Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
Lawrence S.
Wittenberg, Esq.
Michael H. Bison, Esq.
Goodwin Procter LLP
Exchange Place
53 State Street Boston, MA02109
(617) 570-1000
Christopher E.
Nolin, Esq.
athenahealth, Inc.
311 Arsenal Street Watertown, MA02472
(617) 402-1000
Christopher J. Austin, Esq.
Michael D. Beauvais, Esq.
Ropes & Gray LLP
One International Place Boston, MA02110
(617) 951-7000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not permitted.
This is an initial public offering of shares of common stock of
athenahealth, Inc. athenahealth is offering all of the shares to
be sold in the offering.
Prior to this offering, there has been no public market for our
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . Application has been made for
listing on the NASDAQ Global Market under the symbol
“ATHN.”
See “Risk Factors” on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to
athenahealth
$
$
To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from athenahealth and up to an
additional shares from a
selling stockholder at the initial public offering price less
the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2007.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and are seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider before buying shares of our common stock. Before
deciding to invest in shares of our common stock, you should
read the entire prospectus carefully, including our consolidated
financial statements and the accompanying notes and the
information set forth under the headings “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
in each case included elsewhere in this prospectus.
athenahealth,
Inc.
Overview
athenahealth is a provider of
internet-based
business services for physician practices. Our service offerings
are based on three integrated components: our proprietary
internet-based
software, our continually updated database of payer
reimbursement process rules and our back-office service
operations that perform administrative aspects of billing and
clinical data management for physician practices. Our principal
offering, athenaCollector, automates and manages billing-related
functions for physician practices and includes a medical
practice management platform. We have also developed a service
offering, athenaClinicals, that automates and manages medical
record-related functions for physician practices and includes an
electronic medical record, or EMR, platform. We refer to
athenaCollector as our revenue cycle management service and
athenaClinicals as our clinical cycle management service. Our
services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
Our services require relatively modest initial investment, are
highly adaptable to changing healthcare and technology trends
and are designed to generate significant financial benefit for
our physician clients. Our results are directly tied to the
financial performance of our clients, because the majority of
our revenue is based on a percentage of their collections. Our
fees are typically 2% to 8% of a practice’s total
collections depending upon the size, complexity and other
characteristics of the practice, with other fees for
implementation, patient billing statements and training
services. Our services have enabled our clients, on average, to
resolve 93% of their claims to payers on their first submission
attempt, compared to an industry average we estimate to be 70%.
Our internal studies show that we have reduced the days in
accounts receivable of our client base by more than 30%. We have
experienced a contract renewal rate of at least 97% in each of
the last five years, and this persistent client base drives a
predictable revenue stream. In 2006, we generated revenue of
$75.8 million from the sale of our services, compared to
$53.5 million in 2005. As of June 30, 2007, there were
more than 10,500 medical providers, including more than 8,000
physicians, using our services across 32 states and 54
medical specialties.
We believe our innovative internet-based business services model
represents a significant departure from the traditional model of
physicians relying upon
on-site or
outsourced administrative staff, using stand-alone software that
is not internet-based, to run the back-office aspects of their
practices. By continuously improving all three components of our
services, we drive improvement in the business results of our
network of clients: we typically update our centralized
internet-based software every six to eight weeks; we add more
than 100 rules on average each month to our database of payer
rules; and we regularly improve our back-office service
operations with more efficient technology and processes.
Additionally, as our database of aggregated health information
grows, we are able to use this information to further the
strategic position of our company. For example, in June 2006 we
introduced our annual PayerView rankings of health plans’
performance with respect to the speed and accuracy of
reimbursement processes at different insurance companies, an
initiative that we believe increases our profile in the provider
and payer communities.
Market
Opportunity
The market opportunity for our services is driven by physician
office collections in the United States. According to the
U.S. Centers for Medicare and Medicaid Services, since
2000, ambulatory care spending
increased by an average of 7.7% per year to $420 billion in
2005. As the ambulatory care market has grown, we estimate that
the market for revenue and clinical cycle management solutions
has grown to over $27 billion. These expenditures are
primarily comprised of salary and benefits for
in-house
administrative staff and the cost of third-party practice
management and EMR software.
In addition, growth in managed care has increased the complexity
of physician practice reimbursement. Managed care plans
typically create complex reimbursement structures and plan
designs that place greater responsibility on physician practices
to capture data and provide appropriate claims to obtain
payments. As a result, physician practices must keep track of
multiple plan designs and processing requirements to ensure
appropriate payment for services rendered. We also believe that
new initiatives by government-sponsored and private health plans
will further increase the complexity of physician practice
reimbursement. For example, pay-for-performance programs require
submission of enhanced information to payers, and new health
plan designs, known as consumer driven health plans, include
provisions for increased direct payment by patients.
Physician practices are generally not well equipped to address
this increasing complexity. In addition to administering typical
small business functions, physician practices must invest
significant time and resources in activities that are required
to secure reimbursement from third-party payers or patients and
to process inbound and outbound communications related to
physician orders to laboratories and pharmacies. To accomplish
these tasks, physician offices often use locally installed
software, send and receive paper-based and fax-based
communications and conduct telephone-based discussions with
payers and intermediaries to resolve unpaid claims or to inquire
about the status of transactions. This work is typically
performed by
in-house
staff, although some practices hire
third-party
services that also use locally installed software to manage
transactions.
As the complexity and number of health benefit plan payer rules
have increased, the ability of physician practices or
third-party billing services to use locally installed software
solutions to keep up with these rules has diminished, leading to
poor financial performance and decreased clinical efficiency. In
addition to the time and cost of these activities, medical
offices typically stop seeking reimbursement and write off
associated receivables for approximately 10% of their medical
claims.
Our
Solution
The dynamic and increasingly complex healthcare market requires
an integrated solution to effectively manage the reimbursement
and clinical landscape. We believe we are the first company to
integrate internet-based software, a continually updated
database of payer reimbursement process rules and back-office
service operations into a single internet-based business service
for physician practices. We deliver these services at each
critical step in the revenue and clinical cycle workflow through
a combination of software, knowledge and work:
•
Software. athenaNet, our proprietary
internet-based practice management and EMR application, is a
workflow management tool used in every work step that is
required to properly handle billing, collections and medical
record management-related functions. All users across our
client-base simultaneously use the same version of our software
application, which connects them to our continually updated
database of payer rules and to our services team.
•
Knowledge. athenaRules, our proprietary
database of payer rules, enforces physician office workflow
requirements, and is continually updated with payer-specific
coding and documentation information. This knowledge continues
to grow as a result of our years of experience managing back
office service operations for hundreds of physician practices,
including processing medical claims with tens of thousands of
health benefit plans.
•
Work. The athenahealth service operations,
consisting of nearly 400 people in the United States, and more
than 700 people at our off-shore service provider, interact
with clients at all key steps of the revenue and clinical cycle
workflow. These operations include setting up medical providers
for billing, checking the eligibility of scheduled patients
electronically, submitting electronic and paper-based
claims to payers directly or through intermediaries, processing
clinical orders, receiving and processing checks and remittance
information from payers, documenting the result of payers’
responses and evaluating and resubmitting claims denials.
Our
Strategy
Our mission is to be the most trusted and effective provider of
business services for physician practices. To achieve this, our
strategy includes:
•
Remaining intensely focused on our clients’
success. Our business model aligns our goals with
our clients’ goals and provides an incentive for us to
continually improve the performance of our clients. We believe
that this approach enables us to maintain client loyalty, to
enhance our reputation and to improve the quality of our
solutions.
•
Maintaining and growing our payer rules
database. Our rules engine development work
increases the percentage of transactions that are successfully
executed on the first attempt and reduces the time to resolution
after claims or other transactions are submitted. An important
component of increasing value to our clients is that we continue
to develop our centralized payer reimbursement process rules
database, athenaRules, using our experience gained each day
across our network of clients. This continued development allows
all our clients to benefit from our more than 50 full-time
equivalent staff focused on finding, researching, documenting
and implementing new payer rules.
•
Attracting new clients. We expect to continue
with current and expanded sales and marketing efforts to address
our market opportunity by aggressively seeking new clients. We
believe that our internet-based business services provide
significant value for physician offices of any size. We estimate
that our athenaCollector client base represents less than two
percent of the U.S. addressable market for revenue cycle
management.
•
Increasing revenue per client by adding new service
offerings. We have only recently begun to offer
our athenaClinicals service, which we combine with
athenaCollector for sale to prospective clients. In the future,
we plan to offer athenaClinicals as a stand-alone option. We are
also developing additional services to address other
administrative tasks within the physician office, such as
patient communications for scheduling appointments, accessing
lab results and refilling prescriptions.
•
Expanding operating margins by reducing the costs of
providing our services. We believe we can
increase our operating margins as we increase the scalability of
our service operations. Our integrated operations enable us to
deploy efficient and effective resources at each step of the
revenue and clinical cycle workflow.
Risks
Associated with Our Business
Our business is subject to a number of risks which you should be
aware of before making an investment decision. Those risks are
discussed more fully in “Risk Factors” beginning on
page 8. For example:
•
we have incurred significant losses since inception, including
net losses of $9.2 million and $6.1 million for the
year ended December 31, 2006 and the six months ended
June 30, 2007, respectively, resulting in an accumulated
deficit of $71.3 million at June 30, 2007;
•
we operate in a highly competitive industry, and if we are not
able to compete effectively, our business and operating results
will be harmed;
•
our proprietary internet-based software may not operate
properly, which could damage our reputation, give rise to claims
against us or divert application of our resources from other
purposes, any of which could cause harm to our business and
operating results; and
government regulation of healthcare creates risks and challenges
with respect to our compliance efforts and our business
strategies.
Our
Corporate Information
We were incorporated in Delaware on August 21, 1997 as
Athena Healthcare Incorporated. We changed our name to
athenahealth.com, Inc. on March 31, 2000 and to
athenahealth, Inc. on November 17, 2000. Our corporate
headquarters are located at 311 Arsenal Street, Watertown,
Massachusetts02472, and our telephone number is
(617) 402-1000.
Our website address is www.athenahealth.com. The information on,
or that can be accessed through, our website is not part of this
prospectus. In this prospectus, the terms “athena,”“athenahealth,”“we,”“us” and
“our” refer to athenahealth, Inc. and its subsidiary,
Athena Net India Pvt. Ltd., and any subsidiary that may be
acquired or formed in the future.
athenahealth, athenaNet and the athenahealth logo are registered
trademarks of athenahealth and athenaCollector, athenaClinicals,
athenaEnterprise and athenaRules are trademarks of athenahealth.
This prospectus also includes the registered and unregistered
trademarks of other persons.
Common stock to be outstanding after this offering
shares
Overallotment option offered by us and a selling stockholder
To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from athenahealth and up to an
additional shares
from our chief executive officer at the initial public offering
price less the underwriting discount.
Use of proceeds
We expect our net proceeds from the offering to be approximately
$ , assuming an initial offering
price of $ per share, which is the
midpoint of the range listed on the cover page of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated fees and expenses payable by us.
If the underwriters’ overallotment option is exercised in
full, we estimate that our net proceeds will be
$ million. We will not
receive any of the proceeds from the sale of shares by our chief
executive officer. We intend to use the net proceeds to us from
this offering to repay outstanding indebtedness and the
remainder for working capital and other general corporate
purposes. We may also use a portion of the net proceeds to
acquire complementary technologies or businesses. See “Use
of Proceeds.”
Proposed NASDAQ Global Market symbol
“ATHN”
The number of shares of common stock to be outstanding after
this offering is based on 26,600,399 shares of common stock
outstanding as of June 30, 2007. The number of shares of
common stock to be outstanding after this offering does not
include:
•
3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2007 with a
weighted average exercise price of $3.43 per share;
•
634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share; and
•
shares
of common stock reserved for future issuance under our equity
incentive plans.
Unless otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise their
over-allotment option to
purchase shares
of our common stock in this offering and also reflects:
•
our amended and restated certificate of incorporation and the
adoption of our amended and restated by-laws, which will be in
place prior to the completion of this offering; and
•
the conversion of all our outstanding preferred stock into
21,531,457 shares of common stock upon the closing of this
offering.
The following tables present our summary consolidated financial
data for our fiscal years 2004 through 2006 and for the six
months ended June 30, 2006 and 2007 and our summary
consolidated balance sheet data as of June 30, 2007. The
consolidated financial data for the fiscal years ended
December 31, 2004, 2005 and 2006 and for the six months
ended June 30, 2006 and 2007 and as of June 30, 2007
has been derived from our consolidated financial statements,
which appear elsewhere in this prospectus. The financial data as
of and for the six months ended June 30, 2006 and 2007 are
derived from our consolidated financial statements, which in the
opinion of management contain all adjustments necessary for a
fair presentation of such consolidated financial data. Operating
results for these interim periods are not necessarily indicative
of the operating results for a full year. Historical results are
not necessarily indicative of the results to be expected in
future periods. You should read this information in conjunction
with our consolidated financial statements, the related notes to
these financial statements and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
(1) Amounts include
stock-based compensation expense as follows:
Direct operating
$
—
$
—
$
64
$
27
$
93
Selling and marketing
—
—
43
19
81
Research and
development
—
—
53
24
99
General and
administrative
—
—
196
26
331
Total
$
—
$
—
$
356
$
96
$
604
The summary consolidated balance sheet data as of June 30,2007 is presented:
•
on an actual basis;
•
on a pro forma basis to reflect the conversion of all of our
outstanding preferred stock into 21,531,457 shares of our
common stock upon the closing of this offering; and
•
on a pro forma as adjusted basis to further reflect:
•
the receipt by us of net proceeds of
$ million from the sale of
the shares
of common stock offered by us in this offering at an assumed
public offering price of $ per
share, less underwriting discounts and commissions and estimated
offering expenses payable by us; and
•
the payment by us of approximately $32.7 million to repay
our outstanding indebtedness with, and other amounts payable to,
our financial lenders as described under “Use of
Proceeds.”
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this prospectus, including the consolidated financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. If any
of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be
materially and adversely affected. In that event, the market
price of our common stock could decline and you could lose part
or all of your investment.
RISKS
RELATED TO OUR BUSINESS
We
have incurred significant operating losses in the past and may
not be profitable in the future.
We have incurred significant operating losses since our
inception. For the year ended December 31, 2006, we had a
net loss of $9.2 million and a loss from operations of
$5.9 million and for the six months ended
June 30, 2007 we had a net loss of $6.1 million and a
loss from operations of $0.3 million. We have an
accumulated deficit of $71.3 million as of June 30,2007. It is not certain that we will become profitable, or that,
if we become profitable, our profitability will increase. In
addition, we expect our costs and operating expenses to increase
in the future as we expand our operations. If our revenue does
not grow to offset these expected increased costs and operating
expenses, we may not be profitable. You should not consider
recent quarterly revenue growth as indicative of our future
performance. In fact, in future quarters we may not have any
revenue growth and our revenue could decline. Furthermore, if
our costs and operating expenses exceed our expectations, our
financial performance will be adversely affected.
Our
operating results have in the past and may continue to fluctuate
significantly and if we fail to meet the expectations of
analysts or investors, our stock price and the value of your
investment could decline substantially.
Our operating results are likely to fluctuate, and if we fail to
meet or exceed the expectations of securities analysts or
investors, the trading price of our common stock could decline.
Moreover, our stock price may be based on expectations of our
future performance that may be unrealistic or that may not be
met. Some of the important factors that could cause our revenues
and operating results to fluctuate from quarter to quarter
include:
•
the extent to which our services achieve or maintain market
acceptance;
•
our ability to introduce new services and enhancements to our
existing services on a timely basis;
•
new competitors and introduction of enhanced products and
services from new or existing competitors;
•
the length of our contracting and implementation cycles;
•
the financial condition of our current and potential clients;
•
changes in client budgets and procurement policies;
•
amount and timing of our investment in research and development
activities;
•
technical difficulties or interruptions in our services;
•
our ability to hire and retain qualified personnel, including
the rate of expansion of our sales force;
•
changes in the regulatory environment related to healthcare;
•
regulatory compliance costs;
•
the timing, size and integration success of potential future
acquisitions; and
•
unforeseen legal expenses, including litigation and settlement
costs.
Many of these factors are not within our control, and the
occurrence of one or more of them might cause our operating
results to vary widely. As such, we believe that
quarter-to-quarter comparisons of our revenues and operating
results may not be meaningful and should not be relied upon as
an indication of future performance.
A significant portion of our operating expense is relatively
fixed in nature and planned expenditures are based in part on
expectations regarding future revenue. Accordingly, unexpected
revenue shortfalls may decrease our gross margins and could
cause significant changes in our operating results from quarter
to quarter. In addition, our future quarterly operating results
may fluctuate and may not meet the expectations of securities
analysts or investors. If this occurs, the trading price of our
common stock could fall substantially either suddenly or over
time.
We
operate in a highly competitive industry, and if we are not able
to compete effectively, our business and operating results will
be harmed.
The provision by third parties of revenue cycle services to
physician practices has historically been dominated by small
service providers who offer highly individualized services and a
high degree of specialized knowledge applicable in many cases to
a limited medical specialty, a limited set of payers or a
limited geographical area. We anticipate that the software,
statistical and database tools that are available to such
service providers will continue to become more sophisticated and
effective and that demand for our services could be adversely
affected.
Revenue cycle software for physician practices has historically
been dominated by large, well-financed and
technologically-sophisticated entities that have focused on
software solutions. The size and financial strength of these
entities is increasing as a result of continued consolidation in
both the information technology and healthcare industries. We
expect large integrated technology companies to become more
active in our markets, both through acquisition and internal
investment. As costs fall and technology improves, increased
market saturation may change the competitive landscape in favor
of competitors with greater scale than we currently possess.
Some of our current large competitors, such as GE Healthcare,
Sage Software Healthcare, Inc., Misys Healthcare Systems,
Allscripts Healthcare Solutions, Inc., Quality Systems, Inc.,
Siemens Medical Solutions USA, Inc. and McKesson Corp. have
greater name recognition, longer operating histories and
significantly greater resources than we do. As a result, our
competitors may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies,
standards or client requirements. In addition, current and
potential competitors have established, and may in the future
establish, cooperative relationships with vendors of
complementary products, technologies or services to increase the
availability of their products to the marketplace. Accordingly,
new competitors or alliances may emerge that have greater market
share, larger client bases, more widely adopted proprietary
technologies, greater marketing expertise, greater financial
resources and larger sales forces than we have, which could put
us at a competitive disadvantage. Further, in light of these
advantages, even if our services are more effective than the
product or service offerings of our competitors, current or
potential clients might accept competitive products and services
in lieu of purchasing our services. Increased competition is
likely to result in pricing pressures, which could negatively
impact our sales, profitability or market share. In addition to
new niche vendors, who offer stand-alone products and services,
we face competition from existing enterprise vendors, including
those currently focused on software solutions, which have
information systems in place at clients in our target market.
These existing enterprise vendors may now, or in the future,
offer or promise products or services with less functionality
than our services, but which offer ease of integration with
existing systems and which leverage existing vendor
relationships.
The
market for our services is immature and volatile, and if it does
not develop or if it develops more slowly than we expect, the
growth of our business will be harmed.
The market for
internet-based
business services is relatively new and unproven, and it is
uncertain whether these services will achieve and sustain high
levels of demand and market acceptance. Our success
will depend to a substantial extent on the willingness of
enterprises, large and small, to increase their use of on-demand
business services in general, and for their revenue and clinical
cycles in particular. Many enterprises have invested substantial
personnel and financial resources to integrate established
enterprise software into their businesses, and therefore may be
reluctant or unwilling to switch to an on-demand application
service. Furthermore, some enterprises may be reluctant or
unwilling to use on-demand application services, because they
have concerns regarding the risks associated with security
capabilities, among other things, of the technology delivery
model associated with these services. If enterprises do not
perceive the benefits of our services, then the market for these
services may not develop at all, or it may develop more slowly
than we expect, either of which would significantly adversely
affect our operating results. In addition, as a new company in
this unproven market, we have limited insight into trends that
may develop and affect our business. We may make errors in
predicting and reacting to relevant business trends, which could
harm our business. If any of these risks occur, it could
materially adversely affect our business, financial condition or
results of operations.
If we
do not continue to innovate and provide services that are useful
to users, we may not remain competitive, and our revenues and
operating results could suffer.
Our success depends on providing services that the medical
community uses to improve business performance and quality of
service to patients. Our competitors are constantly developing
products and services that may become more efficient or
appealing to our clients. As a result, we must continue to
invest significant resources in research and development in
order to enhance our existing services and introduce new
high-quality services that clients will want. If we are unable
to predict user preferences or industry changes, or if we are
unable to modify our services on a timely basis, we may lose
clients. Our operating results would also suffer if our
innovations are not responsive to the needs of our clients, are
not appropriately timed with market opportunity or are not
effectively brought to market. As technology continues to
develop, our competitors may be able to offer results that are,
or that are perceived to be, substantially similar to or better
than those generated by our services. This may force us to
compete on additional service attributes and to expend
significant resources in order to remain competitive.
As a
result of our variable sales and implementation cycles, we may
be unable to recognize revenue to offset expenditures, which
could result in fluctuations in our quarterly results of
operations or otherwise harm our future operating
results.
The sales cycle for our services can be variable, typically
ranging from three to five months from initial contact to
contract execution. During the sales cycle, we expend time and
resources, and we do not recognize any revenue to offset such
expenditures. Our implementation cycle is also variable,
typically ranging from three to five months from contract
execution to completion of implementation. Some of our
new-client
set-up
projects are complex and require a lengthy delay and significant
implementation work. Each client’s situation is different,
and unanticipated difficulties and delays may arise as a result
of failure by us or by the client to meet our respective
implementation responsibilities. During the implementation
cycle, we expend substantial time, effort and financial
resources implementing our service, but accounting principles do
not allow us to recognize the resulting revenue until the
service has been implemented, at which time we begin recognition
of implementation revenue over the life of the contract. This
could harm our future operating results.
After a client contract is signed, we provide an implementation
process for the client during which appropriate connections and
registrations are established and checked, data is loaded into
our athenaNet system, data tables are set up and practice
personnel are given initial training. The length and details of
this implementation process vary widely from client to client.
Typically implementation of larger clients takes longer than
implementation for smaller clients. Implementation for a given
client may be cancelled. Our contracts typically provide that
they can be terminated for any reason or for no reason in
90 days. Despite the fact that we typically require a
deposit in advance of implementation, some clients have
cancelled before our service has been started. In addition,
implementation may be delayed or the target dates for completion
may be extended into the future for a variety of reasons,
including to meet the needs and requirements of the client,
because of delays with payer processing and because of the
volume and complexity of the implementations
awaiting our work. If implementation periods are extended, our
provision of the revenue cycle or clinical cycle services upon
which we realize most of our revenues will be delayed and our
financial condition may be adversely affected. In addition,
cancellation of any implementation after it has begun may
involve loss to us of time, effort and expenses invested in the
cancelled implementation process and lost opportunity for
implementing paying clients in that same period of time.
These factors may contribute to substantial fluctuations in our
quarterly operating results, particularly in the near term and
during any period in which our sales volume is relatively low.
As a result, in future quarters our operating results could fall
below the expectations of securities analysts or investors, in
which event our stock price would likely decrease.
If the
revenue of our clients decreases, our revenue will
decrease.
Under most of our client contracts, we base our charges on a
percentage of the revenue that the client realizes while using
our services. Many factors may lead to decrease in client
revenue, including:
•
interruption of client access to our system for any reason;
•
our failure to provide services in a timely or high-quality
manner;
•
failure of our clients to adopt or maintain effective business
practices;
•
actions by third-party payers of medical claims to reduce
reimbursement;
•
government regulations reducing reimbursement; and
•
reduction of client revenue resulting from increased competition
or other changes in the marketplace for physician services.
If the clients’ revenue decreases for any reason, our
revenue will likely decrease.
If
participants in our channel marketing and sales lead programs do
not maintain appropriate relationships with potential clients,
our sales accomplished with their help or data may be unwound
and our payments to them may be deemed
improper.
We maintain a series of relationships with third parties that we
term channel relationships. These relationships take different
forms under different contractual language. Some relationships
help us identify sales leads. Other relationships permit third
parties to act as value-added resellers or as independent sales
representatives for our services. In some cases, for example in
the case of some membership organizations, these relationships
involve endorsement of our services as well as other marketing
activities. In each of these cases, we require contractually
that the third party disclose information to
and/or limit
their relationships with potential purchasers of our services
for regulatory compliance reasons. If these third parties do not
comply with these regulatory requirements, sales accomplished
with the data or help that they have provided may not be
enforceable and may be unwound. Third parties that, despite our
requirements, exercise undue influence over decisions by
prospective clients, occupy positions with obligations of
fidelity or fiduciary obligations to prospective clients, or who
offer bribes or kickbacks to prospective clients or their
employees, may be committing wrongful or illegal acts that could
render any resulting contract between us and the client
unenforceable. Any misconduct by these third parties with
respect to prospective clients may result in allegations that we
have encouraged or participated in wrongful or illegal behavior
and that payments to such third parties under our channel
contracts are improper. This misconduct could subject us to
civil or criminal claims and liabilities, could require us to
change or terminate some portions of our business, could require
us to refund portions of our services fees and could adversely
effect our revenue and operating margin. Even an unsuccessful
challenge of our activities could result in adverse publicity,
require costly response from us, impair our ability to attract
and maintain clients and lead analysts or potential investors to
reduce their expectations of our performance, resulting in
reduction to our market price.
Failure
to manage our rapid growth effectively could increase our
expenses, decrease our revenue and prevent us from implementing
our business strategy.
We have been experiencing a period of rapid growth. To manage
our anticipated future growth effectively, we must continue to
maintain and may need to enhance our information technology
infrastructure, financial and accounting systems and controls
and manage expanded operations in geographically-distributed
locations. We also must attract, train and retain a significant
number of qualified sales and marketing personnel, professional
services personnel, software engineers, technical personnel and
management personnel. Failure to manage our rapid growth
effectively could lead us to over-invest or under-invest in
technology and operations, could result in weaknesses in our
infrastructure, systems or controls, could give rise to
operational mistakes, losses, loss of productivity or business
opportunities, and could result in loss of employees and reduced
productivity of remaining employees. Our growth could require
significant capital expenditures and may divert financial
resources from other projects, such as the development of new
services. If our management is unable to effectively manage our
growth, our expenses may increase more than expected, our
revenue could decline or may grow more slowly than expected, and
we may be unable to implement our business strategy.
We
depend upon a third-party service provider for important
processing functions. If this third-party provider does not
fulfill its contractual obligations or chooses to discontinue
its services, our business and operations could be disrupted and
our operating results would be harmed.
We have entered into a service agreement with Vision
Healthsource, a subsidiary of Perot Systems Corporation, through
which more than 700 people provide data entry and other
services from facilities located in India and the Philippines to
support our client service operations. Among other things, this
provider processes critical claims data and patient statements.
If these services fail or are of poor quality, our business,
reputation and operating results could be harmed. Failure of the
service provider to perform satisfactorily could result in
client dissatisfaction, disrupt our operations and adversely
affect operating results. With respect to this service provider,
we have significantly less control over the systems and
processes than if we maintained and operated them ourselves,
which increases our risk. In some cases, functions necessary to
our business are performed on proprietary systems and software
to which we have no access. If we need to find an alternative
source for performing these functions, we may have to expend
significant money, resources and time to develop the
alternative, and if this development is not accomplished in a
timely manner and without significant disruption to our
business, we may be unable to fulfill our responsibilities to
clients or the expectations of clients, with the attendant
potential for liability claims and a loss of business
reputation, loss of ability to attract or maintain clients and
reduction of our revenue or operating margin.
Various
risks could interrupt international operations, exposing us to
significant costs.
We have contracted with companies operating in Canada, India and
the Philippines for various services, including data entry,
outgoing calls to payers, data classification and software
development. In addition, in October 2005, we established a
subsidiary in Chennai, India to conduct research and development
activities. International operations expose the company to
potential operational disruptions as a result of currency
valuations, political turmoil and labor issues. Any such
disruptions may have a negative effect on our profits, on client
satisfaction and on our ability to attract or maintain clients.
Because
competition for our target employees is intense, we may not be
able to attract and retain the highly-skilled employees we need
to support our planned growth.
To continue to execute on our growth plan, we must attract and
retain highly-qualified personnel. Competition for these
personnel is intense, especially for engineers with high levels
of experience in designing and developing software and
internet-related services and senior sales executives. We may
not be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced,
and we expect to continue to experience in the future,
difficulty in hiring and retaining highly-skilled employees with
appropriate qualifications. Many of the companies with which we
compete for experienced personnel have greater resources than we
have. In addition, in making employment decisions, particularly
in the Internet and
high-technology industries, job candidates often consider the
value of the stock options they are to receive in connection
with their employment. Volatility in the price of our stock may,
therefore, adversely affect our ability to attract or retain key
employees. Furthermore, the new requirement to expense stock
options may discourage us from granting the size or type of
stock option awards that job candidates require to join our
company. If we fail to attract new personnel or fail to retain
and motivate our current personnel, our business and future
growth prospects could be severely harmed.
If we
acquire companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results and
the value of our common stock.
As part of our business strategy, we may acquire, enter into
joint ventures with, or make investments in complementary
companies, services and technologies in the future. Acquisitions
and investments involve numerous risks, including:
•
difficulties in identifying and acquiring products, technologies
or businesses that will help our business;
•
difficulties in integrating operations, technologies, services
and personnel;
•
diversion of financial and managerial resources from existing
operations;
•
risk of entering new markets in which we have little to no
experience; and
•
delays in client purchases due to uncertainty and the inability
to maintain relationships with clients of the acquired
businesses.
As a result, if we fail to properly evaluate acquisitions or
investments, we may not achieve the anticipated benefits of any
such acquisitions, we may incur costs in excess of what we
anticipate, and management resources and attention may be
diverted from other necessary or valuable activities.
If we
are required to collect sales and use taxes on the services we
sell in additional jurisdictions, we may be subject to liability
for past sales and our future sales may decrease.
We may lose sales or incur significant expenses should states be
successful in imposing broader guidelines to state sales and use
taxes. A successful assertion by one or more states that we
should collect sales or other taxes on the sale of our services
could result in substantial tax liabilities for past sales,
decrease our ability to compete with traditional retailers and
otherwise harm our business. Each state has different rules and
regulations governing sales and use taxes and these rules and
regulations are subject to varying interpretations that may
change over time. We review these rules and regulations
periodically and, when we believe our services are subject to
sales and use taxes in a particular state, voluntarily engage
state tax authorities in order to determine how to comply with
their rules and regulations. For example, in April 2006 we
entered into a settlement agreement with the Ohio Department of
Taxation after it determined that we owed sales and use taxes
for sales made in the State of Ohio between July 2005 and
January 2006. In connection with this settlement we paid the
State of Ohio $0.2 million in taxes, interest and
penalties. Additionally, in November 2004, we began paying sales
and use taxes in the State of Texas. We cannot assure you that
we will not be subject to sales and use taxes or related
penalties for past sales in states where we believe no
compliance is necessary.
Vendors of services, like us, are typically held responsible by
taxing authorities for the collection and payment of any
applicable sales and similar taxes. If one or more taxing
authorities determines that taxes should have, but have not,
been paid with respect to our services, we may be liable for
past taxes in addition to taxes going forward. Liability for
past taxes may also include very substantial interest and
penalty charges. Our client contracts provide that our clients
must pay all applicable sales and similar taxes. Nevertheless,
clients may be reluctant to pay back taxes and may refuse
responsibility for interest or penalties associated with those
taxes. If we are required to collect and pay back taxes and the
associated interest and penalties and if our clients fail or
refuse to reimburse us for all or a portion of these amounts, we
will have incurred unplanned expenses that may be substantial.
Moreover, imposition of such taxes on our services going forward
will effectively increase the cost of such services to our
clients and may adversely affect our ability to retain existing
clients or to gain new clients in the areas in which such taxes
are imposed.
We may
be unable to adequately protect, and we may incur significant
costs in enforcing, our intellectual property and other
proprietary rights.
Our success depends in part on our ability to enforce our
intellectual property and other proprietary rights. We rely upon
a combination of trademark, trade secret, copyright, patent and
unfair competition laws, as well as license and access
agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. In addition,
we attempt to protect our intellectual property and proprietary
information by requiring certain of our employees and
consultants to enter into confidentiality, noncompetition and
assignment of inventions agreements. Our attempts to protect our
intellectual property may be challenged by others or invalidated
through administrative process or litigation. While we have six
U.S. patent applications pending, we currently have no
issued patents and may be unable to obtain meaningful patent
protection for our technology. We have received a final office
action rejecting application on our oldest and broadest
application and have filed a request for continued examination,
along with a response and revised claims with respect to that
patent. In addition, if any patents are issued in the future,
they may not provide us with any competitive advantages, or may
be successfully challenged by third parties. Agreement terms
that address non-competition are difficult to enforce in many
jurisdictions and may not be enforceable in any particular case.
To the extent that our intellectual property and other
proprietary rights are not adequately protected, third parties
might gain access to our proprietary information, develop and
market products or services similar to ours, or use trademarks
similar to ours, each of which could materially harm our
business. Existing U.S. federal and state intellectual
property laws offer only limited protection. Moreover, the laws
of other countries in which we now or may in the future conduct
operations or contract for services may afford little or no
effective protection of our intellectual property. Further, our
platform incorporates open source software components that are
licensed to us under various public domain licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software that we use, there
is little or no legal precedent governing the interpretation of
many of the terms of certain of these licenses and therefore the
potential impact of such terms on our business is somewhat
unknown. The failure to adequately protect our intellectual
property and other proprietary rights could materially harm our
business.
In addition, if we resort to legal proceedings to enforce our
intellectual property rights or to determine the validity and
scope of the intellectual property or other proprietary rights
of others, the proceedings could be burdensome and expensive,
even if we were to prevail. Any litigation that may be necessary
in the future could result in substantial costs and diversion of
resources and could have a material adverse effect on our
business, operating results or financial condition.
We may
be sued by third parties for alleged infringement of their
proprietary rights.
The software and Internet industries are characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Moreover, our business involves the systematic gathering
and analysis of data about the requirements and behaviors of
payers and other third parties, some or all of which may be
claimed to be confidential or proprietary. We have received in
the past, and may receive in the future, communications from
third parties claiming that we have infringed on the
intellectual property rights of others. For example, in 2005,
Billingnetwork Patent, Inc. sued us in Florida federal court
alleging infringement of its patent issued in 2002 entitled
“Integrated Internet Facilitated Billing, Data Processing
and Communications System.” We have moved to dismiss that
case and oral argument on that motion was heard by the court in
March 2006. We are awaiting further action from the court at
this time. Our technologies may not be able to withstand any
third-party claims or rights against their use. Any intellectual
property claims, with or without merit, could be time-consuming
and expensive to resolve, could divert management attention from
executing our business plan and could require us to pay monetary
damages or enter into royalty or licensing agreements. In
addition, many of our contracts contain warranties with respect
to intellectual property rights, and some require us to
indemnify our clients for third-party intellectual property
infringement claims, which would increase the cost to us of an
adverse ruling on such a claim.
Moreover, any settlement or adverse judgment resulting from such
a claim could require us to pay substantial amounts of money or
obtain a license to continue to use the technology or
information that is the subject of the claim, or otherwise
restrict or prohibit our use of the technology or information.
There can be
no assurance that we would be able to obtain a license on
commercially reasonable terms, if at all, from third parties
asserting an infringement claim; that we would be able to
develop alternative technology on a timely basis, if at all; or
that we would be able to obtain a license to use a suitable
alternative technology to permit us to continue offering, and
our clients to continue using, our affected services.
Accordingly, an adverse determination could prevent us from
offering our services to others. In addition, we may be required
to indemnify our clients for third-party intellectual property
infringement claims, which would increase the cost to us of an
adverse ruling for such a claim.
We are
bound by exclusivity provisions that restrict our ability to
enter into certain sales and marketing relationships in order to
market and sell our services.
Our marketing and sales agreement with Worldmed Shared Services,
Inc. (d/b/a PSS World Medical Shared Services, Inc.), or PSS,
restricts us during the term of the agreement from certain sales
and marketing relationships, including relationships with
certain competitors of PSS and certain distributors and
manufacturers of medical, surgical or pharmaceutical supplies.
