Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

o

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
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
  23-2703715
(I.R.S. EMPLOYER
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 ý    No o

        The number of shares of the registrant's Common Stock outstanding, as of November 7, 2002 was 13,300,391.




CARESCIENCE, INC.

FORM 10-Q

SEPTEMBER 30, 2002

INDEX

PART I. FINANCIAL INFORMATION    

Item 1. Financial Statements

 

 

Consolidated Balance Sheets—September 30, 2002 and December 31, 2001(unaudited)

 

2

Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2002 and September 30, 2001 (unaudited)

 

3

Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2002 and September 30, 2001 (unaudited)

 

4

Notes to Consolidated Financial Statements

 

5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

15

Item 4. Controls and Procedures

 

15

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

16

Item 2. Changes in Securities and Use of Proceeds

 

16

Item 6. Exhibits and Reports on Form 8-K

 

17

Signatures

 

18

1



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

 
  September 30,
2002

  December 31,
2001

 
 
  (unaudited)

 
ASSETS  
Current assets:              
  Cash and cash equivalents   $ 13,318,991   $ 8,860,436  
  Short-term investments     4,983,080     12,000,950  
  Interest receivable     14,695     83,821  
  Accounts receivable, net of allowance for doubtful accounts of $77,054 and $68,354, respectively     1,364,598     1,207,094  
  Prepaid expenses and other     715,284     479,696  
   
 
 
Total current assets     20,396,648     22,631,997  
   
 
 
Property and equipment:              
  Computer equipment     5,348,752     4,707,706  
  Office equipment     546,857     471,754  
  Leasehold improvements     169,956     169,956  
  Furniture and fixtures     516,059     508,598  
   
 
 
      6,581,624     5,858,014  
  Less—Accumulated depreciation and amortization     (4,298,856 )   (3,345,267 )
   
 
 
    Net property and equipment     2,282,768     2,512,747  
   
 
 
Other assets     151,493     155,639  
   
 
 
Goodwill, net     1,245,687     1,245,687  
   
 
 
      Total assets   $ 24,076,596   $ 26,546,070  
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities:              
  Current portion of capital lease obligations and notes payable   $ 349,324   $ 207,747  
  Accounts payable     472,478     529,809  
  Accrued expenses     1,243,286     1,196,176  
  Deferred revenues     3,130,250     3,535,484  
   
 
 
Total current liabilities     5,195,338     5,469,216  
   
 
 
Capital lease obligations     133,012     200,069  
   
 
 
Notes payable     231,725      
   
 
 
Commitments and contingencies              
Shareholders' equity:              
  Preferred stock, no par value, 20,000,000 shares authorized, no shares issued or outstanding          
  Common stock, no par value, 100,000,000 shares authorized, 14,740,391 shares issued and 13,300,391 shares outstanding, and; 14,720,016 shares issued and 13,280,016 shares outstanding, respectively     60,282,656     60,256,012  
  Additional paid-in capital     4,838,843     5,008,718  
  Deferred compensation     (1,243,369 )   (2,202,250 )
  Accumulated other comprehensive income     32,123     57,852  
  Accumulated deficit     (44,198,399 )   (40,923,547 )
  Subscriptions receivable     (295,333 )   (420,000 )
  Treasury stock, at cost, 1,440,000 shares     (900,000 )   (900,000 )
   
 
 
    Total shareholders' equity     18,516,521     20,876,785  
   
 
 
      Total liabilities and shareholders' equity   $ 24,076,596   $ 26,546,070  
   
 
 

The accompanying notes are an integral part of these statements.

