 12,988 5,969
------------------------
Cash and cash equivalents at end of period $ 40,704 $ 10,783
========================
Supplemental disclosure of cash flow information
Income taxes paid, net of refunds $ 159
Interest paid $ 1,746 $ 1,297
See accompanying notes.
-5-
VitalWorks Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2002
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included in the accompanying unaudited
financial statements. Operating results for the three and nine-month periods
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2001 included in the VitalWorks Inc. (the "Company" or
"VitalWorks") annual report on Form 10-K filed on March 29, 2002. Certain prior
period amounts in the condensed consolidated financial statements have been
reclassified to conform to the current presentation.
B. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share ("EPS") (in thousands, except per share data):
Third Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------ ------------------------
Numerator:
Continuing operations $ 4,135 $ (1,668) $ 20,065 $(20,217)
Discontinued operations (5,384)
------------------------ ------------------------
$ 4,135 $ (1,668) $ 20,065 $(25,601)
======================== ========================
Denominator:
Basic EPS - weighted-average shares 43,284 38,327 41,110 36,979
Effect of dilutive securities, stock option
and warrant rights 7,101 8,118
------------------------ ------------------------
Diluted EPS - adjusted weighted-average
shares and assumed conversions 50,385 38,327 49,228 36,979
======================== ========================
Basic EPS:
Continuing operations $ 0.10 $ (0.04) $ 0.49 $ (0.55)
Discontinued operations (0.14)
------------------------ ------------------------
$ 0.10 $ (0.04) $ 0.49 $ (0.69)
======================== ========================
Diluted EPS:
Continuing operations $ 0.08 $ (0.04) $ 0.41 $ (0.55)
Discontinued operations (0.14)
------------------------ ------------------------
$ 0.08 $ (0.04) $ 0.41 $ (0.69)
======================== ========================
Because their effect would be antidilutive, stock option and warrant
rights for up to .4 million and 1.1 million common shares were excluded from the
diluted EPS calculation for the three and nine-month periods ended September 30,
2002, respectively. For the same reason, all options and warrants were excluded
from the diluted calculation for the three and nine-month periods ended
September 30, 2001.
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VitalWorks Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2002
C. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of a period other than transactions with owners in their capacity as owners. For
the Company, comprehensive income (loss) is equivalent to its consolidated net
income (loss).
D. CONTINGENT MATTERS
From time to time, in the normal course of business, various claims are
made against the Company. Except for proceedings described below, there are no
material proceedings to which the Company is a party, and management is unaware
of any material contemplated actions against the Company.
On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana. The Company removed the case to the United States
District Court for the Southern District of Indiana. The complaint alleges state
securities law violations, breach of contract, and fraud claims against the
Company and certain former directors and officers. The complaint does not
specify the amount of damages sought by plaintiffs, but seeks rescission of a
transaction plaintiffs valued at $5 million, as well as punitive damages and
reimbursement for the plaintiffs' attorneys' fees and associated costs and
expenses of the lawsuit. In a decision from the Court dated October 15, 2001,
the plaintiffs' request for a preliminary injunction to preserve their remedy of
rescission was denied, the Company's request to transfer the case to the
Northern District Court of Georgia was granted, and the Company's motion to
dismiss plaintiffs' complaint in its entirety was granted in part. On October
26, 2001, the plaintiffs filed a notice of appeal with the 7th Circuit Court of
Appeals. On November 8, 2002, the 7th Circuit Court affirmed the denial of the
preliminary injunction and dismissed the remainder of plaintiffs' appeal.
The Company has been named as a defendant as successor to CDL
Healthcare Systems, Inc. ("CDL"), a company acquired by VitalWorks in December
1999, in a complaint filed in the Circuit Court of the Eleventh Judicial Circuit
in Dade County, Florida on February 27, 2001 by Sonia Abutog, individually,
Angelo Abutog, individually, and Sonia and Angelo Abutog, as parents and next
best friends to Aaron Abutog, a minor. Gary Weiner, former President of CDL, and
his daughter, Elisha Weiner, are also named as defendants. Plaintiffs allege
that they were injured at a time, prior to the merger between the Company and
CDL, when a motor vehicle operated by Elisha Weiner collided with plaintiff
Sonia Abutog, a pedestrian. The plaintiff contends that she and her unborn child
suffered severe personal injuries as a result of the accident and seeks to
recover damages in an unspecified amount in excess of $15,000, plus interest and
costs. The Company's motion for final summary judgment dismissing the action
against the Company was granted by order of the Court dated July 9, 2002. The
plaintiffs did not file a Notice of Appeal of this decision and the time to do
so has expired.
While management believes that the Company has meritorious defenses in
each of the foregoing matters and the Company intends to pursue its positions
vigorously, litigation is inherently subject to many uncertainties. Thus, the
outcome of these matters is uncertain and could be adverse to the Company.
However, even if the outcome of these cases is adverse, management does not
believe that the outcome of these cases, individually or in the aggregate, will
have a material adverse effect on the financial position of the Company.
However, depending on the amount and timing of an unfavorable resolution(s) of
the contingencies, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular reporting
period(s).
E. GOODWILL ASSETS AND SALE OF OFFICE BUILDING
In 2001, depreciation and amortization expense consisted mainly of
goodwill amortization. The decrease in depreciation and amortization expense in
2002 is due primarily to the cessation of goodwill amortization in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
-7-
VitalWorks Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2002
E. GOODWILL ASSETS AND SALE OF OFFICE BUILDING (CONTINUED)
In July 2001, the Financial Accounting Standards Board issued Statement 142,
which provides that, upon adoption, the Company shall no longer amortize its
goodwill assets. Rather, the Company is required to test its goodwill for
impairment of value on at least an annual basis. Pursuant to Statement 142, the
Company discontinued amortizing goodwill on January 1, 2002. Based on the
Company's initial test for impairment of value, the adoption of Statement 142
did not have a negative impact on the Company's financial statements.
Excluding goodwill amortization of $5.8 million, the Company would have
had net income of $4.1 million, or $.10 per diluted share, for the September
2001 quarter, compared to net income of $4.1 million, or $.08 per diluted share,
for the corresponding period of 2002. Excluding goodwill amortization of $17.4
million for the nine months ended September 30, 2001, the net loss would have
been $(8.3) million, or $(.22) per share, compared to net income of $20.1
million, or $.41 per diluted share, for the first nine months of 2002.
In August 2002, the Company completed the sale of a former headquarters
building in Atlanta for proceeds of $6.3 million, after closing costs. A portion
of the proceeds from the sale was used to repay the $5.5 million mortgage loan
on the building. Approximately $.5 million of the proceeds is being held in
escrow to partially guarantee to the new owner the monetary performance of
PracticeWorks, Inc., a tenant of the building, through December 2003 under their
lease agreement. The Company spun-off PracticeWorks in March 2001. In connection
with the sale, the Company entered into a market rate lease with the new owner
of the building ending December 2003 for approximately 3,900 square feet of
office space, or less than 5% of the building. In the September 2002 quarter,
the Company recognized a gain of $13,000 from the sale of the building. The
amount held in escrow has been deferred and may be recognized in the period
ending December 31, 2003.
F. ACCRUED RESTRUCTURING COSTS
On August 1, 2000, VitalWorks announced its intention to restructure
its operations through a plan of employee reductions and consolidation of office
facilities. Since then, the Company closed 14 facilities and terminated
approximately 400 employees.