This restriction may make it more difficult for us to realize
sales, distribution and income opportunities with certain
potential clients, in particular small physician practices,
which could adversely affect our operating results.
We may
require additional capital to support business growth, and this
capital might not be available.
We intend to continue to make investments to support our
business growth and may require additional funds to respond to
business challenges or opportunities, including the need to
develop new services or enhance our existing service, enhance
our operating infrastructure or acquire complementary businesses
and technologies. Accordingly, we may need to engage in equity
or debt financings to secure additional funds. If we raise
additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to
those of holders of our common stock. Any debt financing secured
by us in the future could involve restrictive covenants relating
to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be
able to obtain additional financing on terms favorable to us, if
at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our
ability to continue to support our business growth and to
respond to business challenges could be significantly limited.
Our
loan agreements contain operating and financial covenants that
may restrict our business and
financing activities.
We have loan agreements that provide for up to
$38.5 million of total borrowings, of which
$32.0 million was outstanding at June 30, 2007.
Borrowings are secured by substantially all of our assets
including our intellectual property. Our loan agreements
restrict our ability to:
•
incur additional indebtedness;
•
create liens;
•
make investments;
•
sell assets;
•
pay dividends or make distributions on and, in certain cases,
repurchase our stock; or
•
consolidate or merge with other entities.
In addition, our credit facilities require us to meet specified
minimum financial measurements. The operating and financial
restrictions and covenants in these credit facilities, as well
as any future financing agreements that we may enter into, may
restrict our ability to finance our operations, engage in
business activities or expand or fully pursue our business
strategies. Our ability to comply with these covenants may be
affected by events beyond our control, and we may not be able to
meet those covenants. A breach of any of
these covenants could result in a default under the loan
agreement, which could cause all of the outstanding indebtedness
under both credit facilities to become immediately due and
payable and terminate all commitments to extend further credit.
We
will incur significant increased costs as a result of operating
as a public company, and our management will be required to
devote substantial time to new compliance
initiatives.
We have never operated as a public company. As a public company,
we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the Securities and Exchange Commission and the
NASDAQ Global Market, have imposed various new requirements on
public companies, including requiring changes in corporate
governance practices. Our management and other personnel will
need to devote a substantial amount of time to these new
compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. For
example, we expect these new rules and regulations to make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, commencing in 2008, we must perform system and
process evaluation and testing of our internal control over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal control
over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend
significant management time on compliance-related issues.
Moreover, if we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identifies deficiencies in our
internal control over financial reporting that are deemed to be
material weaknesses, the market price of our stock could
decline, and we could be subject to sanctions or investigations
by the NASDAQ Global Market, the Securities and Exchange
Commission or other regulatory authorities, which would require
additional financial and management resources.
Current
and future litigation against us could be costly and time
consuming to defend.
We are from time to time subject to legal proceedings and claims
that arise in the ordinary course of business, such as claims
brought by our clients in connection with commercial disputes
and employment claims made by our current or former employees.
Litigation may result in substantial costs and may divert
management’s attention and resources, which may seriously
harm our business, overall financial condition and operating
results. In addition, legal claims that have not yet been
asserted against us may be asserted in the future. Insurance may
not cover such claims, may not be sufficient for one or more
such claims and may not continue to be available on terms
acceptable to us. A claim brought against us that is uninsured
or underinsured could result in unanticipated costs thereby
reducing our operating results and leading analysts or potential
investors to reduce their expectations of our performance
resulting in a reduction in the trading price of our stock.
RISKS
RELATED TO OUR SERVICE OFFERINGS
Our
proprietary athenaNet software may not operate properly, which
could damage our reputation, give rise to claims against us or
divert application of our resources from other purposes, any of
which could harm our business and operating
results.
Proprietary software development is time-consuming, expensive
and complex. Unforeseen difficulties can arise. We may encounter
technical obstacles, and it is possible that we discover
additional problems that prevent our proprietary athenaNet
application from operating properly. If athenaNet does not
function reliably
or fails to achieve client expectations in terms of performance,
clients could assert liability claims against us
and/or
attempt to cancel their contracts with us. This could damage our
reputation and impair our ability to attract or maintain clients.
Moreover, information services as complex as those we offer have
in the past contained, and may in the future develop or contain,
undetected defects or errors. We cannot assure you that material
performance problems or defects in our services will not arise
in the future. Errors may result from interface of our services
with legacy systems and data which we did not develop and the
function of which is outside of our control. Despite testing,
defects or errors may arise in our existing or new software or
service processes. Because changes in payer requirements and
practices are frequent and sometimes difficult to determine
except through trial and error, we are continuously discovering
defects and errors in our software and service processes
compared against these requirements and practices. These defects
and errors and any failure by us to identify and address them
could result in loss of revenue or market share, liability to
clients or others, failure to achieve market acceptance or
expansion, diversion of development resources, injury to our
reputation and increased service and maintenance costs. Defects
or errors in our software and service processes might discourage
existing or potential clients from purchasing services from us.
Correction of defects or errors could prove to be impossible or
impracticable. The costs incurred in correcting any defects or
errors or in responding to resulting claims or liability may be
substantial and could adversely affect our operating results.
In addition, clients relying on our services to collect, manage
and report clinical, business and administrative data may have a
greater sensitivity to service errors and security
vulnerabilities than clients of software products in general. We
market and sell services that, among other things, provide
information to assist care providers in tracking and treating
ill patients. Any operational delay in or failure of our
technology or service processes may result in the disruption of
patient care and could cause harm to our business and operating
results.
Our clients or their patients may assert claims against us in
the future alleging that they suffered damages due to a defect,
error or other failure of our software or service processes. A
product liability claim or errors or omissions claim could
subject us to significant legal defense costs and adverse
publicity regardless of the merits or eventual outcome of such a
claim.
If our
security measures are breached or fail and unauthorized access
is obtained to a client’s data, our service may be
perceived as not being secure, clients may curtail or stop using
our service and we may incur significant
liabilities.
Our service involves the storage and transmission of
clients’ proprietary information and protected health
information of patients. Because of the sensitivity of this
information, security features of our software are very
important. If our security measures are breached or fail as a
result of third-party action, employee error, malfeasance or
otherwise, someone may be able to obtain unauthorized access to
client or patient data. As a result, our reputation could be
damaged, our business may suffer and we could face damages for
contract breach, penalties for violation of applicable laws or
regulations and significant costs for remediation and
remediation efforts to prevent future occurrences.
In addition, we rely upon our clients as users of our system for
key activities to promote security of the system and the data
within it, such as administration of client-side access
credentialing and control of client-side display of data. On
occasion, our clients have failed to perform these activities.
For example, our physician practice clients have, on occasion,
failed to terminate the athenaNet login/password of former
employees, or permitted current employees to share
login/passwords, each of which is a violation of our contractual
arrangement with these clients. When we become aware of such
breaches, we work with the client to terminate the inappropriate
access and provide additional instruction to our clients in
order to avoid the reoccurrence of such problems. Although to
date these breaches have not resulted in claims against us or in
material harm to our business, the failure of our clients in
future periods to perform these activities may result in claims
against us, which could expose us to significant expense and
harm to our reputation.
Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques
or to implement adequate preventive measures. If an actual or
perceived breach of our security occurs, the market perception
of the effectiveness of our security measures could be harmed
and we could lose sales and clients. In addition, our clients
may authorize or enable third parties to access their client
data or the data of their patients on our systems. Because we do
not control such access, we cannot ensure the complete integrity
or security of such data in our systems.
Failure
by our clients to obtain proper permissions and waivers may
result in claims against us or may limit or prevent our use of
data which could harm our business.
We require our clients to provide necessary notices and to
obtain necessary permissions and waivers for use and disclosure
of the information that we receive, and we require contractual
assurances from them that they have done so and will do so. If
they do not obtain necessary permissions and waivers, then our
use and disclosure of information that we receive from them or
on their behalf may be limited or prohibited by state or federal
privacy laws or other laws. This could impair our functions,
processes and databases that reflect, contain or are based upon
such data and may prevent use of such data. In addition, this
could interfere with or prevent creation or use of rules,
analyses or other data-driven activities that benefit us.
Moreover, we may be subject to claims or liability for use or
disclosure of information by reason of lack of valid notice,
permission or waiver. These claims or liabilities could subject
us to unexpected costs and adversely affect our operating
results.
Various
events could interrupt clients’ access to athenaNet,
exposing us to significant costs.
The ability to access athenaNet is critical to our clients’
cash flow and business viability. Our operations and facilities
are vulnerable to interruption
and/or
damage from a number of sources, many of which are beyond our
control, including, without limitation: (i) power loss and
telecommunications failures; (ii) fire, flood, hurricane
and other natural disasters; (iii) software and hardware
errors, failures or crashes in our own systems or in other
systems; and (iv) computer viruses, hacking and similar
disruptive problems in our own systems and in other systems. We
attempt to mitigate these risks through various means including
redundant infrastructure, disaster recovery plans, separate test
systems and change control and system security measures, but our
precautions will not protect against all potential problems. If
clients’ access is interrupted because of problems in the
operation of our facilities, we could be exposed to significant
claims by clients or their patients, particularly if the access
interruption is associated with problems in the timely delivery
of funds due to clients or medical information relevant to
patient care. Our plans for disaster recovery and business
continuity rely upon third-party providers of related services,
and if those vendors fail us at a time that our systems are not
operating correctly, we could incur a loss of revenue and
liability for failure to fulfill our obligations. Any
significant instances of system downtime could negatively affect
our reputation and ability to retain clients and sell our
services which would adversely impact our revenues.
In addition, retention and availability of patient care and
physician reimbursement data are subject to federal and state
laws governing record retention, accuracy and access. Some laws
impose obligations on our clients and on us to produce
information to third parties and to amend or expunge data at
their direction. Our failure to meet these obligations may
result in liability which could increase our costs and reduce
our operating results.
Interruptions
or delays in service from our third-party data-hosting
facilities could impair the delivery of our service and harm our
business.
As of the date of this prospectus, we serve our clients from a
third-party data-hosting facility located in Waltham,
Massachusetts. As part of our current disaster recovery
arrangements, a subset of our production environment and client
data is currently replicated in a separate standby facility
located in Chicago, Illinois. We do not control the operation of
any of these facilities, and they are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunications failures and similar events. They are also
subject to break-ins, sabotage, intentional acts of vandalism
and similar misconduct. Despite precautions taken at these
facilities, the occurrence of a natural disaster or an act of
terrorism, a decision to close the facilities
without adequate notice or other unanticipated problems at both
facilities could result in lengthy interruptions in our service.
Even with the disaster recovery arrangements, our service could
be interrupted.
We are planning to transition our primary hosting relationship
from Waltham, Massachusetts to another third-party hosting
facility located in Bedford, Massachusetts. In connection with
this transition, we will be moving, transferring or installing
equipment, data and software to and in that other facility.
Despite precautions taken during this process, any unsuccessful
transfers may impair the delivery of our service. Further, any
damage to, or failure of, our systems generally could result in
interruptions in our service. Interruptions in our service may
reduce our revenue, cause us to issue credits or pay penalties,
may cause clients to terminate services and may adversely affect
our renewal rates and our ability to attract new clients. Our
business may also be harmed if our clients and potential clients
believe our service is unreliable.
We
rely on Internet infrastructure, bandwidth providers, data
center providers, other third parties and our own systems for
providing services to our users, and any failure or interruption
in the services provided by these third parties or our own
systems could expose us to litigation and negatively impact our
relationships with users, adversely affecting our brand and our
business.
Our ability to deliver our internet-based services is dependent
on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security for providing reliable Internet access and
services. Our services are designed to operate without
interruption in accordance with our service level commitments.
However, we have experienced and expect that we will in the
future experience interruptions and delays in services and
availability from time to time. We rely on internal systems as
well as third-party vendors, including data center providers and
bandwidth providers, to provide our services. We do not maintain
redundant systems or facilities for some of these services. In
the event of a catastrophic event with respect to one or more of
these systems or facilities, we may experience an extended
period of system unavailability, which could negatively impact
our relationship with users. To operate without interruption,
both we and our service providers must guard against:
•
damage from fire, power loss and other natural disasters;
•
communications failures;
•
software and hardware errors, failures and crashes;
•
security breaches, computer viruses and similar disruptive
problems; and
•
other potential interruptions.
Any disruption in the network access or co-location services
provided by these third-party providers or any failure of or by
these third-party providers or our own systems to handle current
or higher volume of use could significantly harm our business.
We exercise limited control over these third-party vendors,
which increases our vulnerability to problems with services they
provide.
Any errors, failures, interruptions or delays experienced in
connection with these third-party technologies and information
services or our own systems could negatively impact our
relationships with users and adversely affect our business and
could expose us to third-party liabilities. Although we maintain
insurance for our business, the coverage under our policies may
not be adequate to compensate us for all losses that may occur.
In addition, we cannot provide assurance that we will continue
to be able to obtain adequate insurance coverage at an
acceptable cost.
The reliability and performance of the Internet may be harmed by
increased usage or by denial-of-service attacks. The Internet
has experienced a variety of outages and other delays as a
result of damages to portions of its infrastructure, and it
could face outages and delays in the future. These outages and
delays could reduce the level of Internet usage as well as the
availability of the Internet to us for delivery of our
internet-based services.
We
rely on third-party computer hardware and software that may be
difficult to replace or which could cause errors or failures of
our service which could damage our reputation, harm our ability
to attract and maintain clients and decrease our
revenue.
We rely on computer hardware purchased or leased and software
licensed from third parties in order to offer our service,
including database software from Oracle Corporation. These
licenses are generally commercially available on varying terms,
however it is possible that this hardware and software may not
continue to be available on commercially reasonable terms, or at
all. Any loss of the right to use any of this hardware or
software could result in delays in the provisioning of our
service until equivalent technology is either developed by us,
or, if available, is identified, obtained and integrated, which
could harm our business. Any errors or defects in third-party
hardware or software could result in errors or a failure of our
service which could damage our reputation, harm our ability to
attract and maintain clients and decrease our revenue.
We are
subject to the effect of payer and provider conduct which we
cannot control and which could damage our reputation with
clients and result in liability claims that increase our
expenses.
We offer certain electronic claims submission services as part
of our service, and we rely on content from clients, payers and
others. While we have implemented certain features and
safeguards designed to maximize the accuracy and completeness of
claims content, these features and safeguards may not be
sufficient to prevent inaccurate claims data from being
submitted to payers. Should inaccurate claims data be submitted
to payers, we may experience poor operational results and may be
subject to liability claims which could damage our reputation
with clients and result in liability claims that increase our
expenses.
If our
services fail to provide accurate and timely information, or if
our content or any other element of our service is associated
with faulty clinical decisions or treatment, we could have
liability to clients, clinicians or patients which could
adversely affect our results of operations.
Our software, content and services are used to assist clinical
decision-making and provide information about patient medical
histories and treatment plans. If our software, content or
services fail to provide accurate and timely information or are
associated with faulty clinical decisions or treatment, then
clients, clinicians or their patients could assert claims
against us that could result in substantial costs to us, harm
our reputation in the industry and cause demand for our services
to decline.
Our proprietary athenaClinicals service is utilized in clinical
decision-making, provides access to patient medical histories
and assists in creating patient treatment plans including the
issuance of prescription drugs. If our athenaClinicals service
fails to provide accurate and timely information, or if our
content or any other element of our service is associated with
faulty clinical decisions or treatment, we could have liability
to clients, clinicians or patients.
The assertion of such claims and ensuing litigation, regardless
of its outcome could result in substantial cost to us, divert
management’s attention from operations, damage our
reputation and decrease market acceptance of our services. We
attempt to limit by contract our liability for damages and to
require that our clients assume responsibility for medical care
and approve key system rules, protocols and data. Despite these
precautions, the allocations of responsibility and limitations
of liability set forth in our contracts may not be enforceable,
may not be binding upon patients or may not otherwise protect us
from liability for damages.
We maintain general liability and insurance coverage, but this
coverage may not continue to be available on acceptable terms or
may not be available in sufficient amounts to cover one or more
large claims against us. In addition, the insurer might disclaim
coverage as to any future claim. One or more large claims could
exceed our available insurance coverage.
Our proprietary software may contain errors or failures that are
not detected until after the software is introduced or updates
and new versions are released. It is challenging for us to test
our software for all potential problems because it is difficult
to simulate the wide variety of computing environments or
treatment methodologies that our clients may deploy or rely
upon. From time to time we have discovered defects or errors in
our software, and such defects or errors can be expected to
appear in the future. Defects and errors
that are not timely detected and remedied could expose us to
risk of liability to clients, clinicians and patients and cause
delays in introduction of new services, result in increased
costs and diversion of development resources, require design
modifications or decrease market acceptance or client
satisfaction with our services.
If any of these risks occur, they could materially adversely
affect our business, financial condition or results of
operations.
We may
be liable for use of incorrect or incomplete data we provide
which could harm our business, financial condition and results
of operations.
We store and display data for use by healthcare providers in
treating patients. Our clients or third parties provide us with
most of these data. If these data are incorrect or incomplete or
if we make mistakes in the capture or input of these data,
adverse consequences, including death, may occur and give rise
to product liability and other claims against us. In addition, a
court or government agency may take the position that our
storage and display of health information exposes us to personal
injury liability or other liability for wrongful delivery or
handling of healthcare services or erroneous health information.
While we maintain insurance coverage, we cannot assure that this
coverage will prove to be adequate or will continue to be
available on acceptable terms, if at all. Even unsuccessful
claims could result in substantial costs and diversion of
management resources. A claim brought against us that is
uninsured or under-insured could harm our business, financial
condition and results of operations.
RISKS
RELATED TO REGULATION
Government
regulation of healthcare creates risks and challenges with
respect to our compliance efforts and our business
strategies.
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
could cause us to incur additional costs and could restrict our
operations. Many healthcare laws are complex, and their
application to specific services and relationships may not be
clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate the healthcare
information services that we provide, and these laws and
regulations may be applied to our services in ways that we do
not anticipate. Our failure to accurately anticipate the
application of these laws and regulations, or our other failure
to comply, could create liability for us, result in adverse
publicity and negatively affect our business. Some of the risks
we face from healthcare regulation are as follows:
•
False or Fraudulent Claim Laws. There are
numerous federal and state laws that forbid submission of false
information or the failure to disclose information in connection
with submission and payment of physician claims for
reimbursement. In some cases, these laws also forbid abuse of
existing systems for such submission and payment. Any failure of
our services to comply with these laws and regulations could
result in substantial liability, including but not limited to
criminal liability, could adversely affect demand for our
services and could force us to expend significant capital,
research and development and other resources to address the
failure. Errors by us or our systems with respect to entry,
formatting, preparation or transmission of claim information may
be determined or alleged to be in violation of these laws and
regulations. Determination by a court or regulatory agency that
our services violate these laws could subject us to civil or
criminal penalties, could invalidate all or portions of some of
our client contracts, could require us to change or terminate
some portions of our business, could require us to refund
portions of our services fees, could cause us to be disqualified
from serving clients doing business with government payers and
could have an adverse effect on our business.
In most cases where we are permitted to do so, we calculate
charges for our services based on a percentage of the
collections that our clients receive as a result of our
services. To the extent that violations or liability for
violations of these laws and regulations require intent, it may
be alleged that this percentage calculation provides us or our
employees with incentive to commit or overlook fraud or abuse in
connection with submission and payment of reimbursement claims.
The U.S. Centers for
Medicare and Medicaid Services has stated that it is concerned
that percentage-based billing services may encourage billing
companies to commit or to overlook fraudulent or abusive
practices.
•
HIPAA and other Health Privacy
Regulations. There are numerous federal and state
laws related to patient privacy. In particular, the Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
includes privacy standards that protect individual privacy by
limiting the uses and disclosures of individually identifiable
health information and data security standards that require
covered entities to implement administrative, physical and
technological safeguards to ensure the confidentiality,
integrity, availability and security of individually
identifiable health information in electronic form. HIPAA also
specifies formats that must be used in certain electronic
transactions, such as claims, payment advice and eligibility
inquiries. Because we translate electronic transactions to and
from HIPAA-prescribed electronic formats and other forms, we are
a clearinghouse and as such are a covered entity. In addition,
our clients are also covered entities and are mandated by HIPAA
to enter into written agreements with us, known as business
associate agreements, that require us to safeguard individually
identifiable health information. Business associate agreements
typically include:
•
a description of our permitted uses of individually identifiable
health information;
•
a covenant not to disclose the information other than as
permitted under the agreement and to make our subcontractors, if
any, subject to the same restrictions;
•
assurances that appropriate administrative, physical and
technical safeguards are in place to prevent misuse of the
information;
•
an obligation to report to our client any use or disclosure of
the information not provided for in the agreement;
•
a prohibition against our use or disclosure of the information
if a similar use or disclosure by our client would violate the
HIPAA standards;
•
the ability for our clients to terminate the underlying support
agreement if we breach a material term of the business associate
agreement and are unable to cure the breach;
•
the requirement to return or destroy all individually
identifiable health information at the end of our support
agreement; and
•
access by the Department of Health and Human Services to our
internal practices, books and records to validate that we are
safeguarding individually identifiable health information.
We may not be able to adequately address the business risks
created by HIPAA implementation. Furthermore, we are unable to
predict what changes to HIPAA or other law or regulation might
be made in the future or how those changes could affect our
business or the costs of compliance. In addition, the federal
Office of the National Coordinator for Health Information
Technology, or ONCHIT, is coordinating the development of
national standards for creating an interoperable health
information technology infrastructure based on the widespread
adoption of electronic health records in the healthcare sector.
We are unable to predict what, if any, impact the creation of
such standards will have on our compliance costs or our services.
In addition some payers and clearinghouses with which we conduct
business interpret HIPAA transaction requirements differently
than we do. Where clearinghouses or payers require conformity
with their interpretations a condition of successful transaction
we seek to comply with their interpretations.
The HIPAA transaction standards include proper use of procedure
and diagnosis codes. Since these codes are selected or approved
by our clients, and since we do not verify their propriety, some
of our capability to comply with the transaction standards is
dependant on the proper conduct of our clients.
In addition to the HIPAA Privacy and Security Rules, most states
have enacted patient confidentiality laws that protect against
the disclosure of confidential medical information, and many
states have adopted or are considering further legislation in
this area, including privacy safeguards, security standards, and
data security breach notification requirements. Such state laws,
if more stringent than HIPAA requirements, are not preempted by
the federal requirements we are required to comply with them.
Failure by us to comply with any of the federal and state
standards regarding patient privacy may subject us to penalties,
including civil monetary penalties and in some circumstances,
criminal penalties. In addition, such failure may injure our
reputation and adversely affect our ability to retain clients
and attract new clients.
•
Anti-Kickback and Anti-Bribery Laws. There are
federal and state laws that govern patient referrals, physician
financial relationships and inducements to healthcare providers
and patients. For example, the federal healthcare programs’
anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. Moreover,
both federal and state laws forbid bribery and similar behavior.
Any determination by a state or federal regulatory agency that
any of our activities or those of our clients or vendors violate
any of these laws could subject us to civil or criminal
penalties, could require us to change or terminate some portions
of our business, could require us to refund a portion of our
service fees, could disqualify us from providing services to
clients doing business with government programs and could have
an adverse effect on our business. Even an unsuccessful
challenge by regulatory authorities of our activities could
result in adverse publicity and could require costly response
from us.
•
Anti-Referral Laws. There are federal and
state laws that forbid payment for patient referrals, patient
brokering, remuneration of patients or billing based on
referrals between individuals
and/or
entities that have various financial, ownership or other
business relationships. In many cases, billing for care arising
from such actions is illegal. These vary widely from state to
state, and one of the federal law, termed the Stark Law, is very
complex in its application. Any determination by a state or
federal regulatory agency that any of our clients violate or
have violated any of these laws may result in allegations that
claims that we have processed or forwarded are improper. This
could subject us to civil or criminal penalties, could require
us to change or terminate some portions of our business, could
require us to refund portions of our services fees and could
have an adverse effect on our business. Even an unsuccessful
challenge by regulatory authorities of our activities could
result in adverse publicity and could require costly response
from us.
•
Corporate Practice of Medicine Laws and Fee-Splitting
Laws. In many states, there are state laws that
forbid physicians from practicing medicine in partnership with
non-physicians, such as business corporations. In some states,
including New York, these take the form of laws or regulations
forbidding splitting of physician fees with non-physicians or
others. In some cases, these laws have been interpreted to
prevent business service providers from charging their physician
clients on the basis of a percentage of collections or charges.
We have varied our charge structure in some states to comply
with these laws, which may make our services less desirable to
potential clients. Any determination by a state court or
regulatory agency that our service contracts with our clients
violate these laws could subject us to civil or criminal
penalties, could invalidate all or portions of some of our
client contracts, could require us to change or terminate some
portions of our business, could require us to refund portions of
our services fees and could have an adverse effect on our
business. Even an unsuccessful challenge by regulatory
authorities of our activities could result in adverse publicity
and could require costly response from us.
Anti-Assignment Laws. There are federal and
state laws that forbid or limit assignment of claims for
reimbursement from government-funded programs. In some cases,
these laws have been interpreted in regulations or policy
statements to limit the manner in which business service
companies may handle checks or other payments for such claims
and to limit or prevent such companies from charging their
physician clients on the basis of a percentage of collections or
charges. Any determination by a state court or regulatory agency
that our service contracts with our clients violate these laws
could subject us to civil or criminal penalties, could
invalidate all or portions of some of our client contracts,
could require us to change or terminate some portions of our
business, could require us to refund portions of our services
fees and could have an adverse effect on our business. Even an
unsuccessful challenge by regulatory authorities of our
activities could result in adverse publicity and could require
costly response from us.
•
Prescribing Laws. The use of our software by
physicians to perform a variety of functions, including
electronic prescribing, electronic routing of prescriptions to
pharmacies and dispensing of medication, is governed by state
and federal law, including fraud and abuse laws, drug control
regulations and state department of health regulations. States
have differing prescription format requirements. Many existing
laws and regulations, when enacted, did not anticipate methods
of
e-commerce
now being developed. For example, while federal law and the laws
of many states permit the electronic transmission of
prescription orders, the laws of several states neither
specifically permit nor specifically prohibit the practice.
Given the rapid growth of electronic transactions in healthcare,
and particularly the growth of the Internet, we expect the
remaining states to directly address these areas with regulation
in the near future. Regulatory authorities such as the
U.S. Department of Health and Human Services’ Centers
for Medicare and Medicaid Services may impose functionality
standards with regard to electronic prescribing and EMR
technologies. Determination that we or our clients have violated
prescribing laws may expose us to liability, loss of reputation
and loss of business. These laws and requirements may also
increase the cost and time necessary to market new services and
could affect us in other respects not presently foreseeable.
•
Electronic Medical Records Laws. A number of
federal and state laws govern the use and content of electronic
health record systems, including fraud and abuse laws that may
affect the donation of such technology. As a company that
provides EMR functionality, our systems and services must be
designed in a manner that facilitates our clients’
compliance with these laws. Because this is a topic of
increasing state and federal regulation, we expect additional
and continuing modification of the current legal and regulatory
environment. We cannot predict the content or effect of possible
future regulation on our business activities. The software
component of our athenaClinicals service complies with the
Certification Commission for Healthcare Information Technology,
or CCHIT, for ambulatory electronic health record criteria for
2006.
•
Claims Transmission Laws. Our services include
the manual and electronic transmission of our client’s
claims for reimbursement from payers. Federal and various state
laws provide for civil and criminal penalties for any person who
submits, or causes to be submitted, a claim to any payer,
including, without limitation, Medicare, Medicaid and any
private health plans and managed care plans, that is false or
that that overbills or bills for items that have not been
provided to the patient.
•
Prompt Pay Laws. Laws in many states govern
prompt payment obligations for healthcare services. These laws
generally define claims payment processes and set specific time
frames for submission, payment and appeal steps. They frequently
also define and require clean claims. Failure to meet these
requirements and timeframes may result in rejection or delay of
claims. Failure of our services to comply may adversely affect
our business results and give rise to liability claims by
clients.
•
Medical Device Laws. The U.S. Food and
Drug Administration (FDA) has promulgated a draft policy for the
regulation of computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food,
Drug and Cosmetic Act. To the extent that computer software is a
medical device under the policy, we, as a provider of
application functionality, could be required, depending on the
functionality, to:
•
register and list our products with the FDA;
•
notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing our functionality; or
•
obtain FDA approval by demonstrating safety and effectiveness
before marketing our functionality.
The FDA can impose extensive requirements governing pre- and
post-market conditions like service investigation, approval,
labeling and manufacturing. In addition, the FDA can impose
extensive requirements governing development controls and
quality assurance processes.
Potential
regulatory requirements placed on our software, services and
content could impose increased costs on us, could delay or
prevent our introduction of new services types and could impair
the function or value of our existing service
types.
Our services are and are likely to continue to be subject to
increasing regulatory requirements in a multitude of ways. As
these requirements proliferate, we must change or adapt our
services and our software to comply. Changing regulatory
requirements may render our services obsolete or may block us
from accomplishing our work or from developing new services.
This may in turn impose additional costs upon us to comply or to
further develop services or software. It may also make
introduction of new service types more costly or more time
consuming than we currently anticipate. It may even prevent such
introduction by us of new services or continuation of our
existing services unprofitably or impossible.
Potential
additional regulation of the disclosure of health information
outside the United States may adversely affect our operations
and may increase our costs.
Federal or state governmental authorities may impose additional
data security standards or additional privacy or other
restrictions on the collection, use, transmission and other
disclosures of health information. Legislation has been proposed
at various times at both the federal and the state level that
would limit, forbid or regulate the use or transmission of
medical information outside of the United States. Such
legislation, if adopted, may render our use of our off-shore
partners, such as our data-entry and customer service provider,
Vision Healthsource, for work related to such data impracticable
or substantially more expensive. Alternative processing of such
information within the United States may involve substantial
delay in implementation and increased cost.
Errors
or illegal activity on the part of our clients may result in
claims against us.
We rely on our clients, and we contractually obligate them, to
provide us with accurate and appropriate data and directives for
our actions. We rely upon our clients as users of our system for
key activities to produce proper claims for reimbursement.
Failure of clients to provide these data and directives or to
perform these activities may result in claims against us that
our reliance was misplaced.
Our
services present the potential for embezzlement, identity theft
or other similar illegal behavior by our employees or
subcontractors with respect to third parties.
Among other things, our services involve handling mail from
payers and from patients for many of our clients, and this mail
frequently includes original checks
and/or
credit card information, and occasionally, it includes currency.
Even in those cases in which we do not handle original documents
or mail, our services also involve the use and disclosure of
personal and business information that could be used to
impersonate third parties or otherwise gain access to their data
or funds. If any of our employees or subcontractors takes,
converts or misuses such funds, documents or data, we could be
liable for damages, and our business reputation could be damaged
or destroyed.
Potential
subsidy of services similar to ours may reduce client
demand.
Recently, entities such as the Massachusetts Healthcare
Consortium have offered to subsidize adoption by physicians of
electronic health record technology. In addition, federal
regulations have been changed to permit such subsidy from
additional sources subject to certain limitations. To the extent
that we do not qualify or participate in such subsidy programs,
demand for our services may be reduced which may decrease our
revenues.
RISKS
RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON
STOCK
An
active, liquid and orderly market for our common stock may not
develop.
Prior to this offering there has been no market for shares of
our common stock. An active trading market for our common stock
may never develop or be sustained, which could depress the
market price of our common stock and could affect your ability
to sell your shares. The initial public offering price will be
determined through negotiations between us and the
representatives of the underwriters and may bear no relationship
to the price at which our common stock will trade following the
completion of this offering. The trading price of our common
stock following this offering is likely to be highly volatile
and could be subject to wide fluctuations in response to various
factors, some of which are beyond our control. In addition to
the factors discussed in this “Risk Factors” section
and elsewhere in this prospectus, these factors include:
•
our operating performance and the operating performance of
similar companies;
•
the overall performance of the equity markets;
•
announcements by us or our competitors of acquisitions, business
plans or commercial relationships;
•
threatened or actual litigation;
•
changes in laws or regulations relating to the sale of health
insurance;
•
any major change in our board of directors or management;
•
publication of research reports or news stories about us, our
competitors or our industry or positive or negative
recommendations or withdrawal of research coverage by securities
analysts;
•
large volumes of sales of our shares of common stock by existing
stockholders; and
•
general political and economic conditions.
In addition, the stock market in general, and the market for
internet-related companies in particular, has experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. These fluctuations may be even more pronounced
in the trading market for our stock shortly following this
offering. Securities class action litigation has often been
instituted against companies following periods of volatility in
the overall market and in the market price of a company’s
securities. This litigation, if instituted against us, could
result in very substantial costs, divert our management’s
attention and resources and harm our business, operating results
and financial condition.
Future
sales of shares of our common stock by existing stockholders
could depress the market price of our common
stock.
Upon completion of this offering, there will
be shares
of our common stock outstanding. Of these, shares are being sold
in this offering
(or shares,
if the underwriters exercise their overallotment option in full)
and will be freely tradable immediately after this offering
(except for shares purchased by affiliates) and the
remaining shares
may be sold upon expiration of
lock-up
agreements 180 days after the date of this offering
(subject in some cases to volume limitations). In addition, as
of June 30, 2007, we had outstanding options to purchase
3,010,054 shares of common stock that, if exercised, will
result in these additional shares becoming available for sale
upon expiration of the
lock-up
agreements. A large portion of these shares and options are held
by a small number of persons and investment funds. Sales by
these stockholders or optionholders of a substantial number of
shares after this offering could
significantly reduce the market price of our common stock.
Moreover, after this offering, the holders of shares of common
stock will have rights, subject to some conditions, to require
us to file registration statements covering the shares they
currently hold, or to include these shares in registration
statements that we may file for ourselves or other stockholders.
We also intend to register all common stock that we may issue
under our 1997 Stock Plan, 2000 Stock Plan and 2007 Stock Option
and Incentive Plan. Effective upon the completion of this
offering, an aggregate
of shares
of our common stock will be reserved for future issuance under
this plan. Once we register these shares, which we plan to do
shortly after the completion of this offering, they can be
freely sold in the public market upon issuance, subject to the
lock-up
agreements referred to above. If a large number of these shares
are sold in the public market, the sales could reduce the
trading price of our common stock. See “Shares Eligible for
Future Sale” for a more detailed description of sales that
may occur in the future.
You
will experience immediate and substantial
dilution.
The initial public offering price will be substantially higher
than the net tangible book value of each outstanding share of
common stock immediately after this offering. If you purchase
common stock in this offering, you will suffer immediate and
substantial dilution. At an assumed initial public offering
price of $ with net proceeds of
$ million, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses, investors who purchase shares in this
offering will have contributed
approximately % of the total amount
of funding we have received to date, but will only hold
approximately % of the total voting
rights. The dilution will be $ per
share in the net tangible book value of the common stock from
the assumed initial public offering price. In addition, if
outstanding options to purchase shares of our common stock are
exercised, there could be further dilution. For more information
refer to “Dilution.”
We
have broad discretion in the use of the net proceeds from this
offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in “Use of
Proceeds”. Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the
proceeds, with only limited information concerning
management’s specific intentions. Our management may spend
a portion or all of the net proceeds from this offering in ways
that our stockholders may not desire or that may not yield a
favorable return. The failure by our management to apply these
funds effectively could harm our business. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
A
limited number of stockholders will have the ability to
influence the outcome of director elections and other matters
requiring stockholder approval.
After this offering, our directors, executive officers and their
affiliated entities will beneficially own more
than
percent of our outstanding common stock. These stockholders, if
they act together, could exert substantial influence over
matters requiring approval by our stockholders, including the
election of directors, the amendment of our certificate of
incorporation and by-laws and the approval of mergers or other
business combination transactions. This concentration of
ownership may discourage, delay or prevent a change in control
of our company, which could deprive our stockholders of an
opportunity to receive a premium for their stock as part of a
sale of our company and might reduce our stock price. These
actions may be taken even if they are opposed by other
stockholders, including those who purchase shares in this
offering.
