UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2003
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 000-29377

Landacorp, Inc.
(Exact name of registrant as specified in its charter)


Delaware		94-3346710
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

4151 Ashford Dunwoody Road, Suite 505
Atlanta, Georgia 30319
(Address of principal executive offices including zip code)

(404) 531-9956
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). YES o NO x

Number of shares of Common stock, par value of $0.001, outstanding as of
June 30, 2003: 15,982,000.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statement of Cash Flows
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-3.2.1 CERTIFICATION OF INCORPORATION
EX-3.3.1 BYLAWS OF THE REGISTRANT
EX-10.3.1 1998 EQUITY INCENTIVE PLAN
EX-10.4.1 1999 EMPLOYEE STOCK PURCHASE PLAN
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CEO

Landacorp, Inc.

TABLE OF CONTENTS


		Page No.
PART I	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2003(unaudited) and December 31, 2002	4
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002(unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002(unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II	Other Information	33
Item 1.	Legal Proceedings	33
Item 2:	Changes in Securities and Use of Proceeds	33
Item 3:	Defaults Upon Senior Securities	33
Item 4:	Submission of Matters to a Vote of Security Holders	33
Item 5:	Other Information	33
Item 6.	Exhibits and Reports on Form 8-K	33
Signatures		36
Exhibit Index		37

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDACORP, INC.

Condensed Consolidated Balance Sheets
(in thousands, except share data)


				June 30,			December 31,
				2003			2002

				(Unaudited)
			ASSETS
Current Assets:
	Cash and cash equivalents			$	9,677		$	10,008
	Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts, net				5,405			3,797
	Other current assets				720			761

		Total current assets			15,802			14,566
Property and equipment, net					1,517			1,365
Goodwill					7,749			7,749
Intangible assets, net					1,249			1,516
Other long-term assets					98			123

Total Assets				$	26,415		$	25,319

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	971		$	730
	Accrued expenses				2,604			3,525
	Restructuring accrual				161			208
	Deferred revenue and billings in excess of costs and estimated earnings on uncompleted contracts				6,865			7,122
	Current portion of capital lease obligations				78			78
	Current portion of notes payable				92			—

			Total current liabilities		10,771			11,663
	Capital lease obligations, net of current portion				126			181
	Notes Payable, net of current portion				268			—

			Total liabilities		11,165			11,844

Commitments					—			—
Stockholders’ equity:
	Common Stock, $0.001 par value, 50,000,000 shares authorized; 15,982,000 and 15,694,000 shares issued and outstanding, respectively				16			16
	Additional paid-in capital				58,528			58,412
Notes receivable from officers					(167	)		(163	)
Unearned stock-based compensation					(5	)		(36	)
Accumulated deficit					(43,122	)		(44,754	)

Total stockholders’ equity					15,250			13,475

Total liabilities and stockholders equity				$	26,415		$	25,319

The accompanying notes are an integral part of these condensed consolidated financial statements.

LANDACORP, INC.

Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)


			Three Month Period						Six Month Period
			Ended June 30,						Ended June 30,

			2003			2002			2003			2002

REVENUE:
	Program revenue and maintenance fees		$	5,164		$	4,005		$	9,352		$	7,694
	System sales and consulting fees			1,890			1,713			3,659			2,397

		Total revenues		7,054			5,718			13,011			10,091

COST OF REVENUE:
	Program revenue and maintenance fees			1,702			2,340			3,059			4,337
	System sales and consulting fees			542			780			1,187			1,339

		Total cost of revenue		2,244			3,120			4,246			5,676

GROSS PROFIT				4,810			2,598			8,765			4,415

OPERATING EXPENSES:
	Sales and marketing			1,025			1,346			1,893			2,555
	Research and development			1,197			1,528			2,300			2,713
	General and administrative			1,357			1,601			2,691			3,251
	Amortization of intangible assets			134			317			268			635
	Asset impairment charge			—			3,300			—			3,300

		Total operating expenses		3,713			8,092			7,152			12,454

INCOME (LOSS) FROM OPERATIONS				1,097			(5,494	)		1,613			(8,039	)
INTEREST AND OTHER INCOME				24			39			50			90
INTEREST EXPENSE				(8	)		(13	)		(13	)		(20	)

NET INCOME (LOSS) BEFORE INCOME TAXES				1,113			(5,468	)		1,650			(7,969	)
PROVISION FOR INCOME TAXES				20			—			20			—

NET INCOME (LOSS)			$	1,093		$	(5,468	)	$	1,630		$	(7,969	)

NET INCOME (LOSS) PER SHARE — BASIC			$	0.07		$	(0.35	)	$	0.10		$	(0.52	)

NET INCOME (LOSS) PER SHARE — DILUTED			$	0.06		$	(0.35	)	$	0.10		$	(0.52	)

Weighted average common and common equivalent shares outstanding; basic				15,698			15,440			15,609			15,408

Weighted average common and common equivalent shares outstanding; diluted				17,077			15,440			16,662			15,408

The accompanying notes are an integral part of these condensed consolidated financial statements.

LANDACORP, INC.

Condensed Consolidated Statement of Cash Flows
(unaudited in thousands)


					Six Months Ended
					June 30,

					2003			2002

Cash flows from operating activities:
	Net Income (loss)				$	1,630		$	(7,969	)
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Depreciation and amortization				637			1,249
		Stock-based compensation expense				152			358
		Non-cash interest income				(2	)		(4	)
		Asset Impairment Charge				—			3,300
			Changes in assets and liabilities:
			Accounts receivable and costs and estimated earnings in excess of billing on uncompleted contracts, net			(1,588	)		(100	)
			Other assets			—			(206	)
			Accounts payable			241			1,146
			Accrued expenses			(922	)		571
			Restructuring accrual			(47	)		(126	)
			Deferred revenue and billings in excess of costs and estimated earnings on uncompleted contracts			(257	)		(611	)

				Net cash used in operating activities		(156	)		(2,392	)

Cash flows from investing activities:
	Purchases of property and equipment					(486	)		(606	)

				Net cash used in investing activities		(486	)		(606	)

Cash flows from financing activities
	Repayments of obligations under capital lease					(55	)		(79	)
	Collection on note receivable from officers					—			14
	Repayment of long-term debt					(8	)		—
	Proceeds from long-term debt					368			—
	Proceeds from Common Stock issuances					6			6

				Net cash provided by (used in) financing activities		311			(59	)

Increase (decrease) in cash and cash equivalents						(331	)		(3,057	)
Cash and cash equivalents, beginning of period						10,008			12,274

Cash and cash equivalents, end of period					$	9,677		$	9,217

Non-cash investing and financing activities:
	Assets acquired under capital leases				$	—		$	162

The accompanying notes are an integral part of these condensed consolidated financial statements.

LANDACORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

Landacorp, Inc. was established in 1982 and, along with its subsidiaries (collectively referred to herein as the “Company”), provides population health management solutions to healthcare payer and delivery organizations that include predictive modeling and chronic condition management programs, and Internet-and Windows®-based medical management software. These solutions are designed to help our customers control and avoid cost, while improving outcomes across the continuum of care. The Company maintains offices in Atlanta, Georgia, Chico, California, and Raleigh, North Carolina and derives substantially all of its revenues from customers in the United States.

The accompanying unaudited financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The balance sheet at December 31, 2002 is derived from the audited financial statements included in the Form 10-K for the year ended December 31, 2002. However, this Form 10-Q does not include all Form 10-K and other disclosures required by generally accepted accounting principles in the United States for the balance sheet as presented herein. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented.

The consolidated results of operations presented for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results to be expected for any other interim period or any future year. Certain prior period balances have been reclassified in order to conform with current period presentation.

2. Revenues

Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services.

Revenue Recognition

The Company derives revenue primarily from (i) the licensing and implementation of medical management software systems, (ii) the delivery of post-contract customer support, training and consulting services, and (iii) the delivery of care management services. In accordance with Staff Accounting Bulletin (“SAB”) 101, the Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or the services are rendered, (3) the price is fixed and determinable and, (4) collectibility is reasonably assured.

The Company accounts for their multiple element software systems contracts in accordance with the provision of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2. As the Company provides significant production, modification and/or customization of the software installed, system sales revenues, including training and consulting services essential to the software system, and the associated costs are recognized using the percentage-of-completion method, using labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. Costs and estimated earnings in excess of billings represent revenues that the Company has earned in accordance with its accounting policies but that are not yet billable under the terms of the contracts as of the date of the balance

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

sheet. These balances are generally billable within twelve months. When the current estimates of total contract revenue and contract cost indicate a loss, the Company records a provision for the estimated loss on the contract. Sales of software products of other vendors are recognized upon installation.

Support services included in the initial licensing agreement and annual support service renewal contracts are deferred and are recognized ratably over the support period. Revenues from training and consulting not considered essential to the functionality of the software system are recognized when the Company has delivered the services in accordance with the terms of the service agreements or have no future performance obligations. Amounts billed in advance of revenue recognition are recorded as deferred revenue.

The Company delivers care management program services through a per participant annual enrollment fee and through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. Payments for participants’ annual enrollment fees are generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled. Such obligations include the delivery of health risk assessment surveys, tailored health guides and certain lab test kits.

