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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "FORECASTS", "EXPECTS", "PLANS", "ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", "POTENTIAL", OR "CONTINUE' OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW UNDER THE CAPTION "RISK FACTORS." THESE FACTORS MAY CAUSE OUR ACTUAL EVENTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. WE DO NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT. ITEM 1 -- BUSINESS
COMPANY OVERVIEW We offer three sets of complementary products and services: ASP solutions, HealtheWare™ and HealthWeb®. ASP solutions offer pre-integrated, remotely hosted third-party and proprietary applications and related services to healthcare payer organizations, benefits administrators and providers on a monthly subscription fee basis. As part of our ASP solutions, we also offer outsourcing of business processes and consulting services, including information technology assessment and software development and implementation. HealtheWare offers premium software applications to the payer and benefits administration markets on either a hosted or a licensed basis. HealthWeb is our Internet platform, which facilitates information exchange and commerce over the Internet between health plans and providers, employers and health plan members. Our three sets of products and services allow us to offer comprehensive, integrated solutions to our customers while providing the opportunity to cross-sell our services and diversify our sources of revenue.
OUR SOLUTIONS
OUR STRATEGY
OUR PRODUCTS AND SERVICES
ASP SOLUTIONS Our ASP solutions free customers from capital investment in information technology, the operating costs associated with owning software and hardware, and the cost of managing their information infrastructure. Other advantages of using our ASP solutions include rapid deployment, reliability, scalability, lower implementation risk and preservation of legacy systems. Through our customer connectivity centers in Englewood, Colorado and Naperville, Illinois, we host and maintain software for our customers on most of the widely used computing, networking and operating platforms. We provide access to our hosted applications across high-speed electronic communications channels, such as frame relay, virtual private networks or the Internet. Each center operates with state-of-the-art environmental protection systems to maintain high availability to host systems and wide area network access. Connection to our host application servers and services is provided using the industry-standard TCP/IP protocol. We believe this provides the most efficient and cost-effective transport for information systems services, as well as simplified support and management. Our network connectivity infrastructure eliminates our customers' need to manage and support their own computer systems, network and software. Our ASP solutions provide complete, professionally managed information technology systems that include desktop and network connections, primary software applications that are essential to running the business, ancillary software, and information access and reporting capabilities to aid in data analysis and decision-making. Customers can choose the combination of our products and services to best meet their business requirements. VENDOR PARTNER RELATIONSHIPS. We have acquired rights to license and/or deploy numerous commercially available software applications from a variety of healthcare software vendors. For example, we offer managed care information systems from Quality Care Solutions, Inc. and McKessonHBOC, Inc.; financial management solutions from Great Plains; practice management systems from Medic Computer Systems, Raintree Systems, Inc. and Millbrook Corporation; electronic medical records solutions from The PenChart Corporation and Epic Systems Corporation. These relationships range from perpetual, reusable software licenses and contracts to preferred installer agreements to informal co-marketing arrangements. We enter into relationships with software vendors in order to offer our customers the widest possible variety of solutions tailored to their unique information technology needs. Our relationships with our vendor partners are designed to provide both parties with numerous mutual benefits.