2


CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

 
  For the Three Months Ended
September 30,

  For the Nine Months Ended
September 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (unaudited)

 
Revenues   $ 3,715,892   $ 3,557,760   $ 10,528,521   $ 9,125,916  
Cost of revenues     1,771,351     1,826,459     5,159,826     5,098,627  
   
 
 
 
 
  Gross profit     1,944,541     1,731,301     5,368,695     4,027,289  
   
 
 
 
 
Operating expenses:                          
  Research and development     656,186     850,339     2,010,566     3,197,432  
  Selling, general and administrative     2,083,339     2,563,107     6,893,036     8,885,085  
   
 
 
 
 
    Total operating expenses     2,739,525     3,413,446     8,903,602     12,082,517  
   
 
 
 
 
  Operating loss     (794,984 )   (1,682,145 )   (3,534,907 )   (8,055,228 )
Interest income     (116,720 )   (247,675 )   (299,572 )   (889,652 )
Interest expense     18,238     23,497     39,517     66,215  
   
 
 
 
 
Net loss   $ (696,502 ) $ (1,457,967 ) $ (3,274,852 ) $ (7,231,791 )
   
 
 
 
 
Net loss per common share:                          
  Basic and diluted   $ (0.05 ) $ (0.11 ) $ (0.25 ) $ (0.55 )
   
 
 
 
 
Weighted average shares outstanding:                          
  Basic and diluted     13,300,391     13,277,384     13,295,988     13,108,855  
   
 
 
 
 

The accompanying notes are an integral part of these statements.

3


CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  For the Nine Months Ended
September 30,

 
 
  2002
  2001
 
 
  (unaudited)

 
Cash flows from operating activities:              
  Net loss   $ (3,274,852 ) $ (7,231,791 )
  Adjustments to reconcile net loss to net cash used in operating activities—              
    Depreciation and amortization     978,225     1,034,710  
    Loss on disposal         158,000  
    Provision for bad debts     9,000     14,475  
    Stock-based compensation     789,006     947,396  
    Changes in assets and liabilities—              
      (Increase) decrease in—              
        Interest receivable     69,126     119,559  
        Accounts receivable     (166,504 )   (270,076 )
        Prepaid expenses and other     (235,588 )   (495,571 )
        Other assets     4,146      
      Increase (decrease) in—              
        Accounts payable and accrued expenses     114,446     (1,057,447 )
        Deferred revenues     (405,234 )   805,068  
   
 
 
          Net cash used in operating activities     (2,118,229 )   (5,975,677 )
   
 
 
Cash flows from investing activities:              
  Purchases of short-term investments     (13,884,634 )   (8,000,000 )
  Proceeds from the redemption of short-term investments     20,876,775     5,000,115  
  Cash paid for acquisition         (882,367 )
  Purchases of property and equipment     (724,661 )   (302,155 )
   
 
 
          Net cash provided by (used in) investing activities     6,267,480     (4,184,407 )
   
 
 
Cash flows from financing activities:              
  Proceeds from the exercise of common stock options     26,644     4,883  
  Payments on capital lease obligations and note payable     (271,090 )   (343,805 )
  Proceeds from notes payable     553,750     237,751  
   
 
 
          Net cash provided by (used in) financing activities     309,304     (101,171 )
   
 
 
Net increase (decrease) in cash and cash equivalents     4,458,555     (10,261,255 )
Cash and cash equivalents, beginning of period     8,860,436     26,702,096  
   
 
 
Cash and cash equivalents, end of period   $ 13,318,991   $ 16,440,841  
   
 
 

The accompanying notes are an integral part of these statements.

4


CARESCIENCE, INC. AND SUDSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)    Summary of Significant Accounting Policies

        CareScience, Inc. (the "Company") provides Internet-based tools designed to improve the quality and efficiency of health care. The Company uses its proprietary clinical algorithms and data collection and storage technologies to perform complex clinical analyses. The Company's customers use its services to identify clinical inefficiencies and medical errors and monitor the results of implemented solutions. Additionally, the Company facilitates the real-time exchange of clinical information over the Internet among local health care constituents.

        The consolidated balance sheet as of September 30, 2002, the consolidated statements of operations for the three and nine months ended September 30, 2002 and 2001 and the consolidated statements of cash flows for the nine months ended September 30, 2002 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 as of September 30, 2002 and for all periods presented have been made.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. 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 nine months ended September 30, 2002 are not necessarily indicative of the operating results for the full year.

