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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20805
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APACHE MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2476415
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1650 TYSONS BOULEVARD, 22102
MCLEAN, VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 847-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
COMMON STOCK $.01 PAR VALUE PER SHARE
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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of March 1, 2001 was approximately
$1,632,000. The number of outstanding shares of the registrant's Common Stock as
of that date was 7,466,966.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant intends to file a preliminary proxy statement for its annual
meeting of stockholders pursuant to Regulation 14A within 120 days of the end of
the fiscal year ended December 31, 2000. Portions of such proxy statement are
incorporated by reference into this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
In 2000, APACHE Medical Systems, Inc., which is referred to in this report
as APACHE or the Company, concentrated on its traditional business of providing
clinically based decision support information systems, research and consulting
services to the healthcare industry. This description reflects the business of
the Company as it was conducted in 2000. Subsequently, the Company has signed a
non-binding letter of intent with Cerner Corporation to sell the traditional
clinical outcomes business and has purchased MetaContent, Inc., a company that
specializes in "mission critical" applications including database development,
medical coding strategy and related services. In the future, the Company may
pursue opportunities in other areas, including the medical coding industry. See
Management's Discussion and Analysis of Financial Conditions and Results of
Operations for a discussion.
The Company provides hospitals and physicians with patient-specific,
concurrent and predictive outcomes information at the point of care that can be
used to assist them in making clinical and resource utilization decisions.
APACHE's products and services address the information needs of both healthcare
practitioners and administrators by enabling joint access to clinical and
utilization information, which facilitates the containment of costs, and the
delivery of more consistent, high-quality care, including the potential
reduction of medical errors. APACHE's products and services have been focused on
high-risk, high-cost patients, such as critical care, acute care, cardiovascular
care, HIV/AIDS and certain chronically-ill patients, who typically account for a
disproportionately large share of healthcare expenditures.
THE APACHE(R) SOLUTIONS
APACHE believes that its products and services address the healthcare
industry's need for sophisticated outcomes-based clinical decision support
information. The APACHE solutions bridge the gap between the information needs
of healthcare practitioners and those of hospital administrators by enabling
joint access to clinical and cost information, which facilitates the containment
of cost, improvement in quality outcomes and the consistent delivery of high
quality care.
The Company's primary decision support system is focused on critical care
and targets hospitals and health systems with over 200 beds. For this market, in
1998 the Company introduced a new product line, the APACHE Critical Care Series
CCS, and a companion set of clinical consulting services marketed under the
APACHE Best Care(TM) Services label. These replaced the Company's previous
Medical Cost Management Program, or MCMP, and related Critical Care System
offerings. The CCS is compromised of two major modules, Voyager+ and Discover+,
which are described below.
In 2000, the Company completed development of an Internet version of its
Voyager+ product for critical care and obtained its first contract for this
system. This product is targeted to both domestic and international hospitals,
and is designed to lower the initial capital investment and installation costs
for the product. The Company achieved its first client "go-live" of this product
in January 2001.
Generally, the Company's systems, which incorporate software and related
consulting services, generate information to assist providers concurrently in
making informed clinical resource utilization and patient care decisions. These
clinical decision support systems are designed to enable providers to:
- Determine appropriate cost-effective treatment plans for individual
patients.
- Compare actual individual patient outcomes with both predicted patient
outcomes and statistically relevant similar hospital, regional and national
norms to identify areas for improvement.
- Analyze the performance of physicians by using clinically based,
peer-reviewed, severity-adjustment methods.
- Analyze and measure quantifiable improvements in the clinical and cost
outcomes of specified groups of patients.
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- Plan staffing, number of beds and bed mix given the severity-adjusted
mix of patients in an intensive care unit.
APACHE's products and services are differentiated from many other
healthcare decision support systems in the following important ways:
Detailed Clinical Data
APACHE's products and services utilize detailed clinical data on a variety
of health parameters and outcomes data. In addition, APACHE's products and
services utilize administrative and utilization data.
Patient-specific, Severity-adjusted Data
APACHE's products and services utilize clinical, demographic and financial
data for individual patients, in addition to patient groups. APACHE's
methodologies are designed to severity-adjust these data to enable the
assessment of the overall health status of the patient. Severity adjustment is a
technique for weighting the relative factors affecting the degree of illness of
a patient. Physicians use APACHE's patient-specific clinical decision support
systems to develop individual patient care plans incorporating APACHE's
severity-adjusted outcome predictions.
Concurrent, Predictive Outcomes Information
APACHE's systems support physician decision making by providing outcomes
information in three timeframes: (i) predictions of the patient's outcomes
(e.g., mortality, adverse occurrences and length of stay); (ii) current
information, such as the patient's daily health status; and (iii) historical or
retrospective information about the patient or groups of similar patients. In
contrast to retrospective systems, APACHE's ability to provide concurrent
information permits the generation of predictive information during the course
of a patient's care, thereby enhancing a physician's ability to direct treatment
resources as the patient's health status changes.
High-risk, High-cost Patient Focus
Unlike decision support systems that focus primarily on general hospital
patients, APACHE's systems are specifically designed to help predict outcomes
for high-risk, high-cost patients, such as critical care patients. These
patients typically represent a disproportionately large share of hospital costs.
APACHE's solutions are derived from the Company's clinical outcomes
methodologies and proprietary databases.
Clinical Outcomes Methodologies
APACHE's methodologies include algorithms that apply relative weightings to
selected physiological variables to define a patient's health status. APACHE's
methods of measuring variations in a patient's health status and outcomes in
critical care have been utilized in connection with more than 2,000
peer-reviewed articles in professional journals. APACHE has acquired rights to
and refined these methodologies, which were originally developed by leading
academic medical centers such as The George Washington University Hospital and
Dartmouth-Hitchcock Medical Center.
Proprietary Databases
The Company's databases include data on a variety of health parameters,
such as vital signs, laboratory results and measures of physiological function,
as well as outcomes data, such as adverse occurrences, morbidity and mortality.
The databases contain information from more than 1,500,000 patients, most of
whom are high-risk, high-cost patients. The Company created, and continues to
refine, the critical care database. APACHE acquired rights to its cardiovascular
care, acute care, HIV/AIDS, and neonatal databases. In cardiovascular and acute
care, APACHE also acquired the rights to related methodologies.
