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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000.
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 0-27056
Healthcare.com Corporation
(Exact name of registrant as specified in its charter)
Georgia 58-2112366
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Parkway Place, Suite 1100, Marietta, Georgia 30067
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(Address of principal executive offices) (Zip Code)
(770) 423-8450
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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 outstanding of the Company's Common Stock, $ .01 par value
per share, together with associated preferred stock purchase rights (the "Common
Stock"), as of November 6, 2000 was 28,104,611 shares.
Exhibit Index is on Page 21 herein.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I Financial Information
Item 1. Financial Statements and Notes to Financial Statements......................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 18
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds...................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signature............................................................................... 20
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEALTHCARE.COM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,289 $ 5,609
Trade accounts receivable, less allowances of $4,182 and $5,160 at
September 30, 2000 and December 31, 1999, respectively 12,687 6,662
Other current assets 1,195 1,421
--------- ---------
Total current assets 20,171 13,692
Purchased software, net of accumulated amortization of $2,404 and $1,931
at September 30, 2000 and December 31, 1999, respectively 841 1,266
Capitalized software development costs, net of accumulated amortization of
$1,341 and $801 at September 30, 2000 and December 31, 1999, respectively 2,930 2,425
Property and equipment, net of accumulated depreciation of $3,863 and
$3,006 at September 30, 2000 and December 31, 1999, respectively 2,918 2,908
Excess of cost over net assets of businesses acquired, less accumulated
amortization of $4,114 and $3,283 at September 30, 2000 and December 31,
1999, respectively 11,663 6,887
Other assets 62 89
--------- ---------
Total assets $ 38,585 $ 27,267
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations under capital leases $ 6,230 $ 6,363
Accounts payable, principally trade 2,370 1,211
Accrued liabilities 2,565 1,773
Deferred revenue 4,879 4,583
--------- ---------
Total current liabilities 16,044 13,930
Long-term debt and obligations under capital leases, excluding current
installments 359 254
--------- ---------
Total liabilities 16,403 14,184
--------- ---------
Series B Cumulative Convertible Exchangeable Preferred Stock; designated
550 shares; 23 and 65 shares issued and outstanding at September 30,
2000 and December 31, 1999, respectively 149 348
--------- ---------
Shareholders' equity:
Preferred stock, without par value. Authorized 20,000 shares:
Designated Series A cumulative preferred stock 500 shares; issued none -- --
Common stock, $.01 par value. Authorized 50,000 shares; issued and
outstanding 28,105 and 25,555 shares at September 30, 2000 and
December 31, 1999, respectively 281 256
Additional paid-in capital 49,396 42,236
Accumulated deficit (27,644) (29,757)
--------- ---------
Total shareholders' equity 22,033 12,735
--------- ---------
Total liabilities and shareholders' equity $ 38,585 $ 27,267
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software $ 3,398 $ 2,371 $ 9,653 $ 4,539
Services and other 9,331 4,841 26,244 14,268
-------- -------- -------- --------
Total revenue 12,729 7,212 35,897 18,807
-------- -------- -------- --------
Cost of revenue:
Software 432 378 1,331 936
Services and other 5,895 2,669 17,131 7,721
-------- -------- -------- --------
Total cost of revenue 6,327 3,047 18,462 8,657
-------- -------- -------- --------
Gross profit 6,402 4,165 17,435 10,150
-------- -------- -------- --------
Operating expenses:
Sales and marketing 2,105 1,693 6,714 5,252
Research and development 1,256 1,086 3,079 3,214
General and administrative 1,758 1,727 4,739 4,861
-------- -------- -------- --------
Total operating expenses 5,119 4,506 14,532 13,327
-------- -------- -------- --------
Operating earnings (loss) 1,283 (341) 2,903 (3,177)
Interest expense, net (169) (131) (700) (315)
-------- -------- -------- --------
Earnings (loss) before income taxes 1,114 (472) 2,203 (3,492)
Income taxes (44) -- (44) --
-------- -------- -------- --------
Net earnings (loss) 1,070 (472) 2,159 (3,492)
Accretion of Series B Preferred Stock (4) -- (28) --
Series B Preferred Stock dividend requirement (5) -- (18) --
-------- -------- -------- --------
Net earnings (loss) attributable to
common shareholders $ 1,061 $ (472) $ 2,113 $ (3,492)
======== ======== ======== ========
Net earnings (loss) per share of
common stock:
Basic $ 0.04 $ (0.02) $ 0.08 $ (0.14)
======== ======== ======== ========
Diluted $ 0.04 $ (0.02) $ 0.08 $ (0.14)
======== ======== ======== ========
Shares used in the calculation
of net earnings (loss) per share:
Basic 27,753 25,375 26,997 25,308
======== ======== ======== ========
Diluted 28,123 25,375 27,741 25,308
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,159 $ (3,492)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Provision for doubtful accounts -- 450
Depreciation and amortization 1,949 1,502
Amortization of excess of cost over net assets of businesses acquired 832 504
Increase in trade accounts receivable (6,025) (1,647)
Decrease in other current assets 275 748
Increase in accounts payable, principally trade 1,159 948
Increase in accrued liabilities 364 566
Increase (decrease) in deferred revenue 296 (229)
-------- --------
Net cash provided by (used in) operating activities 1,009 (650)
-------- --------
Cash flows from investing activities:
Purchased software (48) (60)
Capitalized software development costs (1,045) (1,046)
Capital expenditures (773) (1,479)