Provisions
in our certificate of incorporation and by-laws or Delaware law
might discourage, delay or prevent a change of control of our
company or changes in our management and, therefore, depress the
trading price of our common stock.
Provisions of our certificate of incorporation and by-laws and
Delaware law may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may
consider favorable, including
transactions in which you might otherwise receive a premium for
your shares of our common stock. These provisions may also
prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions include:
•
limitations on the removal of directors;
•
advance notice requirements for stockholder proposals and
nominations;
•
the inability of stockholders to act by written consent or to
call special meetings; and
•
the ability of our board of directors to make, alter or repeal
our by-laws.
The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions of our certificate of
incorporation. In addition, our board of directors has the
ability to designate the terms of and issue new series of
preferred stock without stockholder approval. Also, absent
approval of our board of directors, our by-laws may only be
amended or repealed by the affirmative vote of the holders of at
least 75% of our shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns, or within the last three years has owned, 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in an acquisition.
We do
not currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We have never declared or paid any cash dividends on our common
stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if
any, to fund our growth. Therefore, you are not likely to
receive any dividends on your common stock for the foreseeable
future and the success of an investment in shares of our common
stock will depend upon any future appreciation in its value.
There is no guarantee that shares of our common stock will
appreciate in value or even maintain the price at which our
stockholders have purchased their shares.
This prospectus contains forward-looking statements. All
statements other than statements of historical fact contained in
this prospectus are forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such
as “may,”“will,”“should,”“expects,”“plans,”“anticipates,”“believes,”“estimates,”“predicts,”“potential” or
“continue” or the negative of these terms or other
comparable terminology. These statements are only current
predictions and are subject to known and unknown risks,
uncertainties and other factors that may cause our or our
industry’s actual results, levels of activity, performance,
or achievements to be materially different from those
anticipated by the forward-looking statements. These factors
include, among other things, those listed under “Risk
Factors” and elsewhere in this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
Except as required by law, we are under no duty to update or
revise any of the forward-looking statements, whether as a
result of new information, future events or otherwise, after the
date of this prospectus.
This prospectus contains statistical data that we obtained from
industry publications and reports generated by third parties.
Although we believe that the publications and reports are
reliable, we have not independently verified this statistical
data.
Unless otherwise indicated, information contained in this
prospectus concerning our industry and the markets in which we
operate, including our general expectations and market position,
market opportunity and market share, is based on information
from independent industry analysts and third party sources
(including industry publications, surveys and forecasts and our
internal research), and management estimates. Management
estimates are derived from publicly available information
released by independent industry analysts and third-party
sources, as well as data from our internal research, and are
based on assumptions made by us based on such data and our
knowledge of such industry and markets, which we believe to be
reasonable. None of the sources cited in this prospectus has
consented to the inclusion of any data from its reports, nor
have we sought their consent. Our internal research has not been
verified by any independent source, and we have not
independently verified any third-party information. While we
believe the market position, market opportunity and market share
information included in this prospectus is generally reliable,
such information is inherently imprecise. In addition,
projections, assumptions and estimates of our future performance
and the future performance of the industries in which we operate
are necessarily subject to a high degree of uncertainty and risk
due to a variety of factors, including those described in
“Risk Factors” and elsewhere in this prospectus. These
and other factors could cause results to differ materially from
those expressed in the estimates made by the independent parties
and by us.
We estimate that the net proceeds to us from the sale of the
shares of common stock in this offering will be approximately
$ million at an assumed
initial public offering price of $
per share, the midpoint of the price range set forth on the
cover of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses. A $1.00 increase (decrease) in the assumed initial
public offering price would increase (decrease) our net proceeds
from this offering by $ , assuming
the number of shares offered by us, as set forth on the cover of
this prospectus, remains the same. If the underwriters’
overallotment option is exercised in full, we estimate that our
net proceeds will be
$ million. We will not
receive any of the proceeds from the sale of shares by the
selling stockholder.
The principal reasons for this offering are to obtain additional
capital, to create a public market for our common stock and to
facilitate our future access to public equity markets. As a
result, we believe we will be better able to address our various
strategic initiatives and respond to changes in our industry
than we otherwise would as a private company.
We currently estimate that of the net proceeds we receive from
this offering we will spend approximately $32.7 million to
repay the following indebtedness outstanding as of June 30,2007, plus accrued but unpaid interest and prepayment penalties
thereon:
•
approximately $8.9 million in aggregate principal and
interest under our working capital line of credit with Silicon
Valley Bank, or SVB;
•
approximately $1.3 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
Bank of America, N.A., or Bank of America;
•
approximately $4.7 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
Oxford Finance Corporation, or Oxford;
•
approximately $0.3 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
General Electric Capital Corporation; and
•
approximately $17.5 million in aggregate principal,
interest and prepayment penalties under our term loans with ORIX
Venture Finance LLC, or ORIX.
Our working capital line of credit currently bears interest at a
per annum rate equal to SVB’s prime rate, which was 8.25%
as of June 30, 2007, matures on August 31, 2008. Our
equipment line of credit with Bank of America currently bears
interest at per annum rate equal to the greater of 9% or the
Bank of America’s prime rate, which was 8.25% as of
June 30, 2007, plus 3.75%, matures on December 1, 2008
and may be prepaid with a 1% penalty. Our equipment line of
credit with Oxford currently bears interest at 10.73% per annum,
matures on December 1, 2009 and may be prepaid with a 2%-3%
penalty if prepayment occurs prior within 90 days of the
effectiveness of this registration statement. Our equipment line
of credit with General Electric Capital Corporation currently
bears interest at 8.49% per annum, matures on March 1, 2008
and may be prepaid with a 3% penalty if prepayment occurs prior
to December 1, 2007. Each of our term loans with ORIX
currently bears interest at prime, which was 8.25% as of
June 30, 2007, plus 1.75% per annum, matures on
June 30, 2010, and may be prepaid in whole or in part with
a prepayment penalty equal to 3% of the amount prepaid if
prepayment occurs prior to December 28, 2007. We used the
proceeds from indebtedness incurred during the past year to
acquire equipment and for other general working capital purposes.
We anticipate that we will use the remaining net proceeds we
receive from this offering for working capital and other general
corporate purposes, including the funding of our marketing
activities and further investment in the development of our
service offerings. Other than the repayment of indebtedness, we
have not allocated any specific portion of the net proceeds to
any particular purpose, and our management will have the
discretion to allocate the proceeds as it determines. We may use
a portion of the net proceeds for the acquisition of businesses,
products and technologies that we believe are complementary to
our own, although we have no agreements or understandings with
respect to any acquisition at this time.
Pending our use of the net proceeds from this offering, we
intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
This expected use of the net proceeds of this offering
represents our current intentions based upon our present plans
and business condition. The amounts and timing of our actual
expenditures will depend upon numerous factors, including cash
flows from operations and the anticipated growth of our
business. We will retain broad discretion in the allocation and
use of our net proceeds. See “Risk Factors —
Risks Related to This Offering and Ownership of Our Common
Stock.”
We have never declared or paid any dividends on our capital
stock and our loan agreements restrict our ability to pay
dividends. We currently intend to retain any future earnings and
do not intend to declare or pay cash dividends on our common
stock in the foreseeable future. Any future determination to pay
dividends will be, subject to applicable law, at the discretion
of our board of directors and will depend upon, among other
factors, our results of operations, financial condition,
contractual restrictions and capital requirements.
The following table sets forth our capitalization as of
June 30, 2007:
•
on an actual basis;
•
on a pro forma basis to reflect the conversion of all of our
outstanding preferred stock into 21,531,457 shares of our common
stock upon the closing of this offering; and
•
on a pro forma as adjusted basis to further reflect:
•
the receipt by us of net proceeds of
$ million from the sale of
the shares
of common stock offered by us in this offering at an assumed
public offering price of $ per
share, less underwriting discounts and commissions and estimated
offering expenses payable by us; and
•
the payment by us of approximately $32.7 million to repay
our outstanding indebtedness with, and other amounts payable to,
our financial lenders as described under “Use of
Proceeds.”
You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our consolidated
financial statements and the notes to those statements appearing
elsewhere in this prospectus.
Convertible preferred stock;
$0.01 par value per share; 26,389,684 shares
authorized, 22,331,991 shares issued and
21,531,457 shares outstanding, actual; no shares
authorized, issued and outstanding, pro forma and pro forma as
adjusted
50,094
—
Preferred stock, $0.01 par
value; no shares authorized, issued and outstanding, actual and
pro forma; 5,000,000 shares authorized and no shares issued
and outstanding, pro forma as adjusted
—
—
Common stock; $0.01 par value
per share; 50,000,000 shares authorized,
5,546,267 shares issued and 5,068,942 shares
outstanding, actual; 50,000,000 shares authorized,
27,878,258 shares issued and 26,600,399 shares outstanding, pro
forma; 125,000,000 shares authorized
and shares issued and
outstanding, pro forma as adjusted
55
270
Additional paid-in capital
3,819
59,876
Accumulated other comprehensive
income
62
62
Accumulated deficit
(71,264
)
(71,264
)
Treasury stock,
1,277,859 shares
(1,200
)
(1,200
)
Total stockholders’ deficit
(68,528
)
(12,256
)
Total capitalization
31,452
31,452
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) each of additional paid-in capital,
total stockholders’ deficit and total capitalization by
approximately $ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
The number of shares shown as issued and outstanding in the
table above does not include:
•
3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2007 with a
weighted average exercise price of $3.43 per share; and
•
634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share.
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share of our common stock and the
pro forma net tangible book value per share of our common stock.
The net tangible book value of our common stock as of
June 30, 2007 was a deficit of
$ million, or
$ per share. Net tangible book
value per share represents the amount of stockholders’
deficit divided by shares of common stock outstanding at that
date. The pro forma net tangible book value of our common stock
as of June 30, 2007 was
$ million, or approximately
$ per share, excluding proceeds
from this offering. Pro forma net tangible book value gives
effect to the conversion of all shares of outstanding preferred
stock into shares of common stock upon the closing of this
offering.
Net tangible book value dilution per share to new investors
represents the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately
after completion of this offering. After giving effect to our
sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book
value as of June 30, 2007 would have been
$ per share. This represents an
immediate increase in net tangible book value of
$ per share to existing
stockholders and an immediate dilution in net tangible book
value of $ per share to purchasers
of common stock in this offering, as illustrated in the
following table:
Assumed initial public offering
price per share
$
Pro forma net tangible book value
per share as of June 30, 2007
$
Increase per share attributable to
new investors
Pro forma net tangible book value
per share at June 30, 2007 after giving effect to the
offering
$
Dilution per share to new investors
$
Assuming the exercise in full of the underwriters’
overallotment option, our pro forma net tangible book value at
June 30, 2007 would have been approximately
$ per share, representing an
immediate increase in the pro forma net tangible book value of
$ per share to our existing
stockholders and an immediate decrease in net tangible book
value of $ per share to new
investors.
The following table summarizes, on a pro forma basis, as of
June 30, 2007, the difference between the number of shares
of common stock purchased from us, the total consideration paid
to us and the average price per share paid by existing
stockholders and by new investors at an assumed initial public
offering price of $ per share,
before deducting estimated underwriting discounts and
commissions and estimated offering expenses.
The discussion and the tables above assume no exercise of stock
options outstanding on June 30, 2007 and no issuance of
shares reserved for future issuance under our equity
compensation plans. In addition, the numbers set forth in the
table above assume the conversion as of June 30, 2007 of
all outstanding shares of our preferred stock into shares of our
common stock. As of June 30, 2007, there were:
•
3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding with a weighted average exercise
price of $3.43 per share;
•
634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share; and
•
170,504 shares of common stock reserved for issuance under
our equity incentive plans.
If the underwriters’ overallotment option is exercised in
full, the following will occur:
•
the percentage of shares of common stock held by existing
stockholders will decrease to
approximately % of the total number
of shares of our common stock outstanding after this
offering; and
•
the number of shares held by new investors will be increased
to , or
approximately %, of the total
number of shares of our common stock outstanding after this
offering.
The following tables summarize our consolidated financial data
for the periods presented. You should read the following
financial information together with the information under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and the related notes to these consolidated
financial statements appearing elsewhere in this prospectus. The
selected consolidated statements of operations data for the
fiscal years ended December 31, 2004, 2005 and 2006, and
the selected consolidated balance sheet data as of
December 31, 2005 and 2006 are derived from our
consolidated financial statements, which are included elsewhere
in this prospectus, and have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as indicated in their report. The
selected consolidated statements of operations data for the
years ended December 31, 2002 and 2003, and the
consolidated balance sheet data at December 31, 2002, 2003
and 2004 are derived from our audited consolidated financial
statements not included in this prospectus. The selected
consolidated balance sheet data as of June 30, 2007 and the
selected consolidated statements of operations data for six
months ended June 30, 2006 and 2007 are derived from our
unaudited consolidated financial statements appearing elsewhere
in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as our audited
financial statements and include, in the opinion of management,
all adjustments that management considers necessary for a fair
presentation of the financial information set forth in those
statements. Operating results for these periods are not
necessarily indicative of the operating results for a full year.
Historical results are not necessarily indicative of the results
to be expected in future periods.
The following discussion and analysis should be read in
conjunction with our consolidated financial statements, the
accompanying notes to these financial statements and the other
financial information that appear elsewhere in this prospectus.
This discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties. Actual results may differ materially from those
discussed in these forward-looking statements due to a number of
factors, including those set forth in the section entitled
“Risk Factors” and elsewhere in this prospectus.
Overview
athenahealth is a provider of
internet-based
business services for physician practices. Our service offerings
are based on three integrated components: our proprietary
internet-based software, our continually updated database of
payer reimbursement process rules and our back-office service
operations that perform administrative aspects of billing and
clinical data management for physician practices. Our principal
offering, athenaCollector, automates and manages billing-related
functions for physician practices and includes a medical
practice management platform. We have also developed a service
offering, athenaClinicals, that automates and manages medical
record-related functions for physician practices and includes an
electronic medical record, or EMR, platform. We refer to
athenaCollector as our revenue cycle management service and
athenaClinicals as our clinical cycle management service. Our
services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
Our services require relatively modest initial investment, are
highly adaptable to changing healthcare and technology trends
and are designed to generate significant financial benefit for
our physician clients. Our results are directly tied to the
financial performance of our clients because the majority of our
revenue is based on a percentage of their collections. Our
services have enabled our clients on average, to resolve 93% of
their claims to payers on their first submission attempt,
compared to an industry average we estimate to be 70%. Our
internal studies show that we have reduced the days in accounts
receivable of our client base by more than 30%. We have
experienced a contract renewal rate of at least 97% in each of
the last five years, and this persistent client base drives a
predictable revenue stream.
In 2006, we generated revenue of $75.8 million from the
sale of our services compared to $53.5 million in 2005. For
the six months ended June 30, 2007 we generated revenue of
$46.4 million versus $35.3 million for the six months
ended June 30, 2006. Given the scope of our market
opportunity, we have increased our spending each year on growth,
innovation and infrastructure. Despite increased spending in
these areas, higher revenue and lower direct operating expense
as a percentage of revenue have led to smaller net losses.
Our revenues are predominately derived from business services
that we provide on an ongoing basis. This revenue is generally
determined as a percentage of payments collected by our clients,
so the key drivers of our revenue include growth in the number
of physicians working within our client accounts and the
collections of these physicians. To provide these services we
incur expense in several categories, including direct operating,
selling and marketing, research and development, general and
administrative and depreciation and amortization expense. In
general, our direct operating expense increases as our volume of
work increases, whereas our selling and marketing expense
increases in proportion to our rate of adding new accounts to
our network of physician clients. Our other expense categories
are less directly related to growth of revenues and relate more
to our planning for the future, our overall business management
activities and our infrastructure. As our revenues have grown,
the difference between our revenue and our direct operating
expense also has grown, which has afforded us the ability to
spend more in other categories of expense and to experience an
increase in operating margin. Due to growth in the value of our
equity, we have incurred substantial expenses related to
warrants that will cease to accrue further upon the completion
of this offering. We manage our cash and our use of credit
facilities to ensure adequate liquidity, in adherence to related
financial covenants. As a result of this offering, we expect to
retire most of our current debt and seek to establish sufficient
liquidity to achieve our business objectives.
We derive our revenue from two sources: from business services
associated with our revenue cycle and clinical cycle offerings
and from implementation and other services. Implementation and
other services consist primarily of professional services fees
related to assisting clients with the initial implementation of
our services and for ongoing training and related support
services. Business services accounted for approximately 93% of
our total revenues for the six months ended June 30, 2007
and 90%, 91% and 93% for the twelve months ended
December 31, 2004, 2005 and 2006, respectively. Business
services fees are typically 2% to 8% of a practice’s total
collections depending upon the size, complexity and other
characteristics of the practice, plus a per statement charge for
billing statements that are generated for patients. Accordingly,
business services fees are largely driven by: the number of
physician practices we serve; the number of physicians working
in those physician practices; and the volume of activity and
related collections of those physicians, which is largely a
function of the number of patients seen or procedures performed
by the practice, the medical specialty in which the practice
operates and the geographic location of the practice. For
example, high volume, specialty practices in metropolitan areas
tend to collect more payments than slower, primary care
practices in rural areas. There is moderate seasonality in the
activity level of physician offices. Typically, discretionary
use of physician services declines in the late summer and during
the holiday season, which leads to a decline in collections by
our physician clients of about
30-50 days
later. None of our clients accounted for more than 5% of our
total revenues for the six months ended June 30, 2007 or
the twelve months ended December 31, 2006. For the twelve
months ended December 31, 2004 and 2005, our largest client
accounted for approximately 7% of revenues in both years and no
other client exceeded 5% of our total revenues in those years.
Operating
Expense
Direct Operating Expense. Direct operating
expense consists primarily of salaries, benefits, claim
processing costs, other direct costs and stock-based
compensation related to personnel who provide services to
clients, including staff who implement new clients. Although we
expect that direct operating expense will increase in absolute
terms for the foreseeable future, the direct operating expense
is expected to decline as a percentage of revenues as we further
increase the percentage of transactions that are resolved on the
first attempt. In addition, over the longer term, we expect to
increase our overall level of automation and to reduce our
direct operating expense as a percentage of revenues as we
become a larger operation, with higher volumes of work in
particular functions, geographies and medical specialties. In
2007, we include in direct operating expense the service costs
associated with our athenaClinicals offering, which includes
transaction handling related to lab requisitions, lab results
entry, fax classification and other services. We also expect
these costs to increase in absolute terms for the foreseeable
future but to decline as a percentage of revenue. This decrease
will be driven by increased levels of automation and by
economies of scale. Direct operating expense does not include
allocated amounts for rent, depreciation and amortization.
Selling and Marketing Expense. Selling and
marketing expense consists primarily of marketing programs
(including trade shows, brand messaging and on-line initiatives)
and personnel related expense for sales and marketing employees
(including salaries, benefits, commissions, stock-based
compensation, non-billable travel, lodging and other
out-of-pocket employee-related expense). Although we recognize
substantially all of our revenue when services have been
delivered, we recognize a large portion of our sales commission
expense at the time of contract signature and at the time our
services commence. Accordingly, we incur a portion of our sales
and marketing expense prior to the recognition of the
corresponding revenue. We plan to continue to invest in sales
and marketing by hiring additional direct sales personnel to add
new clients and increase sales to our existing clients. We also
plan to expand our marketing activities such as attending trade
shows, expanding user groups and creating new printed materials.
As a result, we expect that in the future, sales and marketing
expense will increase in absolute terms but decline over time as
a percentage of revenue.
Research and Development Expense. Research and
development expense consists primarily of personnel-related
expenses for research and development employees (including
salaries, benefits, stock-based compensation, non-billable
travel, lodging and other out-of-pocket employee-related
expense) and consulting fees for third-party developers. We
expect that in the future, research and development expense will
increase in absolute terms but not as a percentage of revenue as
new services and more mature products require incrementally less
new research and
development investment. For our revenue cycle related
application development, we expense nearly all of the
development costs because we believe the development is
substantially complete. For our clinical cycle related
application development, we capitalized nearly all of our
research and development costs during the year ended
December 31, 2006 and the six months ended June 30,2007, which capitalized costs represented approximately 16% of
our total research and development expenditures in 2006 and
approximately 14% in the six months ended June 30, 2007. We
expect these capitalized expenditures will begin to amortize
during the first quarter of 2008 when we begin to implement our
services to clients who are not part of our beta-testing
program. Our beta-testing program is the implementation and
utilization of a test version of our athenaClinicals product
with a client. It allows for testing, in a live environment, of
the features and functionality of the product. The intent is to
find errors in the application and subsequently correct them.
General and Administrative Expense. General
and administrative expense consists primarily of
personnel-related expense for administrative employees
(including salaries, benefits, stock-based compensation,
non-billable travel, lodging and other out-of-pocket
employee-related expense), occupancy and other indirect costs
(including building maintenance and utilities) and insurance, as
well as software license fees and outside professional fees for
accountants, lawyers and consultants and temporary employees. We
expect that general and administrative expense will increase in
absolute terms for the foreseeable future as we invest in
infrastructure to support our growth and incur additional
expense related to being a publicly traded company. Though
expenses are expected to continue to rise in absolute terms, we
expect general and administrative expense to decline as a
percentage of overall revenues.
Depreciation and Amortization
Expense. Depreciation and amortization expense
consists primarily of depreciation of fixed assets and
amortization of capitalized software development costs, which we
amortize over a two-year period from the time of release of
related software code. Because our core revenue cycle
application is relatively mature, we elect to expense those
costs as incurred, and as a result in 2006 approximately 86% of
our software development expenditures were expensed rather than
capitalized. In the six months ended June 30, 2007,
approximately 86% were expensed rather than capitalized. As we
grow we will continue to make capital investments in the
infrastructure of the business and we will continue to develop
software that we capitalize. At the same time, because we are
spreading fixed costs over a larger client base, we expect
related depreciation and amortization expense to decline as a
percentage of revenues over time.
Other Income (Expense). Interest expense
consists primarily of interest costs related to our working
capital line of credit, our equipment-related term loans and our
subordinated term loan, offset by interest income on
investments. Interest income represents earnings from our cash,
cash equivalents and short-term investments. The unrealized loss
on warrant liability represents the change in the fair value of
our warrants to purchase shares of our preferred stock at the
end of each reporting period. This ongoing loss will cease upon
the completion of this offering at which time the associated
liability will convert to additional paid-in-capital.
Critical
Accounting Policies
We prepare our financial statements in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, expense and related
disclosures. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be
reasonable under the circumstances. We evaluate our estimates
and assumptions on an ongoing basis. Our actual results may
differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies, among
others, affect our more significant judgments and estimates used
in the preparation of our financial statements.
Revenue
Recognition
We recognize revenue when all of the following conditions are
satisfied:
the collection of the fees is reasonably assured; and
•
the amount of fees to be paid by the client is fixed or
determinable.
Our arrangements do not contain general rights of return. All
revenue, other than implementation revenue, is recognized when
the service is performed. As the implementation service is not
separable from the ongoing business services, we record
implementation fees as deferred revenue until the implementation
service is complete, at which time we recognize revenue ratably
on a monthly basis over the expected performance period.
Our clients typically purchase one-year contracts that renew
automatically upon completion. In most cases, our clients may
terminate their agreements with 90 days notice without
cause. We typically retain the right to terminate client
agreements in a similar timeframe. Our clients are billed
monthly, in arrears, based either upon a percentage of
collections posted to athenaNet, minimum fees, flat fees or per
claim fees where applicable. Invoices are generated within the
first two weeks of the month and delivered to clients primarily
by email. For most of our clients, fees are then deducted from a
pre-determined bank account one week after invoice receipt via
an auto-debit transaction. Amounts that have been invoiced are
recorded as revenue or deferred revenue, as appropriate, and are
included in our accounts receivable balances. Deposits received
for future services (such as implementation fees) are recorded
as deferred revenue and amortized over the term of the service
agreement when ongoing services commence.
Software
Development Costs
We account for software development costs under the provisions
of American Institute of Certified Public Accountants Statement
of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Under
SOP 98-1,
costs related to the preliminary project stage of subsequent
versions of athenaNet
and/or other
technology are expensed as incurred. Costs incurred in the
application development stage are capitalized. Such costs are
amortized over the software’s estimated economic life of
two years. In 2006 approximately 86% of our software development
expenditures were expensed rather than capitalized based upon
the stage of development of the software. In the six months
ended June 30, 2007, approximately 86% of our software
development expenditures were expensed rather than capitalized.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for stock-based
awards to employees using the intrinsic value method as
prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Under the intrinsic value
method, compensation expense is measured on the date of grant as
the difference between the deemed fair value of our common stock
and the option exercise price multiplied by the number of
options granted. Generally, we grant stock options with exercise
prices equal to or above the estimated fair value of our common
stock. The option exercise prices and fair value of our common
stock is determined by our management and board of directors.
Accordingly, no compensation expense was recorded for options
issued to employees prior to January 1, 2006 in fixed
amounts and with fixed exercise prices at least equal to the
fair value of our common stock at the date of grant.
On January 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment, which requires companies to expense
the fair value of employee stock options and other forms of
share-based awards. SFAS 123(R) addresses accounting for
share-based awards, including shares issued under employee stock
purchase plans, stock options and share-based awards, with
compensation expense measured using the fair value, for
financial reporting purposes, and recorded over the requisite
service period of the award. In accordance with
SFAS 123(R), we recognize compensation expense for awards
granted and awards modified, repurchased or cancelled after the
adoption date. Under SFAS 123(R), we estimate the fair
value of stock options and share-based awards using the
Black-Scholes option-pricing model.
We have recorded stock-based compensation under SFAS 123(R)
using the prospective transition method and accordingly, will
continue to account for awards granted prior to the adoption
date of SFAS 123(R) following the provisions of APB Opinion
No. 25. Prior periods have not been restated. For awards
granted after January 1, 2006, we have elected to recognize
compensation expense for awards with service conditions
on a straight line basis over the requisite service period.
Prior to the adoption of SFAS 123(R), we used the
straight-line method of recognition for all awards. For the six
months ended June 30, 2007 and for the twelve months ended
December 31, 2006, we recorded $0.6 million and
$0.4 million in stock-based compensation expense,
respectively. As of December 31, 2006 the future expense of
non-vested options of approximately $2.5 million is to be
recognized through 2010. There was no impact on the presentation
in the consolidated statements of cash flows as no excess tax
benefits have been realized in 2006.
The fair value of our options issued during the six months ended
June 30, 2007 and the twelve months ended December 31,2006 was determined using the Black-Scholes model with the
following range of assumptions:
As there was no public market for our common stock prior to this
offering, we have determined the volatility for options granted
in 2006 and 2007 based on an analysis of reported data for a
peer group of companies that issued options with substantially
similar terms. These companies include: HLTH Corporation
(formerly known as Emdeon Corp.), Quality Systems, Inc., Per Se
Technologies, Inc. (acquired by McKesson Corp.) and Allscripts
HealthCare Solutions, Inc. The expected volatility of options
granted has been determined using an average of the historical
volatility measures of this peer group of companies. The
expected volatility for options granted during 2006 and 2007 was
71%. The expected life of options granted during the year ended
December 31, 2006 and the six months ended
June 30, 2007 was determined to be 6.25 years using
the “simplified” method as prescribed by SAB
No. 107, Share-Based Payment. For 2006 and the six
months ended June 30, 2007, the weighted-average risk free
interest rate used was 4.9% and 4.5%, respectively. The
risk-free interest rate is based on a treasury instrument whose
term is consistent with the expected life of the stock options.
We have not paid and do not anticipate paying cash dividends on
our shares of common stock; therefore, the expected dividend
yield is assumed to be zero. In addition,
SFAS No. 123(R) requires companies to utilize an
estimated forfeiture rate when calculating the expense for the
period. Our estimated forfeiture rate of 17% in 2006 and 2007
used in determining the expense recorded in our consolidated
statement of operations is based on our actual forfeiture rate
since 1997.
We believe there is a high degree of subjectivity involved when
using option-pricing models to estimate share-based compensation
under SFAS 123(R). There is currently no market-based
mechanism or other practical application to verify the
reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the
estimates to actual values. Although the fair value of employee
share-based awards is determined in accordance with
SFAS 123(R) using an option-pricing model, that value may
not be indicative of the fair value observed in a market
transaction between a willing buyer and willing seller. If
factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods than those
currently applied under SFAS 123(R), the compensation
expense that we record in future under SFAS 123(R) may
differ significantly from what we have historically reported.
For example, if the volatility percentage used in calculating
our SFAS 123(R) stock compensation expense had fluctuated
by 10%, the total stock compensation expense to be recognized
over the stock options’ four year vesting period would have
increased or decreased by approximately $0.3 million. If
the volatility percentage had fluctuated by the 10%, the effect
on our stock compensation expense for the year ended
December 31, 2006 and for the six months ended
June 30, 2006 and 2007 would be an increase or decrease of
approximately $6,000, $18,000 and $38,000, respectively. If the
forfeiture rate used in calculating our SFAS 123(R) stock
compensation expense had fluctuated by 10%, the total stock
compensation expense to be recognized over the stock
options’ four year vesting period would have decreased or
increased by approximately $0.5 million. If the forfeiture
rate had fluctuated by the 10%, the effect on our stock
compensation expense for the year ended December 31, 2006
and for the six months ended June 30, 2006 and 2007 would
be a decrease or increase of approximately $9,000, $25,000 and
$50,000, respectively. There would be no
fluctuation in the expected life used in calculating our
SFAS 123(R) stock compensation expense as the expected life
was determined to be 6.25 years for all period using the
“simplified” method as prescribed by SAB
No. 107, Share-Based Payment. There would be no
fluctuation in the risk free interest rate used in calculating
our SFAS 123(R) stock compensation expense as the risk free
interest rate used in the calculation is dependant upon the
expected life used in the calculation which remains stagnant as
discussed above. There would also be no fluctuation in the
dividend rate used in calculating our SFAS 123(R) stock
compensation expense as we have never paid a dividend and
currently have no plans to pay a dividend in the future.
Prior to offering, the fair value for our common stock, for the
purpose of determining the exercise prices of our common stock
options, was estimated by our board of directors, with input
from management. Our board of directors exercised judgment in
determining the estimated fair value of our common stock on the
date of grant based on several factors, including:
•
the nature and history of our business;
•
our significant accomplishments and future prospects;
•
our revenue growth and expected future revenue rates;
•
our book value and financial condition;
•
the existence of goodwill or other intangible value within our
company;
•
our ability (or inability) to pay dividends;
•
external market conditions affecting the healthcare information
technology industry sector;
•
the illiquid nature of an investment in our common stock;
•
the prices at which we sold shares of our convertible preferred
stock;
•
the superior rights and preferences of securities senior to our
common stock at the time of each grant;
•
the likelihood of achieving a liquidity event such as an initial
public offering or sale; and
•
the market prices of publicly traded companies engaged in the
same or similar lines of business.
We believe this to have been a reasonable approach to estimating
the fair value of our common stock for those periods along with
our analyses of comparable companies in our industry and
arm’s-length transactions involving our common stock.
Determining the fair value of our stock requires making complex
and subjective judgments, however, and there is inherent
uncertainty in our estimate of fair value.
The following table presents the grant dates and related
exercise prices of stock options granted to employees in the
year ended December 31, 2006 and the six months ended
June 30, 2007:
The exercise price of all stock options described above was
equal to the estimated fair value of our common stock on the
date of grant, and therefore the intrinsic value of each option
grant was zero.
The exercise price of the stock options granted after
January 1, 2006 was set by the board of directors based
upon, in addition to what is described above, an internal
valuation model. The internal valuation model used the weighted
average of the guideline public company method and the
discounted future cash flow
method. The enterprise value from that analysis was then
utilized in the option pricing method as outlined in the
American Institute of Certified Public Accountants (AICPA)
Technical Practice Aid, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation (Practice Aid). The
exercise price for stock options granted subsequent to
January 1, 2006, was based upon our contemporaneous
valuation completed on a quarterly basis.
We estimated our enterprise value under the guideline public
company method by comparing our company to publicly-traded
companies in our industry group. The companies used for
comparison under the guideline public company method were
selected based on a number of factors, including but not limited
to, the similarity of their industry, business model and similar
financial risk to those of ours. We used those companies that we
believed were closely comparable to ours, based on the above
factors. In determining our enterprise value under this method,
we utilized a risk-adjusted enterprise value multiple to sales
ratio, which ranged from 3.0 to 5.6 during the period from
January 1, 2006 through June 30, 2007, based on the
median of the guideline companies and applied the ratio to the
sales of our company.
We also estimated our enterprise value under the discounted
future cash flow method, which involves applying appropriate
discount rates to estimated cash flows that are based on
forecasts of revenue and costs. Our revenue forecasts were based
on expected market growth rates ranging from 12% to 38% during
the next five years, as well as related assumptions about our
future costs during this period. There is inherent uncertainty
in making these estimates. These assumptions underlying the
estimates are consistent with the plans and estimates that we
use to manage the business. The risks associated with achieving
our forecasts were assessed in selecting the appropriate
discount rates, which was approximately 15% to 17% for all
periods during the period from January 1, 2006 through
June 30, 2007. If different discount rates had been used,
the valuations would have been different.
The enterprise value was then allocated to preferred and common
shares using the option-pricing method. The option-pricing
method involves making estimates of the anticipated timing of a
potential liquidity event such as a sale of our company or an
initial public offering, and estimates of the volatility of our
equity securities. The anticipated timing is based on the plans
of our board and management. Estimating the volatility of the
share price of a privately held company is complex because there
is no readily available market for the shares. We estimated the
volatility of our stock based on available information on
volatility of stocks of publicly traded companies in the
industry. Had we used different estimates of volatility, the
allocations between preferred and common shares would have been
different.
The determination of the deemed fair value of our common stock
has involved significant judgments, assumptions, estimates and
complexities that impact the amount of deferred stock-based
compensation recorded and the resulting amortization in future
periods. If we had made different assumptions, the amount of our
deferred stock-based compensation, stock-based compensation
expense, operating loss, net loss attributable to common
stockholders and net loss per share attributable to common
stockholders amounts could have been significantly different. We
believe that we have used reasonable methodologies, approaches
and assumptions to determine the fair value of our common stock
and that stock-based deferred compensation and related
amortization have been recorded properly for accounting purposes.
As discussed more fully in Note 10 to our consolidated
financial statements which appear elsewhere in this prospectus,
we granted stock options with a weighted average exercise price
of $6.08 per share during the twelve months ended
December 31, 2006 and with a weighted average exercise
price of $7.56 per share during the six months ended
June 30, 2007. The increase in weighted average exercise
price resulted from continued growth in our revenue and a
reduction in the net loss. Both of these factors resulted in an
increase in common stock value when factored into our internal
valuation model.
For each of the stock options described above, the exercise
price was equal to the estimated fair value of our common stock
on the date of grant, as determined by our board of directors.
In making these determinations our board of directors relied
upon the internal valuation model and other factors described
above. Specifically, our board of directors took into account
our operating results, market position and
operating achievements at the time of grant, among other
factors. The primary reasons for the difference between the fair
value of our common stock on each of these dates are as follows:
•
On February 28, 2006, we granted options to purchase an
aggregate of 174,978 shares of our common stock with an
exercise price of $5.26 per share. Total revenues increased
approximately 41.6% from the year ended December 31, 2005
to the year ended December 31, 2006. Total revenue
increased approximately 12.7% for the quarter ended
September 30, 2005 to the quarter ended December 31,2005 and the number of clients and the number of physicians live
on athenaNet also increased by 9 clients and 505 physicians,
respectively, during that same period.
•
On May 4, 2006, we granted options to purchase an aggregate
of 107,702 shares of our common stock with an exercise
price of $5.72 per share. Total revenue increased approximately
9.4% from the quarter ended December 31, 2005 to the
quarter ended March 31, 2006 and the number of clients and
the number of physicians live on athenaNet also increased by 58
clients and 166 physicians, respectively, during that same
period. Additionally, in April 2006, the first beta client went
live on our athenaClinicals service offering. A beta-client is a
client willing to implement a test version of our
athenaClinicals product. They agree to do so with the
understanding that the product is being used for testing
purposes in an attempt to identify and correct product errors.
