<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ________ to _____________
COMMISSION FILE NUMBER: 0-30859
CARESCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2703715
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3600 MARKET STREET
PHILADELPHIA, PA 19104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(215) 387-9401
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding, as of
November 10, 2000 was 12,756,851.
<PAGE>
Page 1
CARESCIENCE INC.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -- December 31, 1999 and September 30, 2000 (unaudited).........2
Statements of Operations -- Three and Nine Months Ended September 30, 1999
and September 30, 2000 (unaudited).............................................3
Statements of Cash Flows -- Nine months Ended September 30, 1999 and
September 30, 2000 (unaudited).................................................4
Notes to Financial Statements..................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................12
Item 6. Exhibits and Reports on Form 8-K......................................12
<PAGE>
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CARESCIENCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(unaudited) (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 3,381,600 $ 13,371,617
Held-to-maturity securities ........................................ -- 20,500,129
Interest Receivable ................................................ -- 395,084
Accounts receivable, net of allowance for doubtful
accounts of $29,754 and $48,794, respectively .................. 719,570 761,204
Prepaid expenses and other ......................................... 203,957 354,234
------------ ------------
Total current assets .................................................. 4,305,127 35,382,268
------------ ------------
Property and equipment:
Computer equipment ................................................. 2,213,629 3,931,337
Office equipment ................................................... 263,260 435,389
Furniture and fixtures ............................................. 273,086 397,101
------------ ------------
2,749,975 4,763,827
Less--Accumulated depreciation and amortization .................... (1,705,518) (2,282,650)
------------ ------------
Net property and equipment ....................................... 1,044,457 2,481,177
------------ ------------
Total assets ................................................... $ 5,349,584 $ 37,863,445
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations ....................... $ 317,065 $ 262,404
Accounts payable ................................................... 214,263 903,086
Accrued expenses ................................................... 397,076 662,205
Deferred revenues .................................................. 2,923,737 3,006,660
------------ ------------
Total current liabilities ........................................ 3,852,141 4,834,355
------------ ------------
Capital lease obligations ............................................. 459,955 488,969
------------ ------------
Commitments and contingencies .........................................
Mandatorily redeemable preferred stock ................................ 4,681,634 --
------------ ------------
Shareholders' equity (deficit):
Preferred stock, no par value, liquidation value of
$13,336,234 at December 31, 1999 ................................. 12,009,700 --
Common stock, no par value, 16,000,000 shares
authorized, 4,827,900 and 14,196,851 shares issued
and 3,387,900 and 12,756,851 outstanding ......................... 50,000 59,614,651
Additional paid-in capital ......................................... 5,624,839 5,745,522
Deferred compensation .............................................. (5,392,322) (4,490,560)
Accumulated deficit ................................................ (15,036,363) (27,429,492)
Treasury stock, at cost, 1,440,000 shares .......................... (900,000) (900,000)
------------ ------------
Total shareholders' equity (deficit) ............................ (3,644,146) 32,540,121
------------ ------------
Total liabilities and shareholders' equity (deficit) .......... $ 5,349,584 $ 37,863,445
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
Page 3
CARESCIENCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues ............................... $ 1,195,609 $ 2,207,402 $ 2,781,815 $ 5,758,384
Cost of revenues (excludes
stock-based compensation of
$171,088 and $512,278 for the
three and nine months ended
September 30, 2000) .................. 564,280 1,275,550 1,630,499 3,450,016
------------ ------------ ------------ ------------
Gross profit ......................... 631,329 931,852 1,151,316 2,308,368
------------ ------------ ------------ ------------
Operating expenses:
Research and development
(excludes stock-based
compensation of $23,922 and
$70,779 for the three and nine
months ended September 30, 2000) ... 361,671 1,329,069 1,115,319 2,734,740
Selling, general and
administrative (excludes
stock-based compensation of
$146,742 and $439,387 for the
three and nine months ended
September 30, 2000) ................ 994,251 2,192,210 2,879,710 5,533,485
Stock-based compensation ............. -- 341,752 -- 1,022,444
------------ ------------ ------------ ------------
Total operating expenses ........... 1,355,922 3,863,031 3,995,029 9,290,669
------------ ------------ ------------ ------------
Operating loss ..................... (724,593) (2,931,179) (2,843,713) (6,982,301)
Interest income ........................ (37,534) (561,695) (132,387) (627,982)
Interest expense ....................... 20,906 23,839 71,906 68,302
------------ ------------ ------------ ------------
Net loss ............................... (707,965) (2,393,323) (2,783,232) (6,422,621)
Accretion of redemption premium on
preferred stock ...................... 102,459 -- 293,173 253,731
Preference distribution on
preferred stock ...................... -- -- -- 5,716,784
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ......................... $ (810,424) $ (2,393,323) $ (3,076,405) $(12,393,136)
============ ============ ============ ============
Net loss per common share:
Basic and diluted .................... $ (0.24) $ (0.19) $ (0.91) $ (1.88)
Weighted average shares outstanding:
Basic and diluted .................... 3,387,900 12,756,851 3,387,900 6,602,066
</TABLE>
The accompanying notes are an integral part of these statements.