Cash obtained in connection with an acquisition of business 1,000 --
Change in other non-current assets and liabilities, net 20 (71)
-------- --------
Net cash used in investing activities (846) (2,656)
-------- --------
Cash flows from financing activities:
Series B Preferred Stock dividends (18) --
Principal payments on long-term debt, net (289) (319)
Net borrowings under line of credit -- 1,500
Proceeds from the sale of Series B Preferred Stock, net -- 331
Proceeds from issuances of common stock 824 668
-------- --------
Net cash provided by financing activities 517 2,180
-------- --------
Net increase (decrease) in cash and cash equivalents 680 (1,126)
Cash and cash equivalents at beginning of period 5,609 3,167
-------- --------
Cash and cash equivalents at end of period $ 6,289 $ 2,041
======== ========
Supplemental disclosures of cash paid for:
Interest $ 544 $ 344
======== ========
Supplemental disclosures of non-cash investing and financing activities:
Equipment acquired under capital lease obligations $ 94 $ --
======== ========
Issuance of warrants to purchase common stock in connection with
obtaining financing agreement $ 128 $ --
======== ========
Conversion of Series B Preferred Stock into common stock $ 227 $ --
======== ========
Accretion of discount on Series B Preferred Stock $ 28 $ --
======== ========
Exercise of right to acquire additional common stock $ 6 $ --
======== ========
Acquisition of business:
Fair value of assets acquired, including goodwill $ 5,601 $ --
Fair value of liabilities assumed (595) --
Fair value of common stock issued (5,500) --
Fair value of warrants issued (506) --
-------- --------
Net cash obtained in connection with an acquisition of business $ (1,000) $ --
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements as of September 30,
2000 and for the three and nine-month periods ended September 30, 2000
and 1999 are unaudited. In the opinion of management, all adjustments
consisting of normal recurring accruals, necessary for the fair
presentation of the consolidated financial position and results of
operations and cash flows for the periods presented have been included.
Results for the interim periods are not necessarily indicative of
results that may be expected for the full year. The condensed
consolidated financial statements include the accounts of
Healthcare.com Corporation (formerly HIE, Inc.) and Subsidiary (the
"Company" or "Healthcare.com").
These Condensed Consolidated Financial Statements should be read in
conjunction with Healthcare.com's consolidated financial statements and
notes included in its Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 Form 10-K") filed with the Securities and
Exchange Commission.
The accounting policies followed in the presentation of interim
financial results are the same as those followed on an annual basis.
These policies are presented in Note 1 to the consolidated financial
statements included in the 1999 Form 10-K. Certain prior year amounts
have been reclassified to conform to current year classifications.
No statements of comprehensive income have been included in the
accompanying interim financial statements since the Company has no
other comprehensive income.
2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," using the weighted average number of
common shares outstanding and common stock equivalents. The diluted net
loss per share for the quarter and nine-month period ended September
30, 1999 does not include the effect of common stock equivalents, as
their effect would be antidilutive.
3. ACQUISITION
On March 13, 2000 (the "closing date"), the Company signed an
agreement, effective as of February 25, 2000, to purchase certain
service contracts and other assets and liabilities of the Integrated
Solutions Division ("ISD") of Thermo Information Solutions Inc.
("Thermo"). ISD, based in Charleston, South Carolina, designs,
implements and manages information technology solutions. The purchase
price consisted of 1,307,345 shares of the Company's common stock and a
warrant to purchase an additional 261,469 shares of the Company's
common stock at any time on or before March 13, 2004 at an exercise
price of $4.207 per share. On the closing date, the fair value of the
common stock issued was $5,500,000, determined by calculating the
average closing price of the common stock several days before and after
the closing date and applying a discount related to certain
restrictions on the common stock. The discount applied to the
calculated value of common stock issued in this transaction is
supported by an independent valuation. The value of the warrant was
$506,028 on the closing date, determined using the Black-Scholes
option-pricing model. Thermo had a one-time right, exercisable at any
time on or before September 14, 2000, subject to certain limitations,
to receive additional shares of Healthcare.com common stock in the
event that the average trading price of Healthcare.com common stock
during the 10-day trading period prior to its election was below $4.207
per share. On July 14, 2000, Thermo exercised this right,
6
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
resulting in the issuance of 585,128 additional shares of
Healthcare.com common stock. As part of the transaction, the Company
received $1,000,000 in cash for working capital purposes from Thermo.
The acquisition was accounted for using the purchase method of
accounting with the results of operations of the business acquired
included in the Company's results of operations from the effective date
of the transaction. The acquisition resulted in acquired net assets of
approximately $500 and excess of cost over net assets acquired of
approximately $5,601, which is being amortized over a 10-year life.
The following pro forma financial information presents the combined
results of operations of Healthcare.com and ISD as if the acquisition
had occurred as of the beginning of each period presented, after giving
effect to certain adjustments, including the amortization of goodwill.