•
On July 27, 2006, we granted options to purchase an
aggregate of 66,652 shares of our common stock with an
exercise price of $6.16 per share. Total revenue increased
approximately 10.6% from the quarter ended March 31, 2006
to the quarter ended June 30, 2006 and the number of
clients and the number of physicians live on athenaNet also
increased by 48 clients and 284 physicians, respectively, during
that same period. Additionally, during this period we announced
several strategic partner alliances, including our announcement
on June 30, 2006 of a channel marketing agreement with a
leading provider of advanced clinical, financial and management
software and service solutions.
•
On October 31, 2006 and November 3, 2006, we granted
options to purchase an aggregate of 1,000 and
352,200 shares, respectively, of our common stock with an
exercise price of $6.58 per share. Total revenue increased
approximately 5.8% from the quarter ended June 30, 2006 to
the quarter ended September 30, 2006 and the number of
clients and the number of physicians live on athenaNet also
increased by 59 clients and 587 physicians, respectively, during
that same period. Additionally, in September 2006, we hired a
chief operations officer.
•
On February 7, 2007 and March 15, 2007, we granted
options to purchase an aggregate of 77,100 and
391,250 shares of our common stock with exercise prices of
$7.20 and $7.39 per share, respectively. Total revenue increased
approximately 6.2% from the quarter ended September 30,2006 to the quarter ended December 31, 2006 and the number
of clients and the number of physicians live on athenaNet also
increased by 72 clients and 313 physicians, respectively, during
that same period. Additionally, during this period we announced
several strategic partner alliances and we first began to offer
our athenaClinicals service offering.
•
On May 3, 2007, we granted options to purchase an aggregate
of 52,900 shares of our common stock with an exercise price
of $9.30 per share. Total revenue increased approximately 5.3%
from the quarter ended December 31, 2006 to the quarter
ended March 31, 2007 and the number of clients and the
number of physicians live on athenaNet also increased by 31
clients and 265 physicians, respectively, during that same
period. In addition, new client implementations during this
period occurred at a rate above those experienced during any
previous period. Also, in April 2007 the Certification
Commission for Healthcare Information Technology, or CCHIT, an
independent, industry recognized accreditation organization
created to certify EMR applications, certified our
athenaClinicals service offering as meeting the CCHIT ambulatory
electronic health record (EHR) criteria for 2006.
•
On July 27, 2007, we granted options to purchase an
aggregate of 89,500 shares of our common stock with an
exercise price of $15.27 per share. In determining this
significant increase in fair value from May 3, 2007, our
board of directors took into account significant progress in our
business since the
earlier date in terms of continuing revenue growth and
increasing client acceptance of our athenaClinicals service
offering. Specifically:
•
total revenue increased approximately 11.6% from the quarter
ended March 31, 2007 to the quarter ended June 30,2007 and the number of clients and the number of physicians live
on athenaNet also increased by 68 clients and 504
physicians, respectively, during that same period;
•
in the month of June 2007, our income from operations surpassed
breakeven for the first time in our company’s history with
revenues for the month surpassing $8.5 million for the
first time in our company’s history;
•
on May 24, 2007 we signed a marketing and sales agreement
with PSS World Medical Shared Services, Inc., or PSS, for
the marketing and sales of athenaClinicals and athenaCollector,
and during this period we announced that one of the
nation’s leading academic health care organizations,
comprised of nearly 200 physicians, selected athenaCollector for
its physician organization, representing one of the largest
client additions in our company’s history;
•
the number of physicians using our athenaClinicals service
offering exceeded 100, an important milestone for this new
service offering;
•
on June 29, 2007, certain of our existing stockholders sold
to PSS an aggregate of 1,470,589 shares of our previously
issued and outstanding convertible preferred stock for an
aggregate purchase price of $22.5 million, equating to a
per share price of $15.30 per share; and
•
finally, in late June 2007, we filed a registration statement
with the Securities and Exchange Commission for our initial
public offering.
Based on an assumed initial public offering price of
$ , which is the midpoint of the
price range set forth on the cover page of this prospectus, the
intrinsic value of the options outstanding at June 30,2007, was $ million, of which
$ million related to vested
options and $ million related
to unvested options.
Income
Taxes
We are subject to federal and various state income taxes in the
United States, and we use estimates in determining our provision
and related deferred tax assets. At December 31, 2006, our
deferred tax assets consisted primarily of federal and state net
operating loss carry forwards, research and development credit
carry forwards, and temporary differences between the book and
tax bases of certain assets and liabilities.
We assess the likelihood that deferred tax assets will be
realized, and we recognize a valuation allowance if it is more
likely than not that some portion of the deferred tax assets
will not be realized. This assessment requires judgment as to
the likelihood and amounts of future taxable income by tax
jurisdiction. At December 31, 2006, we had a full valuation
allowance against our deferred tax assets. Although we believe
that our tax estimates are reasonable, the ultimate tax
determination involves significant judgment that is subject to
audit by tax authorities in the ordinary course of business.
Revenue. Total revenue from business services
for the six months ended June 30, 2007 was
$46.4 million, an increase of $11.1 million, or 31.4%,
over revenue of $35.3 million for the six months ended
June 30, 2006.
Business Services. Revenue from business
services for the six months ended June 30, 2007 was
$43.3 million, an increase of $10.5 million, or 32%,
over revenue of $32.8 million for the six months ended
June 30, 2006. This increase was primarily due to the
growth in the number of physicians using our services. The
average number of physicians using our services during the six
months ended June 30, 2007 was 7,834, an increase of 1,559
or 25%. Also contributing to this increase was the growth in
related collections on behalf of these physicians. Total
collections generated by these providers which was posted for
the six months ended June 30, 2007 was $1.3 billion an
increase of $345 million, or 37%, over posted collections
of $927 million for the six months ended June 30, 2006.
Implementation and Other. Revenue from
implementations and other sources was $3.2 million for the
six months ended June 30, 2007, an increase of
$0.7 million, or 26%, over revenue of $2.5 million for
the six months ended June 30, 2006. This increase was
driven by new client implementations and increased professional
services for our larger client base.
Direct operating expense. Direct operating
expense for the six months ended June 30, 2007 was
$22.2 million, an increase of $4.7 million, or 27%,
over costs of $17.5 million for the six months ended
June 30, 2006. This increase was primarily due to an
increase in the number of claims that we processed on behalf of
our clients and the related expense of providing services,
including transactions expense and salary and benefits expense.
Additionally, beginning in the six months ended June 30,2007 we are now allocating costs to direct operating expense
related to our launch of athenaClinicals which was previously
included with research and development. The amount of
collections processed for the six months ended June 30,2007 was $1.3 billion, which was 37% higher than for the
six months ended June 30, 2006.
Selling and Marketing Expense. Selling and
marketing expense for the six months ended June 30, 2007
was $8.3 million, an increase of $0.9 million, or 12%,
over costs of $7.4 million for the six months ended
June 30, 2006. This increase was primarily due to increases
in sales commissions and salaries and benefits.
Research and Development Expense. Research and
development expense for the six months ended June 30, 2007
was $3.6 million, an increase of $1.1 million, or 43%,
over research and development expense of $2.5 million for
the six months ended June 30, 2006. This increase was
primarily due to $0.7 million increase in salaries and
benefits and $0.4 million increase in consulting fees.
General and Administrative Expense. General
and administrative expense for the six months ended
June 30, 2007 was $9.6 million, an increase of
$1.8 million, or 23%, over general and administrative
expenses of $7.8 million for the six months ended
June 30, 2006. This increase was primarily due to
$1.2 million increase in salaries and benefits and a
$0.3 million increase in facility fees and a
$0.3 million increase in professional fees.
Depreciation and Amortization. Depreciation
and amortization expense for the six months ended June 30,2007 was $3.0 million, an increase of $0.1 million, or
3%, from depreciation and amortization of $2.9 million for
the six months ended June 30, 2006. This increase was
primarily due to the larger base of depreciable assets.
Other income (expense). Interest expense, net
for the six months ended June 30, 2007 was
$1.4 million, an increase of $0.3 million, or 27%,
over other income (expense), of $1.1 million for the six
months ended June 30, 2006. The increase is related to an
increase in bank debt, a working capital line of credit and an
equipment line of credit during 2007. The unrealized loss on
warrant liability for the six months ended June 30, 2007
was $3.7 million an increase of $3.4 million from
$0.3 million for the six months ended June 30, 2006,
as a result of the change in the fair value of the warrants.
This change in the fair value of the warrant is attributable to
the appreciation in the fair value of our common stock during
this period, which increased from $5.26 to $9.30 per share.
These warrants will convert to warrants to purchase shares of
common stock upon the consummation of this offering, at which
time the existing liability will be reclassified to additional
paid-in-capital.
Also included in other expense for the six months ended
June 30, 2007, was $0.1 million in loss on disposal of
assets and $0.6 million of financial advisor fees paid by
shareholders.
Revenue. Total revenue for 2006 was
$75.8 million, an increase of $22.3 million, or 42%,
over revenue of $53.5 million for 2005. This increase was
almost entirely due to an increase in business services revenue.
Business Services Revenue. Revenue from
business services for 2006 was $70.7 million, an increase
of $21.7 million, or 44%, over revenue of
$49.0 million for 2005. This increase was primarily due to
the growth in the number of physicians using our services. The
average number of active physicians using our services in 2006
was 6,718, an increase of 1,521, or 29%, over the 5,197
physicians in 2005. Also contributing to this increase was
growth in collections on behalf of these physicians. These
providers generated collections posted in 2006 of
$2.0 billion, which was a 45% increase over
$1.4 billion posted collections in 2005.
Implementation and Other Revenue. Revenue from
implementations and other sources was $5.2 million, an
increase of $0.6 million, or 13%, over revenue of
$4.6 million for 2005. This increase was primarily due to
the expansion of our client base, which required additional
implementation services.
Direct operating expense. Direct operating
expense for 2006 was $36.5 million, an increase of
$9.0 million, or 33%, over direct operating expense of
$27.5 million for 2005. This increase was primarily due to
an increase in the number of claims that we processed on behalf
of our clients and the related expense of providing services,
including transactions expense and salary and benefits expense.
The amount of collections processed for our clients in 2006 was
$2.0 billion, which was 45% higher than in 2005.
Selling and Marketing Expense. Selling and
marketing expense for 2006 was $15.6 million, an increase
of $4.0 million, or 34%, over sales and marketing expense
of $11.7 million for 2005. This increase was primarily due
to a $1.7 million increase in salaries and benefits, a
$1.7 million increase in marketing programs and a
$0.5 million increase in travel and other expenses.
Research and Development Expense. Research and
development expense for 2006 was $6.9 million, an increase
of $4.0 million, or 136%, over research and development
expense of $2.9 million for 2005. This increase was
primarily due to a $2.8 million increase in salaries and
benefits related to the development of our
athenaClinicals product and other product and business
development initiatives, a $0.6 million increase in
consulting fees, a $0.4 million increase in expenses
related to the expansion of Athena Net India and a
$0.2 million increase in travel and other expenses of our
research team.
General and Administrative Expense. General
and administrative expense for 2006 was $16.3 million, an
increase of $0.8 million, or 5%, over general and
administrative expense of $15.5 million for 2005. This
increase was primarily due to an increase in salaries and
benefits.
Depreciation and Amortization
Expense. Depreciation and amortization expense
for 2006 was $6.2 million, an increase of
$0.8 million, or 14%, from depreciation and amortization
expense of $5.5 million for 2005. This increase was
primarily due to the larger base of depreciable assets in 2006.
Other Income (Expense). Interest expense, net,
for 2006 was $2.3 million, an increase of
$0.5 million, or 31%, over interest expense, net, of
$1.8 million for 2005. This increase was related to an
increase in bank debt, a working capital line of credit and an
equipment line of credit during 2006, offset by an increase in
interest income associated with an increase in cash, cash
equivalents and short-term investments. The unrealized loss on
warrant liability for 2006 was $0.7 million and represents
the remeasurement of the fair value of warrants.
Revenue. Total revenue for 2005 was
$53.5 million, an increase of $14.6 million, or 38%,
over revenue of $38.9 million for 2004. This increase was
due almost entirely to an increase in business services revenue.
Business Services Revenue. Revenue from
business services for 2005 was $49.0 million, an increase
of $13.9 million, or 40%, over revenue of
$35.0 million for 2004. This increase was primarily due to
the growth in the number of physicians using our services. The
average number of active physicians using our services in 2005
was 5,197, an increase of 1,453, or 39%, over 3,744 physicians
in 2004. Also contributing to this increase was growth in
collections on behalf of these physicians. These providers
generated posted collections of $1.4 billion in 2005, which
was a 39% increase over $972 million posted collections in
2004.
Implementation and Other Revenue. Revenue from
implementations and other sources was $4.6 million, an
increase of $0.7 million, or 17%, over revenue of
$3.9 million for 2004. This increase was primarily due to
the expansion of our client base and increased professional
services provided to that base.
Direct Operating Expense. The direct operating
expense for 2005 was $27.5 million, an increase of
$7.0 million, or 34%, over direct operating expense of
$20.5 million for 2005. This increase was primarily due to
an increase in the number of claims that we processed on behalf
of our clients and the related expense of providing services,
including transactions expense and salary and benefits expense.
The amount of collections processed in 2005 was
$1.4 billion or 39% higher than 2004.
Selling and Marketing Expense. Selling and
marketing expense for 2005 was $11.7 million, an increase
of $4.0 million, or 53%, over selling and marketing expense
of $7.7 million for 2004. This increase was primarily due
to a $2.0 million increase in marketing programs, a
$1.6 million increase in salaries and benefits and a
$0.4 million increase in travel expense.
Research and Development Expense. Research and
development expense for 2005 was $2.9 million, an increase
of $1.4 million, or 97%, over research and development
expense of $1.5 million for 2004. This increase was
primarily due to a $0.9 million increase in salaries and
benefits and a $0.5 million increase in expense related to
the expansion of Athena Net India.
General and Administrative Expense. General
and administrative expense for 2005 was $15.5 million, an
increase of $7.0 million, or 83%, over general and
administrative expense of $8.5 million for 2004. This
increase was primarily due to a $3.2 million increase in
rent and related expense associated with our move into the
Watertown, Massachusetts facility, a $1.2 million increase
in salaries and benefits, a $0.6 million increase in
consulting fees and a $0.3 million increase in utility
expenses.
Depreciation and Amortization
Expense. Depreciation and amortization expense
for 2005 was $5.5 million, an increase of
$2.3 million, or 74%, from depreciation and amortization
expense of $3.2 million for 2004. The increase was
primarily due to the larger base of depreciable assets in 2005,
due to capital expenditures related to company infrastructure
and client servicing capacity.
Other Income (Expense). Interest expense, net,
for 2005 was $1.8 million, an increase of
$0.5 million, or 44%, over interest expense, net, of
$1.2 million for 2004. The increase is related to an
increase in bank debt, a working capital line of credit and an
equipment line of credit during 2005.
The following table presents our unaudited consolidated
quarterly results of operations for the eight fiscal quarters
ended June 30, 2007. This information is derived from our
unaudited consolidated financial statements, and includes all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for fair statement of our financial
position and operating results for the quarters presented.
Operating results for these periods are not necessarily
indicative of the operating results for a full year. Historical
results are not necessarily indicative of the results to be
expected in future periods. You should read this data together
with our consolidated financial statements and the related notes
to these financial statements included elsewhere in this
prospectus.
During these periods, total revenue increased each quarter,
primarily due to the expansion of our client base and growth in
revenue collections made on behalf of our existing clients. Our
direct operating expense and selling and marketing expense also
increased each quarter, primarily due to an increase in salary
and benefit expense as we expanded our operations to serve and
sell to our increasing client base. Research and development
expense increased in each quarter during this period, primarily
due to our development of athenaClinicals and other product and
business development initiatives as well as the expansion of
Athena Net India. General and administrative expense fluctuated
during this period, with an overall upward trend, primarily as a
result of our hiring additional personnel in connection with our
anticipated growth and incurred expenses in preparation for
becoming a public company.
We have experienced consistent revenue growth over the past
several years, which is primarily the result of a steady
increase in the number of physicians and other medical providers
served by us. This sequential revenue increase is driven by the
implementation of new accounts and the retention of existing
accounts. Because we earn ongoing fees, a large percentage of
each quarter’s revenue comes from accounts that also
contributed to the revenues of the preceding quarter. The vast
majority of our clients pay for services as a percentage of
collections posted, so the company’s revenue is highly
correlated to the underlying collections of our clients. The
provision of medical services by our clients takes place
throughout the year, but there are seasonal factors that affect
the total volume of patients seen by our clients, which in turn
impacts the collections per physician and our related revenues
per physician. In particular, for patient visits that are
discretionary or elective, we typically see a reduction of
office visits during the late summer and during the end of year
holiday season, which leads to a decline in collections by our
physician clients of about 30 to 50 days later. Therefore,
the negative impact on client collections and related company
revenues per physician is generally experienced in the first and
third calendar quarters of the year. In our experience, client
collections and related company revenues per physician are
seasonally stronger in the second and fourth calendar quarters
of each year.
Liquidity
and Capital Resources
At June 30, 2007 our principal sources of liquidity were
cash and cash equivalents and short-term investments totaling
$12.7 million. We have funded our growth primarily through
the private sale of equity securities, totaling approximately
$50.6 million as well as through long-term debt and working
capital and equipment-financing loans. Our total indebtedness
was $32.0 million at June 30, 2007 and was comprised
mainly of term debt which is subordinated to our senior debt.
Cash used in operating activities during the six months ended
June 30, 2007 was $.1 million and consisted of a net
loss of $6.1 million and $3.3 million utilized by
working capital and other activities, offset by positive
non-cash adjustments of $3.0 million related to
depreciation and amortization expense, $3.8 million of
warrant expense, $1.3 million of non-cash rent expense,
$0.6 million of non-cash stock compensation, and
$0.6 million of financial adviser fees paid by
shareholders. Cash used by working capital and other activities
was primarily attributable to a $0.2 million increase in
accrued expense, a $1.7 million decrease in deferred rent,
a $2.6 million increase in accounts receivable, a
$0.4 million decrease in prepaid and other assets, and a
$0.4 million decrease in accounts payable, offset in part
by a $0.8 million increase in deferred revenue. These
changes were attributable to growth in the size of our business
and in related direct operating expense.
Cash used in operating activities during the year ended
December 31, 2006 was $2.1 million and consisted of a
net loss of $9.2 million and $3.5 million utilized by
working capital and other activities, offset by positive
non-cash adjustments of $6.2 million related to
depreciation and amortization expense and $2.6 million of
non-cash rent expense. Cash used by working capital and other
activities was primarily attributable to a $3.3 million
decrease in deferred rent and a $3.1 million increase in
accounts receivable, offset in part by a $1.8 million
increase in accrued expense and a $0.7 million increase in
deferred revenue. These changes were attributable to growth in
the size of our business and in related direct operating expense.
Cash provided by operating activities during the year ended
December 31, 2005 was $6.0 million and consisted of a
net loss of $11.4 million offset by $7.9 million
provided by working capital and other activities, non-cash
adjustments of $5.5 million related to depreciation and
amortization expense and $3.2 million related
to non-cash rent expense. Cash provided by working capital and
other activities was primarily attributable to a
$9.4 million increase in deferred rent and a
$2.0 million increase in accrued expense, offset by
$1.8 million increase in accounts receivable and a
$1.3 million decrease in accounts payable. The change in
deferred rent was caused by the build out of our new company
headquarters and related inducements to enter into a lease for
that facility by the property owner. In addition, these changes
were attributable to growth in the size of our business and in
related direct operating expense. Cash provided by operating
activities during the year ended December 31, 2004 was
$0.2 million and consisted of a net loss of
$3.6 million offset by a non-cash adjustment of
$3.2 million related to depreciation and amortization
expense and $0.1 million provided by working capital and
other activities. Cash provided by working capital and other
activities was primarily attributable to a $1.3 million
increase in accrued expense and a $0.6 million increase in
accounts payable, offset by a $1.7 million increase in
accounts receivable and a $0.2 million increase in prepaid
expenses and other current assets. These changes were
attributable to growth in the size of our business and in
related direct operating expense.
Net cash generated by investing activities was $4.0 million
for the six months ended June 30, 2007, which consisted of
purchases of investments of $2.0 million, purchases of
property, plant and equipment, or PP&E, of
$1.5 million and expenditures for internal development of
the athenaClinicals application of $0.5 million. This
outgoing investment cash flow was offset by positive investment
cash flow of $7.4 million, from proceeds of the sales and
maturities of investments and the return of $0.6 million in
restricted cash. Net cash used in investing activities was
$10.4 million during 2006, $10.3 million during 2005
and $10.1 million during 2004 primarily consisting of
purchases of property and equipment, purchases of investments,
and capitalized software development costs, offset in part by
proceeds from the sales of securities.
Net cash provided by financing activities was $4.3 million
for the six months ended June 30, 2007. This consisted of
$1.8 million of net proceeds under a line of credit,
$4.6 million of proceeds from long term debt, and
$.5 million in proceeds from exercises of stock options
offset by $1.6 million of payments for long term debt and
$1.0 million in deferred offering costs. Net cash provided
by financing activities was $7.3 million during 2006,
consisting primarily of $4.3 million of net borrowings
under a bank term loan and $2.8 million of net borrowings
under a line of credit. Net cash provided by financing
activities was $8.9 million during 2005 and
$8.5 million during 2004, consisting primarily of net
borrowing under a bank term loan and a line of credit as well as
the net proceeds from the issuance of convertible preferred
stock.
At December 31, 2006, we had available, subject to review
and possible adjustment, federal and state net operating loss
carry forwards of approximately $55.6 million and
$23.4 million, respectively, to be used to offset future
federal and state taxable income. These net operating loss carry
forwards will expire through 2026. We also have federal and
state research and development tax credit carry forwards of
approximately $0.7 million and $0.3 million,
respectively, available to offset future federal and state
taxes. Such credits expire at various times through 2021. The
utilization of net operating loss and research and development
tax credit carry forwards may be subject to annual limitations
under Sections 382 and 383 of the Internal Revenue Code.
Given our current cash and cash equivalents, short-term
investments, restricted cash, accounts receivable and funds
available under our existing line of credit, we believe that we
will have sufficient liquidity to fund our business and meet our
contractual obligations for at least the next twelve months. We
may increase our capital expenditures consistent with our
anticipated growth in infrastructure and personnel, and as we
expand our national presence. In addition, we may pursue
acquisitions or investments in complementary businesses or
technologies or experience unexpected operating losses, in which
case we may need to raise additional funds sooner than expected.
Accordingly, we may need to engage in private or public equity
or debt financings to secure additional funds. If we raise
additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to
those of holders of our common stock, including shares of common
stock sold in this offering. Any debt financing obtained by us
in the future could involve restrictive covenants relating to
our capital raising activities and other financial and
operational matters, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be
able to obtain additional financing on terms favorable to us,
if at all. If we are unable to obtain required financing on
terms satisfactory to us, our ability to continue to support our
business growth and to respond to business challenges could be
significantly limited. Beyond the twelve month period, we will
seek to maintain sufficient liquidity through continued
improvements in the size and profitability of our business and
through management of our cash resources and our credit
arrangements.
The company makes investments in PP&E and in software
development on an ongoing basis. Our PP&E investments
consist primarily of technology infrastructure to provide
capacity for expansion of our client base, including computers
and related equipment in our data centers and infrastructure in
our service operations. Our software development investments
consist primarily of company-managed design, development,
testing and deployment of new application functionality. Because
the practice management component of athenaNet is considered
mature, we expense nearly all software development for this
component of our platform as incurred. For the EMR component of
athenaNet, which is the platform for our athenaClinicals
offering, we capitalize nearly all software development. In
2006, we capitalized $4.1 million in PP&E and
$1.1 million in software development. During the six months
ended June 30, 2007, we capitalized $1.5 million of
PP&E and $0.5 million of software development. We
expect capital expenditures for 2007 to range from
$5.9 million to $6.3 million.
Credit
Facilities
Line
of Credit
We have a revolving loan and security agreement with a bank,
which has a maximum available borrowing amount of
$10.0 million at December 31, 2006 and matures in
August 2008. Borrowings under the agreement are limited by our
outstanding accounts receivable balance, and may be further
limited by accounts receivable concentrations. Under this
agreement, we may not borrow more than 80% of our accounts
receivable that are less than 90 days old and no
receivables in excess of 25% of our total accounts receivable
may be included in that borrowing limit. Use of this facility is
also permitted only when our adjusted quick ratio is at or
greater than 0.9. This ratio is defined as cash, cash
equivalents, investments and accounts receivable over current
liabilities excluding deferred revenue. As of June 30,2007, we are in compliance with each of these provisions. The
agreement is collateralized by a first security interest in
receivables, deposit accounts and investments of athenahealth
that have not been pledged as collateral under previous
outstanding loan agreements and a second priority interest in
intellectual property. Principal amounts outstanding under the
agreement accrue interest at a per annum rate equal to the
bank’s prime rate. Beginning in January 2007, principal
amounts outstanding under the agreement will accrue interest at
a per annum rate equal to the bank’s prime rate. We had
$9.0 million and $7.2 million outstanding under this
agreement at June 30, 2007 and December 31, 2006,
respectively. The available borrowing under the agreement at
June 30, 2007 was approximately $35,000. We expect to repay
all amounts outstanding under this facility from the proceeds of
this offering and maintain this line of credit for the duration
of its term. See “Use of Proceeds.”
Equipment
Lines of Credit
As of December 31, 2006, there was a total of
$6.5 million in aggregate principal amount outstanding
under a series of promissory notes and security agreements with
various finance companies. These amounts are secured by specific
equipment, they accrue interest at a weighted-average rate of
10.6% per annum and they are payable on a monthly basis through
December 2009.
In March 2007 and May 2007, we entered into additional
promissory notes that aggregated $1.2 million in principal
amount. These amounts are also secured by specific equipment,
they accrue interest at a weighted-average rate of 11.6% per
annum and they are payable on a monthly basis through May 2010.
In June 2007, we entered into an additional promissory note that
aggregated $0.3 million in principal amount. This amount is
secured by specific equipment and accrues interest at a rate of
4.6% per annum and is payable on a monthly basis through June
2010.
We expect to repay all but this most recent equipment line of
credit from the proceeds of this offering. See “Use of
Proceeds.”
We have contractual obligations under our bank debt, a working
capital line of credit and an equipment line of credit. We also
maintain operating leases for property and certain office
equipment. The following table summarizes our long-term
contractual obligations and commitments as of December 31,2006:
Payments Due by Period
(in thousands)
Less
Than 1
After 5
Total
Year
1-3 Years
4-5 Years
Years
Long-term debt
$
20,469
$
3,116
$
17,353
$
—
$
—
Working capital line
7,204
7,204
—
—
—
Operating lease obligations
35,928
3,655
11,801
9,102
11,370
Total
$
63,602
$
13,975
$
29,154
$
9,102
$
11,370
These amounts include interest payments of $2,684,110 and
$1,766,366 that would be due in less than one year and one to
three years as we anticipate repaying our outstanding
indebtedness with proceeds from this offering.
The working capital line and the portion of equipment lines of
credit included in long-term debt are described above under
“— Credit Facilities.” Also included in long-term
debt is a term loan with a finance company with an outstanding
balance of $14.0 million at December 31, 2006 which
increased to $17.0 million at June 30, 2007, which we
intend to repay from the proceeds of this offering. See
“Use of Proceeds.” Under the terms of the agreement,
the term loan would have to be repaid in thirty monthly
installments starting February 1, 2008.
The commitments under our operating leases shown above consist
primarily of lease payments for our Watertown, Massachusetts
corporate headquarters and our Chennai, India subsidiary
location.
Off-Balance
Sheet Arrangements
As of June 30, 2007 and 2006 and December 31, 2006,
2005 and 2004, we did not have any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. Other than our
operating leases for office space and computer equipment, we do
not engage in off-balance sheet financing arrangements.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), which
establishes a framework for measuring fair value and expands
disclosures about the use of fair value measurements and
liabilities in interim and annual reporting periods subsequent
to initial recognition. Prior to the issuance of SFAS 157,
which emphasizes that fair value is a market-based measurement
and not an entity-specific measurement, there were different
definitions of fair value and limited definitions for applying
those definitions under generally accepted accounting
principles. SFAS 157 is effective for us on a prospective
basis for the reporting period beginning January 1, 2008.
We are evaluating the impact of SFAS 157 on our financial
position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands opportunities to use
fair value measurements in financial reporting and permits
entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. We have
not decided if we will early adopt SFAS 159 or if we will
choose to measure any eligible financial assets and liabilities
at fair value.
Quantitative
and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk. Our results of
operations and cash flows are subject to fluctuations due to
changes in the Indian rupee. None of our consolidated revenues
are generated outside the United States. None of our vendor
relationships, including our contract with our offshore service
provider Vision Healthsource for work performed in India, is
denominated in any currency other than the U.S. dollar. In
2006 and for the six months ended June 30, 2007, 0.7% and
0.8%, respectively, of our expenses occurred in our direct
subsidiary in Chennai, India and were incurred in Indian rupees.
We therefore believe that the risk of a significant impact on
our operating income from foreign currency fluctuations is not
substantial.
Interest Rate Sensitivity. We had unrestricted
cash, cash equivalents and short-term investments totaling
$12.7 million at June 30, 2007. These amounts are held
for working capital purposes and were invested primarily in
deposits, money market funds and short-term, interest-bearing,
investment-grade securities. In addition, some of the net
proceeds of this offering may be invested in short-term,
interest-bearing, investment-grade securities pending their
application. Due to the short-term nature of these investments,
we believe that we do not have any material exposure to changes
in the fair value of our investment portfolio as a result of
changes in interest rates. The value of these securities,
however, will be subject to interest rate risk and could fall in
value if interest rates rise.
We have bank debt and a line of credit which bears interest
based upon the prime rate. At June 30, 2007, there was an
aggregate of $32.0 million outstanding under these
borrowing arrangements. If the prime rate fluctuated by 10% as
of June 30, 2007, interest expense would have fluctuated by
approximately $0.3 million.
athenahealth is a provider of
internet-based
business services for physician practices. Our service offerings
are based on three integrated components: our proprietary
internet-based software, our continually updated database of
payer reimbursement process rules and our back-office service
operations that perform administrative aspects of billing and
clinical data management for physician practices. Our principal
offering, athenaCollector, automates and manages billing-related
functions for physician practices and includes a medical
practice management platform. We have also developed a service
offering, athenaClinicals, that automates and manages medical
record-related functions for physician practices and includes an
electronic medical record, or EMR, platform. We refer to
athenaCollector as our revenue cycle management service and
athenaClinicals as our clinical cycle management service. Our
services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
Our services require relatively modest initial investment, are
highly adaptable to changing healthcare and technology trends
and are designed to generate significant financial benefit for
our physician clients. Our results are directly tied to the
financial performance of our clients, because the majority of
our revenue is based on a percentage of their collections. Our
services have enabled our clients, on average, to resolve 93% of
their claims to payers on their first submission attempt,
compared to an industry average we estimate to be 70%. Our
internal studies show that we have reduced the days in accounts
receivable of our client base by more than 30%. We have
experienced a contract renewal rate of at least 97% in each of
the last five years, and this persistent client base drives a
predictable revenue stream. In 2006, we generated revenue of
$75.8 million from the sale of our services, compared to
$53.5 million in 2005. As of June 30, 2007, there were
more than 10,500 medical providers, including more than 8,000
physicians, using our services across 32 states and 54
medical specialties.
We believe our innovative internet-based business services model
represents a significant departure from the traditional model of
physicians relying upon
on-site or
outsourced administrative staff, using stand-alone software that
is not internet-based, to run the back-office aspects of their
practices. By continuously improving all three components of our
services, we drive improvement in the business results of our
network of clients: we typically update our centralized
internet-based software every six to eight weeks; we add more
than 100 rules on average each month to our database of payer
rules; and we regularly improve our integrated back-office
service operations with more efficient technology and processes.
Additionally, as our database of aggregated health information
grows, we are able to use this information to further the
strategic position of our company. For example, in June 2006 we
introduced our annual PayerView rankings of health plans’
performance with respect to the speed and accuracy of
reimbursement processes at different insurance companies, an
initiative that we believe increases our profile in the provider
and payer communities.
In the last five years, we have focused on developing our
proprietary internet-based software application and integrated
service operations to expand our client base. During this period
we undertook no acquisitions. In 2006, we formed a subsidiary in
India to complement our U.S.-based software development
activities and to work closely with our business partners in
India.
Industry
Overview
We believe that the market we address is defined by the total
annual physician office expenditures in the United States for
revenue and clinical cycle management solutions and by the total
annual physician office collections for services rendered. We
estimate that total annual physician office expenditures in the
United States for revenue and clinical cycle management
solutions exceed $18 billion and $9 billion,
respectively. These expenditures are primarily comprised of
salary, wages and benefits for in-house administrative staff and
third-party practice management and EMR software. In 2005,
physicians collected approximately $420 billion for
services rendered, representing 21% of total health care
industry expenditures of $2.0 trillion according to
the U.S. Centers for Medicare and Medicaid Services. From
2000 to 2005, payments to physicians increased by an average of
7.7% per year.
In addition, growth in managed care has increased the complexity
of physician practice reimbursement. Managed care plans
typically create reimbursement structures with greater
complexity than previous methods, placing greater responsibility
on the physician practice to capture and provide appropriate
data to obtain payments. Also, despite substantial consolidation
in the number of managed care organizations over the last
decade, most of the legacy information technology platforms used
to manage the plans operated by these companies have remained in
place. As a result of this increasing complexity, physician
practices must keep track of multiple plan designs and
processing requirements to ensure appropriate payment for
services rendered.
Physician office-based billing activities that are required to
ensure appropriate payment for services rendered have increased
in number and complexity for the following reasons:
•
Diversity of health benefit plan
design. Health insurers have introduced a wide
range of benefit structures, many of which are customized to
unique goals of particular employer groups. This has resulted in
an increase in rules regarding who is eligible for healthcare
services, what healthcare services are eligible for
reimbursement and who is responsible for payment of healthcare
services delivered.
•
Dynamic nature of health benefit plan
design. Health insurers continuously update their
reimbursement rules based on ongoing monitoring of consumption
patterns, in response to new medical products and procedures,
and to address changing employer demands. As these changes are
made frequently throughout the year and are typically specific
to each individual health plan, physician practices need to be
continually aware of this dynamic element of the reimbursement
cycle as it could impact overall reimbursement and specific
workflow.
•
Proliferation of new payment models. New
health benefit plans and reimbursement structures have
considerably modified the ways in which physician practices are
paid. For example, there is an increasing trend toward consumer
driven health plans, or CDHPs, that require a far greater
portion of fees to be paid by the consumer, typically until a
pre-specified threshold is achieved. Care-based initiatives,
including pay-for-performance, or P4P programs, which provide
reimbursement incentives centered around capture and submission
of specified clinical information have dramatically increased
the administrative and clinical documentation burden of the
physician practice.
•
Changes in the regulatory environment. The
Health Insurance Portability and Accountability Act, or HIPAA,
required changes in the way private health information is
handled, mandated new data formats for the health insurance
industry and created new security standards. As part of HIPAA,
adoption of National Provider Identifiers affects physician
office billing and collection workflow requirements.
In addition to administering typical small business functions,
smaller physician practices must invest significant time and
resources in activities that are required to secure
reimbursement from third party payers or patients and process
inbound and outbound communications related to physician orders
to laboratories and pharmacies. In order to process these
communications, physician offices often manipulate locally
installed software, execute paper-based and fax-based
communications to and from payers and conduct telephone-based
discussions with payers and intermediaries to resolve unpaid
claims or to inquire about the status of transactions.
The
Established Model
Currently, the majority of physician practices bill for their
services in one of two ways, either purchasing, installing and
operating locally installed practice management software or
hiring a third-party billing service to collect billing-related
information and input the information into a locally installed
software system. In almost all instances, the solutions are
installed and operated at the clinic by the administrative
personnel on staff. As the complexity and number of health
benefit plan payer rules has increased, the ability of locally
installed software solutions to keep up with new and revised
payer rules has lagged this trend, leading to higher levels
of unpaid claims, prolonged billing cycles and increased
clinical inefficiencies. While locally installed software has
been shown to provide improvement in physician practice
efficiency and collections relative to paper-based systems, we
believe such software alone is not suited for today’s
dynamic and increasingly complex healthcare system.
