<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000.
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 000-27056
Caredata.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2256400
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Two Piedmont Center, Suite 400, 3565 Piedmont Rd., Atlanta, Georgia 30305
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's Telephone Number Including Area Code: (404) 364-6700
------------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the issuer's only class of Common
Stock, $0.001 par value, as of August 14, 2000 was 8,310,311 .
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CAREDATA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 552 $ 199
Accounts receivable, less allowance for doubtful
accounts of $2,575 and $902 at June 30, 2000
and December 31, 1999, respectively 6,876 12,053
Prepaid expenses 355 956
Note receivable from officer 39 39
Product and data licenses 1,000 1,188
Other current assets 459 621
------- -------
Total current assets 9,281 15,056
------- -------
Property and equipment 9,599 9,058
Less accumulated depreciation and amortization 4,703 4,020
------- -------
Property and equipment, net 4,896 5,038
------- -------
Excess of cost over net assets of businesses
acquired, less accumulated amortization of
$5,735 and $4,467 at June 30, 2000 and December 31, 1999, respectively 46,583 42,568
Intangible assets, less accumulated amortization of
$2,126 and $2,010 at June 30, 2000 and December 31, 1999, respectively 4,192 5,637
Software development costs, less accumulated
amortization of $828 and $925 at June 30, 2000 and
December 31, 1999, respectively 3,951 5,564
Note receivable from officer, excluding current portion -- 23
Investments 6,725 13,490
Other assets 3,632 1,392
------- -------
Total other assets 65,083 68,674
------- -------
Total assets $79,260 $88,768
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 3
CAREDATA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current installments of long-term debt and obligations under
capital leases $27,325 $16,620
Accounts payable 1,090 678
Accrued expenses 12,040 1,927
Income taxes payable 870 758
Deferred revenue 3,401 3,569
------- -------
Total current liabilities 44,726 23,552
Long-term debt and obligations under capital leases, excluding
current installments 104 105
------- -------
Total liabilities 44,830 23,657
------- -------
Series 1998-A preferred stock, $.001 par value, redeemable;
5 shares authorized and designated; 0.465 shares issued and
outstanding with a per-share liquidation value of $10,000 at
June 30, 2000 and December 31, 1999 4,265 4,255
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 795 shares
authorized; none issued or outstanding -- --
Series A junior participating preferred stock $.001 par
value; 200 shares authorized and designated; none
issued or outstanding -- --
Common stock - $.001 par value; 20,000 shares authorized;
8,285 and 8,236 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 8 8
Additional paid in capital 83,067 82,920
Accumulated deficit (52,910) (22,072)
------- -------
30,165 60,856
------- -------
Total liabilities and stockholders' equity $79,260 $88,768
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 4
CAREDATA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 4,944 $ 8,715 $ 16,012 $ 16,793
Salaries, wages and benefits 4,502 3,699 9,494 7,555
Other operating expenses 6,865 3,089 10,668 5,456
Depreciation and amortization 3,836 1,378 5,964 2,380
Impairment of long-term assets 17,160 -- 17,160 --
Costs to exit a business 1,289 -- 1,289 --
IPR&D and integration costs -- 2,549 -- 2,549
-------- -------- -------- --------
Operating loss (28,708) (2,000) (28,563) (1,147)
Interest income (expense), net (1,655) 71 (2,059) 345
-------- -------- -------- --------
Loss before income taxes (30,363) (1,929) (30,622) (802)
Income taxes -- -- (215) (442)
-------- -------- -------- --------
Net loss (30,363) (1,929) (30,837) (1,244)
Series 1998-A preferred stock dividend (58) -- (116) --
Accretion of redemption value of Series 1998-A
convertible preferred stock (10) -- (10) --
-------- -------- -------- --------
Net loss attributable to common stock $(30,431) $ (1,929) $(30,963) $ (1,244)
======== ======== ======== ========
Net loss per share of common stock - basic and diluted $ (3.68) $ (0.25) $ (3.75) $ (0.17)
======== ======== ======== ========
Weighted average number of common shares outstanding -
basic and diluted 8,269 7,664 8,259 7,527
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 5
CAREDATA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands) SIX MONTHS
----------
ENDED JUNE 30,
--------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(30,837) $(1,244)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Acquired in-process research and development costs -- 2,000
Impairment of long-term assets 17,160 --
Depreciation and amortization 5,964 2,380
Provision for doubtful accounts 3,610 185
Increase in:
Accounts receivable (357) (1,079)
Other assets (1,261) (1,091)
Increase (decrease) in:
Accounts payable 412 306
Accrued expenses and other liabilities 2,263 129
Deferred revenue 128 (33)
------- -------
Net cash provided by (used in) operating activities (2,918) 1,553
------- -------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (17,787)
Purchases of property and equipment (1,333) (1,224)
Additions to software development costs (1,511) (1,674)
Purchase of Investments (4,705) --
Repayment of note receivable from stockholders 23 250
------- -------
Net cash used in investing activities (7,526) (20,435)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 192 152
Common stock repurchased and canceled (26) --
Proceeds from draw on revolving credit facility 10,688 5,000
Payments on long-term debt and obligations under capital leases (57) (41)
------- -------
Net cash provided by financing activities 10,797 5,111
------- -------
Net increase (decrease) in cash and cash equivalents 353 (13,771)
Cash and cash equivalents at beginning of period 199 21,365
------- -------
Cash and cash equivalents at end of period $ 552 $ 7,594
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 661 $ 35
======= =======
Supplemental disclosure of non-cash activities:
Accrual of bank fees $ 1,200 $ --
======= =======
Accrual of contingent consideration $ 8,176 $ --
======= =======
Issuance of restricted stock awards $ -- $ 145
======= =======
Equipment acquired under capital lease obligations $ 73 $ --
======= =======
Accretion of Series 1998-A convertible preferred stock $ 10 $ --
======= =======
Accrual of Series 1998-A preferred stock dividend $ 116 $ --
======= =======
Acquisitions of businesses:
Fair value of assets acquired $ -- $15,531
Acquired in-process research and development costs -- 2,000
Fair value of liabilities assumed -- (1,982)
Common stock issued -- (6,260)
Contingent consideration paid -- 8,528
------- -------
Total cash paid for acquisitions -- 17,817
Cash acquired -- (30)
------- -------
Net cash paid for acquisitions $ -- $17,787
======= =======
</TABLE>
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<PAGE> 6
CAREDATA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The consolidated condensed financial statements as of June 30, 2000
and for the three-month and six-month periods ended June 30, 2000 and 1999 are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for the fair presentation of the consolidated
financial position and results of operations and cash flows for the periods
presented have been included. Results for the interim period are not
necessarily indicative of results that may be expected for the full year.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes included in
the Annual Report on Form 10-K of Caredata.com, Inc. (the "Company") for the
year ended December 31, 1999.
2. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Basic earnings (loss) per common share available to common
stockholders is based on the weighted-average number of common shares
outstanding. Diluted earnings (loss) per common share available to common
stockholders is based on the weighted-average number of common shares
outstanding and dilutive potential common shares, such as dilutive stock
options, determined using the treasury stock method.
Securities that could have potentially diluted basic earnings per share
("EPS") that were not included in diluted EPS because their effect on the three
months and six months ended June 30, 2000 was antidilutive totaled approximately
383,000 and 476,000 shares, respectively. Securities that could have potentially
diluted basic earnings per share ("EPS") that were not included in diluted EPS
because their effect on the three months and six months ended June 30, 1999 was
antidilutive totaled approximately 528,000 and 477,000 shares, respectively.
3. LINE OF CREDIT:
In June 1998, the Company entered into an Amended and Restated Credit
Agreement with Bank of America under which a $25 million revolving credit
facility (the "Bank of America Revolver") was made available to the Company to
fund working capital needs as well as new product development and acquisitions.
