FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] 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: 0-30859
CARESCIENCE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2703715
--------------------------------- -------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3600 MARKET STREET
PHILADELPHIA, PA 19104
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(215) 387-9401
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding, as of
November 9, 2001 was 13,280,016.
Page 1
CARESCIENCE INC.
FORM 10-Q
SEPTEMBER 30, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--December 31, 2000 and September 30, 2001
(unaudited).................................................................2
Consolidated Statements of Operations--Three and Nine Months Ended
September 30, 2000 and September 30, 2001 (unaudited).......................3
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
2000 and September 30, 2001 (unaudited).....................................4
Notes to Consolidated Financial Statements....................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 2. Changes in Securities and Use of Proceeds............................13
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
Signatures...................................................................15
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CARESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 26,702,096 $ 16,440,841
Short-term investments ........................................ 3,001,770 6,041,900
Interest receivable ........................................... 174,034 54,360
Accounts receivable, net of allowance for doubtful
accounts of $48,794 and $63,854, respectively ............... 865,075 1,329,618
Prepaid expenses and other .................................... 240,345 737,856
------------ ------------
Total current assets ............................................. 30,983,320 24,604,575
------------ ------------
Property and equipment:
Computer equipment ............................................ 4,611,573 4,943,869
Office equipment .............................................. 482,385 488,760
Furniture and fixtures ........................................ 397,629 397,629
------------ ------------
5,491,587 5,830,258
Less--Accumulated depreciation and amortization ............... (2,562,342) (3,625,986)
------------ ------------
Net property and equipment .................................. 2,929,245 2,204,272
------------ ------------
Goodwill and other intangibles, net ............................. -- 1,328,647
------------ ------------
Total assets .............................................. $ 33,912,565 $ 28,137,494
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations
and note payable ............................................ $ 250,685 $ 375,821
Accounts payable .............................................. 1,090,613 252,859
Accrued expenses .............................................. 1,141,662 1,065,641
Deferred revenues ............................................. 3,035,511 4,250,869
------------ ------------
Total current liabilities ................................... 5,518,471 5,945,190
------------ ------------
Capital lease obligations ........................................ 428,602 247,445
------------ ------------
Shareholders' equity:
Common stock, no par value, 16,000,000 shares
authorized, 14,206,851 and 14,720,016 shares
issued and 12,766,851 and 13,280,016
outstanding ................................................. 59,612,380 60,256,012
Additional paid-in capital .................................... 5,590,620 5,356,977
Deferred compensation ......................................... (4,010,828) (2,829,789)
Accumulated other comprehensive income ........................ 1,770 41,900
Accumulated deficit ........................................... (32,328,450) (39,560,241)
Subscription receivables ...................................... -- (420,000)
Treasury stock, at cost, 1,440,000 shares ..................... (900,000) (900,000)
------------ ------------
Total shareholders' equity .................................. 27,965,492 21,944,859
------------ ------------
Total liabilities and shareholders' equity ................ $ 33,912,565 $ 28,137,494
============ ============
The accompanying notes are an integral part of these statements.
