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 JUNE 30, 2001
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 August 9, 2001 was 13,276,110.
Page 1
CARESCIENCE INC.
FORM 10-Q
JUNE 30, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets- - December 31, 2000 and June 30, 2001
(unaudited).....................................................................................2
Consolidated Statements of Operations- - Three and Six Months Ended June 30, 2000
and June 30, 2001 (unaudited)...................................................................3
Consolidated Statements of Cash Flows- - Six Months Ended June 30, 2000 and
June 30, 2001 (unaudited).......................................................................4
Notes to Consolidated 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............................12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..............................................12
Item 4. Submission of Matters to a Vote of Security Holders....................................13
Item 5. Other Information......................................................................13
Item 6. Exhibits and Reports on Form 8-K.......................................................13
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CARESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2000 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 26,702,096 $ 18,842,660
Short-term investments ................................ 3,001,770 4,984,980
Interest receivable ................................... 174,034 50,309
Accounts receivable, net of allowance for doubtful
accounts of $48,794 and $58,769 , respectively ..... 865,075 1,155,815
Prepaid expenses and other ............................ 240,345 262,837
------------ ------------
Total current assets ..................................... 30,983,320 25,296,601
------------ ------------
Property and equipment:
Computer equipment .................................... 4,611,573 4,841,364
Office equipment ...................................... 482,385 488,760
Furniture and fixtures ................................ 397,629 397,629
------------ ------------
5,491,587 5,727,753
Less--Accumulated depreciation and amortization ....... (2,562,342) (3,320,757)
------------ ------------
Net property and equipment .......................... 2,929,245 2,406,996
------------ ------------
Goodwill and other intangibles, net ................. -- 1,394,796
------------ ------------
Total assets ...................................... $ 33,912,565 $ 29,098,393
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations .......... $ 250,685 $ 220,684
Accounts payable ...................................... 1,090,613 394,418
Accrued expenses ...................................... 1,141,662 1,217,463
Deferred revenues ..................................... 3,035,511 3,912,936
------------ ------------
Total current liabilities ........................... 5,518,471 5,745,501
------------ ------------
Capital lease obligations ................................ 428,602 296,536
------------ ------------
Shareholders' equity:
Common stock, no par value, 16,000,000 shares
authorized, 14,206,851 and 14,716,110 shares issued
and 12,766,851 and 13,276,110 outstanding ........... 59,612,380 60,251,130
Additional paid-in capital ............................ 5,590,620 5,356,977
Deferred compensation ................................. (4,010,828) (3,145,477)
Accumulated other comprehensive income ................ 1,770 16,000
Accumulated deficit ................................... (32,328,450) (38,102,274)
Subscription receivables .............................. -- (420,000)
Treasury stock, at cost, 1,440,000 shares ............. (900,000) (900,000)
------------ ------------
Total shareholders' equity ......................... 27,965,492 23,056,356
------------ ------------
Total liabilities and shareholders' equity ....... $ 33,912,565 $ 29,098,393
============ ============
The accompanying notes are an integral part of these statements
Page 3
CARESCIENCE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Revenues ............................ $ 1,922,055 $ 2,976,770 $ 3,550,982 $ 5,492,381
Cost of revenues (excludes
stock-based compensation of
$171,045 and $341,175 for the
three and six months ended June 30,
2000, respectively, and
$163,209 and $326,622
for three and six months ended
June 30, 2001, respectively) ...... 1,148,426 1,497,407 2,174,467 2,869,771
------------ ------------ ------------ ------------
Gross profit ...................... 773,629 1,479,363 1,376,515 2,622,610
------------ ------------ ------------ ------------
Operating expenses:
Research and development (excludes
stock-based compensation of
$23,900 and $46,865 for the
three and six months ended
June 30, 2000, respectively, and
$9,772 and $19,544
for three and six months ended
June 30, 2001, respectively) .... 806,548 1,029,307 1,405,672 2,327,549
Selling, general and administrative
(excludes stock-based
compensation of $146,723 and