On May 12, 2000, the Company and Bank of America entered into a First Amendment
to Amended and Restated Credit Agreement ("Revolver First Amendment"). The
Revolver First Amendment, together with a letter agreement dated July 14, 2000,
extended the maturity date to July 28, 2000 and provided an additional $1.7
million of borrowing availability. As of August 11, 2000 the Company had
borrowed a total of $27.2 million under the Bank of America Revolver. On August
11, 2000, the Company and Bank of America entered into a Second Amendment to
Amended and Restated Credit Agreement ("Revolver Second Amendment"). The
Revolver Second Amendment waives prior defaults and extends the maturity date to
January 15, 2001, but with no obligation for any lending in addition to the
$27.2 million currently outstanding. In consideration for the Revolver First
Amendment, the Company must pay Bank of America fees of $1.4 million. The
Company has accrued $1.2 million of these costs as part of interest expense for
the three months ended June 30, 2000; none of these fees had been paid as of
August 14, 2000. In consideration for the Revolver Second Amendment, the Company
must pay (i) a commitment fee equal to 1% of the loans made to the Company under
the Bank of America Revolver, payable at maturity date, and (ii) a usage fee
equal to 0.25% of the loans, payable monthly. In addition following the Revolver
Second Amendment, all amounts outstanding under the Bank of America Revolver
bear interest at an annual rate of Prime plus 1%, and the Company is required to
begin repaying accrued interest and other fees to the lender at the rate of
$150,000 per month.
4. ACQUISITIONS:
Many of the Company's acquisition agreements provide for the payment of
contingent consideration based upon the performance of the acquired businesses
over a prescribed period of time. If such acquired businesses exceed the
relevant performance goals, the Company will be required to make additional
payments, which could be material. In connection with the CareData Reports
acquisition, additional consideration of $8.1 million was earned and accrued at
June 30, 2000, was due and payable at July 31, 2000, but remains unpaid at
August 14, 2000. Also in connection with the CareData Reports acquisition, $5.5
million and $3.0 million of contingent consideration was paid in 1999 and 1998,
respectively. In connection with the 1999 acquisition of Healthcare Credentials
Management Services, Inc. ("HCMS") additional consideration of $58,000 was
earned and accrued at June 30, 2000, was due and payable at July 31, 2000 but,
remains unpaid at August 14, 2000.
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<PAGE> 7
In connection with the 1998 acquisition of Healthdemographics, the Company paid
additional cash consideration of $4.7 million during 1999 and issued 465 shares
of Series 1998-A Preferred Stock in September 1999. Each share of Series 1998-A
Preferred Stock has a liquidation preference and redemption value of $10,000, is
mandatorily convertible into 442 shares of common stock upon the market value of
the Company's common stock reaching $22.61 per share, earns dividends at a rate
of 5 percent of the redemption value, and is mandatorily redeemable at the
twentieth anniversary of the date of issuance. Although no additional contingent
payments were made in the six months ended June 30, 2000, contingent payments
totaling $8.2 million were due and payable at July 31, 2000, but remain unpaid
at August 14, 2000.
5. IMPAIRMENT OF LONG-TERM ASSETS AND COSTS TO EXIT AN ACTIVITY:
The Company recorded impairment of asset charges of $17.2 million
during the three months ended June 30, 2000. The charges for impairment of
assets included a charge of $11.5 million to adjust the carrying value of
certain equity investments to estimated net realizable value, a charge of $1.5
million to write-off developed software and a charge of $4.2 million to
write-off assets related to product-lines the Company decided to exit.
The Company has various investments, for which the Company does not
have the ability to exercise significant influence and for which there is not a
readily determinable market value, that are accounted for under the cost method
of accounting. Many of these investments are equity investments in other eHealth
companies. The Company periodically evaluates the carrying value of its
investments accounted for under the cost method of accounting, and for the three
months ended June 30, 2000 a charge of $11.5 million was recorded to adjust the
carrying value of the investments to estimated net realizable value for losses
in value deemed other than temporary. The Company analyzed specific financial
data for these investments, as well as, the general market conditions of the
eHealth industry to determine the estimated net realizable value of the
Company's investments in these companies. Considerable management judgement is
necessary to estimate fair value, and accordingly actual results could vary
significantly from these estimates.
The Company recorded a write-off of capitalized software of $1.5
million for the three months ended June 30, 2000. This charge related to the
Company's provider management client-server software and represented the
carrying value of these assets. The Company decided to discontinue this
client-server-based product due to the high costs of installation and support of
the product and due to the fact that the market's changing technology preference
from client-server software to Internet-based products has eliminated the
Company's ability to generate future revenues from the product. Consequently,
the Company will be focusing on the development of a new provider management
Internet-based product.
On June 27, 2000, the Company decided to exit the Clinical Outcomes and
Physician Education and Profiling product-lines of business. The Company
decided to exit these product-lines primarily due to changing market conditions,
the labor intensive and service oriented nature of the products and the decrease
in demand for these services. These product-lines were originally obtained
through the 1996 acquisition of Formations in Healthcare, Inc. and the 1998
acquisition of Successful Solutions, Inc. At each balance sheet date, the
Company assesses the recoverability of excess of cost over net assets of
businesses acquired (goodwill) by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate equal to the rate of return that would be
required by the Company for a similar investment with like risks. Due to the
poor margins associated with these labor intensive product-lines and the
decreased interest in the marketplace for these services, future cashflows were
deemed to be negative, eliminating the possibility of realizing future benefit
from these product-lines. For these product-lines eliminated, the tangible
assets have been written down to their estimated fair value and all intangible
asset carrying values associated with these eliminated lines of business have
been written-off, resulting in a charge of $4.2 million for the three months
ended June 30, 2000. The exiting of these product-lines will result in workforce
reductions of approximately 28 employees, most of which are operations and sales
positions, and the closing of offices in Chicago, Illinois and certain offices
in Atlanta, Georgia. As a result, the Company also recorded costs to exit these
product-lines of approximately $1.3 million. Included in this total are lease
obligations of $828,000 and severance and other employee-related costs of
$455,000. As of June 30, 2000 no payments had been made for these charges. The
Company expects to have completed the shut down actions of these product-lines
by early fourth quarter 2000.
6. SIGNIFICANT SECOND QUARTER CHARGES:
During the three months ended June 30, 2000 the Company recorded a
number of unusual charges as discussed in the above notes. These charges
included costs associated with the closing of the Clinical Outcomes and
Physician Education and Profiling business units, the write-off of capitalized
software related to a discontinued product, write-downs in the carrying values
of a number of the Company's minority equity investments, fees associated with
the expansion and extension of the Company's credit facility and the write-off
of account receivables related to troubled eHealth companies. These charges
totaled $23.5 million in the three months ended June 30, 2000 and are included
in various line-item categories on the Statement of Operations.
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<PAGE> 8
7. SEGMENT REPORTING:
The Company's reportable segments are strategic business units that
offer different products and services. The Company provides its services and
products through its Market Performance and Physician Information segments. The
Company's market performance products include healthcare forecasting software,
healthcare utilization and reimbursement data, healthcare satisfaction and
pharmacy surveys, clinical outcomes data products and on-line healthcare
research software. Through June 30, 2000 the Company's market performance
services included facility Physician Profiling and Education services, and
clinical outcomes reporting services; but on June 27, 2000 the Company decided
to discontinue these services and its clinical outcomes data products. The
Company's physician information products consist of physician recruiting
databases and software, physician credentialing databases and software, and
practice management software. The Company's physician information services
consist of physician recruiting services, physician credentialing services, and
healthcare administrative consulting services.
