<PAGE> 1
UNITED STATES
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 JUNE 30, 2000
[ ] 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 333-90165
XCARE.NET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 85-0373486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 S. FIDDLER'S GREEN CIRCLE, SUITE 1400, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
(303) 488-2019
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common stock, par value $.01 per share
Outstanding at August 11, 2000 - 16,239,550
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XCARE.NET, INC.
TABLE OF CONTENTS
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Page No.
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Part I - Financial Information
Item 1 - Financial Statements:
Balance Sheet as of June 30, 2000 and December 31, 1999 3
Statement of Operations for the Three and Six months Ended June 30, 2000 and 1999 4
Statement of Cash Flows for the Six Months Ended June 30, 2000 and 1999 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Part II - Other Information
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities and Use of Proceeds 23
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
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XCARE.NET, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 89,945 $ 7,455
Accounts receivable, net of allowance of $550 and $141, respectively 2,807 890
Receivables from affiliates 1,447 453
Work performed in advance of billings 694 557
Other current assets 2,103 1,296
--------- ---------
Total current assets 96,996 10,651
Property and equipment, net 3,053 1,368
Purchased software, net 424 566
Other assets 2,071 598
--------- ---------
Total assets $ 102,544 $ 13,183
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,480 $ 819
Accrued liabilities 2,958 1,449
Unearned revenue 472 153
Current portion of long-term debt and capital lease obligations 68 92
--------- ---------
Total liabilities 4,978 2,513
--------- ---------
Series A mandatorily redeemable convertible preferred stock, $.01 par value; 0
and 6,000,000 shares authorized as of June 30, 2000 and December 31, 1999,
respectively; 0 and 2,450,000 shares issued and outstanding as of June 30,
2000
and December 31, 1999, respectively -- 6,810
Series B mandatorily redeemable convertible preferred stock, $.01 par value; 0 and
75,000,000 shares authorized as of June 30, 2000 and December 31, 1999,
respectively; 0 and 63,053,144 shares issued and outstanding as of June 30,
2000
and December 31, 1999, respectively -- 16,948
Value ascribed to mandatorily redeemable convertible preferred stock warrants -- 84
--------- ---------
-- 23,842
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 and 0 shares authorized as of June
30, 2000 and December 31, 1999, respectively; no shares issued and
outstanding at
June 30, 2000 and December 31, 1999, respectively -- --
Common stock, $.01 par value; 100,000,000 and 12,500,000 shares authorized as of
June 30, 2000 and December 31, 1999, respectively; 16,238,050 and 577,663
shares issued and outstanding as of June 30, 2000 and December 31, 1999,
respectively
162 6
Additional paid-in capital 121,505 3,432
Unearned compensation, net (1,468) (2,269)
Accumulated deficit (22,633) (14,341)
--------- ---------
Total stockholders' equity (deficit) 97,566 (13,172)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 102,544 $ 13,183
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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XCARE.NET, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 2,413 $ 530 $ 4,878 $ 1,841
Revenue from affiliates 276 -- 663 --
-------- -------- -------- --------
Total revenue 2,689 530 5,541 1,841
-------- -------- -------- --------
Costs and expenses:
Cost of revenue 3,016 714 5,813 1,637
Sales and marketing 1,891 138 3,001 293
General and administrative 2,981 282 4,848 426
Research and development 989 57 1,450 161
Stock compensation expense 406 -- 924 --
-------- -------- -------- --------
Total costs and expenses 9,283 1,191 16,036 2,517
-------- -------- -------- --------
Loss from operations (6,594) (661) (10,495) (676)
Interest income (expense), net 1,505 (122) 2,203 (258)
-------- -------- -------- --------
Net loss $ (5,089) $ (783) $ (8,292) $ (934)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.31) $ (2.00) $ (0.66) $ (2.45)
======== ======== ======== ========
Weighted average common shares outstanding
- basic and diluted 16,238 400 12,498 395
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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XCARE.NET, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,292) $ (934)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 682 377
Provision for losses on receivables 560 --
Stock compensation expense 924 --
Other 132 380
Changes in assets and liabilities:
Accounts receivable (2,477) 229
Receivables from affiliates (994) --
Work performed in advance of billings (137) --
Other current assets (1,900) (6)
Long-term deferred contract costs -- 285
Accounts payable 661 (240)
Accrued liabilities 1,509 (527)
Unearned revenue 319 (280)
-------- --------
Net cash used in operating activities (9,013) (716)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,225) (70)
Investment in related party (1,182) --
Long-term security deposits (291) --
-------- --------
Net cash used in investing activities (3,698) (70)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt -- 205
Principal payments on debt (2) (123)
Principal payments under capital leases (22) (302)
Proceeds from issuance of preferred stock, net -- 7,320
Proceeds from issuance of common stock, net 95,197 6
Exercises of stock options 28 --
-------- --------
Net cash provided by financing activities 95,201 7,106
-------- --------
Net increase in cash and cash equivalents 82,490 6,320
Cash and cash equivalents at beginning of period 7,455 198
-------- --------
Cash and cash equivalents at end of period $ 89,945 $ 6,518
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS
Conversion of mandatorily redeemable preferred stock and
mandatorily redeemable preferred stock warrants to common stock $ 23,849 $ --
Conversion of convertible promissory notes and accrued interest to
Series B mandatorily redeemable convertible preferred stock -- 3,204
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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XCARE.NET, INC.
NOTES TO FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
1. BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of
XCare.net, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements included herein
have been prepared on the same basis as the annual financial statements and
reflect all adjustments, which include only normal recurring adjustments
necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States. The results for the three and six month
periods ended June 30, 2000 are not necessarily indicative of the results
expected for the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an Initial Public Offering ("IPO") of 5,750,000 shares of its common
stock (including 750,000 shares sold pursuant to the exercise of the
underwriter's over-allotment option) at an IPO offering price of $18.00 per
share (the "Offering"). Proceeds to the Company from the Offering, after
calculation of the underwriter's discount, totaled approximately $94.1 million,
net of offering costs of approximately $2.1 million. Concurrent with the closing
of the IPO, all outstanding shares of the Company's convertible preferred stock
were automatically converted into 9,108,122 shares of common stock. In addition,
upon closing of the IPO, all outstanding common stock warrants and the Series A
convertible preferred stock warrants were exercised. The Series A convertible
preferred stock issued upon the exercise of the latter warrants was
automatically converted into common stock and together with the exercise of the
common stock warrants, resulted in the issuance of 702,924 additional shares of
common stock.
Revenue Recognition. The Company recognizes revenue in accordance with the
provisions of Statement of Position 97-2, "Software Revenue Recognition". The
Company derives revenue from license fees and related services under the terms
of fixed price contracts. Maintenance revenue is derived from agreements for
supporting and providing periodic updates to licensed software. Consulting
revenue consists of revenue from consulting services provided pursuant to time
and materials or fixed price contracts. Transaction processing revenue is
derived from transaction processing services and is recognized on a
per-transaction basis as services are performed. Operational support revenue is
derived from agreements for supporting and maintaining customers' processing
environments and is recognized ratably over the service period.