$292,652 for the three and six
months ended June 30, 2000
respectively, and $142,707 and
$285,542 for three and six months
ended June 30, 2001,
respectively) ................... 1,776,535 2,725,414 3,341,274 6,036,436
Stock-based compensation .......... 341,668 315,688 680,692 631,708
------------ ------------ ------------ ------------
Total operating expenses ........ 2,924,751 4,070,409 5,427,638 8,995,693
------------ ------------ ------------ ------------
Operating loss .................. (2,151,122) (2,591,046) (4,051,123) (6,373,083)
Interest income ..................... (24,239) (258,369) (66,287) (641,977)
Interest expense .................... 23,616 21,171 44,456 42,718
------------ ------------ ------------ ------------
Net loss ............................ (2,150,499) (2,353,848) (4,029,292) (5,773,824)
Accretion of redemption premium on
preferred stock ................... 138,360 -- 253,731 --
Preference distribution on preferred
stock ............................. 5,716,784 -- 5,716,784 --
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ...................... $ (8,005,643) $ (2,353,848) $ (9,999,807) $ (5,773,824)
============ ============ ============ ============
Net loss per common share:
Basic and diluted ................. $ (2.23) $ (0.18) $ (2.86) $ (0.44)
Weighted average shares outstanding:
Basic and diluted ................. 3,593,811 13,062,435 3,490,856 13,023,194
The accompanying notes are an integral part of these statements.
Page 4
CARESCIENCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
2000 2001
------------ ------------
Cash flows from operating activities:
Net loss ................................. $ (4,029,292) $ (5,773,824)
Adjustments to reconcile net loss to
net cash used in operating activities--
Depreciation and amortization ........ 338,409 663,333
Loss on disposal ..................... -- 158,000
Provision for bad debts .............. 12,000 9,975
Stock-based compensation ............. 680,692 631,708
Changes in assets and liabilities--
(Increase) decrease in--
Interest receivable ............... -- 123,610
Accounts receivable ............... (174,633) (91,773)
Prepaid expenses and other ........ (127,790) (20,552)
Increase (decrease) in--
Accounts payable and accrued
expenses ........................ 1,324,451 (764,068)
Deferred revenues ................. 783,027 467,135
------------ ------------
Net cash used in operating
activities ................... (1,193,136) (4,596,456)
------------ ------------
Cash flows used in investing activities:
Proceeds from the redemption of
short-term investments ................. -- 3,000,115
Purchases of short-term investments ..... -- (4,968,980)
Purchase of acquisition, net ............ -- (882,367)
Purchases of property and equipment, net (998,263) (199,650)
------------ ------------
Net cash used in investing
activities ................... (998,263) (3,050,882)
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations
and notes payable ...................... (187,741) (212,098)
Cost related to the issuance of
Common stock ........................ (116,802) --
------------ ------------
Net cash used in financing
activities ................... (304,543) (212,098)
------------ ------------
Net decrease in cash and cash equivalents .. (2,495,942) (7,859,436)
Cash and cash equivalents,
beginning of period ..................... 3,381,600 26,702,096
------------ ------------
Cash and cash equivalents,
end of period ........................... $ 885,658 $ 18,842,660
============ ============
The accompanying notes are an integral part of these statements.
Page 5
CARESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated balance sheet as of June 30, 2001, the statements of
operations for the three and six months ended June 30, 2000 and 2001 and the
statements of cash flows for the six months ended June 30, 2000 and 2001 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
June 30, 2001 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 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission. The results of operations for the three and six months
ended June 30, 2001 are not necessarily indicative of the operating results for
the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of CareScience, Inc. and its subsidiary. All significant intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents and Short-term Investments
The Company invests excess cash in highly liquid investment-grade
marketable securities including corporate commercial paper and U.S. government
agency bonds. For financial reporting purposes, the Company considers all highly
liquid investment instruments purchased with an original maturity of three
months or less to be cash equivalents. All investment instruments with
maturities greater than three months are available for use in current operations
and accordingly are classified as current assets. All investments are considered
available-for-sale and accordingly, unrealized gains and losses are included in
a separate component of shareholders' equity.