The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had Healthcare.com and
ISD constituted a single entity during the three and nine-month periods
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
========= ========= ========= =========
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $ 12,729 $ 11,285 $ 39,340 $ 31,541
========= ========= ========= =========
Net earnings (loss) attributable
to common shareholders $ 1,061 $ (326) $ 2,280 $ (3,009)
========= ========= ========= =========
Net earnings (loss) per share of
common stock $ 0.04 $ (0.01) $ 0.08 $ (0.11)
========= ========= ========= =========
</TABLE>
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments
with original maturities of three months or less. $3,000,000 of cash
equivalents serve as collateral on the Company's line of credit.
5. DEBT
On February 24, 2000, the Company entered into an Accounts Receivable
Financing Agreement (the "Agreement") with Silicon Valley Bank (the
"Bank"), which provides for an extension of credit in order to finance
receivables up to $6,000,000. The Agreement term continues through
February 15, 2001 and requires
7
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
finance charges equal to the Bank's prime rate plus 2%. In conjunction
with the Agreement, the Company issued a Stock Purchase Warrant to the
Bank, which entitles the holder to purchase 61,539 shares of the
Company's common stock at any time on or before February 23, 2005 at an
exercise price of $4.875 per share. At September 30, 2000, $6,000,000
was available for borrowing under this Agreement.
6. 8.5% SERIES B CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
During the nine months ended September 30, 2000, 42,500 shares of the
65,000 originally issued shares of Series B Cumulative Convertible
Exchangeable Preferred Stock were converted into 197,761 shares of
common stock.
7. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that
offer different products and services. Beginning January 1, 2000, the
Company operates in two segments: (i) the licensing of integration
software products and performance of related integration services
("Software and Services") and (ii) services provided by the Company
that allow enterprises to outsource their information technology,
integration and application functions to Healthcare.com ("Solution
Sourcing"). Prior to 2000, the Solution Sourcing business did not
separately exist. The significant portion of the Solution Sourcing
business was added upon the acquisition of ISD. The Company evaluates
performance of the segments based on revenue and gross profit of the
segments. The Company does not allocate assets to the reportable
segments. Segment information for the three months and nine months
ended September 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Revenue:
Software and Services $ 7,444 $ 22,379
Solution Sourcing 5,285 13,518
--------- ---------
Total revenue $ 12,729 $ 35,897
========= =========
Gross profit:
Software and Services $ 5,095 $ 14,446
Solution Sourcing 1,307 2,989
--------- ---------
Total gross profit $ 6,402 $ 17,435
========= =========
</TABLE>
8. RELATED PARTY TRANSACTION
Matria Healthcare, Inc., whose Chairman of the Board is also the
Chairman of the Board of Healthcare.com, entered into a software and
services agreement with the Company during the first quarter of 2000.
Software revenue from this transaction totaled $485,000 for the nine
months ended September 30, 2000.
8
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HEALTHCARE.COM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
9. MAJOR CUSTOMERS
Individually, three customers exceeded 10% of total revenue for the
three months ended September 30, 2000. Together, these three customers
accounted for 52% of the Company's total revenue for the three months
ended September 30, 2000. These same three customers accounted for 41%
of the Company's total revenue for the nine months ended September 30,
2000. The accounts receivable balance from these three customers
combined at September 30, 2000 was approximately $4,982,000. One
customer accounted for 23% of the Company's total revenue for the three
months ended September 30, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this report includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words such as
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
other similar expressions are intended to identify such forward-looking
statements; however, this report also contains other forward-looking statements
in addition to historical information. The Company cautions that there are
various important factors that could cause actual results to differ materially
from those indicated in the forward-looking statements; accordingly, there can
be no assurance that such indicated results will be realized.
Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements are: (i) the
intensely competitive online commerce industry (including the impact of
competitive products and pricing), (ii) various factors that may inhibit growth
in the use of the Internet such as the availability and acceptance of the
Internet as a secure medium over which to conduct transactions, (iii) inability
of third parties to provide software that is integrated into our products, (iv)
new product development and resulting market acceptance, (v) failure to obtain
significant subscriber growth, (vi) changes in governmental regulations
applicable to or affecting the Company, its competitors, or its customers,
(vii) long sales cycles, (viii) changes in pricing policies, (ix) undetected
errors or bugs in the software, (x) delays in product development, (xi) lower-
than-expected demand for the Company's software tools or services, (xii)
changes in outsourcing trends involving information technology and related
services, (xiii) the ability to successfully integrate acquired assets and
retain key personnel, (xiv) business conditions in the healthcare and other
complementary markets (including, but not limited to, access to capital and the
financial condition of providers and e-Health vendors), (xv) copyright
infringement issues and dependence on intellectual property rights, (xvi)
volatility in the company's stock price and low trading volume, (xvii)
variability in quarterly operating results, and (xviii) the risk factors
detailed from time to time in the Company's periodic reports and registration
statements filed with the Securities & Exchange Commission, including the
Company's Annual Report of Form 10-K for the year ended December 31, 1999.
Readers are urged not to rely on such forward-looking statements,
which speak only as of the date hereof. By making such forward-looking
statements, the Company does not undertake a duty to update them in any manner.