The sale of a licensing arrangement generally generates licensing fees as
well as related services revenue. When the related services revenue is not
significant and is not integral to a licensing sale, the licensing fees are
recognized at the time of software delivery. The related service revenue is
recognized on a percentage-of-completion method.
When the related services revenue is significant or is integral to a
licensing arrangement, the licensing fees and related services are generally
recognized from fixed price contracts using the percentage-of-completion method
of accounting where collectibility of fees is probable. Where collectibility of
fees is not probable, the Company defers revenue and related costs as deferred
contract costs and recognizes revenue and cost of revenue as cash is collected.
The Company may encounter budget and schedule overruns on fixed price
contracts caused by increased material, labor or overhead costs. Adjustments to
cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period in
which current estimates of total contract revenue and contract costs indicate a
loss. The Company does not require collateral for its receivables and an
allowance is maintained for potential credit losses.
6
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XCARE.NET, INC.
NOTES TO FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
Maintenance revenue and operational support revenue are recorded as
unearned revenue and recognized ratably over the service periods, which are
generally 12 months. When maintenance is bundled with the original license fee
arrangement, its fair value is deferred and recognized during the period such
services are provided.
Revenue from consulting services provided pursuant to time-and-materials
contracts are recognized as the services are performed and for fixed price
contracts on a percentage-of-completion basis.
Reclassifications. Certain prior year information has been reclassified to
conform with the current year presentation.
2. NET LOSS PER COMMON SHARE
Net loss per common share is calculated in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic net loss per
common share is computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period. Diluted net loss
per common share is computed by dividing the net loss for the period by the
weighted average number of common and potential common shares outstanding during
the period if their effect is dilutive. Potential common shares consist of
incremental common shares issuable upon the exercise of stock options and
warrants.
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per common share calculations for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (5,089) $ (783) $ (8,292) $ (934)
Accretion of mandatorily redeemable
convertible preferred stock -- (16) (7) (33)
-------- -------- -------- --------
Net loss available to common stockholders $ (5,089) $ (799) $ (8,299) $ (967)
======== ======== ======== ========
Denominator:
Weighted average common shares
outstanding - basic and diluted 16,238 400 12,498 395
======== ======== ======== ========
</TABLE>
7
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XCARE.NET, INC.
NOTES TO FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS
The Receivables from affiliates include a past due amount from a customer
who is also a partner in an entity that is a significant shareholder of the
Company. The customer and the Company have entered into an agreement as of July
21, 2000 specifying a prescribed payment schedule with the final payment due
November 30, 2000. In addition, the Company re-affirmed its warranty obligations
under the terms of the original contract as part of the agreement. In accordance
with the July 21, 2000 agreement, $0.2 million was received from the customer on
July 24, 2000.
Included in Other assets is an investment in a limited partnership for $1.2
million. The limited partnership's only investments are in customer of the
Company. The customer is controlled by a significant shareholder of the Company.
The investment is expected to facilitate the Company's introduction to and
penetration of new markets.
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," as amended, in
December 1999 that provides further interpretive guidance for public companies.
SAB No. 101 will be effective for the Company's fourth quarter of fiscal 2000.
Management anticipates that the adoption of SAB No. 101 will not have a material
impact on the Company's financial condition or results of operations and that it
will not have a significant impact on its current licensing or revenue
recognition practices.
8
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XCARE.NET, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this
Management's Discussion and Analysis Of Financial Condition and Results of
Operations of XCare.net, Inc. ("XCare," or the "Company") are forward-looking
statements within the meaning of the Private-Securities Litigation Reform Act of
1995. These forward-looking statements include, without limitation, discussion
relative to markets for our products and trends in revenue, gross margins and
anticipated expense levels, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions. All statements regarding the Company's expected financial
position and operating results, business strategy, financing plans, forecast
trends relating to our industry are forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and our actual results of operations may differ materially from
those contained in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Factors That May Affect Future Results of Operations" and in the Company's
Annual report on Form 10-K for the year ended December 31, 1999 under "Risk
Factors." Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events, or otherwise. However, readers should carefully
review the risk factors set forth in other reports or documents the Company
files from time to time with the Securities and Exchange Commission.
OVERVIEW
XCare.net is an electronic commerce service provider for health care
businesses. We have developed an Internet-based technology platform using
extensible mark-up language, or XML, to process health care transactions and
provide related services for payers, providers and other health care industry
participants. We provide transaction processing services such as eligibility
checking, claims submission, referral processing, physician credentialing, and
appointment scheduling. We also provide consulting services to define, develop
and implement Internet healthcare strategies as well as Web site hosting,
operational support and maintenance services for our customers.
Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into a community to form an Internet exchange. We use the XCare.net
platform to deliver a broad range of applications, services and electronic
product offerings that streamline and automate high-volume, data-intensive
transactions and processes.
On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an Initial Public Offering ("IPO") of 5,750,000 shares of its common
stock (including 750,000 shares sold pursuant to the exercise of the
underwriter's over-allotment option) at an IPO offering price of $18.00 per
share (the "Offering"). Proceeds to the Company from the Offering, after
calculation of the underwriter's discount, totaled approximately $94.1 million,
net of offering costs of approximately $2.1 million. Concurrent with the closing
of the IPO, all outstanding shares of the Company's convertible preferred stock
were automatically converted into 9,108,122 shares of common stock. In addition,
upon closing of the IPO, all outstanding common stock warrants and the Series A
convertible preferred stock warrants were exercised. The Series A convertible
preferred stock issued upon the exercise of the latter warrants was
automatically converted into common stock and together with the exercise of the
common stock warrants, resulted in the issuance of 702,924 additional shares of
common stock.
We recognize revenue in accordance with the provisions of Statement of
Position 97-2, "Software Revenue Recognition." We derive revenue from license
fees and related services under the terms of fixed price contracts. Maintenance
revenue is derived from agreements for supporting and providing periodic updates
to licensed software. Consulting revenue consists of revenue from consulting
services provided pursuant to time and materials or fixed price contracts.
Transaction processing revenue is derived from transaction processing services
and is recognized on a per-transaction basis as services are performed.
Operational support revenue is derived from agreements for supporting and
maintaining customers' processing environments and is recognized ratably over
the service period.
9
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XCARE.NET, INC.
The sale of a licensing arrangement generally generates licensing fees as
well as related services revenue. When the related services revenue is not
significant and is not integral to a licensing sale, the licensing fees are
recognized at the time of software delivery. The related service revenue is
recognized on a percentage-of-completion method.
When the related services revenue is significant or is integral to a
licensing arrangement, the licensing fees and related services are generally
recognized from fixed price contracts using the percentage-of-completion method
of accounting where collectibility of fees is probable. Where collectibility of
fees is not probable, the Company defers revenue and related costs as deferred
contract costs and recognizes revenue and cost of revenue as cash is collected.
We may encounter budget and schedule overruns on fixed price contracts
caused by increased material, labor or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs indicate a loss.
We do not require collateral for our receivables and an allowance is maintained
for potential credit losses.
Maintenance revenue and operational support revenue are recorded as
unearned revenue and recognized ratably over the service periods, which are
generally 12 months. When maintenance is bundled with the original license fee
arrangement, its fair value is deferred and recognized during the period such
services are provided.