The Company evaluates each segment's performance based on a modified
operating profit measurement (earnings before interest, taxes, depreciation,
amortization, impairment of assets, costs to exit a business and acquired
in-process research and development costs and integration costs).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
(Amounts in thousands) ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Market Performance $ 2,363 $ 4,121 $ 8,092 $ 8,934
Physician Information 2,581 4,594 7,920 7,859
--------- --------- --------- ---------
Total $ 4,944 $ 8,715 $ 16,012 $ 16,793
--------- --------- --------- ---------
Operating profit (loss) (1):
Market Performance $ (2,290) $ 780 $ (796) $ 2,785
Physician Information (290) 1,595 2,691 2,207
Corporate (3,843) (448) (6,045) (1,210)
--------- --------- --------- ---------
Total $ (6,423) $ 1,927 $ (4,150) $ 3,782
--------- --------- --------- ---------
Depreciation and amortization:
Market Performance $ 798 $ 214 $ 1,180 $ 401
Physician Information 483 346 968 543
Corporate 2,555 818 3,816 1,436
--------- --------- --------- ---------
Total $ 3,836 $ 1,378 $ 5,964 $ 2,380
--------- --------- --------- ---------
Reconciling items:
Impairment of long-term assets $ (17,160) $ -- $ (17,160) $ --
Costs to exit a business (1,289) -- (1,289) --
Acquired in-process IPR&D and integration costs -- (2,549) -- (2,549)
Other (1,655) 71 (2,059) 345
--------- --------- --------- ---------
Loss before income taxes $ (30,363) $ (1,929) $ (30,622) $ (802)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUN. 30, DEC. 31,
-------- ---------
2000 1999
--------- --------
<S> <C> <C>
Assets:
Market Performance $ 4,873 $ 13,197
Physician Information 7,679 9,951
Corporate 66,708 65,620
--------- --------
$ 79,260 $ 88,768
========= ========
</TABLE>
(1) Excludes depreciation costs, amortization costs, impairment of assets,
costs to exit a business, acquired in-process research and development
costs, integration costs and acquisition-related costs.
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<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Caredata.com is a leading provider of healthcare intelligence that
drives decision-making among businesses and consumers. Caredata.com's customers
use its products and services to make objective comparisons of the financial
costs of physician services, analyze the supply and demand for healthcare
services, assess consumer satisfaction with healthcare products and services,
and verify the background and credentials of physicians.
Caredata.com is also an online syndicator of healthcare content and
applications to a wide range of Internet portals and e-commerce sites. The
Company enables traditional industry players as well as pure e-health web sites
to enhance their content offerings by delivering Caredata.com's co-branded
tools to their established online communities. These syndicated tools and
services empower physicians, consumers and healthcare enterprises to gain
insight into critical healthcare information and conduct business more
efficiently. Caredata.com's Web applications include its CiteLine(TM) medical
search tool, appSTAT(TM) universal healthplan application,
myPhysicianSelector(TM) and myHealthPlanSelector(TM) consumer reference tools,
HealthcareMatch.com/PracticeMatch(R) job community and PrimeSourceWeb(TM)
physician credentials database. Caredata.com has more than fifty strategic
partnerships and alliances with leading Web businesses.
Through June 30, 2000 the Company's products and services included
facility Physician Profiling and Education services, and clinical outcomes
reporting services and clinical outcomes data products. On June 27, 2000 the
Company decided to discontinue these products and services due to changing
market conditions, the labor intensive and service oriented nature of the
products and the decrease in demand for these services. The exiting of these
product-lines will result in a charge of $4.2 million, workforce reductions of
approximately 28 employees and closing of offices in Chicago, Illinois and
certain offices in Atlanta, Georgia. The Company expects to have completed the
shut down actions of these product-lines by early fourth quarter 2000.
SOURCES OF REVENUE
The Company provides services and licenses its products within its
two segments, market performance and physician information. The Company also
co-brands or syndicates its products with its business partners in order to
enhance Caredata.com's brand recognition. The Company's product offerings
enable its partners to provide Internet features and functionality to their
customers and members, allowing them to remain competitive in the rapidly
changing Internet marketplace without having to incur the extensive time and
costs associated with the internal development of such products. In addition,
because many of the Company's products and databases are digitally linked,
license agreements often create multiple points of entry and distribution
channels for the Company's complementary products and services. These digital
networks also provide primary source data and strengthen the Company's
information infrastructure with minimal incremental costs.
The Company's market performance products include healthcare
forecasting software, healthcare utilization and reimbursement data, healthcare
satisfaction and pharmacy surveys, clinical outcomes data products, and on-line
healthcare research software. Through June 30, 2000 the Company's market
performance services included facility Physician Profiling and Education
services, and clinical outcomes reporting services; but on June 27, 2000 the
Company decided to discontinue these services and its clinical outcomes data
products. The Company's physician information products consist of physician
recruiting databases and software, physician credentialing databases and
software, and practice management software. The Company's physician information
services consist of physician recruiting services, physician credentialing
services, and healthcare administrative consulting services.
The Company's license and product revenues are generally recognized
upon delivery provided that no significant Company obligations remain and
collection of the receivable is probable. Revenue from healthcare surveys is
recognized as the related costs to produce the surveys are incurred. Fees from
maintenance, updates and support of the Company's products are deferred and
recognized ratably over the service period. Revenue from
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<PAGE> 10
subscription to the Company's physician recruiting databases is recognized over
the term of the subscription. Revenues for the Company's services are
recognized as the services are performed.
The Company's two groups of products contribute varying percentages of
the Company's total revenue from quarter to quarter based on a variety of
factors, including, without limitation, the timing and size of acquisitions and
the seasonality of the Company's products. Of its total revenue for the three
months and six months ended June 30, 2000, the Company derived approximately
48% and 51%, respectively, from market performance products and approximately
52% and 49%, respectively from physician information products. Of its total
revenue for the year ended December 31, 1999, the Company derived approximately
56% from market performance products and approximately 44% from physician
information products.
From time to time, the Company agrees to accept equity securities from
its customers in lieu of cash as payment for products and services purchased by
such customers. These arrangements typically involve high risk, start-up
companies whose equity securities have no trading market and, therefore, no
liquidity. Approximately $0 and $2.1 million or 0% and 13% of the Company's
revenue for the three months and six months ended June 30, 2000, respectively,
consists of such securities. Of this total, approximately $1.6 million was from
entities in which we reduced the carrying value in the second quarter 2000 of
the equity securities received in lieu of cash.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated,
certain items from the statements of operations of the Company expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS: THREE MONTHS SIX MONTHS
------------ ----------
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
Salaries, wages and benefits 91 42 59 45
Other operating expenses 139 36 67 33
Depreciation and amortization 78 16 37 14
Impairment of long-term assets 347 - 107 -
Costs to exit a business 26 - 8 -
IPR&D and integration costs - 29 - 15
------- ------- ------- -------
Operating loss (581) (23) (178) (7)
Interest income (expense), net (33) 1 (13) 2
------- ------- ------- -------
Loss before income taxes (614) (22) (191) (5)
Income taxes - - (2) (2)
------- ------- ------- -------
Net loss (614)% (22)% (193)% (7)%
======= ======= ======= =======
</TABLE>
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<PAGE> 11
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Revenue. Revenue for the three months ended June 30, 2000 was $4.9
million, a decrease of $3.8 million, or 43%, over the same period in the prior
year. Internet-related revenue, which consists of sales of newly developed
Internet products, Internet products acquired in connection with the
acquisitions made in 1999 and traditional products that became Web-enabled in
1999 and 2000, represented $1.8 million of the Company's revenue for the three
months ended June 30, 2000 compared with $2.2 million for the same period in
the prior year. The decrease in revenue from 1999 to 2000 is primarily
attributable to an expected de-emphasis of our core business products which
serve institutional healthcare customers and the rapid and unexpected weakening
of sales of the Company's Internet-related products due to the unfavorable
market conditions affecting all eHealth companies.