OVERVIEW
Healthcare.com develops and markets Enterprise Application Integration
("EAI") solutions and provides related implementation, maintenance and support
services and education to companies seeking to connect their disparate software
applications and data repositories. Healthcare.com's products and solutions are
designed to enable companies to more effectively administer the disparate
elements of their Information Technology ("IT") systems by linking both new and
existing software to form a more efficient IT environment. Healthcare.com serves
customers within the healthcare, insurance and government markets and e-Health
vendors.
The Company was incorporated in Georgia in June 1994 as Healthdyne
Information Enterprises, Inc., a wholly-owned subsidiary of Healthdyne, Inc.,
and was initially focused on providing enterprise-wide clinical information
management solutions for integrated healthcare delivery networks. In November
1995, Healthdyne, Inc. distributed all of the outstanding shares of HIE common
stock in a spin-off. In October 1997, HIE redefined its strategic direction to
focus on providing software products and services to support the enterprise-wide
integration of information. As part of the strategic focus, HIE (1) acquired
HUBLink, Inc., a privately-held integration software product company, in May
1998 in a pooling-of-interests transaction and (2) sold assets related to
certain non-strategic consulting services to Superior Consultant Holdings
Corporation in December 1998. On March 13, 2000, the Company signed an
agreement, effective as of February 25, 2000, to purchase certain service
contracts and other assets of ISD. ISD, based in Charleston, South Carolina,
designs, implements and manages information technology solutions. On April 10,
2000, the name of the Company was changed from HIE, Inc. to Healthcare.com
Corporation as part of the Company's introduction of a new healthcare,
business-to-business product strategy to complement and extend its existing
enterprise-wide integration solution business.
Healthcare.com sells its software products to distributors and
application vendors, as well as directly to end-users. Software license sales
are comprised of (1) full-use licenses, which provide the end-user with full
functionality of the product and (2) limited use licenses, which restrict the
functionality of the product or the number of application interfaces. A typical
distributor or application vendor agreement includes an initial purchase of
software for resale with additional licenses purchased periodically during the
term of the agreement. Sales directly to end-users are generally for perpetual
licenses for a one-time, up-front fee.
Healthcare.com recognizes revenue from two primary sources, software
licenses and services. Software license revenue is recognized in accordance with
the criteria set forth in Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" and SOP 98-9 "Software Revenue Recognition with Respect to Certain
Transactions," issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. Accordingly, Healthcare.com
recognizes software license revenue when: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
determinable; and (4) collectibility is probable.
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Services revenue includes fees for product implementation and
integration services, outsourcing services, software support and maintenance
agreements and education. Product implementation and integration services are
generally provided under contracts with terms of less than one year. Revenue is
recognized as the work is performed or, in the case of a fixed-fee contract, on
a percentage-of-completion basis, even though some services may be prepaid. The
Company provides customers the ability to outsource the integration of software,
the hosting of our applications and/or their computing operations. Outsourcing
arrangements are typically one year or longer with a fixed monthly fee. Revenue
is recognized monthly in accordance with the fixed fee. Software support and
maintenance services are generally provided under one-year renewable service
contracts for a prepaid standard fee. Revenue is recognized ratably on a
straight-line basis over the term of the contract. Education classes are
provided for a standard per-student charge and revenue is recognized as the
service is provided.
Research and development expenses are accounted for in accordance with
the provisions of the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). SFAS 86 requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on Healthcare.com's product
development model, technological feasibility is established upon completion of a
working model.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (1) the Company's total
revenue and (2) unless otherwise indicated, the percentage of total revenue for
each component included in the Company's Condensed Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue (in thousands) $ 12,729 $ 7,212 $ 35,897 $ 18,807
======== ======== ======== ========
Revenue:
Software 27% 33% 27% 24%
Services and other 73% 67% 73% 76%
-------- -------- -------- --------
Total revenue 100% 100% 100% 100%
-------- -------- -------- --------
Cost of revenue:
Software (as a percentage of software revenue) 13% 16% 14% 21%
Services and other (as a percentage of
services and other revenue) 63% 55% 65% 54%
Total cost of revenue 50% 42% 51% 46%
-------- -------- -------- --------
Gross profit 50% 58% 49% 54%
-------- -------- -------- --------
Operating expenses:
Sales and marketing 16% 24% 19% 28%
Research and development 10% 15% 9% 17%
General and administrative 14% 24% 13% 26%
-------- -------- -------- --------
Total operating expenses 40% 63% 41% 71%
-------- -------- -------- --------
Operating earnings (loss) 10% (5)% 8% (17)%
Interest expense, net (1)% (2)% (2)% (2)%
-------- -------- -------- --------
Earnings (loss) before income taxes 9% (7)% 6% (19)%
Income taxes (1)% 0% 0% 0%
-------- -------- -------- --------
Net earnings (loss) 8% (7)% 6% (19)%
======== ======== ======== ========
</TABLE>
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COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue increased 76% to $12.7 million for the three months ended
September 30, 2000 from $7.2 million for the three months ended September 30,
1999. As discussed below, the Company experienced increases in both software
revenue and services and other revenue.
Software. Software revenue increased 43% to $3.4 million for the three
months ended September 30, 2000 from $2.4 million for the three months ended
September 30, 1999. As a percentage of total revenue, software revenue decreased
to 27% for the three months ended September 30, 2000 from 33% for the three
months ended September 30, 1999. The dollar increase in software revenue was
primarily attributable to an expanded market, which now includes e-Health
vendors, for the Company's existing software products. The decrease in software
revenue as a percentage of total revenue resulted from a large increase in
services and other revenue due to the acquisition of ISD.