        The accompanying consolidated financial statements include the accounts of CareScience, Inc. and its subsidiary. All significant intercompany transactions and balances have been eliminated.

        On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement modifies existing generally accepted accounting principles related to the amortization and impairment of goodwill and other intangible assets. Goodwill, including goodwill associated with equity method investments, will no longer be amortized. In addition, goodwill, other than goodwill associated with equity method investments, must be assessed at least annually for impairment using a fair-value based approach. Impairment losses that arise due to the initial application of this statement are to be reported as a cumulative effect of change in accounting principle. The Company has completed an analysis of the impact of implementing the provisions of this statement as of January 1, 2002 and has determined that there is no impairment loss. With the adoption of this new standard, as of January 1, 2002 the Company discontinued the amortization of the

5


goodwill balance. The following proforma disclosure is included pursuant to the disclosure requirements of SFAS 142:

 
  For the Three Months Ended
September 30,

  For the Nine Months Ended
September 30,

 
 
  2002
  2001
  2002
  2001
 
Reported net loss   $ (696,502 ) $ (1,457,967 ) $ (3,274,852 ) $ (7,231,791 )
Add back—Goodwill amortization         66,149         129,069  
   
 
 
 
 
Adjusted net loss   $ (696,502 ) $ (1,391,818 ) $ (3,274,852 ) $ (7,102,722 )
   
 
 
 
 
Basic and diluted net loss per Common share:                          
Reported net loss   $ (0.05 ) $ (0.11 ) $ (0.25 ) $ (0.55 )
Goodwill amortization         0.01         0.01  
   
 
 
 
 
Adjusted net income   $ (0.05 ) $ (0.10 ) $ (0.25 ) $ (0.54 )
   
 
 
 
 

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a business". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The impact of adopting this accounting standard did not have a material effect on the Company's financial position or results of operations.

        In January 2002, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred." This consensus requires that reimbursements received for out-of-pocket expenses incurred are characterized as revenue in the statement of operations. The Company adopted EITF 01-14 effective January 1, 2002 and has made the appropriate reclassifications as required by EITF 01-14. The effect of adopting EITF 01-14 was to increase revenues and expenses by $23,000 and $69,000 for the three and nine months ended September 30, 2002, respectively and $49,000 and $125,000 for three and nine months ended September 30, 2001, respectively.

        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.

6


        As of September 30, 2002 cash and cash equivalents and short-term investments at cost and fair market value consisted of the following:

 
  September 30, 2002
 
  Original
Cost

  Unrealized
Gains

  Fair
Market
Value

Cash and cash equivalents   $ 13,318,991   $   $ 13,318,991
Short-term investments     4,950,957     32,123     4,983,080
   
 
 
    $ 18,269,948   $ 32,123   $ 18,302,071
   
 
 

        At September 30, 2002 short-term investments consisted of five debt instruments maturing between October 31, 2002 and February 14, 2003.

        The Company paid interest of $39,517 and $66,215 for the nine months ended September 30, 2002 and 2001, respectively.

        The Company financed $23,585 and $0 of property and equipment purchases with capital leases for the nine months ended September 30, 2002 and 2001, respectively.

        The Company generates revenue from subscriptions to its internet based proprietary technology applications and hosting of customer data, as well as development agreements and consulting services.

        The Company's agreements for its internet based tools, which typically cover an initial period of one-to-five years and are fixed priced, provide to customers, among other things, a software license, project management services, data management services, data storage and computer server maintenance and software support and maintenance. Revenues under these contracts are recognized ratably over the contract period. Any additional consulting fees, outside of the initial contract, are recognized as the service is delivered.

        The Company's development agreements, with periods ranging from three-to-five years, provide for customer funding for the development of new solutions and services. In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", the Company is treating revenue on these agreements as a single element contract and is recognizing total revenue on a cost-to-cost basis over the entire agreement period.

        The Company's various consulting services are delivered either as a single program or as a project whose completion normally occurs over a several month period. Consulting revenues from program services are recorded as the program is completed. Consulting revenues from projects are recorded on a percentage of completion basis over the term of the project.