Other miscellaneous revenue is recognized as services are provided and obligations to the customer are fulfilled.

From time to time, the Company may enter into care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. As of June 30, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,019,000, which is included in deferred revenue.

Included in the second quarter of 2003, is revenue of approximately $308,000 related to achieving certain performance criteria from an ongoing care management contract.

Also included in the second quarter of 2003, is additional revenue of approximately $374,000 due to the revision of the estimated time required to complete an ongoing fixed-price medical management software contract.

3. Net income (loss) per share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common and potential common shares outstanding. Potential common shares consist of outstanding common shares subject to repurchase by the Company, and common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Potential common shares are excluded from the computation if their effect is anti-dilutive. The approximate potential common shares, which are excluded from the determination of diluted net income per share as the effect of such shares is anti-dilutive were 737,000 and 1,462,000 for the three and six months ended June 30, 2003, respectively. The approximate potential common shares, which are excluded from the determination of basic and diluted net loss per share as the effect of such shares is anti-dilutive were 3,636,000 at June 30, 2002.

4. Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this statement effective January 1, 2003 and it did not have a material effect on our financial position, results of operations or cash flows.

In June of 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In FAS 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. The Company adopted this statement effective January 1, 2003 and did not have a material effect on our financial position, results of operations or cash flows.

In November 2002, the FASB reached a consensus on EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“the Issue”). The guidance in this Issue is effective for revenue arrangements entered into fiscal years beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company currently follows the appropriate pronouncement as discussed in “Revenue Recognition” and anticipates the Issue will not have a significant impact on the results of operations, financial position, or cash flows.

In November 2002, the FASB issued FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirements of SFAS 5, “Accounting for Contingencies,” relating to guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. The interpretation’s provisions for initial recognition and measurement are required on a prospective basis to guarantees issued or modified after December 31, 2002. We have adopted the disclosure provisions of this interpretation and it did not have a material effect on our financial position, results of operations or cash flows. From time to time, the Company indemnifies certain customers from any claims arising from patent or copyright infringements related to the implementation of its Medical Management software. To date, there have been no such infringements or claims thereof. The Company is also a party to employment agreements with certain executive officers that contain change of control provisions. These agreements are disclosed in our definitive proxy statement for our 2003 Annual Meeting of Stockholders.

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Goodwill and Other Intangible Assets

We adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, we reclassified $462,000 of intangible assets to goodwill and discontinued periodic amortization of goodwill. Goodwill will be assessed annually on January 1 for impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. We have performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002. We have completed the test as of January 1, 2003, which also indicated no impairment.

Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Our intangible assets consist principally of existing technology and customer base, and all are considered to have finite lives. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of FAS 142 on January 1, 2002.

(in thousands)


		Existing			Customer
		Technology			Base			Workforce			Total

Acquired Cost		$	5,200		$	1,150		$	710		$	7,060
Accumulated Amortization			(1,213	)		(269	)		(248	)		(1,730	)

Intangible assets as of December 31, 2001			3,987			881			462			5,330
	Reclassify Workforce to Goodwill		—			—			(462	)		(462	)
	Amortization		(740	)		(162	)		—			(902	)
	Impairment Charge (note 7)		(2,006	)		(444	)		—			(2,450	)

Intangible assets as of December 31, 2002			1,241		$	275		$	—		$	1,516
Amortization			(110	)		(24	)		—			(134	)

Intangible assets as of March 31, 2003			1,131			251			—			1,382
Amortization			(110	)		(23	)		—			(133	)

Intangible assets as of June 30, 2003		$	1,021		$	228		$	—		$	1,249

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Restructuring and Acquisition Related Costs

In May 2001, the Company announced a reduction in work force representing approximately 16% of the Company’s total work force which consisted of 40 employees from various areas of the Company. Also in May 2001, the Company announced its plan to cease operations of its Portland, Oregon-based Interactive Media Group (IMG). On August 8, 2001, the Company announced an additional reduction in work force of approximately 18%, or 36 employees. For the year ended December 31, 2001, restructuring and acquisition related charges consisted of $1,301,000 relating to severance costs, the closing of the IMG operations and additional lease obligations related to unoccupied office space that the Company had committed to, as well as a charge of $268,000 related to re-pricing of stock options granted in connection with the acquisition of PatientCentrix. In December 2002, the Company recorded a restructuring charge of $106,000 related to additional estimated real estate lease obligations on office space that was vacated as a result of the reductions in force announced by the Company in May 2001.

The following is a rollforward of the restructuring accrual:


Balance, January 1, 2002			368,000
Additions:
	Facility/rental payments		106,000
Reductions:
	Facility/rental payments		(226,000	)
	Severance payments		(40,000	)

Balance, December 31, 2002			208,000

Reductions:
	Facility/rental payments		(28,000	)

Balance, March 31, 2003			180,000
Reductions:
	Facility/rental payments		(19,000	)

Balance, June 30, 2003		$	161,000

7. Asset Impairment Charge

During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Management reporting unit, previously referred to as Care Analytics/Care Management. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis, which indicated an impairment in its Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten years utilizing a

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

discount rate and terminal value commensurate with other Disease Management companies, and companies of similar size to Landacorp. The assumptions used in this analysis represent management’s estimate of future results.

The analysis resulted in an impairment charge during the year ended December 31, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

8. Agreement with Certain Shareholders and Option Holders

On March 13, 2002, the Company settled a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the Earn Out payment due under the PatientCentrix merger agreement. We agreed to pay the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the Earn Out payment. This amount has been recorded as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and Merger Agreement, we agreed to reduce to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This amount has been recorded as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003. Our board of directors has determined that Mr. Miele should remain on our board of directors, and Mr. Miele was re-elected at our 2003 annual meeting of stockholders.

9. Stock-Based Compensation

The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), which states that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company’s common stock on the grant date. In the event that stock options are granted at a price lower than the fair market value at that date, the difference between the fair market value of the Company’s common stock and the exercise price of the stock option is recorded as unearned compensation. Unearned compensation is amortized to compensation expense over the vesting period of the stock option. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as it relates to stock options granted to employees, which requires pro forma net losses be disclosed based on the fair value of the options granted at the date of the grant. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Fair Value Disclosures

The Company calculated the fair value of each option on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions:


	June 30, 2003			June 30, 2002

Risk-free interest rate		3.90	%		5.02	%
Expected lives (in years)		10.0			10.0
Dividend yield		0.0	%		0.0	%
Expected volatility		100	%		100	%

LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Had compensation cost for the Company’s stock-based compensation plans been determined as prescribed by SFAS No. 123, the Company’s net pro forma income (loss) would have been as follows:


		June 30, 2003			June 30, 2002

Net income (loss):
	As reported	$	1,630,000			($7,969,000	)
	Compensation Expense		(402,000	)		(395,000	)

	Pro forma		1,228,000			(8,364,000	)

Basic net income (loss) per share:
	As reported	$	0.10		$	(0.52	)
	Compensation Expense		(0.02	)		(0.02	)

	Pro forma	$	0.08		$	(0.54	)

Diluted net income (loss) per share:
	As reported	$	0.10		$	(0.52	)
	Compensation Expense		(0.02	)		(0.02	)

	Pro forma	$	0.08		$	(0.54	)

The pro forma expense was calculated based upon conditions present for a public company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements: This report contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. Examples of such forward-looking statements include projections of our future results of operations, including consecutive quarter over quarter revenues during the remainder of 2003, or of our financial condition and plans to hire additional personnel; our market opportunities; deployment, capabilities and uses of our products and services; advantages and advancements that may be enabled by our products; product development and product innovations; developments in the healthcare and population health management industries; expansion of our intellectual property portfolio; growth in our research and development, sales, marketing and general administrative expenses; and anticipated trends in our business. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, Landacorp’s dependence on a limited number of products with limited market acceptance and other risk factors that are discussed in this Form 10-Q and the Company’s other filings with the SEC, including its Form 10-K for the year ended December 31, 2002. Such statements reflect the judgment of the Company as of the date of this report on Form 10-Q with respect to future events, the outcome of which is subject to certain risks, including the risk factors set forth below, which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Landacorp undertakes no obligation to update forward looking statements.

Overview

Landacorp provides population health management solutions to healthcare payer and delivery organizations. Our innovative predictive modeling and chronic condition management programs work together with our Internet- and Windows®-based medical management software to deliver comprehensive solutions that can help our clients better manage their at-risk patient populations. This can result in prevented and reduced cost, while improving health outcomes. Combined, our products and services comprise a unique set of capabilities that support our customers across the continuum of patient care.

Landacorp’s care management solutions — our predictive modeling and chronic condition management capabilities — help health plans and other payers identify and intervene with members who have health conditions like asthma, diabetes and heart disease and are at risk for potentially high predicted expenditure outcomes associated with their condition. These member-focused solutions help our clients manage the health of these members through the delivery of consistent and appropriate educational information and self-management materials, or through referral to the customer’s nurse case managers. Taken together, Landacorp’s care management solutions allow customers to integrate targeting capabilities with a wide range of multi-disease intervention solutions to reach identified at-risk members. These programs also support our clients’ branding and marketing efforts by helping them build stronger, more binding relationships with their members through the communication tools and methodologies used to deliver information.