Page 3
CARESCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Revenues ................................. $ 2,207,402 $ 3,508,661 $ 5,758,384 $ 9,001,043
Cost of revenues (excludes
stock-based compensation of $171,088
and $512,278 for the three and nine
months ended September 30, 2000,
respectively, and $163,209 and
$489,831 for three and nine months
ended September 30, 2001,
respectively) .......................... 1,275,550 1,614,151 3,450,016 4,483,923
------------ ------------ ------------ ------------
Gross profit ........................... 931,852 1,894,510 2,308,368 4,517,120
------------ ------------ ------------ ------------
Operating expenses:
Research and development (excludes
stock-based compensation of $23,922
and $70,779 for the three and nine
months ended September 30, 2000,
respectively, and $9,772 and $29,316
for three and nine months ended
September 30, 2001, respectively) .... 1,329,069 840,567 2,734,740 3,168,116
Selling, general and administrative
(excludes stock-based compensation
of $146,742 and $439,387 for the three
and nine months ended September 30,
2000, respectively, and $142,707 and
$428,249 for three and nine months
ended September 30, 2001,
respectively) ........................ 2,192,210 2,420,400 5,533,485 8,456,836
Stock-based compensation ............... 341,752 315,688 1,022,444 947,396
------------ ------------ ------------ ------------
Total operating expenses ............. 3,863,031 3,576,655 9,290,669 12,572,348
------------ ------------ ------------ ------------
Operating loss ....................... (2,931,179) (1,682,145) (6,982,301) (8,055,228)
Interest income .......................... (561,695) (247,675) (627,982) (889,652)
Interest expense ......................... 23,839 23,497 68,302 66,215
------------ ------------ ------------ ------------
Net loss ................................. (2,393,323) (1,457,967) (6,422,621) (7,231,791)
Accretion of redemption premium on
preferred stock ........................ -- -- 253,731 --
Preference distribution on preferred
stock .................................. -- -- 5,716,784 --
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ........................... $ (2,393,323) $ (1,457,967) $(12,393,136) $ (7,231,791)
============ ============ ============ ============
Net loss per common share:
Basic and diluted ...................... $ (0.19) $ (0.11) $ (1.88) $ (0.55)
Weighted average shares outstanding:
Basic and diluted ...................... 12,756,851 13,277,384 6,602,066 13,108,855
The accompanying notes are an integral part of these statements.
Page 4
CARESCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 2001
------------ ------------
Cash flows from operating activities:
Net loss ............................... $ (6,422,621) $ (7,231,791)
Adjustments to reconcile net loss to
net cash used inoperating activities--
Depreciation and amortization ........ 577,132 1,034,710
Loss on disposal ..................... -- 158,000
Provision for bad debts .............. 12,000 14,475
Stock-based compensation ............. 1,022,444 947,396
Changes in assets and liabilities--
(Increase) decrease in--
Interest receivable .............. (395,084) 119,559
Accounts receivable .............. (53,634) (270,076)
Prepaid expenses and other ....... (150,277) (495,571)
Increase (decrease) in--
Accounts payable and accrued
expenses ....................... 953,952 (1,057,447)
Deferred revenues ................ 82,923 805,068
------------ ------------
Net cash used in operating
activities ..................... (4,373,165) (5,975,677)
------------ ------------
Cash flows used in investing activities:
Proceeds from the redemption of
short-term investments ............... -- 5,000,115
Purchases of short-term investments .... (20,500,129) (8,000,000)
Purchase of acquisition, net ........... -- (882,367)
Purchases of property and equipment,
net .................................. (1,761,450) (302,155)
------------ ------------
Net cash used in investing
activities ..................... (22,261,579) (4,184,407)
Cash flows provided by (used in)
financing activities:
Proceeds from note payable ............. -- 237,751
Payments on capital lease obligations
and note payable ...................... (278,040) (343,805)
Cost related to the issuance of
Common stock ......................... (1,285,047) --
Payments of dividends of Series C, D,
& E Preferred Stock .................. (1,516,785) --
Redemption of Series F Preferred Stock . (4,935,367) --
Proceeds from the issuance of common
stock and exercise of common
stock options ........................ 44,640,000 4,883
------------ ------------
Net cash provided by (used
in) financing activities ....... 36,624,761 (101,171)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ............................ 9,990,017 (10,261,255)
Cash and cash equivalents,
beginning of period .................... 3,381,600 26,702,096
------------ ------------
Cash and cash equivalents,
end of period .......................... $ 13,371,617 $ 16,440,841
============ ============
The accompanying notes are an integral part of these statements.
Page 5
CARESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated balance sheet as of September 30, 2001, the statements
of operations for the three and nine months ended September 30, 2000 and 2001
and the statements of cash flows for the nine months ended September 30, 2000
and 2001 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 2001 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Annual Report on Form 10-K as filed with the Securities
and Exchange Commission. The results of operations for the three and nine months
ended September 30, 2001 are not necessarily indicative of the operating results
for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of CareScience, Inc. and its subsidiary. All significant intercompany
transactions and balances have been eliminated.