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APACHE's databases are periodically updated with patient data from customers as
well as special studies, with the goal of ensuring that the databases reflect
the results of current medical practice on a national basis.
APACHE's products and services are currently focused on coverage of
patients in the critical, acute and cardiovascular care categories. The Company
also currently offers products, consulting services, and health outcomes
research in HIV/AIDS.
APACHE PRODUCTS AND SERVICES
The following tables summarize the major products and services currently
offered by the Company. (See "Restructuring Charges" in Management's Discussion
and Analysis regarding the Company's decision to no longer pursue the
development and selling of certain of these products and services.)
APACHE PRIMARY INFORMATION SYSTEMS PRODUCTS:
PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
------- ------------------- ------------------------- -------------------------
Benchmark Study Critical care; Acute care hospitals with One-time comparative
cardiovascular care ICU's; acute care analysis and report of a
hospitals with heart provider's clinical and
centers financial performance;
used to identify and
quantify opportunities
for cost or quality
improvement.
APACHE Critical care Acute care hospitals with Point-of-care information
Critical Care Series: ICU's system, providing daily
Discover+ and prospective outcomes
predictions, as well as
response to treatment
trending and reporting.
These tools support the
case management of
individuals and patient
groups.
APACHE Critical care Acute care hospitals with Multi-dimensional
Critical Care Internet ICU's analytical tools
Voyager+ and Critical providing severity
Care Series: Voyager+ adjusted outcomes
compared to normative
standards, integration of
financial and clinical
outcomes and standard
reports.
APACHE Acute Care Acute care Acute care hospitals, Used for quality
Voyager+ business coalitions assurance and to identify
priorities for clinical
process improvement and
assess results of these
initiatives. The Acute
Care Voyager+ product
includes JCAHO
ORYX-certified outcomes
measures.
HIV Manager HIV/AIDS Physicians and Physician practice
Physicians' Groups management tool including
electronic medical record
and outcomes and
comparisons to national
and group norms.
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APACHE HEALTH OUTCOMES RESEARCH AND DISEASE MANAGEMENT PRODUCTS SERVICES:
PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
------- ------------------- ------------------------- -------------------------
Clinical Trial Support All Product Lines Pharmaceutical, Protocol/analytic study
biotechnology, medical design; severity adjusted
device/diagnostic risk prediction modeling
companies; contract in support of efficacy
research organizations testing and reporting.
Product Marketing All Product Lines Pharmaceutical, Outcomes research; market
Information Tools biotechnology, medical analysis; data sets; data
device/diagnostic analysis; reporting and
companies; contract related services.
research organizations
Disease Management All Product Lines Pharmaceutical, Short and long-term cost
Programs biotechnology, medical benefit analysis; risk
device/diagnostic prediction
companies; contract models/methodologies;
research organizations; best practice
healthcare providers norms/protocols.
Custom Analysis, All Product Lines Pharmaceutical, Data management, analysis
Report Cards, biotechnology, medical and reporting services
Registries device/diagnostic offering comparisons to
companies; contract best demonstrated
research organizations; practices, regional
healthcare providers norms, national norms.
APACHE BEST CARE CLINICAL CONSULTING SERVICES:
PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
------- ------------------- ------------------------- -------------------------
Clinical Process Critical Care Hospitals and IDS's Assesses the
Improvement Program organization's
performance against
national norms and best
practices; determines
organization readiness
for change, and
implements one process
improvement project
delivered simultaneously
with a hospital's
implementation of CCS
products.
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PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
------- ------------------- ------------------------- -------------------------
Annual Performance Critical Care Hospitals and IDS's Assesses the
Review organization's
performance in light of
both national norms, best
practices and new medical
practice and care process
developments uncovered by
APACHE database analysis
and outcomes research;
can be used in
conjunction with client's
budgeting process to plan
priorities, staffing and
investment.
Bed Planning Study Critical Care Hospitals and IDS's Projects and plans for
the hospital's daily
demand for the intensive
care and/or step-down
unit beds in light of
planned or potential
APACHE recommend care
management changes.
Operations Improvement Hospital wide Hospitals and IDS's Rapid design of hospital
operations and care
delivery infrastructure.
CUSTOMER TRAINING AND SUPPORT
The Company provides standard and custom training programs to customers on
the use of APACHE's products. In addition to direct user training, APACHE trains
customer representatives to train their own personnel.
Following initial standard training, the Company provides customer software
support, a toll-free customer service hotline and periodic standard product
upgrades. Customers pay an annual software support service fee approximately
equal to 18% of the software license portion of the product price for ongoing
software support services.
CUSTOMERS
APACHE currently markets its products and services to three types of
customers: healthcare providers, healthcare suppliers, and government. The
Company's healthcare customers include hospital-based integrated delivery
systems, academic and teaching hospitals and individual not-for-profit hospitals
within integrated systems. In addition, APACHE's provider customers include
Vencor, Inc., a multi-facility provider of long-term healthcare and medical
coalitions. The Company's healthcare supplier customers are pharmaceutical
manufacturers, biotechnology firms, and medical device companies. The Company
also offers health outcomes research and database services to federal and state
government agencies such as The Centers for Disease Control. The Centers for
Disease Control accounted for approximately 10% of the Company's revenue in
2000.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and the
enhancement of existing product lines are important to continue to build a
sustainable competitive position. APACHE releases enhancements, standard
upgrades, revisions and new products on an ongoing basis.
The Company's development strategy includes products and services that: (i)
leverage APACHE's databases; (ii) increase the functionality of current
products; and (iii) expand coverage along the continuum
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of care to additional disease or procedure groups. The Company's major products
are based on internally developed software and analytical studies.
In 1998, the Company commissioned an independent third party to undertake a
feasibility study concerning development by the Company of an architecture
pursuant to which the Company could provide its clients with Internet-based
access to certain of the Company's products. In 1999, the Company proceeded with
development of Internet based decision support products and services. The
Company has implemented a functional fault tolerant Internet architecture
Residing on computer platforms from Data General, a division of EMC Corporation
("DG"), and operating via a backbone provided by UUNET, an MCI Worldcom Company.
The Company completed software development of its first such Internet based
decision support applications, for critical care and cardiovascular care, in the
year 2000.