Landacorp’s medical management software solutions help healthcare payers, and hospitals and healthcare delivery systems manage the cost and care of their patients by documenting treatment, ensuring that clinical guidelines and government compliance requirements are met, and by automating the workflow and processes surrounding care coordination activities. These applications use customer-defined business process rules to streamline administrative and business processes; facilitate interaction among various healthcare participants; and minimize inefficient paper-, fax- and phone-based communications. Our software solutions utilize an n-tiered system architecture that enables them to complement existing information systems, as well as other Internet-based products, with a rich set of functions. They are flexible and secure, and can be deployed across a broad range of computing environments. They are also scalable, allowing our customers to configure and adapt them to fit their unique administrative and business requirements and processes.

During the quarter ended June 30, 2003, 59% and 41% of revenue was generated from care management services and medical management software, respectively.

We recognize system sales revenues and associated costs using the percentage-of-completion method for fixed-fee contracts, with labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. Revenues on time and materials based contracts are recognized as services are delivered. We recognize revenues from sublicensing of third-party software upon installation of such software. We recognize revenues from support services ratably over the support period. We recognize revenues from training and consulting as such services are delivered.

The Company delivers care management programs and services through a per participant annual enrollment fee and through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. Payments for participants’ annual enrollment fees are generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled. Such obligations include the delivery of health risk assessment surveys, tailored health guides and certain lab test kits.

Other miscellaneous revenue is recognized as services are provided and obligations to the customer are fulfilled.

From time to time, the Company may enter into care analytics and care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. As of June 30, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,019,000, which is included in deferred revenue.

To accelerate the implementation of elements of our strategy, we intend to target and pursue strategic relationships, such as marketing alliances with vendors of complementary products and services and partnerships with Internet providers of healthcare content, disease management and health-related e-commerce services. Evaluating or entering into any such strategic relationships could lead to additional expenditures.

Critical Accounting Policies

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, allowances and reserves, restructuring costs, goodwill and other intangible assets.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

The Company has identified the policies below as critical to our business operations and the understanding of our results of operations.

Revenue recognition. The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. Revenues consist of software license and implementation fees, related maintenance and software service fees, and certain revenue derived from our care management programs. Deferred revenue consists of maintenance billings and annual enrollment fees due in advance of service periods. From time to time, the Company may enter into care

management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. The Company’s revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” and AICPA Statement of position No. 97 — 2 “Software Revenue Recognition”. The Company follows specific and detailed guidelines in measuring revenue; however certain estimates and judgments affect the application of the revenue policy. These estimates include the estimated contract hours and time to complete for percentage of completion accounting, and the effort-based measures used in services accounting. Changes in conditions or new contract terms could cause management to determine these estimates and judgments must be revised. Such changes or revisions could adversely affect the revenue recognition for any reporting period.

Bad debt. Management analyzes accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in our customer payment terms and trends when evaluating the adequacy of the allowance for bad debt. Significant management judgment and estimates must be made and used in connection with establishing the allowance for bad debt in any accounting period. The accounts receivable balance was $3.8 million, net of allowance for bad debt of $0.3 million as of June 30, 2003. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for bad debt may be required.

Goodwill. The Company adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, the Company discontinued periodic amortization of goodwill of approximately $650,000 annually. Goodwill will be assessed annually on January 1 for impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. The Company has performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002. The Company has completed the test as of January 1, 2003, which also indicated no impairment. The projections used to test for impairment of goodwill were based on management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in impairment charges.

Other Intangible Assets. Other intangible assets are amortized on a straight-line basis over the useful life of the asset, which is the period the asset is expected to contribute directly or indirectly to future cash flows. Other intangibles include customer relationships and acquired technology. The lives established for our intangible assets are based on many factors, and are subject to change because of the nature of our operations. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or indicate that an impairment exists. These evaluations are based on the Company’s estimates of future results and may be revised in future periods. During the second quarter of 2002, we recorded an impairment charge of $2,450,000 on our intangible assets. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of FAS 142 on January 1, 2002.

Restructuring costs. The restructuring accrual is based on certain estimates and judgments related to contractual obligations and related costs. Potential restructuring accruals related to lease contractual obligations could be materially affected by factors such as our ability to secure subleases, the credit-worthiness of subleases and our success at negotiating early termination agreements with lessors. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, we may need to establish additional restructuring accruals or reverse accrual amounts accordingly.

Recent Developments

On November 2, 2000 we completed the acquisition of PatientCentrix, Inc. (“PatientCentrix”), a leading provider of predictive modeling and targeting. The Company acquired 100% of the shares and assumed all outstanding options of PatientCentrix in return for cash of $5,850,000 paid to the stockholders and option holders, and issuing 1,157,000 shares to the stockholders of PatientCentrix. The price of the shares issued was $1.777 based on the average of the previous 20 trading days prior to the date of the definitive agreement, which was October 31, 2000. We also assumed all the incentive stock options issued by PatientCentrix prior to the acquisition, representing

options to purchase up to 1,582,532 of Common Stock of Landacorp with an average exercise price of $1.525. The total purchase price of $11,188,000 consisted of $5,850,000 cash, $2,056,000 of our Common Stock (1,157,000 shares), assumed stock options with a fair value of $2,970,000, and other acquisition related expenses of approximately $312,000, consisting primarily of payment for legal and financial advisory services. Of the total purchase price, approximately $191,000 was allocated to the net tangible assets, approximately $961,000 was allocated to unearned compensation related to our right to repurchase 30% of the shares of the Company’s Common Stock and options to purchase our Common Stock issued to employees of PatientCentrix pursuant to the purchase agreement in the event of such employee’s termination under certain circumstances, and the remainder was allocated to intangible assets, including existing technology ($3,600,000), customer base ($640,000), assembled work force ($280,000), and goodwill ($5,516,000). Additionally, up to $6 million in additional cash could be paid to the shareholders and option holders of PatientCentrix, under the earn out provision of the purchase agreement. As discussed in the following paragraphs, the Company reached various settlements with shareholders of PatientCentrix during 2001 affecting this provision. Accordingly, approximately $1,477,000 has been recorded to goodwill as additional purchase price, resulting in a cumulative aggregate purchase price of $12,665,000.

Subsequent to the acquisition of PatientCentrix, its majority shareholder, Michael Miele, became an employee and Director of the Company. During 2001, the Company and the majority shareholder entered into a Settlement Agreement and Mutual Release whereby the Company and majority shareholder mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship. The majority shareholder released the Company from any and all claims that the termination of employment in and of itself violates the merger agreement or interferes with or negatively impacts the payment of any earn out under the merger agreement or achievement of any related milestone event. The agreement requires the Company to make payments to the majority shareholder of approximately $800,000 and to allow the vesting of the majority shareholder’s options and allow the options to be immediately exercisable. The amount related to this accelerated vesting is approximately $277,000. The Settlement and Mutual Release amount of $1,077,000 has been recorded as goodwill.

On March 13, 2002, we settled a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the earn out payment due under the PatientCentrix merger agreement. We agreed to pay the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the earn out payment. This amount has been recorded as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and the merger agreement, we agreed to reduce, to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This re-pricing has been recorded as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003. Mr. Miele was nominated and elected as a director at our 2003 annual meeting of stockholders.

During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Management reporting unit, previously referred to as Care Analytics/Care Management. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis, which indicated an impairment in its Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten years utilizing a discount rate and terminal value commensurate with other Disease Management companies, and companies of similar size to Landacorp. The assumptions used in this analysis represent management’s estimate of future results.

The analysis resulted in an impairment charge during the three months ended June 30, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

As of September 30, 2002 the Company’s office in Montclair, NJ was closed.

On October 9, 2002, the Company announced the early termination of its agreement with Lifeguard, Inc. due to the takeover of the Lifeguard HMO by the State of California’s Department of Managed Healthcare. At that time,

the Company amended its agreement with Lifeguard to provide for the early termination of the agreement and to eliminate the Company’s obligation to reimburse any fees paid to the Company by Lifeguard.

On October 21, 2002, as part of its continuing efforts to reduce costs, the Company eliminated a total of ten positions, or approximately 6% of its workforce.

Effective at the opening of trading on November 7, 2002, the Company’s common stock began trading on the NASDAQ SmallCap Market. The Company’s common stock continues to trade under the symbol “LCOR”.

On February 17, 2003, Thomas Stephenson, resigned as Chairman of our board of directors and Eugene Santa Cattarina was appointed Chairman. Mr. Stephenson continues to be a director of the company.