New Accounting Prounouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". SFAS No. 141 eliminates the use of the pooling-of-interests
method of accounting for business combinations and establishes the purchase
method of accounting as the only acceptable method on all business combinations
initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement modifies existing generally accepted
accounting principles related to the amortization and impairment of goodwill and
other intangible assets. Upon adoption of the new standard, goodwill, including
goodwill associated with equity method investments, will no longer be amortized.
For the nine months ended September 30, 2001, goodwill amortization was
$129,070. In addition, goodwill, other than goodwill associated with equity
method investments, must be assessed at least annually for impairment using a
fair-value based approach. The provisions of this statement are required to be
adopted as of the beginning of the first fiscal year after December 15, 2001.
Impairment losses that arise due to the initial application of this statement
are to be reported as a cumulative effect of change in accounting principle. The
Company has not completed an analysis of the impact of implementing the
provisions of this statement.
Cash and Cash Equivalents and Short-term Investments
The Company invests excess cash in highly liquid investment-grade
marketable securities including corporate commercial paper and U.S. government
agency bonds. For financial reporting purposes, the Company considers all highly
liquid investment instruments purchased with an original maturity of three
months or less to be cash equivalents. All investment instruments with
maturities greater than three months are available for use in current operations
and accordingly are classified as current assets.
Page 6
All investments are considered available-for-sale and accordingly, unrealized
gains and losses are included in a separate component of shareholders' equity.
As of September 30, 2001 cash and cash equivalents and short-term
investments at cost and fair market value consisted of the following:
SEPTEMBER 30, 2001
-----------------------------------------
GROSS FAIR
ORIGINAL UNREALIZED MARKET
COST GAINS VALUE
----------- ----------- -----------
Cash and cash equivalents $16,440,841 $ -- $16,440,841
Short-term investments 6,000,000 41,900 6,041,900
----------- ----------- -----------
$22,440,841 $ 41,900 $22,482,741
=========== =========== ===========
At September 30, 2001, short-term investments consisted of a $2 million
debt instrument maturing July 25, 2002 and two $2 million debt instruments each
maturing August 28, 2002.
Supplemental Cash Flow Information
The Company paid interest of $68,302 and $66,215 for the nine months
ended September 30, 2000 and 2001, respectively.
The Company financed $252,401 and $0 of property and equipment purchases
with capital leases for the nine months ended September 30, 2000 and 2001,
respectively.
Major Customers
The Company's operations are conducted in one business segment and sales
are primarily made to health care payors and providers. The Company had one
customer for each of the nine month periods ended September 30, 2000 and 2001,
which accounted for 20% and 13% of total revenues, respectively. The Company
also had two customers for each of the three month periods ended September 30,
2000 and 2001, which accounted for 31% and 22% of total revenues, respectively.
The Company had two customers at September 30, 2001, which accounted for
31% of total accounts receivable.
(2) NET LOSS PER SHARE
Net loss per share is calculated utilizing the principles of SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). Basic Earnings per Share ("EPS")
excludes potentially dilutive securities and is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed assuming the conversion or
exercise of all dilutive securities such as preferred stock, options and
warrants.
Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of basic
EPS. The number of incremental shares from the assumed exercise of stock options
and warrants is calculated applying the treasury stock method. Stock options,
warrants and Preferred stock convertible into common shares were excluded from
the calculations as they were anti-dilutive due to the net loss.
(3) COMMITMENTS AND CONTINGENCIES
CareScience and certain of its officers are defendants in several
purported shareholder class action lawsuits described below for alleged
violations of federal securities laws. Although we cannot predict the ultimate
outcome of the case or estimate the range of any potential loss that may be
Page 7
incurred in the litigation, we believe the lawsuits are frivolous and without
merit, strenuously deny all allegations of wrongdoing asserted by plaintiffs,
and believe we have meritorious defenses to plaintiffs' claims. We intend to
vigorously defend the lawsuits.