The nature of the restructuring accrual as of December 31, 2001 and
September 30, 2002 was primarily the total cost of future payments that remained
outstanding under lease commitments regarding certain of the offices that were
closed. In the nine months ended September 30, 2002, payments of $.9 million
were applied against the accrual. The accrual was reduced by another $.5 million
reflecting a savings credited to selling, general and administrative expenses in
the June 2002 quarter in connection with the early termination of an office
lease for a facility closed in March 2001.
G. STOCKHOLDERS' EQUITY
Employee Savings and Stock Option Plans
In 2002, the Company issued 5,497,365 shares of its common stock,
consisting of 5,101,830 shares in connection with the exercise of stock options
by certain employees, 222,012 shares with respect to the Company-sponsored
employee savings plan, and 173,523 shares in connection with the exercise of
warrants. As a result, the Company recognized $10.9 million as a credit to
additional paid-in capital.
Notes Receivable From Former Directors
In the June 2002 quarter and in July 2002, VitalWorks received final
payments from three former directors satisfying their outstanding loans from the
Company, including interest. Consequently, the Company
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VitalWorks Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2002
G. STOCKHOLDERS' EQUITY (CONTINUED)
recorded a credit to operating expenses of $6.0 million, reflecting a complete
reversal of the allowance for loan losses established in March 2001, and related
interest income of $1.1 million.
H. SEGMENT INFORMATION
The Company has identified two reportable operating segments: software
licenses and system sales, and maintenance and services. Software license fees
and system revenues are derived from the sale of software product licenses and
computer hardware. Maintenance and services revenues come from providing ongoing
product support, training and transaction processing services. The accompanying
statements of operations disclose the financial information of the Company's
reportable segments for the three and nine-month periods ended September 30,
2002 and 2001. The Company does not account for or report its assets or capital
expenditures by segments.
The Company markets its products and services primarily to three types
of physician practices: ambulatory imaging centers and radiology practices, as
well as anesthesiology practices; large general and emergency medicine
practices, such as physician networks, clinics and management service
organizations that include ten or more doctors; and small group practices of
fewer than ten doctors that serve a local community, including ophthalmology,
dermatology and general medicine practices.
I. SUBSEQUENT EVENT
In October 2002, the Company's board of directors authorized the
repurchase of up to $15 million of the Company's common stock from time to time.
The timing and amount of any shares repurchased will be determined by the
Company's management based on its evaluation of market conditions and other
factors. The repurchase program may be suspended or discontinued at any time.
Any repurchased shares will be available for use in connection with stock plans
and for other corporate purposes. The repurchase program will be funded using
the Company's existing cash resources. As of November 12, 2002, the Company has
repurchased 1,247,900 shares of its common stock for an aggregate cost of $4.1
million.
-9-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained in this Report on Form
10-Q, the matters discussed herein contain "forward-looking statements" within
the meaning of the federal securities laws. Statements regarding future events
and developments and our future performance, as well as our management's
expectations, beliefs, intentions, plans, estimates or projections relating to
the future, are forward-looking statements within the meaning of these laws. Our
management believes that these forward-looking statements are reasonable and are
based on reasonable assumptions and forecasts. However, these forward-looking
statements are subject to a number of risks and uncertainties. As a result,
actual results may vary materially from those anticipated by the forward-looking
statements.
Among the important factors that could cause actual results to differ
materially are the risk factors described below. You should read these factors
and the other cautionary statements made in this document as being applicable to
all related forward-looking statements wherever they appear in this Report on
Form 10-Q. You should also consider the forward-looking statements contained in
this document in light of the cautionary language contained in our other filings
with the Securities and Exchange Commission, including our Annual Report on Form
10-K.
You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this report. Except as required
by law, we undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You should carefully consider the following risk factors. Any of the
following risks could seriously harm our business, financial condition, cash
flows and results of operations and cause the value of our common stock to
decline. The risks and uncertainties described below are those that we currently
believe may materially affect us. Additional risks and uncertainties that we are
currently unaware of or that we currently consider to be immaterial may also
become important factors that affect us.
Our operating results will vary from period to period. In addition, we have
experienced losses in the past and may never achieve or maintain consistent
profitability.
Our operating results will vary significantly from quarter to quarter
and from year to year. In addition, prior to the first quarter of 2002, we have
experienced net losses. Our net loss was $(27.8) million for the year ended
December 31, 2001 and $(78.1) million for the year ended December 31, 2000.
Our operating results have been and may be influenced significantly by
factors such as:
o release of new products, product upgrades and services, and the rate of
adoption of these products and services by new and existing customers;
o timing of and costs related to development of our products;
o length of sales and delivery cycles;
o size and timing of orders for our products and services;
o availability of specified computer hardware for resale;
o deferral and/or realization of deferred software license and system
revenues according to contract terms;
o changes in customer purchasing patterns;
o competition, including alternative product and service offerings, and
price pressure;
o timing of and charges associated with acquisitions or other strategic
events or transactions;
o timing and levels of advertising and promotional expenditures;
-10-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
o changes of accounting estimates used to prepare the prior periods'
financial statements (e.g., our valuation of assets and estimation of
liabilities); and
o uncertainties concerning pending litigation against us.
In addition, we operate with a minimal amount of software licensing and
system sales backlog. Therefore, quarterly and annual revenues and operating
results are highly dependent on the volume and timing of the signing of license
agreements and product deliveries during each quarter. A significant portion of
our quarterly sales of software product licenses and computer hardware is
concluded in the last month of the fiscal quarter, generally with a
concentration of our quarterly revenues earned in the final ten business days of
that month. Also, our projections for revenues and operating results include
significant sales of new product and service offerings, including our new
radiology information system, or RIS, and sales and services related to the
implementation of the Health Insurance Portability and Accountability Act of
1996, or HIPAA, which may not be realized. Due to these and other factors, our
revenues and operating results are very difficult to forecast. A major portion
of our costs and expenses, such as personnel and facilities, is of a fixed
nature and, accordingly, a shortfall or decline in quarterly and/or annual
revenues typically results in lower profitability or losses. As a result,
comparison of our period-to-period financial performance is not necessarily
meaningful and should not be relied upon as an indicator of future performance.
Due to the many variables in forecasting our revenues and operating results, it
is likely that our results for a particular reporting period(s) will not meet
our expectations or the expectations of public market analysts or investors.
Failure to attain these expectations would likely cause the price of our common
stock to decline.
Our competitive position could be significantly harmed if we fail to protect our
intellectual property rights from third-party challenges.
Our ability to compete depends in part on our ability to protect our
intellectual property rights. We rely on a combination of copyright, trademark
and trade secret laws and restrictions on disclosure to protect the intellectual
property rights related to our software applications. Our software technology is
not patented and existing copyright laws offer only limited practical
protection. In addition, in the past we have not generally entered into
confidentiality agreements with our employees. Although current practices
require all new employees to sign confidentiality agreements, not all existing
employees have signed agreements. We cannot assure you that the legal
protections that we rely on will be adequate to prevent misappropriation of our
technology.
Further, we may need to bring lawsuits or pursue other legal or
administrative proceedings in order to enforce our intellectual property rights.
Generally, lawsuits and proceedings of this type, even if successful, are
costly, time consuming and could divert our personnel and other resources away
from our business, which could harm our business.