At present, we estimate that 70% of all medical claims submitted
to payers are resolved on the first submission attempt, which we
refer to as a practice’s first pass resolution rate.
Medical practices typically will attempt to fix a denied claim
and then resubmit it for payment, frequently leading to multiple
cycles of submission and rejection. In addition to the time and
cost of these activities, medical offices typically stop seeking
reimbursement (and write off associated receivables) for
approximately ten percent of their medical claims. Beyond the
high rate of claim rejection that typically occurs, it also is
common for physicians to be paid at levels below contracted
amounts due to administrative error, contract complexity or
other factors.
Despite advances in practice management software to address the
administrative needs of the physician office, the billing,
collections and medical record management functions remain
expensive, inefficient and challenging for many physician
practice groups. We believe that established locally installed
physician practice management software has generally suffered
from the following challenges:
•
Software is static. Payer rules change
continuously and the systems used to seek reimbursement require
constant updating to remain accurate. By not being linked to a
centrally-hosted, continuously updated knowledge base of payer
rules, software typically cannot reflect real-time changes based
upon health benefit plan specific requirements. Additionally,
since most software vendors are not in the business of
processing claims, they are often unaware of the creation of new
payer rules and changes to existing payer rules. As a result,
physician practices typically have the responsibility to
navigate this complex and dynamic reimbursement system in order
to submit accurate and complete claims. We believe their
inability to keep current on these rules changes is the single
largest factor leading to claims denials and diverting time and
resources away from revenue and clinical cycle workflow.
•
Software requires reliance on physician office
personnel. Physician offices have difficulty
managing the increased complexity of billing, collections and
medical record management because they lack the necessary
infrastructure and suffer from a high staff turnover rate.
Despite attempts to automate workflow, many software solutions
still require that a number of payer interactions be executed
manually via paper or phone. These manual interactions include
insurance product monitoring, insurance eligibility, claims
submission, claims tracking, remittance posting, denials
management, payment processing, formatting of lab requisitions,
submitting of lab requisitions, monitoring and classification of
all inbound faxes. These tasks are prone to human error, are
inefficient and require the accumulation of rules and claims
processing knowledge. Given that employee clinic turnover in
physician offices averages
10-25%
annually, critical reimbursement knowledge can be lost.
•
Software vendors are not paid on results. Most
established software companies operate under a business model
that does not directly incentivize them to improve their
client’s financial results. The established software
business model involves a substantial upfront license payment in
addition to ongoing maintenance fees. While the goal of practice
management software is to improve reimbursement and clinical
efficiency, realizing these efficiencies still largely rests on
the physician office’s administrative staff.
Traditional outsourced back office service providers do not
compensate significantly for these deficiencies of the locally
installed software model. These service providers generally rely
on third-party software that suffers from the same deficiencies
that physicians experience when they perform their own back
office processing operations. The software often is not
connected to payer rules that can be enforced in real-time by
office staff throughout the patient workflow. In addition, these
service providers typically operate discrete databases and
separate processes for each client they serve, which affords
limited advantages of scale, thereby conferring limited cost
advantages to physician practices. Without control over the
software application and without an integrated rules database,
outsourced service providers cannot offer physicians the
benefits of our internet-based business service model.
The payer universe is dynamic and continuously growing in
complexity as rules are changed and new rules are added, making
it extremely difficult for physician practices, and even payers,
to effectively manage the reimbursement rules landscape. While
locally installed software has struggled to meet these
challenges, the Internet has developed in the broader economy
into a reliable and efficient medium that opens the door to
entirely new ways of performing business functions. The Internet
is ideally suited to centralization of the large-scale research
needed to stay current with payer rules and to the instantaneous
dissemination of this information. The Internet also allows
real-time consolidation and centralized execution of
administrative work across many medical practice locations. As a
result, the health care industry is an ideal industry to benefit
from the efficiency and effectiveness of the Internet as a
delivery platform.
Our
Solution
The dynamic and increasingly complex healthcare market requires
an integrated solution to effectively manage the reimbursement
and clinical landscape. We believe we are the first company to
integrate web-based software, a continually updated database of
payer rules and back-office service operations into a single
internet-based business service for physician practices. We
deliver these services at each critical step in the revenue and
clinical cycle workflow through a combination of software,
knowledge and work:
•
Software. athenaNet, our proprietary web-based
practice management and EMR application, is a workflow
management tool used in every work step that is required to
properly handle billing, collections and medical record
management-related functions. All users across our client-base
simultaneously use the same version of our software application,
which connects them to our continually updated database of payer
rules and to our services team.
•
Knowledge. athenaRules, our proprietary
database of payer rules, enforces physician office workflow
requirements, and is continually updated with payer-specific
coding and documentation information. This knowledge continues
to grow as a result of our years of experience managing back
office service operations for hundreds of physician practices,
including processing medical claims with tens of thousands of
health benefit plans.
•
Work. The athenahealth service operations,
consisting of nearly 400 people in the United States, and more
than 700 people at our off-shore service provider, interact
with clients at all key steps of the revenue and clinical cycle
workflow. These operations include setting up medical providers
for billing, checking the eligibility of scheduled patients
electronically, submitting electronic and paper-based claims to
payers directly or through intermediaries, processing clinical
orders, receiving and processing checks and remittance
information from payers, documenting the result of payers’
responses and evaluating and resubmitting claims denials.
We are economically aligned with our physician practice clients
because payment for our services in most cases is dependent on
the results our services achieve for our clients. As a result of
this approach, the effectiveness of our revenue cycle management
services are borne out by measurable improvements in the
financial performance for physician practices within a short
period of time after they start using our services. These
results include:
•
a successful resolution rate of over 93% on average on the first
submission attempt of claims to payers compared to the national
average which we estimate to be 70%;
•
an average reduction in
days-in-accounts
receivable of more than 30% within 90 days of
implementation;
•
an average increase in the collection rate of approximately 4%;
and
•
an average increase in total collections of 13%.
The positive results of our approach are seen in the significant
growth in clients serviced, collections under management and
overall revenue in each of the preceding seven years.
Lower total cost of the athenahealth
solutions. The cost of our services includes a
modest up-front expenditure, with subsequent costs based on the
amounts collected. This approach eliminates the large and risky
upfront investments in software, hardware, implementation
service and support and additional IT staff often associated
with the established software model. We update our web-based
software every six to eight weeks and we add over 100 new rules
on average each month to our shared payer knowledge base, which
enables our clients to use these new features with minimal
disruption and no incremental cost. Once implemented, only an
Internet connection and a web browser are required to run our
internet-based
practice management system and EMR. By removing cost barriers to
initial adoption, we believe our services-based model provides a
lower total cost to our clients based on the elimination of
future upgrade, training and extra
follow-up
costs associated with the established model.
•
Comprehensive payer rules engine that is continuously
expanded and updated. We believe we have the
largest and most comprehensive continually updated database of
payer reimbursement process rules in the United States. We
collect health benefit plan specific processing information so
that the medical office workflow and the work at our service
operations can be tailored to the requirements of each health
benefit plan. Real-time error alerts automatically triggered by
our rules engine enable our clients to catch billing-related
errors immediately at the beginning of the reimbursement cycle,
fix these errors quickly and easily and generate medical claims
that achieve substantially higher first-pass success rates than
the industry norm. Payer rules are frequently unavailable from
the payers and therefore must be learned from experience. We
have more than 50 full-time equivalent staff focused on finding,
researching, documenting and implementing new rules, enabling
our solution to consistently deliver quantifiably superior
financial results for our clients. Additionally, we discover and
implement even more new rules as new clients connect to our
rules engine. Our other clients benefit from the addition of
these new rules, and this continuous updating increases our
value proposition benefiting both current and future clients.
•
Real-time workflow and process optimization resulting in
improved financial outcomes. Our solution
incorporates a large number of efficient, real-time
communications between the physician practice’s staff and
our rules engine and service operations staff throughout the
patient encounter and billing processes. These process steps
begin prior to the claims submission process, making our
efficient online interaction vital for delivering the financial
performance our clients enjoy. This enables us to stay close to
client needs and constantly upgrade our offerings in order to
continuously improve the effectiveness of our overall service.
These elements ensure we can identify and influence critical
practice workflow steps to maximize billing performance and
deliver improved financial outcomes for our physician clients.
•
Critical mass and access to superior scale and
capabilities. We believe that our service site in
Watertown, Massachusetts is the largest single-site operation in
the United States for physician back-office operations. Our
platform was designed and constructed to enable us to assume
full responsibility for the completion of automated and manual
tasks in the revenue and clinical workflow cycles, while
providing critical tools and knowledge to effectively assist
clients in completing those tasks that must be done
on-site in
the physician practice. By taking on the administrative effort
associated with revenue and clinical workflow, we free our
clients from the burden of performing these laborious tasks in a
time-consuming and expensive manner with insufficient scale to
operate effectively. As a result of our substantial
infrastructure, we can apply a broad array of resources (from
athenahealth, our clients and our off-shore partners) to
cost-effectively address the myriad of discrete tasks within the
revenue and clinical workflow cycles. This approach allows us to
deliver resources, expertise and performance superior to what
any individual physician practice could achieve on its own.
Our mission is to be the most trusted and effective provider of
business services for physician practices. Key elements of our
strategy include:
•
Remaining intensely focused on our clients’
success. Our business model aligns our goals with
our clients’ goals and provides an incentive for us to
continually improve the performance of our clients. We believe
that this approach enables us to maintain client loyalty, to
enhance our reputation and to improve the quality of our
solutions. For instance, we collaborate closely with our clients
to identify the resources required to efficiently manage each
critical step in the revenue and clinical cycle workflow so that
they fully realize the intended benefits of our solutions. We
also provide benchmarking against physician practices as
measured by size, geography and specialty which enables clients
to measure their results against and learn from their peers.
•
Maintaining and growing our payer rules
database. An important component of increasing
value to our clients is that we continue to develop our
centralized payer rules database, athenaRules, based on
experience gained each day across our network of clients. This
allows all of our clients to benefit from our more than 50
full-time equivalent staff focused on finding, researching,
documenting and implementing new payer rules. Our rules engine
development work increases the percentage of transactions that
are successfully executed on the first attempt and reduces the
time to resolution after claims or other transactions are
submitted. Over 100 new rules on average are added to our rules
engine each month and approximately 50% of the rules triggered
each month were added within the previous six months. We intend
to maintain a work environment that fosters creativity and
innovation so that we can continue to attract and retain the
type of employees needed to find, research, document and
implement new payer rules. Additionally, we will discover and
implement even more rules as new clients connect to our rules
engine.
•
Attracting new clients. We estimate that our
current athenaCollector client base represents less than 2% of
the U.S. addressable market for revenue cycle management.
We expect to continue with current and expanded sales and
marketing efforts to address our market opportunity by
aggressively seeking new clients. We believe that our
internet-based business services provide significant value for
physician offices of any size, from small practices (one to
three physicians) to larger practices (greater than 26
physicians). We have steadily increased and plan to continue to
increase the number of direct sales professionals we employ, and
we intend to develop additional distribution channels for our
services. For example, we have developed a remote sales and
implementation model (web and phone only), which creates a
distinct advantage in the small practice segment, which we
define as offices with fewer than four physicians.
•
Increasing revenue per client by adding new service
offerings. We have only recently begun to offer
our athenaClinicals service, which we combined with
athenaCollector for sale to prospective clients. Given the
recent advances in the overall EMR market and recent regulatory
changes, we expect that many of our current and future clients
will be making purchasing decisions based in part on EMR
functionality. Our recent certification by the Certification
Commission for Healthcare Information Technology, or CCHIT, an
independent, industry-recognized accreditation organization
created to certify EMR applications, for the software component
of athenaClinicals provides further opportunity for it to be
combined with athenaCollector for sale to prospective new
clients. In the future, we plan to offer athenaClinicals as a
stand-alone option. We are developing additional services to
address other administrative tasks within the physician office
that create opportunities to leverage our healthcare domain
knowledge and create increased revenue opportunity from our
existing clients. These additional services will focus on
managing patient communications with the physician office such
as scheduling appointments, accessing lab results and refilling
prescriptions. Consistent with our other offerings, we intend to
deliver these services on an ongoing basis for a percentage of
collections. Like our other services, this new service would be
delivered through use of the athenaNet platform, through use of
the athenaRules database of payer rules and through our
integrated service operations.
Expanding operating margins by reducing the costs of
providing our services. We believe we can
increase our operating margins as we increase the scalability of
our service operations. Our integrated operations enable us to
deploy the most efficient resources to lower the cost of
providing specific discrete tasks at each step of the revenue
and clinical cycles workflow. To do this, we will make targeted
investments that are likely to include additional and
geographically diverse datacenter capacity, an additional
service center location in the United States, enhanced use of
off-shore capacity for processing work and increased capability
in our off-shore software development center. As we add new
service offerings, these offerings will also utilize our current
capabilities, ultimately further reducing the cost of providing
our services to our clients.
Our
Services
athenahealth is a provider of internet-based business services
for physician practices. Our service offerings are based on our
proprietary web-based software, a continually updated database
of payer rules and integrated back-office service operations.
Our services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
athenaCollector
Our principal offering, athenaCollector, is our revenue cycle
management service that automates and manages billing-related
functions for physician practices, and includes a practice
management platform. athenaCollector assists our physician
clients with the proper handling of claims and billing processes
to help submit claims quickly and efficiently.
Software
(athenaNet)
Through athenaNet, athenaCollector utilizes the Internet to
connect physician practices to our rules engine and service
operations team. In its 2006 year-end “Best in KLAS”
survey, KLAS Enterprises, LLC, a healthcare information
technology industry research firm, rated athenaNet No. 3 in
the Ambulatory and Billing Scheduling category for practice
groups with one to five physicians, No. 1 in the Ambulatory
and Billing Scheduling category for practice groups with six to
25 physicians and No. 2 in the Ambulatory and Billing
Scheduling category for practice groups with 25 to 100
physicians. athenaNet has been ranked No. 1, No. 2 or
No. 3 in each of these categories in each annual Best in
KLAS ranking since 2004. It includes a workflow dashboard used
by our clients and our services team to track in real-time
claims requiring edits before they are sent to the payer, claims
requiring work that have come back from the payer unpaid and
claims that are being held up due to administrative steps
required by the individual client. This internet-native
functionality provides our clients with the benefits of our
database of payer rules as it is updated and enables them to
interact with our services team to efficiently monitor
workflows. The internet-based architecture of athenaNet allows
each transaction to be available to our centralized rules engine
so that mistakes can be corrected quickly across all of our
clients.
Knowledge
(athenaRules)
Physician practices route all of their electronic and paper
payer communications to us, which we then process using
athenaRules and our significant understanding of payer rules to
achieve faster reimbursement rates and improve practice revenue.
Our proprietary database of payer knowledge has been constructed
based on over seven years of experience in dealing with
physician workflow in hundreds of physician practices with
medical claims from tens of thousands of health benefit plans.
The core focus of the database is on the payer rules which are
the key drivers of claim payment and denials. Understanding
denials allows us to construct rules to avoid future denials
across our entire client base resulting in increased automation
of our workflow processes. Over 100 new rules on average are
added to our rules engine each month and approximately 50% of
the rules triggered each month were added within the previous
six months. athenaRules has been designed to interact seamlessly
with athenaNet in the medical office workflow and in our service
operations. As of the end of 2006, the company dedicated more
than 50 full-time equivalents cross functionally to the process
of analyzing denials and developing and adding new rules to the
database.
Work
(athenahealth Service Operations)
Our athenahealth service operations provides the service teams
that collaborate with client staff to achieve successful
outcomes or payment transactions. Our services operations
consists of both the highly healthcare knowledgeable staff and
technological infrastructure required to execute the key steps
associated with proper handling of physician claims and clinical
data management. It is comprised of nearly 400 people on
our service teams in the United States and more than
700 people at our off-shore partners who interact with
physicians at all of the key steps in the revenue cycle
including:
•
coordinating with payers to ensure that client providers are
properly
set-up for
billing;
•
checking the eligibility of scheduled patients electronically;
•
submitting claims to payers directly or through intermediaries,
whether electronic or via printed claim forms;
•
obtaining confirmation of claim receipt from the payer either
electronically or through phone calls;
•
receiving and processing checks and remittance information from
payers and documenting the result of payers’ responses;
•
evaluating denied claims and determining the best approach to
appealing
and/or
resubmitting claims to obtain payment;
•
billing patients for balances that are due;
•
compiling and delivering management reporting about the
performance of clients at both the account level and the
provider level;
•
transmitting key clinical data to the revenue cycle workflow to
eliminate the need for code re-entry and providing all key date
elements required to achieve maximum appropriate
reimbursement; and
•
providing proactive and responsive client support to manage
issues, address questions, identify training needs and
communicate trends.
Our most recent offering, athenaClinicals, is our clinical cycle
management service which automates and manages medical record
management-related functions for physician practices, and
includes an EMR platform. It assists medical groups with the
proper handling of physician orders and related inbound and
outbound communications to ensure that orders are carried out
quickly and accurately and to provide an up-to-date and accurate
online patient clinical record. athenaClinicals is designed to
improve clinical administrative workflow, the software component
of that recently received CCHIT certification.
Software
(athenaNet)
Through athenaNet, athenaClinicals displays key clinical
measures by office location related to the drivers of high
quality and efficient care delivery on a workflow dashboard,
including lab results requiring review, patient referral
requests, prescription requests and family history of previous
exams. Similar to its functionality within athenaCollector,
athenaNet provides comprehensive reporting on a range of
clinical results, including distribution of different procedure
codes (leveling), incidence of different diagnoses, timeliness
of turnaround by lab companies and other intermediaries and
other key performance indicators.
Knowledge
(athenaRules)
Clinical data must be captured according to the requirements and
incentives of different payers and plans. Clinical
intermediaries such as laboratories and pharmacy networks
require specific formats and data elements as well. athenaRules
can access medication formularies, identify potential medication
errors such as drug-to-drug interactions or allergy reactions
and identify the specific clinical activities that are required
to adhere to pay-for-performance programs, which can add
incremental revenue to the physician practice.
Work
(athenahealth Service Operations)
athenaClinicals provides the additional functionality that
medical groups expect from an EMR to help them complete the key
processes that affect the clinical care record related to
patient care including:
•
identifying available P4P programs, incentives and enrollment
requirements;
•
entering data about patient encounters as they happen for
general exams (well visits) as well as problem-focused visits
(sick exams);
•
delivering outbound physician orders such as prescriptions and
lab requisitions; and
•
capturing, classifying and presenting inbound documentation
electronically or via fax such as lab results.
Sales and
Marketing
We have developed a sales and marketing capability aimed at
expanding our network of physician clients, and expect to expand
these efforts in the future. We have a significant direct sales
effort which we augment through our indirect channel
relationships.
Direct
Sales
As of June 30, 2007, we employed a direct sales and sales
support force of 52 employees. Of these employees, 40 were
sales professionals. Because of our ongoing service relationship
with clients we conduct a consultative sales process. This
process includes understanding the needs of perspective clients,
developing service proposals and negotiating contracts to enable
the commencement of services. Of this sales force, 32 members of
our sales force are dedicated to physician practices with four
or more physicians and eight members of our sales force are
dedicated to physician practices with one to three physicians.
Our sales force is supported by 12 personnel in our sales
and marketing organizations that provide specialized support for
promotional and selling efforts.
In addition to our employed sales force, we maintain business
relationships with individuals and organizations that promote or
support our sales or services within specific industries of
geographic regions, which we refer to as channels. We refer to
these individuals and organizations as our channel partners.
These relationships are generally agreements that compensate
channel partners for providing us sales lead information that
result in sales. These channel partners generally do not make
sales but instead provide us with leads that we use to develop
new business through our direct sales force. In 2006,
channel-based leads were associated with approximately half of
our new business. Our channel relationships include state
medical societies, Healthcare Information Technology product
companies, healthcare product distribution companies and
consulting firms. Examples of these types of channel
relationships include:
•
the Ohio State Medical Society;
•
Eclipsys Corporation; and
•
WorldMed Shared Services, Inc. (d/b/a PSS World Medical Shares
Services, Inc.), or PSS.
In May 2007, we entered into a marketing and sales agreement
with PSS for the marketing and sale of athenaClinicals and
athenaCollector. The agreement has an initial term of three
years and may be terminated by either party for cause or
convenience. Under the terms of the agreement, we will pay PSS
sales commissions based upon the estimated contract value of
orders placed with PSS, which will be adjusted 15 months
after the date the service begins for a client to reflect actual
revenue received by us from clients. Subsequent commissions will
be based upon a specified percentage of actual revenue generated
from orders placed with PSS. We will be responsible for funding
$300,000 toward the establishment of an incentive plan for the
PSS sales representatives during the first twelve months of the
agreement, as well as co-sponsoring training sessions for PSS
sales representatives and conducting on-line education for PSS
sales representatives.
Under the terms of the agreement, no later than June 2009,
revenue cycle services or software from athenahealth will be the
exclusive revenue cycle solution distributed by PSS, and from
and after the date that clinical cycle services and software
from athenahealth has been CCHIT certified and is generally
commercially released as a stand-alone service, such services
and software will be the exclusive clinical cycle solution
marketed and sold by PSS. Additionally, the terms of the
agreement prohibit us from entering into a similar agreement
with any business that has, as its primary source of revenue,
revenue from the business of distributing medical and surgical
supplies to the physician ambulatory care market in the United
States. None of our existing channel relationships are affected
by our exclusive arrangement with PSS, and while our agreement
with PSS precludes us from entering into similar arrangements
with other distributors of medical and surgical supplies to the
physician ambulatory care market in the United States, we
believe PSS is of sufficient size so as to offer us a compelling
opportunity to market our services to prospective clients that
would otherwise be difficult for us to reach. According to PSS,
they have the largest medical and surgical supplies sales force
in the United States, consisting of approximately 720 sales
consultants who distribute medical supplies and equipment to
more than 100,000 offices in all 50 states.
Marketing
Initiatives
Since our service model is new to most physicians, our marketing
and sales objectives are designed to increase awareness of our
company, establish the benefits of our service model and build
credibility with prospective clients, so that they will view our
company as a trustworthy long-term service provider. To effect
this strategy, we have designed and implemented specific
activities and programs aimed at converting leads to new clients.
In June 2006, we introduced our annual PayerView rankings in
order to provide an industry-unique framework to systematically
address what we believe is unnecessary administrative complexity
existing between payers and providers. PayerView is designed to
look at payers’ performance based on a number of
categories, which combine to provide an overall ranking aimed at
quantifying the “ease of doing business with the
payer.” All data used for the rankings come from actual
claims performance data of our clients and depict
our experience in dealing with individual payers across the
nation. The rankings include national payers with at least
120,000 charge lines of data and regional payers with a minimum
of 20,000 charge lines.
Our marketing initiatives are generally targeted towards
specific segments of physician practices. These marketing
programs primarily consist of:
•
sponsoring
pay-per-click
search advertising and other internet-focused awareness building
efforts (such as online videos and webinars);
•
engaging in public relations activities aimed at generating
media coverage;
•
participating in industry-focused trade shows;
•
disseminating targeted mail and phone calls to physician
practices; and
•
conducting informational meetings (such as town-hall style
meetings or strategic retreats with targeted potential clients
at an event called the “athenahealth Institute”).
Technology,
Development and Operations
We currently operate data centers in Waltham, Massachusetts and
in Bedford, Massachusetts. The company operates an application
in a separate data center located in Chicago, Illinois, which we
call athenaNet EmergencyEdition, which provides our clients
access to their critical data and functionality in the event of
a failure at our primary data centers. Our data centers are
maintained and supported by third-parties at their dedicated
locations. In addition, in 2007 we signed a disaster recovery
contract with a major provider of these services, so that in the
event of a total disaster at our primary data centers, we could
become operational in an acceptable timeframe at a
back-up
location. The services provided by our data center and disaster
recovery service providers are generally commercially available
at comparable rates from other service providers. Our corporate
technology support is augmented by a third-party service
provider in New Brunswick, Canada.
Our mission-critical business application is hosted by the
company and accessed by clients using high-speed Internet
connections or private network connections. We have devoted
significant resources to producing software and related
application and data center services that meet the functionality
and performance expectations of clients. We use commercially
available hardware and a combination of proprietary and
commercially available software to provide our service. These
software licenses are generally available on commercially
reasonable terms. The design of our application and database
servers is modular and scaleable in that as new clients are
added the company adds additional capacity as necessary. We
refer to this as a “horizontal scaling architecture,”
which means that hardware to support new clients is added
alongside existing clients’ hardware and does not directly
affect those clients.
The company devotes significant resources to innovation. We
execute six to eight releases of new software functionality to
our clients each year. We deploy a rigorous application
development methodology so that each software release is
properly designed, built, tested and rolled out. Our clients all
operate on the same version of our software. Our software
development activities involve more than 49 technologists
employed by the company in the United States as of June 30,2007. We complement this team’s work with software
development services from a third-party technology development
provider in Pune, India and with our own direct employees at our
development center operated through our wholly-owned subsidiary
located in Chennai, India. As of June 30, 2007, we employed nine
people in our direct subsidiary, and in the first half of 2007
this entity represented approximately 1.0% of our total
operating expense. In addition to our core software development
activities, we dedicate more than 50 full-time equivalent staff
across the company to our ongoing development and maintenance of
the athenaRules database. Over 100 new rules on average are
added to our rules engine each month and approximately 50% of
the rules triggered each month were added within the previous
six months. We also employ process innovation specialists and
product management personnel, who work continually on
improvements to our service operations processes and our service
design, respectively.
Once our clients are live on our service, we collaborate with
them to generate strong business results. We employed nearly
400 people in our service operations dedicated to providing
these services to our clients as of June 30, 2007. These
employees assist our clients at each critical step in the
revenue cycle and clinical cycle
workflow process including, insurance benefits packaging,
insurance eligibility, claims submission, claims tracking,
remittance posting, denials management, payment processing,
formatting of lab requisitions, submission of lab requisitions,
monitoring and classification of all inbound faxes. Additionally
we use third-parties for data entry, data matching, data
characterization and outbound telephone services. Currently, we
have contracted for these services with Vision Healthsource, a
subsidiary of Perot Systems Corporation, through which more than
700 people provide data entry and other services from facilities
located in India and the Philippines to support our client
service operations. These services are generally commercially
available at comparable rates from other service providers.
During 2006, athenahealth:
•
posted over $2 billion in physician payments;
•
processed over 17 million medical claims;
•
handled over 38 million charge postings; and
•
sorted approximately 14 million pages of paper which
amounted to approximately 140,000 pounds of mail.
We depend on satisfied clients to succeed. Our client contracts
require minimum commitments by us on a range of tasks, including
claims submission, payment posting, claims tracking and claims
denial management. We also commit to our clients that athenaNet
is accessible 99.7% of the time, excluding scheduled maintenance
windows. Each quarter, our management conducts a survey of
clients to identify client concerns and track progress against
client satisfaction objectives. In our most recent survey, 88%
of the respondents reported that they would recommend our
services to a trusted friend or colleague.
In addition to the services described above, we also provide
client support services. There are several client service
support activities that take place on a regular basis, including
the following:
•
client support by the client services center designed to address
client questions and concerns rapidly, whether registered via a
phone call or via an online support case through the
company’s customized use of customer relationship
management technology;
•
account performance and issue resolution activities by the
account management organization, designed to address open issues
and focus clients on the financial results of the co-sourcing
relationship; these efforts also are intended to result in
client retention, appropriate adjustments to service pricing at
renewal dates and provision of incremental services when
appropriate; and
•
relationship management by regional leaders of the client
services organization to ensure that decision-makers at clients
are satisfied and that regional performance is managed
proactively with regard to client satisfaction, client margins,
client retention, renewal pricing and added services.
Competition
We have experienced, and expect to continue to experience
intense competition from a number of companies. Our primary
competition is the use of locally installed software to manage
revenue and clinical cycle workflow within the physician’s
office. Software companies that sell practice management and EMR
software and medical billing and collection organizations
include GE Healthcare, Sage Software Healthcare, Inc., Misys
Healthcare Systems, Allscripts Healthcare Solutions, Inc.,
Siemens Medical Solutions USA, Inc. and Quality Systems, Inc. As
a service company that provides revenue cycle services, we also
compete against large billing companies such as McKesson Corp.,
Medical Management Professions, a division of CBIZ, Inc., and
regional billing companies.
The principal competitive factors in our industry include:
•
ability to quickly adapt to increasing complexity of the
healthcare reimbursement system;
performance, security, scalability and reliability of service;
•
sale and marketing capabilities of vendor; and
•
financial stability of the vendor.
We believe that we compete favorably with our competitors on the
basis of these factors. However, many of our competitors and
potential competitors have significantly greater financial,
technological and other resources and name recognition than we
do and more established distribution networks and relationships
with healthcare providers. As a result, many of these companies
may respond more quickly to new or emerging technologies and
standards and changes in customer requirements. These companies
may be able to invest more resources in research and
development, strategic acquisitions, sales and marketing, patent
prosecution and litigation and finance capital equipment
acquisitions for their customers.
Government
Regulation
Although we generally do not contract with U.S. government
entities, the services that we provide are subject to a complex
array of federal and state laws and regulations, including
regulation by the Centers for Medicare and Medicaid Services, or
CMS, of the U.S. Department of Health and Human Services, as
well as additional regulation.
Government
Regulation of Health Information
Privacy and Security Regulations. The Health
Insurance Portability and Accountability Act of 1996, as
amended, and the regulations that have been issued under it
(collectively “HIPAA”) contain substantial
restrictions and requirements with respect to the use and
disclosure of individuals’ protected health information.
These are embodied in the Privacy Rule and Security Rule
portions of HIPAA. The HIPAA Privacy Rule prohibits a covered
entity from using or disclosing an individual’s protected
health information unless the use or disclosure is authorized by
the individual or is specifically required or permitted under
the Privacy Rule. The Privacy Rule imposes a complex system of
requirements on covered entities for complying with this basic
standard. Under the HIPAA Security Rule, covered entities must
establish administrative, physical and technical safeguards to
protect the confidentiality, integrity and availability of
electronic protected health information maintained or
transmitted by them or by others on their behalf.
The HIPAA Privacy and Security Rules apply directly to covered
entities, such as healthcare providers who engage in
HIPAA-defined standard electronic transactions, health plans and
healthcare clearinghouses. Because we translate electronic
transactions to and from the HIPAA-prescribed electronic forms
and other forms, we are a clearinghouse and as such are a
covered entity. In addition, our clients are also covered
entities. In order to provide clients with services that involve
the use or disclosure of protected health information, the HIPAA
Privacy and Security Rules require us to enter into business
associate agreements with our clients. Such agreements must,
among other things, provide adequate written assurances:
•
as to how we will use and disclose the protected health
information;
•
that we will implement reasonable administrative, physical and
technical safeguards to protect such information from misuse;
•
that we will enter into similar agreements with our agents and
subcontractors that have access to the information;
•
that we will report security incidents and other inappropriate
uses or disclosures of the information; and
•
that we will assist the covered entity with certain of its
duties under the Privacy Rule.
State Laws. In addition to the HIPAA Privacy
and Security Rules, most states have enacted patient
confidentiality laws that protect against the disclosure of
confidential medical information, and many states
have adopted or are considering further legislation in this
area, including privacy safeguards, security standards and data
security breach notification requirements. Such state laws, if
more stringent than HIPAA requirements, are not preempted by the
federal requirements, and we must comply with them.
Transaction Requirements. In addition to the
Privacy and Security Rules, HIPAA also requires that certain
electronic transactions related to health care billing be
conducted using prescribed electronic formats. For example,
claims for reimbursement that are transmitted electronically to
payers must comply with specific formatting standards, and these
standards apply whether the payer is a government or a private
entity. As a covered entity subject to HIPAA, we must meet these
requirements, and moreover, we must structure and provide our
services in a way that supports our clients’ HIPAA
compliance obligations.
Government
Regulation of Reimbursement
Our clients are subject to regulation by a number of
governmental agencies, including those that administer the
Medicare and Medicaid programs. Accordingly, our clients are
sensitive to legislative and regulatory changes in, and
limitations on, the government healthcare programs and changes
in reimbursement policies, processes and payment rates. During
recent years, there have been numerous federal legislative and
administrative actions that have affected government programs,
including adjustments that have reduced or increased payments to
physicians and other healthcare providers and adjustments that
have affected the complexity of our work. For example, Medicare
reimbursement was, for a period of time in 2006, reduced with
respect to portions of the physician payment fee schedule. The
federal government subsequently rescinded reduction and decided
to pay physicians the amount of the reduction that had been
applied to claims already processed under the reduced payment
fee schedule. To collect these payments for our clients, we
re-submitted claims that had previously been processed. This
process required substantial unanticipated processing work by
us, and the additional payments for re-submitted claims were
sometimes very small. It is possible that the federal or state
governments will implement future reductions, increases or
changes in reimbursement under government programs that
adversely affect our client base or our cost of providing our
services. Any such changes could adversely affect our own
financial condition by reducing the reimbursement rates of our
clients.
Fraud
and Abuse
A number of federal and state laws, loosely referred to as fraud
and abuse laws, are used to prosecute healthcare providers,
physicians and others that make, offer, seek or receive
referrals or payments for products or services that may be paid
for through any federal or state healthcare program and in some
instances any private program. Given the breadth of these laws
and regulations, they are potentially applicable to our
business, to the transactions which we undertake on behalf of
our clients and to the financial arrangements through which we
market, sell and distribute our products. These laws and
regulations include:
Anti-kickback Laws. There are numerous federal
and state laws that govern patient referrals, physician
financial relationships, and inducements to healthcare providers
and patients. The federal healthcare programs’
anti-kickback law prohibits any person or entity from offering,
paying, soliciting, or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Courts have construed this anti-kickback law
to mean that a financial arrangement may violate this law if any
one of the purposes of one of the arrangements is to encourage
patient referrals or other federal healthcare program business,
regardless of whether there are other legitimate purposes for
the arrangement. There are several limited exclusions known as
safe harbors that may protect some arrangements from enforcement
penalties. These safe harbors have very limited application.
Penalties for federal anti-kickback violations are severe, and
include imprisonment, criminal fines, civil money penalties with
triple damages and exclusion from participation in federal
healthcare programs. Many states have similar anti-kickback
laws, some of which are not limited to items or services for
which payment is made by a federal healthcare program.
False or Fraudulent Claim Laws. There are
numerous federal and state laws that forbid submission of false
information or the failure to disclose information in connection
with the submission and payment of
physician claims for reimbursement. In some cases, these laws
also forbid abuse of existing systems for such submission and
payment, for example, by systematic over treatment or duplicate
billing of the same services to collect increased or duplicate
payments. These laws and regulations may change rapidly, and it
is frequently unclear how they apply to our business. For
example, one federal false claim law forbids knowing submission
to government programs of false claims for reimbursement for
medical items or services. Under this law, knowledge may consist
of willful ignorance or reckless disregard of falsity. How these
concepts apply to a services such as ours that rely
substantially on automated processes, has not been well defined
in the regulations or relevant case law. As a result, our errors
with respect to the formatting, preparation or transmission of
such claims and any mishandling by us of claims information that
is supplied by our clients or other third parties may be
determined to or may be alleged to involve willful ignorance or
reckless disregard of any falsity that is later determined to
exist.
In most cases where we are permitted to do so, we charge our
clients a percentage of the collections that they receive as a
result of our services. To the extent that liability under fraud
and abuse laws and regulations requires intent, it may be
alleged that this percentage calculation provides us or our
employees with incentive to commit or overlook fraud or abuse in
connection with submission and payment of reimbursement claims.
The Centers for Medicare and Medicaid Services has stated that
it is concerned that percentage-based billing services may
encourage billing companies to commit or to overlook fraudulent
or abusive practices.
Stark Law and similar state laws. The Ethics
in Patient Referrals Act, known as the Stark Law, prohibits
certain types of referral arrangements between physicians and
healthcare entities. Physicians are prohibited from referring
patients for certain designated health services reimbursed under
federally-funded programs to entities with which they or their
immediate family members have a financial relationship or an
ownership interest, unless such referrals fall within a specific
exception. Violations of the statute can result in civil
monetary penalties
and/or
exclusion from the Medicare and Medicaid programs. Furthermore,
reimbursement claims for care rendered under forbidden referrals
may be deemed false or fraudulent, resulting in liability under
other fraud and abuse laws.