CareScience and certain of its officers are defendants in a purported
class action litigation pending in the United States District Court for the
Eastern District of Pennsylvania. These actions are the result of several
complaints filed with the Court beginning on October 17, 2001. We are currently
seeking to consolidate these actions. These complaints purport to bring claims
on behalf of all persons who allegedly purchased our common stock between June
29, 2000 and November 1, 2000, for alleged violations of the federal securities
laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by
issuing a materially false and misleading Prospectus and Registration Statement
with respect to the initial public offering of our common stock. Specifically,
the complaints allege, among other things, that our Prospectus and Registration
Statement misrepresented and omitted to disclose material facts concerning two
of our prospective products. The actions seek compensatory and other damages,
and costs and expenses associated with litigation.
(4) SHAREHOLDERS'EQUITY
Subscriptions Receivable
On June 15, 2001 the Company issued 259,259 shares of its Common stock
to seven of its officers and three of its directors in a private sale at a price
of $1.62 per share which is equal to the closing price of its Common stock on
the Nasdaq National Market on that date. Concurrent with this sale, full
recourse notes bearing interest at a rate of 4.11% compounded semi-annually,
were issued to these officers and directors. The total amount of such notes
issued was $420,000.
Equity Compensation Plans
The Company's 1995 Equity Compensation Plan (the "Plan") permits the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights and restricted stock. The Company has authorized the
issuance of up to 2,565,038 shares of Common stock to satisfy grants under the
Plan. At September 30, 2001, there were 480,786 shares reserved under the Plan
available for grant. A committee of the Board of Directors (the "Committee")
administers the Plan and determines the terms of the grants.
In December 1998, the Company adopted the 1998 Time Accelerated
Restricted Stock Option Plan (the "Accelerated Plan"). The Accelerated Plan
provides for the granting of non-qualified stock options to officers, senior
management and employee directors of the Company. The aggregate number of shares
of Common stock the Company may issue under the Accelerated Plan is 483,594
shares. At September 30, 2001 there were no shares reserved under the
Accelerated Plan available for grant.
The Company accounts for all plans under APB Opinion No. 25, under which
compensation expense is recognized based on the amount by which the fair value
of the underlying common stock exceeds the exercise price of the stock options
on the measurement date. For financial reporting purposes, the Company has
determined that the deemed fair market value on the measurement date for certain
stock options was in excess of the exercise price. This amount has been recorded
as deferred compensation and is being amortized over the vesting period of the
applicable options, which range between four and seven years. The Company
recorded deferred compensation of $120,683 and $0 during the year ended December
31, 2000 and the nine months ended September 30, 2001, respectively and reversed
$154,902 and $233,643 of deferred compensation in connection with forfeited
common stock options during the year ended December 31, 2000 and the nine months
ended September 30, 2001, respectively. The Company recognized $341,752 and
$1,022,444 of compensation expense related to options for the three and nine
months ended September 30, 2000, respectively and $315,688 and $947,396 of
compensation expense related to options for the three and nine months ended
September 30, 2001, respectively.
Page 8
The following table summarizes the option activity for both plans:
OPTIONS OUTSTANDING
------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AVERAGE
FOR OF PRICE AGGREGATE EXERCISE
GRANT SHARES PER SHARE PRICE PRICE
---------- --------- ----------- ---------- ----------
Balance, December 31, 1997............. 362,800 251,200 $0.25- 1.25 $ 271,200 $1.08
Authorized........................... 1,134,632 -- -- -- --
Granted.............................. (472,635) 472,635 1.25- 2.60 895,227 1.89
Forfeited/Canceled................... 12,800 (12,800) 0.25- 1.25 (10,800) .84
---------- --------- ----------- ----------
Balance, December 31, 1998............. 1,037,597 711,035 0.25- 2.60 1,155,627 1.63
Authorized........................... -- -- -- -- --
Granted.............................. (1,108,150) 1,108,150 1.25- 2.59 2,814,164 2.54
Forfeited/Canceled................... 216,413 (216,413) 0.25- 2.59 (291,017) 1.34
---------- --------- ----------- ----------
Balance, December 31, 1999............. 145,860 1,602,772 0.25- 2.60 3,678,774 2.30
Authorized........................... 800,000 -- -- -- --
Granted.............................. (817,663) 817,663 0.78-12.00 6,782,592 8.30
Forfeited/Canceled................... 573,298 (573,298) 1.25-12.00 (4,926,524) 8.59
Excercised........................... -- (10,000) 0.25 2,500 0.25
---------- --------- ----------- ----------
Balance, December 31, 2000............. 701,495 1,837,137 0.25-12.00 5,537,342 3.01
Authorized (unaudited)............... 500,000 -- -- -- --
Granted (unaudited).................. (880,036) 880,036 0.38- 2.81 1,563,002 1.78
Forfeited/canceled (unaudited)....... 159,327 (159,327) 0.78- 6.63 (442,536) 2.78