RESULTS OF OPERATIONS

The following table presents the statement of operations data as a percentage of total revenues:


			Three month period						Six month period
			ended June 30,						ended June 30,

			2003			2002			2003			2002

REVENUE:
	Program revenue and maintenance fees			73.2			70.0			71.9			76.2
	System sales and consulting fees			26.8			30.0			28.1			23.8

		Total revenues		100.0			100.0			100.0			100.0

COST OF REVENUE:
	Program revenue and maintenance fees			24.1			40.9			23.5			43.0
	System sales and consulting fees			7.7			13.7			9.1			13.3

		Total cost of revenue		31.8			54.6			32.6			56.3

GROSS PROFIT				68.2			45.4			67.4			43.7

OPERATING EXPENSES:
	Sales and marketing			14.5			23.5			14.6			25.3
	Research and development			17.0			26.7			17.7			26.9
	General and administrative			19.2			28.0			20.7			32.2
	Amortization of intangible assets			1.9			5.6			2.0			6.3
	Asset Impairment Charge			—			57.7			—			32.7

		Total operating expenses		52.6			141.5			55.0			123.4

INCOME (LOSS) FROM OPERATIONS				15.6			(96.1	)		12.4			(79.7	)
INTEREST AND OTHER INCOME				0.3			0.7			0.4			0.9
INTEREST EXPENSE				(0.1	)		(0.2	)		(0.1	)		(0.2	)

NET INCOME (LOSS) BEFORE INCOME TAXES				15.8			(95.6	)		12.7			(79.0	)

PROVISION FOR INCOME TAXES				0.3			—			0.2			—

NET INCOME (LOSS)				15.5			(95.6	)		12.5			(79.0	)

Comparison of the three and six-month periods ended June 30, 2003 and 2002.

Revenues. Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services. During the three months ended June 30, 2003, four customers accounted for 24%, 21%, 17%, and 14% of revenue. One customer accounted for 25% of revenue for the three-month period ended June 30, 2002. During the six months ended June 30, 2003, four customers accounted for 21%, 18%, 17% and 15% of revenue. One customer accounted for 26% of revenue for the six-month period ended June 30, 2002.

Program revenues and maintenance fees have increased by $1,159,000 or 29% from $4,005,000 for the three-month period ended June 30, 2002 to $5,164,000 in the three-month period ended June 30, 2003. The increase in revenues relates largely to the increased enrollments in our care management programs, as well as approximately $308,000 related to meeting the requirements of a performance guarantee under an ongoing care management contract. Program revenues and maintenance fees have increased by $1,658,000 or 22% from $7,694,000 in the six-month period ended June 30, 2002 to $9,352,000 in the six-month period ended June 30, 2003. The increase in revenues largely relates to increased enrollments in our care management programs including a major program launched toward the end of the first quarter with favorable pricing, as well as approximately $770,000 related to meeting the requirements of a performance guarantee under an ongoing care management contract.

System sales and consulting fees increased by $177,000 or 10% from $1,713,000 in the three-month period ended June 30, 2002 to $1,890,000 in the three-month period ended June 30, 2003. This increase is primarily due to additional revenue in 2003 related to implementations of our medical management software. Included in the three-month period ended June 30, 2003 is additional revenue of approximately $374,000 related to the revision of the estimated time to complete a fixed-price medical management software contract. System sales and consulting fees increased by $1,262,000 or 53% from $2,397,000 in the six-month period ended June 30, 2002 to $3,659,000 in the six-month period ended June 30, 2003. The increase in system sales and consulting fees are primarily due to additional revenue in 2003 related to several new implementations of our medical management software at major health payer organizations.

Based on existing and anticipated customer contracts, management does not believe that consecutive quarter over quarter increases in revenue will continue for the remainder of 2003.

Cost of Program Revenue and Maintenance Fees. Cost of Program Revenue and Maintenance Fees consists principally of personnel related costs, product costs, amortization of unearned stock-based compensation, related department overhead, costs of third party software products, and depreciation of equipment. Cost of program revenues and maintenance fees decreased by $638,000 or 27% from $2,340,000 in the three-month period ended June 30, 2002 to $1,702,000 in the three-month period ended June 30, 2003, representing 58.4% of program revenues and maintenance fees revenues for the second quarter of 2002 and 33.0% for the second quarter of 2003. Cost of program revenues and maintenance fees decreased by $1,278,000 or 29% from $4,337,000 in the six-month period ended June 30, 2002 to $3,059,000 in the six-month period ended June 30, 2003, representing 56.4% of program revenues and maintenance fees revenues for the six months ended June 30, 2002 and 32.7% for the same period in 2003. This decrease in costs for the three and six month periods ended June 30, 2003, is primarily due to cost reductions associated with the closing of our Montclair, New Jersey office in September of 2002 and cost reductions related to the termination of our contract with Lifeguard in October of 2002.

Cost of System Sales and Consulting Fees. Cost of system sales and consulting fees consist principally of costs incurred in the implementation of our software products, and other consulting and training personnel costs. The cost of system sales and consulting fees includes personnel costs, amortization of unearned stock-based compensation, travel expenditures, related department overhead, amortization of capitalized software development costs, costs of third party software products, and depreciation on equipment. During the quarter ended June 30, 2003 these costs were $542,000 or 28.7% of system sales and consulting fees, compared to costs of $780,000 representing 45.5% of system sales and consulting fees during the quarter ended June 30, 2002. Cost of system sales and consulting fees decreased by $238,000 or 31% from the quarter ended June 30, 2002 to the same period for 2003. During the six-month period ended June 30, 2003 these costs were $1,187,000 or 32.4% of system sales and consulting fees, compared to costs of $1,339,000 representing 55.9% of system sales and consulting fees during the six-month period ended June 30, 2002. Cost of system sales and consulting fees decreased by $152,000 or 11% from the six-month period ended June 30, 2002 to the same period for 2003. This cost decrease for the three months ended June 30, 2003 was due to reduced personnel costs and a decrease in royalty payments in 2003. The decrease during the six months ended June 30, 2003 was due to reduced personnel costs and royalties during the second quarter, offset by additional purchases of third-party software for resale to the Company’s customers during the first quarter of 2003.

Sales and Marketing. Sales and marketing expenses consist principally of compensation for our sales and marketing personnel, amortization of unearned stock-based compensation, advertising, trade show and other promotional costs, and departmental overhead. Sales and marketing expenses during the quarter ended June 30, 2003 amounted to $1,025,000 representing 14.5% of total revenues, in comparison with $1,346,000 representing 23.5% of total revenues during the corresponding quarter of 2002. Sales and marketing expenses decreased by $321,000 or 24% from the second quarter of 2002. Sales and marketing expenses during the six-month period ended June 30, 2003 amounted to $1,893,000 representing 14.6% of total revenues, in comparison with $2,555,000 representing 25.3% of total revenues during the corresponding period of 2002. Sales and marketing expenses decreased by $662,000 or 26% from the six-months ended June 30, 2002. This is primarily due to decreased personnel associated costs during both the three and six- month periods ended June 30, 2003.

Research and Development. Research and development expenses consist of personnel costs, amortization of unearned stock-based compensation, related department overhead and depreciation on equipment. Research and development expenses totaled $1,197,000 or 17.0% of total revenues during the quarter ended June 30, 2003, a decrease of $331,000 or 22% compared to expenses totaling $1,528,000 representing 26.7% of total revenues during the quarter ended June 30, 2002. Research and development expenses totaled $2,300,000 or 17.7% of total revenues in the six-months ended June 30, 2003, a decrease of $413,000 or 15% compared to expenses totaling $2,713,000 representing 26.9% of total revenues in the six-months ended June 30, 2002. During both the three and six-month periods ended June 30, 2003, this is primarily due to cost reductions associated with the closing of our Montclair, New Jersey office in September of 2002.

General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, amortization of unearned stock-based compensation, allocated occupancy and overhead costs and bad debt. General and administrative expenses decreased by $244,000 or 15% from $1,601,000, representing 28.0% of total revenues, in the second quarter of 2002 to $1,357,000, representing 19.2% of total revenues, in the second quarter of 2003. General and administrative expenses decreased by $560,000 or 17% from $3,251,000, representing 32.2% of total revenues, in the six-months ended June 30, 2002 to $2,691,000, representing 20.7% of total revenues, in the six-months ended June 30, 2003. The decrease during both the three and six-month periods ended June 30, 2003 is largely related to the closing of Montclair, New Jersey office and general cost cutting measures throughout 2002.

Amortization of Intangible Assets. Amortization expense decreased by $183,000 or 58% from $317,000 or 5.5% of revenues in the second quarter of 2002 to $134,000 or 1.9% of revenues in the second quarter 2003. Amortization expense decreased by $367,000 or 58% from $635,000 or 6.3% of revenues in the six-months ended June 30, 2002 to $268,000 or 2.1% of revenues in the six-months ended June 30, 2003. The decrease in amortization of intangible assets during both the three and six-month periods ended June 30, 2003 is due to the intangible asset impairment charge of $2,450,000 recorded in the second quarter of 2002.

Stock-Based Compensation. Amortization of unearned stock compensation during the quarters ended June 30, 2003 and 2002 was $31,000 and $104,000, respectively. Amortization of unearned stock compensation during the six-month periods ended June 30, 2003 and 2002 was $152,000 and $271,000, respectively. These amounts have been allocated to cost of sales and operating expenses. Included in these amounts is stock compensation expense of approximately $15,000 in the quarter ended June 30, 2003 for the modification of a fixed stock option grant.