SALES AND MARKETING
The Company currently markets and sells its products and services primarily
through direct sales. APACHE believes that the most effective use of its direct
sales efforts is in marketing the CCS and Best Care consulting services to
hospital systems and individual hospitals with 200 or more licensed beds.
During 2000, the Company decided to increase its sales and marketing
efforts directed at the Federal government. It applied for and subsequently, in
February 2001, received notification that both its information systems and
consulting services have been approved for inclusion in the U.S. Government's
GSA purchasing schedule. Also during 2000, the Company decided to disband its
strategic consulting division, acquired in the 1997 merger with National Health
Advisors completing all outstanding client engagements and eliminating all staff
by January 2001.
PROPRIETARY RIGHTS
The Company continues to make significant investments in the development
and maintenance of its risk-adjustment methodologies and its proprietary
databases and software. The clinical databases maintained by the Company include
a highly detailed level of clinical information that the Company believes
provides a key advantage over competing decision support systems when combined
with APACHE's value-added clinical software. APACHE has multi-disciplinary
clinical and database management personnel that audit, edit and standardize data
from customers and other sources to maintain statistically relevant databases.
The Company believes that the sophistication of its risk-adjustment
methodologies, the size and richness of its corresponding proprietary databases
and the usefulness of its software provide better outcomes measurements and
utilization control than competitive systems.
The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes its software products under agreements that grant
customers non-exclusive licenses and contain terms and conditions restricting
the disclosure and use of APACHE's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, APACHE
attempts to protect the secrecy of its proprietary databases and other trade
secrets and proprietary information through agreements with employees and
consultants. Portions of APACHE's methodologies are, however, available in
scientific literature and bona fide researchers have been granted access to
portions of APACHE's databases for peer review and other research purposes.
The Company also seeks to protect the source code of its software and its
databases as trade secrets and under copyright law. The Company has copyright
registrations for certain of its software, user manuals and databases. The
copyright protection accorded to databases, however, is fairly limited. While
the arrangement and selection of data are protectable, the actual data are not,
and others are free to attempt to create databases that performs the same
function. The Company believes, however, that the creation of competing
databases would be very time consuming and costly. In addition, the Company
expects that the pending implementation of HIPAA, as defined below, could raise
an additional barrier to entry for prospective competitors.
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"APACHE" is registered as a trademark and/or service mark in connection
with certain of the Company's current products and services in the United
States, Australia, the Benelux countries, Brazil, Canada, France, Germany,
Italy, Sweden and the United Kingdom. The Company believes that it has developed
substantial goodwill in connection with its mark as an indicator of quality
products and services.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and its reliable product maintenance and
support are integral to establishing and maintaining a leadership position
within the healthcare industry. In addition, although the Company believes that
its products do not infringe upon the proprietary rights of third parties, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim.
COMPETITION
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical outcomes systems and services are achieving
documented success in impacting cost and quality and demonstrating an attractive
payback on the decision support system investment. Other differentiating factors
include quality and depth of the underlying clinical outcomes databases, the
proprietary nature of methodologies, databases and technical resources, customer
service and support, compatibility with the customer's existing information
systems, potential for product enhancement, vendor reputation, price and the
effectiveness of marketing and sales efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as Solucient, MIDS, Inc., CareScience, Inc.,
The MEDSTAT Group, MEDai, Inc. and Iameter. Other companies that provide
healthcare information systems include Cerner Corporation, McKessonHBOC, Siemens
Medical Systems Corporation, Eclipsys Corporation, IDX Systems Corporation,
VitalCom Inc. and Medical Information Technology, Inc. The Company's products
and services differ from the products and services offered by competitors by the
focus on high-risk, high-cost patients for both concurrent and predictive
outcomes information. Many of the Company's competitors and potential
competitors may have greater financial, product development, technical and
marketing resources than the Company, and currently have, or may develop or
acquire, substantial installed customer bases in the healthcare industry. The
Company also faces potential competition from existing and new industry
associations, such as the Project IMPACT(R) initiative, sponsored by the Society
of Critical Care Medicine, who collect data from their member physicians in a
voluntary association effort to build registry services and comparative reports.
As the market for decision support systems develops, additional competitors may
enter the market and competition may intensify.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation under state
and federal laws and regulations. To protect patient confidentiality, data
entries to APACHE's national databases omit patient identifiers such as name and
address. The Company believes that in 2000 its procedures complied with the
then-current laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional laws and regulations governing the dissemination of medical record
information have been proposed at both the state and federal level. These laws
and regulations may require holders of such information to implement security
measures that may be of substantial cost to the Company. There can be no
assurance that changes to state or federal laws would not materially restrict
the ability of the Company to obtain patient information originating from
records.
PATIENT DATA AND CONFIDENTIALITY
The Health Insurance Portability and Accountability Act of 1996, or HIPAA
or the Act is comprehensive health reform legislation that, among other things,
contains "administrative simplification" provisions
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and directs the Secretary of Health and Human Services, or HHS, to adopt
regulations in seven distinct areas designed to facilitate and safeguard the
security and privacy of electronic and other health care transactions. To date,
HHS has issued only two of the seven regulations in final form. On August 17,
2000, HHS published its final regulations pursuant to HIPAA setting forth its
standards for certain electronic health care transactions. On December 28, 2000,
HHS published the final standards for Privacy of Individually Identifiable
Health Information, the Privacy Rule. The Privacy Rule has an effective date of
April 14, 2001 and a compliance date of April 14, 2003. Because HHS has opened
up the regulations for an additional comment period, it is possible that the
effective date of the regulation may be delayed.
In addition to these final regulations, HHS has also issued a number of
proposed, but not yet final, regulations. The proposed Security Regulation,
published for public comment on August 12, 1998, for example, would impose a
number of stringent requirements on health plans, health care providers, health
care clearinghouses, and their business associates. In particular, this proposed
regulation would mandate the use of certain safeguards to secure the
confidentiality of "protected health information." The regulations implement
required security standards for all "health information" pertaining to an
individual that is electronically maintained or electronically transmitted. The
basic standards require entities to (1) assess their risks and vulnerabilities,
(2) maintain appropriate security measures, and (3) document these methods. At a
minimum, the methods must include administrative procedures, physical
safeguards, technical security services, and technical security mechanisms to
guard data integrity, confidentiality, and availability of confidential patient
information.