In addition, we offer Erisco and RIMS solutions, our proprietary administrative software for payers and benefits administrators, on an ASP basis. We expect to expand our product and service offerings as we continue to develop relationships with additional software application vendors and information technology services partners. As of December 31, 2000, we had approximately 200 customers accessing our services on an ASP basis. TRANSFORMATION SERVICES. Our ASP solutions also include consulting services through our transformation services group. Our transformation services group has approximately 200 consultants. Our consultants:
HEALTHEWARE ERISCO. Erisco, founded in 1968, is a leading provider of information technology for healthcare payers. As of December 31, 2000, our Erisco solutions were used by over 125 payer organizations serving approximately 70 million lives, including managed care organizations, managed indemnity carriers, third-party administrators, and 27% of all Blue Cross Blue Shield organizations. Our Erisco products provide the core administrative systems required to operate a healthcare payer organization and are fully configured for use over the Internet. Erisco's Facets is a widely implemented, scalable client/server solution for healthcare payers. Facets supports the transaction demands of all sizes of managed care organizations. Facets allows healthcare payers to select from a variety of modules to meet specific business requirements -- including claims processing, claims re-pricing, capitation/risk fund accounting, premium billing, provider network management, group/membership administration, referral management, hospital and medical pre-authorization, case management, customer service and electronic commerce. Erisco's Managed Care Enterprise strategy provides built-in interoperability with complementary software to address the enterprise-wide needs of a managed care organization. Erisco has extended its core Facets system through alliances with complementary solutions for physician credentialing, document imaging, workflow management, data warehousing, decision support, provider profiling and Health Plan Employer Data Information Set reporting. As of December 31, 2000, we had 45 customers serving over 30 million members using Facets. Facets is available to customers on a license or ASP basis. Facets is integrated with HealthWeb and is currently offered to health plans as a single solution. Facets-HealthWeb allows customers to communicate and engage in commerce with providers, employer groups and members on a real-time basis over the Internet. Introduced in 1980, Erisco's Facts is designed for the indemnity insurance market, specifically managed indemnity, group insurance and third-party administrators. Facts software is used for the essential administrative transactions of an indemnity plan, including enrollment, rating and premium calculation, billing and claims processing. As of December 31, 2000, approximately 80 customers serving over 40 million members were using Facts - more than any other competing packaged software in the U.S. healthcare industry. RIMS. We believe that RIMS, founded in 1982, is the nation's largest provider of automated claims processing technology for benefits administrators. As of December 31, 2000, our RIMS solutions served over 300 customers with 20 million members, and its software was used to process nearly 180 million claims annually, or over 7% of the non-pharmacy claims processed in the United States. RIMS applications automate and simplify the claims adjudication, re-pricing and payment process, and are available to customers on a licensed or ASP basis. RIMS' QicLink software engine is the leading product for benefits administrators. QicLink reduces claims processing costs while increasing staff productivity. QicLink can be licensed at the customer site or offered on an ASP basis. RIMS' NetworX was the first enterprise-wide management system and claims re-pricing solution for preferred provider organizations. NetworX complements ClaimsExchange, which provides Internet connections that allow preferred provider organizations and healthcare claims payers to exchange information online. ClaimsExchange allows access to electronic transaction routing between providers and payers 24 hours a day, seven days a week, such as exchange of re-priced claims, claims tracking and reporting capabilities. RIMS solutions are currently being integrated with our HealthWeb Internet platform.
HEALTHWEB HealthWeb provides an effective way for health plans to reduce administrative costs and increase resources for medical services or other uses. HealthWeb creates an on-line "self-service" vehicle, reducing delays and phone calls and increasing customer satisfaction with prompt access to key information. HealthWeb's business-to-business transaction capabilities improve workflow and reduce costs throughout the healthcare system. HealthWeb's electronic desktop is easy to use and personalized for each customer, providing access to the business applications and content needed to perform typical healthcare tasks. HealthWeb is designed to manage online eligibility, authorizations, referrals, benefit verification, claims status, claims adjudication and many other transactions benefiting physician offices. It also supports enrollment, demographic changes, primary care physician selection, identification card requests and other transactions for employers, brokers and health plan members. HealthWeb works across multiple platforms to ensure comprehensive access to data for all users and provides an advanced method of security to protect information. HealthWeb is designed to work with legacy healthcare applications that do not have graphical user interfaces as well as with newer client/server applications. We believe that the abandonment of legacy systems will generally not serve the best interests of our customers, especially in light of significant capital outlays customers have recently made in addressing year 2000 system requirements. HealthWeb's proprietary technology used to access and connect to these legacy systems allows us to maximize value to our customers while minimizing risks of business interruption. HealthWeb's electronic healthcare business platform is built using industry standard technology. The system is multi-tiered and contains a collection of healthcare modules that handle core electronic transaction processing. HealthWeb operates based upon a set of powerful utilities that allow configuration by us or the customer. These utilities control security, data access, presentation, data capture, business logic, workflow and disposition of transactions. HealthWeb uses XML technology to interact with other applications and also works with industry standard middleware. We anticipate that the number of offerings available through HealthWeb will grow, as we continue to develop proprietary products and relationships with additional Internet service and content partners. HealthWeb is integrated with Facets and is currently being integrated to function with RIMS software.