        The Company's operations are conducted in one business segment and sales are primarily made to health care payors and providers. One customer accounted for 10% and two customers accounted for 22% of total revenues for the three and nine months ended September 30, 2002. One different customer accounted for 10% of total accounts receivable as of September 30, 2002. Two customers accounted for 22% and one customer accounted for 13% of total revenues for the three months and nine months ended September 30, 2001, respectively. As of December 31, 2001, a different customer represented 12% of accounts receivable.

7


        Accumulated other comprehensive income consists of unrealized gains and losses on available for sale securities as follows:

Balance, December 31, 2001   $ 57,852  
Current-period change     (25,729 )
   
 
Balance, September 30, 2002   $ 32,123  
   
 

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

        Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the 2002 presentation.

(2)    Net Loss per Share

        Net loss per share is calculated utilizing the principles of SFAS No. 128, "Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive securities and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as options and warrants.

        Under SFAS No. 128, the Company's granting of certain stock options and warrants 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 and warrants and convertible into common shares were excluded from the calculations as they were anti-dilutive due to the net loss. Stock options to purchase 2,047,873 shares of common stock at exercise prices ranging from $0.25 to $12.00 were outstanding as of September 30, 2002, but were excluded from the computation of diluted net loss per share since the inclusion would be anti-dilutive due to the net loss.

(3)    Commitments and Contingencies

Litigation

        The Company and certain of its officers are defendants in a purported class action litigation pending in the United States District Court for the Eastern District of Pennsylvania. The complaints purport to bring claims on behalf of all persons who allegedly purchased Company common stock between June 29, 2000 and November 1, 2000, for alleged violations of the federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with respect to the initial public offering of Company common stock. Specifically, the complaints allege, among other things, that the Company's Prospectus and Registration Statement misrepresented and omitted to disclose material facts concerning the Company's competitors, two of the Company's prospective products and the Company's contract with the California HealthCare Foundation. The actions seek compensatory and other damages, and costs and expenses associated with litigation. Although the Company cannot predict the ultimate outcome of

8



the case or estimate the range of any potential loss that may be incurred in the litigation, management believes the lawsuits are frivolous and without merit, strenuously denies all allegations of wrongdoing asserted by plaintiffs, and believes it has meritorious defenses to plaintiffs' claims. The Company intends to vigorously defend the lawsuits. Management believes that the resolution of this litigation will not have a material effect on our consolidated financial position or results of operations.

(4)    Income Taxes

        The Company has incurred operating losses and generated a significant accumulated deficit through September 30, 2002, therefore, no tax provisions have been recorded. As of September 30, 2002 the Company had federal net operating loss carryforwards of approximately $34 million which expire from 2010 through 2021. As of September 30, 2002 and September 30, 2001, a valuation allowance was recorded for 100% of the Company's deferred tax asset as realization of the tax benefit was not considered more likely than not under the provisions of SFAS No. 109.

        The Tax Reform Act of 1986 contains certain provisions that limit the utilization of net operating losses and tax credit carryforwards if there has been a cumulative ownership change greater than 50% within a three-year period. Such limitation could result in the expiration of the net operating losses before such losses are fully utilized.

9



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, 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:

10


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.

        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 products collect, share, store and analyze clinical data generated by 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 also provide consulting services to healthcare providers that support strategic planning and clinical operations.

        For the pharmaceutical and biotechnology industry, we provide services that shorten the drug development cycle and improve development yield. Our offerings consulting services, customized research and strategic development support. These services are aimed at the specialized drug development needs of pharmaceutical industry clinicians, product managers, market strategists, health economists and outcomes researchers.

        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 product based on this proprietary technology under our Care Management System™ product line. In 1999, we initiated our Care Data Exchange™, as well as our Lifecycle Decision System™, which is aimed at the pharmaceutical and biotechnology industries. 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 consulting services and development agreements. We sell our services individually or as an integrated suite of solutions and services. We price our subscription services on a per-encounter basis, such as the number of a hospital's patient admissions or outpatient visits.