The final Privacy Rule imposes a number of restrictions on the use and
disclosure of an individual's health information. Under the Privacy Rule, health
plans, health care providers, health care clearinghouses and their business
associates must: (i) not use or disclose an individual's "protected health
information" without first obtaining an authorization from that individual,
except for treatment, payment, or health care operations, and certain other
enumerated purposes, (ii) provide individuals with specific rights relating to
obtaining and correcting their protected health information, and (iii) adhere to
the administrative requirements of the regulations, which include designating a
privacy official; creating a contact person or office to handle complaints;
training employees regarding the entity's policies and procedures; implementing
appropriate administrative, technical, and physical safeguards to protect
protected health information; providing a process for individuals to make
complaints; and documenting compliance with the regulations through policies and
procedures.
As noted above, the Privacy Rule does not become effective until April
2003. The remaining proposed regulations will not be effective until two years
after the regulations are finalized, which is not currently expected to occur
until later in 2001. To the extent that uncertainty regarding the application of
the Act impacts our customers' purchasing decisions and the Company incurs the
incremental cost for system modifications required to comply with the Act, the
Act may have a material adverse effect on the Company and its operations for the
next few years. To the extent that the Company has access to protected health
information as defined under the Act and regulations, it will be required to be
in compliance with such regulations if and when the Act goes into effect. The
Company is closely monitoring the status of the proposed and final regulations
and intends be in full compliance with them when they become final and
effective. However, compliance cannot be assured, and the cost of achieving
compliance is not known at this time.
Patient Safety: The Institute of Medicine of the National Academies has
recently issued reports compiling findings of major studies of medical errors
that pointed to high rates of medical errors resulting in deaths, permanent
disability, and unnecessary suffering. The document also laid out suggestions
for a comprehensive strategy for government, industry, consumers, and health
providers to reduce medical errors, and called on Congress to create a national
patient safety center to develop new tools and systems needed to address these
problems.
In response to the first of these studies, the Clinton Administration in
February 2000, announced several new edicts, which did not requiring
Congressional action, including immediate mandatory reporting requirement for
the 500 Defense Department-administered hospitals, a Health Care Financing
Administration requirement for error reduction plans in all hospitals that
participate in Medicare, and giving the Food
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and Drug Administration one year to develop new standards to help prevent
medical mistakes caused by sound-alike drug names or look-alike products.
It is not known what impact, if any, final regulations or legislation may
have on the Company.
OTHER GOVERNMENT REGULATION
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's customers.
Healthcare industry participants may react to these proposals by curtailing or
deferring investments, including investments in the Company's products. The
Company cannot predict what impact, if any, such factors may have on its
business, financial condition and results of operations or on the price of the
Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the Food and Drug
Administration, or the FDA under the Federal Food, Drug and Cosmetic Act of
1938, or the FDCA, as amended. The FDCA imposes substantial regulatory controls
over the manufacturing, testing, labeling, sale, distribution, marketing and
promotion of medical devices and other related activities. These regulatory
controls can include, for example, compliance with the following: manufacturer
establishment registration and device listing; current good manufacturing
practices; completion of premarket notification or premarket approval; medical
device adverse event reporting; and general controls over misbranding and
adulteration. Violations of the FDCA can result in severe criminal and civil
penalties, and other sanctions, including, but not limited to, product seizure,
recall, repair or refund orders, withdrawal or denial of premarket notifications
and approvals, and denial or suspension of government contracts, and injunctions
against unlawful product manufacture, labeling, promotion, and distribution or
other activities.
In its 1989 Policy for the Regulation of Computer Products, the FDA stated
that it intended to exempt certain clinical decision support software products
from a number of regulatory controls. Under the 1989 Policy Statement, the FDA
stated that it intended to promulgate regulations exempting decision support
software products that are intended to involve "competent human intervention
before any impact on human health occurs (e.g., where clinical judgment and
experience can be used to check and interpret a system's output)" from the
following controls: manufacturer establishment registration and device listing,
premarket notification, and compliance with the medical device reporting and
current good manufacturing practice regulations. In the 1989 Policy Statement,
the FDA stated that until it promulgated regulations implementing the
exemptions, manufacturers of eligible decision support software products would
not be required to comply with those controls.
Since issuing the 1989 Policy Statement, the FDA has neither promulgated
the exemption regulations discussed in the 1989 Policy Statement nor actively
sought to enforce compliance with the controls discussed in such Policy
Statement. Furthermore, the FDA has referred to the 1989 Policy Statement in
official presentations regarding software regulation and in decisions and
opinions regarding the regulatory status of various products. Over the last few
years, however, the FDA has stated that it intends to revise the 1989 Policy
Statement and to base exemptions from regulatory controls, if any, upon a
product specific "risk factor" analysis. The risk factors the FDA has proposed
using include: (i) seriousness of the disease to be diagnosed or treated; (ii)
time frame for use of the information; (iii) concordance with accepted medical
practice; (iv) format of data and its presentation; (v) individualized versus
aggregate patient care recommendations; and (vi) clarity of algorithms used in
the software. Given the formative state of the FDA's evaluation and possible
revision of the 1989 Policy Statement, there can be no assurance as to the
criteria or application of such revisions, if any.
The Company's products are intended to assist healthcare providers in
analyzing economic and quality data related to patient care and expected
outcomes in order to maximize or monitor the cost-effectiveness of
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general treatment plans and practice guidelines. These products are not intended
to provide specific diagnostic data or results or affect the use of specific
therapeutic interventions. As such, the Company believes that its products are
not medical devices under the FDCA and, thus, are not subject to the controls
imposed on manufacturers of medical devices. The Company further believes that
to the extent that its products are determined to be medical devices, they fall
within the exemptions for decision support systems provided by the 1989 Policy
Statement. The Company has not taken action to comply with the requirements that
would otherwise apply if the Company's products were non-exempt medical devices.
Since 1992, the Company's products have been widely marketed and have been
reviewed or evaluated in the medical literature. The FDA has neither requested
that the Company take any action to comply with any controls under the FDCA nor
notified the Company that it is not in compliance with any such controls. The
Company is not aware of the FDA requiring other developers of similar products
to take any action to comply with any controls under the FDCA, or of the FDA
notifying such developers that they are not in compliance with any such controls
with respect to those similar products.