Revenue from consulting services provided pursuant to time-and-materials
contracts are recognized as the services are performed and for fixed price
contracts on a percentage-of-completion basis.
We incurred net losses and losses from operations for the three and six
months ended June 30, 2000 and 1999. As of June 30, 2000, we had an accumulated
deficit of $22.6 million. Since we began developing and marketing our
Internet-based health care applications, services, and product offerings in
early 1999, we have funded our business primarily by borrowing funds and from
the sale of convertible preferred stock, and from our initial public offering of
stock, not from cash generated by our business. We expect to continue to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we will experience losses and negative
cash flows for the foreseeable future. Factors that may prevent us from
achieving or maintaining profitability and cause our stock price to decline
include the demand for and acceptance of our solutions and our ability to
attract new customers.
During 1999 and through February 9, 2000, the effective date of the
Company's IPO, in connection with stock options granted to certain employees and
a consultant under the stock plan, we recorded unearned stock compensation
representing the difference between the exercise price of the options and the
deemed fair value of our common stock at the date of grant. This unearned stock
compensation will be amortized to expense over the period during which the
options or common stock subject to repurchase vest, generally four years, using
an accelerated method as described in Financial Accounting Standards Board
Interpretation No. 28. Amortization of unearned stock compensation amounted to
$406,000 and $924,000 during the three and six months ended June 30, 2000,
respectively. We expect to recognize amortization expense related to unearned
compensation for the aforementioned grants of $1,510,000 in 2000, $570,000 in
2001, $260,000 in 2002 and $52,000 in 2003.
In 1999, Laidlaw Inc., the Canadian parent company of American Medical
Response, Inc. announced its intention to divest its interest in that company in
order to focus on its transportation business. American Medical Response, Inc.
is the parent company of one of our customers, American Medical Pathways, Inc
("AMP"). If such a sale is consummated, and the new owner decided to terminate
our agreement, there would likely be a material adverse impact on our future
earnings and cash flow. As of June 30, 2000, there has been no change in our
relationship with AMP and we have continued to provide services under our
agreement.
10
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XCARE.NET, INC.
The following table sets forth, for the periods indicated, certain items
from the Company's statements of operations as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue 89.7% 100.0% 88.0% 100.0%
Revenue from affiliate 10.3 0.0 12.0 0.0
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of revenue 112.2 134.7 104.9 88.9
Sales and marketing 70.3 26.0 54.2 15.9
General and administrative 110.9 53.2 87.5 23.1
Research and development 36.8 10.8 26.2 8.8
Stock compensation expense 15.1 0.0 16.6 0.0
----- ----- ----- -----
Total costs and expenses 345.3 224.7 289.4 136.7
----- ----- ----- -----
Loss from operations (245.3) (124.7) (189.4) (36.7)
Interest income (expense), net 56.0 (23.0) 39.8 (14.0)
----- ----- ----- -----
Net loss (189.3)% (147.7)% (149.6)% (50.7)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE COMPANY'S RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999.
Total revenue. Total revenue increased $2.2 million, or 407%, to $2.7
million for the three months ended June 30, 2000 from $0.5 million for the
three months ended June 30, 1999. This increase reflects the sale of a
completed Web site to one customer, which accounted for $1.1 million or 39% of
total revenue and increased consulting revenue derived from Internet-based
development projects as compared to the managed care information systems (MCIS)
implementation-related projects in the prior year; and higher recurring revenue
from Web site hosting, transaction processing, operational support, recurring
license fees and maintenance services in the three months ended June 30, 2000
as more of the Company's Internet-based development projects move into
production.
Cost of revenue. Cost of revenue consists primarily of salaries, bonuses
and employee benefits for personnel and payments to third-party consultants who
work on the consulting projects or are involved in the Web site hosting,
operational support and maintenance services, and facilities costs and equipment
depreciation that is directly related to Web site hosting and transaction
processing services. Cost of revenue increased $2.3 million, or 322%, to $3.0
million for the three months ended June 30, 2000 from $0.7 million for the year
earlier period. This increase reflects the cost of additional personnel hired to
support the growth in our Internet-based development projects and an increase in
the ratio of third-party contractors to Company personnel. Third-party
contractors generally cost the Company more than our own personnel and
consequently generate lower gross profit margins. We anticipate cost of revenue
expenditures will increase as we continue to expand our Internet strategy.
Sales and marketing. Sales and marketing expenses consist of
personnel-related costs, including salaries, commissions, employee benefits,
travel expenses, field sales office expenses and advertising and promotion
costs. Sales and marketing expenses increased $1.7 million, or 1,270%, to $1.8
million during the three months ended June 30, 2000 from $0.1 million for the
three months ended June 30, 1999. This increase reflects additional personnel
and increased travel and entertainment and trade show and conference expenses as
the Company's sales and marketing programs were expanded and intensified.
General and administrative. General and administrative expenses include
personnel and overhead costs for our executive, administrative, finance,
facilities and human resources functions, as well as professional fees,
insurance and bad debt expense. General and administrative expenses increased
$2.7 million, or 957%, to $3.0 million for the three months ended June 30, 2000
from $0.3 million from the year earlier period. This increase was due to the
rapid growth of the Company, as well as its transition from a private Company to
a public company. Growth-related expenses were primarily due to an increase in
personnel in the areas of human resources, accounting and administration and
recruiting costs. Professional fees increased due to additional legal and
accounting fees associated with periodic reporting requirements of a public
company and consulting fees associated with process improvement initiatives.
Subsequent to our IPO in February 2000, we purchased directors and officers
insurance resulting in an increase in insurance expense. We have begun the
dispute resolution process as set out in the contracts with two of our customers
for payment of past due receivables. Accordingly, we increased our allowance for
doubtful accounts by $0.3 million during the three months ended June 30, 2000
for the potentially uncollectible portion of these receivables. In addition, we
recently entered into an agreement with one of our customers, which is a related
party, for the payment of a past due receivable. Pursuant to the terms of this
agreement, the related party agreed to pay all outstanding amounts owed to us by
November 30, 2000.
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XCARE.NET, INC.
Research and development. Research and development expenses include
personnel costs and facilities and depreciation costs that are directly related
to product development, enhancements to existing applications and services and
quality assurance activities. Research and development expenses increased $0.9
million, or 1,635%, to $1.0 million for the three months ended June 30, 2000
from $57,000 for the three months ended June 30, 1999. This increase reflects an
increase in salaries and benefits due to an increase in departmental personnel
and the increased use of third-party contractors.
Stock compensation expense. During the three months ended June 30, 2000, we
recorded amortization of the aggregate amount of unearned compensation of $0.4
million.
Interest income (expense), net. Interest income (expense), net includes
interest income on cash and cash equivalent balances offset by interest expense
on our capital lease obligation, and in 1999, interest expense on our
convertible promissory notes. Interest income, net of interest expense,
increased $1.6 million, to net interest income of $1.5 million for the three
months ended June 30, 2000 from net interest expense of $0.1 million for the
prior year period. This increase is primarily due to the interest income
realized from the investment of the proceeds from our IPO in the first quarter
2000 and the reduction of debt and capital lease obligations during 1999.