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CARESCIENCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................ $ (2,783,232) $ (6,422,621)
Adjustments to reconcile net loss to
net cash used in operating activities--
Depreciation and amortization ......... 426,246 577,132
Provision for bad debts ............... 17,500 12,000
Stock-based compensation .............. -- 1,022,444
Changes in assets and liabilities--
(Increase) in--
Interest Receivable .............. -- (395,084)
Accounts receivable .............. (861,242) (53,634)
Prepaid expenses and other ....... (63,289) (150,277)
Increase (decrease) in--
Accounts payable and accrued
expenses ....................... (64,436) 953,952
Deferred revenues ................ 1,112,084 82,923
------------ ------------
Net cash used in operating
activities ................... (2,216,369) (4,373,165)
------------ ------------
Cash flows used in investing activities:
Purchases of held-to-maturity
securities ............................ -- (20,500,129)
Purchases of property and equipment,
net ................................... (209,342) (1,761,450)
------------ ------------
Net cash used in investing
activities ................... (209,342) (22,261,579)
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations ... (275,935) (278,040)
Cost related to the issuance of
common stock .......................... -- (1,285,047)
Payments of dividends of Series C,D &
E Preferred Stock ..................... -- (1,516,785)
Redemption of Series F Preferred Stock.. -- (4,935,367)
Proceeds from the issuance of common
stock ................................. -- 44,640,000
------------ ------------
Net cash provided by (used
in) financing activities ...... (275,935) 36,624,761
------------ ------------
Net increase (decrease) in cash and cash
equivalents ............................. (2,701,646) 9,990,017
Cash and cash equivalents,
beginning of period ..................... 5,346,099 3,381,600
------------ ------------
Cash and cash equivalents,
end of period ........................... $ 2,644,453 $ 13,371,617
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Page 5
CARESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
CareScience, Inc. (formerly Care Management Science Corporation) provides
Internet-based tools designed to improve the quality and efficiency of health
care. The Company's products use its proprietary clinical algorithms and data
collection and storage technologies to perform complex clinical analyses. The
Company's customers use its products to identify clinical inefficiencies and
medical errors and monitor the results of implemented solutions. Additionally,
the Company facilitates the real-time exchange of clinical information over the
Internet among local health care constituents.
The balance sheet as of September 30, 2000, the statements of operations
for the three and nine months ended September 30, 1999 and 2000 and the
statements of cash flows for the nine months ended September 30, 1999 and 2000
have been prepared by the Company without audit. In the opinion of management,
all adjustments, consisting of normal and recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
September 30, 2000 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the operating results for the full year.
Cash and Cash Equivalents and Held-to-Maturity Securities
The Company invested excess cash in highly liquid corporate debt
securities all with maturities of six months or less. For financial reporting
purposes, the Company considers such investments with an original maturity of
three months or less to be cash equivalents. Held-to-maturity investments in the
accompanying balance sheet represent such investments that mature in three to
six months. It is the Company's intent to hold these securities to maturity. As
of September 30, 2000 cash and cash equivalents and held-to-maturity securities
include $11,862,417 and $20,500,129 of such securities, respectively.
Supplemental Cash Flow Information
The Company paid interest of $71,906 and $68,302 for the nine months ended
September 30, 1999 and 2000, respectively.
The Company financed $71,834 and $252,401 of property and equipment
purchases with capital leases for the nine months ended September 30, 1999 and
2000, respectively.
<PAGE>
Page 6
Major Customers
The Company's operations are conducted in one business segment and sales
are primarily made to health care payors and providers. The company had one
customer for each of the nine month periods ended September 30, 1999 and 2000,
which accounted for 13% and 20% of total revenues.