Nevertheless, there can be no assurance that the FDA will not make such a
request or take other action to require the Company to comply with any or all
current or future controls applicable to medical devices. There can be no
assurance that, if such a request were made or other action were taken, the
Company could comply in a timely manner, if at all, or that any failure to
comply would not have a material adverse effect on the Company's business,
financial condition, results of operations or on the price of the Common Stock,
or that the Company would not be subjected to significant penalties or other
sanctions. There can be no assurance that the FDA will continue any or all of
the exemptions provided in the 1989 Policy Statement, or in a revised policy
statement, if any, or that the FDA will promulgate regulations formally
implementing such exemptions. There can be no assurance that the FDA will not
now or in the future make determinations that the Company's current or future
products are medical devices subject to FDA regulations and are ineligible for
the exemptions from those regulations. If the FDA made such determinations, the
Company would not be able to market its products without obtaining FDA clearance
of premarket notifications, or FDA approval of premarket approval applications
submitted by the Company. The regulatory process can be lengthy, expensive, and
uncertain; securing FDA clearances or approvals may require the submission of
extensive non-clinical and clinical safety and effectiveness data together with
other supporting information to the FDA; and there could be no assurance as to
when if ever the FDA clearances or approvals would be obtained. There can be no
assurance that the Company's current or future products will qualify for future
exemptions, if any, nor can there be any assurance that any future requirements
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of December 31, 2000, the Company employed a total of 35 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are satisfactory and in keeping with industry norms.
ITEM 2. PROPERTIES
The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 2006. The
Company is currently considering alternatives in order to reduce its office
space. These alternatives include terminating its lease and relocating to
smaller facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not currently subject to, and none of its properties
are subject to, any material legal proceedings.
SUBSEQUENT EVENTS
On January 31, 2001, the Company and Cerner Corporation signed a
non-binding letter of intent under which Cerner would acquire substantially all
of the assets and certain liabilities relating to the Company's
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Clinical Outcomes business, which accounts for a majority of its operations, for
cash. The transaction is subject to the execution of an asset purchase agreement
and shareholder approval.
On February 7, 2001, H-Quotient, Inc. and Henry M. Cohn made an unsolicited
tender offer to acquire a minimum of fifty-one percent (51%) of the outstanding
shares of the Company. On February 12, 2001, H-Quotient, Inc. announced that the
tender offer was being withdrawn.
On February 15, 2001, the Company announced that its shares had begun
trading on the OTC Bulletin Board under the trading symbol, "AMSI." Its shares,
which previously were traded on The Nasdaq Small Cap Market, did not meet the
minimum bid requirement for continued listing.
On March 21, 2001, the Company acquired MetaContent, Inc., a Delaware
corporation engaged in the business of providing medical coding products and
services to the healthcare industry, whereby MetaContent, Inc. became a wholly
owned subsidiary. The Company intends to pursue opportunities in the medical
coding industry. The Company exchanged one million shares of its common stock
and warrants to purchase one million shares of the Company's common stock at
$0.50 per share for all of the outstanding shares of MetaContent. The Company's
Chairman and its financial advisor were two of several owners of MetaContent and
received 32.5% and 28% respectively, of the purchase price. MetaContent develops
and markets data management solutions for healthcare providers. MetaContent
specializes in "mission critical" applications including database development,
medical coding strategy and related services. It has particular expertise in the
application and use of clinical and financial standards.
During the first quarter of 2001, the Company granted to Dr. Bisbee, the
Company's Chairman of the Board, 500,000 shares of restricted stock that will
become fully vested by December 31, 2001. In addition, the Company granted an
aggregate of approximately 425,000 options to Directors, members of Management,
employees and consultants. The exercise price of those options is equal to the
fair market value of the Company's stock on the date of grant. Approximately
400,000 of those options become fully vested by December 31, 2001 and the
remainder vest ratably over a five year period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that required a vote of security holders during the
three months ended December 31, 2000.
Executive Officers of the Registrant
The following persons are or have served as the executive officers of the
Company during the year ended December 31, 2000:
NAMES AGE POSITION
----- --- --------
William A. Knaus, M.D.(1).......... 53 President and Chief Executive Officer
Peter Gladkin(2)................... 53 President and Chief Executive Officer
Violet L. Shaffer.................. 52 Chief Operating Officer and Vice
President of Marketing
Scott A. Mason(3).................. 49 Secretary and Executive Vice President
Karen C. Miller.................... 41 Vice President, Finance and CFO
Regina M. Campbell(4).............. 50 Vice President and General Counsel
Sean Seerey(5)..................... 36 Vice President of Sales
- ---------------
1. William A. Knaus, M.D. served as President and Chief Executive Officer of the
Company from July 2000 to December 31, 2000. Effective January 1, 2001, Dr.
Knaus will no longer serve as its President and Chief Executive Officer. Dr.
Knaus will continue in his role as Chief Scientific Officer of the Company.
2. Peter Gladkin served as President and Chief Executive Officer from July 1998
to June 2000.
3. Scott A. Mason served as Secretary and Executive Vice President of the
Company from the acquisition of NHA by the Company in June 1997 to October
2000.
4. Regina M. Campbell served as Vice President and General Counsel of the
Company from September 1998 to December 2000.
5. Sean Seerey served as Vice President of Sales of the Company from May 1999 to
December 2000.
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Violet L. Shaffer has served as Chief Operating Officer of the Company
since September 2000, and in addition was named President of the Company
effective January 1, 2001. Previously she was Vice President of Marketing for
the Company since September 1997. Prior to joining the Company, from January
1997 through September 1997, Ms. Shaffer served as President and Chief Executive
Officer of Competitive Advantage Services, Inc. Ms. Shaffer served as Vice
President of Business Development for Nichols Research Corporation and of
HealthGate Data Corporation, an entity partially owned by Nichols, from
September 1995 through December 1996.