Interest and Other Income and Interest Expense. Interest and other income consists primarily of earnings on our cash and cash equivalents. Interest and other income amounted to $39,000 for the second quarter of 2002 and $24,000 for the second quarter of 2003, and $90,000 for the six-months ended June 30, 2002 and $50,000 for the six-months ended June 30, 2003. The decrease in interest and other income in the second quarter 2003 of $15,000 or 38% and the decrease of 40,000 or 44% in the six-months ended June 30, 2003 is due to the decrease in cash from June 30, 2002 to June 30, 2003 as well as an overall decrease in interest rates. Interest expense of $8,000 during the second quarter of 2003 and $13,000 for the second quarter of 2002, and $13,000 during the six-months ended June 30, 2003 and $20,000 for the six-months ended June 30, 2002 arises from financing certain fixed assets through capital leases and debt.

Provision for Income Tax. Based on various Federal tax regulations that do not allow the full application of net operating loss carry-forwards against net income, we have recorded an income tax provision of $20,000 during the three and six months ended June 30, 2003.

Liquidity and Capital Resources

Since inception, we have financed our operations through net cash generated from operating activities, and sales of common and preferred stock. As of June 30, 2003, we had $9.7 million in cash and cash equivalents, which includes approximately $564,000 used to secure certain letters of credit and notes payable. We also had $5.0 million in working capital with outstanding capital lease obligations and notes payable totaling approximately $564,000.

Net cash used in operating activities was $156,000 and $2,392,000 during the six months ended June 30, 2003 and 2002, respectively. Net cash used to fund operating activities in the first half of 2003 reflects net income

before non-cash charges for depreciation and amortization, stock-based compensation, an increase in net accounts receivable, a decrease in other assets, an increase in accounts payable, and decreases in accrued expenses, restructuring accrual, and deferred revenue. The decrease in accrued expenses during the first half of 2003 was primarily due to the payment in March 2003 of 2002 accrued employee bonus amounts. The decrease in deferred revenue was primarily due to the recognition of approximately $770,000 in revenue related to achieving the performance criteria from an ongoing contract, as well as the recognition of revenue that was deferred in the fourth quarter of 2002 due to the timing of prepayments by certain customers. Net cash used to fund operating activities in the first half of 2002 reflects net losses before non-cash charges for depreciation and amortization of intangible assets, stock-based compensation, asset impairment charge, an increase in accounts payable and accrued expenses, offset by an increase in net accounts receivable and other assets, and a decrease in the restructuring accrual and deferred revenue.

During the six months ended June 30, 2003 and 2002, net cash used in investing activities was $486,000 and $606,000, respectively. Investing activities consist primarily of purchases of computer equipment, software, office furniture and leasehold improvements.

Net cash provided by financing activities was $311,000 for the six months ended June 30, 2003. Net cash used in financing activities was $59,000 for the six months ended June 30, 2002. Net cash provided by financing activities for the six months ended June 30, 2003 resulted from proceeds from long-term debt offset somewhat by payments on capital lease obligations. Net cash used in financing activities for the six months ended June 30, 2002 resulted from the payments on certain capital lease obligations.

We may utilize existing cash to fund strategic transactions or investments in other businesses, technologies or product lines. We believe that cash generated by revenues, available cash and cash equivalents will be sufficient to meet our working capital, operating expense and capital expenditure requirements for the next twelve months. Thereafter, we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings, although there can be no assurance that such funding will be available on terms acceptable to us.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

We Have a Long History of Losses and May Not Sustain or Increase Profitability

We have been in business since 1982 and we have incurred significant losses since that time. We may continue to incur losses on an annual or quarterly basis in the future. As of June 30, 2003, our accumulated deficit was $43.1 million. Even though we have achieved profitability during the past three quarters, due to competition and the evolving nature of the disease management, medical management, healthcare information technology and Internet markets, we could fail to sustain or increase profitability on a quarterly or annual basis.

We Have a History of Quarterly and Annual Fluctuations in Our Revenue and Operating Results, and Expect These Fluctuations to Continue, Which May Result in Volatility in Our Stock Price.

Our quarterly and annual revenue and operating results have varied significantly in the past and will likely vary significantly in the future due to a number of factors, many of which we cannot control. The factors that may cause our quarterly revenue and operating results to fluctuate include:

	•		fluctuations in demand for our population health management products and related services;

	•		the ability of customers to provide us with the names of qualified members to enroll in our Managing for Tomorrow member-driven chronic condition management program;

	•		the timing of customer orders and product implementations, particularly orders from large customers involving substantial software implementation;

	•		the length of our sales cycle, which varies and is unpredictable;

	•		the length of our software implementation process varies and often depends on matters outside of our control such as the customer’s ability to commit its resources to the implementation process;

	•		our ability to develop, introduce, implement and support new products and product enhancements;

	•		the rate of adoption of our population health management solutions, which often require our customers to change some aspects of the way in which they have traditionally conducted business;

	•		announcements and new product introductions by our competitors and deferrals of customer orders in anticipation of new products, services or product enhancements introduced by us or our competitors; and

	•		changes in the prices at which we can sell our population health management solutions.

Accordingly, you should not rely on the results of any past periods as an indication of our future performance. In some future periods, our operating results may not meet expectations of public market analysts or investors. If this occurs, our stock price may decline.

Our Business will Suffer if Our Population Health Management Solutions Do Not Achieve Widespread Market Acceptance Among Healthcare Payer Organizations.

Achieving our growth objectives depends on our population health management solutions achieving widespread market acceptance among healthcare payer organizations. This is difficult to determine at this time. We commercially released our maxMC medical management software in 1997 and acquired the predictive modeling applications and services, and chronic condition management programs in the fourth quarter of 2000. Our solutions currently have limited market acceptance with only 17 payer customers currently using them. Our maxMC medical management software product has achieved a modest degree of market acceptance as we have implemented or are in the process of implementing it at 9 client sites. Realizing market acceptance for our care management solutions will require ongoing enhancement of their features and functionalities, and improved sales and marketing efforts. If we do not gain significant market share for all of our population health management solutions before our competitors

introduce alternative products with features similar to ours, our operating results will suffer. Operating results will also suffer if our pricing strategies are not economically viable or acceptable to our customers.

The Healthcare Industry May Not Accept Our Population Health Management Solutions.

To be successful, we must attract as customers a significant number of healthcare payer organizations, and continue to attract hospitals and healthcare delivery organizations. We cannot determine the extent to which the payer market will accept either our care management or medical management solutions as substitutes for traditional methods of intervening with members with chronic health conditions or processing healthcare information and managing patient care. To date, many healthcare industry participants have been slow to adopt new disease management methodologies and medical management technology solutions. We believe that the complex nature of healthcare processes and communications among healthcare industry participants, as well as concerns about confidentiality of patient information, may hinder the development and acceptance of our population health management solutions.

In addition, customers that are already engaged in disease management programs or have implemented information systems in which they have made significant commitments may refuse to adopt our solutions if they perceive that our solutions will not complement their existing investments. As a result, the conversion from traditional methods of disease management and communication to electronic information exchange may not occur as rapidly as we expect it will. Even if these conversions do occur as rapidly as expected, payers and providers may use solutions, products and services offered by others.

Because We Offer a Limited Number of Products and Operate Exclusively in the Population Health Management Solutions Market, We Are Particularly Susceptible to Competition, Product Obsolescence and Market Downturns.

We depend on a limited number of products and we operate exclusively in the disease management and medical management solutions markets. Prior to our acquisitions of predictive modeling and chronic condition management products, we derived substantially all of our revenue from the sale and associated support of Maxsys II (and its predecessor Maxsys I), maxMC, a medical management software solution marketed to hospitals, healthcare delivery organizations and health insurance companies. We anticipate that we will continue to generate revenue from the continued sales and support of medical management software solutions. With the acquisitions of Care Management solutions, we have increased our product offering, but it is still limited. Dependence on this limited product line makes us particularly susceptible to the successful introduction of, or changes in market preferences for, competing products. In addition, operating exclusively in the market for population management solutions make us particularly susceptible to downturns in that market that may be unrelated to the quality or competitiveness of our solutions.

We Currently Depend on a Limited Number of Key Customers and the Loss of Any of Them, or Any Future Customer on Whom We May Depend For a Significant Portion of Our Sales, Could Significantly Reduce Our Revenues and Negatively Impact Our Results of Operations, Our Stock Price and Our Future Viability.

We currently serve a limited number of customers, four of whom accounted for 24%, 21%, 17%, and 14%, respectively, of our revenues for the three-month period ended June 30, 2003. Moreover, because we focus our sales efforts on a small group of potential customers in the healthcare industry we anticipate our operating results will continue to depend on sales to a small number of key customers for the foreseeable future. The loss of, or a reduction in sales to, any of our current customers or our failure to sell our products and services to additional customers would significantly reduce our future revenues and negatively impact our results of operations, our stock price and our future viability.

We Are Exposed to the Credit Risk of Some of Our Customers.

Due to the current slowdown in the economy, the credit risks relating to our customers have increased. Although we have programs in place to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks. We have experienced losses due to customers failing to meet their obligations. Although these losses have not been significant, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial conditions.

If We Do Not Hire and Retain Additional Sales, Marketing and Implementation Personnel We May Not Succeed in Implementing Our Growth Strategy and Achieving Our Target Revenue Growth.