The Company had three customers at September 30, 2000, which accounted for
38% of total accounts receivable.
(2) INITIAL PUBLIC OFFERING
On June 28, 2000, the Company completed its initial public offering of
4,000,000 shares of Common stock at a price of $12.00 per share. The Company
received net proceeds of approximately $43.4 million from the offering. Upon the
consummation of the offering the following transactions were recorded:
- The conversion of Series C, D and E Convertible Preferred stock into
5,018,951 shares of Common stock;
- The issuance, upon the conversion of the Series C Convertible Preferred
stock, of Series F Redeemable Preferred stock, with a redemption value of
$4.2 million, and the simultaneous redemption of the Series F Redeemable
Preferred stock for 350,000 shares of Common stock;
- The accretion of the redemption value of the Series G Preferred stock through
June 2000 which was paid on July 5, 2000; and
- The declaration of a dividend of $1.5 million (calculated at 8% per annum
through July 5, 2000) paid to the Series C, D and E Preferred shareholders
from the proceeds of the Offering on July 5, 2000.
(3) NET LOSS PER SHARE
Net loss per share is calculated utilizing the principles of SFAS No. 128,
"Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive securities
and is computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is computed assuming the conversion or exercise of all dilutive securities such
as preferred stock, options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of basic
EPS. The number of incremental shares from the assumed exercise of stock options
and warrants is calculated applying the treasury stock method. Stock options,
warrants and Preferred stock convertible into common shares were excluded from
the calculations as they were anti-dilutive due to the net loss.
(4) COMMON STOCK OPTIONS
Equity Compensation Plans
The Company's 1995 Equity Compensation Plan (the "Plan") permits the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights and restricted stock. The Company has authorized the
issuance of up to 2,065,038 shares of Common stock to satisfy grants under the
Plan. At September 30, 2000, there were 294,940 shares reserved under the Plan
available for grant. A committee of the Board of Directors (the "Committee")
administers the Plan and determines the terms of the grants.
In December 1998, the Company adopted the 1998 Time Accelerated Restricted
Stock Option Plan (the "Accelerated Plan"). The Accelerated Plan provides for
the granting of non-qualified stock options to officers, senior management and
employee directors of the Company. The aggregate number of shares of Common
stock the Company may issue under the Accelerated Plan is 483,594 shares. At
September 30, 2000 there were no shares reserved under the Accelerated Plan
available for grant.
The Company accounts for all plans under APB Opinion No. 25, under which
compensation expense is recognized based on the amount by which the fair value
of the underlying common stock exceeds the exercise price of the stock options
on the measurement date. For financial reporting purposes, the Company has
determined that the deemed fair market value on the measurement date for certain
stock options was in
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Page 7
excess of the exercise price. This amount has been recorded as deferred
compensation and is being amortized over the vesting period of the applicable
options, which range between four and seven years. The Company recorded deferred
compensation of $5,624,839 and $120,683 during the year ended December 31, 1999
and the nine months ended September 30, 2000, respectively. The Company
recognized $341,752 and $1,022,444 of compensation expense related to options
for the three and nine months ended September 30, 2000, respectively.