Income tax (benefit) expense. No provision for federal and state income
taxes has been recorded for the three months ended June 30, 2000 or 1999 as we
have incurred net operating losses for each of these periods. We believe that,
based on the history of losses and other factors, the weight of available
evidence indicates that it is more likely than not that we will not be able to
realize our deferred tax assets, and thus a full valuation allowance has been
recorded against such assets as of June 30, 2000 and 1999.
COMPARISON OF THE COMPANY'S RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Total revenue. Total revenue increased $3.7 million, or 201%, to $5.5
million for the six months ended June 30, 2000 from $1.8 million for the six
months ended June 30, 1999. This increase reflects the sale of a completed Web
site to one customer, which accounted for $1.1 million or 19% of total revenue
and increased consulting revenue derived from more time intensive
Internet-based development projects as compared to the managed care information
systems (MCIS) implementation-related projects in the prior year; and higher
recurring revenue from Web-site hosting, transaction processing, operational
support, recurring license fees and maintenance services in the six months
ended June 30, 2000 as more of the Company's Internet-based development
projects move into production.
Cost of revenue. Cost of revenue consists primarily of salaries, bonuses
and employee benefits for personnel and payments to third-party consultants who
work on the consulting projects or are involved in the Web site hosting,
operational support and maintenance services, and facilities costs and equipment
depreciation that is directly related to Web site hosting and transaction
processing services. Cost of revenue increased $4.2 million, or 255%, to $5.8
million for the six months ended June 30, 2000 from $1.6 million for the year
earlier period. This increase reflects the cost of additional personnel hired to
support the growth in our Internet-based development projects and an increase in
the ratio of third-party contractors to Company personnel. Third-party
contractors generally cost the Company more than our own personnel and
consequently generate lower gross profit margins. Also, for the first quarter
2000, significant research and development costs were charged to cost of
revenue. This resulted from the Company entering into a development agreement
with a major customer prior to completion of the internal development effort. We
anticipate cost of revenue expenditures will increase as we continue to expand
our Internet strategy.
Sales and marketing. Sales and marketing expenses consist of
personnel-related costs, including salaries, commissions, employee benefits,
travel expenses, field sales office expenses and advertising and promotion
costs. Sales and marketing expenses increased $2.7 million, or 924%, to $3.0
million during the six months ended June 30, 2000 from $0.3 million for the six
months ended June 30, 1999. This increase reflects additional personnel and
increased travel and entertainment and trade show and conference expenses as the
Company's sales and marketing programs were expanded and intensified. Also, in
the first quarter 2000, expenses were incurred to develop an in-depth market and
competitive analysis and brand development plan.
General and administrative. General and administrative expenses include
personnel and overhead costs for
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our executive, administrative, finance, facilities and human resources
functions, as well as professional fees, insurance and bad debt expense. General
and administrative expenses increased $4.4 million, or 1,038%, to $4.8 million
for the six months ended June 30, 2000 from $0.4 million from the year earlier
period. This increase was due to the rapid growth of the Company, as well as its
transition from a private Company to a public company. Growth-related expenses
were primarily due to an increase in personnel in the areas of human resources,
accounting and administration and recruiting costs. Professional fees increased
due to additional legal and accounting fees associated with periodic reporting
requirements of a public company and consulting fees associated with process
improvement initiatives. Subsequent to our IPO in February 2000, we purchased
directors and officers insurance resulting in an increase in insurance expense.
We have begun the dispute resolution process as set out in the contracts with
two of our customers for payment of past due receivables. Accordingly, we
increased our allowance for doubtful accounts by $0.6 million during the six
months ended June 30, 2000 for the potentially uncollectible portion of these
receivables. In addition, we recently entered into an agreement with one of our
customers, which is a related party, for the payment of a past due receivable.
Pursuant to the terms of this agreement, the related party agreed to pay all
outstanding amounts owed to us by November 30, 2000.
Research and development. Research and development expenses include
personnel costs and facilities and depreciation costs that are directly related
to product development, enhancements to existing applications and services and
quality assurance activities. Research and development expenses increased $1.3
million, or 801%, to $1.5 million for the six months ended June 30, 2000 from
$0.2 million for the six months ended June 30, 1999. This increase reflects an
increase in salaries and benefits due to an increase in departmental personnel
and the increased use of third-party contractors.
Stock compensation expense. During the six months ended June 30, 2000, we
recorded amortization of the aggregate amount of unearned compensation of $0.9
million.
Interest income (expense), net. Interest income (expense), net includes
interest income on cash and cash equivalent balances offset by interest expense
on our capital lease obligation, and in 1999, interest expense on our
convertible promissory notes. Interest income, net of interest expense,
increased $2.5 million, to net interest income of $2.2 million for the six
months ended June 30, 2000 from net interest expense of $0.3 million for the
prior year period. This increase is primarily due to the interest income
realized from the investment of the proceeds from our IPO in the first quarter
2000 and the reduction of debt and capital lease obligations during 1999.
Income tax (benefit) expense. No provision for federal and state income
taxes has been recorded for the six months ended June 30, 2000 or 1999 as we
have incurred net operating losses for each of these periods. We believe that,
based on the history of losses and other factors, the weight of available
evidence indicates that it is more likely than not that we will not be able to
realize our deferred tax assets, and thus a full valuation allowance has been
recorded against such assets as of June 30, 2000 and 1999.
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XCARE.NET, INC.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through a combination of cash
flow from operations, private sales of common and convertible preferred stock,
and issuances of convertible promissory notes. At June 30, 2000, our principal
sources of liquidity included $92.0 million in working capital with no long-term
outstanding debt. The Company performs ongoing evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an Initial Public Offering ("IPO") of 5,750,000 shares of its common
stock (including 750,000 shares sold pursuant to the exercise of the
underwriter's over-allotment option) at an IPO offering price of $18.00 per
share (the "Offering"). Proceeds to the Company from the Offering, after
calculation of the underwriter's discount, totaled approximately $94.1 million,
net of offering costs of approximately $2.1 million. Concurrent with the closing
of the IPO, all outstanding shares of the Company's convertible preferred stock
were automatically converted into 9,108,122 shares of common stock. In addition,
upon closing of the IPO, all outstanding common stock warrants and the Series A
convertible preferred stock warrants were exercised. The Series A convertible
preferred stock issued upon the exercise of the latter warrants was
automatically converted into common stock and together with the exercise of the
common stock warrants, resulted in the issuance of 702,924 additional shares of
common stock.
We expect to use our cash and cash equivalents, as well as the net proceeds
from this offering, for general corporate purposes, working capital and capital
expenditures to fund our operations and to continue expanding our product
offerings. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the status of our product development efforts,
marketing and sales activities, and the amount of cash generated by our
operations and competition. We may find it necessary or advisable to use
portions of the proceeds for other purposes. A portion of the proceeds may also
be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. Pending use of the net
proceeds for the above purposes, we intend to invest such funds in short-term,
interest-bearing, investment grade obligations.
Net cash used in operating activities for the six months ended June 30,
2000 was $9.0 million and for the six months ended June 30, 1999 was $0.7
million. Net cash used in operating activities is primarily attributable to net
losses.