Moreover, these protections do not prevent independent third-party
development of competitive technology or services. Unauthorized parties may
attempt to copy or otherwise obtain and use our technology. Monitoring use of
our technology is difficult, and we cannot assure you that the steps we have
taken will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
Intellectual property infringement claims against us could be costly to defend
and could divert our management's attention away from our business.
As the number of software products and services in our target markets
increases and as the functionality of these products and services overlaps, we
may become increasingly subject to the threat of intellectual property
-11-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
infringement claims. Any infringement claims alleged against us, regardless of
their merit, can be time consuming and expensive to defend. Infringement claims
may also divert our management's attention and resources and could also cause
delays in the delivery of our applications to our customers. Settlement of any
infringement claims could require us to enter into royalty or licensing
agreements on terms that are costly or cost-prohibitive. If a claim of
infringement against us were successful and we were unable to license the
infringing or similar technology or redesign our products and services to avoid
infringement, our business, financial condition, cash flows and results of
operations could be harmed.
We recently instituted a stock repurchase program, which may involve the use of
significant cash resources.
In October 2002, our board of directors authorized the repurchase of up
to $15 million of our common stock from time to time. The timing and amount of
any shares repurchased will be determined by management based on our evaluation
of market conditions and other factors. The repurchase program may be suspended
or discontinued at any time. Any repurchased shares will be available for use in
connection with stock plans and for other corporate purposes. The repurchase
program will be funded using our existing cash resources and the dollar amount
of shares repurchased may be significant. Spending under this program may in
turn limit our ability to invest in our core business activities or undertake
acquisitions, if any. In addition, there are a number of important factors that
could cause us not to repurchase shares including, among others, the market
price of our common stock, the nature of other investment opportunities
available to us, our cash flows from operations, general economic conditions,
and other factors identified in this report and our most recent annual report on
Form 10-K.
We may undertake acquisitions, which may involve significant uncertainties and
may increase costs, divert management resources from our core business
activities, or fail to realize anticipated benefits of such acquisitions.
We may undertake acquisitions if we identify companies with
complementary applications, services, businesses or technologies. We may not
achieve any of the anticipated synergies and other benefits that we expected to
realize from these acquisitions. In addition, software companies are very
dependent on their employees to maintain the quality of their software offerings
and related customer services. If we were unable to retain the acquired
companies' personnel or integrate them into our operations, the value of the
acquired products, technology and/or client base could be compromised. The
amount and timing of the expected benefits of any acquisition are also subject
to other significant risks and uncertainties. These risks and uncertainties
include:
o our ability to cross-sell products and services to customers with which
we have established relationships and those with which the acquired
business has established relationships;
o diversion of our management's attention from our existing business;
o potential conflicts in customer and supplier relationships;
o our ability to coordinate organizations that are geographically diverse
and may have different business cultures;
o dilution to existing stockholders if we issue equity securities;
o assumption of liabilities or other obligations in connection with the
acquisition; and
o compliance with regulatory requirements.
Further, our profitability may also suffer because of
acquisition-related costs and/or amortization or impairment of intangible
assets.
-12-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
If our new products, including product upgrades, and services do not achieve
sufficient market acceptance, our business, financial condition, cash flows and
operating results will suffer.
The success of our business will depend in part on the market
acceptance of:
o new products and services, such as our radiology information system, or
RIS, products and services; and
o enhancements to our existing products and services.
There can be no assurance that our clients will accept any of these
products, product upgrades and services. In addition, there can be no assurance
that any pricing strategy that we implement for any of our new products, product
upgrades and services will be economically viable or acceptable to our target
markets. Failure to achieve significant penetration in our target markets with
respect to any of our new products, product upgrades and services could have a
material adverse effect on our business prospects.
Achieving market acceptance for our new products, product upgrades and
services is likely to require substantial marketing and service efforts and
expenditure of significant funds to create awareness and demand by participants
in the healthcare industry. In addition, deployment of new or newly integrated
products or product upgrades may require the use of additional resources for
training our existing sales force and customer service personnel and for hiring
and training additional salespersons and customer service personnel. There can
be no assurance that the revenue opportunities for our new products, product
upgrades and services will justify the amounts that we spend for their
development, marketing and roll-out.
Technology solutions may change faster than we are able to update our
technology, which could cause a loss of customers and have a negative impact on
our revenues.
The information management technology market in which we compete is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and the frequent introduction of new services, software and
other products. Our success depends partly on our ability to:
o develop new or enhance existing products and services to meet our
customers' changing needs in a timely and cost-effective way; and
o respond effectively to technological changes, new product offerings,
product enhancements and new services of our competitors.
We cannot be sure that we will be able to accomplish these goals. Our
development of new and enhanced products and services may take longer than
originally expected, require more testing than originally anticipated and
require the acquisition of additional personnel and other resources. In
addition, there can be no assurance that the products and/or services we develop
or license will be able to compete with the alternatives available to our
customers. Our competitors may develop products or technologies that are better
or more attractive than our products or technologies, or that may render our
products or technology obsolete. If we do not succeed in adapting our products,
technology and services or developing new products, technologies and services,
our business could be harmed.
The nature of our products and services exposes us to product liability claims
that may not be adequately covered by insurance or contractual indemnification.
As a product and service provider in the healthcare industry, we
operate under the continual threat of product liability claims being brought
against us. For example, if patient information processed through our
-13-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
systems is incorrect, patients may receive inadequate or inapplicable medical
treatment, which could subject us to significant liability. Errors or
malfunctions with respect to our products or services could also result in
product liability claims. Although we believe that we carry adequate insurance
coverage against product liability claims, we cannot assure you that claims in
excess of our insurance coverage will not arise. In addition, our insurance
policies must be renewed annually. Although we have been able to obtain what we
believe to be adequate insurance coverage at an acceptable cost in the past, we
cannot assure you that we will continue to be able to obtain adequate insurance
coverage at an acceptable cost.
In many instances, we also have provisions in our agreements that
provide that the other party to the agreement will indemnify us against certain
liabilities. However, any indemnification of this type is limited, as a
practical matter, to the creditworthiness of the indemnifying party. If the
contractual indemnification rights available under our agreements are not
adequate or inapplicable to the product liability claims that may be brought
against us, then, to the extent not covered by our insurance, our business,
operating results, cash flows and financial condition could be materially
adversely affected.
Our business could suffer if our products and services contain errors,
experience failures, result in loss of our customers' data or do not meet
customer expectations.
The products and services that we offer are inherently complex. Despite
testing and quality control, we cannot be certain that errors will not be found
in prior versions, current versions or future versions or enhancements of our
products and services. We also cannot assure you that our products and services
will not experience partial or complete failure. It is also possible that as a
result of any of these errors and/or failures, our customers may suffer loss of
data. The loss of business, medical or patient data for any length of time may
be a significant problem for some of our customers who have time-sensitive or
mission-critical practices. We could face breach of warranty or other claims or
additional development costs if our software contains errors, if our customers
suffer loss of data, if our products and/or services experience failures, do not
perform in accordance with their documentation, or do not meet the expectations
that our customers have for them. Even if these claims do not result in
liability to us, investigating and defending against them could be expensive and
time consuming and could divert management's attention away from our operations.
In addition, negative publicity caused by these events may delay or reduce
market acceptance of our products and services, including unrelated products and
services.
We may be subject to claims resulting from the activities of our strategic
partners.
We rely on third parties to provide services critical to our business.