The following table summarizes the option activity for both plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AVERAGE
FOR OF PRICE AGGREGATE EXERCISE
GRANT SHARES PER SHARE PRICE PRICE
---------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 488,000 126,000 $0.25- 1.25 $ 93,500 $ .74
Authorized........................... -- -- -- -- --
Granted.............................. (163,400) 163,400 1.25 204,250 1.25
Forfeited/Canceled................... 38,200 (38,200) 0.25- 1.25 (26,550) .70
---------- --------- ----------- ----------- -------
Balance, December 31, 1997............. 362,800 251,200 0.25- 1.25 271,200 1.08
Authorized........................... 1,134,632 -- -- -- --
Granted.............................. (472,635) 472,635 1.25- 2.60 895,227 1.89
Forfeited/Canceled................... 12,800 (12,800) 0.25- 1.25 (10,800) .84
---------- --------- ----------- ----------- -------
Balance, December 31, 1998............. 1,037,597 711,035 0.25- 2.60 1,155,627 1.63
Authorized........................... -- -- -- -- --
Granted.............................. (1,108,150) 1,108,150 1.25- 2.59 2,814,164 2.54
Forfeited/Canceled................... 216,413 (216,413) 0.25- 2.59 (291,017) 1.34
---------- --------- ----------- ----------- -------
Balance, December 31, 1999............. 145,860 1,602,772 0.25- 2.60 3,678,774 2.30
Authorized (unaudited)............... 800,000 -- -- -- --
Granted (unaudited).................. (697,358) 697,358 2.59-12.00 6,594,548 9.46
Forfeited/Canceled (unaudited)....... 46,438 (46,438) 1.25- 2.59 (141,458) 3.05
---------- --------- ----------- ----------- -------
Balance, September 30, 2000
(unaudited).......................... 294,940 2,253,692 $0.25-12.00 $10,131,864 $ 4.50
========== ========= =========== =========== =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report includes a number of forward-looking statements that reflect
our current views with respect to future events and financial performance. We
use words such as anticipates, believes, expects, future, and intends, and
similar expressions to identify forward-looking statements. For these statements
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. There are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements, including:
- the difficulty in evaluating our business because we operate in a new
industry and our operating history is limited;
- we have a history of losses and expect our losses to continue;
- the proprietary technology we own or license may be subjected to
infringement claims or disagreements with the licensor which could be
costly to resolve;
- we depend on an exclusive license with the University of Pennsylvania for
our technology, and the loss of this license would impair our ability to
develop our business;
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Page 8
- we could be liable for information retrieved from our Web sites and incur
significant costs from resulting claims;
- we may experience system failures which could interrupt our service and
damage our customer relationships;
- the health care industry may not accept our solutions or buy our products
which would adversely affect our financial results;
- because our revenues are dependent on a limited number of product lines,
the failure of any one of these product lines would significantly decrease
our revenues;
- termination of one or more of our significant contracts would cause a
significant decline in our revenue;
- failure to manage our growth would adversely affect our operations;
- we face intense competition and may be unable to compete successfully which
would adversely effect our financial results;
- the loss of any of our key personnel could adversely affect our operations;
- our failure to develop strategic relationships could adversely affect our
ability to develop new products;
- our failure to use new technologies effectively or to adapt emerging
industry standards would adversely affect our ability to compete;
- our failure to adapt our technology to our customers' needs or to handle
high levels of customer activity would adversely affect our ability to
increase revenue;
- failure of our service providers could interrupt our business and damage
our customer relationships;
- we may need to obtain additional capital and failure to do so may limit our
growth;
- health information is subject to potential government regulation and legal
uncertainties and changes may require us to alter our business;
- changes in the health care industry could adversely affect our operations;
- our business will suffer if commercial users do not accept Internet
solutions;
- our industry is evolving and we may not adapt successfully.
Overview
We released our first Internet products, CaduCIS Manager and CaduCIS Net,
in 1996. Since our first product release, we have signed over $15 million in
multi-year contracts with customers for our CaduCIS products. In March 1999, we
introduced our CareStandard products, and entered into a $4.6 million contract
with the California HealthCare Foundation to develop our Care Exchange
technology and business model. We have recently entered into a $1.5 million
five-year collaboration agreement with British Biotech plc to further develop
our CareScript product which is a web based analytical tool for acquiring,
managing and evaluating clinical data in the field of oncology.
We generate revenues from subscriptions to our Internet-based proprietary
technology applications and hosting of customer data, as well as from training,
implementation and consulting services. We sell our products individually or as
an integrated suite of products and services. Our contracts are fixed price
based on estimates of certain variables, such as the number of a hospital's
patient admissions or outpatient visits. In the future, we may also price our
products on a per-transaction basis.
Our subscription and development agreements typically cover an initial
three-to five-year period with provisions for automatic renewals. We recognize
training and implementation fees, as well as subscriptions and related hosting
revenues, on a pro-rata basis over the life of the contract. We recognize
consulting fees as the program or service is delivered.
Our contracts generally provide for payment in advance of services
rendered. Therefore, we record these payments as deferred revenues and recognize
these payments when earned in accordance with our
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Page 9
revenue recognition policy. Our deferred revenue balances were $2.9 million
and $3.0 million at December 31, 1999 and September 30, 2000, respectively.
More than 100 health care organizations subscribe to our products.
We have incurred substantial research and development costs since
inception and have also invested in our corporate infrastructure to support our
long-term growth strategy. We expect that our operating expenses will continue
to increase as we expand our product development and sales and marketing
efforts. Accordingly, we expect to continue to incur quarterly net losses for
the foreseeable future.