SALES AND MARKETING Our marketing organization is organized by target market and is closely aligned with the sales force to provide market specific campaigns and lead generation initiatives for our ASP, software licenses, Internet technology and business and consulting services. These initiatives include direct mail campaigns, marketing collateral, trade shows, seminars and events. The marketing organization also develops and supports our corporate positioning and brands. Our comprehensivecorporate communications program includes advertising, media relations and industry analyst relations. Our transformation services group works closely with the sales organization to provide a consultative, executive selling approach that complements our sales program. This team of healthcare information technology professionals is trained in a proprietary assessment methodology that allows a quick and comprehensive analysis of a customer's information technology capabilities and requirements. In conjunction with their consulting responsibilities, our transformation services group identifies opportunities to introduce customers to the broad range of applications and technology solutions available to them, including those that we offer.
CUSTOMER SERVICE Because we support multiple applications and technology solutions, our functional and technical support staff are grouped and trained by specific application and by application type. These focused staff groups have concentrated expertise that we can deploy as needed to address customer needs. We cross-train employees to support multiple applications and technology solutions to create economies-of-scale in our support staff. We further leverage the capabilities of our support staff through the use of sophisticated computer software that tracks solutions to common computer and software-related problems. This allows our support staff to learn from the experience of other people within the organization and it reduces the time it takes to solve problems. As of December 31, 2000, we had approximately 435 employees and independent contractors providing technical support functions for our customers. In addition, we provide business services support for our customers in the areas of claims processing, billing and enrollment, membership services, provider contracting and provider credential verification services. As of December 31, 2000, we had approximately 345 employees and independent contractors providing such support services.
COMPETITION
Each of these types of companies can be expected to compete with us within various segments of the healthcare information technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our products and services, may enter our markets. In addition, some of our third-party software vendors compete with us from time to time by offering their software on a licensed or ASP basis. We believe companies in our industry primarily compete based on performance, price, software functionality, customer awareness, ease of implementation and level of service. Although our competitive position is difficult to characterize due principally to the variety of current and potential competitors and the evolving nature of our market, we believe that we presently compete favorably with respect to all of these factors. While our competition comes from many industry segments, we believe no single segment offers the integrated, single-source solution that we provide to our customers. To be competitive, we must continue to enhance our products and services, as well as our sales, marketing and distribution channels to respond promptly and effectively to:
INTELLECTUAL PROPERTY Our efforts to protect our intellectual property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. In addition, the laws of some foreign countries do not protect proprietary rights as well as the laws of the United States. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be time consuming and costly. We could be subject to intellectual property infringement claims as we expand our product and service offerings and the number of our competitors increases. Defending against these claims, even if not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay a substantial damage award and be forced to develop noninfringing technology,obtain a license or cease using the applications that contain the infringing technology or content. We may be unable to develop noninfringing technology or content or obtain a license on commercially reasonable terms, or at all. We also rely on a variety of technologies that are licensed from third parties to perform key functions. These third-party licenses are an essential element of our business as an application services provider. These third-party licenses may not be available to us on commercially reasonable terms in the future. The loss of or inability to maintain any of these licenses could delay the introduction of software enhancements and other features until equivalent technology can be licensed or developed. Any such delay could materially adversely affect our ability to attract and retain customers.
EMPLOYEES RISK FACTORS OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE. Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as our mix of non-recurring and recurring revenue, our ability to add new customers, renew existing accounts, sell additional products and services to existing customers, meet project milestones and customer expectations, and the timing of new customer sales. The variation in our quarterly operating results could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance. We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short-term. If we record lower revenue, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and our stock price could decline. We have experienced long sales and implementation cycles for our HealtheWare solutions. HealtheWare solutions typically require significant capital expenditures by customers. Major decisions for large payer organizations typically range from six to 12 months or more from initial contact to contract execution. Historically, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales cycle and the implementation cycle, we will expend substantial time, effort and financial resources preparing contract proposals, negotiating the contract and implementing the solution. We may not realize any revenue to offset these expenditures, and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our revenues. WE HAVE A HISTORY OF OPERATING LOSSES AND CANNOT