For example, we use national clearinghouses in the processing of insurance
claims and we outsource some of our hardware maintenance services and the
printing and delivery of patient billings for our customers. We also have
relationships with certain third parties where these third parties serve as
sales channels through which we generate a portion of our revenues. Due to these
third-party relationships, we could be subject to claims as a result of the
activities, products, or services of these third-party service providers even
though we were not directly involved in the circumstances leading to those
claims. Even if these claims do not result in liability to us, defending and
investigating these claims could be expensive, time-consuming, divert personnel
and other resources from our business and result in adverse publicity that could
harm our business.
-14-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
We are subject to government regulation and legal uncertainties, the compliance
with which could have a material adverse effect on our business.
HIPAA
Federal regulations have been adopted, and others have been proposed,
that impact the manner in which we conduct our business. Regulations under HIPAA
will require us to expend resources to comply with applicable requirements. The
total extent and amount of resources to be expended is not yet known. Because
these regulations are new, there is uncertainty as to how they will be
interpreted and enforced. In addition, the delay in adopting final security
regulations creates uncertainties as to what security requirements ultimately
will be imposed, to what extent we will be required to comply with those
requirements, and what the deadline for compliance will be.
Although we will make a good faith effort to ensure that we comply
with, and that our go-forward products enable compliance with, applicable HIPAA
requirements, we may not be able to conform all of our operations and products
to such requirements in a timely manner, or at all. The failure to do so could
subject us to civil liability when we are the business associate of a covered
entity, and could subject us to civil liability and criminal sanctions to the
extent we are regulated directly as a covered entity. In addition, delay in
developing or failure to develop products that would enable HIPAA compliance for
our current and prospective customers could put us at a significant disadvantage
in the marketplace. Accordingly, the sale of our products and our business could
be harmed by the implementation of HIPAA regulations.
Other E-Commerce Regulations
We may be subject to additional federal and state statutes and
regulations in connection with offering services and products via the Internet.
On an increasingly frequent basis, federal and state legislators are proposing
laws and regulations that apply to Internet commerce and communications. Areas
being affected by these regulations include user privacy, pricing, content,
taxation, copyright protection, distribution, and quality of products and
services. To the extent that our products and services are subject to these laws
and regulations, the sale of our products and services could be harmed.
Changes in state and federal laws relating to confidentiality of patient medical
records could limit our customers' ability to use our services.
The confidentiality of patient records and the circumstances under
which records may be released are already subject to substantial regulation by
state governments. Although compliance with these laws and regulations is
principally the responsibility of the healthcare provider, under these current
laws and regulations patient confidentiality rights are evolving rapidly. In
addition to the obligations being imposed at the state level, there is also
legislation governing the dissemination of medical information at the federal
level. The federal regulations may require holders of this information to
implement security measures, which could entail substantial expenditures on our
part. Adoption of these types of legislation or other changes to state or
federal laws could materially affect or restrict the ability of healthcare
providers to submit information from patient records using our products and
services. These kinds of restrictions would likely decrease the value of our
applications to our customers, which could materially harm our business.
-15-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Changes in the regulatory and economic environment in the healthcare industry
could cause us to lose revenue and incur substantial costs to comply with new
regulations.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operations of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could require us to make
unplanned enhancements of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our services by
our strategic partners and others. 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 participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services.
Larger competitors and consolidation of competitors could cause us to lower our
prices or to lose customers.
Our principal competitors include both national and regional vendors of
practice management systems. Currently, the practice management system industry
in the United States is characterized by a large number of relatively small,
regionally focused companies, resulting in a highly fragmented industry with
only a few national vendors. Until recently, larger, national vendors have
targeted primarily large healthcare providers. We believe that the larger,
national vendors may broaden their markets to include both small and large
healthcare providers. In addition, we compete with national and regional
providers of computerized billing, insurance processing and record management
services to healthcare practices. As the market for our products and services
expands, additional competitors are likely to enter this market. We believe that
the primary competitive factors in our markets are:
o product features and functionality;
o customer service, support and satisfaction;
o price;
o ongoing product enhancements; and
o the reputation and stability of the vendor.
We have experienced, and we expect to continue to experience, increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
us. Such competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of their products than us. Also, certain
current and potential competitors have greater name recognition or more
extensive customer bases that could be leveraged, thereby gaining market share
to our detriment. We expect additional competition as other established and
emerging companies enter into the practice management software market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which would materially adversely affect our business,
operating results, cash flows and financial condition.
-16-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
We depend on partners/suppliers for delivery of electronic data interchange
(insurance claims processing and invoice printing services), commonly referred
to as EDI, hardware maintenance services and sales lead generation; any failure,
inability or unwillingness of these suppliers to perform these services could
negatively impact customer satisfaction and revenues.
We utilize various third-party suppliers to provide our customers with
EDI transactions and on-site hardware maintenance. EDI revenue would be
particularly vulnerable to a supplier failure because EDI revenues are earned on
a daily basis. Although other vendors are available in the marketplace to
provide these services, it would take time to switch suppliers. If these
suppliers were unable to perform such services or the quality of these services
declined, it could have a negative impact on customer satisfaction and
ultimately result in a decrease in our revenues.
Our systems may be vulnerable to security breaches and viruses.
The success of our strategy to offer our EDI services and Internet
solutions depends on the confidence of our customers in our ability to securely
transmit confidential information. Our EDI services and Internet solutions rely
on encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. We may not
be able to stop unauthorized attempts to gain access to or disrupt the
transmission of communications by our customers. Anyone who is able to
circumvent our security measures could misappropriate confidential user
information or interrupt our, or our customers', operations. In addition, our
EDI and Internet solutions may be vulnerable to viruses, physical or electronic
break-ins, and similar disruptions. Any failure to provide secure electronic
communication services could result in a lack of trust by our customers causing
them to seek out other vendors, and/or, damage our reputation in the market
making it difficult to obtain new customers.
If the marketplace demands subscription pricing and/or application service
provider, or ASP, delivered offerings, our revenues may be adversely impacted.
We currently derive substantially all of our revenues from traditional
software license, maintenance and service fees, as well as the resale of
computer hardware. Today, customers pay an initial license fee for the use of
our products, in addition to a periodic maintenance fee. If the marketplace
demands subscription pricing and/or ASP-delivered offerings, we may be forced to
adjust our strategy accordingly, by offering a higher percentage of our products
and services through these means. Shifting to subscription pricing and/or
ASP-delivered offerings could adversely impact our financial condition, cash
flows and quarterly and annual results of operations, as our revenues would
initially decrease substantially. We cannot assure you that the marketplace will
not embrace subscription pricing and/or ASP-delivered offerings.
We structured the spin-off of PracticeWorks, Inc., our dental practice
management software business, as a tax-free transaction and PracticeWorks agreed
to indemnify us for any tax liabilities arising out of the transaction. If the
spin-off does not qualify as a tax-free transaction, we may be subject to
liabilities and we cannot assure you that PracticeWorks will honor its
indemnification obligations.
The spin-off of our former dental practice management software business
was structured to qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code of 1986. Section 355 places certain requirements that must
be complied with in order to qualify for tax-free treatment. Failure to comply
with those restrictions could cause us to incur significant liabilities.