Karen C. Miller has served as Vice President of Finance and Chief Financial
Officer of the Company since October 1998. From 1997 to 1998, Ms. Miller served
as Controller of the Per-Se Technologies Division of Medaphis Corporation, now
Per-Se Technologies, Inc. Prior to assuming this role, Ms. Miller was Chief
Financial Officer, Vice President of Finance and Controller of Health Data
Sciences Corporation, a company she co-founded in 1983 that was acquired by
Medaphis in 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until February 12, 2001, the Company's Common Stock was traded on the
Nasdaq SmallCap Market under the symbol "AMSI." The following table sets forth,
for the periods indicated, the range of high and low sale prices for the Common
Stock as reported by the Nasdaq SmallCap Market.
HIGH LOW
----- -----
Year Ended December 31, 2000
First Quarter.......................................... $7.00 $1.44
Second Quarter......................................... 3.50 0.88
Third Quarter.......................................... 1.66 0.75
Fourth Quarter......................................... 1.00 0.09
Year Ended December 31, 1999
First Quarter.......................................... $7.94 $0.38
Second Quarter......................................... 1.63 0.94
Third Quarter.......................................... 2.00 1.00
Fourth Quarter......................................... 2.13 0.88
On February 13, 2001, the Company's Common Stock began trading on the OTC
Bulletin Board under the symbol "AMSI." As of March 1, 2001, the Company had
approximately 3,460 holders of record of its Common Stock.
The Company has never paid or declared any cash dividends and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain its future earnings, if any, to fund the
development and finance the growth of its business. The amount and timing of any
future dividends will depend on improvements in Company operations as well as
general business conditions encountered by the Company, as well as the financial
condition, earnings and capital requirements of the Company and such other
factors as the Company's Board of Directors may deem relevant.
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xITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Systems:.................................... $ 618 $ 5,046 $ 2,384 $ 935 $ 4,459
Support:.................................... 2,068 2,330 2,117 1,961 1,486
Professional services....................... 3,974 4,647 5,705 5,732 5,649
------- ------- ------- -------- -------
Total revenue.......................... 6,660 12,023 10,206 8,628 11,594
------- ------- ------- -------- -------
Expenses:
Cost of operations.......................... 2,814 3,142 4,378 5,404 4,159
Research and development.................... 659 701 1,317 2,704 1,723
Selling, general and administrative......... 6,772 7,125 8,145 14,028 9,704
Restructuring Charge........................ 1,389 -- -- 1,623 --
Write-off of acquired in-process research
and development costs..................... -- -- -- 1,612 853
Write-off of product development and related
costs..................................... -- -- -- -- 1,100
------- ------- ------- -------- -------
Total expenses......................... 11,634 10,968 13,840 25,371 17,539
------- ------- ------- -------- -------
Income (loss) from operations.................... (4,974) 1,055 (3,634) (16,743) (5,945)
Other income (expense):
Interest income............................. 216 321 477 859 717
Interest expense............................ (39) (30) (38) (44) (370)
Other, net.................................. 4 5 2 10 1
------- ------- ------- -------- -------
Total other income (expense)........... 181 296 441 825 348
------- ------- ------- -------- -------
Net Income (loss)................................ $(4,793) $ 1,351 $(3,193) $(15,918) $(5,597)
======= ======= ======= ======== =======
Basic and diluted net income (loss) per share.... $ (0.64) $ 0.18 $ (0.44) $ (2.20) $ (0.87)
======= ======= ======= ======== =======
Weighted average number of shares used for
calculation of basic net income (loss) per
share.......................................... 7,440 7,356 7,301 7,251 6,074
======= ======= ======= ======== =======
Weighted average number of shares used for
calculation of diluted net income (loss) per
share.......................................... 7,440 7,597 7,301 7,251 6,074
======= ======= ======= ======== =======
DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments.................. $ 2,062 $ 6,242 $ 6,532 $ 11,317 $21,987
Working capital (deficit)........................ (356) 3,448 2,119 5,134 20,332
Total Assets..................................... 5,442 11,466 12,142 14,936 29,137
Long-term obligations, less current maturities... 76 43 206 79 231
Total stockholders' equity....................... $ 485 $ 5,113 $ 3,740 $ 6,866 $22,405
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company believes that the reductions in expenditures by hospitals
stemming from the Balanced Budget Act's tightening of Medicare reimbursement has
had and will continue to have a negative impact on all companies in this sector
for some time to come. In response, in 2000 the Company continued its 1999 plan
to focus its going-forward strategy on lower-cost, Internet-based products and
performance improvement services in the high-cost, high-risk critical care
sector. In 2000, the Company expanded its marketing to the government hospital
sector. The Company also executed a plan to discontinue its declining
hospital-targeted strategic consulting business. In an effort to compensate for
the overall weakness in the hospital market, the Company renewed its focus on
customer analysis, clinical trial support and other outcomes research services
for the pharmaceutical and biotech industry, concentrating in the areas of
critical care and HIV/AIDS.
The Company also believes that there has been a significant change in the
buying patterns of large healthcare systems, with these buyers now preferring to
do business with large companies offering integrated information system
solutions, thus making substantial business expansion more difficult for small
best-of-breed vendors like APACHE. As a consequence of this analysis, in
September of 2000, the Company announced that it had engaged Allen & Company
Incorporated to explore its strategic options, including sale of the Company.
The Company also announced that it had initiated a restructuring plan designed
to manage cost and conserve cash, which plan resulted in a net reduction in
total employees from 69 at the end of 1999 to 35 at the end of 2000.
Further, in February of 2001, the Company announced that it had entered
into a nonbinding letter of intent for Cerner Corporation to acquire certain
assets of the Company, which account for the majority of its operations.
Consistent with the letter of intent with Cerner, and contingent upon
shareholder approval of the transaction, the Company intends to adopt an asset
purchase agreement providing for the sale of substantially all of the Company's
assets to Cerner. The assets to be sold to Cerner are those related to the
Company's Clinical Outcomes business. These assets include the Company's rights
to its current intellectual property assets, including its APACHE III
Methodologies, the CDC/AIDS Data Collection Methodologies, the Northern NE - CV
Methodologies, the APACHE/Vencor Long Term Acute Care Methodologies, and the
QIMC - Acute Care Methodologies. The Company will include its current data,
including its APACHE III Databases, the CDC/AIDS Databases, the CV Databases,
the Neonatal Databases and the Acute Care Databases. The Company will also
include rights to certain of its products, including the Critical Care Series -
Client Server Voyager+ and Discover+, the Critical Care Internet Voyager+, the
CV Risk Predictor, the Acute Care Software, the Vencor Software (VAST Tool) and
other custom software. In addition, the Company will sell some of its related
customer and vendor contracts.