Salaries, wages and benefits. Salaries, wages and benefits for the
three months ended June 30, 2000 were $4.5 million, an increase of $803,000 or
22% over the same period in the prior year. The increase was primarily the
result of the full-year impact of the business acquisitions made in 1999 and
incremental expenses associated with internal growth. As a percentage of
revenue, salaries, wages and benefits for the three months ended June 30, 2000
and 1999 were 91% and 42%, respectively. The increase in salaries, wages and
benefits as a percentage of revenue was primarily attributable to the decline in
revenue for the three months ended June 30, 2000, over the same period in the
prior year.
Other operating expenses. Other operating expenses for the three months
ended June 30, 2000 were $6.9 million, an increase of $3.8 million or 122% over
the same period in the prior year. The increase was primarily related to an
increase in the provision for doubtful accounts due to uncertainty of
collectibility of accounts receivable related to the Company's eHealth customers
as a result of the recent adverse changes in the capital market conditions of
this industry. Other operating expenses as a percentage of revenue were 139% for
the three months ended June 30, 2000 as compared to 36% in the same period in
the prior year. The increase in other operating expenses as a percentage of
revenue was primarily attributable to the decline in revenue for the three
months ended June 30, 2000, over the same period in the prior year and the
increase in the provision for doubtful accounts.
Depreciation and amortization. Depreciation and amortization expenses
for the three months ended June 30, 2000 were $3.8 million, an increase of $2.5
million or 178% over the same period in the prior year. The increase was
primarily the result of the amortization of intangible assets acquired in the
business acquisitions made in 1999, 1998 and 1997 and the amortization of
product and data licenses acquired in 2000 and 1999. Many acquisitions completed
by the Company in prior years provided for the payment of contingent
consideration based upon the performance of the acquired business. Amortization
of intangible assets from such acquisitions increases in later years as
contingent consideration payments are earned and accrued. Depreciation and
amortization as a percentage of revenue increased to 78% for the three months
ended June 30, 2000 compared to 16% in the same period in the prior year. The
increase in depreciation and amortization expenses as a percentage of revenue
was primarily attributable to the decline in revenue for the three months ended
June 30, 2000, over the same period in the prior year and the increases in the
amortization of intangible assets acquired and product and data licenses
acquired.
Impairment of long-term assets. The Company recorded impairment of
asset charges of $17.2 million during the three months ended June 30, 2000. The
charges for impairment of assets included a charge of $11.5 million to adjust
the carrying value of certain equity investments to estimated net realizable
value, a charge of $1.5 million to write-off developed software and a charge of
$4.2 million to write-off assets related to product-lines the Company decided
to exit.
Costs to exit a business. The Company recorded costs to exit the
Clinical Outcomes and Physician Education and Profiling product-lines of
business of approximately $1.3 million. Included in this total are lease
obligations of $828,000 and severance and other employee-related costs of
$455,000.
Interest income (expense), net. Net interest expense for the three
months ended June 30, 2000 was $1.7 million, compared to net interest income of
$71,000 for the same period in the prior year. The increase in expense was a
result of decreased cash balances and the interest expense related to draws on
the Company's revolving credit facility with Bank of America and the accrual of
$1.2 million in fees to amend the revolving credit facility.
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SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue. Revenue for the six months ended June 30, 2000 was $16.0
million, a decrease of $781,000, or 5%, over the same period in the prior year.
Internet-related revenue, which consists of sales of newly developed Internet
products, Internet products acquired in connection with the business
acquisitions made in 1999 and traditional products that became Web-enabled in
1999 and 2000, represented $10.2 million of the Company's revenue for the six
months ended June 30, 2000 compared with $2.7 million for the same period in the
prior year. The decrease in revenue from 1999 to 2000 is primarily attributable
to an expected de-emphasis of our core business products which serve
institutional healthcare customers and the rapid and unexpected weakening of
sales of the Company's Internet-related products due to the unfavorable market
conditions affecting all eHealth companies.
Salaries, wages and benefits. Salaries, wages and benefits for the six
months ended June 30, 2000 were $9.5 million, an increase of $1.9 million or 26%
over the same period in the prior year. The increase was primarily the result of
the full-year impact of the business acquisitions made in 1999 and incremental
expenses associated with anticipated internal growth. Salaries, wages and
benefits as a percentage of revenue increased to 59% as compared to 45% in the
same period in the prior year.
Other operating expenses. Other operating expenses for the six months
ended June 30, 2000 were $10.7 million, an increase of $5.2 million or 96% over
the same period in the prior year. The increase was primarily related to an
increase in the provision for doubtful accounts due to uncertainty of
collectibility of accounts receivable related to the Company's eHealth customers
as a result of the recent adverse changes in the capital market conditions for
this industry and to costs associated with the full-year impact of the business
acquisitions made in 1999. Other operating expenses as a percentage of revenue
increased to 67% as compared to 33% in the same period in the prior year.
Depreciation and amortization. Depreciation and amortization expenses
for the six months ended June 30, 2000 were $6.0 million, an increase of $3.6
million or 151% over the same period in the prior year. The increase was
primarily the result of the amortization of intangible assets acquired in the
business acquisitions made in 1999, 1998 and 1997 and the amortization of
product and data licenses acquired in 2000 and 1999. Many acquisitions completed
by the Company in prior years provided for the payment of contingent
consideration based upon the performance of the acquired business. Amortization
of intangible assets from such acquisitions increases in later years as
contingent consideration payments are earned and accrued. As a result of these
increases, depreciation and amortization as a percentage of revenue increased to
37% for the six months ended June 30, 2000 compared to 14% in the same period in
the prior year.
Impairment of long-term assets. The Company recorded impairment of
asset charges of $17.2 million during the six months ended June 30, 2000. The
charges for impairment of assets included a charge of $11.5 million to adjust
the carrying value of certain equity investments to estimated net
realizable value, a charge of $1.5 million to write-off developed software and
a charge of $4.2 million to write-off assets related to product-lines the
Company decided to exit.
Costs to exit a business. The Company recorded costs to exit the
Clinical Outcomes and Physician Education and Profiling product-lines of
business of approximately $1.3 million for the six months ended June 30, 2000.
Included in this total are lease obligations of $828,000 and severance and other
employee-related costs of $455,000.
Interest income (expense), net. Net interest expense for the six
months ended June 30, 2000 was $2.1 million, compared to net interest income of
$345,000 for the same period in the prior year. The increase in expense was a
result of decreased cash balances and the interest expense related to draws on
the Company's revolving credit facility with Bank of America and the accrual of
$1.2 million in fees to amend the revolving credit facility.
Income tax expense. Income tax expense for the six months ended June
30, 2000 was $215,000, compared to income tax expense of $442,000 for the same
period in the prior year. The decrease was primarily due to a decrease in
taxable income. The Company records income tax expense using an effective tax
rate of 39% on its taxable income. Differences between taxable income and net
income (loss) arise primarily from the non-deductibility of amortization
expense related to certain acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's Amended and Restated Credit Agreement with Bank of
America (the "Bank of America Revolver"), under which $27.2 million is presently
outstanding, is secured by substantially all of the Company's assets. The
Amended and Restated Credit Agreement for the Bank of America Revolver provides
for interest at Bank of America's prime rate plus 1%. On May 12, 2000, the
Company and Bank of America entered into the First Amendment to Amended and
Restated Credit Agreement ("Revolver First Amendment"). The Revolver First
Amendment, together with a letter agreement dated July 14, 2000, extended the
maturity date to July 28, 2000 and provided an additional $1.7 million of
borrowing availability. In consideration for the Revolver First Amendment, the
Company must pay Bank of America fees of $1.4 million. The Company has accrued
$1.2 million of these costs as part of interest expense for the three months
ended June 30, 2000; none of these fees had been paid as of August 14, 2000.