Excercised (unaudited)............... -- (3,906) 1.25 (4,883) 1.25
---------- --------- ----------- ----------
Balance, September 30, 2001(unaudited) 480,786 2,553,940 $0.25-12.00 $6,652,925 2.60
========== ========= =========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report includes a number of forward-looking statements that reflect
our current views with respect to future events and financial performance. We
use words such as anticipates, believes, expects, future, and intends, and
similar expressions to identify forward-looking statements. For these statements
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. There are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements, including:
- the difficulty in evaluating our business because we operate in a new
industry and our operating history is limited;
- we have a history of losses and expect our losses to continue;
- the proprietary technology we own or license may be subjected to
infringement claims or disagreements with the licensor which could be
costly to resolve;
- we depend on exclusive licenses with the University of Pennsylvania and
California Health Care Foundation for important parts of our technology,
and the loss of either of these licenses would impair our ability to
develop our business;
- we could be liable for information retrieved from our Web sites and incur
significant costs from resulting claims;
- we may experience system failures which could interrupt our service and
damage our customer relationships;
- the health care industry may not accept our solutions or buy our products
which would adversely affect our financial results;
Page 9
- because our revenues are dependent on a limited number of product lines,
the failure of any one of these product lines would significantly decrease
our revenues;
- termination of one or more of our significant contracts would cause a
significant decline in our revenue;
- failure to manage our growth would adversely affect our operations;
- we face intense competition and may be unable to compete successfully which
would adversely affect our financial results;
- the loss of any of our key personnel could adversely affect our operations;
- our failure to develop strategic relationships could adversely affect our
ability to develop new products;
- our failure to use new technologies effectively or to adapt emerging
industry standards would adversely affect our ability to compete;
- our failure to adapt our technology to our customers' needs or to handle
high levels of customer activity would adversely affect our ability to
increase revenue;
- failure of our service providers could interrupt our business and damage
our customer relationships;
- we may need to obtain additional capital and failure to do so may limit our
growth;
- health information is subject to potential government regulation and legal
uncertainties and changes may require us to alter our business;
- changes in the health care industry could adversely affect our operations;
- our business will suffer if commercial users do not accept Internet
solutions;
- our industry is evolving and we may not adapt successfully.
Overview
CareScience, Inc. is a provider of online care management services. Our
mission is to transform the quality and efficiency of care delivery by providing
innovative clinical information technology to the health care industry. We
market our services to hospitals, health systems and pharmaceutical and
biotechnology manufacturers, and support more than 150 customers in 40 states
and in Europe.
We work with health care providers to manage clinical processes
surrounding the point of care so that fundamental reductions in errors and
operating cost can be achieved. Our online service offerings collect, share,
store and analyze clinical data generated by more than 100 widely used health
information systems. Our services allow customers to apply this data to the
management of care, including quality monitoring, practice improvement,
credentialing, profiling, error tracking, case management and clinical
guidelines. We provide consulting services to healthcare providers that support
strategic planning and clinical operations, with a special emphasis on mentoring
physicians and other clinical leaders in operational and executive roles.
For the pharmaceutical and biotechnology industry, we provide tools and
services that shorten the drug development cycle and improve development yield.
Our offerings include a suite of Internet-based data analysis and workflow
management tools, consulting services, customized research and strategic
development support. These tools and services are aimed at the specialized drug
development needs of pharmaceutical industry clinicians, product managers,
market strategists, health economists and outcomes researchers.
We have pioneered and commercialized numerous clinical information
technologies. We have developed one of the nation's first online quality
measurement and management tools, one of the first clinically based outcome risk
assessment algorithms, one of the first health care application service
providers, and, most recently, the first peer-to-peer clinical data sharing
technology. We have developed these tools in collaboration with leading public
organizations, including the Wharton School of Business at the University of
Pennsylvania, the National Library of Medicine, Los Alamos National Laboratory
and The California HealthCare Foundation.