Services and other. Services and other revenue increased 93% to $9.3
million for the three months ended September 30, 2000 from $4.8 million for the
three months ended September 30, 1999. Services and other revenue as a
percentage of total revenue increased to 73% for the three months ended
September 30, 2000 from 67% for the three months ended September 30, 1999. The
dollar increase in services and other revenue was primarily due to additional
service revenue from the acquisition of ISD effective February 25, 2000. The
increase in services and other revenue as a percentage of total revenue resulted
primarily from a large increase in services and other revenue due to the
acquisition of ISD. The Company's integration services for the three months
ended September 30, 2000 were relatively flat compared to the three months
ended June 30, 2000 due to various industry factors affecting healthcare
providers.
COST OF REVENUE. Total cost of revenue increased 108% to $6.3 million for the
three months ended September 30, 2000 from $3.0 million for the three months
ended September 30, 1999. Total cost of revenue increased primarily from the
acquisition of ISD in the first quarter of 2000.
Software. Cost of software revenue consists principally of royalty
payments to third parties for software products that were sold with
Healthcare.com's products and amortization of both purchased software and
capitalized software development costs. Cost of software revenue increased
$54,000 to $432,000 for the three months ended September 30, 2000 from $378,000
for the three months ended September 30, 1999. As a percentage of software
revenue, cost of software revenue decreased to 13% for the three months ended
September 30, 2000 from 16% for the three months ended September 30, 1999. Cost
of software revenue increased due to an increase in amortization of capitalized
software development costs for the three months ended September 30, 2000,
compared to the three months ended September 30, 1999. The decrease in cost of
software revenue as a percentage of software revenue was a result of the
relatively high dollar increase in software revenue.
Services and other. Cost of services and other revenue consists
primarily of personnel, contract services, facility and systems costs incurred
in providing product implementation, integration projects, maintenance,
consulting and education services. Cost of services and other revenue increased
121% to $5.9 million for the three months ended September 30, 2000 from $2.7
million for the three months ended September 30, 1999. As a percentage of
services and other revenue, cost of services and other revenue increased to 63%
for the three months ended September 30, 2000 from 55% for the three months
ended September 30, 1999. The dollar increase in cost of services and other
revenue was primarily attributable to the acquisition of ISD during the first
quarter of 2000. The increase in cost of services and other revenue as a
percentage of services and other revenue was primarily attributable to the
addition of long-term service contracts obtained upon the acquisition of ISD,
which have higher cost of services than our traditional short-term service
contracts.
OPERATING EXPENSES:
Sales and marketing. Sales and marketing expense consists primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and promotional expenses. Sales and marketing expense increased 24% to
$2.1 million for the three months ended September 30, 2000 from $1.7 million for
the three months ended September 30, 1999. Sales and marketing expense as a
percentage of total revenue decreased to 16% for the three months ended
September 30, 2000 from 24% for the three months ended September 30, 1999. The
dollar increase in sales and marketing expense was primarily due to increases in
salaries and commissions. The decrease in sales
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<PAGE> 14
and marketing expense as a percentage of revenue was a result of the relatively
high increase in software and service and other revenue during the three months
ended September 30, 2000.
Research and development. Research and development expense includes
personnel costs, contract services, and travel associated with the development
of new products, enhancements of existing products and quality assurance
activities. Research and development expense increased 16% to $1.3 million for
the three months ended September 30, 2000 from $1.1 million for the three months
ended September 30, 1999. Research and development expense as a percentage of
total revenue decreased to 10% for the three months ended September 30, 2000
from 15% for the three months ended September 30, 1999. Research and development
expense increased due to an increase in salaries and wages. The decrease in
research and development expense as a percentage of revenue was a result of the
relatively high increase in software and service and other revenue during the
three months ended September 30, 2000. Capitalized research and development
costs were $364,000 and $277,000 for the three months ended September 30, 2000
and 1999, respectively.
General and administrative. General and administrative expense consists
primarily of personnel costs, outside professional fees, and software and
equipment costs associated with the finance, legal, human resources, information
systems, and administrative functions of Healthcare.com. General and
administrative expense increased slightly to $1.8 million for the three months
ended September 30, 2000 from $1.7 million for the three months ended September
30, 1999. General and administrative expense as a percentage of total revenue
decreased to 14% for the three months ended September 30, 2000 from 24% for the
three months ended September 30, 1999. General and administrative expense
remained fairly constant, while the decrease in general and administrative
expense as a percentage of total revenue was primarily due to the relatively
high increase in software and service revenues for the three months ended
September 30, 2000.
INTEREST EXPENSE, NET. Net interest expense increased $38,000 to $169,000 for
the three months ended September 30, 2000 from $131,000 for the three months
ended September 30, 1999. The increase in interest expense resulted from an
increase in short-term debt used primarily for working capital purposes,
partially offset by interest income earned on cash equivalents.