PREDICT WHEN, OR IF, WE WILL ACHIEVE PROFITABILITY. We have lost money in seven of our past eight quarters (through December 31, 2000). Although our revenue has grown in recent periods, we cannot assure you that our revenue will be maintained at the current level or increase in the future. In addition, we have a limited operating history and it is difficult to evaluate our business. Our stockholders must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in rapidly evolving markets. We cannot assure you that we will achieve or sustain profitability on either a quarterly or annual basis. We currently derive our revenue primarily from providing application services, software licensing and maintenance, and other services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and acquisitions. As a result, we expect that we will lose money through at least the fiscal year ending December 31, 2001, and we may never achieve or sustain profitability. WE DEPEND ON OUR SOFTWARE APPLICATION VENDOR RELATIONSHIPS, AND IF OUR SOFTWARE APPLICATION VENDORS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE BUSINESS DIFFICULTIES, OR IF WE ARE UNABLE TO ESTABLISH NEW RELATIONSHIPS WITH ADDITIONAL SOFTWARE APPLICATION VENDORS, IT COULD HARM OUR BUSINESS. We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We cannot assure you that we will be able to maintain relationships with our vendors or establish relationships with new vendors. We cannot assure you that the software, products or services of our third-party vendors will achieve or maintain market acceptance or commercial success. Accordingly, we cannot assure you that our existing relationships will result in sustained business partnerships, successful product or service offerings or the generation of significant revenue for us. Our arrangements with third-party software application vendors are not exclusive. We cannot assure you that these third-party vendors regard our relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services. If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition and operating results. Our licenses for the use of third-party software applications are essential to the technology solutions we provide for our customers. Loss of any one of our major vendor agreements may have a material adverse effect on our business, financial condition and operating results. REVENUE FROM A LIMITED NUMBER OF CUSTOMERS COMPRISE A SIGNIFICANT PORTION OF OUR TOTAL REVENUE, AND IF THESE CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE BUSINESS DIFFICULTIES, IT COULD ADVERSELY AFFECT OUR EARNINGS. As of December 31, 2000, we were providing services to approximately 600 customers. Three of our customers, QualChoice of Arkansas, Inc., Preferred Health Network of Maryland, Inc. and Maxicare Health Plans, Inc. represented an aggregate of approximately 36% of our total revenue for the twelve months ended December 31, 2000. Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some ASP customers without long-term contracts. In addition, many of our contracts are structured so that we generate revenue based on units of volume, which include the number of members, number of physicians or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted. Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition and operating results. WE ARE GROWING RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH COULD HARM OUR BUSINESS. We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, financial, information systems and other resources. As of December 31, 2000, we had grown to approximately 1,600 employees and independent contractors, from approximately 75 employees and independent contractors in December 1997. We expect to hire a significant number of new employees to support our business. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition and operating results. OUR ACQUISITION STRATEGY MAY DISRUPT OUR BUSINESS AND REQUIRE ADDITIONAL FINANCING. Since inception, we have made several acquisitions and expect to continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses. We expect this competition to increase, making it more difficult in the future to acquire suitable companies on favorable terms. We may be unable to successfully integrate companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the failure to successfully integrate acquisitions may divert management's attention from our existing business and may damage our relationships with our key customers and employees. To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition and operating results. OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN AS IS OUR ABILITY TO RAISE FURTHER FINANCING IF REQUIRED. If we continue to incur losses, we may need additional financing to fund operations or growth. We cannot assure you that we will be able to raise additional funds through public or private financings, at any particular point in the future or on favorable terms. Future financings could adversely affect your ownership interest in comparison with those of other stockholders. OUR BUSINESS WILL SUFFER IF OUR SOFTWARE PRODUCTS CONTAIN ERRORS. The proprietary and third-party software products we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in current versions, new versions or enhancements of our products. Significant technical challenges also arise with our products because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers' expectations. As a result of the foregoing, we could experience:
Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective or incompatible with future versions of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use. WE COULD LOSE CUSTOMERS AND REVENUE IF WE FAIL TO MEET THE PERFORMANCE STANDARDS IN OUR CONTRACTS. Many of our service agreements contain performance standards. If we fail to meet these standards, our customers could terminate their agreements with us or require that we refund part or all of the fees charged under those agreements. The termination of any of our material services agreements and/or any associated refunds could have a material adverse effect on our business, financial condition and operating results. IF OUR ABILITY TO EXPAND OUR NETWORK INFRASTRUCTURE IS CONSTRAINED IN ANY WAY, WE COULD LOSE CUSTOMERS AND DAMAGE OUR OPERATING RESULTS. We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. We may not be able to accurately project the rate or timing of increases, if any, in the use of our application services or HealthWeb