<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 SEPTEMBER 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 [ ]
At November 6, 2000, 16,271,186 shares of common stock were outstanding.
<PAGE> 2
XCARE.NET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1 - Financial Statements:
Balance Sheet as of September 30, 2000 and December 31, 1999 3
Statement of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999 4
Statement of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Part II - Other Information
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities and Use of Proceeds 22
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
</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)
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86,924 $ 7,455
Accounts receivable, net of allowance of $485 and $141, respectively 1,279 890
Receivables from affiliates 672 453
Work performed in advance of billings 1,026 557
Other current assets 1,980 1,296
--------- ---------
Total current assets 91,881 10,651
Property and equipment, net 3,349 1,368
Purchased software, net 354 566
Other assets 1,538 598
--------- ---------
Total assets $ 97,122 $ 13,183
========= =========
</TABLE>
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 684 $ 819
Accrued liabilities 1,718 1,449
Unearned revenue 535 153
Current portion of long-term debt and capital lease obligations 52 92
--------- ---------
Total liabilities 2,989 2,513
--------- ---------
Series A mandatorily redeemable convertible preferred stock, $0.01 par value; 0
and 6,000,000 shares authorized as of September 30, 2000 and December 31,
1999, respectively; 0 and 2,450,000 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively -- 6,810
Series B mandatorily redeemable convertible preferred stock, $0.01 par value; 0 and
75,000,000 shares authorized as of September 30, 2000 and December 31, 1999,
respectively; 0 and 63,053,144 shares issued and outstanding as of September
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, $0.01 par value, 5,000,000 and 0 shares authorized as of
September 30, 2000 and December 31, 1999, respectively; no shares issued and
outstanding at September 30, 2000 and December 31, 1999, respectively -- --
Common stock, $0.01 par value; 100,000,000 and 12,500,000 shares authorized as
of September 30, 2000 and December 31, 1999, respectively; 16,254,801 and
577,663 shares issued and outstanding as of September 30, 2000 and December
31, 1999, respectively 163 6
Additional paid-in capital 121,173 3,432
Unearned compensation, net (833) (2,269)
Accumulated deficit (26,370) (14,341)
--------- ---------
Total stockholders' equity (deficit) 94,133 (13,172)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 97,122 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 1,961 $ 813 $ 6,839 $ 2,654
Revenue from affiliates -- -- 663 --
-------- -------- -------- --------
Total revenue 1,961 813 7,502 2,654
-------- -------- -------- --------
Costs and expenses:
Cost of revenue 3,190 784 9,003 2,421
Sales and marketing 1,203 252 4,204 545
General and administrative 2,038 759 6,886 1,185
Research and development 427 256 1,877 417
Stock compensation expense 286 112 1,210 112
-------- -------- -------- --------
Total costs and expenses 7,144 2,163 23,180 4,680
-------- -------- -------- --------
Loss from operations (5,183) (1,350) (15,678) (2,026)
Interest income (expense), net 1,446 108 3,649 (150)
-------- -------- -------- --------
Net loss $ (3,737) $ (1,242) $(12,029) $ (2,176)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.23) $ (2.36) $ (0.88) $ (5.09)
======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 16,241 526 13,746 438
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,029) $ (2,176)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,116 535
Provision for losses on receivables 560 25
Stock compensation expense 1,210 112
Other 234 234
Changes in assets and liabilities:
Accounts receivable (949) 403
Receivables from affiliates (219) --
Work performed in advance of billings (469) --
Other current assets (1,777) (1,101)
Long-term deferred contract costs -- 285
Accounts payable (135) 160
Accrued liabilities 269 (1)
Unearned revenue 382 (356)
-------- --------
Net cash used in operating activities (11,807) (1,880)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,886) (113)
Investment in a related party (552) --
Long-term security deposits (297) --
Other (190) 4
-------- --------
Net cash used in investing activities (3,925) (109)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt -- 205
Principal payments on debt (3) (425)
Principal payments under capital leases (37) (740)
Proceeds from issuance of preferred stock, net -- 13,740
Proceeds from issuance of common stock, net 95,197 42
Exercises of stock options 44 --
-------- --------
Net cash provided by financing activities 95,201 12,822
-------- --------
Net increase in cash and cash equivalents 79,469 10,833
Cash and cash equivalents at beginning of period 7,455 198
-------- --------
Cash and cash equivalents at end of period $ 86,924 $ 11,031
======== ========
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 ("SEC"). 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, we believe that the disclosures are adequate to make the
information presented not misleading. The unaudited financial statements have
been prepared on the same basis as our 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 nine months ended September 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 accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 1999.