PracticeWorks has generally agreed to indemnify us under certain circumstances
to the extent any action or omission on its part contributes to a determination
by the Internal Revenue Service that the spin-off was not a tax-free
transaction. However, we cannot assure you that
-17-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PracticeWorks will have sufficient resources to fulfill its indemnification
obligations and even if it had the resources, we cannot assure you that
PracticeWorks will not refute its indemnifications altogether. In either case,
if we are not indemnified, we may incur substantial liabilities, which could
have a material adverse effect on our business, financial condition, cash flows
and results of operations.
Our growth could be limited if we are unable to attract and retain qualified
personnel.
We believe that our success depends largely on our ability to attract
and retain highly skilled technical, managerial and sales personnel to develop,
sell and implement our products and services. Individuals with the information
technology, managerial and selling skills we need to further develop, sell and
implement our products and services are in short supply and competition for
qualified personnel is particularly intense. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot assure you
that we will succeed in attracting and retaining the personnel we need to
continue to grow and to implement our business strategy. In addition, we depend
on the performance of our executive officers and other key employees. The loss
of any member of our senior management team could negatively impact our ability
to execute our business strategy.
If our interpretation of the accounting pronouncements regarding revenue
recognition is not correct or if the American Institute of Certified Public
Accountants, or AICPA, or other regulators of accounting standards modifies or
issues new pronouncements, then our business and financial condition could be
adversely affected.
Based on our reading and interpretations of Statement of Positions
81-1, 97-2 and 98-9, issued by the AICPA, and Staff Accounting Bulletin No. 101,
issued by the United States Securities and Exchange Commission, we believe our
current sales contract terms and business arrangements have been properly
reported. However, the AICPA and its Software Revenue Recognition Task Force
continue to issue interpretations and guidance for applying the relevant
standards to a wide range of sales contract terms and business arrangements that
are prevalent in the software industry. Future interpretations or changes by the
AICPA or other regulators of existing accounting standards or changes in our
business practices could result in future changes in our revenue recognition
accounting policies and practices that could have a material adverse effect on
our business, financial condition, cash flows and results of operations.
OVERVIEW
VitalWorks Inc. is a leading, nationwide provider of information
management technology and services targeted to healthcare practices and
organizations. We provide information technology-based solutions for general
medical practices and have specialty-specific products and services for
practices such as radiology, anesthesiology, ophthalmology, emergency medicine,
plastic surgery, and dermatology. We also offer enterprise-level systems
designed for large physician groups and networks. Our range of software
solutions, which include workflow features related to patient encounters,
automate the administrative, financial, and clinical information management
functions for physicians and other healthcare providers. We provide our clients
with ongoing software support, training, electronic data interchange, or EDI,
services for patient billing and claims processing, and a variety of Web-based
services.
Software license fees and system revenues are derived from the sale of
software product licenses and computer hardware. Maintenance and services
revenues come from providing ongoing product support, training and transaction
processing services. Approximately two-thirds of our total revenues are of a
recurring nature.
-18-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
We market our products and services primarily to three types of physician
practices:
o ambulatory imaging centers and radiology practices, as well as
anesthesiology practices;
o large general and emergency medicine practices, such as physician
networks, clinics and management service organizations that include ten
or more doctors; and
o small group practices of fewer than ten doctors that serve a local
community, including ophthalmology, dermatology and general medicine
practices.
In 2002, approximately 40% of revenues were derived from the
radiology/anesthesiology market and 30% from each of our other markets.
Approximately an equal amount of revenues was derived from each of these three
markets in 2001. Revenues from the small group market are skewed more towards
maintenance and services.
RESULTS OF OPERATIONS
Revenues
Third Quarter Ended Nine Months Ended
September 30, 2002 Change 2001 2002 Change 2001
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Maintenance and services $21,389 2.0% $20,969 $63,783 1.3% $62,947
Percentage of total revenues 74.6% 76.9% 74.4% 79.8%
- -------------------------------------------------------------------------------------------------------------------------
Software licenses and system sales $ 7,267 15.5% $6,290 $21,983 38.1% $15,914
Percentage of total revenues 25.4% 23.1% 25.6% 20.2%
- -------------------------------------------------------------------------------------------------------------------------
We recognize software license revenues (initial fees) and system
(computer hardware) sales upon execution of the sales contract and delivery of
the software and/or hardware. In all cases, however, collection of any related
receivable must be probable, and no significant post-contract obligations of
ours shall be remaining. Otherwise, we defer the sale until all of the
requirements for revenue recognition have been satisfied. Maintenance fees for
routine support and product updates are recognized ratably over the term of the
license agreement, which is typically three years. Training, consulting and EDI
service revenues are recognized as the services are performed. We provide
allowances for estimated future returns and discounts, as well as bad debts,
upon recognition of revenues.
If we were to adopt new, or change our current, licensing practices in
response to a preference from the market or otherwise, then our revenue
recognition practices may be subject to significant change to comply with the
requisite accounting principles. For example, contracts strictly for software
services and support (e.g., subscription type contracts) would result in the
recognition of revenues ratably over the term of the contract.
Excluding EDI transaction revenues of $1.6 million recognized in July
2001 in connection with the settlement of a contract dispute with an EDI
supplier, maintenance and services revenues increased $2.0 million and $2.4
million, respectively, for the three and nine-month periods. The increase is
mainly attributable to (i) an increase in training and other professional
services revenues of $.8 million for the September quarter
-19-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
and $1.8 million for the nine months, corresponding to the favorable trend in
sales of software licenses and systems, and (ii) additional EDI revenues, net of
customer attrition, of approximately $1.3 million for the September quarter and
$2.4 million for the nine months, which reflects the conversion of a number of
customer accounts to direct billing from us for printing services performed by
certain third parties that, in the first nine months of 2001, had been billed
directly by the printing vendor. Our revised agreements with these printers now
call for us to bill our physician practices directly for printing services and,
in turn, remit a specified dollar amount per page to the printer. Accordingly,
based on the amended agreements, we recognize 100% of our direct billings as
revenue, compared to an amount that previously was net of the printers' fees.
Moreover, regarding the nine-month comparison, the increases were partly offset
by the loss of revenues totaling $1.8 million earned in the first six months of
2001 under agreements to promote third-party product and services, which
agreements were terminated in May and October 2001. Maintenance revenues have
remained substantially unchanged.
Software license and system revenues rose primarily as a result of an
increase in the number of licenses and systems sold (unit volume versus, for
example, price increases). This increase was led by software sales made
primarily to ambulatory imaging centers and radiology practices.
Cost of revenues
Third Quarter Ended Nine Months Ended
September 30, 2002 Change 2001 2002 Change 2001
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Maintenance and services $ 5,553 49.4% $ 3,718 $16,473 19.0% $13,845
Percentage of maintenance and services
revenue 26.0% 17.7% 25.8% 22.0%
- -----------------------------------------------------------------------------------------------------------------------------
Software licenses and system sales $ 2,204 23.3% $ 1,788 $ 6,005 30.9% $ 4,586
Percentage of software licenses and
system sales 30.3% 28.4% 27.3% 28.8%
- -----------------------------------------------------------------------------------------------------------------------------
Cost of maintenance and services revenues consists primarily of the
cost of EDI claims processing, outsourced hardware maintenance and billing and
statement printing services, and postage. The increase in the cost of
maintenance and services revenues principally reflects additional costs of EDI
services incurred in connection with the conversion of a number of customers to
direct billing for printing services, as discussed above regarding EDI revenues.
In addition, in July 2001, we recovered certain EDI processing costs and
recognized a credit of $.6 million in connection with the contract settlement
referred to above.