Net cash used in investing activities for the six months ended June 30,
2000 and 1999 was $3.7 million and $70,000, respectively. Investing activities
consist primarily of purchases of computer hardware and software and office
furniture and equipment and an investment in a related party.
Net cash provided by financing activities for the six months ended June 30,
2000 was $95.2 million and consists primarily of net proceeds from our initial
public offering. Net cash provided by financing activities for the six months
ended June 30, 1999 was $7.1 million and consists primarily of net proceeds from
the issuance of Series B convertible preferred stock.
We anticipate that the above funds will be sufficient to meet our needs as
described above for the next eighteen months. Thereafter, we may require
additional funds to support our working capital requirements or for other
purposes, and we may seek, even before such time, to raise additional funds
through public or private equity financing or from other sources. Such
additional financing may not be available at all or, if available, on terms
acceptable to us and that are not dilutive to our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," as amended, in
December 1999 that provides further interpretive guidance for public companies.
SAB No. 101 will be effective for the Company's fourth quarter of fiscal 2000.
Management anticipates the adoption of SAB No. 101 will not have a material
impact on the Company's financial condition or results of operations and that it
will not have a significant impact on its current licensing or revenue
recognition practices.
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XCARE.NET, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Our business and prospects are difficult to evaluate because we are in a
transitional stage of development.
It is difficult to evaluate our business and our prospects because our
business model is new and unproven. We commenced operations in March 1989, but
we did not begin focusing on Internet-based health care solutions until early
1999. We have historically derived a significant portion of our revenue from
sales of maintenance and client/server software for managed health care systems
and from providing services to health care organizations seeking to outsource
administrative functions. We intend to derive an increasing portion of our
future revenue from our Internet-based applications, services and product
offerings. As a result, even though we have been in existence for over ten
years, we are prone to the risks and difficulties frequently encountered by
early stage companies, particularly companies in new and rapidly evolving
technology-related markets.
We will have difficulty predicting our future results of operations.
Due to our limited operating history in the Internet-based health care
market, it is difficult for us to predict with any accuracy our future results
of operations. For example, we cannot accurately forecast expenses based on our
historical results because our experience in our current market is limited, and
we are required to forecast expenses in part on future revenue projections. The
provision of services using Internet technology in the health care industry is a
developing business that is inherently riskier than business in industries where
companies have established operating histories. Accordingly, our historical
financial results are not necessarily indicative of our future financial
performance.
We have incurred losses since changing our focus to internet-based solutions and
we may not be able to achieve or sustain profitability.
We incurred net losses and losses from operations for the six months ended
June 30, 2000 and 1999 and for the years ended December 31, 1999 and 1998. As of
June 30, 2000, we had an accumulated deficit of $22.6 million. Since we began
developing and marketing our Internet-based health care products and services in
early 1999, we have funded our business primarily by borrowing funds and from
the sale of our stock, not from cash generated by our business. We expect to
continue to incur significant sales and marketing, research and development and
general and administrative expenses. As a result, we will experience losses and
negative cash flows for the foreseeable future. Factors which may prevent us
from achieving or maintaining profitability and cause our stock price to decline
include the demand for and acceptance of our products, product enhancements and
services, and our ability to attract new customers, as well as a number of other
factors described elsewhere in this section.
Our quarterly operating results are likely to fluctuate significantly and may
fail to meet the expectations of securities analysts and investors, causing our
share price to decline.
Our quarterly operating results have fluctuated significantly in the past
and are likely to fluctuate in the future depending on a number of factors
described below and elsewhere in this section, including: any delay in the
introduction of new applications, services and product offerings and
enhancements of existing solutions; the loss of a major customer; reductions in
the average selling prices of our applications, services and product offerings;
cost pressures from shortages of skilled technical employees, increased product
development and engineering expenditures; and changes in industry market
conditions.
Due to the factors described above and other factors, our results of
operations could fluctuate substantially in the future, and quarterly
comparisons may not indicate reliable trends of future performance. If our
operating results do not meet the expectations of securities analysts and
investors, our share price is likely to decline.
If we fail to develop relationships with established health care industry
participants, we may experience delays in the growth of our business.
Relationships with established health care industry participants are
critical to our success. These relationships include customer, vendor,
distribution and co-marketing relationships. To date, we have established only a
limited number of these relationships, and these relationships are in the early
stages of development. Entering into relationships is complicated because it
involves identifying opportunities and collaborating with a number of our
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XCARE.NET, INC.
customers, vendors and competitors. In addition, we may not be able to establish
relationships with particular key participants in the health care industry if we
have established relationships with competitors, and therefore it is important
that we are perceived as independent of any particular customer or partner.
Moreover, many potential customers and vendors may resist working with us until
our applications, services and product offerings have been successfully
introduced and have achieved market acceptance. If we cannot successfully
establish relationships with key health care industry participants, our business
will grow slowly.
If we cannot maintain our relationships with established health care industry
participants, our applications, services and products may not achieve market
acceptance.
Once we have established a relationship with an established health care
industry participant, we rely on that participant's ability to assist us in
generating increased acceptance and use of our applications, services and
product offerings. We have limited experience in maintaining relationships with
health care industry participants. Additionally, the other parties to these
relationships may not view these relationships with us as significant to their
own business, and they may reassess their commitment to us or decide to compete
directly with us in the future. We generally do not have agreements that
prohibit them from competing against us directly or from contracting with our
competitors. We cannot guarantee that any such party will perform its
obligations as agreed or contemplated or that we would be able to specifically
enforce any agreement with it. Our arrangements generally do not establish
minimum performance requirements, but instead rely on the voluntary efforts of
the other party. Therefore, we cannot guarantee that these relationships will be
successful. If we were to lose any of these relationships, or if the other
parties were to fail to collaborate with us to pursue additional business
relationships, we would not be able to execute our business plans and our
business would suffer significantly. Moreover, we may not experience increased
use of our applications, services and product offerings even if we establish and
maintain these relationships.
If the health care industry does not accept the need for a common technology
platform, our business would not grow.
To be successful and to grow, we must attract a significant number of
customers throughout the health care industry. To date, the health care industry
has been resistant to adopting new information technology applications, services
and product offerings. Electronic information exchange and transaction
processing by the health care industry is still developing. Complexities in the
nature of health care transactions and lack of a common technology platform are
significant issues in the development and acceptance of information technology
applications, services and product offerings by the industry. There are
currently hundreds of different incompatible hardware, software and database
components. If health care industry participants do not accept the need to
integrate pre-existing information technology components, the market for our
applications and services would not develop and our business would not grow.
If physicians and other health care providers do not accept internet-based
workflow modifications, the market for our products may not grow.
Acceptance of Internet technology by physicians and other providers into
daily administrative and clinical workflow is a key factor in our ability to
meet our anticipated deployment levels for transaction services and process
automation components. However, without the acceptance by physicians and
providers of workflow modifications, new installation projects, such as our
applications, services and product offerings, may be stalled.
If the extensible mark-up language fails to become a standard data exchange
protocol for the internet, the marketability of our products may be limited.