        Our agreements for our internet based tools, which typically cover an initial period of one-to-five years and are fixed priced, provide to customers, among other things, a software license, project management services, data management services, data storage and computer server maintenance and software support and maintenance. Revenues under these contracts are recognized ratably over the contract period.

11



        Our development agreements, with periods ranging from one-to-five years, provide for customer funding for the development of new solutions and services. In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", the Company is treating revenue on these agreements as a single element contract and is recognizing total revenue on a cost-to-cost basis over the entire agreement period.

        Our various consulting services are delivered either as a single program or as a project whose completion normally occurs over a several month period. Consulting revenues from program services are recorded as the program is completed. Consulting revenues from projects are recorded on a percentage of completion basis over the term of the project.

        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 $3.1 million and $3.5 million at September 30, 2002 and December 31, 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 at historic or greater levels as we further our product development and sales and marketing efforts. Accordingly, we expect to continue to incur quarterly net losses for the foreseeable future.

        Since inception, we have incurred cumulative net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of December 31, 2001, we had net operating loss carryforwards of approximately $34.0 million for federal income tax purposes. The net operating loss carryforwards, if not utilized, expire from 2010 through 2021. Federal tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of an ownership change as defined in Section 382 of the Internal Revenue Code.

Results of Operations

Three Months Ended September 30, 2002 and September 30, 2001

        Total revenues increased 4% to $3.7 million for the three months ended September 30, 2002 from $3.6 million for the three months ended September 30, 2001. The increase was primarily related to revenues generated from additional customer and development contracts.

        Unrecognized revenues related to customer and development contracts (backlog) as of September 30, 2002 totaled $26.4 million.

        Cost of revenues include customer and service-related costs including personnel and facility costs, depreciation and maintenance. Cost of revenues for the three months ended September 30, 2002 was $1.8 million a decrease of $55,000 or 3% compared to $1.8 million for the three months ended September 30, 2001. We have been able to service an increasing revenue base while keeping cost of revenues relatively constant as a result of cost control initiatives.

        Our gross profit margin increased from 49% for the three months ended September 30, 2001, to 52% for the three months ended September 30, 2002. The increase in gross profit margin is primarily due to increased revenues spread over a partially fixed cost base, as well as the results of our cost control initiatives.

12


        Research and development costs include technology and product development costs. Research and development costs for the three months ended September 30, 2002 were $656,000, a decrease of $194,000 or approximately 23%, compared to $850,000 for the three months ended September 30, 2001. This decrease is primarily due to lowering costs as certain development projects near completion.

        As a percentage of revenue, research and development costs were 18% for the three months ended September 30, 2002 as compared to 24% for the three months ended September 30, 2001. As we continue to invest in research and development, we expect these costs will increase as a percentage of revenue in the future.

        Selling, general and administrative expenses include costs associated with our sales, marketing, finance, human resource and administrative functions. Selling, general and administrative expenses for the three months ended September 30, 2002 were $2.1 million, a decrease of $480,000, or 19% compared to $2.6 million for the three months ended September 30, 2001. The decrease was primarily related to a reduction in marketing and other administrative expenditures in 2002 as part of the company's efforts of reducing costs.

        As a percentage of revenues, selling, general, and administrative expenses were 56% for the three months ended September 30, 2002 as compared to 72% for the three months ended September 30, 2001. We expect the percentage of selling, general and administrative costs to increase as a percentage of revenues in the future as we invest in new sales and marketing initiatives in order to promote growth in revenues.

        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 $1.2 million at September 30, 2002. We expect to amortize this amount over the remaining one to four year vesting periods of the granted options. Accordingly, our results from operations will include stock-based compensation expense at least through 2006. We recognized $262,000 and $316,000 of this expense during the three months ended September 30, 2002 and 2001, respectively.

        Net interest income for the three months ended September 30, 2002 was $98,000, a decrease of $126,000, compared to $224,000 for the three months ended September 30, 2001. The decrease is primarily due to lower investable cash balances and a decrease in investment interest rates.