Page 10
CareScience was incorporated in 1992 with the purpose of commercializing
intellectual property that was developed at the University of Pennsylvania
School of Medicine and The Wharton School of Business. In 1993, we exclusively
licensed the intellectual property underlying our core technology in a 30-year
agreement with the University of Pennsylvania. In 1996, we launched our first
Internet-based commercial offering based on this proprietary technology under
our Care Management System-TM- (formerly called CaduCIS) service line. In 1999,
we launched our Care Data Exchange-TM-, and Technology Assessment Tools-TM-, as
well as our Lifecycle Decision System-TM- service line, which is aimed at the
pharmaceutical and biotechnology industries. To date, we have signed more than
50 contracts covering more than 150 hospitals, health systems and pharmaceutical
companies.
We generate revenues from subscriptions to our Internet-based
proprietary technology applications and hosting of customer data, as well as
from training, implementation and consulting services. We sell our services
individually or as an integrated suite of services. Our contracts are fixed
price based on estimates of certain variables, such as the number of a
hospital's patient admissions or outpatient visits.
Our subscription and development agreements typically cover an initial
three-to five-year period with provisions for automatic renewals. We recognize
training and implementation fees, as well as subscriptions and related hosting
revenues, on a pro-rata basis over the life of the contract. We recognize
consulting fees on a percentage-of-completion basis or as the program or service
is delivered.
Our contracts generally provide for payment in advance of services
rendered. Therefore, we record these payments as deferred revenues and recognize
these payments when earned in accordance with our revenue recognition policy.
Our deferred revenue balances were $3.0 million and $4.3 million at December 31,
2000 and September 30, 2001, respectively.
We have incurred substantial research and development costs since
inception and have also invested in our corporate infrastructure to support our
long-term growth strategy. We expect that our operating expenses will continue
to exceed our gross profit, and as a result, we expect to continue to incur
quarterly net losses for the foreseeable future.
On June 28, 2000 we completed an initial public offering of 4,000,000
shares of Common stock at a price of $12.00 per share. We received aggregate net
cash proceeds of approximately $43.2 million from the initial public offering on
July 5, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
REVENUES
Total revenues increased 59% to $3.5 million for the three months ended
September 30, 2001 from $2.2 million for the three months ended September 30,
2000. The increase was primarily related to revenues generated for services
provided under newly signed customer contracts.
Unrecognized revenues related to customer contracts as of September 30,
2001 totaled $18.0 million.
COST OF REVENUES
Cost of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the three months ended September 30, 2001 was $1.6 million
(excluding stock-based compensation of $163,000), an increase of $339,000 or
27%, compared to $1.3 million (excluding stock-based compensation of $171,000)
for the three months ended September 30, 2000. The increase was primarily a
result of additional costs necessary to service new customers.
GROSS PROFIT
Our gross profit margin increased from 42% for the three months ended
September 30, 2000, to 54% for the three months ended September 30, 2001. The
increase in gross profit margin is primarily due to increased revenues spread
over a partially fixed cost base.
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RESEARCH AND DEVELOPMENT
Research and development costs include technology and product
development costs. Research and development costs for the three months ended
September 30, 2001 were $841,000 (excluding stock-based compensation of
$10,000), a decrease of $489,000 or approximately 37%, compared to $1.3 million
(excluding stock-based compensation of $24,000) for the three months ended
September 30, 2000. This decrease is primarily due to the allocation of
resources to the other areas as well as a reduction of emphasis on the
development of new products.
As a percentage of revenue, research and development costs were 24% for
the three months ended September 30, 2001 as compared to 60% for the three
months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include costs associated
with our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the three months ended
September 30, 2001 were $2.4 million (excluding stock-based compensation of
$143,000), an increase of $228,000, or 10% compared to $2.2 million (excluding
stock-based compensation of $147,000) for the three months ended September 30,
2000. The increase was primarily related to hiring of additional sales and
management personnel and marketing expenditures to increase and support customer
growth.