Cost of software license and system revenues consists primarily of
costs incurred to purchase computer hardware, third-party software and other
items for resale in connection with sales of new systems and software, and, in
2002, amortization of product development costs. The increase reflects the
increase in the corresponding sales of software products and computer hardware,
and amortization of product development costs of $.3 million for the September
quarter and $.6 million for the nine months.
-20-
VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Operating expenses
Third Quarter Ended Nine Months Ended
September 30, 2002 Change 2001 2002 Change 2001
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Selling, general and administrative $12,367 .4% $12,320 $36,909 (10.2)% $41,103
Percentage of total revenues 43.2% 45.2% 43.0% 52.1%
- -----------------------------------------------------------------------------------------------------------------------------
Research and development $ 3,360 10.8% $ 3,033 $10,100 24.6% $ 8,108
Percentage of total revenues 11.7% 11.1% 11.8% 10.3%
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 665 (89.8)% $ 6,543 $ 1,899 (90.4)% $19,780
Percentage of total revenues 2.3% 24.0% 2.2% 25.1%
- -----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses include fixed and variable
compensation and benefits of all personnel other than research and development
personnel, facilities, travel, communications, bad debt, legal, marketing,
insurance and other administrative expenses. For the September quarter, selling,
general and administrative expenses have remained substantially unchanged. Our
employee-base average has leveled off, with 640 for the September 2002 quarter,
compared to 656 for the September 2001 quarter. The decrease regarding the
nine-month comparison is related to the savings that resulted from a major
restructuring plan that we initiated in August 2000. We closed 14 offices, the
last five of which were closed in March and April 2001, and our employee-base
average was reduced to 653 for the first nine months of 2002, from 718 for the
corresponding period of 2001. The decrease also reflects (i) declines in
contract labor costs of $.9 million, legal fees of $.7 million and bad debt
expense of $.5 million, and (ii) a savings of $.5 million recognized in the June
2002 quarter in connection with the early termination of an office lease for a
facility closed in March 2001 as part of the restructuring.
The increase in research and development expenses is mainly
attributable to additional personnel costs and third-party software developer
fees associated with our expanded product research and development activities.
For the quarter and nine months ended September 30, 2002, we capitalized $1.2
million (or 26.4% of total research and development expenditures) and $3.6
million (or 26.2% of total research and development expenditures) of third-party
software developer fees, respectively, in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed". For the same periods of 2001, we
capitalized $1.6 million (or 34.2% of total research and development
expenditures) and $3.0 million (or 27.2% of total research and development
expenditures) of third-party developer fees. The amounts capitalized relate to
our development of Web-based applications, including a radiology information
system, or RIS, which is a workflow solution for medical imaging centers. We
amortize capitalized software development costs over the estimated economic life
of the products. Depending on the nature and success of the product, we
generally expect to amortize these deferred costs over a three to five-year
period. Amortization commences when the product is made commercially available.
One new application became commercially available in the first quarter of 2002.
The new RIS product was made available in the second quarter of 2002. We expect
the remaining products to become commercially available in the December 2002 and
March 2003 quarters.
In the three and nine-month periods ended September 30, 2001,
depreciation and amortization expense consisted mainly of $5.8 million and $17.4
million of goodwill amortization, respectively. The decrease in depreciation and
amortization expense in 2002 is due primarily to the cessation of goodwill
amortization in
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VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets". In July 2001, the Financial Accounting Standards
Board issued Statement 142, which provides that, upon adoption, we shall no
longer amortize our goodwill assets. Rather, we are required to test these
assets for impairment of value on at least an annual basis. Pursuant to
Statement 142, we discontinued amortizing goodwill on January 1, 2002. Based on
our initial test for impairment of value, the adoption of Statement 142 did not
have a negative impact on our financial statements.
In the September 2001 quarter, we recorded an impairment charge of $1.3
million relating to our former headquarters building in Atlanta. We sold the
building in August 2002. See Note E of the accompanying financial statements for
more information relating to the sale of the building.
In the June 2002 quarter and in July 2002, we received final payments
from three former directors satisfying their outstanding loans from VitalWorks,
including interest. Consequently, we recorded a credit of $6.0 million ($3.0
million each in the March and June quarters) reflecting a complete reversal of
the allowance for loan losses established in March 2001. In 2001, we recognized
impairment charges and incurred other nonrecurring costs of $8.1 million. These
costs and expenses included the $6.0 million provision for loan losses relating
to the notes receivable from former directors and $.9 million for unused equity
financing, both recorded in the March 2001 quarter, $.8 million of executive
severance paid in the June 2001 quarter, and a credit of $.3 million for changes
of estimates related to certain nonrecurring costs recognized in the September
2001 quarter.
Interest income
The decline in interest income in the quarter reflects $.2 million of
interest received in July 2001 in connection with the contract settlement
referred to above regarding EDI revenues. The nine-month comparison also
reflects interest of $1.1 million not previously recognized on the notes
receivable from former directors. We received substantial interest and principal
payments in the June 2002 quarter.
Interest expense
Interest expense consists primarily of interest costs incurred in
connection with our outstanding term loan and real estate mortgage loans. As of
August 2002, the mortgage loans have been repaid in full. The decrease in
interest expense is due to a decline in both the outstanding principal balances
and associated interest rates under our credit agreement.
Income taxes
For the three and nine-month periods ended September 30, 2002, we
recorded an income tax provision of $56,000 and $106,000, respectively. No
income tax provision or benefit was recognized in 2001. Management has assessed
the realizable value of our deferred tax assets of $55.3 million and determined
that a valuation allowance of $25.7 million was necessary as of September 30,
2002 to, along with deferred tax liabilities of $2.9 million, reduce the net
deferred tax asset to $26.7 million, an amount which we believe is more likely
than not to be realized. In reaching this conclusion, management noted that
internal projections indicate that we will generate sufficient taxable income to
realize the net deferred tax assets within three to four years.
The effective income tax rate was less than 2% for the three and
nine-month periods ended September 30, 2002 and is expected to remain at less
than 2% for the rest of 2002 due primarily to utilization of net operating loss
carryforwards.
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VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Loss from discontinued operations
Discontinued operations represent the results of PracticeWorks, Inc., a
provider of practice management software for dental and oral surgery practices,
through March 5, 2001. On that date, we distributed 100% of the common stock of
PracticeWorks to our stockholders. For the period January 1, 2001 to March 5,
2001, our net loss from discontinued operations was $5.4 million.
Net income (loss)
As a result of the above factors, operating results for the three and
nine-month periods ended September 30, 2002 increased to net income of $4.1
million from a net loss of $(1.7) million and to net income of $20.1 million
from a net loss of $(25.6) million, respectively, for the corresponding periods
of 2001.
To date, the overall impact of inflation on us has not been material.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our business through positive cash flows from
operations and proceeds from the issuance of common stock and long-term
borrowings. For fiscal years 1999, 2000 and 2001, and for the nine months ended
September 30, 2002, we generated positive cash flows from operations of $3.4
million, $12.8 million, $18.2 million and $13.8 million, respectively.
Days sales outstanding (calculated as accounts receivable, net of
allowances, divided by total quarterly revenues multiplied by 90 days) for the
third quarter of 2002 was 47 days. Looking forward, assuming license and systems
sales increase, we would expect our days sales outstanding to range from 50 to
60 days.