INCOME TAXES. The Company recorded a provision for income taxes of $44,000 for
the three months ended September 30, 2000 relating to certain alternative
minimum tax restrictions on the use of net operating loss carryforwards. The
Company had no provision for income taxes for the three months ended September
30, 1999 as a result of having a net operating loss.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue increased 91% to $35.9 million for the nine months ended
September 30, 2000 from $18.8 million for the nine months ended September 30,
1999. As discussed below, the Company experienced increases in both software
revenue and services and other revenue.
Software. Software revenue increased 113% to $9.7 million for the nine
months ended September 30, 2000 from $4.5 million for the nine months ended
September 30, 1999. As a percentage of total revenue, software revenue increased
to 27% for the nine months ended September 30, 2000 from 24% for the nine months
ended September 30, 1999. The dollar increase in software revenue was primarily
attributable to an expanded market, which now includes e-Health vendors, for the
Company's existing software products. The increase in software revenue as a
percentage of total revenue resulted from the software revenue increasing at a
higher percentage rate than the services and other revenue.
Services and other. Services and other revenue increased 84% to $26.2
million for the nine months ended September 30, 2000 from $14.3 million for the
nine months ended September 30, 1999. Services and other revenue as a percentage
of total revenue decreased slightly to 73% for the nine months ended September
30, 2000 from 76% for the nine months ended September 30, 1999. The dollar
increase in services and other revenue was primarily due to additional service
revenue from the acquisition of ISD effective February 25, 2000. The slight
decrease in
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<PAGE> 15
services and other revenue as a percentage of total revenue resulted primarily
from the relatively high increase in software revenue discussed above.
COST OF REVENUE. Total cost of revenue increased 113% to $18.5 million for the
nine months ended September 30, 2000 from $8.7 million for the nine months ended
September 30, 1999. The total cost of revenue increased primarily from the
acquisition of ISD in the first quarter of 2000.
Software. Cost of software revenue consists principally of royalty
payments to third parties for software products that were sold with
Healthcare.com's products and amortization of both purchased software and
capitalized software development costs. Cost of software revenue increased 42%
to $1.3 million for the nine months ended September 30, 2000 from $936,000 for
the nine months ended September 30, 1999. As a percentage of software revenue,
cost of software revenue decreased to 14% for the nine months ended September
30, 2000 from 21% for the nine months ended September 30, 1999. Cost of software
revenue increased due to an increase in amortization of capitalized software
development costs and an increase in royalty expense for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999. The
decrease in cost of software revenue as a percentage of software revenue was a
result of the relatively high dollar increase in software revenue.
Services and other. Cost of services and other revenue consists
primarily of personnel, contract services, facility and systems costs incurred
in providing product implementation, integration projects, maintenance,
consulting and education services. Cost of services and other revenue increased
122% to $17.1 million for the nine months ended September 30, 2000 from $7.7
million for the nine months ended September 30, 1999. As a percentage of
services and other revenue, cost of services and other revenue increased to 65%
for the nine months ended September 30, 2000 from 54% for the nine months ended
September 30, 1999. The dollar increase in cost of services and other revenue
was primarily attributable to the acquisition of ISD during the first quarter of
2000. The increase in cost of services and other revenue as a percentage of
services and other revenue was primarily attributable to the addition of
long-term service contracts obtained upon the acquisition of ISD, which have
higher cost of services than our traditional short-term service contracts.
OPERATING EXPENSES:
Sales and marketing. Sales and marketing expense consists primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and promotional expenses. Sales and marketing expense increased 28% to
$6.7 million for the nine months ended September 30, 2000 from $5.3 million for
the nine months ended September 30, 1999. Sales and marketing expense as a
percentage of total revenue decreased to 19% for the nine months ended September
30, 2000 from 28% for the nine months ended September 30, 1999. The dollar
increase in sales and marketing expense was primarily due to increases in
salaries and commissions as a result of marketing to an expanded market,
including e-Health vendors. The decrease in sales and marketing expense as a
percentage of revenue was a result of the relatively high increase in software
and service and other revenue during the nine months ended September 30, 2000.
Research and development. Research and development expense includes
personnel costs, contract services, and travel associated with the development
of new products, enhancements of existing products and quality assurance
activities. Research and development expense decreased 4% to $3.1 million for
the nine months ended September 30, 2000 from $3.2 million for the nine months
ended September 30, 1999. Research and development expense as a percentage of
total revenue decreased to 9% for the nine months ended September 30, 2000 from
17% for the nine months ended September 30, 1999. Capitalized research and
development costs were $1.0 million for the nine months ended September 30, 2000
and 1999.
General and administrative. General and administrative expense consists
primarily of personnel costs, outside professional fees, and software and
equipment costs associated with the finance, legal, human resources, information
systems, and administrative functions of Healthcare.com. General and
administrative expense decreased 3% to $4.7 million for the nine months ended
September 30, 2000 from $4.9 million for the nine months ended September 30,
1999. General and administrative expense as a percentage of total revenue
decreased to 13% for the nine months ended September 30, 2000 from 26% for the
nine months ended September 30, 1999. The dollar decrease is a result of
decreases in consulting fees and bad debt expense, partially offset by increases
in
15
<PAGE> 16
salaries and wages and goodwill amortization. The decrease in general and
administrative expense as a percentage of total revenue was primarily due to the
relatively high increase in software and service and other revenues for the nine
months ended September 30, 2000.