Under the terms of the Bank of America Revolver, the Company is subject to
various restrictive covenants regarding, among other things, payment of any
dividends, capital expenditures limitations, incurrence of indebtedness from
others in excess of certain amounts, and consummation of certain mergers and
acquisitions without the consent of Bank of America. Financial covenants
include, but are not limited to, maintaining minimum rates of cash collections
and maximum rates of cash disbursements. In 2000 and 1999, the Company borrowed
$5.0 million on the Bank of America Revolver to partially fund the acquisition
of Citizen 1, $1.7 million to partially fund the contingent consideration paid
in connection with the Healthdemographics acquisition, $9.8 million for general
working capital use and $10.7 million to make minority equity investments in
several strategic businesses, primarily e-health companies. As of August 11,
2000 the Company had borrowed a total of $27.2 million under the Bank of America
Revolver. On August 11, 2000, the Company and Bank of America entered into the
Second Amendment to Amended and Restated Credit Agreement ("Revolver Second
Amendment"). The Revolver Second Amendment waives prior defaults and extends the
maturity date to January 15, 2001, but with no obligation for any lending in
addition to the $27.2 million currently outstanding. In consideration for the
Revolver Second Amendment, the Company must pay (i) a commitment fee equal to 1%
of the loans made to the Company under the Bank of America Revolver, payable at
maturity date, and (ii) a usage fee equal to 0.25% of the loans, payable
monthly. In addition, following the Revolver Second Amendment, all amounts
outstanding under the Bank of America Revolver bear interest at an annual rate
of Prime plus 1%, and the Company is required to begin repaying accrued interest
and other fees to the lender at the rate of $150,000 per month. In July 2000,
the Company entered into a Master Facility Agreement with Fusion Capital Fund
II, LLC, under which the Company may have access to new equity financing. The
financing from Fusion Capital is subject to specified conditions and
restrictions which, as of August 14, 2000 have not been met. There can be no
assurances that the Company will meet the conditions for availability of the
financing from Fusion Capital. The Master Facility Agreement with Fusion Capital
is filed as an exhibit to the Company's Current Reports on Form 8-K dated July
5, 2000.
The Company had a working capital deficit of $35.4 million as of June
30, 2000 as compared to a working capital deficit of $8.5 million at December
31, 1999. The decrease was primarily due to the additional borrowings against
the Bank of America Revolver as discussed in the preceding paragraph, the
accrual of $8.1 million of additional contingent consideration payable in
connection with the acquisition of CareData Reports, the accrual of $1.3 million
of costs related to exiting healthcare analytical services and clinical outcomes
product-lines of business, an additional accrual for doubtful accounts of $3.6
million and the accrual $1.2 million of bank fees related to the extension of
the Bank of America Revolver as discussed in the preceding paragraph.
Net cash used in operating activities totaled $2.9 million for the six
months ended June 30, 2000 as compared to net cash provided by operating
activities of $1.6 million for the same period in the prior year. The decrease
in cash provided by operating activities of $4.5 million was primarily due to a
larger net loss for the six months ended June 30, 2000 versus the same period
in the prior year.
Net cash used in investing activities was approximately $7.5 million
for the six months ended June 30, 2000 as compared to $20.4 million for the
same period in the prior year. In the six months ended June 30, 2000, the
Company used cash to fund $1.3 million in fixed asset purchases, $1.5 million
of software development and $4.7 million in minority investments in other
companies.
Net cash provided by financing activities was $10.8 million for the
six months ended June 30, 2000 as compared to $5.1 million for the same period
in the prior year. In the six months ended June 30, 2000, the Company borrowed
$10.7 million under the Bank of America revolving credit facility.
Many of the Company's acquisition agreements provide for the payment of
contingent consideration based upon the performance of the acquired businesses
over a prescribed period of time. In connection with the CareData Reports
acquisition, additional consideration of $8.1 million was earned and accrued at
June 30, 2000, was due and payable at July 31, 2000, but remains unpaid at
August 14, 2000. Also in connection with the CareData Reports acquisition, $5.5
million and $3.0 million was paid in 1999 and 1998, respectively. In connection
with the 1999 acquisition of Healthcare Credentials Management Services, Inc.
("HCMS") additional consideration of $58,000 was earned and accrued at June 30,
2000, was due and
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payable at July 31, 2000 but, remains unpaid at August 14, 2000. In connection
with the Healthdemographics acquisition, additional consideration payments of
$4.7 million in cash and 465 shares of Series 1998-A Preferred Stock were made
in 1999. Although no additional contingent payments were made in the six months
ended June 30, 2000, additional contingent payments totaling $8.2 million were
due and payable at July 31, 2000 but remain unpaid at August 14, 2000.
The Company believes that cash generated from operations may not be
sufficient to meet the capital needs for the Company's operations for the very
near term. Therefore, to fund operations and to satisfy certain required
contingent obligations due as of July 31, 2000, the Company must obtain
additional capital resources through debt and/or equity financing, the
disposition of assets or otherwise. In addition, the Company's senior credit
facility with Bank of America is due and payable in full on January 15, 2001.
Therefore, the Company must also either refinance the Bank of America Revolver,
seek alternative debt and/or equity financing, dispose of assets or otherwise
raise capital to satisfy its obligations in this regard. There can be no
assurance that the Company will be able to refinance the Bank of America
Revolver, obtain alternative financing or otherwise raise capital in amounts and
on terms acceptable to the Company. The Company's business operations will be
materially and adversely affected, or the Company may be forced to cease
operations, if the Company is unable to raise capital during the third quarter
of 2000.
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact
on the Company's results of operations for the periods presented. Substantial
increases in costs, particularly the cost of labor for product development,
marketing and sales, could have an adverse impact on the Company and the
healthcare information industry.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101. SAB No. 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
current revenue recognition principles comply with SAB No. 101.
RISK FACTORS
In evaluating the Company and its business, prospective investors
should carefully consider the following risk factors in addition to the other
information contained herein. This quarterly report, as well as press releases
and other public statements made by the Company from time to time, contain
"forward-looking statements" within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. These statements
address activities, events or developments that will or may occur in the future
and are based on assumptions and analyses made by the Company in light of its
experience and perception of historical trends, current conditions, expected
future developments and other factors. Forward-looking statements include those
statements that anticipate future financial performance, business prospects,
growth and operating strategies, industry and market dynamics, business
relationships, sources and types of revenue, sources and availability of
capital and similar matters, as well as statements modified by the words
"believes," "expects," "anticipates," "intends," "estimates" or similar
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<PAGE> 15
expressions. These forward-looking statements are subject to a number of risks
and uncertainties (such as those set forth below) that could cause future
events or actual results to differ materially from those expressed in or
implied by the forward-looking statements. Many of these risks and
uncertainties are beyond the control of the Company. Accordingly, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date made and which the Company undertakes no obligation
to revise or update in order to reflect events after the date made.