Cash provided by investing activities for the nine months ended
September 30, 2002 amounted to $3.5 million. This total includes net proceeds of
$7.2 million from the sale of office buildings and $.3 million related to the
spin-off of PracticeWorks, offset partially by $3.4 million used for software
development costs and $.6 million used primarily for purchases of computer
equipment and software.
Cash provided by financing activities for the nine months ended
September 30, 2002 amounted to $10.4 million, consisting of proceeds of $27.5
million received in connection with a new four-year credit agreement, $11.0
million of loan payments received from former directors, and $9.7 million of
payments received in connection with the exercise of stock options by employees.
These amounts were partly offset by $37.2 million of principal payments of
long-term debt and $.5 million of finance costs.
As of September 30, 2002, we had cash and cash equivalents of $40.7
million and $20.4 million of total long-term debt. Cash equivalents are
comprised primarily of investment-grade commercial paper, time deposits, and
U.S. federal, state and political subdivision obligations with varying terms of
three months or less. In March 2002, we entered into a new four-year credit
agreement with Foothill Capital Corporation, a wholly-owned subsidiary of Wells
Fargo & Company. The new agreement included a term loan of $22.0 million at an
interest rate of prime plus 2%, and a mortgage loan of $5.5 million. We repaid
the mortgage loan in August 2002 in connection with the sale of our Atlanta
property. Subject to achieving certain specified earnings targets, the margin by
which our interest rate on the term loan exceeds prime may be reduced by as much
as 1.1% over the life of the loan. Interest is payable monthly in arrears.
Principal is payable over the life of the agreement, including a balloon payment
in March 2006. Should we decide to prepay the term loan in full prior to year
four, we would incur a prepayment fee equal to 3% in year one, 2% in year two,
and 1% in year three of the then outstanding principal balance of the term loan.
The prepayment fee may be reduced should the loan be prepaid in connection with
a change of control of VitalWorks. The loans, which are collateralized by
substantially all of our
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VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
assets and intellectual property rights, subject us to certain restrictive
covenants, including (i) the required maintenance of minimum levels of recurring
revenues and earnings, as defined, (ii) an annual limit on the amount of capital
expenditures and (iii) the prohibition of dividend payments to shareholders.
The following table summarizes, as of September 30, 2002, the general
timing of future payments under our outstanding loan agreement and under lease
agreements that include noncancellable terms.
Payments Due by Period
---------------------------------------------------------------------------
Contractual 2004 &
Obligations Totals 2002 2003 2005 2006 Thereafter
---------------------------------------------------------------------------
(in thousands)
Long-term debt.... $ 19,500 $ 5,000 $2,500 $ 12,000
Capital leases.... 860 $ 146 516 198
Operating leases.. 8,617 972 2,424 3,028 1,216 $ 977
---------------------------------------------------------------------------
$ 28,977 $ 1,118 $ 7,940 $5,726 $ 13,216 $ 977
===========================================================================
We anticipate capital expenditures of approximately $2 million for the
remainder of 2002, including software development costs of approximately $1.5
million. We intend to review potential strategic acquisitions and other business
alliances.
In October 2002, our board of directors authorized the repurchase of up
to $15 million of our common stock from time to time. The timing and amount of
any shares repurchased will be determined by management based on our evaluation
of market conditions and other factors. The repurchase program may be suspended
or discontinued at any time. Any repurchased shares will be available for use in
connection with stock plans and for other corporate purposes. The repurchase
program will be funded using our existing cash resources. As of November 12,
2002, we repurchased 1,247,900 shares of our common stock for an aggregate cost
of $4.1 million.
From time to time, in the normal course of business, various claims are
made against us. Except for proceedings described below, there are no material
proceedings to which we are a party, and management is unaware of any material
contemplated actions against us.
On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana. We removed the case to the United States District
Court for the Southern District of Indiana. The complaint alleges state
securities law violations, breach of contract, and fraud claims against us and
certain former directors and officers. The complaint does not specify the amount
of damages sought by plaintiffs, but seeks rescission of a transaction
plaintiffs valued at $5 million, as well as punitive damages and reimbursement
for the plaintiffs' attorneys' fees and associated costs and expenses of the
lawsuit. In a decision from the Court dated October 15, 2001, the plaintiffs'
request for a preliminary injunction to preserve their remedy of rescission was
denied, our request to transfer the case to the Northern District Court of
Georgia was granted, and our motion to dismiss plaintiffs' complaint in its
entirety was granted in part. On October 26, 2001, the plaintiffs filed a notice
of appeal with the 7th Circuit Court of Appeals. On November 8, 2002, the 7th
Circuit Court affirmed the denial of the preliminary injunction and dismissed
the remainder of plaintiffs' appeal.
We have been named as a defendant as successor to CDL Healthcare
Systems, Inc. ("CDL"), a company acquired by us in December 1999, in a complaint
filed in the Circuit Court of the Eleventh Judicial Circuit in Dade County,
Florida on February 27, 2001 by Sonia Abutog, individually, Angelo Abutog,
individually, and
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VitalWorks Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Sonia and Angelo Abutog, as parents and next best friends to Aaron Abutog, a
minor. Gary Weiner, former President of CDL, and his daughter, Elisha Weiner,
are also named as defendants. Plaintiffs allege that they were injured at a
time, prior to the merger between us and CDL, when a motor vehicle operated by
Elisha Weiner collided with plaintiff Sonia Abutog, a pedestrian. The plaintiff
contends that she and her unborn child suffered severe personal injuries as a
result of the accident and seeks to recover damages in an unspecified amount in
excess of $15,000, plus interest and costs. Our motion for final summary
judgment dismissing the action against us was granted by order of the Court
dated July 9, 2002. The plaintiffs did not file a Notice of Appeal of this
decision and the time to do so has expired.
While management believes that we have meritorious defenses in each of
the foregoing matters and we intend to pursue our positions vigorously,
litigation is inherently subject to many uncertainties. Thus, the outcome of
these matters is uncertain and could be adverse to us. However, even if the
outcome of these cases is adverse, management does not believe that the outcome
of these cases, individually or in the aggregate, will have a material adverse
effect on our financial position. However, depending on the amount and timing of
an unfavorable resolution(s) of the contingencies, it is possible that our
future results of operations or cash flows could be materially affected in a
particular reporting period(s).
We believe that our current cash and cash equivalent balances, together
with the funds we expect to generate from our operations, will be sufficient to
finance our business for the next twelve months, including the repurchase of up
to $15 million of our outstanding common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Statement 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by Statement 146 include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, facility closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
In July 2001, the FASB issued Statement 141, "Business Combinations."
Statement 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. Statement 141 also requires us to
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. Statement 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires that, upon
adoption of Statement 142, "Goodwill and Other Intangible Assets" (adoption of
Statement 142 is discussed in the operating expenses section above), we
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in Statement 141.
Our previous business combinations were accounted for using both the
pooling-of-interests and purchase methods. The pooling-of-interests method does
not result in the recognition of acquired goodwill or other intangible assets.
As a result, the adoption of Statements 141 and 142 will not affect the results
of past transactions accounted for under the pooling-of-interests method.
However, all future business combinations would be accounted for under the
purchase method, which may result in the recognition of goodwill and other
intangible assets, some of which would be recognized through operations, either
by amortization or impairment charges, in the future.