As of June 30, 2001 cash and cash equivalents and short-term
investments at cost and fair market value consisted of the following:
JUNE 30, 2001
--------------------------------------
GROSS FAIR
ORIGINAL UNREALIZED MARKET
COST GAINS VALUE
----------- ---------- -----------
Cash and cash equivalents $18,842,660 $ -- $18,842,660
Short-term investments .. 4,968,980 16,000 4,984,980
----------- ---------- -----------
$23,811,640 $ 16,000 $23,827,640
=========== ========== ===========
At June 30, 2001, short-term investments consisted of a $2 million
debt instrument maturing June 13, 2003 and $3 million debt instrument maturing
August 17, 2001.
Page 6
Supplemental Cash Flow Information
The Company paid interest of $44,456 and $42,718 for the six months
ended June 30, 2000 and 2001, respectively.
The Company financed $214,872 and $0 of property and equipment
purchases with capital leases for the six months ended June 30, 2000 and 2001,
respectively.
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 six month periods ended June 30, 2000 and 2001,
which accounted for 22% and 14% of total revenues, respectively. The Company
also had one customer for each of the three month periods ended June 30, 2000
and 2001, which accounted for 20% and 13% of total revenues, respectively.
The Company had two customers at June 30, 2001, which accounted for 23%
of total accounts receivable.
(2) NET LOSS PER SHARE
Net loss per share is calculated utilizing the principles of SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). Basic Earnings per Share ("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.
(3) SHAREHOLDERS'EQUITY
Subscriptions Receivable
On June 15, 2001 the Company issued 259,259 shares of its Common
stock to seven of its officers and three of its directors in a private sale at a
price of $1.62 per share which is equal to the closing price of its Common stock
on the Nasdaq National Market on that date. Concurrent with this sale, full
recourse notes bearing interest at a rate of 4.11% compounded semi-annually,
were issued to these officers and directors. The total amount of such notes
issued was $420,000.
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 2,565,038 shares of Common stock to satisfy grants under the
Plan. At June 30, 2001, there were 507,238 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 June 30, 2001 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 excess of the exercise price. This amount has been recorded
as deferred compensation and is being
Page 7
amortized over the vesting period of the applicable options, which range between
four and seven years. The Company recorded deferred compensation of $120,683 and
$0 during the year ended December 31, 2000 and the six months ended June 30,
2001, respectively and reversed $154,902 and $233,643 of deferred compensation
in connection with forfeited common stock options during the year ended December
31, 2000 and the six months ended June 30, 2001, respectively. The Company
recognized $341,668 and $680,692 of compensation expense related to options for
the three and six months ended June 30, 2000, respectively and $315,688 and
$631,708 of compensation expense related to options for the three and six months
ended June 30, 2001, respectively.
The following table summarizes the option activity for both plans:
OPTIONS OUTSTANDING
----------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AVERAGE
FOR OF PRICE AGGREGATE EXERCISE
GRANT SHARES PER SHARE PRICE PRICE
---------- --------- -------------- ---------- --------
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........................... 800,000 -- -- -- --
Granted.............................. (817,663) 817,663 0.78- 12.00 6,782,592 8.30
Forfeited/Canceled................... 573,298 (573,298) 1.25- 12.00 (4,926,524) 8.59
Excercised........................... -- (10,000) 0.25 2,500 0.25
---------- --------- -------------- ----------
Balance, December 31, 2000............. 701,495 1,837,137 0.25- 12.00 5,537,342 3.01
Authorized .......................... 500,000 -- -- -- --
Granted ............................ (813,685) 813,685 0.88- 2.81 1,186,130 1.46
Forfeited/canceled .................. 119,428 (119,428) 0.78- 6.63 (354,507) 2.97
---------- --------- -------------- ----------
Balance, June 30, 2001 ................ 507,238 2,531,394 $ 0.25- 12.00 $6,368,965 2.52
========== ========= ============== ==========
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 exclusive licenses with the University of Pennsylvania and
California Health Care Foundation for important parts our technology, and
the loss of either of these licenses would impair our ability to develop
our business;
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
CareScience, Inc. is a provider of online care management services. Our
mission is to transform the quality and efficiency of care delivery by providing
innovative clinical information technology to the health care industry. We
market our services to hospitals, health systems and pharmaceutical and
biotechnology manufacturers, and support more than 150 customers in 40 states
and in Europe.