or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers' changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors. PERFORMANCE OR SECURITY PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS. Our customers' satisfaction and our business could be harmed if we or our customers experience any system delays, failures or loss of data. Although we devote substantial resources to meeting these demands, errors may occur. Errors in the processing of customer data may result in loss of data, inaccurate information and delays. Such errors could cause us to lose customers and be liable for damages. We currently process substantially all of our customers' transactions and data at our customer connectivity centers in Englewood, Colorado and Naperville, Illinois. Although we have safeguards for emergencies and we have contracted backup processing for our customers' critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers which have had periodic operational problems or experienced outages. A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient information in our customer connectivity centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Our services agreements generally contain limitations on liability, and we maintain insurance with coverage limits of $25 million for general liability and $10 million for professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and operating results. Even unsuccessful claims could result in litigation or arbitration costs and may divert management's attention from our existing business. OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE MANAGEMENT AND OTHER KEY PERSONNEL. Our success will depend in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition and operating results. Although we currently experience relatively low rates of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations, and our needs for additional management and key personnel will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain and motivate these individuals. WE RELY ON AN ADEQUATE SUPPLY AND PERFORMANCE OF COMPUTER HARDWARE AND RELATED EQUIPMENT FROM THIRD PARTIES TO PROVIDE SERVICES TO LARGER CUSTOMERS AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OR PERFORMANCE OF THIRD-PARTY HARDWARE AND RELATED EQUIPMENT COULD ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR PRODUCTS TO CERTAIN CUSTOMERS ON A TIMELY BASIS. As we offer our application services and software to a greater number of customers and particularly to larger customers, we may require specialized computer equipment which may be difficult to obtain on short notice. Any delay in obtaining such equipment may prevent us from delivering large systems to our customers on a timely basis. We also rely on such equipment to meet required performance standards. If such performance standards are not met, we may be adversely impacted under our service agreements with our customers. ANY FAILURE OR INABILITY TO PROTECT OUR TECHNOLOGY AND CONFIDENTIAL INFORMATION COULD ADVERSELY AFFECT OUR BUSINESS. Our success depends in part upon proprietary software and other confidential information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We do not own any patents. We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. However, these protections may not be sufficient, and they do not prevent independent third-party development of competitive products or services. We believe that our proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties may assert infringement claims against us in the future, and we could be required to enter into a license agreement or royalty arrangement with the party asserting the claim. We may also be required to indemnify customers for claims made against them. IF OUR CONSULTING SERVICES REVENUE DOES NOT GROW SUBSTANTIALLY, OUR REVENUE GROWTH COULD BE ADVERSELY IMPACTED. Our consulting services revenue represents a significant component of our total revenue and we anticipate that consulting services revenue will continue to represent a significant percentage of total revenue in the future. To a large extent, the level of consulting services revenue depends upon the healthcare industry's demand for outsourced information technology services and our ability to deliver products which generate implementation and follow-on consulting services revenue. Our ability to increase services revenue will depend in large part on our ability to increase the capacity of our transformation services group, including our ability to recruit, train and retain a sufficient number of qualified personnel. IF WE FAIL TO MEET THE CHANGING DEMANDS OF TECHNOLOGY, WE MAY NOT CONTINUE TO BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER PROVIDERS OF SOFTWARE APPLICATIONS. The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. We believe our ability to compete in this market will depend in part upon our ability to:
Competitors may develop products or technologies that are better or more attractive than those offered by us or that may render our technology and services obsolete. Many of our current and potential competitors are larger and offer broader services and have significantly greater financial, marketing and other competitive resources than us. PART OF OUR BUSINESS WILL SUFFER IF HEALTH PLAN CUSTOMERS DO NOT ACCEPT INTERNET SOLUTIONS. The success of HealthWeb depends on the adoption of Internet solutions by health plan customers. Our business could suffer dramatically if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including:
We expect Internet use to continue to grow in number of users and volume of traffic. The Internet infrastructure may be unable to support the demands placed on it by this continued growth. Growth in the demand for our application and Internet platform services depends on the adoption of Internet solutions by healthcare participants, which requires the acceptance of a new way of conducting business and exchanging information. To maximize the benefits of our solutions, our customers must be willing to allow their applications and data to be hosted in our customer connectivity centers. THE INTENSIFYING COMPETITION WE FACE FROM BOTH ESTABLISHED ENTITIES AND NEW ENTRIES IN THE MARKET MAY ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY. We face intense competition. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than we have. Many of our competitors also have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their applications or services than we can devote. Our competitors can be categorized as follows:
Each of these types of companies can be expected to compete with us within the various segments of the healthcare information technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our technology and services, may enter these markets. In addition, some of our third-party software vendors may compete with us from time to time by offering their software on a licensed or ASP basis. We cannot assure you that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us will not have a material adverse effect on our business, financial condition and operating results. THE INSOLVENCY OF OUR CUSTOMERS OR THE INABILITY OF OUR CUSTOMERS TO PAY FOR OUR SERVICES WOULD DECREASE OUR REVENUE. Healthcare payer organizations are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. In addition, healthcare payer organizations are subject to risks that physician groups or associations within their organizations become subject to costly litigation or become insolvent, which may adversely affect the financial stability of the payer organizations. If healthcare payer organizations are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered would be impaired and our financial condition could be adversely affected. CONSOLIDATION OF HEALTHCARE PAYER ORGANIZATIONS COULD DECREASE THE NUMBER OF OUR EXISTING AND POTENTIAL CUSTOMERS. There has been and continues to be acquisition and consolidation activity in the healthcare payer organizations industry. Mergers or consolidations of payer organizations in the future could decrease the number of our existing and potential customers. A smaller market for our products and services could result in lower revenue. CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS. During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise adversely affect the healthcare industry which could adversely impact our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations. Participants in the healthcare industry, such as our payer and provider customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of patient medical records and other healthcare information. Legislators at both the state and federal levels have proposed additional legislation relating to the use and disclosure of medical information, and the federal government is likely to enact new federal laws or regulations in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the Department of Health and Human Services ("DHHS") has issued a series of regulations setting forth security, privacy and transactions standards for all health plans, clearinghouses and healthcare providers to follow with respect to individually identifiable health information. DHHS has issued final regulations mandating the use of standard transactions and code sets, with compliance required by October 16, 2002. DHHS has also issued final HIPAA privacy regulations, with a scheduled compliance date of April 14, 2003 (subject to the outcome of a newly announced 30-day comment period), and proposed HIPAA security regulations. Many of our customers will also be subject to state laws implementing the federal Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information and nonpublic personal financial information by insurers and health plans. Our payer and provider customers must comply with HIPAA, its regulations and other applicable healthcare laws and regulations. Accordingly, in order for our products and services to be marketable, they must contain features and functions that allow our customers to comply with these laws and regulations. We believe our products currently allow our customers to comply with existing laws and regulations. However, because some HIPAA regulations have yet to be issued and because the proposed HIPAA regulations may be modified prior to becoming final, our products may require modification in the future. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations, our business will suffer. We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has imposed heightened scrutiny on billing and collection practices of healthcare providers and related entities, particularly with respect to potentially fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines, imprisonment or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for us and our customers. Any of these results could have a material adverse effect on our business, financial condition and operating results. Federal and state consumer protection laws may apply to us when we bill patients directly for the cost of physician services provided. Failure to comply with any of these laws or regulations could result in a loss of licensure or other fines and penalties. Any of these results could have a material adverse effect on our business, financial condition and operating results. In addition, laws governing healthcare payers and providers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations. PART OF OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION RELATING TO THE INTERNET THAT COULD IMPAIR OUR OPERATIONS. The Internet and its associated technologies are subject to increasing government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Many existing laws and regulations, when enacted, did not anticipate the methods of the Internet-based ASP, software and information technology solutions we offer. We believe, however, that these laws may be applied to us. We expect our products and services to be in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, new legal requirements or interpretations applicable to the Internet could decrease the growth in the use of the Internet, limit the use of the Internet for our products and services or prohibit the sale of a particular product or service, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial conditions. To the extent that we market our products and services outside the United States, the international regulatory environment relating to the Internet and healthcare services could also have an adverse effect on our business. A number of legislative proposals have been made that would impose additional taxes on the sale of goods and services over the Internet. Although in October 1998 Congress placed a three-year moratorium on state and local taxes on Internet access or on discriminatory taxes on electronic commerce, existing state or local laws were expressly excepted from this moratorium. Once this moratorium is lifted, some type of federal and/or state taxes may be imposed upon Internet commerce which could adversely affect our opportunity to derive financial benefit from such activities.
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