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VitalWorks Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is fluctuations in the "prime rate" of interest
announced from time to time by Wells Fargo Bank N.A. Approximately $19.5 million
of outstanding debt at September 30, 2002 related to long-term indebtedness
under our credit agreement with Foothill Capital Corporation, a wholly-owned
subsidiary of Wells Fargo & Company. We expect interest on the outstanding
balance of the loans to be charged based on a variable rate related to the prime
rate. Thus, interest expense is subject to market risk in the form of
fluctuations in the prime rate of interest. The effect of a hypothetical one
hundred basis point increase across all maturities of variable rate debt would
result in an annual decrease of approximately $.2 million in pre-tax results
assuming no further changes in the amount of borrowings subject to variable rate
interest from amounts outstanding at September 30, 2002. We do not hold
derivative securities and have not entered into contracts embedded with
derivative instruments, such as foreign currency and interest rate swaps,
options, forwards, futures, collars, and warrants, either to hedge existing
risks or for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Quarterly Report on Form 10-Q, our
chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
(b) Changes in internal controls. There were no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, in the normal course of business, various claims are
made against us. Except for proceedings described below, there are no material
proceedings to which we are a party, and management is unaware of any material
contemplated actions against us.
On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana. We removed the case to the United States District
Court for the Southern District of Indiana. The complaint alleges state
securities law violations, breach of contract, and fraud claims against us and
certain former directors and officers. The complaint does not specify the amount
of damages sought by plaintiffs, but seeks rescission of a transaction
plaintiffs valued at $5 million, as well as punitive damages and reimbursement
for the plaintiffs' attorneys' fees and associated costs and expenses of the
lawsuit. In a decision from the Court dated October 15, 2001, the plaintiffs'
request for a preliminary injunction to preserve their remedy of rescission was
denied, our request to transfer the case to the Northern District Court of
Georgia was granted, and our motion to dismiss plaintiffs' complaint in its
entirety was granted in part. On October 26, 2001, the plaintiffs filed a notice
of appeal with the 7th Circuit Court of Appeals. On November 8, 2002, the 7th
Circuit Court affirmed the denial of the preliminary injunction and dismissed
the remainder of plaintiffs' appeal.
We have been named as a defendant as successor to CDL Healthcare
Systems, Inc. ("CDL"), a company acquired by us in December 1999, in a complaint
filed in the Circuit Court of the Eleventh Judicial Circuit in Dade County,
Florida on February 27, 2001 by Sonia Abutog, individually, Angelo Abutog,
individually, and Sonia and Angelo Abutog, as parents and next best friends to
Aaron Abutog, a minor. Gary Weiner, former
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VitalWorks Inc.
President of CDL, and his daughter, Elisha Weiner, are also named as defendants.
Plaintiffs allege that they were injured at a time, prior to the merger between
us and CDL, when a motor vehicle operated by Elisha Weiner collided with
plaintiff Sonia Abutog, a pedestrian. The plaintiff contends that she and her
unborn child suffered severe personal injuries as a result of the accident and
seeks to recover damages in an unspecified amount in excess of $15,000, plus
interest and costs. Our motion for final summary judgment dismissing the action
against us was granted by order of the Court dated July 9, 2002. The plaintiffs
did not file a Notice of Appeal of this decision and the time to do so has
expired.
While management believes that we have meritorious defenses in each of
the foregoing matters and we intend to pursue our positions vigorously,
litigation is inherently subject to many uncertainties. Thus, the outcome of
these matters is uncertain and could be adverse to us. However, even if the
outcome of these cases is adverse, management does not believe that the outcome
of these cases, individually or in the aggregate, will have a material adverse
effect on our financial position. However, depending on the amount and timing of
an unfavorable resolution(s) of the contingencies, it is possible that our
future results of operations or cash flows could be materially affected in a
particular reporting period(s).
ITEM 5. OTHER INFORMATION
In April and May 2002, each executive officer entered into an
individual stock trading plan, or so-called Rule 10b5-1 plan. These plans
specify trading periods that generally extend for up to one year, number of
shares to be sold, and prices at which shares may be sold. If all conditions of
the plans are met, the total number of shares that may be sold under the plans
would equal 19.9% of the aggregate number of shares, including unvested option
shares, then held by the executive officers. More specifically, the Rule 10b5-1
plan of Joseph M. Walsh, president and CEO, provides for the sale of not more
than 90,000 shares on-average per quarter over the twelve months ending May 30,
2003, which began with the announcement of our operating results for the June
2002 quarter. The aggregate number of shares that may be sold under this plan
represents 11.3% of the number of shares, including unvested option shares, then
held by Mr. Walsh. Since March 6, 2001, approximately 11% of the aggregate
holdings of the executive officers were sold.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
15 Letter regarding unaudited interim financial information from
BDO Seidman, LLP, independent certified public accountants
(With respect to the unaudited interim financial statements of
VitalWorks Inc. for the periods ended September 30, 2002 and
2001 included in this Quarterly Report on Form 10-Q, BDO
Seidman, LLP have applied limited procedures in accordance
with professional standards for a review of such information.
However, as stated in their report included in this Quarterly
Report on Form 10-Q, they did not audit and they do not
express an opinion on those unaudited interim financial
statements. Accordingly, the degree of reliance on their
reports on such information should be restricted in light of
the limited nature of the review procedures applied. To the
extent that this Quarterly Report on Form 10-Q is incorporated
by reference in any registration statements that VitalWorks
Inc. has filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, BDO Seidman, LLP
are not subject to the liability provisions of Section 11 of
that Act for their reports on the unaudited interim financial
statements because those reports are not "reports" or a
"part" of the registration statement prepared or certified by
an accountant within the meaning of Sections 7 and 11 of the
Act.)
(b) Reports on Form 8-K
None
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VitalWorks Inc.
Form 10-Q for the Three-month Period Ended September 30, 2002
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.
VitalWorks Inc.
/s/ Michael A. Manto 11/13/02
---------------------------------------------------------------
Michael A. Manto Date
Executive Vice President and Chief Financial Officer
/s/ Joseph M. Walsh 11/13/02
---------------------------------------------------------------
Joseph M. Walsh Date
Chairman and Chief Executive Officer
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VitalWorks Inc.
Form 10-Q for the Three-month Period Ended September 30, 2002
CERTIFICATIONS
I, Joseph M. Walsh, Chairman and Chief Executive Officer of the Company, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of
VitalWorks Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Joseph M. Walsh 11/13/02
-------------------------------------------------------
Joseph M. Walsh Date
Chairman and Chief Executive Officer
(principal executive officer)
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VitalWorks Inc.
Form 10-Q for the Three-month Period Ended September 30, 2002
I, Michael A. Manto, Executive Vice President and Chief Financial Officer of the
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
VitalWorks Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Michael A. Manto 11/13/02
---------------------------------------------------------------
Michael A. Manto Date
Executive Vice President and Chief Financial Officer
(principal financial officer)
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VitalWorks Inc.
Form 10-Q for the Three-month Period Ended September 30, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of VitalWorks
Inc. (the "Company") for the period ended September 30, 2002 (the "Report"), the
undersigned, Joseph M. Walsh, Chief Executive Officer of the Company, and
Michael A. Manto, Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Joseph M. Walsh 11/13/02
--------------------------------------------------------------
Joseph M. Walsh Date
Chief Executive Officer
/s/ Michael A. Manto 11/13/02
--------------------------------------------------------------
Michael A. Manto Date
Chief Financial Officer
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