INTEREST EXPENSE, NET. Net interest expense increased $385,000 to $700,000 for
the nine months ended September 30, 2000 from $315,000 for the nine months ended
September 30, 1999. The increase in interest expense resulted from an increase
in short-term debt used primarily for working capital purposes, partially offset
by interest income earned on cash equivalents.
INCOME TAXES. The Company recorded a provision for income taxes of $44,000 for
the nine months ended September 30, 2000, relating to certain alternative
minimum tax restrictions on the use of net operating loss carryforwards. The
Company had no provision for income taxes for the nine months ended September
30, 1999 as a result of having a net operating loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $4.1 million at September 30, 2000
compared to negative working capital of $238,000 at December 31, 1999. The
working capital increase was primarily due to the ISD acquisition and profitable
operations during the first nine months of 2000.
Net cash provided by operating activities totaled $1.0 million for the
nine months ended September 30, 2000 compared to net cash used in operating
activities of $650,000 for the nine months ended September 30, 1999. This
increase of $1.7 million was primarily due to net earnings before depreciation
and amortization during the nine months ended September 30, 2000, partially
offset by the increase in accounts receivable, compared to the same items in the
comparable period of 1999.
Net cash used in investing activities was $846,000 for the nine months
ended September 30, 2000 compared to $2.7 million for the nine months ended
September 30, 1999. This decreased use of cash of $1.8 million was primarily due
to cash obtained in connection with the ISD acquisition and a decrease in
capital expenditures during the nine months ended September 30, 2000, compared
to last year's comparable period.
Net cash provided by financing activities was $517,000 for the nine
months ended September 30, 2000 compared to $2.2 million for the nine months
ended September 30, 1999. This decrease of $1.7 million in cash provided by
financing activities is primarily the result of net borrowings under the line of
credit during the nine months ended September 30, 1999, whereas there were no
net borrowings under the line of credit during the nine months ended September
30, 2000. Additionally, during the nine months ended September 30, 1999, the
Company received $331,000 in proceeds from the sale of Series B Preferred Stock.
On December 21, 1999, the Company entered into a convertible note and
warrant purchase agreement with Cybear, Inc., pursuant to which the Company
obtained a $3.0 million working capital loan with interest payable quarterly at
a rate of 7.8% per annum, and the principal payable on December 21, 2000. The
note is convertible at maturity at the holder's option into that number of
shares of the Company's common stock determined by dividing the outstanding
principal amount by $3.19 (approximately 940,439 shares). The warrant purchase
agreement entitles Cybear, Inc. to purchase 47,022 shares of the Company's
common stock at any time before December 21, 2004, at an exercise price of
$4.875 per share.
On December 31, 1999, the Company entered into an Amended and Restated
Loan and Security Agreement with Silicon Valley Bank (the "Bank"), which
provides for a revolving line of credit up to $3.0 million subject to certain
borrowing base limitations described in the agreement. The revolving line of
credit matures on December 31, 2000, bears interest at the Bank's prime rate
(9.50% at September 30, 2000) and is secured by $3.0 million of cash
equivalents.
On February 24, 2000, the Company entered into an Accounts Receivable
Financing Agreement (the "Agreement") with the Bank, which provides for an
extension of credit in order to finance receivables up to $6.0 million. The
Agreement term continues through February 15, 2001 and requires finance charges
equal to the Bank's prime rate plus 2%. At September 30, 2000, all $6.0 million
was available for borrowing. In conjunction with the Agreement, the Company
issued a Stock Purchase Warrant to the Bank, which entitles the holder to
purchase 61,539 shares of the Company's common stock at any time on or before
February 23, 2005 at an exercise price of $4.875 per share. The Stock Purchase
Warrant had not been exercised as of September 30, 2000.
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<PAGE> 17
On March 13, 2000 (the "closing date"), the Company signed an
agreement, effective as of February 25, 2000, to purchase certain service
contracts and other assets and liabilities of the Integrated Solutions Division
("ISD") of Thermo Information Solutions Inc. ("Thermo"). ISD, based in
Charleston, South Carolina, designs, implements and manages information
technology solutions. The purchase price consisted of 1,307,345 shares of the
Company's common stock and a warrant to purchase an additional 261,469 shares of
the Company's common stock at any time on or before March 13, 2004 at an
exercise price of $4.207 per share. On the closing date, the fair value of the
securities issued was $5,500,000, determined by calculating the average closing
price of the common stock several days before and after the closing date and
applying a discount related to certain restrictions on the common stock. The
discount applied to the calculated value of common stock issued in this
transaction is supported by an independent valuation. The value of the warrant
was $506,028 on the closing date, determined using the Black-Scholes
option-pricing model. As part of the transaction, the Company received
$1,000,000 in cash for working capital purposes from Thermo. Thermo had a
one-time right, exercisable at any time on or before September 14, 2000, subject
to certain limitations, to receive additional shares of Healthcare.com common
stock in the event that the average trading price of Healthcare.com common stock
during the 10-day trading period prior to its election was below $4.207 per
share. On July 14, 2000, Thermo exercised this right, resulting in the issuance
of 585,128 additional shares of Healthcare.com common stock.