Our future growth depends to a significant extent on our ability to hire additional sales, marketing and implementation personnel. Competition for these people is intense. We have experienced difficulty in hiring qualified sales and marketing professionals, as well as database administrators, and we may not be successful in attracting and retaining such individuals. If we do not hire additional qualified sales and marketing personnel, we may not succeed in implementing our growth strategy and our targeted revenue growth may not be achieved. In addition, even if our sales increase, our market penetration and revenue growth will be limited if we are unable to hire additional personnel to implement the medical management solutions we sell.

We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Many of our employees have only recently joined us, and we may experience high turnover rates in some categories of personnel. If we do not assimilate new employees in a timely and cost-effective manner, the productivity of those employees will be low, and as a result our operating results may decrease.

In addition, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. Competitors or other companies may make such claims against us in the future as we seek to hire qualified personnel. Any claim of this nature could result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.

Our Future Success Depends in Significant Part Upon the Continued Service of Our Management Team.

Our management team has a great deal of experience in the software, medical management software and healthcare information technology industries in general and in the market for population health management solutions, in particular. While our management is relatively inexperienced in the disease management industry, which is a relatively new market, they are uniquely qualified to manage our business and would be difficult to replace. These employees may voluntarily terminate their employment with us at any time. The search for a replacement for any of our key personnel could be time consuming, and could distract our management team from the day-to-day operations of our business. This could delay the implementation of our growth strategy and negatively impact our ability to achieve targeted revenue growth. In addition, we do not maintain key person life insurance on our key personnel.

The Length and Complexity of Our Sales Cycle and Product Implementation Period May Cause Us to Expend Substantial Time, Effort and Funds Without Receiving Related Revenue.

We do not control many of the factors that influence our customers’ buying decisions and the implementation of our population health management solutions. The sales and implementation process for our solutions is lengthy, particularly for our medical management software products, and involves a significant technical evaluation and requires our customers to commit considerable time and money. The sale and implementation of our solutions are subject to delays due to healthcare payers’ and providers’ internal budgets and procedures for approving large capital expenditures and deploying new technologies and methodologies within their organizations. The sales cycle for our solutions is unpredictable and has generally ranged from six to twenty-four months from initial contact to contract signing. The time it takes to implement our medical management software solutions is also difficult to predict and has typically ranged from six to fifteen months from contract execution to the commencement of live operation. During the sales cycle and the implementation period, we may expend substantial time, effort and money preparing contract proposals, negotiating the contract and implementing the solution without receiving any related revenue.

Our Care Management Solutions Depend on Accurate Member Data Provided by the Client, Which Must be Received on a Timely Basis in Order for Us to Fulfill Our Obligations.

Our care management solutions rely on claims data such as medical claims, prescription data, member contact information, UR data and lab data for the client to identify and target for intervention members at risk. The inability

of a customer to provide this information on a timely basis or the delivery of inaccurate or incorrect data could have an impact on our ability to fulfill customer obligations and deliver guaranteed savings and, therefore, achieve revenue expectations from particular contracts.

Our Managing for Tomorrow Chronic Condition Management Programs Rely on Complex, Proprietary Technology, the Malfunctioning of Which Could Delay or Impede the Realization of Revenue.

Our Managing for Tomorrow programs rely on the engagement in the program of members targeted by a health plan or other payer organization. In order to fulfill our customer obligations, we rely on an automated system that uses sophisticated technologies and data management processes to contact, profile, stratify and intervene with these members with customized self-management materials. Additionally, this system automates workflow, and monitors and reports on results of the program. Our telecommunications hardware and a significant portion of our data systems reside at an offsite data center owned by a co-location and managed hosting service. The co-location and managed hosting industry is experiencing a severe economic downturn, which could effect our co-location and managed hosting service provider. If our service provider were to curtail or close its business our access to our telecommunications hardware, systems and data could be interrupted until we can make co-location arrangements with a new service provider. Any such interruption or other malfunctions, system downtime or software errors could impede our ability to realize anticipated revenue, lead to an increase in our costs, adversely effect our relationship with our customers, and potentially expose us to liability.

We Enter into Chronic Condition Management Contracts that Provide Guaranteed Levels of Performance to Our Customers, and We May be Required to Refund to Customers a Significant Portion of the Subscription Fees Paid to Us if We Fail to Achieve the Guaranteed Performance Criteria.

From time to time, the Company may enter into chronic condition management contracts pursuant to which we guarantee certain minimum levels of cost savings or other performance measures to the customer. Under such contracts, we often agree to reimburse all or a portion of the enrollment fees paid to us by the customer if we fail to achieve such minimum cost savings. Due to the large number of variables, many of which are not within our control, that could impact the realization of such minimum cost savings, there can be no assurance that we will achieve such savings. If we do not achieve the necessary cost savings we may be obligated to reimburse significant portions of the enrollment fees paid to us by customers, we will not be able to recognize the revenue associated with such fees and our business and reputation may be harmed. As of June 30, 2003, we had three contracts that contain some level of performance guarantee. As of June 30, 2003 we had deferred revenue of approximately $1,019,000 related to performance guarantees.

Our Medical Management Solutions Are Complex and May Contain Undetected Software Errors, Which Could Lead to an Increase in Our Costs or a Reduction in Our Revenues.

Complex software products such as our medical management solutions frequently contain undetected errors when first introduced or as new versions are released. We have, from time to time, found errors in our software products, and in the future we may find further errors. In addition, we combine our solutions with software and hardware products from other vendors. As a result, we may experience difficulty in identifying the source of an error. The occurrence of hardware and software errors, whether caused by our solutions or another vendor’s products, could:

	•		impair market acceptance of our products;

	•		cause sales of our solutions to decrease and our revenues to decline;

	•		cause us to incur significant warranty and repair costs;

	•		divert the attention of our technical personnel away from product development efforts; and

	•		cause significant customer relations problems.

Because Our Population Health Management Solutions Rely on Technology That We Own, Our Business Will Suffer if We Fail to Protect Our Intellectual Property Rights to That Technology Against Infringement by Competitors.

To protect our intellectual property rights, we rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our solutions is difficult and the steps we have taken may not prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If we fail to protect our intellectual property from infringement, other companies may use our intellectual property to offer competitive products at lower prices. If we fail to compete effectively against these companies we could lose customers and sales of our solutions and our revenue could decline.

Efforts to Protect Our Intellectual Property or Our Alleged Misuse of the Intellectual Property of Others May Cause Us to Become Involved in Costly and Lengthy Litigation.

Although we are not currently involved in any intellectual property litigation, we may be a party to litigation in the future either to protect our intellectual property or as a result of an alleged infringement by us of the intellectual property of others. These claims and any resulting litigation could subject us to significant liability or invalidate our ownership rights in the technology used in our solutions. Litigation, regardless of the merits of the claim or outcome, could consume a great deal of our time and money and would divert management time and attention away from our core business. Any potential intellectual property litigation could also force us to do one or more of the following:

	•		stop using the challenged intellectual property or selling our products or services that incorporate it;

	•		obtain a license to use the challenged intellectual property or to sell products or services that incorporate it, which could be costly or unavailable; or

	•		redesign those products or services that are based on or incorporate the challenged intellectual property, which could be costly and time consuming or could adversely affect the functionality and market acceptance of our products.

If we must take any of the foregoing actions, we may be unable to manufacture and sell our solutions, which would substantially reduce our revenue.

We Face Significant Competition From, Among Others, Disease Management Vendors, Medical Management Software Vendors, Internet Companies and Consulting Groups Focused on the Healthcare Industry.

We face intense market competition for our population health management solutions. Many of our competitors have greater financial, technical, product development, marketing and other resources than we have. Because these organizations may be better known and have more customers than us, we may not compete successfully against them. The principal companies we compete against in the disease management market include American Healthways, CorSolutions, Lifemasters and Matria Healthcare. Our principal competitors in the medical management software payer market include HPR (a subsidiary of McKesson HBOC), MEDecision, and others. In the healthcare delivery segment of the medical management software market, we compete against MIDS (a division of Affiliated Computer Systems, Inc.), SoftMed Systems and others. We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries.

Rapidly Changing Technology May Impair Our Ability to Develop and Market Our Population Health Management Solutions.

Because our business relies on technology, it is susceptible to:

•

rapid technological change;

	•		changing customer needs;

	•		frequent new product introductions; and

	•		evolving industry standards.

In particular, the Internet is evolving rapidly and the technology used in Internet related products changes rapidly. As the Internet, computer and software industries continue to experience rapid technological change, we must quickly modify our solutions to adapt to such changes. The demands of operating in such an environment may delay or prevent our development and introduction of new solutions and additional functions for our existing solutions that must continue to meet changing market demands and keep pace with evolving industry standards. Moreover, competitors may develop products superior to our solutions, which could make our products obsolete.

Our Customers May Encounter System Delays, Failures or Loss of Data When Using Our Internet-Based Medical Management Solution and Internet Capabilities of Our Chronic Condition Management Products and Services as a Result of Disruptions or Other Problems With Internet Services and Internet Access Provided by Third Parties.

System delays, failures or loss of data experienced by our customers could harm our business. The success of our Internet-based medical management solutions and chronic condition management capabilities depend on the efficient operation of Internet connections among our payer customers and their members and associated providers, and with us. These connections, in turn, depend on the efficient operation of Internet service providers, Internet connections and Web browsers. In the past, Internet users have occasionally experienced difficulties with Internet connections and services due to system failures. Any disruption in Internet access provided by third parties could delay or disrupt the performance of our Internet-based solutions, and consequently, make them less acceptable to payers. Furthermore, we will depend on our customers’ hardware suppliers for prompt delivery, installation and service of the equipment that runs our applications.