Our XCare.net platform operates with the extensible mark-up language, or
XML. The failure of extensible mark-up language to become well accepted would
seriously impede the marketability of our products and force us to adapt our
products to other data exchange protocols. Any such adaptation may entail
substantial costs, may require substantial time and effort, and may not lead to
marketable and competitive products. In addition, if incompatible versions of
the extensible mark-up language standard arise in the market, the market for
extensible mark-up language-based applications may grow slowly or not at all. If
the version of extensive mark-up language for which we have developed
applications, services and product offerings does not gain widespread
acceptance, we will have to adapt our products to another version of extensible
mark-up language, which will cause delays in shipments of our application and
product offerings and impede our ability to provide services.
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XCARE.NET, INC.
Our revenue is concentrated in a few customers, which puts our revenue at risk.
We receive a substantial majority of our revenue from a limited number of
customers. For the six months ended June 30, 2000, sales to NurseFinders, Inc.
accounted for 19% of our revenue, sales to Expert Practice, Inc. accounted for
18% of our revenue, sales to Munshee.com, LLC (a related party) accounted for 9%
of our revenue, sales to Methodist Care, Inc. accounted for 9% of our revenue
and sales to American Medical Pathways, Inc. a subsidiary of American Medical
Response, Inc., accounted for 7% of revenue. We expect that a significant
portion of our revenue will continue to depend on sales to a small number of
customers. If we do not generate as much revenue from these major customers as
we expect to, or if we lose any of them as customers, our total revenue will be
significantly reduced.
We have a contract with American Medical Pathways, Inc., a wholly owned
subsidiary of American Medical Response, Inc., to provide third-party
administrative services in connection with its contracts to provide medical
transportation services. Our revenue under this contract accounted for 7% of our
revenue for the six months ended June 30, 2000. American Medical Pathways, Inc.
may terminate our contract on 120 days notice. In addition, Laidlaw, Inc., the
owner of American Medical Response, Inc., recently announced its decision to
seek a buyer for American Medical Response, Inc. A new owner of American Medical
Response, Inc. may not continue to provide the same level of medical
transportation services or may seek to terminate our contract. Any termination
of the contract or reduction in license fees earned under the contract would
reduce our revenue and could slow our growth. American Medical Response, Inc. is
the largest provider of private ambulance service in the United States.
Therefore, if we lose revenue due to termination of the contract or reduction in
license fees, it will be difficult to replace such revenue through contracts
with other providers of medical transportation services.
If we lose key licenses we may be required to develop or license alternative
technology, which may cause delays, add considerable expense or reduce sales.
We currently rely on software that we have licensed from Sinclair Montrose
Healthcare plc of London, England for our Match.Net Staffing and Scheduling
product. We will integrate this software with our software applications,
services and product offerings to centralize the scheduling and staffing
functions for health care providers in a secure Internet environment. We
currently have a license to the software, although this license may not continue
to be available to us on commercially reasonable terms in the future. The loss
of this license could result in delays or reductions of shipments of our
MatchNet Staffing & Scheduling product until equivalent software could be
identified, developed, licensed and integrated. In addition, other products and
services we may offer in the future may rely on licensed software. The loss of
any current or future license could result in delays in the introduction of our
products and services, add additional expense, and reduce sales of our products
and services until equivalent software could be developed, identified, licensed
and integrated.
If our transaction and data processing facility fails, customer satisfaction
could decline.
We currently process substantially all of our customer transactions and
data at our facility in Albuquerque, New Mexico. Although we have safeguards for
emergencies, we do not have back-up facilities to process information if this
facility is not functioning. The occurrence of a major catastrophic event or
other system failure at our Albuquerque, New Mexico facility could interrupt
data processing or result in the loss of stored data. In addition, we depend on
the efficient operation of Internet connections from customers to our systems.
These connections, in turn, depend on the efficient operation of Web browsers,
Internet service providers and Internet backbone service providers, all of which
have had periodic operational problems or experienced outages. Any system
delays, failures or loss of data, whatever the cause, could reduce customer
satisfaction with our applications, services and product offerings.
If security of our customer and patient information is compromised, patient care
could suffer, we could be liable for damages and our reputation could decline.
We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure remain
secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive
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problems. If we fail to meet our clients' expectations, we could be liable for
damages and our reputation could suffer. In addition, patient care could suffer
and we could be liable if our systems fail to deliver correct information in a
timely manner. Our insurance may not protect us from this risk.
If our transaction hosting services suffer interruptions, our business and
reputation could be harmed.
Our customers have in the past experienced some interruptions with our
transaction hosting services. Similar interruptions may continue to occur from
time to time. These interruptions could be due to hardware and operating system
failures. We expect a large portion of our revenue to be derived from customers
who use our transaction hosting services. As a result, our business will suffer
if we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosting. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation in levels of customer service. If this were to
continue to happen, our business and reputation could be seriously harmed.
Our markets are highly competitive and competition could harm our ability to
sell applications, services and product offerings.
Competition could seriously harm our ability to sell additional products
and services. Potential competitors fall primarily into three categories: health
care Internet companies focused on providing connectivity and transactions
within business-to-business and business-to-consumer frameworks; traditional
health care information system vendors who seek to extend the services of their
core products using Internet-based technology; and traditional managed care
information system and outsourcing vendors who are focusing on extending the
services of their core products to the Internet. In addition, from time to time
our customers may develop applications, services and product offerings
competitive with those offered by us. Many of our competitors have longer
operating histories, significantly greater financial, technical, marketing or
other resources, or greater name recognition than we do. Our competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. Our competitors may develop and successfully
market Internet-based health care products and services in a manner that could
have an adverse effect on our business model.
If we cannot expand our management systems and network infrastructure, we may
experience delays in the growth of our business.
In order to grow, we intend to rapidly expand our management, product
development, testing, network operations, marketing, sales and customer service
personnel over the next year. This growth has and will continue to place a
significant strain on our managerial, operational, financial and information
systems resources. We may not be able to effectively manage expansion of our
operations, and our facilities, systems, procedures or controls may not be
adequate to support our operations. Moreover, our systems may not accommodate
increased use while maintaining acceptable overall performance.
As we grow, we will also need to expand and adapt our network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. So far, we have processed a limited number
and variety of transactions over our network infrastructure and only a limited
number of health care participants use our infrastructure. Many of our service
agreements contain performance standards. If we fail to meet these standards,
our customers could terminate their agreements with us. The loss of any of our
service agreements would cause a decline in our revenues. We may be unable to
expand or adapt our network infrastructure to meet additional demand or our
customers' changing needs on a timely basis and at a commercially reasonable
cost, or at all.
If our operating results vary significantly due to the lengthy sales and
implementation cycles for our products and services, our revenues may be delayed
and our results of operations and share price may fluctuate.
Because our applications, services and product offerings have lengthy sales
and implementation cycles, it is difficult for us to forecast the timing and
recognition of revenues from sales of our applications, services and product
offerings. Since we are unable to control many of the factors that will
influence our customers' buying decisions, the lengthy sales cycle could cause
our operating results to be below the expectations of analysts and investors.
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A key element of our strategy is to market our applications, services and
product offerings to large organizations with significant data management and
access needs. The sales process normally involves a significant evaluation
process, and commitment of budgets may be subject to delays due to a customer's
internal procedures for approving new expenditures and deploying new
technologies. The period of time between initial customer contact and a purchase
order can span up to three months or more.