Need for Additional Capital. The Company has substantial near term
demands on its liquidity and capital resources, including its revolving line of
credit with Bank of America, earnout obligations from past acquisitions which
were due as of July 31, 2000 and cash needed to fund operations. The Company's
existing Capital resources are extremely limited. Therefore, the Company must
either re-finance the Bank of America revolver, seek alternative debt and/or
equity financing or otherwise raise capital, which may involve the disposition
of assets. Any debt financings could result in the imposition on the Company of
operational or financial restrictions and increased interest expense. Any equity
financings could result in substantial dilution to holders of the Company's
Common Stock. Any disposition of assets could result in a decrease in revenues
or could otherwise adversely affect the Company's results of operations or
financial condition. There can be no assurance that the Company will be able to
obtain needed capital in the near future on terms acceptable to the Company or
at all. The Company's business operations will be materially and adversely
affected, or the Company could be forced to cease operations, if the Company is
unable to obtain capital during the third quarter of 2000. "See Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Variable Quarterly Operating Results; Seasonality. The Company's
quarterly revenue and operating results have varied significantly in the past
and are likely to vary substantially from quarter-to-quarter in the future.
Quarterly results may fluctuate as a result of a variety of factors including,
but not limited to, the length and unpredictable nature of the Company's sales
cycle; demand for the Company's products; the timing of significant new
customer contracts; the loss or non-renewal of significant customer contracts;
the implementation of new pricing strategies for the Company's products and
services; the timing of acquisitions or new strategic relationships;
competitive conditions in the industry; changes in customer budgets; and
general economic factors. The Company has historically recorded a
disproportionate amount of its revenue for each quarter in the final month of
the quarter, while expenses have been incurred more evenly throughout the
period. Furthermore, the Company has experienced a seasonal pattern in its
operating results, with a greater proportion of the Company's revenue and more
favorable operating margins occurring in the second half of the year.
Accordingly, results of operations for any particular quarter may not be
indicative of results of operations for future periods. Additionally,
significant portions of the Company's expenses are relatively fixed, and the
amount and timing of increases in such expenses are based in large part on the
Company's expectations concerning future revenue. If revenue is below
expectations in any given quarter, the adverse effect may be magnified by the
Company's inability to adjust spending quickly enough to compensate for the
revenue shortfall. Accordingly, even a small variation from expected revenue
could have a material adverse effect on the Company's operating results and
financial condition for a given quarter. Fluctuations in the Company's revenue
and operating results could have a material adverse effect on the market price
for the Company's Common Stock.
Pricing Pressure on Caredata Products and Services. Many of the
Company's customers are small and/or development stage companies that operate
healthcare-related web sites and have limited capital resources. These and other
customers often seek price concessions or require pricing arrangements that
involve little or no up-front fees in favor of greater transaction-based fees to
be paid as and when the Company's products and services are used. This trend has
negatively impacted the Company's revenues and it is expected that this trend
will continue. In addition, increased competition in the market for providing
online healthcare information as well as the increasing availability of
inexpensive and/or free online healthcare information has placed pressure on the
prices that the Company is able to charge for its products and services.
Competition and pricing pressure are expected to continue to intensify.
History of Operating Losses; Uncertain Profitability. Although the
Company had net income for the year ended December 31, 1999, the Company has
recorded net losses in the three years ended December 31, 1996, 1997 and 1998
and in the six-month period ended June 30, 2000. In view of the Company's prior
operating history, there can be no assurance that the Company will be able to
achieve profitability on a quarterly or annual basis or that it will be able to
sustain or increase its revenue growth in future periods. Furthermore, in
applying the provisions of Statement of Financial Accounting Standards No. 109
("SFAS 109") to the Company, particularly considering the Company's history of
net losses, the Company has been unable to support a conclusion that it is more
likely than not that its deferred tax assets will be realized for purposes of
SFAS 109. As a result, the Company has provided a full valuation allowance
against its net deferred tax assets.
Risks Related to Growth. The Company's strategy has been to grow
aggressively through investments in new products, strategic relationships,
pursuit of Internet-related opportunities and acquisitions. This strategy
places significant demands on the Company's financial, operational and
management resources, and exposes the Company to a variety of risks, including
the risk that the Company will be unable to retain the personnel or obtain the
financial and other resources necessary to pursue and manage such growth. The
tremendous opportunity related to equity upside in non-public, Internet startup
companies also makes it extremely difficult for the Company to recruit and
retain quality Web-knowledgeable employees. The Company's growth has resulted
in an increase in the level of responsibility for the Company's key personnel.
Expenses arising from the Company's efforts to complete acquisitions, develop
new products or increase its existing market penetration could have an adverse
impact on the Company's business, results of operations and financial
condition. Furthermore, there can be no assurance that the
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Company will be able to identify, acquire or integrate acquisition candidates
successfully or manage profitably any additional products and services
resulting from such acquisitions. Acquired businesses, products and services
may not contribute to the Company's overall strategy or produce returns that
justify the related investment or implementation by the Company. In addition,
the Company's growth may involve the acquisition of companies or the
development of products or services in areas in which the Company does not
currently operate. Such acquisition or development may require the Company's
management to develop expertise in new areas and to attract a new customer
base, and could have a material adverse effect on the Company's business,
results of operations or financial condition. There can be no assurance that
the Company will be able to implement its growth strategy successfully or, if
successful in consummating acquisitions, that it will be able to manage its
expanded operations effectively and profitably.
Risks of Integration of Acquired Operations. The process of
integrating management services, administrative organizations, facilities,
management information systems and other operational aspects of acquired
businesses, products or services can be time consuming and costly, and may
distract management from day-to-day operations. The difficulties of integration
may be increased by challenges in coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. If the Company is to realize the
anticipated benefits of past and future acquisitions, the operations of the
acquired entities must be combined and integrated successfully. There can be no
assurance that the Company's integration processes will be successful or that
the anticipated benefits of any past or future acquisitions will be realized.
Furthermore, there can be no assurance that there will not be substantial
unanticipated costs or liabilities, or other material adverse effects
associated with past or future acquisitions and integration activities
conducted by the Company.
Dependence on Data Sources and AMA Licenses. The Company incorporates
the Physicians' Current Procedural Terminology ("CPT") codes of the AMA into
certain of its market performance products under a non-exclusive five-year
license with the AMA that expired in February 2000, but which remains in effect
based on an oral understanding with the AMA while a new license is being
negotiated. The CPT code system is considered to be the current industry
standard for identifying physician procedures, and the loss of the AMA CPT code
license or the failure to agree upon the terms of a new AMA CPT code license
would have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, the Company relies in large
part on data from outside payor, provider and other sources to develop its
proprietary products, including acquired data and data received from customers
under the Company's data collection program. In general, the Company's data
sources are not subject to exclusive agreements with the Company; therefore,
data included in the Company's data products may also be included in data
products of the Company's competitors. There can be no assurance that the
Company's sources will continue to provide data in the future. If any of the
Company's sources of data becomes unavailable, there can be no assurance that
alternative sources of data would be available or that the Company could
purchase such data in a cost-efficient manner.
Risks of Rapid Technological Change. The healthcare information market
is characterized by rapid technological change, changing customer needs and
evolving industry standards. The Company believes that as the market for its
current products matures, its future success will depend on its ability to
enhance its current products and to develop or acquire and introduce new
products to keep pace with technological developments and emerging industry
standards. In addition, the introduction of competing products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products non-competitive or obsolete. Accordingly, the
Company anticipates that significant amounts of future revenue may be derived
from products and product enhancements that do not exist today or have not been
sold in sufficient quantities to measure accurately market acceptance. There
can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development and introduction of product
enhancements or new products, or that such enhancements or new products will
adequately meet the requirements of the marketplace or achieve market
acceptance. Any failure by the Company to develop and introduce product
enhancements and new products in a timely and cost-efficient manner in response
to changing market conditions or customer requirements could have a material
adverse effect on the Company's business, results of operations or financial
condition.