On June 28, 2000 we completed an initial public offering of 4,000,000
shares of Common stock at a price of $12.00 per share. We received aggregate net
cash proceeds of approximately $43.4 million from the initial public offering on
July 5, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUES
Total revenues increased 85% to $2.2 million for the three months ended
September 30, 2000 from $1.2 million for the three months ended September 30,
1999. The increase was primarily related to revenues generated from newly signed
customer contracts.
Unrecognized revenues related to customer contracts as of September 30,
2000 totaled $14.7 million.
COST OF REVENUES
Costs of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the three months ended September 30, 2000 was $1.3 million
(excluding stock-based compensation of $171,000), an increase of $711,000 or
126%, compared to $564,000 for the three months ended September 30, 1999. The
increase was primarily a result of additional costs necessary to service new
customers.
GROSS PROFIT
Our gross profit margin decreased from 53% for the three months ended
September 30, 1999, to 42% for the three months ended September 30, 2000. The
decrease in gross profit margin is primarily due to increased costs to service
new client growth.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product development
costs. Research and development costs for the three months ended September 30,
2000 were $1.3 million (excluding stock-based compensation of $24,000), an
increase of $967,000 or approximately 267%, compared to $362,000 for the three
months ended September 30, 1999. This increase is primarily due to expenditures
made related to new product development.
As a percentage of revenue, research and development costs were 60% for
the three months ended September 30, 2000 as compared to 30% for the three
months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include costs associated with
our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $2.2 million (excluding stock-based compensation of
$147,000), an increase of $1.2 million, or 120% compared to $994,000 for the
three months ended September 30, 1999. The increase was primarily related to
hiring of additional sales and management personnel and marketing expenditures
to increase and support customer growth.
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Page 10
As a percentage of revenues, selling, general, and administrative expenses
were 99% for the three months ended September 30, 2000 as compared to 83% for
the three months ended September 30, 1999.
STOCK-BASED COMPENSATION
We granted certain stock options to our officers and employees with
exercise prices deemed to be below the fair market value of the underlying
stock. The cumulative difference between the fair value of the underlying stock
at the date the options were granted and the exercise price of the granted
options was $5.7 million at September 30, 2000. We expect to amortize this
amount over the four to seven year vesting periods of the granted options.
Accordingly, our results from operations will include stock-based compensation
expense at least through 2006. We recognized $342,000 of this expense during the
three months ended September 30, 2000.
INTEREST INCOME AND EXPENSE
Net interest income for the three months ended September 30, 2000 was
$538,000, an increase of $521,000, compared to $17,000 for the three months
ended September 30, 1999. The increase is primarily due to higher investable
cash balances as a result of the initial public offering.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUES
Total revenues increased 107% to $5.8 million for the nine months ended
September 30, 2000 from $2.8 for the nine months ended September 30, 1999. The
increase was primarily related to revenues generated from newly signed customer
contracts.
COST OF REVENUES
Costs of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the nine months ended September 30, 2000 was $3.5 million
(excluding stock-based compensation of $512,000), an increase of $1.8 million or
112%, compared to $1.6 million for the nine months ended September 30, 1999. The
increase was primarily a result of additional costs necessary to service new
customers.
GROSS PROFIT
Our gross profit margin decreased from 41% for the nine months ended
September 30, 1999, to 40% for the nine months ended September 30, 2000. The
decrease in gross profit margin is primarily due to increased costs to service
new client growth.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product development
costs. Research and development costs for the nine months ended September 30,
2000 were $2.7 million (excluding stock-based compensation of $71,000), an
increase of $1.6 million or approximately 145%, compared to $1.1 million for the
nine months ended September 30, 1999. This increase is primarily due to
expenditures made related to new product development.
As a percentage of revenue, research and development costs were 47% of
revenue for the nine months ended September 30, 2000 as compared to 40% for the
nine months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include costs associated with
our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $5.5 million (excluding stock-based compensation of $439,000); an
increase of $2.7 million, or 92% compared to $2.9 million for the nine months
ended September 30, 1999. The increase was primarily related to hiring of
additional sales and management personnel and marketing expenditures to increase
and support customer growth.
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As a percentage of revenues, selling, general, and administrative expenses
were 96% for the nine months ended September 30, 2000 as compared to 104% for
the nine months ended September 30, 1999.