As a percentage of revenues, selling, general, and administrative
expenses were 69% for the three months periods ended September 30, 2001 as
compared to 99% for the three months ended September 30, 2000.
STOCK-BASED COMPENSATION
We granted certain stock options to our officers and employees with
exercise prices deemed to be below the fair market value of the underlying
stock. The remaining cumulative difference between the fair value of the
underlying stock at the date the options were granted and the exercise price of
the granted options was $2.8 million at September 30, 2001. We expect to
amortize this amount over the four to seven year vesting periods of the granted
options. Accordingly, our results from operations will include stock-based
compensation expense at least through 2006. We recognized $342,000 and $316,000
of this expense during the three months ended September 30, 2000 and 2001,
respectively.
INTEREST INCOME AND EXPENSE
Net interest income for the three months ended September 30, 2001 was
$224,000, a decrease of $314,000 compared to $538,000 for the three months ended
September 30, 2000. The decrease is primarily due to lower investable cash
balances as funds from the initial public offering have been used to fund
operations.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
REVENUES
Total revenues increased 56% to $9.0 million for the nine months ended
September 30, 2001 from $5.8 million for the nine months ended September 30,
2000. The increase was primarily related to revenues generated for services
provided under newly signed customer contracts.
COST OF REVENUES
Cost of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the nine months ended September 30, 2001 was $4.5 million
(excluding stock-based compensation of $490,000), an increase of $1.0 million
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or 30%, compared to $3.5 million (excluding stock-based compensation of
$512,000) for the nine months ended September 30, 2000. The increase was
primarily a result of additional costs necessary to service new customers.
GROSS PROFIT
Our gross profit margin increased from 40% for the nine months ended
September 30, 2000, to 50% for the nine months ended September 30, 2001. The
increase in gross profit margin is primarily due to increased revenues spread
over a partially fixed cost base.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product
development costs. Research and development costs for the nine months ended
September 30, 2001 were $3.2 million (excluding stock-based compensation of
$29,000), an increase of $433,000 or approximately 16%, compared to $2.7 million
(excluding stock-based compensation of $71,000) for the nine months ended
September 30, 2000. This increase is primarily due to expenditures made related
to new product development.
As a percentage of revenue, research and development costs were 35% of
revenue for the nine months ended September 30, 2001 as compared to 47% for the
nine months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include costs associated
with our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the nine months ended September
30, 2001 were $8.5 million (excluding stock-based compensation of $428,000); an
increase of $2.9 million, or 53% compared to $5.5 million (excluding stock based
compensation of $439,000) for the nine months ended September 30, 2000. The
increase was primarily related to hiring of additional sales and management
personnel and marketing expenditures to increase and support customer growth.
As a percentage of revenues, selling, general, and administrative
expenses were 94% for the nine months ended September 30, 2001 as compared to
96% for the nine months ended September 30, 2000.
STOCK-BASED COMPENSATION
We granted certain stock options to our officers and employees with
exercise prices deemed to be below the fair market value of the underlying
stock. The remaining cumulative difference between the fair value of the
underlying stock at the date the options were granted and the exercise price of
the granted options was $2.8 million at September 30, 2001. We expect to
amortize this amount over the four to seven year vesting periods of the granted
options. Accordingly, our results from operations will include stock-based
compensation expense at least through 2006. We recognized $1.0 million and
$947,000 of this expense during the nine months ended September 30, 2000 and
September 30, 2001, respectively.
INTEREST INCOME AND EXPENSE
Net interest income for the nine months ended September 30, 2001 was
$823,000, an increase of $263,000 compared to $560,000 for the nine months ended
September 30, 2000. The increase is primarily due to higher investable cash
balances as a result of the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES - SEPTEMBER 30, 2001
Since inception, we have financed our operations and funded our capital
expenditures through the private sale of equity securities, supplemented by debt
and equipment leases. As of September 30, 2001, we had $22.5 million in cash and
short term investments and working capital of $18.7 million.
Net cash used in operating activities was $6.0 million for the nine
months ended September 30, 2001 and $4.4 million for the nine months ended
September 30, 2000. For those periods, net cash used in operating activities was
primarily to fund losses from operations partially offset by changes in current
assets and liabilities.