Laws in many states similarly forbid billing based on referrals
between individuals
and/or
entities that have various financial, ownership or other
business relationships. These laws vary widely from state to
state.
Corporate
Practice of Medicine Laws, Fee-Splitting Laws and
Anti-Assignment Laws
In many states, there are laws that forbid non-licensed
practitioners from practicing medicine, that prevent
corporations from being licensed as practitioners and that
forbid licensed medical practitioners from practicing medicine
in partnership with non-physicians, such as business
corporations. In some states, these prohibitions take the form
of laws or regulations forbidding the splitting of physician
fees with non-physicians or others. In some cases, these laws
have been interpreted to prevent business service providers from
charging their physician clients on the basis of a percentage of
collections or charges.
There are also federal and state laws that forbid or limit
assignment of claims for reimbursement from government funded
programs. Some of these laws limit the manner in which business
service companies may handle payments for such claims and
prevent such companies from charging their physician clients on
the basis of a percentage of collections or charges. In
particular, the Medicare program specifically requires that
billing agents who receive Medicare payments on behalf of
medical care providers must meet the following requirements:
•
the agent must receive the payment under an agreement between
the provider and the agent;
•
the agent’s compensation may not be related in any way to
the dollar amount billed or collected;
•
the agent’s compensation may not depend upon the actual
collection of payment;
•
the agent must act under payment disposition instructions, which
the provider may modify or revoke at any time; and
•
in receiving the payment, the agent must act only on behalf of
the provider, except insofar as the agent uses part of that
payment to compensate the agent for the agent’s billing and
collection services.
Medicaid regulations similarly provide that payments may be
received by billing agents in the name of their clients without
violating anti-assignment requirements if payment to the agent
is related to the cost of the billing service, not related on a
percentage basis to the amount billed or collected and not
dependant on collection of payment.
Electronic
Prescribing Laws
States have differing prescription format and signature
requirements. Many existing laws and regulations, when enacted,
did not anticipate the methods of
e-commerce
now being developed. While federal law and the laws of many
states permit the electronic transmission of prescription
orders, the laws of several states neither specifically permit
nor specifically prohibit the practice. Given the rapid growth
of electronic transactions in healthcare and the growth of the
Internet, we expect the remaining states to directly address the
electronic transmission of prescription orders with regulation
in the near future. In addition, on November 7, 2005, the
Department of Health and Human Services published its final
E-Prescribing
and the Prescription Drug Program regulations
(E-Prescribing
Regulations). These regulations are required by the Medicare
Prescription Drug Improvement and Modernization Act of 2003
(MMA) and became effective beginning on January 1, 2006.
The
E-Prescribing
Regulations consist of detailed standards and requirements, in
addition to the HIPAA standards discussed previously, for
prescription and other information transmitted electronically in
connection with a drug benefit covered by the MMA’s
Prescription Drug Benefit. These standards cover not only
transactions between prescribers and dispensers for
prescriptions but also electronic eligibility and benefits
inquiries and drug formulary and benefit coverage information.
The standards apply to prescription drug plans participating in
the MMA’s Prescription Drug Benefit. Aspects of our
services are affected by such regulation, as our clients need to
comply with these requirements.
Electronic
Health Records Certification Requirements
The federal Office of the National Coordinator for Health
Information Technology, or ONCHIT, is responsible for promoting
the use of interoperable electronic health records, or EHRs, and
systems. ONCHIT has introduced a strategic framework and has
awarded contracts to advance a national health information
network and interoperable EHRs. One project within this
framework is a “voluntary” private sector based
certification commission, CCHIT, to certify electronic health
record systems as meeting minimum functional and
interoperability requirements. The certification commission has
begun and our clinical application functionality is certified by
CCHIT under its 2006 criteria. It is possible that such
certification may become a requirement for selling clinical
systems in the future, and CCHIT’s certification
requirement may change substantially. While we believe our
system is well designed in terms of function and
interoperability, we cannot be certain that it will meet future
requirements.
United
States Food and Drug Administration
The FDA has promulgated a draft policy for the regulation of
computer software products as medical devices under the 1976
Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act, or FDCA. If our computer software functionality is a
medical device under the policy, we could be subject to the FDA
requirements discussed below. Although it is not possible to
anticipate the final form of the FDA’s policy with regard
to computer software, we expect that the FDA is likely to become
increasingly active in regulating computer software intended for
use in healthcare settings regardless of whether the draft is
finalized or changed.
Medical devices are subject to extensive regulation by the FDA
under the FDCA. Under the FDCA, medical devices include any
instrument, apparatus, machine, contrivance or other similar or
related articles that is intended for use in the diagnosis of
disease or other conditions, or in the cure, mitigation,
treatment or prevention of disease. FDA regulations govern among
other things, product development, testing, manufacture,
packaging,
labeling, storage, clearance or approval, advertising and
promotion, sales and distribution and import and export. FDA
requirements with respect to devices that are determined to pose
lesser risk to the public include:
•
establishment registration and device listing with FDA;
•
the Quality System Regulation, or QSR, which requires
manufacturers, including third-party or contract manufacturers,
to follow stringent design, testing, control, documentation and
other quality assurance procedures during all aspects of
manufacturing;
•
labeling regulations and FDA prohibitions against the
advertising and promotion of products for uncleared, unapproved
off-label uses and other requirements related to advertising and
promotional activities;
•
medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if the malfunction were to recur;
•
corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FDCA
that may present a risk to health; and
•
post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device.
Non-compliance with applicable FDA requirements can result in,
among other things, public warning letters, fines, injunctions,
civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the FDA to grant marketing
approvals, withdrawal of marketing approvals, a recommendation
by the FDA to disallow us from entering into government
contracts and criminal prosecutions. The FDA also has the
authority to request repair, replacement or refund of the cost
of any device.
Foreign
Regulations
Our subsidiary in Chennai, India is subject to additional
regulations by the Government of India, as well as its
subdivisions. These include Indian federal and local corporation
requirements, restrictions on exchange of funds,
employment-related laws and qualification for tax status.
Intellectual
Property
We rely on a combination of patent, trademark, copyright and
trade secret laws in the United States as well as
confidentiality procedures and contractual provisions to protect
our proprietary technology, databases and our brand. Despite
these reliances, we believe the following factors are more
essential to establishing and maintaining a competitive
advantage:
•
the statistical and technological skills of our service
operations team;
•
the healthcare domain expertise and payer rules knowledge of our
service operations team;
•
real-time connectivity of our solutions;
•
continued expansion of our proprietary rules engine; and
•
continued focus on the improved financial results of our clients.
We have filed six patent applications related to the technology
and workflow processes underlying our core service offerings
such as our athenaNet Rules Engine. Our first patent
application describes and documents our unique patient workflow
process, including the athenaNet Rules Engine which applies
proprietary rules to practice and payer inputs on a live,
ongoing basis to produce cleaner health care claims which can be
adjudicated more quickly and efficiently. This patent
application was filed in August 2001. We have received a final
office action from the U.S. Patent and Trademark Office, or
USPTO, rejecting this application. In response, we have filed a
request for continued examination and have submitted a response
and
revised claims. Five subsequent patent applications which
describe and document other unique aspects of our functionality
and workflow processes were filed during calendar year 2006 and
are currently pending before the USPTO. None of them have
received any office actions from the USPTO.
We also rely on a combination of registered and unregistered
trademarks to protect our brands. athenahealth, athenaNet and
the athenahealth logo are our registered trademarks of
athenahealth and athenaCollector, athenaClinicals,
athenaEnterprise and athenaRules are trademarks of athenahealth.
We have a policy of requiring key employees and consultants to
execute confidentiality agreements upon the commencement of an
employment or consulting relationship with us. Our employee
agreements also require relevant employees to assign to us all
rights to any inventions made or conceived during their
employment with us. In addition, we have a policy of requiring
individuals and entities with which we discuss potential
business relationships to sign non-disclosure agreements. Our
agreements with clients include confidentiality and
non-disclosure provisions.
Employees
As of June 30, 2007, we had 564 U.S. employees,
including 377 in service operations, 67 in sales and marketing,
48 in research and development and 72 in general and
administrative functions. In addition, as of that date, we had
nine employees, located in Chennai, India, who were
employed by our 100% directly owned subsidiary, Athena Net India
Pvt., including two in service operations, five in research and
development and three in client general and administrative
functions. We believe that we have good relationships with our
employees. None of our employees is subject to collective
bargaining agreements or is represented by a union.
Legal
Proceedings
We have been sued by Billingnetwork Patent, Inc. in a patent
infringement case (Billingnetwork Patent, Inc. v.
athenahealth, Inc., Civil Action
No. 8:05-CV-205-T-17TGW
United States District Court for the Middle District of
Florida). The complaint alleges that we have infringed on a
patent issued in 2002 entitled “Integrated Internet
Facilitated Billing, Data Processing and Communications
System” and it seeks an injunction enjoining infringement,
treble damages and attorneys’ fees. We have moved to
dismiss that case, and arguments on that motion were heard by
the court in March 2006. There have been no material proceedings
in the matter since that time, and we are currently awaiting
further action from the court on the pending motion. We do not
believe that this case will have a material adverse effect on
our business, financial condition, or operating results. From
time to time, in the ordinary course of business, we have been
threatened with litigation by employees, former employees,
clients or former clients.
Facilities
We do not own any real property. We lease our existing
facilities. The company’s primary location is 311 Arsenal
Street in Watertown, Massachusetts, where we lease
133,616 square feet, which is under lease until
July 1, 2015. We also lease 11,146 square feet in
Chennai, India through our direct subsidiary, Athena Net India
Pvt. Ltd., which is leased through November 5, 2014. Our
servers are housed at our headquarters and also in data centers
in Bedford, Massachusetts, in Waltham, Massachusetts, and in
Chicago, Illinois.
Our executive officers, key employees and directors and their
respective ages and positions as of the date of this prospectus
are as follows:
Name
Age
Position
Jonathan Bush(1)
38
Chief Executive Officer, President
and Chairman
Todd Y. Park(1)
34
Executive Vice President and Chief
Development Officer
James M. MacDonald(1)
51
Senior Vice President and Chief
Operating Officer
Carl B. Byers(1)
35
Senior Vice President, Chief
Financial Officer and Treasurer
Christopher E. Nolin(1)
54
Senior Vice President, General
Counsel and Secretary
Robert M. Hueber
52
Senior Vice President of Sales
Nancy G. Brown
46
Senior Vice President of Business
Development and Government Affairs
Amy Pooser
34
Vice President of People and
Process
Ruben J. King-Shaw, Jr.(2)
45
Lead Director
Richard N. Foster(3),(4)
66
Director
Brandon H. Hull(2)
46
Director
John A. Kane(2)
54
Director
Ann H. Lamont(3),(4)
50
Director
James L. Mann(3),(4)
73
Director
Bryan E. Roberts(2)
40
Director
(1)
Executive Officer
(2)
Member of audit committee
(3)
Member of compensation committee
(4)
Member of nominating and corporate governance committee
Jonathan Bush is our Chief Executive Officer, President
and Chairman. Mr. Bush co-founded athenahealth in 1997.
Prior to joining athenahealth, Mr. Bush served as an EMT
for the City of New Orleans, was trained as a medic in the
U.S. Army, and worked as a management consultant with Booz
Allen & Hamilton. Mr. Bush obtained a Bachelor of
Arts in the College of Social Studies from Wesleyan University
and an M.B.A. from Harvard Business School.
Todd Y. Park is our Executive Vice President and Chief
Development Officer. Mr. Park co-founded athenahealth in
1997. Prior to joining athenahealth, Mr. Park served as a
management consultant with Booz Allen & Hamilton.
Mr. Park obtained a Bachelor of Arts in Economics from
Harvard University.
James M. MacDonald is our Senior Vice President and Chief
Operating Officer. Mr. MacDonald joined athenahealth in
September of 2006. From 2000 to 2006, Mr. MacDonald was
employed by Fidelity Investments, most recently as President of
Fidelity Human Resources Services Company; he also served as
Chief Information Officer of Fidelity Employer Services Company
and as Chief Information Officer of Fidelity
Management & Research Company. Prior to his work at
Fidelity, Mr. MacDonald was a partner at Computer Sciences
Corporation and served as Chief Information Officer for State
Street Corporation. Mr. MacDonald obtained a Bachelor of
Science in Business Management from the University of
Massachusetts Boston (formerly Boston State College).
Carl B. Byers is our Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Byers joined
athenahealth at its founding in 1997. Prior to joining
athenahealth, Mr. Byers served as a management consultant
with Booz Allen & Hamilton. Mr. Byers obtained a
Bachelor of Arts in the College of Social Studies from Wesleyan
University and was a Business Fellow at the University of
Chicago’s Graduate School of Business.
Christopher E. Nolin is our Senior Vice President,
General Counsel and Secretary. Mr. Nolin joined
athenahealth in 2001. From 1999 to 2001, Mr. Nolin was a
partner at Holland & Knight LLP. Prior to that,
Mr. Nolin was a partner at Warner & Stackpole
LLP, which he joined in 1979. Mr. Nolin obtained a Bachelor
of Arts in Anthropology and a Juris Doctor from Boston
University. He is admitted to practice in Massachusetts and is a
member of the American Health Lawyers Association and the
American Bar Association.
Robert M. Hueber is our Senior Vice President of Sales.
Mr. Hueber joined athenahealth in 2002. From 1984 to 2002,
Mr. Hueber served IDX Systems Corporation as Vice President
and National Director of Sales and most recently as Vice
President of Sales for the Enterprise Solutions Division. Prior
to joining IDX, Mr. Hueber served as Senior Marketing
Representative at Raytheon Data Systems and as a Sales Executive
for Exxon Enterprises. Mr. Hueber obtained a Bachelor of
Science in Marketing from Northeastern University.
Nancy G. Brown is our Senior Vice President of Business
Development and Government Affairs. Ms. Brown joined
athenahealth in 2004. From 1999 to 2004, Ms. Brown served
McKesson Corporation as Senior Vice President. Before McKesson,
Ms. Brown was co-founder of Abaton.com, which was acquired
by McKesson Corp. Prior to that, Ms. Brown worked for
Harvard Community Health Plan in various senior management roles
over a five year period. Ms. Brown obtained a Bachelor of
Science from the University of New Hampshire and an M.B.A. from
Northeastern University.
Amy Pooser is our Vice President of People and Process.
Ms. Pooser joined athenahealth in 1998. Prior to joining
athenahealth, Ms. Pooser worked as a corporate paralegal at
Warner & Stackpole LLP in Boston. Ms. Pooser
obtained a Bachelor of Arts in Political Science and
Women’s and Gender Studies from Amherst College.
Ruben J. King-Shaw, Jr. has served as a member of
our Board of Directors since 2005 and was named Lead Director in
2007. Mr. King-Shaw is the Chairman and CEO of Mansa Equity
Partners, Inc., which he founded in 2005. From January 2003 to
August 2003, Mr. King-Shaw served as Senior Advisor to the
Secretary of the Department of the Treasury. From July 2001 to
April 2003, Mr. King-Shaw served as Deputy Administrator
and Chief Operating Officer of the U.S. Department of
Health and Human Services’ Centers for Medicare and
Medicaid Services (CMS). From January 1999 to July 2001,
Mr. King-Shaw served as Secretary of the Florida Agency for
Health Care Administration. Before that, Mr. King-Shaw was
the Chief Operating Officer of Neighborhood Health Partnership,
Inc. and the Executive Director of the JMH Health Plan.
Mr. King-Shaw serves on numerous boards of directors,
including the Scripps Florida Corporation, and is a Trustee of
the University of Massachusetts. Mr. King-Shaw obtained a
Bachelor of Science in Industrial and Labor Relations from
Cornell University, a Master in Health Services Administration
from Florida International University and a Master of
International Business from the Chapman Graduate School of
Business and the Center for International Studies in Madrid,
Spain.
Richard N. Foster has served as a member of our
Board of Directors since 2005. Mr. Foster is the Managing
Partner of Millbrook Management Group. Prior to joining
Millbrook Management Group in 2004, Mr. Foster served as
Director of McKinsey & Company, Inc. During his
31 year tenure with McKinsey & Company which began in
1973, Mr. Foster was elected principal (1977) and later
Senior Partner and Director (1982), a position he maintained for
22 years. Before retiring from McKinsey & Company,
Mr. Foster served as founder and Managing Director of
McKinsey’s private equity practice. He also founded and led
McKinsey’s technology and healthcare sectors.
Mr. Foster is the author of Innovation: The
Attacker’s Advantage (1986) and Creative
Destruction (2001). He is a Member of the Board of Directors
of Trust Company of the West, Cardax Pharmaceuticals, Memorial
Sloan Kettering Institute, the Dean’s Advisory Committee of
the Yale School of Medicine, the Council for Aid to Education,
and the Council on Foreign Relations. Mr. Foster received
his B.S., M.S. and Ph.D. in Engineering and Applied Science from
Yale University.
Brandon H. Hull has served as a member of our Board of
Directors since 1999. Since October 1997, Mr. Hull has
served as General Partner of Cardinal Partners, a venture
capital firm that he co-founded that specializes in healthcare
and life-sciences investments. From 1991 to 1997, Mr. Hull
served as principal of the Edison Venture Fund, another venture
capital firm, where he directed Edison’s healthcare
investing activities and served on the boards of its healthcare
portfolio companies. Mr. Hull serves on the boards of
directors of
Cardio Optics, Replication Medical, CodeRyte and FluidNet.
Mr. Hull obtained his Bachelor of Arts from Wheaton College
and his M.B.A. from The Wharton School at the University of
Pennsylvania.
John A. Kane has served as a member of our Board of
Directors since July 2007. Mr. Kane served as Senior Vice
President, Finance and Administration, Chief Financial Officer
and Treasurer of IDX Systems Corporation from May 2001 until it
was acquired by GE Healthcare in 2006, and as the Vice
President, Finance and Administration, Chief Financial Officer
and Treasurer of IDX from October 1984, when he joined IDX.
While at IDX, Mr. Kane guided the company through more than
a dozen acquisitions and at various times, he managed the
finance, facilities, legal, human resources and information
systems functions for the company. Previous to his employment
with IDX, Mr. Kane worked as an audit manager at
Ernst & Young, LLP, in Boston. Mr. Kane serves as
a director of Merchants Bank, Spheris Inc. and several private
organizations. Since his retirement from IDX in 2006,
Mr. Kane has not been employed on a
full-time
basis and his principal occupations have consisted of the
directorships mentioned in the preceding sentence. He is a
certified public accountant and earned a B.S. and Master of
Accountancy from Brigham Young University.
Ann H. Lamont has served as a member of our Board of
Directors since January 2001. Ms. Lamont has been with Oak
Investment Partners since 1982 and is Managing Partner. She
served as General Partner from 1986 to 2006. Ms. Lamont
previously served as a research associate with
Hambrecht & Quist. Ms. Lamont serves on the
boards of numerous private companies including CareMedic
Systems, Inc., Health Dialog Services Corporation, NetSpend
Corporation, Next Page, Inc., Franklin & Seidelmann, LLC,
Pay Flex Systems USA, Inc., United BioSource Holding LLC and
iHealth Technologies, Inc. Ms. Lamont obtained a Bachelor
of Arts in Political Science from Stanford University.
James L. Mann has served as a member of our Board of
Directors since 2006. Mr. Mann has served as Chairman of
the Board of Directors of SunGard Availability Services L.P.
from 1987 to 2005 and as Director from 1983 to 2005 and
currently from 2006. Mr. Mann served as SunGard’s
Chief Executive Officer from 1986 to 2002, President from 1986
to 2000 and Chief Operating Officer from 1983 to 1985. Since
2002, Mr. Mann has been employed by SunGard in an advisory
capacity. Mr. Mann previously served as President and COO
of Bradford National Corp. Mr. Mann obtained a Bachelor of
Science in Business Administration from Wichita State University.
Bryan E. Roberts has served as a member of our Board of
Directors since 1999. Dr. Roberts joined Venrock
Associates, a venture capital investment firm, in 1997, served
as a General Partner from 2001 to 2006, and is now a Managing
General Partner. From 1989 to 1992, Dr. Roberts worked in
the Corporate Finance Department of Kidder, Peabody &
Co., a brokerage company. Dr. Roberts serves on the Board
of Directors of Xenoport as well as several private companies.
He received a Bachelor of Arts from Dartmouth University and a
Ph.D. in chemistry and chemical biology from Harvard University.
Board
Composition
Our board of directors currently consists of eight members, of
whom Bryan E. Roberts, Brandon H. Hull and Ann H. Lamont were
elected as directors under the board composition provisions of a
stockholders agreement. The board composition provisions of the
stockholders agreement will be terminated upon the consummation
of this offering. Upon the termination of these provisions,
there will be no further contractual obligations regarding the
election of our directors. Our directors hold office until their
successors have been elected and qualified or until the earlier
of their resignation or removal.
Our by-laws permit our board of directors to establish by
resolution the authorized number of directors, and our amended
and restated certificate of incorporation provides that the
authorized number of directors may be changed only by resolution
of the board of directors.
Upon the completion of this offering, our directors will be
divided into three classes serving staggered three-year terms.
At each annual meeting of our stockholders, directors will be
elected to succeed the class of directors whose terms have
expired. For our current directors, Class I directors’
terms will expire at our 2008 annual stockholders’ meeting,
Class II directors’ terms will expire at our 2009
annual stockholders’ meeting and Class III
directors’ terms will expire at our 2010 annual
stockholders’ meeting. Messrs. Bush, Hull and Roberts
are our current Class I directors; Ms. Lamont and
Messrs. Mann and Foster are our current Class II
directors; and Messrs. Kane and King-Shaw, Jr. are our
current Class III directors. Our classified board could
have the effect of increasing the length of time necessary to
change the composition of a majority of our board of directors.
Generally, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in the majority of
the members of our board of directors.
Board
Committees
Our board of directors has established an audit committee, a
compensation committee and a nominating and governance
committee, each of which operates pursuant to a separate charter
adopted by our board of directors. The composition and
functioning of all of our committees will comply with all
applicable requirements of the Sarbanes-Oxley Act of 2002, the
NASDAQ Global Market and Securities and Exchange Commission
rules and regulations.
Audit Committee. Messrs. Kane,
King-Shaw, Jr., Hull and Roberts currently serve on the
audit committee. Mr. Kane is the chairman of our audit
committee and qualifies as an “audit committee financial
expert” for purposes of the Securities Exchange Act of
1934, as amended, or the Exchange Act. The audit
committee’s responsibilities include:
•
overseeing our regulatory compliance programs and procedures;
•
appointing, approving the compensation of and assessing the
independence of our independent registered public accounting
firm;
•
pre-approving auditing and permissible non-audit services, and
the terms of such services, to be provided by our independent
registered public accounting firm;
•
reviewing and discussing with management and the independent
registered public accounting firm our annual and quarterly
financial statements and related disclosures;
•
coordinating the oversight and reviewing the adequacy of our
internal control over financial reporting;
•
establishing policies and procedures for the receipt and
retention of accounting related complaints and concerns; and
•
preparing the audit committee report required by Securities and
Exchange Commission rules to be included in our annual proxy
statement.
Under the Exchange Act and the rules of the NASDAQ Global
Market, the members of our audit committee must be independent,
as defined thereunder. Messrs. Roberts and Hull may be deemed to
fall outside the non-exclusive safe harbor provision provided by
these rules, under which persons that beneficially own 10% or
fewer shares of our common stock are presumptively deemed to be
independent. Our board of directors has determined that each of
Messrs. Roberts and Hull are independent under these rules,
notwithstanding this non-exclusive safe harbor.
Compensation Committee. Messrs. Mann and
Foster and Ms. Lamont currently serve on the compensation
committee. Mr. Mann is the chairman of our compensation
committee. The compensation committee’s responsibilities
include:
•
annually reviewing and approving corporate goals and objectives
relevant to compensation of our chief executive officer;
•
evaluating the performance of our chief executive officer in
light of such corporate goals and objectives and determining the
compensation of our chief executive officer;
•
reviewing and approving the compensation of all our other
officers;
•
overseeing and administering our employment agreements,
severance arrangements, compensation, welfare, benefit and
pension plans and similar plans; and
•
reviewing and making recommendations to the board with respect
to director compensation.
Nominating and Governance
Committee. Messrs. Foster and Mann and
Ms. Lamont currently serve on the nominating and governance
committee. Mr. Foster is the chairman of our nominating and
governance committee. The nominating and governance
committee’s responsibilities include:
•
developing and recommending to the board criteria for selecting
board and committee membership;
establishing procedures for identifying and evaluating director
candidates including nominees recommended by stockholders;
•
identifying individuals qualified to become board members;
•
recommending to the board the persons to be nominated for
election as directors and to each of the board’s committees;
•
developing and recommending to the board a code of business
conduct and ethics and a set of corporate governance guidelines;
•
conducting appropriate review of all related party
transactions; and
•
overseeing the evaluation of the board, its committees and
management.
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board
of directors or compensation committee, or other committee
serving an equivalent function, of any other entity that has one
or more of its executive officers serving as a member of our
board of directors or compensation committee.
Corporate
Governance
We have adopted a code of business conduct and ethics that
applies to all of our employees, officers and directors,
including those officers responsible for financial reporting.
The code of business conduct and ethics will be available on our
Internet site at www.athenahealth.com. We expect that any
amendments to the code, or any waivers of its requirements, will
be disclosed on our website.
Executive
Officers
Each of our executive officers has been elected by our board of
directors and serves until his or her successor is duly elected
and qualified.
Jonathan Bush, Chief Executive Officer, President and Chairman;
•
Carl B. Byers, Senior Vice President, Chief Financial Officer
and Treasurer;
•
Todd Y. Park, Executive Vice President and Chief Development
Officer;
•
Christopher E. Nolin, Senior Vice President, General Counsel and
Secretary; and
•
James M. MacDonald, Senior Vice President and Chief Operating
Officer.
Compensation
Discussion and Analysis
Evolution
of our Compensation Approach
Our compensation approach is necessarily tied to our stage of
development as a company. Historically, compensation decisions
for our executive officers were approved by our board of
directors upon the recommendation of our compensation committee,
which in turn relied upon the recommendation of our Chief
Executive Officer. As discussed below, in some cases, the
recommendation of our Chief Executive Officer was largely
discretionary, based on his subjective assessment of the
particular executive. As we gain experience as a public company,
we expect that the specific direction, emphasis and components
of our executive compensation program will continue to evolve.
For example, over time, we expect to reduce our reliance upon
subjective determinations made by our Chief Executive Officer in
favor of a more empirically based approach that involves
benchmarking the compensation paid to our executive officers
against peer companies that we identify and the use of clearly
defined, objective targets to determine incentive compensation
awards. We may also reduce our executive compensation
program’s emphasis on stock options as a long-term
incentive component in favor of other forms of equity
compensation such as restricted stock awards. Anticipating these
changes, beginning in 2007 we engaged a compensation consultant
to more proactively assist our compensation committee in
continuing to develop our executive compensation program, and in
the future we may look to programs implemented by comparable
public companies in refining our compensation approach.
Our
Executive Compensation Philosophy and Objectives
We have designed our executive compensation program to attract,
retain and motivate highly qualified executives and to align
their interests with the interests of our stockholders. Our
business model is based on our ability to establish long-term
relationships with clients and to maintain our strong mission,
client focus, entrepreneurial spirit and team orientation. We
have sought to create an executive compensation package that
balances short-term versus long-term components, cash versus
equity elements and fixed versus contingent payments, in ways we
believe are most appropriate to motivate senior management and
reward them for achieving the following goals:
•
develop a culture that embodies a passion for our business,
creative contribution and a drive to achieve established goals
and objectives;
•
provide leadership to the organization in such a way as to
maximize the results of our business operations;
•
lead us by demonstrating forward thinking in the operation,
development and expansion of our business;
•
effectively manage organizational resources to derive the
greatest value possible from each dollar invested; and
•
take strategic advantage of the market opportunity to expand and
grow our business.
We believe that having a compensation program designed to align
executive officers to achieve business results and to reinforce
accountability is the cornerstone to successfully implement and
achieve our strategic plan. In determining the compensation of
our executive officers, we are guided by the following key
principles:
•
Competition. Compensation should reflect the
competitive marketplace, so we can retain, attract and motivate
talented executives.
•
Accountability for Business
Performance. Compensation should be tied to
financial performance, so that executives are held accountable
through their compensation for contributions to the performance
of the company as a whole through the performance of the
businesses for which they are responsible.
•
Accountability for Individual
Performance. Compensation should be tied to the
individual’s performance to encourage and reflect
individual contributions to our performance. We consider
individual performance as well as performance of the businesses
and responsibility areas that an individual oversees, and weigh
these factors as appropriate in assessing a particular
individual’s performance.
•
Alignment with Stockholder
Interests. Compensation should be tied to our
financial performance through equity awards to align
executives’ interests with those of our stockholders.
Our executive compensation structure not only aims to be
competitive in our industry, but also to be fair relative to
compensation paid to other professionals within our
organization, relative to our short-term and long-term
performance and relative to the value we deliver to our
stockholders. We seek to maintain a performance-oriented culture
and a compensation approach that rewards our executive officers
when we achieve our goals and objectives, while putting at risk
an appropriate portion of their compensation against the
possibility that our goals and objectives may not be achieved.
Determination
of Executive Compensation Awards
Historically, compensation decisions for our executive officers
were approved by our board of directors upon the recommendation
of our compensation committee, which in turn relied upon the
recommendation of our Chief Executive Officer. We have
traditionally placed significant emphasis on the recommendation
of our Chief Executive Officer with respect to the determination
of executive compensation (other than his own), in particular
with respect to the determination of base salary, cash incentive
and equity incentive awards, and typically followed such
recommendations as presented by our Chief Executive Officer.
Following this offering, our compensation committee will be
solely responsible for administering our executive compensation
program, although we expect to continue to rely, in part, upon
the advice and recommendations of our Chief Executive Officer,
particularly with respect to those executive officers that
report directly to him. The compensation committee’s
composition and oversight of our executive compensation program
is described in more detail below and in the section above
entitled “Board Composition — Board
Committees — Compensation Committee.”
For purposes of determining our executive officer compensation
in 2006 and in prior years, we considered the following factors:
our understanding of the amount of compensation generally paid
by professional service firms or similarly situated companies to
their executives with similar roles and responsibilities; the
roles and responsibilities of our executives; the individual
experience and skills of, and expected contributions from, our
executives; the amounts of compensation being paid to our other
executives; and our executives’ historical compensation at
our company; an assessment of the professional effectiveness and
capabilities of the executive officer; and the performance of
the executive officer against the corporate and other scorecards
used to determine incentive compensation. While we have not used
any formula to determine compensation based on these factors, we
have placed the most emphasis in determining compensation on our
understanding of the amount of compensation generally paid by
professional service firms or similarly situated companies to
their executives with similar roles and responsibilities and the
subjective assessment of the professional effectiveness and
capabilities of the executive officer. Our understanding of the
amount of compensation generally paid by professional service
firms or by similarly situated companies was based on our
compensation committee’s and CEO’s own business
judgment and collective experience in such matters. This
understanding was not based on
quantitative data or benchmarking against any specific
professional service firm or similar company or set of
professional service firms or similar companies.
Beginning in January 2007, our management retained Axiom
Consulting Partners, a compensation consultant, to conduct an
assessment of our current executive compensation practices for
our NEOs. This market survey compared the compensation paid to
our Chief Executive Officer and our other NEOs to executives at
similar management levels and functions at over fifty software,
information technology services or other technology oriented
companies, located in metropolitan areas, that had annual
revenue of between approximately $100 million and
$200 million. This market survey was not considered by the
compensation committee in determining executive compensation for
fiscal 2006.
Also in early 2007, the compensation committee established a
goal to pay our NEOs, in subsequent years, at the
60th percentile of the market survey results for base
salary compensation, at the 60th percentile for total cash
compensation (i.e., base salary plus cash incentives awards) for
achievement of pre-defined performance objectives (as set forth
below) and at the 75th percentile for total cash
compensation for superior achievement in excess of these
pre-defined objectives (as set forth below). For NEOs other than
our Chief Executive Officer, the pre-defined performance
objectives would be established in the form of corporate and
similar scorecards, as described below. In the case of our Chief
Executive Officer, the pre-defined performance objectives would
be established in the form of specified financial targets, as
described below. The percentile rankings are made with reference
to compensation paid to executives at similar management levels
and functions. Although the compensation committee established
this executive compensation objective in 2007, as described
below, it did not adjust 2007 base salary and total cash
compensation for all of our NEOs to the 60th percentile or 75th
percentile, as applicable. The compensation committee intends to
reach this objective over time as our annual revenue reaches the
level of annual revenue of the companies in the Axiom market
survey, but the compensation committee has not set a specific
date as a deadline for achieving this objective.
Components
of our Executive Compensation Program
Our executive compensation program currently consists of three
components:
•
base salary;
•
cash incentives paid in quarterly installments linked to
corporate (or in some cases individual) performance; and
•
periodic grants of long-term stock-based compensation, such as
stock options.
Our compensation philosophies with respect to each of these
elements, including the basis for the compensation awarded to
each of our executive officers, are discussed below. In
addition, although each element of compensation described below
is considered separately, the compensation committee takes into
account the aggregate compensation package for each individual
in its determination of each individual component of that
package. The committee’s philosophy is to put significant
weight on those aspects of compensation tied to performance,
such as annual cash incentives based on measurable performance
objectives and long-term incentives in the form of stock options.
Base
Salary
The base salary of our NEOs is reviewed on an annual basis.
Prior to this offering, adjustments were made to reflect
performance-based factors, as well as competitive and market
conditions. With respect to the performance-based component,
such determinations were based upon a subjective assessment of
professional effectiveness and capabilities. In the case of our
NEOs other than Mr. Bush, this assessment was made by
Mr. Bush and was informed by his personal annual
performance evaluation of the executive, since each of these
executives report directly to him. In the case of Mr. Bush,
this assessment was made by our compensation committee.
Historically we have not applied specific formulas to set base
salary or to determine
salary increases, nor have we sought to formally benchmark base
salary against similarly situated companies. Generally,
executive officer salaries are adjusted effective the first
quarter of each year.
With respect to each NEO other than Mr. MacDonald, 2006
base salary was largely determined with the goal of paying the
executive an amount that our CEO believed was necessary to be
competitive with base salaries at a similarly situated company
or professional services firm, based on his own business
judgement and experience in such matters and not based on
quantitative data or benchmarking, and to a lesser degree
informed by his subjective assessment of the executive as
described above. While mindful of competitive factors in
determining base salary for our executive officers, our
compensation philosophy places significant weight on those
aspects of compensation tied to performance, such as annual cash
incentives and long-term incentives in the form of stock
options, as further described below.
We hired Mr. MacDonald as our Chief Operating Officer in
September 2006 and established his base salary at $300,000 per
year, on an annualized basis. His base salary was negotiated
based on his prior experience, his prior levels of compensation,
and competitive market factors. Mr. MacDonald’s salary
did not increase in 2007 because the compensation committee had
set his 2006 salary so late in the calendar year. In reviewing
the Axiom market survey, the compensation committee observed
that 2006 base salary compensation for each of
Messrs. Bush, Park and Byers was below the median of the
companies surveyed. Although base salary for 2007 for each of
Messrs. Bush and Byers is still below the median of the
companies surveyed, the significant increases in their salaries
set forth below reflect the effort of the compensation committee
to move their base salaries towards the 60th percentile
over time. 2007 base salaries for each of Messrs. Park and
Nolin are above the median but less than the
60th percentile of these companies. The compensation
committee intends to reach the 60th percentile objective for
Messrs. Bush, Park, Byers and Nolin over time as our annual
revenue reaches the level of annual revenue of the companies in
the Axiom market survey, but the compensation committee has not
set a specific date as a deadline for achieving this objective.
2007 base salary for Mr. MacDonald is above the 60th
percentile but less than the 75th percentile.
The following table sets forth base salaries of our NEOs for
2006 and 2007 and the percentage increase for each NEO.