Dependence on Intellectual Property Rights. The Company does not own
any patents or federally-registered copyrights relating to its databases or
software applications. The Company relies largely on copyright law, its license
agreements with customers and its own security systems, confidentiality
procedures and employee non-disclosure agreements to maintain the
confidentiality and trade secrecy of its proprietary procedures and
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resources. Policing unauthorized use and piracy of the Company's products is
difficult. The Company is aware that from time to time there have been limited
breaches of the confidentiality provisions of customers' agreements with the
Company, and there can be no assurance that the precautions taken by the
Company will be adequate to prevent further breaches or misappropriation of the
Company's proprietary information. In addition, the Company cannot prevent the
independent development or implementation of functionally equivalent or
superior systems, products or methodologies. The misappropriation of the
Company's information or independent development of similar products may have a
material adverse effect on the Company's competitive position. Furthermore,
there can be no assurance that third parties will not assert infringement
claims against the Company or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim.
Risk Related to Intangible Assets and Acquisition Related Charges.
Largely as a result of the Company's various acquisitions, the Company has
recorded approximately $54.7 million in intangible assets net of accumulated
amortization as of June 30, 2000. Such intangible assets are being amortized
over periods of five to 15 years. The Company expects its intangible assets to
increase in connection with future acquisitions, in connection with future
contingent consideration payments for acquisitions that have been consummated
and in connection with capitalized software development projects, resulting in
increases in the Company's amortization expense. In the event of any sale or
liquidation of the Company or a portion of its assets, there can be no
assurance that the value of the Company's intangible assets will be realized.
In addition, the Company regularly evaluates whether events and circumstances
have occurred indicating that any portion of the remaining balance of amounts
allocable to the Company's intangible assets may not be recoverable. If factors
indicate that the carrying value of the Company's intangible assets has been
impaired, the Company would be required to reduce the carrying value of such
assets. Any future determination requiring the write-off of a significant
portion of the unamortized intangible assets could have a material adverse
effect on the Company's business, results of operations or financial condition.
In connection with many of its acquisitions, the Company has recorded
non-recurring charges related to in-process research and development costs. The
amount of each of these non-recurring charges is equal to the estimated current
fair value of specifically identified technologies for which technological
feasibility has not yet been established pursuant to Statement of Financial
Accounting Standards No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" and for which future alternative uses did
not exist at the time of acquisition. The Company has recorded approximately
$4.4 million of these charges in 1997, $11.7 million in 1998 and $2.0 million
in 1999. Similar charges could result in the future as a result of additional
acquisitions accounted for as purchases.
Uncertainty and Consolidation in the Healthcare Industry. The
healthcare industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operation of
healthcare providers, payors and other industry participants. The Company's
products and services are designed to function within the current structure of
the U.S. healthcare system; therefore, the commercial value of the Company's
products could be adversely affected if there were material changes in the
current U.S. healthcare system. Many federal and state legislators have
announced that they intend to propose programs to reform the U.S. healthcare
system at both the federal and state levels. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change healthcare delivery and payment
systems. Participants in the healthcare market may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments, including investments in the Company's products and services. In
addition, in response to this changing environment, many market participants
are consolidating to create larger healthcare delivery organizations. This
consolidation reduces the number of potential customers for the Company and may
increase the bargaining power of these organizations, which could lead to
reduced prices for the Company's products and services. The impact of these
developments on the healthcare industry is difficult to predict and could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Competition. The healthcare information market is intensely
competitive and rapidly changing. The Company believes that the principal
competitive factors in its target markets include the breadth and quality of
database and applications offerings, access to proprietary data, the
proprietary nature of methodologies and technical resources, price, and the
effectiveness of marketing and sales efforts. In each of its target markets,
the Company competes with various competitors, which vary in size, scope and
breadth of product and service offerings. In addition, other information
companies not presently offering healthcare information services competitive
with the Company's products and services may enter the markets in which the
Company competes. Many of the Company's competitors have, and many of its
potential competitors may have, significantly greater financial, technical,
product
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<PAGE> 18
development and marketing resources than the Company. The Company also competes
with the internal information resources and systems of certain of its
prospective and existing customers. There can be no assurance that competitive
pressures will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Potential for System Defects or Flawed Data Products. The information
products offered by the Company may contain undetected errors or failures. Any
such errors or failures could result in a loss of, or delay in, market
acceptance of the product and in claims against the Company. The Company also
depends on the accuracy of the data received from its data sources. If a
statistically significant number of medical records, transactions or physician
profiles were found to have been altered or incorrectly entered, or otherwise
contain flawed data, there could be a loss of, or delay in, market acceptance of
the product and possible claims against the Company. Any of the foregoing
results could have a material adverse effect on the Company's business, results
of operations or financial condition.
Adverse Impact Of Anti-Takeover Provisions. Certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could have
the effect of delaying, deterring or preventing a change of control involving
the Company. Specifically, the Company's Certificate of Incorporation, as
amended, provides for the issuance of preferred stock with such rights and
preferences as may be determined by the Board of Directors. Such shares may be
issued without further stockholder approval in circumstances that could have the
effect of preventing or delaying a change of control. The Company's Board of
Directors is classified into three classes, with each class of directors having
a staggered three-year term. The Company's Bylaws prohibit action by the
stockholders through written consent and restrict the ability of stockholders to
call stockholder meetings and propose action at meetings. In addition, Section
203 of the Delaware General Corporation Law restricts transactions between the
Company and any "interested stockholders" (as defined therein). Finally, the
Company adopted a Shareholder Protection Rights Agreement, commonly known as a
"poison pill," in August of 1998. These provisions could reduce or eliminate any
takeover premium in the market price for the Company's Common Stock or otherwise
limit the price certain investors might be willing to pay for the Company's
Common Stock.
Reliance on Strategic Relationships. The Company has established
strategic relationships with a number of healthcare industry participants and
intends to continue doing so. The Company's experience in establishing and
managing these relationships is limited; therefore, the success or failure of
such relationships is difficult to predict. The costs of establishing and
managing these relationships could exceed any revenue they generate. Loss of
these strategic relationships, failure of these relationships to generate
additional revenue, actions taken by the Company's partners in these
relationships which conflict with the Company's values and objectives, and
failure by the Company to establish new strategic relationships in the future
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Risks Related to Investing in Strategic Partners or Allowing Customers
to Pay for our Products Using their Equity Securities. From time to time the
Company makes minority equity investments in private companies with whom it has
strategic relationships or customer relationships. In addition, in some cases
the Company agrees to accept equity securities from its customers in lieu of
cash as payment for products and services purchased by such customers. These
arrangements typically involve high risk, start-up companies whose equity
securities have no trading market and, therefore, no liquidity. As a result, the
Company may be required to hold these equity securities for an indefinite period
of time and may never have an opportunity to liquidate these securities. In
addition, these companies are subject to the numerous risks typically associated
with start-up, high growth companies. As a result, these companies may struggle
or even fail, causing the Company's equity in these companies to decrease or
become worthless and be partially or fully written off. Any such event could
have a material adverse effect on the Company's business, financial condition or
results of operations.
Internet Regulation Uncertainties. With the increased usage of and
transition to the Internet by both consumers and commercial users, it is likely
that local, state, federal, and international government agencies and other
regulators will continue to adopt new laws and regulations covering issues such
as Internet content, commerce, privacy, usage and/or access. Numerous laws
regulating these issues have been adopted at both the federal and state levels,
and the extent to which additional laws will be adopted is uncertain.
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<PAGE> 19
Because Internet-related revenues are becoming a significant portion of the
Company's revenue, any law or regulation impairing the growth and usage of
the Internet may hinder the demand for the Company's Internet-related products
and services and could have a material adverse effect on the Company's
business, results of operations or financial condition.
Dependence on Key Personnel. The Company's success is substantially
dependent on the performance of its key employees, including its senior
management team, key sales and marketing personnel, and key technical personnel.