The Company intends to continue to evaluate potential activities after the
Cerner transaction, including the Company's entry into new but related
businesses. On March 21, 2001, the Company acquired MetaContent, Inc., a
Delaware corporation engaged in the business of providing medical coding
products and services to the healthcare industry, whereby MetaContent, Inc.
became a wholly owned subsidiary. The Company intends to pursue opportunities in
the medical coding industry. The Company exchanged one million shares of its
common stock and warrants to purchase one million shares of the Company's common
stock at $0.50 per share for all of the outstanding shares of MetaContent. The
Company's Chairman and its financial advisor were two of the several owners of
MetaContent and received 32.5% and 28% respectively, of the purchase price.
MetaContent develops and markets data management solutions for healthcare
providers. MetaContent specializes in "mission critical" applications including
database development, medical coding strategy and related services. It has
particular expertise in the application and use of clinical and financial
standards.
Internet Initiative. In 1999, the Company launched its Internet healthcare
initiative, APACHE 2000. The initiative is designed to position the Company as
an application service provider in the field of Internet-based healthcare
decision support. During 2000, the Company completed development of its Critical
Care Internet Voyager+ and the Cardiovascular Risk Predictor products. The roll
out of these Internet products began in 2000. In January 2001, the Company
achieved the first client "go-live" of its Internet Voyager+ product. The
Company is now in the early marketing and sales phase and is not currently in a
position to fully assess the financial or other impact on the Company's
operations.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
YEAR ENDED
DECEMBER 31
------------------
2000 1999 1998
---- ---- ----
Revenue:
Systems................................................ 9% 42% 23%
Support................................................ 31 19 21
Professional services.................................. 60 39 56
--- --- ---
Total revenue..................................... 100 100 100
--- --- ---
Expenses:
Cost of operations..................................... 42 26 43
Research and development............................... 10 6 13
Selling, general and administrative.................... 102 59 80
Restructuring Charge................................... 21 -- --
--- --- ---
Total expenses.................................... 175 91 136
--- --- ---
Income (loss) from operations............................... (75) 9 (36)
Other income (expense):
Interest income........................................ 3 2 5
Interest expense....................................... -- -- --
Other, net............................................. -- -- --
--- --- ---
Total other income (expense)...................... 3 2 5
Net income (loss)........................................... (72)% 11% (31)%
=== === ===
2000 Compared to 1999
Revenue. Revenue for 2000 decreased 44% to $6.7 million from $12 million
in the prior year period. Systems revenue for 2000 decreased 88% to $0.6 million
from $5 million in the prior year period. Decreased Systems revenue was
primarily due to a decrease in sales to new customers and the impact of one time
sales to existing customers in 1999. Support revenue for 2000 decreased 9% to
$2.1 million from $2.3 million in the prior year period. While Support revenues
included a contractual price increase, the decline was due to a reduction of
renewed service agreements. Professional service revenue for 2000 decreased 15%
to $4 million from $4.7 million in the prior year period. Decreased Professional
Services revenue was primarily due to a decline in the demand for Consulting
Services.
Cost of Operations. Cost of operations for 2000 decreased 10% to $2.8
million from $3.1 million in the prior year period. This decrease was primarily
due to the reduction in hardware cost related to the decline in Systems sales.
Cost of operations for 2000 increased to 42% of revenue from 26% in the prior
year period due to weaker System sales in 2000. Cost of operations consist
primarily of personnel costs, production manuals, telephone support, third party
equipment, licenses sold, and other direct costs related to providing systems,
support, and professional services.
Research and Development. Research and development expenses for 2000
decreased 1% to $695,000 from $701,000 in the prior year period, due primarily
to a decrease in license fees related to product development. During 2000,
$593,000 of software development costs were capitalized, compared to $501,000 in
the prior year period. In addition, $423,000 of software development costs
related to certain non-Internet products were written-off during the period.
Research and development expenses for 2000 increased to 10% of revenue from 6%
in the prior year period, due primarily to decreased revenues.
Selling, General and Administrative. Selling, general and administrative
expenses for 2000 decreased 4% to $6.8 million from $7.1 million in the prior
year period. This decrease was due to reduction in personnel,
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travel, phone, and office supplies in 2000. Selling, general and administrative
expenses for 2000 increased to 102% of revenue from 59% for the prior year
period, due primarily to decreased revenue.
Restructuring. During the third and fourth quarters of 2000, the Company
recognized restructuring charges of $1.4 million primarily related to the
Company's decision to revise its business strategy. The Company has decided to
focus on the development and selling of its Internet based products and will no
longer pursue the development and selling of certain products and strategic
consulting services. As a result, the Company has written-off the unamortized
development costs and intangible assets associated with those products and its
purchase of Health Research Network. In addition, the Company eliminated
approximately 30 positions and has taken steps to downsize its corporate office.
The revenue related to these discontinued products and the costs related to the
eliminated positions and excess office rent was $2.1 million and $2.9 million,
respectively, for the year ended December 31, 2000.
The following table summarizes the activity in 2000 related to the
restructuring. The balance of the restructuring accrual at December 31, 2000 is
anticipated to be paid within 12 months.
(IN THOUSANDS)
NON BALANCE
RESTRUCTURING CASH DECEMBER 31,
CHARGES ITEMS PAYMENTS 2000
------------- ----- -------- ------------
Severance costs..................................... $ 411 $ -- $(111) $300
Development costs write-off......................... 423 (423) -- --
Intangibles write-off............................... 260 (260) -- --
Excess rent......................................... 295 -- -- 295
------ ----- ----- ----
Total..................................... $1,389 $(683) $(111) $595
====== ===== ===== ====
Other Income (Expense). Other income for 2000 decreased 39% to $181,000
from $296,000 in the prior year period. This decrease was attributed to a
decrease in interest income related to a decrease in the amount of short-term
investments.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses in prior years for tax purposes.