STOCK-BASED COMPENSATION
We granted certain stock options to our officers and employees with
exercise prices deemed to be below the fair market value of the underlying
stock. The cumulative difference between the fair value of the underlying stock
at the date the options were granted and the exercise price of the granted
options was $5.7 million at September 30, 2000. We expect to amortize this
amount over the four to seven year vesting periods of the granted options.
Accordingly, our results from operations will include stock-based compensation
expense at least through 2006. We recognized $1 million of this expense during
the nine months ended September 30, 2000.
INTEREST INCOME AND EXPENSE
Net interest income for the nine months ended September 30, 2000 was
$560,000, an increase of $500,000, compared to $60,000 for the nine months ended
September 30, 1999. The increase is primarily due to higher investable cash
balances as a result of the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES - SEPTEMBER 30, 2000
Since inception, we have financed our operations and funded our capital
expenditures through the private sale of equity securities, supplemented by
private debt and equipment leases. We believe that proceeds from our initial
public offering will be sufficient to fund anticipated capital expenditures and
working capital requirement for at least the next 12 months. As of September 30,
2000, we had $34.3 million in cash and working capital of $30.5 million.
Net cash used in operating activities was $4.0 million for the nine months
ended September 30, 2000 and $2.2 million for the nine months ended September
30, 1999. For those periods, net cash used in operating activities was primarily
to fund losses from operations.
Net cash used in investing activities was $22.3 million for the nine
months ended September 30, 2000 and $209,000 for the nine months ended September
30, 1999. Investing activities consisted primarily of purchases of
held-to-maturity securities and property and equipment.
Net cash from financing activities was $36.6 million for the nine months
ended September 30, 2000 and consisted primarily of the proceeds of the initial
public offering net of the payment of dividends and redemption of preferred
stock. Net cash used in financing activities was $276,000 for the nine months
ended September 30, 1999 and consisted primarily of payments on capital lease
obligations as well as proceeds from our initial public offering and related
transactions.
As we execute our strategy, we expect significant increases in our
operating expenses to fund development of current and new divisions and product
lines. Presently, we anticipate that our existing capital resources and the
proceeds from the offering will meet our operating and investing needs through
the end of 2001. After that time, additional funding may not be available on
acceptable terms or at all. If we require additional capital resources to grow
our business, execute our operating plans or acquire complementary businesses at
any time in the future, we may seek to sell additional equity or debt securities
or secure additional lines of credit, which may result in ownership dilution to
our shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash equivalents, held-to-maturity securities and capital lease
obligations are at fixed interest rates and therefore the fair market value of
these instruments is affected by changes in market interest rates. As of
September 30, 2000 all of our cash equivalents and held-to-maturity securities
matured within 6 months and we had the ability to immediately liquidate our
investments. Therefore, we believe that we are exposed to immaterial levels of
market risk.
PART II. OTHER INFORMATION
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 28, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File number 333-32376), relating to the
initial public offering of our Common Stock, no par value per share. The
offering commenced on June 28, 2000 and all 4,000,000 shares covered by the
Registration Statement were sold. The managing underwriters for the offering
were Deutsche Bank Securities, Inc., FleetBoston Robertson Stephens Inc. and
Thomas Weisel Partners LLC.
The aggregate gross proceeds from the offering were $48.0 million. We
incurred expenses of approximately $4.8 million, of which $3.4 million
represented underwriting discounts and commissions and approximately $1.3
million represented other expenses related to the offering. The net offering
proceeds to us after total expenses were $43.2 million. The transaction settled
on July 5,2000 at which time we used approximately $5.0 million of the net
proceeds to redeem our Series G Preferred stock and approximately $1.5 million
to pay accrued dividends on our Series C, D and E Convertible Preferred stock.
The remaining net proceeds are being used to fund general corporate purposes and
have been invested in cash, cash equivalents and short-term investments. The use
of the proceeds from the offering does not represent a material change in the
use of proceeds described in the prospectus.
None of the net proceeds from the offering were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARESCIENCE, INC.
Date: November 10, 2000 By: /s/ Ronald A. Paulus
----------------------------
Ronald A. Paulus, President
Date: November 10, 2000 By: /s/ Steven Bell
----------------------------
Steven Bell, Chief Financial
Officer and Treasurer
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EXHIBIT INDEX
Exhibit No. Description
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27.1 Financial Data Schedule