Reclassifications. Certain prior year information has been reclassified to
conform with the current year presentation.
2. INITIAL PUBLIC OFFERING
On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, we completed an
Initial Public Offering ("IPO") of 5,750,000 shares of our common stock
(including 750,000 shares sold pursuant to the exercise of the underwriter's
over-allotment option) at an offering price of $18.00 per share (the
"Offering"). Proceeds to us 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 our 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.
3. NET LOSS PER COMMON SHARE
Net loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("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 shares outstanding excluding potential common shares outstanding
during the period if their effect is antidilutive. Potential common shares
consist of incremental common shares issuable upon the exercise of stock options
and warrants.
6
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XCARE.NET, INC.
NOTES TO FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (3,737) $ (1,242) $(12,029) $ (2,176)
Accretion of mandatorily redeemable
convertible preferred stock -- (21) (7) (54)
-------- -------- -------- --------
Net loss available to common stockholders $ (3,737) $ (1,263) $(12,036) $ (2,230)
======== ======== ======== ========
Denominator:
Weighted average common shares
outstanding - basic and diluted 16,241 526 13,746 438
======== ======== ======== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
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 dated July 21, 2000
specifying a prescribed payment schedule with the final payment due on November
30, 2000. In addition, we re-affirmed our warranty obligations under the terms
of the original contract as part of the agreement. In accordance with the
agreement, we have received $400,000 from the customer and the outstanding
balance as of September 30, 2000 was $566,000.
The Other assets balance includes an investment in a limited partnership
for $1.2 million. The limited partnership's only asset is an investment in
Advica Health Resources ("Advica"), one of our customers. In addition, a
significant shareholder of the Company controlled Advica. The investment in the
limited partnership is partially offset by unearned revenue of $630,000 related
to a professional service agreement with Advica.
In October 2000, the Company combined a $268,000 loan to Advica and the
$1.2 million limited partnership investment into a $1.5 million promissory note
payable from Advica to the Company.
On November 8, 2000, the Company purchased all of Advica's common shares
for 70,000 shares of XCare.net common stock. Total value of the consideration
was $1.7 million. Advica became a wholly owned subsidiary of XCare.net effective
on the date of the acquisition and the transaction will be accounted under the
purchase method of accounting in the fourth quarter of 2000. Under certain
circumstances as prescribed in the purchase agreement, we will pay additional
consideration of $400,000 in our stock.
In October 2000, we signed an agreement with MedUnite, Inc. ("MedUnite") to
provide software license, hosting, transaction processing and maintenance
services. The MedUnite agreement provides that, among other things, MedUnite can
cancel the agreement at any time prior to June 1, 2001. In addition, under the
terms of the agreement, XCare.net may make an investment in MedUnite between $10
and $20 million. In connection with the agreement, we granted and issued
warrants to MedUnite to purchase 1,350,000 shares of our common stock at an
exercise price of $4.06. The warrants are vested, exercisable and
non-forfeitable for a period of eighteen months from the date of grant. A $3.1
million charge related to issuance of the warrants will be recorded as sales and
marketing expense in the fourth quarter of 2000.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," as amended, in December 1999 that provides
further interpretive guidance on revenue recognition for public companies. SAB
No. 101 will be effective for our fourth quarter of fiscal year 2000 results.
Management anticipates that the adoption of SAB No. 101 will not have a material
impact on our financial condition or results of operations and that it will not
have a significant impact on our current licensing or revenue recognition
practices.
7
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XCARE.NET, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis Of Financial Condition and Results
of Operations of XCare.net, Inc. ("Xcare.net,", the "Company", "we", "us" or
"our") contains 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 our 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 our Annual report on Form 10-K for the year ended
December 31, 1999 under "Risk Factors". Unless required by law, we undertake 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 we
file from time to time with the Securities and Exchange Commission ("SEC").
OVERVIEW
XCare.net is an electronic commerce service provider for health care
businesses. We have developed an Internet-based proprietary software platform,
Xtiera(TM) 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 Xtiera(TM), 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 Xtiera(TM) to deliver a broad range of applications, services and
electronic product offerings that streamline and automate high-volume,
data-intensive transactions and processes.
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
revenues and cash flow. As of September 30, 2000, there had been no change in
our relationship with AMP and we have continued to provide services under our
agreement.