% Increase
Executive
2006 Salary(1)
2007 Salary
(2006-2007)
Jonathan Bush
$
300,000
$
350,000
16.7
%
Carl B. Byers
200,000
240,000
20.0
Todd Y. Park
242,000
270,000
11.6
Christopher E. Nolin
220,500
225,000
2.0
James M. MacDonald
300,000
300,000
—
(1)
Represents base salary during 2006 on an annualized basis. For
amounts actually paid during 2006, see “— Summary
Compensation Table” below.
Cash
Incentives Awards
For 2006, cash incentive awards for Messrs. Bush, Park and
MacDonald were tied to the achievement of our annual company
goals and objectives, which are set forth in the corporate and
financial scorecards described below. Cash incentive awards were
paid to Messrs. Bush, Park and MacDonald on a quarterly
basis. The compensation committee set a bonus target amount for
each of these executive officers that was equal to a certain
percentage of their base salary, as set forth below (although in
the case of Mr. MacDonald, pro rated from his date of hire
in September 2006). The target percentage was adjustable up or
down based on our performance as measured against the corporate
and financial scorecards. In 2006, the bonus percentage earned
was adjusted (upward or downward, as applicable) by 3% for every
1% of variance from the applicable scorecard target. The annual
performance bonus for the first three quarters is based on a
year-to-date corporate and financial scorecard value and the
annual performance bonus for the fourth quarter is based on the
annual
corporate and financial scorecard values. Our compensation
committee approved the corporate and financial scorecards as
summarized below:
Corporate scorecard. Our corporate scorecard
is comprised of 22 specific performance metrics, which as
set forth below is comprised of financial metrics, client
satisfaction metrics, service operations metrics and employee
based metrics, and each metric is assigned a different
percentage value (although none more than 10%) of the overall
scorecard value. These categories of performance metrics are
designed to capture all of the important operational and
financial aspects of the organization:
•
The financial metrics comprise 30% of the overall scorecard
value and are comprised of gross margin targets, revenue
targets, and the estimated value of new contracts, which we
refer to as bookings.
•
The client metrics comprise 25% of the overall scorecard value
and are comprised of client satisfaction targets, client
days-in-accounts
receivable, or DAR, and the amount of client claims that are
written off and not collected.
•
The service metrics comprise 25% of the overall scorecard value
and are comprised of eight distinct metrics designed to measure
the turn-around time in processing the claims of our clients,
such as claims processing, posting and tracking metrics, and
five distinct metrics designed to measure the quality of our
service offerings, such as claim denial metrics.
•
The employee based metrics comprise 20% of the overall scorecard
value and are comprised of the voluntary turnover rate and the
percentage of employees certified on their relevant
certification programs.
Since the components of the corporate scorecard, other than
certain of the financial metrics which are discussed below,
contain highly sensitive data such as service operation results,
we do not disclose all of our specific performance measures and
targets because we believe that such disclosure would result in
serious competitive harm. We believe the targets within each of
the corporate and financial scorecards were designed to be
challenging but attainable if we had what we considered to be a
successful year. The elements included in the corporate
scorecard have changed over time as we gain experience using
them, and are likely to be adjusted in the future as well.
Financial scorecard. Our financial scorecard
consists of the three metrics on the corporate scorecard that
are in the financial category: revenue, gross margin and
bookings (each of which is equally weighted). For 2006, our
annualized bookings target represented an increase of 66.4% over
our actual bookings for 2005 and our actual bookings in 2006
represented 66.2% of this target. Since the targeted bookings
growth metric in the financial scorecard is highly sensitive
data, we do not disclose the specific performance measure and
target for this metric because we believe that such disclosure
would result in serious competitive harm. We set the targets for
the bookings metric at a high level because we are a growth
oriented company and rely on bookings to help drive our growth.
Additionally, the value associated at the time of booking is an
estimate of the revenue we expect to receive from new clients
which, in turn, is based on an estimate of what the
client’s total collections will be using our services. The
number is an estimate based on an estimate which means it is
inherently volatile and can not be used predict actual revenue.
Our revenue and gross margin targets are summarized below.
Metric
Q1 Target
Q1 Score
Q2 Target
Q2 Score
Q3 Target
Q3 Score
Annual Target
Annual Score
Total revenue
$16.9 million
99.2%
$18.3 million
101.2%
$20.7 million
94.2%
$75.9 million
95.9%
Gross margin
47.2%
100.1%
47.2%
99.8%
49.4%
95.6%
47.4%
96.0%
The above-referenced performance targets and scorecard results
were determined using our unaudited financial results and thus
differ from the actual results as reported in our audited
consolidated financial statements included elsewhere in this
prospectus. You should read these consolidated financial
statements, the related notes to these financial statements and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus. The above-referenced performance targets
should not be interpreted as a prediction of how we will
perform in future periods. As described above, the purpose of
these targets was to establish a method for determining the
payment of cash based incentive compensation. You are cautioned
not to rely on these performance goals as a prediction of our
future performance.
Although the compensation committee has discretion to award
annual cash incentives when targets are not met, historically no
discretion has been exercised by the compensation committee in
determining whether the targets described above have been
achieved as the targets are objective.
The following table contains the original and adjusted 2006
bonus target percentages for each of the following NEOs based on
the amounts attributable to the corporate scorecard and
financial scorecard:
Target
Corporate
Target
Financial
Corporate
Scorecard%
Financial
Scorecard%
Executive
Scorecard%
(As Adjusted)
Scorecard%
(As Adjusted)
Jonathan Bush
30.0
%
19.8
%
20.0
%
—
Todd Y. Park
22.5
12.3
7.5
—
James M. MacDonald(1)
30.0
19.8
10.0
—
(1)
Since Mr. MacDonald joined athenahealth in September 2006,
actual payments were pro rated on a going forward basis from his
date of hire.
As described above, in 2006, the bonus percentage earned was
adjusted by 3% for every 1% of variance from the applicable
scorecard target. For the 2006 corporate scorecard, the
financial metrics were 86.0% of target, the client metrics were
96.4% of target, the service metrics were 101.9% of target and
the employee based metrics were 106.3% of target. Overall, the
2006 corporate scorecard was 96.6% of target. Since that number
was 3.4% off of target, the target bonus percentage for each of
Messrs. Bush, Park and MacDonald was reduced by 10.2%. The
2006 financial scorecard was 86.0% of target. Since that number
was 14.0% off of the target, the target bonus percentage for
each of Messrs. Bush, Park and MacDonald was reduced by a
percentage greater than their target bonus percentage. As a
result, the 2006 bonus paid to each of these executive officers
did not include any amount attributable to the financial
scorecard.
In addition, Mr. MacDonald received an additional signing bonus
of $53,308 in 2006 to compensate him in part for the cost to him
associated with the timing of his transition to athenahealth
from his prior employer.
For 2006, annual cash incentive bonuses for Messrs. Byers
and Nolin were based on the recommendation of our Chief
Executive Officer based on his subjective assessment of the
professional effectiveness and accomplishments of these
executives during 2006, with the goal of rewarding and
encouraging short-term performance. Although beginning in 2007
the compensation committee expects to determine cash-based
incentive awards for these executives based on the corporate
scorecard program described above, for 2006 these awards were
discretionary and not based upon a pre-determined incentive plan
arrangement. For each of Messrs. Byers and Nolin, their
2006 bonus target was 25% of their base salary. For 2006,
Mr. Byers received a cash bonus in the amount of $30,000,
representing approximately 15% of his base salary for 2006, and
Mr. Nolin received a cash bonus in the amount of $67,000,
representing approximately 30% of his base salary for 2006.
Mr. Nolin was awarded an amount in excess of his target
amount in recognition of his extraordinary work effort and
leadership in connection with the legal department’s
preparation for this offering during fiscal 2006, based on the
subjective determination of our Chief Executive Officer and not
on any quantitative factors. Mr. Byers was awarded an
amount below his target because he received a 20% raise in his
2007 base salary (as described above) based on the results of
the Axiom market survey. This survey was completed after the
2006 bonus target was set for Mr. Byers but before his
actual 2006 bonus was paid. Our Chief Executive Officer
subjectively determined that awarding Mr. Byers a bonus
greater than 15% of his base salary would have resulted in total
cash compensation in any one calendar year in excess of the
level necessary to retain Mr. Byers. The Summary
Compensation Table includes all bonus awards approved by the
Compensation Committee for the NEOs.
Beginning in 2007, our chief executive officer’s bonus will
be based only on our earnings before interest taxes depreciation
and amortization, or EBITDA. This goal was based on the
Compensation Committee’s interest in linking
Mr. Bush’s annual cash incentive compensation directly
to our profitability. Based on EBITDA achievement,
Mr. Bush’s bonus will range in 2007 from $0 to
$0.3 million and, subject to compensation committee
approval, he will be granted options ranging from 0 to
90,000 shares on the same basis. At budgeted EBITDA, this
bonus would be $0.2 million and options to purchase
45,000 shares of our common stock at fair value at the time
of grant. The bonus is adjustable up or down based on actual
EBITDA as measured against budgeted EBITDA.
Beginning in 2007, all of our other NEOs will receive their cash
incentive awards on a quarterly basis and the amounts paid will
be determined based on the corporate scorecard as described
above, the corporate growth scorecards described below.
In 2007, the corporate scorecard is comprised of the following
measures: revenue, gross margin, EBITDA, client satisfaction,
days-in-accounts receivable, lost patient care revenue, the
client work rate, employee engagement, the first and second pass
resolution rates and the voluntary turnover rate. The growth
scorecard is comprised of the following measures: revenues, the
estimated value of new contracts, client satisfaction with
sales, quarterly forecast accuracy, new prospect meetings,
employee engagement on the growth team and the voluntary rate on
the growth team.
These scorecards are assigned to NEOs based on their areas of
primary accountability. Mr. Park is primarily focused on
our growth, so his 2007 annual cash incentives are tied to the
growth scorecard. Messrs. Byers and Nolin are primarily
focused on our performance overall, so their 2007 annual cash
incentives are tied to the corporate scorecard.
Mr. MacDonald is focused more specifically on our goals
other than sales, so his 2007 annual cash incentives are tied to
the corporate scorecard excluding bookings.
Since the components of the corporate scorecard and the growth
scorecard contain highly sensitive data such as targeted revenue
growth and service operation results, we do not disclose
specific performance measures and targets because we believe
that such disclosure would result in serious competitive harm.
The compensation committee designed these targets within these
scorecards to be challenging but attainable if we have what we
consider to be a successful year. Although the compensation
committee has discretion to award annual cash incentives when
targets are not met, historically no discretion has been
exercised by the compensation committee in determining whether
the targets have been achieved as the targets are objective.
Long-term
Stock-Based Compensation
Our long-term compensation program has historically consisted
solely of stock options. Option grants made to executive
officers are designed to provide them with incentive to execute
their responsibilities in such a way as to generate long-term
benefit to us and our stockholders. Through possession of stock
options, our executives participate in the long-term results of
their efforts, whether by appreciation of our company’s
value or the impact of business setbacks, either
company-specific or industry-based. Additionally, stock options
provide a means of ensuring the retention of our executive
officers, in that they are in almost all cases subject to
vesting over an extended period of time.
Stock options provide executives with a significant and
long-term interest in our success. By only rewarding the
creation of shareholder value, we believe stock options provide
our NEOs with an effective risk and reward profile. Although it
is our current practice to use stock options as our sole form of
long-term incentive compensation, the compensation committee
reviews this practice on an annual basis in light of our overall
business strategy, existing market-competitive best practices
and other factors.
Stock options are granted periodically and are subject to
vesting based on the executive’s continued employment.
Historically we have granted our executive officers a
combination of incentive stock options that vest over a period
of time and non-qualified stock options that are immediately
exercisable but the shares issued upon exercise are subject to
vesting. Incentive stock options were the primary type of stock
options granted to our executive officers early in the
company’s development. Starting in 2000, we granted
non-qualified stock options that were immediately exercisable
because this approach enabled exercise prior to vesting which
provided certain advantages with regard to achieving stock
ownership sooner and at a time when the fair value of stock was
lower. Most options vest evenly over four years, beginning on
the date of the grant.
Prior to the offering, the exercise price of options was
determined by our board of directors, with input from
management, after taking into account a variety of factors,
including the nature and history of our business and our
significant accomplishments and future prospects. For additional
discussion of these factors please see “Management’s
Discussion & Analysis — Stock-Based
Compensation.”
Stock options are granted to our NEOs in amounts determined by
the compensation committee in its discretion. Grants have not
been formula-based, but instead have historically been granted
taking into account a mixture of the following qualitative
factors: the executives’ level of responsibility; the
competitive market for the executive’s position; the
executive’s potential contribution to our growth; and the
subjective assessment of the professional effectiveness and
capabilities of these executives as determined by our Chief
Executive Officer for our NEOs other than our Chief Executive
Officer and by our compensation committee for our Chief
Executive Officer. Although no specific number of options
granted can be attributable to any specific factor, we have
placed the most emphasis in determining the amount of the stock
options grants on the competitive market for the
executive’s position and the executive’s potential
contribution to our success. Additionally, larger awards are
typically made to the NEOs that have areas of responsibility and
function that are more likely to build long-term shareholder
value as determined by how directly linked their areas of
responsibility and function are to the growth of the Company.
Relative to other NEOs, larger awards are typically made to each
of Messrs. Bush and Park in light of their areas of
responsibility and function which are more directly linked to
the growth of the Company than other NEOs.
In 2006, our compensation committee awarded the following
non-qualified stock options to our NEOs. The awards made in
February 2006 to Messrs. Byers, Park and Nolin were made by
the compensation committee taking into account the
recommendation of our Chief Executive Officer. The
recommendation for Mr. Park was based on the following factors:
that in the business judgment and experience of our Chief
Executive Officer an award of 35,000 options was necessary to
remain competitive with the market for his services; that Mr.
Park, as the Chief Development Officer, has an area of
responsibility and function that is directly linked to the
growth of the Company; and to a lesser degree on our Chief
Executive Officer’s subjective assessment of the
professional effectiveness and capabilities of Mr. Park. The
recommendation for Messrs. Byers and Nolin was based on the
following factors: that in the business judgment and experience
of our Chief Executive Officer an award of 5,000 options was
necessary to remain competitive with the market for their
continued services; that Messrs. Byers and Nolin, as the Chief
Financial Officer and General Counsel, respectively, have areas
of responsibility and function that are not directly linked to
the growth of the Company; and to a lesser degree on our Chief
Executive Officer’s subjective assessment of the
professional effectiveness and capabilities of Messrs. Byers and
Nolin. The award made in July 2006 to Mr. Bush by our
compensation committee was based on the following factors: that
in the business judgment and experience of
our compensation committee an award of 50,000 options was
necessary to remain competitive with the market for his
services; that Mr. Bush, as the Chief Executive Officer, has an
area of responsibility and function that is directly linked to
the growth of the Company; and to a lesser degree on our
compensation committee’s subjective assessment of the
professional effectiveness and capabilities of Mr. Bush. The
award made in September 2006 to Mr. MacDonald was our
initial equity award to Mr. MacDonald in connection with
his joining athenahealth at that time. The award was made by the
compensation committee and was based on Mr. McDonald’s
prior experience, his prior levels of equity compensation, his
lack of equity ownership in athenahealth at the time of hiring
and competitive market factors.
On March 15, 2007, we awarded the following non-qualified
stock options to our NEOs. The awards made to our NEOs other
than Mr. Bush were made by the compensation committee
taking into account the recommendation of Mr. Bush based on
his subjective assessment of the professional effectiveness and
capabilities of these executives; Mr. Bush’s award was
based on our compensation committee’s subjective assessment
of the professional effectiveness and capabilities of
Mr. Bush.
Executive
Number of Options
Exercise Price
Jonathan Bush
45,000
$
7.39
Carl B. Byers
10,000
$
7.39
Todd Y. Park
35,000
$
7.39
Christopher E. Nolin
18,000
$
7.39
James M. MacDonald
11,500
$
7.39
Additionally, under the terms of their employment agreements,
Messrs. Bush, Park, Nolin and Byers are due to receive new
option bonuses upon the completion of a company milestone, as
defined in their employment agreements, if and when the company
achieves a positive net income for three consecutive months with
$10.0 million or more of cash, cash equivalents and
short-term investments on hand. Such options would be awarded by
our board of directors following achievement of these
milestones, and priced at fair value at the time of such grant.
This incentive would result in cash bonuses and option grants
with an exercise price at the fair value at the time of grant
subsequent to achievement of this milestone and in the following
amounts:
Number of
Cash
Executive
Options
Bonus
Jonathan Bush
120,000
$
25,000
Carl B. Byers
30,000
12,500
Todd Y. Park
70,000
12,500
Christopher E. Nolin
10,000
12,500
Because these potential option awards have not yet occurred they
are not included in the statements of beneficial ownership
elsewhere in this document. See “— Employment
Agreements and Change of Control Arrangements” for
additional discussion.
We have granted stock options as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as
amended, subject to the volume limitations contained in the
Internal Revenue Code, and we may, in the future, grant
non-qualified stock options. Generally, for stock options that
do not qualify as incentive
stock options, we are entitled to a tax deduction in the year in
which the stock options are exercised equal to the spread
between the exercise price and the fair value of the stock for
which the stock option was exercised. The holders of the
non-qualified stock options are generally taxed on this same
amount in the year of exercise. For stock options that qualify
as incentive stock options, we do not receive a tax deduction,
and the holder of the stock option may receive more favorable
tax treatment than he or she would receive for a non-qualified
stock option. We may choose to grant incentive stock options in
order to provide these potential tax benefits to our executives
and because of the limited expected benefits to our company of
the potential tax deductions as a result of our historical net
losses.
Our newly-adopted equity award grant policy formalizes our
process for granting equity-based awards to officers and
employees after this offering. Under our equity award grant
policy all grants must be approved by our board of directors or
compensation committee. All stock options will be awarded at
fair value and calculated based on our closing market price on
the grant date. Under our equity award grant policy, equity
awards will typically be made on a regularly scheduled basis, as
follows:
•
grants made in conjunction with the hiring of a new employee or
the promotion of an existing employee will be made on the first
trading day of the month following the later of (i) the hire
date or the promotion date or (ii) the date on which such grant
is approved; and
•
grants made to existing employees other than in connection with
a promotion will be made, if at all, on an annual basis.
Benefits
We provide the following benefits to our executive officers on
the same basis as the benefits provided to all employees:
•
health and dental insurance;
•
life insurance;
•
short-and long-term disability; and
•
401(k) plan.
These benefits are consistent with those offered by other
companies and specifically with those companies with which we
compete for employees.
Beginning on July 1, 2007, we will provide a qualified
matching contribution to each employee, including our executive
officers, who participate in our 401(k) plan. This matching
policy will provide a match of one-third of contributions up to
6% of eligible compensation.
Employment
Agreements and Change of Control Arrangements
Jonathan Bush. We are party to an employment agreement
with Jonathan Bush for the position of Chief Executive Officer.
The agreement provides for at-will employment, and a base annual
salary subject to annual review. Mr. Bush currently
receives a base salary of $350,000. Mr. Bush is eligible to
participate in our employee benefit plans, to the extent he is
eligible for those plans, on the same terms as other
similarly-situated executive officers of athenahealth. He is
also eligible for a bonus as described above. In addition, under
the terms of the agreement, if and when athenahealth achieves
positive net income for three consecutive months with
$10.0 million or more of cash, cash equivalents and
short-term investments on hand, Mr. Bush is due to receive
a one-time option bonus of 120,000 options and a one-time cash
bonus of $25,000. The option grant will be fully vested upon the
date of grant.
Carl B. Byers. We are party to an employment agreement
with Carl B. Byers for the position of Chief Financial Officer.
The agreement provides for at-will employment and for a base
annual salary subject to
annual review. Mr. Byers currently receives a base salary
of $240,000. Mr. Byers is eligible to participate in our
employee benefit plans, to the extent he is eligible for those
plans, on the same terms as other similarly-situated executive
officers of athenahealth and is eligible for a bonus as
described above. In addition, if and when athenahealth achieves
positive net income for three consecutive months with
$10.0 million or more of cash, cash equivalents and
short-term investments on hand, Mr. Byers is due to receive
a one-time option bonus of 30,000 options and a one-time cash
bonus of $12,500. The option grant will be fully vested upon the
date of grant.
Todd Y. Park. We are party to an employment agreement
with Todd Y. Park for the position of Chief Development Officer.
The agreement provides for at-will employment at a base annual
salary subject to annual review. Mr. Park currently
receives a base salary of $270,000. Mr. Park is eligible to
participate in our employee benefit plans, to the extent he is
eligible for those plans, on the same terms as other
similarly-situated executive officers of athenahealth and is
eligible for a bonus as described above. In addition, if and
when athenahealth achieves positive net income for three
consecutive months with $10.0 million or more of cash, cash
equivalents and short-term investments on hand, Mr. Park is
due to receive a one-time option bonus of 70,000 options and a
one-time cash bonus of $12,500. The option grant will be fully
vested upon the date of grant.
Christopher E. Nolin. We are party to an employment
agreement with Christopher E. Nolin for the position of General
Counsel. The agreement provided for at-will employment at a base
annual salary subject to annual review. Mr. Nolin currently
receives a base salary of $225,000. Mr. Nolin is eligible
to participate in our employee benefit plans, to the extent he
is eligible for those plans, on the same terms as other
similarly-situated executive officers of athenahealth and is
eligible for a bonus as described above. In addition, if and
when athenahealth achieves positive net income for three
consecutive months with $10.0 million or more of cash, cash
equivalents and short-term investments on hand, Mr. Nolin
is due to receive a one-time option bonus of 10,000 options and
a one-time cash bonus of $12,500. The option grant will be fully
vested upon the date of grant.
James M. MacDonald. We are party to an employment
agreement with James M. MacDonald for the position of Chief
Operating Officer. The agreement provided for at-will
employment. The agreement provided for a base salary subject to
annual review and a one time option grant of 330,000 options.
Mr. MacDonald currently receives a base salary of $300,000.
Mr. MacDonald is eligible to participate in our employee
benefit plans, to the extent he is eligible for those plans, on
the same terms as other similarly-situated executive officers of
athenahealth and is eligible to receive a bonus as described
above.
Equity
Benefit Plans
2007
Stock Option and Incentive Plan
Our 2007 Option and Incentive Plan, or 2007 Stock Option Plan,
was adopted by our board of directors and approved by our
stockholders in 2007. The 2007 Option Plan permits us to make
grants of incentive stock options, non-qualified stock options,
stock appreciation rights, deferred stock awards, restricted
stock awards, unrestricted stock awards and dividend equivalent
rights. We have initially reserved 1,000,000 shares of our
common stock for the issuance of awards under the 2007 Option
Plan. The 2007 Stock Option Plan provides that the number of
shares reserved and available for issuance under the plan will
automatically increase each January 1, beginning in 2008, by an
additional number of shares which is equal to the lower of (i)
that number of shares as is necessary such that the total number
of shares reserved and available for issuance under the plan
(excluding shares reserved for issuance pursuant to awards
outstanding on such date) shall equal ten percent of the
outstanding number of shares of stock on the immediately
preceding December 31 and (ii) such lower number of shares
as may be determined by our board of directors. Notwithstanding
the foregoing, in no event will more than 20,000,000 shares be
issued under the 2007 Stock Option Plan.
The number of shares reserved for issuance under the 2007 Stock
Option Plan is subject to adjustment in the event of a stock
split, stock dividend or other change in our capitalization.
Generally, shares that are
forfeited or canceled from awards under the 2007 Option Plan
also will be available for future awards. No awards had been
granted under the 2007 Option Plan.
The 2007 Option Plan may be administered by either a committee
of at least two non-employee directors or by our full board of
directors, or the administrator. The administrator has full
power and authority to select the participants to whom awards
will be granted, to make any combination of awards to
participants, to accelerate the exercisability or vesting of any
award and to determine the specific terms and conditions of each
award, subject to the provisions of the 2007 Option Plan.
All full-time and part-time officers, employees, non-employee
directors and other key persons (including consultants and
prospective employees) are eligible to participate in the 2007
Option Plan, subject to the discretion of the administrator.
There are certain limits on the number of awards that may be
granted under the 2007 Option Plan. For example, no more than
shares of common stock may be granted in the form of stock
options or stock appreciation rights to any one individual
during any one-calendar-year period.
The exercise price of stock options awarded under the 2007
Option Plan may not be less than the fair value of our common
stock on the date of the option grant and the term of each
option may not exceed ten years from the date of grant. The
administrator will determine at what time or times each option
may be exercised and, subject to the provisions of the 2007
Option Plan, the period of time, if any, after retirement,
death, disability or other termination of employment during
which options may be exercised.
To qualify as incentive options, stock options must meet
additional federal tax requirements, including a $100,000 limit
on the value of shares subject to incentive options which first
become exercisable in any one calendar year, and a shorter term
and higher minimum exercise price in the case of certain large
stockholders.
Stock appreciation rights may be granted under our 2007 Option
Plan. Stock appreciation rights allow the recipient to receive
the appreciation in the fair value of our common stock between
the exercise date and the date of grant. The administrator
determines the terms of stock appreciation rights, including
when such rights become exercisable and whether to pay the
increased appreciation in cash or with shares of our common
stock, or a combination thereof.
Restricted stock may be granted under our 2007 Option Plan.
Restricted stock awards are shares of our common stock that vest
in accordance with terms and conditions established by the
administrator. The administrator will determine the number of
shares of restricted stock granted to any employee. The
administrator may impose whatever conditions to vesting it
determines to be appropriate. For example, the administrator may
set restrictions based on the achievement of specific
performance goals. Shares of restricted stock that do not vest
are subject to our right of repurchase or forfeiture.
Deferred and unrestricted stock awards may be granted under our
2007 Option Plan. Deferred stock awards are units entitling the
recipient to receive shares of stock paid out on a deferred
basis, and are subject to such restrictions and conditions as
the administrator shall determine. Our 2007 Option Plan also
gives the administrator discretion to grant stock awards free of
any restrictions.
Dividend equivalent rights may be granted under our 2007 Option
Plan. Dividend equivalent rights are awards entitling the
grantee to current or deferred payments equal to dividends on a
specified number of shares of stock. Dividend equivalent rights
may be settled in cash or shares and are subject to other
conditions as the administrator shall determine.
Cash-based awards may be granted under our 2007 Option Plan.
Each cash-based award shall specify a cash-denominated payment
amount, formula or payment ranges as determined by the
administrator. Payment, if any, with respect to a cash-based
award may be made in cash or in shares of stock, as the
administrator determines.
Unless the administrator provides otherwise, our 2007 Option
Plan does not allow for the transfer of awards and only the
recipient of an award may exercise an award during his or her
lifetime.
In the event of a merger, sale or dissolution, or a similar
“sale event,” unless assumed or substituted, all stock
options and stock appreciation rights granted under the 2007
Option Plan will automatically become fully exercisable, all
other awards granted under the 2007 Option Plan will become
fully vested and non-forfeitable and awards with conditions and
restrictions relating to the attainment of performance goals may
become vested and non-forfeitable in connection with a sale
event in the administrator’s discretion. In addition, upon
the effective time of any such sale event, the 2007 Option Plan
and all awards will terminate unless the parties to the
transaction, in their discretion, provide for appropriate
substitutions or assumptions of outstanding awards. Any award so
assumed or continued or substituted shall be deemed vested and
exercisable in full upon the date on which the grantee’s
employment or service relationship with us terminates if such
termination occurs (i) within 18 months after such
sale event and (ii) such termination is by us or a
successor entity without cause or by the grantee for good reason.
No awards may be granted under the 2007 Option Plan
after 2017.
In addition, our board of directors may amend or discontinue the
2007 Option Plan at any time and the administrator may amend or
cancel any outstanding award for the purpose of satisfying
changes in law or for any other lawful purpose. No such
amendment may adversely affect the rights under any outstanding
award without the holder’s consent. Other than in the event
of a necessary adjustment in connection with a change in our
stock or a merger or similar transaction, the administrator may
not “reprice” or otherwise reduce the exercise price
of outstanding stock options or stock appreciation rights.
Further, amendments to the 2007 Option Plan will be subject to
approval by our stockholders if the amendment (i) increases
the number of shares available for issuance under the 2007
Option Plan, (ii) expands the types of awards available
under, the eligibility to participate in, or the duration of,
the plan, (iii) materially changes the method of
determining fair value for purposes of the 2007 Option Plan,
(iv) is required by the Nasdaq Global Market rules, or
(v) is required by the Internal Revenue Code of 1986, as
amended, or the Code, to ensure that incentive options are
tax-qualified.
2007
Employee Stock Purchase Plan
Our 2007 Employee Stock Purchase Plan, or 2007 ESPP, was adopted
by our board of directors and approved by our stockholders in
2007 and will become effective upon the completion of this
offering. We have reserved a total
of shares
of our common stock for issuance to participating employees
under the 2007 ESPP.
All of our employees, including our directors who are employees
and all employees of any of our participating subsidiaries, who
have been employed by us for at least six months prior to
enrolling in the 2007 ESPP, who are employees on the first day
of the offering period, and whose customary employment is for
more than twenty hours a week, will be eligible to participate
in the 2007 ESPP. Employees who would, immediately after being
granted an option to purchase shares under the 2007 ESPP,
own % or more of the total combined
voting power or value of our common stock will not be eligible
to participate in the 2007 ESPP.
We will make one or more offerings to our employees to purchase
stock under the purchase 2007 ESPP. The first offering will
begin on the first day of our initial public offering and end
on ,
2007. Subsequent offerings will begin on each April 1 and
October 1, or the first business day thereafter and end on
the last business day occurring on or before the following
September 30 and March 31, respectively. During each
offering period, payroll deductions will be made and held for
the purchase of the common stock at the end of the offering
period.
On the first day of a designated payroll deduction period, or
offering period, we will grant to each eligible employee who has
elected to participate in the 2007 ESPP an option to purchase
shares of our common stock. The employee may authorize
deductions from %
to % of his compensation for each
payroll period during the offering period. On the last day of
the offering period, the employee will be deemed to have
exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the
2007 ESPP, the option exercise price shall be equal
to % of the closing price of the
common stock on the exercise date.
An employee who is not a participant on the last day of the
offering period will not be entitled to exercise any option, and
the employee’s accumulated payroll deductions will be
refunded. An employee’s rights under the 2007 ESPP will
terminate upon voluntary withdrawal from the 2007 ESPP at any
time, or when the employee ceases employment for any reason,
except that upon termination of employment because of death, the
balance in the employee’s account will be paid to the
employee’s beneficiary.
1997
Stock Plan and 2000 Stock Plan
Our 1997 Option Plan was adopted by our board of directors and
approved by our stockholders in October 1997. We reserved
600,000 shares of our common stock for the issuance of
awards under the 1997 Option Plan.
Our 1997 Option Plan is administered by our compensation
committee, or in the absence of any such committee, by the full
board of directors. Our compensation committee has the full
power and authority to select the individuals to whom awards
will be granted, to make any combination of awards to
participants, to accelerate the exercisability or vesting of any
award, to provide substitute awards and to determine the
specific terms and conditions of each award, subject to the
provisions of the 1997 Option Plan.
The 1997 Option Plan permits us to make grants of incentive
stock options, non-qualified stock options, restricted stock
awards and unrestricted stock awards to employees. Stock options
granted under the 1997 Option Plan have a maximum term of ten
years from the date of grant and incentive stock options have an
exercise price of no less than the fair value of our common
stock on the date of grant.
Upon a sale event in which all awards are not assumed or
substituted by the successor entity, we may take such action
with respect to such awards as the compensation committee or the
board of directors may deem to be equitable and in the best
interests of athenahealth and its stockholders under the
circumstances. Under the 1997 Option Plan, a sale event is
defined as (i) the consolidation of athenahealth with
another entity, (ii) the acquisition of athenahealth by
another entity in a merger, or (iii) the sale of all or
substantially all of athenahealth assets.
Our 2000 Option Plan was adopted by our board of directors in
January 2000 and approved by our stockholders in March 2000. We
reserved 5,834,181 shares of our common stock for the
issuance of awards under the 2000 Option Plan.
Our 2000 Option Plan is administered by our board of directors.
Our board of directors has the authority to delegate full power
and authority to a committee of the board to select the
individuals to whom awards will be granted, to make any
combination of awards to participants, to accelerate the
exercisability or vesting of any award, to provide substitute
awards and to determine the specific terms and conditions of
each award, subject to the provisions of the 2000 Option Plan.
The 2000 Option Plan permits us to make grants of incentive
stock options, non-qualified stock options, restricted stock
awards and any other stock-based award to officers, employees,
directors, consultants and advisors. Stock options granted under
the 2000 Option Plan have a maximum term of ten years from the
date of grant and incentive stock options have an exercise price
of no less than the fair value of our common stock on the date
of grant.
Upon a sale event in which all awards are not assumed or
substituted by the successor entity, all outstanding awards,
unless otherwise provided in those awards, shall remain our
obligation and there shall be automatically substituted for the
shares of common stock then subject to such awards either
(A) the consideration payable with respect to the
outstanding shares of common stock in connection with the sale
event, (B) shares of stock of the surviving or acquiring
corporation or (C) such other securities as the board of
directors deems appropriate (the fair value of which (as
determined by the board of directors in its sole discretion)
shall not materially differ from the fair value of the shares of
common stock subject to such awards immediately preceding the
sale event), and the vesting provisions of all the unvested
awards shall become accelerated by a period of one year. Under
the 2000 Option Plan, a sale event is defined as (i) the
sale of athenahealth by merger in which our shareholders in
their capacity as such no longer own a majority of the
outstanding equity securities of athenahealth (or its
successor); or (ii) any sale of all or substantially all of
the
assets or capital stock of athenahealth (other than in a
spin-off or similar transaction) or (iii) any other
acquisition of the business of athenahealth, as determined by
the board of directors.
Following this offering, our board of directors does not intend
to grant any further awards under the 2000 Option Plan. We
intend to adopt the 2007 Stock Option and Incentive Plan, under
which we expect to make all future awards.
Summary Compensation. The following table sets
forth summary information concerning the compensation paid or
earned for services rendered to the Company in all capacities
during the fiscal year ended December 31, 2006 to the
Company’s Chief Executive Officer, Chief Financial Officer
and each of the other three most highly compensated persons
serving as executive officers of the Company during fiscal year
2006 who received total compensation in excess of $100,000 in
2006, who we refer to as an Named Executive Officers or NEOs.
Summary
Compensation Table(1)
Non-Equity
Incentive Plan
Salary
Bonus
Option Awards
Compensation
Total
Name and Principal Position
Year
($)
($)
($)(2)
($)(3)
($)
Jonathan Bush
2006
$
298,077
—
$
22,521
(4)
$
59,400
$
379,998
Chief Executive Officer,
President and Chairman of the Board
Carl B. Byers
2006
199,039
30,000
4,361
(5)
—
233,400
Senior Vice President, Chief
Financial Officer and Treasurer
Todd Y. Park
2006
241,154
—
26,164
(6)
30,134
297,452
Executive Vice President, Chief
Development Officer
Christopher E. Nolin
2006
220,096
67,000
4,361
(7)
—
291,457
Senior Vice President, General
Counsel and Secretary
James M. MacDonald
2006
75,000
53,308
(8)
98,098
(9)
14,850
241,256
Senior Vice President and Chief
Operating Officer
(1)
Column disclosing compensation under the headings “Stock
Awards,”“Change In Pension Value And Nonqualified
Deferred Compensation Earnings” and “All Other
Compensation” are not included because no compensation in
these categories were awarded to, earned by or paid to our named
executive officers in 2006. The compensation in this table also
does not include certain perquisites and other personal benefits
received by the named executive officers that did not exceed
$10,000 in the aggregate during 2006.
(2)
These amounts represent stock-based compensation expense for
stock option awards granted to each of Messrs. Bush, Byers,
Park, Nolin and MacDonald as described in (4), (5), (6),
(7) and (8) below. Stock-based compensation expense
for these awards was calculated in accordance with
SFAS No. 123(R) and is being amortized over the
vesting period of the related awards. The amounts reflected in
this table exclude the estimate of forfeitures applied by us
under SFAS No. 123(R) when recognizing stock-based
compensation expense for financial statement reporting purposes
in fiscal 2006. For a discussion of valuation assumptions the
section entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Critical Accounting Policies — Stock-Based
Compensation”. All stock option awards granted to each of
the above named officers prior to 2006 were accounted for in
accordance with APB Opinion No. 25 and were granted at
exercise prices equal to fair value on the date of grant.