We work with health care providers to manage clinical processes
surrounding the point of care so that fundamental reductions in errors and
operating cost can be achieved. Our online service offerings collect, share,
store and analyze clinical data generated by more than 100 widely used health
information systems. Our services allow customers to apply this data to the
management of care, including quality monitoring, practice improvement,
credentialing, profiling, error tracking, case management and clinical
guidelines. We provide consulting services to healthcare providers that support
strategic planning and clinical operations, with a special emphasis on mentoring
physicians and other clinical leaders in operational and executive roles.
For the pharmaceutical and biotechnology industry, we provide tools and
services that shorten the drug development cycle and improve development yield.
Our offerings include a suite of Internet-based data analysis and workflow
management tools, consulting services, customized research and strategic
development support. These tools and services are aimed at the specialized drug
development needs of pharmaceutical industry clinicians, product managers,
market strategists, health economists and outcomes researchers.
Page 9
We have pioneered and commercialized numerous clinical information
technologies. We have developed one of the nation's first online quality
measurement and management tools, one of the first clinically based outcome risk
assessment algorithms, one of the first health care application service
providers, and, most recently, the first peer-to-peer clinical data sharing
technology. We have developed these tools in collaboration with leading public
organizations, including the Wharton School of Business at the University of
Pennsylvania, the National Library of Medicine, Los Alamos National Laboratory
and The California HealthCare Foundation.
CareScience was incorporated in 1992 with the purpose of
commercializing intellectual property that was developed at the University of
Pennsylvania School of Medicine and The Wharton School of Business. In 1993, we
exclusively licensed the intellectual property underlying our core technology in
a 30-year agreement with the University of Pennsylvania. In 1996, we launched
our first Internet-based commercial offering based on this proprietary
technology under our Care Management System-TM- (formerly called CaduCIS)
service line. In 1999, we launched our Care Data Exchange-TM-, and Technology
Assessment Tools-TM-, as well as our Lifecycle Decision System-TM- service line,
which is aimed at the pharmaceutical and biotechnology industries. To date, we
have signed more than 50 contracts covering more than 150 hospitals, health
systems and pharmaceutical companies. On March 7, 2000, we changed our name from
Care Management Science Corporation to CareScience, Inc.
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 services
individually or as an integrated suite of 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.
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 on a percentage-of-completion basis or 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 revenue recognition policy.
Our deferred revenue balances were $3.0 million and $3.9 million at December 31,
2000 and June 30, 2001, respectively.
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 $43.2 million from the initial public offering on
July 5, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
REVENUES
Total revenues increased 55% to $3.0 million for the three months ended
June 30, 2001 from $1.9 million for the three months ended June 30, 2000. The
increase was primarily related to revenues generated from newly signed customer
contracts.
Unrecognized revenues related to customer contracts as of June 30, 2001
totaled $19.0 million.
COST OF REVENUES
Cost 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 June 30, 2001
Page 10
was $1.5 million (excluding stock-based compensation of $163,000), an increase
of $349,000 or 30%, compared to $1.1 million (excluding stock-based compensated
of $171,000) for the three months ended June 30, 2000. The increase was
primarily a result of additional costs necessary to service new customers.