In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our applications,
services and product offerings, which may cause additional delays during the
evaluation and acceptance process. Our long and unpredictable sales cycle can
result in delayed revenues, difficulty in matching revenues with expenses and
increased expenditures, which together may contribute to fluctuations in our
results of operations and share price.
We may lose existing customers or be unable to attract new customers if we do
not develop new applications, services and products or if these solutions do not
keep pace with technological changes.
Internet technologies are evolving rapidly and the technology used by any
electronic commerce business is subject to rapid change and obsolescence. If we
are not able to maintain and improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and evolving customer requirements and achieve market
acceptance, we may lose existing customers or be unable to attract new
customers. For example, we currently are developing Physician Credentialing,
Electronic Medical Record, Case Management, Medication and Medical Assessment
Inquiry Systems, Physician Practice Management, MD Pay Accelerator, Online Drug
Store, Medical Supply Product, Health and Medical Bookstore products. We may not
be successful in developing and marketing these or other product enhancements or
new products that respond to technological advances by others on a timely or
cost-effective basis. In addition, such applications, services and product
offerings may contain licensed components, which may be difficult to integrate
or may cause the solutions to be ineffective. These products, if developed, may
not achieve market acceptance. Any delay or problems in the installation or
implementation of new products or services may cause customers to forego
purchases from us and could cause them to purchase from our competitors.
If we are required to commit unanticipated resources to complete fixed-price
contracts, our operating results may decline.
We had historically derived a majority of our revenue from contracts that
were billed on a time-and-materials basis. Beginning in 1998, a significant
portion of our revenue has been derived from contracts that were billed on a
fixed-price basis. These contracts specify certain obligations and deliverables
to be met by us regardless of our actual costs incurred. We cannot assure you
that we can successfully complete these contracts on budget, and our inability
to do so could seriously harm our business, financial condition and results of
operations.
Our failure to accurately estimate the resources required for a fixed-price
contract could cause our operating results to decline. In the past, we have been
required to commit unanticipated additional resources to complete certain
project plans during the project to ensure that the project was completed on
schedule. We may experience similar situations in the future.
If compliance with government regulation of health care becomes costly and
difficult for our customers, and us we may not be able to grow our business.
Participants in the health care industry are subject to extensive and
frequently changing regulation under numerous laws administered by governmental
entities at the federal, state and local levels, some of which are, and others
of which may be, applicable to our business. Furthermore, our health care
service provider, payer and plan customers are also subject to a wide variety of
laws and regulations that could affect the nature and scope of their
relationships with us.
Laws regulating health care providers, health insurance, health maintenance
organizations and similar organizations, employee benefit plans and governmental
health benefit programs cover a broad array of subjects, including but not
limited to licensing, billing, collection and reimbursement, advertising,
confidentiality, financial relationships with, and referral of services and
goods among and to, suppliers and providers, mandated benefits and grievance and
appeal procedures. Furthermore, the federal Health Insurance Portability and
Accountability
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Act of 1996 mandates the use of standard transactions, standard identifiers,
security and other provisions by the year 2000.
These laws are often not uniform between states, and could require us to
undertake the expense and difficulty of tailoring our business procedures,
information systems, or financial relationships in order for our customers to be
in compliance with applicable laws and regulations. Compliance with such laws
could also interfere with the scope of our applications, services and product
offerings, or make them less cost effective for our customers. Furthermore, the
impact of regulatory developments in the health care industry is complex and
difficult to predict, and we cannot guarantee that we will not be adversely
affected by new regulatory requirements or interpretations.
Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
FDA. We do not believe that our current applications, services or product
offerings are subject to FDA regulation. If we expand our applications, services
and product offerings into areas subject to FDA regulation, complying with these
regulations could be time consuming, burdensome and expensive and could delay
our introduction of new products.
Because we provide utilization review services, we may incur liability.
One of the functions of our applications is automatic adjudication of
whether or not a claim for payment or service should be denied or whether
existing coverage should be continued based upon particular plans or contracts
and industry-standard, clinical-support criteria. Our payer customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of payment of medical claims or medical service. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability.
If our executive officers and key personnel do not remain with us in the future,
we may experience difficulty in attracting and retaining qualified personnel.
Our future success depends upon the continued service of our executive
officers and other key employees as well as our ability to hire a significant
number of new employees. In particular, it would be difficult for us to replace
the services of our President and Chief Executive Officer, Lorine Sweeney. In
addition, we are particularly dependent on the continued services of software
developers with programming skills in extensible mark-up language, Java and
Oracle. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. None of our executive officers or key personnel have employment
agreements with us, except for standard agreements we have with all of our
employees providing for confidentiality and invention assignment obligations.
We may face product-related liabilities that could force us to pay damages,
which would hurt our reputation.
While our customers and we test our applications, services and product
offerings, they may contain defects or result in system failures. These defects
or problems could result in the loss of or delay in generating revenue, loss of
market share, failure to achieve market acceptance, diversion of development
resources, injury to our reputation or increased insurance costs.
Our contracts limit our liability arising from our errors; however, these
provisions may not be enforceable and may not protect us from liability. While
we have general liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to maintain this insurance
on reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our financial condition could be materially
harmed.
If we do not establish and maintain the XCare.net brand, our reputation could be
adversely affected.
In order to increase our customer base and expand our online traffic, we
must establish, maintain and strengthen the XCare.net brand. For us to be
successful in establishing our brand, health care professionals must perceive us
as offering quality, cost-effective, communications, information and
administrative services. Our reputation and brand name could be adversely
affected if we experience difficulties in introducing new
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XCARE.NET, INC.
applications, services and product offerings, if these applications, services
and product offerings are not accepted by customers, if we are required to
discontinue existing applications, services and product offerings or if our
products and services do not function properly.
Our growth and operating results would be impaired if we were unable to meet our
future capital requirements.
We expect that the money generated from our initial public offering,
combined with our current cash resources, will be sufficient to meet our
requirements for approximately 18 months. However, we expect that we will
continue to experience negative cash flow in the near term. Accordingly, we may
need to raise additional capital to support expansion, develop new or enhanced
applications, services and product offerings, respond to competitive pressures,
acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. We may need to raise additional funds by selling
debt or equity securities, by entering into strategic relationships or through
other arrangements. We cannot assure you that we will be able to raise any
additional amounts on reasonable terms, or at all, when they are needed.
Acquisitions could be difficult to integrate, disrupt our business and dilute
stockholder value.
We expect to acquire technologies and other health care technology
companies to increase the number and variety of applications, services and
product offerings we offer and to increase our customer base. To be successful,
we will need to identify applications, technologies and businesses that are
complementary to ours, integrate disparate technologies and corporate cultures
and manage a geographically dispersed company. Acquisitions could divert our
attention from other business concerns and expose us to unforeseen liabilities
or risks associated with entering new markets. Finally, we may lose key
employees while integrating these new companies. Integrating newly acquired
organizations and technologies into XCare.net could be expensive, time consuming
and may strain our resources. In addition, we may lose our current customers if
any acquired companies have relationships with competitors of our customers.