Accordingly, there was no stock-based compensation expense
associated with the awards prior to 2006.
Represents annual and quarterly cash incentive awards earned for
2006 and paid in part in 2006 and in part in 2007 in the case of
Messrs. Bush, Park and MacDonald, and paid in 2007 in the
case of Messrs. Byers and Nolin. The awards are described
in more detail above in the section entitled “Cash
Bonus.”
(4)
Represents stock-based compensation expense recognized as
described in (2) above for a stock option award to purchase
50,000 shares of our common stock at an exercise price of
$6.16 per share, granted to Mr. Bush on July 27, 2006.
The option award is subject to vesting at the rate of 25% on the
first anniversary of the vesting start date and 25% on the next
three anniversaries thereafter. At December 31, 2006, there
was approximately $186,914 of unamortized stock-based
compensation expense related to this award excluding our
estimate of forfeitures, which will be amortized over the
remaining vesting period of the award.
(5)
Represents stock-based compensation expense recognized as
described in (2) above for a stock option award to purchase
5,000 shares of our common stock at an exercise price of
$5.26 per share, granted to Mr. Byers on February 28,2006. The option award is subject to vesting at the rate of 25%
on the first anniversary of the vesting start date and 25% on
the next three anniversaries thereafter. At December 31,2006, there was approximately $13,523 of unamortized stock-based
compensation expense related to this award excluding our
estimate of forfeitures, which will be amortized over the
remaining vesting period of the award.
(6)
Represents stock-based compensation expense recognized as
described in (2) above for a stock option award to purchase
30,000 shares of our common stock at an exercise price of
$5.26 per share, granted to Mr. Park on February 28,2006. The option award is subject to vesting at the rate of 25%
on the first anniversary of the vesting start date and 25% on
the next three anniversaries thereafter. At December 31,2006, there was approximately $81,137 of unamortized stock-based
compensation expense related to this award excluding our
estimate of forfeitures, which will be amortized over the
remaining vesting period of the award.
(7)
Represents stock-based compensation expense recognized as
described in (2) above for a stock option award to purchase
5,000 shares of our common stock at an exercise price of
$5.26 per share, granted to Mr. Nolin on February 28,2006. The option award is subject to vesting at the rate of 25%
on the first anniversary of the vesting start date and 25% on
the next three anniversaries thereafter. At December 31,2006, there was approximately $13,523 of unamortized stock-based
compensation expense related to this award excluding our
estimate of forfeitures, which will be amortized over the
remaining vesting period of the award.
(8)
Represents bonus paid to compensate Mr. MacDonald in part
for the cost to him associated with the timing of his transition
to athenahealth from his prior employer.
(9)
Represents stock-based compensation expense recognized as
described in (2) above for a stock option award to purchase
330,000 shares of our common stock at an exercise price of
$6.58 per share, granted to Mr. MacDonald on
November 3, 2006. The option award is subject to vesting at
the rate of 25% on the first anniversary of the vesting start
date and 25% on the next three anniversaries thereafter. At
December 31, 2006, there was approximately $1,378,422 of
unamortized stock-based compensation expense related to this
award excluding our estimate of forfeitures, which will be
amortized over the remaining vesting period of the award.
Grants of Plan-Based Awards. The following
table sets forth information concerning the stock option grants
made to each of the NEOs during the fiscal year ended
December 31, 2006 pursuant to the Company’s 1997 and
2000 Stock Option and Incentive Plans. The Company has never
granted any stock appreciation rights.
Grants of
Plan-Based Awards(1)
All Other
Option
Awards:
Exercise
Grant Date
Estimated Possible Payouts Under
Estimated Possible Payouts
Number of
or Base
Fair Value
Non-Equity Incentive Plan
Under Equity Incentive Plan
Securities
Price of
of Stock
Awards(2)(3)
Awards
Underlying
Option
and Option
Grant
Threshold
Target
Maximum
Threshold
Target
Maximum
Options
Awards
Awards
Name
Date
($)
($)
($)
(#)
(#)
(#)
(#)(3)
($/Sh)
($)
Jonathan Bush
7/27/06
—
—
—
50,000
(4)
$
6.16
$
$
—
$
14,400
$
60,000
18,600
60,000
10,860
60,000
15,540
60,000
Carl B. Byers
2/28/06
—
—
—
5,000
(5)
5.26
Todd Y. Park
2/28/06
—
—
—
30,000
(6)
5.26
—
8,391
36,750
11,821
36,750
3,050
36,750
6,872
36,750
Christopher E. Nolin
2/28/06
—
—
—
5,000
(7)
5.26
James M. MacDonald
11/3/06
—
—
—
330,000
(8)
6.58
—
67,000
—
(1)
Columns disclosing grants of plan-based awards under the
headings “Estimated Possible Payouts Under Equity Incentive
Plan Awards,” “All other Option Awards: Number of
Securities Underlying Options and “Exercise or Base Price
of Options Awards” are not included in this table because
no plan-based grants in these categories were granted to our
named executive officers in 2006.
(2)
Includes annual and quarterly cash incentive awards earned for
2006 and paid in part in 2006 and in part in 2007 in the case of
Messrs. Bush, Park and MacDonald, and in 2007 in the case
of Messrs. Byers and Nolin. The awards are described in
more detail above in the section entitled “Cash Bonus.”
(3)
Represents quarterly equity incentive awards earned for 2006 and
granted in 2006. The awards are described in more detail above
in the section entitled “Long Term Incentive
Compensation.”
(4)
Represents an option award to purchase 50,000 shares of our
common stock at an exercise price of $6.16 per share, granted to
Mr. Bush on July 27, 2006. The option award is subject
to vesting at the rate of 25% on the first anniversary of the
vesting start date and 25% on the next three anniversaries
thereafter.
(5)
Represents an option award to purchase 5,000 shares of our
common stock at an exercise price of $5.26 per share, granted to
Mr. Byers on February 28, 2006. The option award is
subject to vesting at the rate of 25% on the first anniversary
of the vesting start date and 25% on the next three
anniversaries thereafter.
(6)
Represents an option award to purchase 30,000 shares of our
common stock at an exercise price of $5.26 per share, granted to
Mr. Park on February 28, 2006. The option award is
subject to vesting at the rate of 25% on the first anniversary
of the vesting start date and 25% on the next three
anniversaries thereafter.
(7)
Represents an option award to purchase 5,000 shares of our
common stock at an exercise price of $5.26 per share, granted to
Mr. Nolin on February 28, 2006. The option award is
subject to vesting at the rate of 25% on the first anniversary
of the vesting start date and 25% on the next three
anniversaries thereafter.
(8)
Represents an option award to purchase 330,000 shares of
our common stock at an exercise price of $6.58 per share,
granted to Mr. MacDonald on November 3, 2006. The
option award is subject to vesting at the rate of 25% on the
first anniversary of the vesting start date and 25% on the next
three anniversaries thereafter.
Option Exercises and Unexercised Option
Holdings. The following table sets forth certain
information regarding the number and value of exercisable
options by each of the NEOs as of December 31, 2006 and the
number and value of unexercised options held by each of the NEOs
as of December 31, 2006.
Outstanding
Equity Awards at Fiscal Year-End(1)
Option Awards
Number of
Number of
Securities
Securities
Underlying
Underlying
Unexercised
Unexercised
Option
Options
Options
Exercise
Option
(#)
(#)
Price
Expiration
Name
Exercisable
Unexercisable
($)
Date
Jonathan Bush
65,000
(2)
—
$
0.62
3/18/2011
50,000
(3)
—
0.62
8/1/2013
130,849
(4)
—
0.62
8/1/2013
100,000
(5)
—
0.62
2/6/2014
10,000
(6)
—
3.50
4/27/2015
285,537
(7)
—
3.50
4/27/2015
50,000
(8)
—
6.16
7/27/2016
Carl B. Byers
5,000
(9)
—
3.50
4/27/2015
5,000
(10)
—
5.26
2/28/2016
Todd Y. Park
55,000
(11)
—
0.62
3/18/2011
50,000
(12)
—
0.62
8/1/2013
50,000
(13)
—
0.62
2/6/2014
10,000
(14)
—
3.50
4/27/2015
30,000
(15)
—
5.26
2/28/2016
Christopher E. Nolin
20,000
(16)
—
0.62
2/6/2014
5,000
(17)
—
3.50
4/27/2015
5,000
(18)
—
5.26
2/28/2016
James M. MacDonald
330,000
(19)
—
6.58
9/25/2016
(1)
Columns disclosing outstanding equity awards at fiscal year end
under the headings “Equity Incentive Plan Awards: Number of
Securities Underlying Unexercised Unearned Options,”“Number of Shares or Units of Stock That Have Not
Vested,”“Market Value of Shares of Stock That Have
Not Vested,”“Equity Incentive Plan Awards: Number of
Unearned Shares, Units or Other Rights That Have Not
Vested” and “Equity Incentive Plan Awards: Market or
Payout of Unearned Shares, Units or Other Rights That Have Not
Vested” are not included in this table because no equity
awards were outstanding in these categories for the fiscal year
ending 2006.
(2)
100% of the options in this grant were exercisable on
March 18, 2001 and 100% of the options in this grant were
vested as of February 1, 2005.
(3)
100% of the options in this grant were exercisable on
August 1, 2003 and 100% of the options in this grant were
vested as of January 1, 2007.
(4)
100% of the options in this grant were exercisable on
August 1, 2003 and 60% of the options in this grant vest
monthly until the third anniversary of the vesting start date
and the remaining vest monthly until fully vested on the fourth
anniversary of the vesting start date.
(5)
100% of the options in this grant were exercisable on
February 6, 2004 and 60% of the options in this grant were
vested as of the third anniversary of the vesting start date and
the remaining vest monthly until fully vested on the fourth
anniversary of the vesting start date.
100% of the options in this grant were exercisable on
April 27, 2005 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(7)
100% of the options in this grant were exercisable on
April 27, 2005 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(8)
100% of the options in this grant were exercisable on
July 27, 2006 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(9)
100% of the options in this grant were exercisable on
April 27, 2005 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(10)
100% of the options in this grant were exercisable on
February 28, 2006 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(11)
100% of the options in this grant were exercisable on
March 18, 2001 and 100% of the options in this grant were
vested as of February 1, 2005.
(12)
100% of the options in this grant were exercisable on
August 1, 2003 and 100% of the options in this grant were
vested as of January 1, 2007.
(13)
100% of the options in this grant were exercisable on
February 6, 2004 and 60% of the options in this grant vest
monthly until the third anniversary of the vesting start date
and the remaining vest monthly until fully vested on the fourth
anniversary of the vesting start date.
(14)
100% of the options in this grant were exercisable on
April 27, 2005 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(15)
100% of the options in this grant were exercisable on
February 28, 2006 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(16)
100% of the options in this grant were exercisable on
February 6, 2004 and 60% of the options in this grant vest
monthly until the third anniversary of the vesting start date
and the remaining vest monthly until fully vested on the fourth
anniversary of the vesting start date.
(17)
100% of the options in this grant were exercisable on
April 27, 2005 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(18)
100% of the options in this grant were exercisable on
February 28, 2006 and 25% of the options in this grant were
vested as of the first anniversary of the vesting start date and
the remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
(19)
100% of the options in this grant were exercisable on
November 3, 2006 and 25% of the options in this grant vest
as of the first anniversary of the vesting start date and the
remaining vest yearly until fully vested on the fourth
anniversary of the vesting start date.
Option
Exercises and Stock Vested
None of our NEOs exercised options during 2006 or hold shares of
stock that vested during 2006.
Pension
Benefits
None of our NEOs participate in or have account balances in
qualified or non-qualified defined benefit plans sponsored by us
at December 31, 2006 and, as a result, there is not a
pension benefits table included in this registration statement.
None of our NEOs participate in or have account balances in
non-qualified defined contribution plans maintained by us at
December 31, 2006 and, as a result, there is not a
non-qualified deferred compensation table included in this
registration statement.
Potential
Payments Upon Termination or
Change-in-Control
Pursuant to stock option agreements between us and each of our
named executive officers, unvested stock options awarded under
these agreements shall become accelerated by a period of one
year upon the consummation of an acquisition of athenahealth.
For purposes of these agreements, an acquisition is defined as:
(i) the sale of athenahealth by merger in which its
shareholders in their capacity as such no longer own a majority
of the outstanding equity securities of athenahealth;
(ii) any sale of all or substantially all of the assets or
capital stock of athenahealth; or (iii) any other
acquisition of the business of athenahealth, as determined by
our board of directors.
The tables below reflect the acceleration of options outstanding
as of December 31, 2006, for each of our named executive
officers, upon the consummation of any such acquisition.
Value upon
Number of
Consummation of
Name
Securities(1)
Acquisition(2)
Jonathan Bush
Carl B. Byers
Todd Y. Park
Christopher E. Nolin
James M. MacDonald
(1)
Reflects one year acceleration of vesting as of
December 31, 2006, assuming consummation of an acquisition
on such date.
(2)
There was no public market for our common stock in 2006. We have
estimated the market value of the unvested option shares based
on an assumed initial public offering price of
$ per share, which is the
midpoint of the range listed on the cover page of this
prospectus.
Limitation
of Liability and Indemnification Agreements
As permitted by the Delaware General Corporation Law, we have
adopted provisions in our certificate of incorporation and
by-laws to be in effect at the closing of this offering that
limit or eliminate the personal liability of our directors.
Consequently, a director will not be personally liable to us or
our stockholders for monetary damages or breach of fiduciary
duty as a director, except for liability for:
•
any breach of the director’s duty of loyalty to us or our
stockholders;
•
any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
•
any unlawful payments related to dividends or unlawful stock
purchases, redemptions or other distributions; or
•
any transaction from which the director derived an improper
personal benefit.
These limitations of liability do not alter director liability
under the federal securities laws and do not affect the
availability of equitable remedies such as an injunction or
rescission.
we will indemnify our directors, officers and, in the discretion
of our board of directors, certain employees to the fullest
extent permitted by the Delaware General Corporation
Law; and
we will advance expenses, including attorneys’ fees, to our
directors and, in the discretion of our board of directors, to
our officers and certain employees, in connection with legal
proceedings, subject to limited exceptions.
We have entered into indemnification agreements with each of our
directors and our executive officers. These agreements provide
that we will indemnify each of our directors and executive
officers to the fullest extent permitted by law and advance
expenses, including attorneys’ fees, to each indemnified
director or executive officer in connection with any proceeding
in which indemnification is available.
We also maintain general liability insurance which covers
certain liabilities of our directors and officers arising out of
claims based on acts or omissions in their capacities as
directors or officers, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant under the foregoing
provisions, we have been informed that in the opinion of the SEC
such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
These provisions may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary
duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a
stockholder’s investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers under these indemnification provisions.
We believe that these provisions, the indemnification agreements
and the insurance are necessary to attract and retain talented
and experienced directors and officers.
At present, there is no pending litigation or proceeding
involving any of our directors or officers where indemnification
will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim
for such indemnification.
Director
Compensation
Non-employee
Director Compensation Policy
We reimburse each member of our board of directors who is not an
employee for reasonable travel and other expenses in connection
with attending meetings of the board of directors or committees
thereof. Mr. Foster, Mr. King-Shaw and Mr. Mann
each received an option grant of 60,000 shares upon their
election to the board of directors.
The following table sets forth a summary of the compensation
earned by our directors and/or paid to our directors under
certain agreements, in each case, in 2006, other than Mr. Bush.
Mr. Bush receives no additional compensation for his services to
us as a director. Mr. Kane joined our board in July 2007.
Director
Compensation Table(1)
Fees Earned
Non-Equity
or Paid in
Option
Incentive Plan
All Other
Cash
Awards
Compensation
Compensation
Total
Name
($)(2)
($)(3)
($)
($)
($)
Richard N. Foster
$
7,500
$
—
$
—
$
—
$
7,500
Ruben J. King-Shaw, Jr.
17,500
—
—
—
17,500
James L. Mann
2,500
38,496
—
—
40,996
(1)
Columns disclosing compensation under the heading “Stock
Awards,”“Non-Equity Incentive Plan Awards,”“All other Compensation” and “Change In Pension
Value And Nonqualified Deferred Compensation Earnings” are
not included because no compensation in this category was
awarded to, earned by or paid to our directors in 2006.
Represents fees earned in 2006 pursuant to our Non-Employee
Director Compensation Policy discussed above.
(3)
Represents stock-based compensation expense for fiscal 2006 for
stock option awards granted in 2006 to Mr. Mann.
Stock-based compensation expense for these awards was calculated
in accordance with SFAS No. 123(R) and is being
amortized over the vesting period of the related awards. The
amounts reflected in this table exclude the estimate of
forfeitures applied by us under SFAS No. 123(R) when
recognizing stock-based compensation expense for financial
statement reporting purposes in fiscal 2006. For a discussion of
valuation assumptions the section entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies — Stock-Based Compensation.”
In May 2006, we awarded Mr. Mann a one-time stock option
award to purchase 60,000 shares of our common stock at an
exercise price of $5.72 per share, which vests quarterly over a
four year period. At December 31, 2006, there was
approximately $194,872 of unamortized stock-based compensation
expense related to these awards excluding our estimate of
forfeitures, which will be amortized over the remaining vesting
period of the awards.
Since inception, we have engaged in the following transactions
with our directors, executive officers, holders of more than
five percent of our voting securities, or any member of the
immediate family of the foregoing persons.
We have granted registration rights to holders of our preferred
stock pursuant to an investors’ rights agreement. See
“Description of Capital Stock — Registration
Rights.”
Voting
Agreement
Pursuant to a voting agreement by and among us and certain of
our stockholders, each of Bryan Roberts, Brandon Hull and Ann
Lamont were each elected to serve as members of our board of
directors. Mr. Roberts was selected as a representative of
our Series C preferred stock as designated by Venrock
Associates, Mr. Hull was selected as a representative of our
Series C preferred stock as designed by Cardinal Partners and
Ms. Lamont was selected as a representative of our
Series D preferred stock, as designated by Oak Investment
Partners. The voting agreement and all rights thereunder will
automatically terminate upon completion of this offering.
Board
Compensation
We pay non-employee directors for board meeting attendance, and
certain of our non-employee directors have received options to
purchase shares of our common stock. For more information
regarding these arrangements, see “Management —
Director Compensation.”
Employment
Agreements
We have entered into offer letters or employment related
agreements with each of Messrs. Bush, Byers, Park, Nolin
and MacDonald. For more information regarding these
arrangements, see “Management — Employment
Agreements and Change of Control Arrangements.”
Indemnification
Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. These agreements, among other
things, require us to indemnify each director and executive
officer to the fullest extent permitted by Delaware law,
including indemnification of expenses such as attorneys’
fees, judgments, fines and settlement amounts incurred by the
director or executive officer in any action or proceeding,
including any action or proceeding by or in right of us, arising
out of the person’s services as a director or executive
officer.
Stock
Option Grants
We have granted options to purchase shares of our common stock
to our directors and executive officers. See
“Management — Director Compensation,”“Management — Option Grants in Last Fiscal
Year” and “Management — 2005 Stock Option
Values.”
Marketing
and Sales Agreement with PSS
We are party to a marketing and sales agreement with WorldMed
Shared Services, Inc. (d/b/a PSS World Medical Shares Services,
Inc.), or PSS, for the sales and marketing of athenaClinicals
and athenaCollector. See “Business — Sales and
Marketing — Channel Relationships.”
In June 2007, certain of our existing stockholders sold to PSS
an aggregate of 1,470,589 shares of our previously issued and
outstanding convertible preferred stock for an aggregate
purchase price of $22.5 million. In connection with the
transaction, PSS agreed to a standstill provision pursuant to
which it agreed not to purchase (together with its affiliates)
more than 14.99% of our capital stock prior to the earlier of
January 1, 2011, the first public announcement by an
unaffiliated third party of its intention to purchase a majority
of the outstanding capital stock of athenahealth or the purchase
by an unaffiliated third party of more than 14.99% of the
outstanding capital stock of athenahealth. Also in connection
with the transaction, PSS was made party to the investors’
rights agreement described above thereby acquiring certain
registration rights with respect to its
shares of capital stock. See “Description of Capital
Stock — Registration Rights.” In connection with
this stock purchase, PSS agreed to pay on demand up to a maximum
of $562,000 in advisory fees, as well as to reimburse up to a
maximum of $30,000 in costs and expenses incurred in connection
with the transaction.
Policies
for Approval of Related Person Transactions
Our board of directors reviews and approves transactions with
directors, officers and holders of five percent or more of our
voting securities and their affiliates, or each, a related
party. Prior to this offering, prior to our board of
directors’ consideration of a transaction with a related
party, the material facts as to the related party’s
relationship or interest in the transaction are disclosed to our
board of directors, and the transaction is not considered
approved by our board of directors unless a majority of the
directors who are not interested in the transaction approve the
transaction. Following this offering, such transactions must be
approved by our audit committee or another independent body of
our board of directors. Further, when stockholders are entitled
to vote on a transaction with a related party, the material
facts of the related party’s relationship or interest in
the transaction are disclosed to the stockholders, who must
approve the transaction in good faith.
The following table sets forth certain information known to us
regarding beneficial ownership of our common stock as of
June 30, 2007, as adjusted to reflect the sale of shares of
common stock offered by us in this offering, for:
•
each person known by us to be the beneficial owner of more than
five percent of our common stock;
•
our named executive officers;
•
each of our directors; and
•
all executive officers and directors as a group.
To the extent that the underwriters sell more
than shares of common stock
in this offering, the underwriters have the option to purchase
up to an additional shares
from athenahealth and up to an
additional shares from our
chief executive officer at the initial public offering price
less the underwriting discount. Other than our chief executive
officer, no other stockholders will participate as selling
stockholders in this offering.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Except as
noted by footnote, and subject to community property laws where
applicable, we believe based on the information provided to us
that the persons and entities named in the table below have sole
voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
The table lists applicable percentage ownership based on
26,600,399 shares of common stock outstanding as of
June 30, 2007, and also lists applicable percentage
ownership based
on shares
of common stock assumed to be outstanding after the closing of
the offering. Options to purchase shares of our common stock
that are exercisable within 60 days of June 30, 2007,
are deemed to be beneficially owned by the persons holding these
options for the purpose of computing percentage ownership of
that person, but are not treated as outstanding for the purpose
of computing any other person’s ownership percentage.
Number
Percentage of
Shares
of Shares
Shares Owned
Shares Beneficially
Beneficially
Being Offered
Assuming Full
Owned Prior to the
Owned After
Pursuant to an
Exercise of an
Offering
the Offering
Option Granted to
Option Granted to
Name and Address of Beneficial Owner(1)
Number
Percent
Number
Percent
the Underwriters
the Underwriters
5% Stockholders
Entities affiliated with Oak
Investment Partners(2)
All executive officers and
directors as a group (12 persons)(15)
15,988,758
56.6
%
*
Represents beneficial ownership of less than one percent of our
outstanding common stock.
(1)
Unless otherwise indicated, the address for each beneficial
owner is
c/o athenahealth,
Inc., 311 Arsenal Street, Watertown, Massachusetts02472.
(2)
Consists of 4,457,942 shares held by Oak Investment
Partners IX, L.P., 47,512 shares held by Oak IX Affiliates
Fund, L.P. and 107,004 shares held by Oak IX Affiliates
Fund-A, L.P. Ms. Lamont is a managing director of Oak Investment
Partners. As such, Ms. Lamont may be deemed to share voting
and investment power with respect to all shares held by such
entity. Ms. Lamont disclaims beneficial ownership of such
shares except to the extent of her pecuniary interest, if any.
(3)
Draper Fisher Jurvetson Fund VI, L.P. is a California
Limited Partnership (the “Fund”). Its general partner,
Draper Fisher Jurvetson Management Company VI, LLC, a California
Limited Liability Company (the “General Partner”),
controls the investing and voting power of the shares held by
the Fund. The General Partner is controlled by a majority vote
of its three managing members: Timothy C. Draper, John H.N.
Fisher and Steven T. Jurvetson. Draper Fisher Jurvetson Partners
VI, LLC, is a California Limited Liability Company. The
investing and voting power of the shares held by Partners VI is
controlled by a majority vote of its three Managing Members:
Timothy C. Draper, John H.N. Fisher and Steven T. Jurvetson.
Draper Associates, L.P. is a California Limited Partnership and
a Small Business Investment Company, regulated by the Small
Business Administration. The investing and voting power of the
shares held by Draper Associates, L.P. is controlled by its
general partner, Draper Associates, Inc., a California
Corporation. Draper Associates, Inc. is controlled by its
President and majority shareholder, Timothy C. Draper.
(4)
Consists of 1,547,889 shares held by Venrock Associates,
2,227,377 shares held by Venrock Associates, II, L.P.
and 169,758 shares held by Venrock Entrepreneurs Fund, L.P.
Mr. Roberts is a managing general partner of Venrock Associates.
As such, Mr. Roberts may be deemed to share voting and
investment power with respect to all shares held by such entity.
Mr. Roberts disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest, if any.
(5)
Consists of 1,450,944 shares held by CHP II, L.P. and
1,915,246 shares held by Cardinal Health Partners, L.P. CHP
II Management, LLC is the General Partner of CHP II, L.P.
Cardinal Health Partners Management, LLC is the General Partner
of Cardinal Health Partners, L.P. John K. Clarke, Brandon H.
Hull, Lisa Skeete Tatum and John J. Park are the managing
members of CHP II Management, LLC and Cardinal Health Partners
Management, LLC. As such, Mr. Hull may be deemed to share
voting and investment power with respect to all shares held by
CHP II, L.P. and Cardinal Health Partners, L.P. Mr. Hull
disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest, if any.
(6)
Includes 736,386 shares of common stock issuable to
Mr. Bush upon exercise of stock options. Includes
330,000 shares of common stock owned by Mr. Bush and
pledged to Silicon Valley Bank as security for a personal loan.
Excludes 250,000 shares held by a trust for the benefit of
certain of Mr. Bush’s children of which Todd Park and Mr.
Park’s wife serve as co-trustees, who together acting by
unanimous consent have sole voting and dispositive power over
such shares.
(7)
Includes 265,000 shares of common stock issuable to
Mr. Park upon exercise of stock options. Includes 250,000
shares held by a trust for the benefit of certain of Mr.
Bush’s children of which Todd Park and Mr. Park’s wife
serve as co-trustees, who together acting by unanimous consent
have sole voting and dispositive power over such shares.
(8)
Includes 316,500 shares of common stock issuable to
Mr. MacDonald upon exercise of stock options.
(9)
Includes 20,000 shares of common stock issuable to
Mr. Byers upon exercise of stock options.
Includes 48,000 shares of common stock issuable to
Mr. Nolin upon exercise of stock options. Also, includes
166,700 shares held by the Nolin Investment Trust. Each of
Mr. Nolin and his wife are beneficiaries and trustees of
such trust, each with independent power as trustee to vote and
dispose of all of such shares.
(11)
Includes 60,000 shares of common stock issuable to
Mr. King-Shaw upon exercise of stock options.
(12)
Includes 60,000 shares of common stock issuable to
Mr. Foster upon exercise of stock options.
(13)
Includes 80,000 shares of common stock issuable to
Mr. Kane upon exercise of stock options.
(14)
Includes 60,000 shares of common stock issuable to
Mr. Mann upon exercise of stock options.
(15)
Includes an aggregate of 1,635,886 shares of common stock
issuable upon exercise of stock options held by 9 executive
officers and directors.
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our certificate of
incorporation and bylaws as they will be in effect upon the
closing of this offering. For more detailed information, please
see our certificate of incorporation, by-laws and
Investors’ Rights Agreement, filed as exhibits to the
registration statement of which this prospectus forms a part.
Upon completion of this offering, our authorized capital stock
will consist
of shares,
par value of $0.01 per share, of
which shares
will be designated as common stock
and shares
will be designated as preferred stock.
At June 30, 2007, we had outstanding 26,429,164 shares
of common stock held of record by 294 stockholders,
assuming the automatic conversion into common stock of each
outstanding share of preferred stock immediately prior to the
completion of the offering. Upon completion of this offering,
there will
be shares
of our common stock outstanding, or shares if the underwriters
exercise their overallotment option in full.
Common
Stock
On all matters submitted to our stockholders for vote, our
common stockholders are entitled to one vote per share, voting
together as a single class and do not have cumulative voting
rights. Accordingly, the holders of a majority of the shares of
common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they so
choose. Subject to preferences that may apply to any shares of
preferred stock outstanding, the holders of common stock are
entitled to share equally in any dividends that our board of
directors may determine to issue from time to time. Upon our
liquidation, dissolution or
winding-up,
the holders of common stock shall be entitled to share equally
all assets remaining after the payment of any liabilities and
the liquidation preferences on any outstanding preferred stock.
Holders of common stock have no preemptive or conversion rights
or other subscription rights and there are no redemption or
sinking funds provisions applicable to the common stock.
Preferred
Stock
The board of directors will have the authority, without any
action by the stockholders, to issue from time to time the
preferred stock in one or more series and to fix the number of
shares, designations, preferences, powers and rights and the
qualification, limitations or restrictions thereof. The
preferences, powers, rights and restrictions of different series
of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other
matters. The issuance of preferred stock could decrease the
amount of earnings and assets available for distribution to
holders of common stock or adversely affect the rights and
powers, including voting rights, of the holders of common stock
and may have the effect of delaying, deferring or preventing a
change in control of our company. The existence of authorized
but unissued preferred stock may enable the board of directors
to render more difficult or to discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest
or otherwise. For example, if in the due exercise of its
fiduciary obligations, the board of directors were to determine
that a takeover proposal was not in the best interests of our
stockholders, the board of directors could cause shares of
preferred stock to be issued without stockholder approval in one
or more private offerings or other transactions that might
dilute the voting or other rights of the proposed acquirer,
stockholder or stockholder group.
We are party to an agreement with ORIX Venture Partners LLC and
SVB Financial Group providing for rights to register under the
Securities Act the shares of our common stock issuable upon the
conversion of
preferred stock issuable under warrants held by them. Under this
agreement, holders of shares having registration rights can
request that their shares be covered by a registration statement
that we are otherwise filing.
Piggyback Registration Rights. If we determine
to register any of our securities under the Securities Act,
either for our own account or for the account of a security
holder or holders, the holders of registration rights are
entitled to written notice of the registration and are entitled
to include their shares of our common stock.
Expenses of Registration. We will pay all
registration expenses, other than underwriting discounts and
commissions, related to any piggyback registration.
Indemnification. The registration rights
agreement contains customary cross-indemnification provisions,
pursuant to which we are obligated to indemnify the selling
stockholder in the event of material untrue statements or
omissions in the registration statement attributable to us, and
they are obligated to indemnify us for material untrue
statements or omissions attributable to them.
All of these registration rights are subject to conditions and
limitations, including the right of the underwriters of an
offering to limit the number of shares included in such
registration.
We are party to an agreement with the founders, holders of
convertible preferred stock and holders of warrants to purchase
common stock or convertible preferred stock providing for rights
to register under the Securities Act the shares of our common
stock held, issuable upon the conversion of preferred stock held
by them or issuable upon the conversion of preferred stock
issuable under warrants held by them. Under this agreement,
holders of shares having registration rights can request that
their shares be covered by a registration statement that we are
otherwise filing.
Piggyback Registration Rights. If we determine
to register any of our securities under the Securities Act,
either for our own account or for the account of a security
holder or holders, the holders of registration rights are
entitled to written notice of the registration and are entitled
to include their shares of our common stock.
Demand Registration Rights. In addition, one
or more holders of 30% in interest or more may demand us to use
our best efforts to effect the expeditious registration of their
shares of our common stock on up to two occasions.
S-3
Registration. If we qualify for registration on
Form S-3,
certain holders of registration rights may also request a
registration on
Form S-3
and we are required (no more than one time in any twelve-month
period) to use our best efforts to effect the expeditious
registration of their shares of our common stock.
Expenses of Registration. We are required to
pay all registration expenses except any underwriting discounts
and applicable selling commissions and any expenses related to
registrations on
Forms S-1
and S-3.
Our certificate of incorporation and by-laws include a number of
provisions that may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors
rather than pursue non-negotiated takeover attempts. These
provisions include the items described below.
Board Composition and Filling Vacancies. Our
certificate of incorporation provides that directors may be
removed only for cause and then only by the affirmative vote of
the holders of 75% or more of the shares then entitled to vote
at an election of directors. Furthermore, any vacancy on our
board of directors, however occurring, including a vacancy
resulting from an increase in the size of our board, may only be
filled by the affirmative vote of a majority of our directors
then in office even if less than a quorum.
No Written Consent of Stockholders. Our
certificate of incorporation provides that all stockholder
actions are required to be taken by a vote of the stockholders
at an annual or special meeting, and that stockholders may not
take any action by written consent in lieu of a meeting.
Meetings of Stockholders. Our by-laws provide
that only a majority of the members of our board of directors
then in office may call special meetings of stockholders and
only those matters set forth in the notice of the special
meeting may be considered or acted upon at a special meeting of
stockholders. Our by-laws limit the business that may be
conducted at an annual meeting of stockholders to those matters
properly brought before the meeting.
Advance Notice Requirements. Our by-laws
establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election
as directors or new business to be brought before meetings of
our stockholders. These procedures provide that notice of
stockholder proposals must be timely given in writing to our
corporate secretary prior to the meeting at which the action is
to be taken. Generally, to be timely, notice must be received at
our principal executive offices not less than 90 days or
more than 120 days prior to the first anniversary date of
the annual meeting for the preceding year. The notice must
contain certain information specified in the by-laws.
Amendment to By-Laws and Certificate of
Incorporation. As required by the Delaware
General Corporation Law, any amendment of our certificate of
incorporation must first be approved by a majority of our board
of directors and, if required by law or our certificate of
incorporation, thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment, and a
majority of the outstanding shares of each class entitled to
vote thereon as a class, except that the amendment of the
provisions relating to stockholder action, directors, limitation
of liability and the amendment of our by-laws and certificate of
incorporation must be approved by not less than 75% of the
outstanding shares entitled to vote on the amendment, and not
less than 75% of the outstanding shares of each class entitled
to vote thereon as a class. Our by-laws may be amended by the
affirmative vote of a majority vote of the directors then in
office, subject to any limitations set forth in the by-laws; and
may also be amended by the affirmative vote of at least 75% of
the outstanding shares entitled to vote on the amendment, or, if
the board of directors recommends that the stockholders approve
the amendment, by the affirmative vote of the majority of the
outstanding shares entitled to vote on the amendment, in each
case voting together as a single class.
Blank Check Preferred Stock. Our certificate
of incorporation provides for 5,000,000 authorized shares of
preferred stock. The existence of authorized but unissued shares
of preferred stock may enable our board of directors to render
more difficult or to discourage an attempt to obtain control of
us by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary
obligations, our board of directors were to determine that a
takeover proposal is not in the best interests of us or our
stockholders, our board of directors could cause shares of
preferred stock to be issued without stockholder approval in one
or more private offerings or other transactions that might
dilute the voting or other rights of the proposed acquirer or
insurgent stockholder or stockholder group. In this regard, our
certificate of incorporation grants our board of directors broad
power to establish the rights and preferences of authorized and
unissued shares of preferred stock. The issuance of shares of
preferred stock could decrease the amount of earnings and assets
available for distribution to holders of shares of common stock.
The issuance may also adversely affect the rights and powers,
including voting rights, of these holders and may have the
effect of delaying, deterring or preventing a change in control
of us.
Section 203 of the Delaware General Corporate
Law. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a “business combination”
with an “interested stockholder” for a three-year
period following the time that this stockholder becomes an
interested stockholder, unless the business combination is
approved in a prescribed manner. A “business
combination” includes, among other things, a merger, asset
or stock sale or other transaction resulting in a financial
benefit to the interested stockholder. An “interested
stockholder” is a person who, together with affiliates and
associates, owns, or did own within three years prior to the
determination of interested stoc