On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, we completed an
Initial Public Offering ("IPO") of 5,750,000 shares of our common stock
(including 750,000 shares sold pursuant to the exercise of the underwriter's
over-allotment option) at an 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.
8
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XCARE.NET, INC.
On November 8, 2000, the Company purchased all of Advica's common shares
for 70,000 shares of XCare.net common stock. Total value of the consideration
was $1.7 million. Advica became a wholly owned subsidiary of XCare.net effective
on the date of the acquisition and the transaction will be accounted under the
purchase method of accounting in the fourth quarter of 2000. Under certain
circumstances as prescribed in the purchase agreement, we will pay additional
consideration of $400,000 in our stock.
In October 2000, we signed an agreement with MedUnite, Inc. ("MedUnite") to
provide software license, hosting, transaction processing and maintenance
services. The MedUnite agreement provides that, among other things, Medunite can
cancel the agreement at any time prior to June 1, 2001. In addition, under the
terms of the agreement, XCare.net may make an investment in MedUnite between
$10.0 and $20.0 million. In connection with the agreement, we granted and issued
warrants to MedUnite to purchase 1,350,000 shares of our common stock. The
warrants are vested, exercisable and non-forfeitable for a period of eighteen
months from the date of grant. A $3.1 million charge related to issuance of the
warrants will be recorded as sales and marketing expense in the fourth quarter
of 2000.
The following table sets forth, for the periods indicated, certain items
from our statements of operations as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Cost of revenue 162.7 96.4 120.0 91.2
Sales and marketing 61.3 31.0 56.0 20.5
General and administrative 103.9 93.4 91.8 44.6
Research and development 21.8 31.5 25.0 15.7
Stock compensation expense 14.6 13.8 16.1 4.2
------ ------ ------ ------
Total costs and expenses 364.3 266.1 309.0 176.3
------ ------ ------ ------
Loss from operations (264.3) (166.1) (209.0) (76.3)
Interest income (expense), net 73.7 13.3 48.6 (5.7)
------ ------ ------ ------
Net loss (190.6)% (152.8)% (160.3)% (82.0)%
====== ====== ====== ======
</TABLE>
COMPARISON OF THE COMPANY'S RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 AND 1999.
Total revenue. The increase in revenue reflects 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. Additionally, higher recurring revenue from Web site hosting,
transaction processing, operational support, recurring license fees and
maintenance services in the three months ended September 30, 2000 added to the
increase in revenues as more of our Internet-based development projects moved
into production.
Cost of revenue. Cost of revenue consists primarily of salaries, bonuses,
employee benefits, payments to third-party consultants, facilities costs and
depreciation directly related to consulting projects, Web site hosting,
operational support, transaction processing and maintenance services. The
increase in the cost of revenue is related to the cost of additional personnel
hired to support the growth in our Internet-based development projects and an
increase in third-party contractors from the prior comparable period. We
anticipate cost of revenue will increase as we continue to expand our Internet
strategy.
Gross margins decreased due to increased staffing in anticipation of
obtaining two large contracts which resulted in lower than expected utilization.
Additionally, an increased hosting infrastructure without the offsetting hosting
revenue also contributed to lower gross margins.
Sales and marketing. Sales and marketing expenses consist of
personnel-related costs, including salaries, commissions, employee benefits,
travel expenses, field sales office expenses, advertising and promotion costs.
Sales and marketing expenses increased due to additional personnel and increased
travel and entertainment, trade show and conference expenses as our sales and
marketing programs were expanded and intensified. In the fourth quarter of 2000,
a $3.1 million charge related to issuance of the warrants will be recorded as
sales and marketing expense.
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. The increase in general and administrative
expenses was primarily due to an increase in
9
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XCARE.NET, INC.
personnel in the areas of human resources, accounting and administration and
recruiting costs. Additionally, professional fees increased due to higher legal
and accounting fees associated with periodic reporting requirements of a public
company. In 2000, we purchased directors and officers insurance resulting in an
increase in insurance expense.
Research and development. Research and development expenses include
personnel, facilities and depreciation costs that are directly related to
product development, enhancements to existing applications, services and quality
assurance activities. The increase in research and development expenses reflects
an increase in departmental personnel and the increased use of third-party
contractors related to the development of our transaction platform, Xtiera(TM).