Nine Months Ended September 30, 2002 and September 30, 2001

        Total revenues increased 15% to $10.5 million for the nine months ended September 30, 2002 from $9.1 million for the nine months ended September 30, 2001. The increase was primarily related to revenues generated from additional customer and development contracts.

        Unrecognized revenues related to customer and development contracts (backlog) as of September 30, 2002 totaled $26.4 million.

13



        Cost of revenues includes customer and service-related costs including personnel and facility costs, depreciation and maintenance. Cost of revenues for the nine months ended September 30, 2002 was $5.2 million an increase of $61,000 or 1%, compared to $5.1 million for the nine months ended September 30, 2001. We have been able to service an increasing revenue base while keeping cost of revenues relatively constant as a result of a partially fixed cost base as well as cost control initiatives.

        Our gross profit margin increased from 44% for the nine months ended September 30, 2001, to 51% for the nine months ended September 30, 2002. The increase in gross profit margin is primarily due to increased revenues spread over a partially fixed cost base, as well as the results of our cost control initiatives.

        Research and development costs include technology and product development costs. Research and development costs for the nine months ended September 30, 2002 were $2.0 million, a decrease of $1.2 million or approximately 37%, compared to $3.2 million for the nine months ended September 30, 2001. This decrease is primarily due to lowering costs as certain development projects were completed.

        As a percentage of revenue, research and development costs were 19% for the nine months ended September 30, 2002 as compared to 35% for the nine months ended September 30, 2001. As we continue to invest in research and development, we expect these costs will increase as a percentage of revenue in the future.

        Selling, general and administrative expenses include costs associated with our sales, marketing, finance, human resource and administrative functions. Selling, general and administrative expenses for the nine months ended September 30, 2002 were $6.9 million, a decrease of $2.0 million, or 22% compared to $8.9 million for the nine months ended September 30, 2001. The decrease was primarily related to a planned reduction in marketing and other administrative expenditures in 2002 as part of the company's efforts of reducing costs.

        As a percentage of revenues, selling, general, and administrative expenses were 65% for the nine months ended September 30, 2002 as compared to 97% for the nine months ended September 30, 2001. We expect the percentage of selling, general and administrative costs to increase as a percentage of revenues in the future as we invest in new sales and marketing initiatives in order to promote growth in revenues.

        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 $1.2 million at September 30, 2002. We expect to amortize this amount over the remaining one to four year vesting periods of the granted options. Accordingly, our results from operations will include stock-based compensation expense at least through 2006. We recognized $789,000 and $947,000 of this expense during the nine months ended September 30, 2002 and 2001, respectively.

14


        Net interest income for the nine months ended September30, 2002 was $260,000, a decrease of $563,000, compared to $823,000 for the nine months ended September 30, 2001. The decrease is primarily due to lower investable cash balances and a decrease in investment interest rates.

        Since inception, we have financed our operations and funded our capital expenditures through the public offering and private sale of equity securities, supplemented by private debt and equipment leases. We believe that current capital resources will be sufficient to fund anticipated capital expenditures and working capital requirements for at least the next 12 months. As of September 30, 2002, we had $18.3 million in cash and cash equivalents and short-term investments and working capital of $15.2 million.

        Net cash used in operating activities was $2.1 million for the nine months ended September 30, 2002 and $6.0 million for the nine months ended September 30, 2001. For those periods, net cash used in operating activities was primarily to fund losses from operations offset by changes in current assets and liabilities.

        Net cash provided by investing activities was $6.3 million for the nine months ended September 30, 2002 and consisted primarily of the net proceeds from the redemption of short-term investments offset with purchases of property and equipment. Net cash used in investing activities was $4.2 million for the nine months ended September 30, 2001 and consisted primarily of the net purchases of short-term investments offset with funding of an acquisition and purchases of property and equipment.

        Net cash provided by financing activities was $309,000 for the nine months ended September 30, 2002 and consisted of proceeds from notes payable and the exercise of common stock options net of payments on capital lease obligations and notes payable. Net cash used in financing activities consisted of $101,000 for nine months ended September 30, 2001, and consisted of payments on capital lease obligations net of proceeds from a note payable and the exercise of common stock options.