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Net cash used in investing activities was $4.2 million for the nine
months ended September 30, 2001 and consisted of purchases of short-term
investments (net of proceeds), funding of an acquisition and purchases of
property and equipment. For the nine months ended September 30, 2000 net cash
used in investing activities was $22.3 million and consisted of purchases of
short-term investments and property and equipment.
Net cash used in financing activities was $101,000 for the nine months
ended September 30, 2001. Financing activities for this period consisted
primarily of payments on capital lease obligations and proceeds from issuance of
a note payable. Net cash provided by financing activities was $36.6 million for
the nine months ended September 30, 2000 and consisted primarily of the proceeds
of the initial public offering net of the payment of dividends and redemption of
preferred stock.
As we execute our strategy, we expect significant increases in our
operating expenses to fund development of current and new divisions and product
lines. Presently, we anticipate that our existing capital resources will meet
our operating and investing needs through the end of 2002. After that time,
additional funding may not be available on acceptable terms or at all. If we
require additional capital resources to grow our business, execute our operating
plans or acquire complementary businesses at any time in the future, we may seek
to sell additional equity or debt securities or secure additional lines of
credit, which may result in ownership dilution to our shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of our cash equivalents and capital lease obligations are at fixed
interest rates and therefore the fair market value of these instruments is
affected by changes in market interest rates. As of September 30, 2001 all of
our cash equivalents matured within 90 days and we had the ability to
immediately liquidate our investments. Therefore, we believe that we are exposed
to immaterial levels of market risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CareScience and certain of its officers are defendants in several
purported shareholder class action lawsuits described below for alleged
violations of federal securities laws. Although we cannot predict the ultimate
outcome of the case or estimate the range of any potential loss that may be
incurred in the litigation, we believe the lawsuits are frivolous and without
merit, strenuously deny all allegations of wrongdoing asserted by plaintiffs,
and believe we have meritorious defenses to plaintiffs' claims. We intend to
vigorously defend the lawsuits.
CareScience and certain of its officers are defendants in a purported
class action litigation pending in the United States District Court for the
Eastern District of Pennsylvania. These actions are the result of several
complaints filed with the Court beginning on October 17, 2001. We are currently
seeking to consolidate these actions. These complaints purport to bring claims
on behalf of all persons who allegedly purchased our common stock between June
29, 2000 and November 1, 2000, for alleged violations of the federal securities
laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by
issuing a materially false and misleading Prospectus and Registration Statement
with respect to the initial public offering of our common stock. Specifically,
the complaints allege, among other things, that our Prospectus and Registration
Statement misrepresented and omitted to disclose material facts concerning two
of our prospective products. The actions seek compensatory and other damages,
and costs and expenses associated with litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
On June 28, 2000 the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1 (File number 333-32376),
relating to the initial public offering of our Common
Page 14
Stock, no par value per share. The net offering proceeds to us after total
expenses were $43.2 million. As of September 30, 2001, we have used
approximately $21.3 million of the net proceeds from our initial public offering
of which approximately $11.4 million was used for working capital and other
general corporate purposes, approximately $6.5 million was used for dividends on
and the redemption of preferred stock, approximately $2.3 million was used for
the purchase of property plant and equipment and $1.1 million was used for the
acquisition of Strategic Outcomes Services, Inc.
None of the net proceeds from the offering were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
ITEM 5. OTHER INFORMATION
On October 30, 2001, our board of directors approved the amendment and
restatement of the Company's Amended and Restated 1995 Equity Compensation Plan
in order to amend the change of control provisions of that plan. The amendment
and restatement of the plan became effective upon approval by our board of
directors. The amended and restated plan is attached as an exhibit to this Form
10-Q and is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None
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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.
CARESCIENCE, INC.
Date: November 9, 2001 By: /s/ RONALD A. PAULUS
----------------------------
Ronald A. Paulus, President
Date: November 9, 2001 By: /s/ STEVEN BELL
----------------------------
Steven Bell, Chief Financial
Officer and Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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10.1 Amended and Restated 1995 Equity Compensation Plan