The loss of the services of any of these key employees could have a material
adverse effect on the business, results of operations or financial condition of
the Company. The Company is heavily dependent upon its ability to attract,
retain and motivate skilled sales, marketing, technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, hire, or retain other highly
qualified sales, marketing, technical and managerial personnel in the future.
The inability to attract, hire, assimilate or retain the necessary sales,
marketing, technical and managerial personnel could have a material adverse
effect upon the Company's business, results of operations or financial
condition.
Liability for Information Retrieved from the Internet. Because
information distributed over the Internet is subject to unauthorized copying,
redistribution and other potential misuses, the Company may be exposed to
potential copyright infringement claims, privacy complaints, breach of contract
claims, or other legal claims that may not be covered by the Company's liability
insurance, which may have a material adverse effect on the Company's business,
results of operations or financial condition.
Dependence on the Internet. Access to the Company's Internet-related
products and services depends on the Internet infrastructure remaining a
reliable and effective medium. As the number of users of and products and
services offered on the Internet grows, there can be no assurance that the
Internet infrastructure will continue to be able to support the increased
demands placed upon it. In addition, the Internet could lose its commercial
viability if new technology and processes designed to alleviate increased levels
of Internet activity are not developed. Failure of the Internet to maintain a
reliable and effective infrastructure necessary to support commercial
transactions or the loss in confidence in the marketplace in the Internet's
ability to maintain a reliable and effective infrastructure may have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated with Internet "Hackers" and Computer Vandalism. In
the past, computer vandals have caused certain leading Internet sites to shut
down temporarily and have materially affected the performance of the Internet
during key business hours by various methods, including bombarding targeted
sites with numerous false requests for data. While the Company does not operate
any Web sites like those recently affected, the Company does rely on the
Internet to deliver products and services to certain customers and the Internet
is expected to become an even more significant distribution channel in the
future. If the overall performance of the Internet is seriously downgraded by
such Web site attacks or other acts of computer vandalism, the Company's ability
to deliver its products and services over the Internet could be adversely
impacted. In addition, traditional business interruption insurance may not cover
losses the Company could incur because of any such disruption of the Internet.
Risk of System Failure. Many of the Company's products and services
are accessible only over the Internet. The Internet and the Company's related
hardware and software is vulnerable to interruption or damage from fire, floods,
earthquakes, power loss, telecommunications failures, computer viruses, and
intentional sabotage. The occurrence of any of these interruptions could have a
material adverse effect on the Company's business, results of operations and
financial condition.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based
on the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
Quarterly Report on Form 10-Q, the words "estimate," "project," "believe,"
"anticipate," "intend," "expect," "plan," "predict," "may," "should," "will,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results, financial and otherwise, could
differ materially from
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<PAGE> 20
those set forth in or contemplated by the forward-looking statements contained
herein. Important factors that could contribute to such differences include,
but are not limited to, the matters discussed above under the caption "Risk
Factors" and other factors that may be described from time to time in the
Company's other filings with the Securities and Exchange Commission, news
releases and other communications. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained in this
Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to interest rate risk on its Bank of America
Revolver and obligations under capital leases. The Company's primary market risk
exposure relates to (i) the interest rate risk on long-term and short-term
borrowings, (ii) the impact of interest rate movements on its ability to meet
interest expense requirements and (iii) the impact of the interest rate
movements on the Company's ability to obtain adequate financing for future
operations. While the Company cannot predict or manage its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management continues to evaluate its financial position on an ongoing
basis.
Amounts outstanding under the Company's line of credit with Bank of
America bear interest at a variable rate based on Bank of America's prime rate.
At June 30, 2000, the Company had $27.2 million outstanding pursuant to the line
of credit. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations and cash flows should not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on May 2,
2000, the following matters were brought before and voted upon by the
stockholders.
1. On the proposal to elect the following persons to each serve as a
Class 1 Director for a three-year period and until his successor is elected and
qualified:
<TABLE>
<CAPTION>
AUTHORITY GRANTED AUTHORITY WITHHELD
----------------- ------------------
<S> <C> <C>
Keith O. Cowan ...................... 6,422,439 372,820
William M. McClatchey, M.D. ......... 6,422,439 372,820
</TABLE>
2. On the proposal to amend the Caredata.com, Inc. 1998 Long-Term
Incentive Plan to increase the number of shares of Common Stock available for
awards under the Plan by 400,000 from 850,000 to 1,250,000:
<TABLE>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
5,594,076 1,196,086 5,097
</TABLE>
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<PAGE> 21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (No. 333-12311) filed with the
Commission on September 19, 1996).
3.1.1 Certificate of Designation of Series 1998-A Preferred Stock
(incorporated by reference from Exhibit 3.1.1 to the
Company's Current Report on Form 8-K dated March 31, 1998).
3.1.2 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock (incorporated by
reference from Exhibit 3.1.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998).
3.2 Bylaws of the Company (incorporated by reference from Exhibit
3.2 to the Company's Registration Statement on Form S-1 (No.
333-12311) filed with the Commission on September 19, 1996).
4.1 Shareholder Protection Rights Agreement dated as of July 29,
1998 between the Company and SunTrust Bank, Atlanta, as
Rights Agent (incorporated by reference from Exhibit 2.8 to
the Company's Current Report on Form 8-K dated July 29,
1998).
4.2 Specimen Stock Certificate of the Common Stock of the Company
(incorporated by reference from Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (No. 333-12311) filed with
the Commission on September 19, 1996).
10.1 First Amendment to Amended and Restated Credit Agreement,
dated as of May 12, 2000, between the Company and Bank of
America.
10.2 Letter Agreement, dated as of July 14, 2000, between the
Company and Bank of America.
10.3 Second Amendment to Amended and Restated Credit Agreement,
dated as of August 11, 2000, between the Company and Bank of
America.
11 Statements of Computation of Per Share Loss
27 Financial Data Schedule (EDGAR Filing Only).
</TABLE>
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Caredata.com, Inc.
August 14, 2000 By: /s/ Thomas C. Kuhn III
-------------------------------
Thomas C. Kuhn III
Senior Vice President
Chief Financial Officer and
Chief Accounting Officer
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<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (No. 333-12311) filed with the
Commission on September 19, 1996).
3.1.1 Certificate of Designation of Series 1998-A Preferred Stock
(incorporated by reference from Exhibit 3.1.1 to the
Company's Current Report on Form 8-K dated March 31, 1998).
3.1.2 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock (incorporated by
reference from Exhibit 3.1.2 to the Company's Annual Report
on Form 10-K for the fiscal year-ended December 31, 1998).
3.2 Bylaws of the Company (incorporated by reference from Exhibit
3.2 to the Company's Registration Statement on Form S-1 (No.
333-12311) filed with the Commission on September 19, 1996).
4.1 Shareholder Protection Rights Agreement dated as of July 29,
1998 between the Company and SunTrust Bank, Atlanta, as
Rights Agent (incorporated by reference from Exhibit 2.8 to
the Company's Current Report on Form 8-K dated July 29,
1998).
4.2 Specimen Stock Certificate of the Common Stock of the Company
(incorporated by reference from Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (No. 333-12311) filed with
the Commission on September 19, 1996).
10.1 First Amendment to Amended and Restated Credit Agreement,
dated as of May 12, 2000, between the Company and Bank of
America.
10.2 Letter Agreement, dated as of July 14, 2000, between the
Company and Bank of America.
10.3 Second Amendment to Amended and Restated Credit Agreement,
dated as of August 11, 2000, between the Company and Bank of
America.
11 Statements of Computation of Per Share Loss
27 Financial Data Schedule (EDGAR Filing Only).
</TABLE>
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