Stock compensation expense. During 1999 and through February 9, 2000, the
effective date of our 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 fair value of our common stock at the date of grant. Unearned
stock compensation will be amortized to expense over the vesting period,
generally four years, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28. The options or common stock
may be subject to repurchase during the vesting period. During the three months
ended September 30, 2000, we recorded amortization expense of unearned
compensation of $0.3 million. We expect to recognize amortization expense
related to unearned compensation for the aforementioned grants of $1.4 million
in 2000, $0.5 million in 2001, $0.2 million in 2002 and $45,000 in 2003.
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. The increase in net interest income 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 September 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 September 30, 2000 and 1999.
COMPARISON OF THE COMPANY'S RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
Total revenue. The increase in revenue reflects the sale of a completed Web
site to one customer, which accounted for $1.1 million or 14.7% of total revenue
and increased consulting revenue derived from more time intensive Internet-based
development projects as compared to the MCIS implementation-related projects in
the prior year. Additionally, higher recurring revenue from Web site hosting,
transaction processing, operational support, recurring license fees and
maintenance services in the nine months ended September 30, 2000 added to the
increase in revenues as more of our Internet-based development projects moved
into production.
Cost of revenue. Cost of revenue consists primarily of salaries, bonuses,
employee benefits, payments to third-party consultants, facilities costs and
depreciation directly related to consulting projects, Web site hosting,
operational support, transaction processing and maintenance services. The
increase in cost of revenue is related to the cost of additional personnel hired
to support the growth in our Internet-based development projects and an increase
in contractors from the prior comparable period. In addition, in 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 will increase as we continue to expand our Internet
strategy.
Gross margins decreased due to increased staffing in anticipation of
obtaining two large contracts which resulted in lower than expected utilization.
Additionally, an increased hosting infrastructure without the offsetting hosting
revenue also contributed to lower gross margins.
Sales and marketing. Sales and marketing expenses consist of
personnel-related costs, including salaries, commissions, employee benefits,
travel expenses, field sales office expenses, advertising and promotion costs.
Sales
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XCARE.NET, INC.
and marketing expenses increased due to additional personnel and increased
travel and entertainment, 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. In the fourth quarter of 2000,
a $3.1 million charge related to issuance of the warrants will be recorded as
sales and marketing expense.
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. The increase in general and administrative
expenses was primarily due to (1) an increase in personnel in the areas of human
resources, accounting and administration, (2) higher recruiting costs, (3)
additional legal and accounting fees associated with periodic reporting
requirements of a public company, (4) consulting fees associated with process
improvement initiatives, (5) additional insurance expense related to purchasing
directors and officers insurance, (6) increased costs related to opening
separate offices in Santa Clara and Los Angeles and (7) an increase in bad debt
expense of $0.5 million to reserve for the potentially uncollectible portion of
our outstanding receivables.
Research and development. Research and development expenses include
personnel costs, facilities and depreciation costs that are directly related to
product development, enhancements to existing applications, services and quality
assurance activities. The increase in research and development expenses reflects
an increase in departmental personnel and the increased use of third-party
contractors related to the development of our transaction platform, Xtiera(TM).
Stock compensation expense. During 1999 and through February 9, 2000, the
effective date of our 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 fair value of our common stock at the date of grant. Unearned
stock compensation will be amortized to expense over the vesting period,
generally four years, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28. The options or common stock
may be subject to repurchase during the vesting period. During the nine months
ended September 30, 2000, we recorded amortization expense of unearned
compensation of $1.2 million. We expect to recognize amortization expense
related to unearned compensation for the aforementioned grants of $1.4 million
in 2000, $0.5 million in 2001, $0.2 million in 2002 and $45,000 in 2003.
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. The increase in net interest income 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 nine months ended September 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 September 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through a combination of cash
flow from operations, sales of common and convertible preferred stock, and
issuances of convertible promissory notes. At September 30, 2000, our principal
source of liquidity included $89 million in working capital and no long-term
outstanding debt.
On February 9, 2000, we completed an IPO of 5,750,000 shares of our common
stock (including 750,000 shares sold pursuant to the exercise of the
underwriter's over-allotment option) at an offering price of $18.00 per share.
Proceeds to us from the Offering, after calculation of the underwriter's
discount, totaled approximately $94.1 million, net of offering costs of
approximately $2.1 million.
We expect to use our cash and cash equivalents 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,
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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 our cash and cash equivalents for other purposes. A portion of our
cash and cash equivalents 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 our cash and cash equivalents for the above purposes, we intend
to invest such funds in short-term, interest-bearing, investment-grade
securities.