Security Breaches and Security Concerns Relating to Disclosure of Confidential Patient and Customer Information May Result in Liability to the Company and Cause Customers to Refuse to Purchase or Discontinue the Use of Our Population Health Management Solutions.

In the course of providing our solutions, we and our customers maintain confidential information about patients and members, including their names and addresses, social security numbers and certain details about their health. An experienced computer user who is able to access our or our customers’ computer systems could gain access to confidential patient and member information. Therefore, our solutions must remain secure and the market must perceive them as secure. The occurrence of security breaches could cause customers to refuse to purchase or discontinue use of our solutions. Protecting against such security breaches or alleviating problems caused by security breaches may require us to expend significant capital and other resources. In addition, upgrading our systems to incorporate more advanced encryption and authentication technology as it becomes available may cause us to spend significant resources and encounter costly delays. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the market for our Internet-based population health management solutions.

Recently, a laptop computer containing the names, social security numbers and certain health information of approximately 30,000 members of two of our health plan customers was stolen during a burglary at our headquarters. Although the information is password protected, it is possible that an experienced computer user could access the information and use it, or give it to others who might use it, for identity theft or other unlawful activities. If the information were misused in this manner we could be liable for damages incurred by the effected members, and our existing and future customers could determine that our solutions are not secure and cease to use them. In either event, our results of operation could be materially and adversely impacted.

We Operate in an Industry Subject to Changing Regulatory Influences, Which Could Limit the Usefulness of Our Solutions or Require Us to Make Expensive and Time-Consuming Modifications to Our Products.

During the past several years, federal, state and local governments have increased their regulation of the U.S. healthcare industry and have proposed numerous healthcare industry reforms. These reforms may increase governmental involvement in healthcare, continue to reduce reimbursement rates and otherwise change the operating environment for our customers.

Our customers may react to these proposals and the uncertainty surrounding the proposals by curtailing or deferring investments, including those for our medical management solutions.

Existing state and federal laws regulate the confidentiality of healthcare information and the circumstances under which such records may be released. Congress is considering further legislation and the Department of Health and Human Services has proposed regulations that would further regulate the confidentiality of healthcare information. In addition, the Department of Health and Human Services has proposed regulations setting forth security standards for all health plans, clearinghouses and providers to follow with respect to healthcare information that is electronically transmitted, processed or stored. While these laws and regulations may not apply to us directly, our products must comply with existing and future laws and regulations in order to achieve market acceptance. Such compliance may be difficult and expensive or even impossible to achieve. These laws or regulations could restrict the ability of our customers to obtain, use or disseminate patient information, which in turn could limit the usefulness of our medical management solutions causing a decrease in our sales.

Because of the Internet’s popularity and increasing use, new laws and regulations with respect to the Internet are becoming prevalent. Such new laws and regulations could limit the effectiveness and market acceptance of our Internet-based solutions or could cause us to have to modify our solutions, which could be expensive and time consuming.

Our Population Health Management Solutions Will Have to Contain HIPAA-Compliant Features and Functionality to Remain Marketable.

The requirements of HIPAA are continuously being modified. Therefore, our products may require modification in the future. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations our business will suffer.

Consolidation in the Healthcare Industry Could Lead to Large Integrated Healthcare Delivery Systems That May Use Their Enhanced Market Power to Force Price Reductions for Our Population Health Management Solutions and Related Services.

Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Our operating results may suffer if we reduce our prices without achieving corresponding reductions in our expenses.

We May Encounter Acquisition-Related Risks Such as Becoming Responsible for Unexpected Liabilities of Acquired Businesses and Difficulties Integrating Employees and Operations of Acquired Businesses.

We may review opportunities to acquire other businesses or technologies. In connection with acquisitions, we could:

	•		issue stock that would dilute our stockholders’ percentage ownership;

	•		incur debt; or

	•		assume liabilities.

Acquisitions could involve numerous risks, including:

	•		problems integrating the purchased operations, technologies or products;

	•		unanticipated costs or unexpected liabilities;

	•		diversion of our management’s attention from our core business;

	•		interference with existing business relationships with suppliers and customers;

	•		risks associated with entering markets in which we have no or limited prior experience; and

	•		potential loss of key employees of purchased organizations.

We may not be able to successfully integrate any businesses, products, technologies or personnel that we might purchase in the future.

Our Principal Stockholders Have Significant Voting Power, Which May Limit Our Stockholders’ Ability to Influence the Outcome of Director Elections and Other Stockholder Matters.

Our executive officers and directors and their affiliates beneficially own, in the aggregate, approximately 48% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us.

Due to Our Limited Funds, We May Be Unable to Develop or Enhance Our Population Health Management Solutions, Take Advantage of Future Opportunities or Respond to Competitive Pressures or Unanticipated Events.

Our funds are limited. They consist of existing cash reserves and limited anticipated cash flow from operations. We believe that these funds will be sufficient to meet our capital and operating expense requirements for the next twelve months. Thereafter, we may require additional funds to support our working capital, operating expense and capital expenditure requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings if such funding is available on terms acceptable to us. If we cannot raise capital on acceptable terms and when needed, we may not have the resources to develop new products or enhance existing products, take advantage of future opportunities or respond to competitive pressures or unanticipated events.

We Have Experienced Over $4 Million in Impairments of Our Fixed and Intangible Assets Since the First Quarter Of 2001, And Our Assets May Continue to Become Additionally Impaired in The Future.

During the first quarter of 2001, we recorded an impairment of intangible assets in the amount of $704,000 in connection with the cessation of operations of our web consulting business.

During the second quarter of 2002, primarily due to a decline in demand for services in the Company’s Care Management reporting unit, management determined that it was necessary to test for an impairment of long-lived assets. As a result of this test and the subsequent analysis of the fair value of its Care Management reporting unit, Landacorp recorded an impairment to its long-lived assets in the amount of $3,300,000 during the second quarter of 2002. In accordance with the provisions of SFAS 144 and 142, we will continue to evaluate the fair value of our reporting units and the recoverability of the assets contained therein.

The impairments recorded during the quarter ended March 31, 2001 and the quarter ended June 30, 2002 were based on assumptions that reflected management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in additional impairment charges.

Our Stock Price Has Been Highly Volatile, and Your Investment Could Suffer a Decline in Value.

The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

	•		actual or anticipated variations in quarterly operating results;

	•		failure to achieve, or changes in, financial estimates by securities analysts;

	•		announcements of new products or services or technological innovations by us or our competitors;

	•		conditions or trends in the healthcare industry;

	•		announcements by us of significant strategic transactions or capital commitments;

	•		additions or departures of key personnel;

	•		sales of our common stock; and

	•		developments regarding our intellectual property or that of our competitors.

In addition, the stock market in general, and the NASDAQ SmallCap Market and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of healthcare services and software companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

There May Not be an Active, Liquid Trading Market For Our Common Stock.

As of the opening of trading on November 7, 2002, our common stock has traded on the NASDAQ Stock Market’s SmallCap Market. There is no guarantee that an active trading market for our Common Stock will be maintained on the NASDAQ SmallCap Market. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

If we were to be unable to comply with NASDAQ’s continued listing criteria and other requirements within the time frame prescribed, we could be delisted from trading on such market, and thereafter trading in our common stock, if any, would likely be conducted through the over-the-counter market or on the Electronic Bulletin Board of the National Association of Securities Dealers, Inc.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve principal while, at the same time, maximizing the yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high-quality money market accounts that invest in debt securities. Our investment in debt securities is subject to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, we invest in money market accounts that invest only in short-term securities that maintain an average maturity of less than one year and debt securities that also have an average maturity of less than one year. As a result, we do not believe we are subject to significant market risk.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief

Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any material legal proceedings.

Item 2. Changes in Securities

None.

Item 3. Defaults in Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on June 9, 2003 in Atlanta, Georgia. Of the 15,964,593 shares outstanding as of the record date, 14,807,610 were present or represented by proxy at the meeting. The results of the voting on the matters submitted to the stockholders are as follows:

1. To elect seven (7) directors to serve until the 2003 Annual Meeting of Stockholders and until their successors are duly elected and qualified.


Name	Votes For		Votes Withheld

Eugene Miller		14,772,845		34,765
Eugene Santa Cattarina		14,681,030		126,580
Jerome Grossman, M.D.		14,635,284		172,326
Bryan Lang		14,654,090		153,520
Thomas Stephenson		14,570,921		236,689
Howard Cox		14,746,595		61,015
Michael Miele		14,593,353		214,257

2. To ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending December 31, 2002.


Votes for:			14,757,830
Votes against:			34,994
Votes abstaining:			14,786

3. To approve the amendment to the Second Amended and Restated Certificate of Incorporation of the Company to remove certain supermajority voting requirements.


Votes for:			11,226,837
Votes against:			43,805
Votes abstaining, including broker non-votes:			3,536,968

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.