        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 for at least the next 12 months. 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. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our cash equivalents, short-term investments and capital lease obligations are at fixed interest rates and therefore the fair market value of these instruments is affected by changes in market interest rates. As of September 30, 2002 all of our short-term investments mature within 5 months and we had the ability to immediately liquidate our investments. Therefore, we believe that we are exposed to immaterial levels of market risk.


ITEM 4. CONTROLS AND PROCEDURES

a.
Within the 90 days prior to the date of filing of this report, we carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer along with Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chairman and Chief Executive Officer

15


b.
There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        We and certain of our officers are defendants in a purported shareholder class action lawsuit litigation pending in the United States District Court for the Eastern District of Pennsylvania described below for alleged violations of federal securities laws. Although we cannot predict the ultimate outcome of the case or estimate the range of any potential loss that may be incurred in the litigation, we believe the lawsuits are frivolous and without merit, strenuously deny all allegations of wrongdoing asserted by plaintiffs, and believe we have meritorious defenses to plaintiffs' claims. We intend to vigorously defend the lawsuits. We believe that the resolution of this litigation will not have a material effect on our business, financial condition or results of operations.

        The class action litigation is the result of several complaints filed with the court beginning on October 17, 2001. These actions were consolidated on November 16, 2001. The court approved the selection of the lead plaintiff in the litigation on March 12, 2002. We filed a motion to dismiss the consolidated complaint on August 7, 2002. These complaints purport to bring claims on behalf of all persons who allegedly purchased our common stock between June 29, 2000 and November 1, 2000, for alleged violations of the federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with respect to the initial public offering of our common stock. Specifically, the complaints allege, among other things, that our Prospectus and Registration Statement misrepresented and omitted to disclose material facts concerning our competitors, two of our prospective products and our contract with the California HealthCare Foundation. The actions seek compensatory and other damages, and costs and expenses associated with litigation.

        We are not involved in any other legal proceedings that either individually or taken as a whole would have a material adverse effect on our business, financial condition or results of operations.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        On June 28, 2000 the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File number 333-32376), relating to the initial public offering of our Common Stock, no par value per share. The net offering proceeds to us after total expenses were $43.4 million. As of September 30, 2002, we have used approximately $26.1 million of the net proceeds from our initial public offering of which approximately $15.8 million was used for working capital and other general corporate purposes, including expansion of our sales and marketing efforts as well as development of our solutions and services, approximately $6.5 million was used for dividends on and the redemption of preferred stock, approximately $3.4 million was used for the purchase of property plant and equipment, including technology and equipment expenditures required to support our product development infrastructure 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.

16




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

17


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    CARESCIENCE, INC.

Date: November 7, 2002

 

By:

 

/s/  
DAVID J. BRAILER      
David J. Brailer
Chairman and Chief Executive Officer

Date: November 7, 2002

 

By:

 

 
        /s/  STEVEN BELL      
Steven Bell, Chief Financial Officer and Treasurer

18



Sarbanes-Oxley Section 302(a) Certification

I, David J. Brailer, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of CareScience, Inc.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 7, 2002   By:   /s/  DAVID J. BRAILER      
David J. Brailer
Chairman and Chief Executive Officer

19



Sarbanes-Oxley Section 302(a) Certification

I, Steven Bell, certify that:

7.
I have reviewed this quarterly report on Form 10-Q of CareScience, Inc.;

8.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

9.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

10.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
11.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
12.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 7, 2002   By:   /s/  STEVEN BELL      
Steven Bell
Chief Financial Officer and Treasurer

20



EXHIBIT INDEX

Exhibit No.

  Description
99.1   Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2

 

Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

21




QuickLinks

INDEX
PART I. FINANCIAL INFORMATION
Sarbanes-Oxley Section 302(a) Certification
Sarbanes-Oxley Section 302(a) Certification
EXHIBIT INDEX