GROSS PROFIT
Our gross profit margin increased from 40% for the three months ended
June 30, 2000, to 50% for the three months ended June 30, 2001. The increase in
gross profit margin is primarily due to increased revenues spread over a fixed
cost base.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product
development costs. Research and development costs for the three months ended
June 30, 2001 were $1.0 million (excluding stock-based compensation of $10,000),
an increase of $223,000 or approximately 28%, compared to $807,000 (excluding
stock-based compensation of $24,000) for the three months ended June 30, 2000.
This increase is primarily due to expenditures made related to new product
development.
As a percentage of revenue, research and development costs were 35% for
the three months ended June 30, 2001 as compared to 42% for the three months
ended June 30, 2000.
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 June 30,
2001 were $2.7 million (excluding stock-based compensation of $143,000), an
increase of $949,000, or 53% compared to $1.8 million (excluding stock-based
compensation of $147,000) for the three months ended June 30, 2000. The increase
was primarily related to hiring of additional sales and management personnel and
marketing expenditures to increase and support customer growth.
As a percentage of revenues, selling, general, and administrative
expenses were 92% for each of the three month periods ended June 30, 2001 and
June 30, 2000.
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 remaining 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 $3.1 million at June 30, 2001. 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 and $316,000 of this
expense during the three months ended June 30, 2000 and 2001, respectively.
INTEREST INCOME AND EXPENSE
Net interest income for the three months ended June 30, 2001 was
$237,000, an increase of $236,000 compared to $1,000 for the three months ended
June 30, 2000. The increase is primarily due to higher investable cash balances
as a result of the initial public offering.
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
REVENUES
Total revenues increased 55% to $5.5 million for the six months ended
June 30, 2001 from $3.6 million for the six months ended June 30, 2000. The
increase was primarily related to revenues generated from newly signed customer
contracts.
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COST OF REVENUES
Cost of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the six months ended June 30, 2001 was $2.9 million (excluding
stock-based compensation of $327,000), an increase of $700,000 or 32%, compared
to $2.2 million (excluding stock-based compensation of $341,000 for the six
months ended June 30, 2000. The increase was primarily a result of additional
costs necessary to service new customers.
GROSS PROFIT
Our gross profit margin increased from 39% for the six months ended
June 30, 2000, to 48% for the six months ended June 30, 2001. The increase in
gross profit margin is primarily due to increased revenues spread over a fixed
cost base.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product
development costs. Research and development costs for the six months ended June
30, 2001 were $2.3 million (excluding stock-based compensation of $20,000), an
increase of $900,000 or approximately 66%, compared to $1.4 (excluding
stock-based compensation of $47,000) for the six months ended June 30, 2000.
This increase is primarily due to expenditures made related to new product
development.
As a percentage of revenue, research and development costs were 42% of
revenue for the six months ended June 30, 2001 as compared to 40% for the six
months ended June 30, 2000.
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 six months ended June 30,
2001 were $6.0 million (excluding stock-based compensation of $286,000); an
increase of $2.7 million, or 81% compared to $3.3 million (excluding stock based
compensation of $293,000) for the six months ended June 30, 2000. The increase
was primarily related to hiring of additional sales and management personnel and
marketing expenditures to increase and support customer growth.
As a percentage of revenues, selling, general, and administrative
expenses were 110% for the six months ended June 30, 2001 as compared to 94% for
the six months ended June 30, 2000.
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 remaining 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 $3.1 million at June 30, 2001. 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 $681,000 and $632,000 of this
expense during the six months ended June 30, 2000 and June 30, 2001,
respectively.
INTEREST INCOME AND EXPENSE
Net interest income for the six months ended June 30, 2001 was
$599,000, an increase of $577,000 compared to $22,000 for the six months ended
June 30, 2000. The increase is primarily due to higher investable cash balances
as a result of the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES - JUNE 30, 2001
Since inception, we have financed our operations and funded our capital
expenditures through the private sale of equity securities, supplemented by 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 into at least 2002. As of June 30, 2001, we had $23.8 million in
cash and short term investments and working capital of $19.6 million.