Net cash used in operating activities for the nine months ended September
30, 2000 and 1999 was $11.9 million and $1.9 million, respectively. Net cash
used in operating activities was primarily attributable to net losses.
Net cash used in investing activities for the nine months ended September
30, 2000 and 1999 was $3.9 million and $0.1 million, respectively. Investing
activities increased primarily due to purchases of computer hardware and
software, office furniture and equipment of $2.9 million. Additionally, we
invested $0.6 million in a related party. We anticipate total capital
expenditures for 2000 to be approximately $3.0 million.
Net cash provided by financing activities of $95.2 million for the nine
months ended September 30, 2000 was primarily related to the net proceeds
received from our initial public offering. The net cash provided by financing
activities of $12.8 million for the nine months ended September 30, 1999 was
primarily related to the net proceeds received from the issuance of 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 SEC 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 our
financial condition or results of operations and that it will not have a
significant impact on our current licensing or revenue recognition practices.
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.
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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 nine months ended
September 30, 2000 and 1999 and for the years ended December 31, 1999 and 1998.
As of September 30, 2000, we had an accumulated deficit of $26.4 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
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.
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If the health care industry does not accept the need for a common technology
platform, our business may 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 may 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.
Xtiera(TM) 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.
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 nine months ended September 30, 2000, sales to NurseFinders,
Inc. accounted for 14% of revenues, sales to American Medical Pathways, Inc. a
subsidiary of American Medical Response, Inc and American Psych Systems each
accounted for 10% of revenues, sales to Methodist Care, Inc. accounted for 9% of
revenues, Munshee.com, LLC (a related party) accounted for 7% of our revenue and
sales to Expert Practice, Inc. accounted for 6% of our 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. 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 MatchNet 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
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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 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.
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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.
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
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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, 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 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 be liable for the denial
of payments for medical claims or medical services.
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.
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We may face product-related liabilities that could force us to pay damages,
which would hurt our reputation.
Although the Company and its customers test the 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 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 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.
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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," "Xtiera," "Solution
Channels" and "the Business to 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.
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XCARE.NET, INC.
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.
20
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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 cost. 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.
We hold marketable equity investments, which are recorded at fair value.
These investments have exposure to equity price risk. We periodically assess
whether these equity investments have declined in value and if the decline is
other than temporary. If we deem the decline to be other than temporary, we
will take a charge associated with the decline in these equity investments in
the future.
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XCARE.NET, INC.
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 continued expansion of our sales and marketing operations
and 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, $3 million in hardware and software purchases and other
capital expenditures, $5 million on sales and marketing expenses and $9 million
on general and administrative expenses. The estimates of $3 million for capital
expenditures, $5 million for sales and marketing and $9 million for general and
administrative expenses represent changes from the estimates set forth in the
initial public offering prospectus for such categories which were $2 million, $7
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 decrease in the
estimate for sales and marketing expense is related to a decrease in forecasted
sales personnel. The increase in the estimate for general and administrative
expense is due to an increase in forecasted personnel and recruiting costs and
higher than expected professional services and insurance costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders (the "Annual Meeting") on
November 1, 2000. The number of common votes present at the Annual Meeting
voting and withholding authority to vote was 14,369,561 which represented 88% of
the common votes outstanding, which were 16,249,801 votes, on September 20,
2000, the record date for the Annual Meeting. At the meeting, the following
items relating to the Company were submitted to a vote of shareholders of the
Company:
1. Election of Directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES ABSTAINED
---------- ---------------
<S> <C> <C>
Fred L. Brown 13,493,440 876,121
L. Ben Lytle 13,492,340 877,221
Daniel J. Mitchell 13,507,440 862,121
</TABLE>
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XCARE.NET, INC.
2. Amendment of the Company's 1997 Stock Plan to increase the number of
shares of common stock reserved for issuance under the plan from
2,200,000 to 3,600,000 shares.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
---------- ------------- ---------------
<S> <C> <C>
10,176,820 1,745,188 8,000
</TABLE>
Based on the aforementioned voting results, both proposals were approved by our
shareholders.
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.
23
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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: November 14, 2000 By: /s/ Lorine R. Sweeney
------------------ ----------------------------------
Lorine R. Sweeney
President and Chief Executive Officer
Date: November 14, 2000 By: /s/ Gary T. Scherping
------------------ ----------------------------------
Gary T. Scherping
Vice President of Finance
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
</TABLE>