Consequently, we may not be successful in integrating any acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. The
health care industry is consolidating and we expect that we will face
intensified competition for acquisitions, especially from larger, better-funded
organizations. If we fail to execute our acquisition strategy successfully for
any reason, our business will suffer significantly.
We intend to pay for some of our acquisitions by issuing additional common
stock and this could dilute our stockholders. We may also use cash to buy
companies or technologies in the future. If we do use cash, we may need to incur
debt to pay for these acquisitions. Acquisition financing may not be available
on favorable terms or at all. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which would seriously harm our results of operations.
If our proprietary technology is subjected to infringement claims, we may have
to pay damages or seek a license from third parties, which could delay sales of
our products, and if our proprietary technology is infringed upon, we may
experience losses.
Our intellectual property is important to our business. We expect that we
could be subject to intellectual property infringement claims as the number of
our competitors grows and the functionality of our applications overlap with
competitive offerings. These claims, whether or not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
would be required to pay a substantial damage award and to develop
non-infringing technology, obtain a license or cease selling the applications
that contain the infringing intellectual property. We may be unable to develop
noninfringing technology or obtain a license on commercially reasonable terms,
or at all. In addition, we may not be able to protect against misappropriation
of our intellectual property. Third parties may infringe upon our intellectual
property rights, we may not detect this unauthorized use and we may be unable to
enforce our rights.
If we are not able to protect and enforce our trade names, internet address and
intellectual property rights, our financial condition and results of operations
may suffer.
We seek to protect our brand and our other intellectual property through a
combination of copyright, trade secret and trademark laws. Our XCare.net brand
is an important component of our business strategy. We have recently filed
federal trademark applications for "XCare.net," "XCare," "Solution Channels" and
"the Business to
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XCARE.NET, INC.
Business Platform for eHealth." We cannot guarantee that any of these trademark
applications will be granted. If we are unable to secure registration of these
marks or otherwise obtain the right to use these marks under contract or common
law, we may be required to stop using these marks. This could cause confusion to
our customers and in the marketplace and harm our business, financial condition
and results of operations.
In addition, our future success and ability to compete in our markets may
be dependent in part on our proprietary rights to products and services, which
we develop. We rely on copyright, trademark and trade secret laws and
contractual restrictions. We also expect to rely on patents to protect our
proprietary technology and to rely on similar proprietary rights of any of our
technology providers. We have filed a patent application to protect certain of
our proprietary technology. We cannot assure you that such application will be
approved or, if approved, will be effective in protecting our proprietary
technology. We enter into confidentiality agreements with all of our employees,
as well as with our customers and potential customers seeking proprietary
information, and limit access to and distribution of our software, documentation
and other proprietary information. We cannot assure you that the steps we take
or the steps such providers take would be adequate to prevent misappropriation
of our respective proprietary rights.
Government regulation of internet communications may impact our business by
directly or indirectly increasing our costs.
We provide Internet services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wireline communications. We currently are not
subject to direct regulation by the Federal Communications Commission or any
other governmental agency, other than regulations applicable to businesses
generally.
However, in the future we could become subject to regulation by the Federal
Communications Commission or another regulatory agency as a provider of basic
telecommunications services. Changes in the regulatory environment relating to
the application of access charges and Universal Service Fund support payments to
Internet and Internet telephony providers, regulation of Internet services,
including Internet telephony, and other regulatory changes that directly or
indirectly affect costs imposed on Internet or Internet telephony providers,
telecommunications costs or increase in the likelihood or scope of competition,
could harm our business and financial results.
We have anti-takeover defenses that could delay or prevent an acquisition of our
company.
On July 12, 2000 the Company's board of directors approved a preferred
stock rights agreement. This plan is not intended to prevent a takeover, but to
protect and maximize the value of shareholders' interests. In addition,
provisions of our certificate of incorporation, bylaws, other agreements and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
We may be subject to litigation if our common stock price is volatile.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company. The institution of class action litigation
against us could result in substantial costs to us and a diversion of our
management's attention and resources, which would harm our business, financial
condition, and results of operations. Any adverse determination in this
litigation could also subject us to significant liabilities.
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XCARE.NET, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, primarily changes in
interest rates. Uncertainties that are either non-financial or non-quantifiable,
such as political, economic, tax, other regulatory, or credit risks, are not
included in the following assessment of the Company's market risks.
Investments, including cash equivalents, short-term investments, long-term
marketable securities, consist of commercial paper and corporate bonds, with
maturities of up to 3 months. All investments are classified as held-to-maturity
as defined in SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and accordingly are carried at amortized costs. Changes in
interest rates could impact the Company's anticipated interest income.
The Company prepared sensitivity analyses of its interest rate exposures
and its exposure from anticipated investment for fiscal 2000 and 2001 to assess
the impact of hypothetical changes in interest rates. Based on the results of
these analyses, a 10% adverse change in interest rates from the 1999 fiscal
year-end rates would not have a material adverse effect of the fair value of
investments and would not materially impact the Company's results of operations,
cash flows, or financial condition for the next twelve months.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's registration statement on Form S-1 (SEC File No. 333-90165)
covering the Company's initial public offering (the "Offering") of 5,750,000
shares of common stock (including the underwriter's over-allotment option of
750,000 shares of common stock) at $18.00 per share was declared effective on
February 9, 2000. FleetBoston Robertson Stephens, Inc., SG Cowen Securities
Corporation, E*OFFERING Corp and Advest, Inc. acted as representatives for the
underwriters. The net proceeds to us from the sale of shares of our common stock
in the offering at the initial public offering price of $18.00 per share, after
deducting expenses of $2.1 million and underwriting discounts and commissions,
were approximately $94.1 million.
We expect to use the net proceeds from our initial public offering for
general corporate purposes, working capital and capital expenditures to fund our
operations, including to continue to expand and enhance our sales and marketing
operations and continue expanding our product offerings. We currently anticipate
that during the next 12 months, we will spend approximately $3 million of the
proceeds on research and development expenses, $7 million on sales and marketing
expenses, $3 million in hardware and software purchases and other capital
expenditures and $11 million on general and administrative expenses. The
estimates of $3 million for capital expenditures and $11 million for general and
administrative expenses represent increases from the estimates set forth in the
initial public offering prospectus for such categories of $2 million and $6
million, respectively. The increase in the estimate for capital expenditures is
due to greater than anticipated computer hardware and software needs and costs
relating to establishing new offices. The increase in the estimate for general
and administrative expenses is due to higher than expected personnel and
recruiting costs, increases in allowances for bad debts, and higher than
expected professional services and insurance costs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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XCARE.NET, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
Reports on Form 8-K
Filed on July 14, 2000 announcing that the board of directors of the
Company approved the adoption of a preferred stock rights agreement.
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XCARE.NET, INC.
SIGNATURES
In accordance with 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 thereto duly authorized.
XCARE.NET, INC.
Date: August 14, 2000 By: /s/ Lorine R. Sweeney
----------------------------- ------------------------------------
Lorine R. Sweeney
President and Chief Executive Officer
Date: August 14, 2000 By: /s/ Peter H. Cheesbrough
----------------------------- ------------------------------------
Peter H. Cheesbrough
Senior Vice President of Finance and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