The Company is engaged in discussions with the Bank and Cybear, Inc.
regarding an extension or replacement of the Credit Facility and convertible
note as well as with other potential financing sources to provide additional
capital for the Company's ongoing and future operations. There can be no
assurance that the Company will be successful in its negotiations with the Bank
and Cybear, Inc. or in attracting additional capital on terms acceptable to the
Company, if at all.
Based on the Company's business plan and business model projections,
the Company believes that currently available cash, anticipated cash flow from
operations and borrowings under existing or future credit facilities will be
sufficient to meet Healthcare.com's requirements for at least the next twelve
months. Healthcare.com may seek to raise additional financing to support
expansion, develop new or enhanced applications and services, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of favorable market conditions. In such event, or if the Company's
cash needs or plans change, Healthcare.com may seek to raise additional funds by
incurring debt, or by issuing equity securities, by entering into strategic
relationships or through other arrangements. There can be no assurance, however,
that Healthcare.com will be able to raise any additional amounts on reasonable
terms, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement was amended in June 2000 by Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
Statement No. 138 will be effective for the Company beginning January 2001. The
new Statement requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for three types of hedges:
hedges of changes in the fair value of assets, liabilities, or firm commitments;
hedges of the variable cash flows of forecasted transactions; and hedges of
foreign currency exposures of net investments in foreign operations. To date,
the Company has not invested in derivative instruments nor participated in
hedging activities and, therefore, does not anticipate there will be a material
impact on the results of operations or financial position from Statements No.
133 or No. 138.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in the fourth quarter of 2000. While SAB 101 does not
supersede the software industry-specific revenue recognition guidance, with
which we believe we comply, the SEC Staff has recently informally indicated its
views related to SAB 101 that may change current interpretations of software
revenue recognition requirements. We are currently reviewing the provisions of
SAB 101. The Company does not believe that the adoption of SAB 101 will have a
material impact on the results of operations or financial position.
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<PAGE> 18
YEAR 2000
The Year 2000 issue refers generally to the data structure and
processing problem that may prevent systems from properly processing
date-sensitive information beginning on January 1, 2000. Healthcare.com formed
a Year 2000 task force which systematically evaluated all existing systems,
products and key external relationships to ascertain material Year 2000 issues
and solutions. These efforts were to ensure that its computer products were Year
2000 ready and that its internal core information technology ("IT and non-IT
systems") were Year 2000 ready.
The Company successfully implemented its Year 2000 program as evidenced
by the continued successful operation of its computer products and core internal
IT and non-IT systems. Further, the Company has not encountered any significant
problems with its third party customers, financial institutions, vendors and
others with whom it conducts business. To date, we have not experienced any Year
2000 problems. If any of our third-party suppliers experience Year 2000
disruptions, the Company may incur costs to develop alternative ways of managing
the affected aspects of the business. The Company will continue to monitor its
product performance and core IT and non-IT systems throughout 2000 to ensure
ongoing performance. While there can be no assurance that no Year 2000-related
issues may arise, as of September 30, 2000, the Company believes, based on
information currently available, that Year 2000 related events are not likely to
have a material effect on its results of operations, financial condition or
liquidity. Healthcare.com did not incur any material costs directly associated
with its Year 2000 readiness efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to interest rate risk on its line of credit
(variable-rate debt), financing agreement (variable-rate debt), convertible note
payable (fixed-rate debt) and obligations under capital leases (fixed-rate
debt). The Company's primary market risk exposure relates to (i) the interest
rate risk on long-term and short-term borrowings, (ii) the impact of interest
rate movements on its ability to meet interest expense requirements and (iii)
the impact of interest rate movements on the Company's ability to obtain
adequate financing for future operations. The Company manages interest rate risk
on its outstanding long-term and short-term debt through its use of fixed and
variable rate debt. The Company's risk profile has not significantly changed
from that previously disclosed. While the Company cannot predict or manage its
ability to refinance existing debt or the impact interest rate movements will
have on its existing debt, management continues to evaluate its financial
position on an on-going basis.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company issued 585,128 shares of common stock to Thermo Information
Solutions, Inc. ("Thermo") on July 14, 2000. As part of the acquisition of ISD,
the Company granted Thermo a one-time right, exercisable at any time on or
before September 14, 2000, subject to certain limitations, to receive additional
shares of Healthcare.com common stock in the event that the average trading
price of Healthcare.com common stock during the 10-day trading period prior to
its election was below $4.207 per share. On July 14, 2000, Thermo exercised this
right, resulting in the issuance of 585,128 additional shares of Healthcare.com
common stock. This transaction was exempt from registration under Section 4(2)
of the Securities Act, as a transaction not involving a public offering. In
addition, Thermo is a sophisticated investor and had access to information about
the Company.
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<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Statements of Computation of Per Share Earnings (Loss).
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
During the quarter ended September 30, 2000 the Company did not
file any reports on Form 8-K.
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<PAGE> 20
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.
Healthcare.com Corporation
November 14, 2000 By: /s/ Joseph A. Blankenship
------------------------------------------------
Joseph A. Blankenship
Chief Financial Officer, Treasurer and Assistant
Secretary (duly authorized officer and principal
financial officer)
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Statements of Computation of Per Share Earnings (Loss).
27 Financial Data Schedule (for SEC use only).
</TABLE>
21