Exhibit Number		Description of Document

3.1(1)		Second Amended and Restated Certificate of Incorporation of the Registrant dated February 14, 2000.
3.2(5)		Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Registrant dated March 26, 2001.
3.2.1		Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of the Registrant dated June 12, 2003.
3.3(1)		Bylaws of the Registrant.
3.3.1		Certificate of Amendment to the Bylaws of the Registrant, dated June 19, 2003.
4.1(1)		Specimen Common Stock Certificate.
4.2(1)		Registration Rights Agreement dated October 29, 1997, as amended.
4.3(4)		Registration Rights Agreement by and among Landacorp, Inc., and certain holders of shares of Landacorp, Inc., dated October 31, 2000.
10.1(1)		Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2(1)		1995 Stock Plan and form of agreements thereunder.
10.3(2)		1998 Equity Incentive Plan, as amended.
10.3.1		1998 Equity Incentive Plan, as amended on June 9, 2003 and form of agreements thereunder.
10.4(1)		1999 Employee Stock Purchase Plan.
10.4.1		1999 Employee Stock Purchase Plan, as amended on April 1, 2003.
10.5(1)		Sublease Agreement for Offices located at 4151 Ashford Dunwoody Rd., Atlanta, Georgia. between Landacorp and Unisys Corporation, dated September 1, 1991.
10.6(1)		Lease Agreement for offices located on Fortress Avenue, Chico, CA, between Landacorp and Fortress Development Group, dated March 8, 1999.
10.7(1)		Licensing Agreement by and between Interqual® Incorporated and Landa Management Systems Corporation, dated September 8, 1992.
10.8(1)		Sublicensor Agreement by and between Interqual® Incorporated and Landa Management Systems, effective April 15, 1994.
10.9(1)		Distribution Agreement for Interqual® Medical Appropriateness Review Systems, signed on January 1, 1996.
10.10(1)		License Agreement — Software Developers, between Milliman & Robertson, Inc. and Landacorp, dated August 17, 1998.
10.11(3)		Asset Purchase Agreement by and among Landacorp, Inc., PMX Holdings, Inc., and Landacorp Acquisition Subsidiary Inc. dated October 27, 2000.
10.12(4)		Merger Agreement by and among Landacorp, Inc., CDMS Acquisition Corporation, PatientCentrix, Inc., Michael S. Miele, Christopher C. Synn, and James W. Tiepel, dated October 31, 2000.
10.13(6)		Settlement Agreement and Mutual Release by and between Landacorp, Inc. and Bryan Lang dated June 20, 2001.
10.14(6)		Separation Agreement between Eugene Santa Cattarina and Landacorp, Inc. dated January 15, 2002.
10.15(6)		Memorandum of Agreement between Landacorp, Inc. and Marlene McCurdy dated August 6, 2001.
10.16(6)		Settlement Agreement and Mutual Release by and among Landacorp, Inc. and Michael S. Miele dated May 3, 2001.
10.17(6)		Settlement Agreement and Mutual Release by and among Landacorp, Inc., Eugene Santa Cattarina and Michael S. Miele, Christopher C. Synn, James W. Tiepel, Richard Sweeney, Stephen Brooks, Mary Dean, Ian Duncan, Percival Herrero, John Burke, Arthur Robb, Anne Forbes, Virginia O’Shea, Lucia Egoavil, Thomas Sweeney, and Bradley Green dated March 13, 2002.
10.18(6)		Stock Purchase Agreement by and between Landa Management Systems Corporation and Eugene Santa Cattarina dated March 17, 1999.
10.19(6)		Stock Purchase Agreement by and between Landa Management Systems Corporation and Stephen P. Kay dated March 17, 1999.
10.20(7)		First Amended and Restated Services and Systems Agreement Number 01071003 between Lifeguard, Inc. and Lifeguard Life Insurance Company, and Landacorp, Inc. dated July 31, 2002.*
10.21(8)		Second Amended and Restated Services and Systems Agreement Number 01071003 between Lifeguard, Inc. and Lifeguard Life Insurance Company, and Landacorp, Inc. dated October 8, 2002.*
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)		Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (file no. 333-84703), as amended.

(2)		Incorporated by reference from the Registrant’s Registration Statement on Form S-8 filed on March 22, 2001.

(3)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 13, 2000.

(4)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 17, 2000.

(5)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 30, 2001.

(6)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 29, 2002.

(7)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on August 7, 2002.

(8)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on October 15, 2002.

Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.

(b) Reports on Form 8-K.

A Current Report on Form 8-K was furnished to the SEC on May 9, 2003, presenting the Company’s press release announcing financial results for its second fiscal quarter ended March 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	LANDACORP, INC. (Registrant)

Dated: August 12, 2003

	By:	/s/ Eugene Miller Eugene Miller President, Chief Executive Officer



	By:	/s/ Mark Rapoport Mark Rapoport Chief Operating Officer and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description of Document

3.1(1)		Second Amended and Restated Certificate of Incorporation of the Registrant dated February 14, 2000.
3.2(5)		Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Registrant dated March 26, 2001.
3.2.1		Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of the Registrant dated June 12, 2003.
3.3(1)		Bylaws of the Registrant.
3.3.1		Certificate of Amendment to the Bylaws of the Registrant, dated June 19, 2003.
4.1(1)		Specimen Common Stock Certificate.
4.2(1)		Registration Rights Agreement dated October 29, 1997, as amended.
4.3(4)		Registration Rights Agreement by and among Landacorp, Inc., and certain holders of shares of Landacorp, Inc., dated October 31, 2000.
10.1(1)		Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2(1)		1995 Stock Plan and form of agreements thereunder.
10.3(2)		1998 Equity Incentive Plan, as amended.
10.3.1		1998 Equity Incentive Plan, as amended on June 9, 2003 and form of agreements thereunder.
10.4(1)		1999 Employee Stock Purchase Plan.
10.4.1		1999 Employee Stock Purchase Plan, as amended on April 1, 2003.
10.5(1)		Sublease Agreement for Offices located at 4151 Ashford Dunwoody Rd., Atlanta, Georgia. between Landacorp and Unisys Corporation, dated September 1, 1991.
10.6(1)		Lease Agreement for offices located on Fortress Avenue, Chico, CA, between Landacorp and Fortress Development Group, dated March 8, 1999.
10.7(1)		Licensing Agreement by and between Interqual® Incorporated and Landa Management Systems Corporation, dated September 8, 1992.
10.8(1)		Sublicensor Agreement by and between Interqual® Incorporated and Landa Management Systems, effective April 15, 1994.
10.9(1)		Distribution Agreement for Interqual® Medical Appropriateness Review Systems, signed on January 1, 1996.
10.10(1)		License Agreement — Software Developers, between Milliman & Robertson, Inc. and Landacorp, dated August 17, 1998.
10.11(3)		Asset Purchase Agreement by and among Landacorp, Inc., PMX Holdings, Inc., and Landacorp Acquisition Subsidiary Inc. dated October 27, 2000.
10.12(4)		Merger Agreement by and among Landacorp, Inc., CDMS Acquisition Corporation, PatientCentrix, Inc., Michael S. Miele, Christopher C. Synn, and James W. Tiepel, dated October 31, 2000.
10.13(6)		Settlement Agreement and Mutual Release by and between Landacorp, Inc. and Bryan Lang dated June 20, 2001.
10.14(6)		Separation Agreement between Eugene Santa Cattarina and Landacorp, Inc. dated January 15, 2002.
10.15(6)		Memorandum of Agreement between Landacorp, Inc. and Marlene McCurdy dated August 6, 2001.
10.16(6)		Settlement Agreement and Mutual Release by and among Landacorp, Inc. and Michael S. Miele dated May 3, 2001.
10.17(6)		Settlement Agreement and Mutual Release by and among Landacorp, Inc., Eugene Santa Cattarina and Michael S. Miele, Christopher C. Synn, James W. Tiepel, Richard Sweeney, Stephen Brooks, Mary Dean, Ian Duncan, Percival Herrero, John Burke, Arthur Robb, Anne Forbes, Virginia O’Shea, Lucia Egoavil, Thomas Sweeney, and Bradley Green dated March 13, 2002.
10.18(6)		Stock Purchase Agreement by and between Landa Management Systems Corporation and Eugene Santa Cattarina dated March 17, 1999.
10.19(6)		Stock Purchase Agreement by and between Landa Management Systems Corporation and Stephen P. Kay dated March 17, 1999.
10.20(7)		First Amended and Restated Services and Systems Agreement Number 01071003 between Lifeguard, Inc. and Lifeguard Life Insurance Company, and Landacorp, Inc. dated July 31, 2002.*
10.21(8)		Second Amended and Restated Services and Systems Agreement Number 01071003 between Lifeguard, Inc. and Lifeguard Life Insurance Company, and Landacorp, Inc. dated October 8, 2002.*
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Exhibit Number		Description of Document

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)		Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (file no. 333-84703), as amended.

(2)		Incorporated by reference from the Registrant’s Registration Statement on Form S-8 filed on March 22, 2001.

(3)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 13, 2000.

(4)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 17, 2000.

(5)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 30, 2001.

(6)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 29, 2002.

(7)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on August 7, 2002.

(8)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on October 15, 2002.

Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.

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LANDACORP INC 10-Q