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Net cash used in operating activities was $4.6 million for the six
months ended June 30, 2001 and $1.2 million for the six months ended June 30,
2000. For those periods, net cash used in operating activities was primarily to
fund losses from operations which was partially offset by a $1.3 million
increase in accounts payable and accrued expenses for the six months ended June
30, 2000.
Net cash used in investing activities was $3.1 million for the six
months ended June 30, 2001 and consisted of purchases of short-term investments
(net of proceeds), purchase of an acquisition and purchases of property and
equipment. For the six months ended June 30, 2000 net cash used in investing
activities was $1.0 million and consisted of purchases of property and
equipment.
Net cash used in financing activities was $212,000 for the six months
ended June 30, 2001 and $305,000 for the six months ended June 30, 2000.
Financing activities for these periods consisted primarily of payments on
capital lease obligations.
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 will meet
our operating and investing needs through the end of 2002. 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
Most of our cash equivalents 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 June 30, 2001 all of our
cash equivalents matured within 1 day 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
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
On June 15, 2001, we issued 259,259 shares of our Common stock to 7 of
our executive officers and 3 of our directors in a private sale at a price per
share equal to the closing price of our Common stock on the Nasdaq National
Market on that date. Such sales were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act for transactions not involving a
public offering and/or Rule 701 under the Securities Act.
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 net offering proceeds to us after total expenses were $43.2 million.
As of June 30, 2001, we have used approximately $20.0 million of the net
proceeds from our initial public offering of which approximately $10.4 million
was used for working capital and other general corporate purposes, approximately
$6.5 million was used for dividends on and the redemption of preferred stock,
approximately $2.0 million was used for the purchase of property plant and
equipment and $1.1 million was used for the acquisition of Strategic Outcomes
Services, Inc..
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.
Page 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2001, the Company held its 2001 Annual Meeting of
Stockholders, at which the stockholders approved (i) the election of 2
directors; (ii) the approval of an amendment to the Company's Amended and
Restated 1995 Equity Compensation Plan to increase the authorized shares of
Company Common stock issuable under the plan from 2,065,038 shares to 2,565,038
shares; and (iii) the ratification of the selection of Arthur Andersen LLP as
the Company's independent public accountants for the year 2001. At the date of
record, April 23, 2001, there were 13,016,851 shares outstanding. The vote on
such matters was as follows:
1. Election of directors:
Total Vote Withheld From
Name of Nominee Total Vote for Each Nominee Each Nominee
--------------- --------------------------- ------------
Ronald A. Paulus 9,841,710 73,500
Christopher R. McCleary 9,841,710 73,500
The terms of office of the following directors continued after the
Annual Meeting: David J. Brailer, Edward N. Antoian, C. Martin Harris, Jeffrey
R. Jay and William Winkenwerder.
2. The approval of an amendment to the Company's Amended and Restated
1995 Equity Compensation Plan to increase the authorized shares of Company
Common stock issuable under the plan from 2,065,038 shares to 2,565,038 shares:
FOR AGAINST ABSTAIN
--- ------- -------
9,638,510 0 161,075
3. The the ratification of the selection of Arthur Andersen LLP as the
Company's independent public accountants for the year 2001:
FOR AGAINST ABSTAIN
--- ------- -------
9,774,085 0 141,125
ITEM 5. OTHER INFORMATION
On May 23, 2001, our board of directors approved the amendment and
restatement of the Company's Amended and Restated 1998 Time Accelerated
Restricted Stock Option Plan in order to amend the change of control provisions
of that plan. The amendment and restatement of the plan became effective upon
approval by our board of directors. The amended and restated plan is attached as
an exhibit to this Form 10-Q and is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None
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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: August 9, 2001 By: /s/ Ronald A. Paulus
----------------------------
Ronald A. Paulus, President
Date: August 9, 2001 By: /s/ Steven Bell
----------------------------
Steven Bell, Chief Financial
Officer and Treasurer
Page 15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Amended and Restated 1998 Time Accelerated Restricted Stock
Option Plan.