1999 COMPARED TO 1998
Revenue. Revenue for 1999 increased 18% to $12 million from $10.2 million
in the prior year period. Systems revenue for 1999 increased 112% to $5.0
million from $2.4 in the prior year period. Increased Systems revenue was
primarily related to the delivery and implementation of the new CCS to new
customers and the sale of this system to existing customers. Systems revenue
included revenue related to the accompanying sales of associated third party
hardware and software. Support revenue for 1999 increased 9% to $2.3 million
from $2.1 million in the prior year period, due to contractual price increases
and an increase in the number of clients utilizing the Company's systems.
Professional services revenue for 1999 declined 19% to $4.7 million from $5.7;
the decline was due, in part, to a decrease in Health Outcomes Research revenues
following the bankruptcy of one of the Company's largest customers. Consulting
Services revenue also declined; this was primarily attributed to customers'
concerns over addressing their own Y2K issues and the impact of the Balanced
Budget Act on their operations.
Cost of Operations. Cost of operations for 1999 decreased 28% to $3.1
million from $4.4 million in the prior year period. This decrease was due to the
Company's continued corporate reorganization resulting in productivity
improvements and related decreases in costs associated with the delivery of
systems, support and professional services. Cost of operations for 1999
decreased to 26% of revenue from 43% in the prior year period, due to the
reasons mentioned here and the increase in revenue during the same period. Cost
of operations consists primarily of personnel costs, costs of media, production
manuals, telephone support, third party equipment, licenses sold, and other
direct costs related to providing systems, support and professional services.
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Research and Development. Research and development expenses for 1999
decreased 47% to $701,000 from $1.3 million in the prior year period, due
primarily to a decrease in staffing requirements related to the development of
new, non-core, peripheral products and services that the Company had previously
discontinued. During 1999, $501,000 of software development costs were
capitalized, compared to $556,000 in the prior year period. Research and
development expenses for 1999 decreased to 6% of revenue from 13% in the prior
year period, due to decreased staffing and other costs as well as the increase
in revenue during the same period.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 decreased 13% to $7.1 million from $8.1 million in the prior
year period. This decrease was due primarily to a decrease in overall general
and administrative expenses including decreases in staffing and consulting
expenses. The reduction in general and administrative expenses were partially
offset by increases in costs associated with sales and marketing. Selling,
general and administrative expenses for 1999 decreased to 59% of revenue from
80% for the prior year period, due primarily to the increase in revenue during
the same period.
Other Income (Expense). Other income decreased from $441,000 in 1998 to
$296,000 in 1999. This decrease was attributable to a decrease in interest
income related to the decrease in the amount of short-term investments.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses in prior years for tax purposes.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data
for fiscal 2000 and 1999. In the opinion of the Company's management, this
unaudited information has been prepared on the same basis as the audited
information included elsewhere in this annual report and includes all
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period:
FISCAL YEAR 2000 FISCAL YEAR 1999
----------------------------------- ---------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------- ------- ------ ------ ------ ------
Revenue..................................... $1,583 $1,829 $ 1,551 $ 1,697 $3,309 $3,629 $2,972 $2,113
Expenses:
Cost of operations...................... 625 778 761 650 261 1,220 927 734
Research and development................ 147 152 157 203 251 200 131 119
Selling, general and administrative..... 1,656 1,655 1,828 1,633 2,426 1,819 1,630 1,250
Restructuring charge.................... -- -- 225 1,164 -- -- -- --
------ ------ ------- ------- ------ ------ ------ ------
Total expenses...................... 2,428 2,585 2,971 3,650 2,938 3,239 2,688 2,103
------ ------ ------- ------- ------ ------ ------ ------
Income (loss) from operations............... (845) (756) (1,420) (1,953) 371 390 284 10
Total other income (expense)........ 70 57 34 20 85 81 65 65
------ ------ ------- ------- ------ ------ ------ ------
Net income (loss)........................... $ (775) $ (699) $(1,386) $(1,933) $ 456 $ 471 $ 349 $ 75
====== ====== ======= ======= ====== ====== ====== ======
In addition, the Company's quarterly results have been, and may continue to
be, affected by supplier and provider budgeting practices that cause many
discretionary purchase decisions to be made before certain quarter and year
ends. The timing of quarterly revenue is also affected by the ability of the
Company to perform on its contracts, which is subject to the availability of the
client personnel as well as the availability of the Company's personnel.
Although the Company has not historically experienced any material seasonality
in its operating results, the Company could experience such seasonality in the
future, which could cause fluctuations in the Company's quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company has cash and cash equivalents and
short-term investments of $2.1 million representing a decrease of $4.1 million
from the total $6.2 million at December 31, 1999.
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During 2000, the Company's operating activities used approximately $3.4
million in cash. Net cash used in 2000 was composed primarily of net loss,
decreases in accounts payable, accrued expenses, deferred revenue and an
increase in accounts receivable.
The Company's investing activities used cash of $269,000 in 2000. The
Company's investing activities had increases in capital software development
costs and furniture and equipment purchases, offset by the redemption of
short-term investments.
Net cash used in financing activities during 2000 was $47,000 and was
primarily related to the payments of capital lease obligations and short-term
obligations, offset by the proceeds from the issuance of common stock upon
exercise of options.
During 2000, the Company made capital expenditures totaling $82,000. As of
December 31, 2000, the Company had a net working deficit of ($356,000) including
cash and short-term investments in the amount of $2.1 million.
The Company anticipates that its cash and short-term investments will be
sufficient to meet its planned ongoing operating and working capital
requirements and to finance planned product development, sales and marketing
activities and capital acquisitions for the next twelve months. Through December
31, 2000, the Company has incurred cumulative net operating losses of
approximately $45.5 million. There can be no assurance that the Company will be
profitable in the future or that present capital will be sufficient to fund the
Company's ongoing operations. If additional financing is required to fund
operations, there can be no assurance that such financing can be obtained or
obtained on terms acceptable to the Company.
The Company does not believe the impact of inflation has significantly
affected the Company's operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
without limitation, statements regarding our expectations, beliefs, intentions
or future strategies that are signified by the words "expects," "anticipates,"
believes" or similar language. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause its actual results in
fiscal 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's: having sufficient sales and timely
collections to meet cash requirements and achieve profitability; ability to
attract and retain key employees; success of concentrating its product offerings
on high-risk, high-cost patients; ability to timely develop new products and
enhance existing products; ability to compete in the competitive and rapidly
evolving healthcare information technology industry; success of its marketing
and consulting efforts and ability to effectively utilize its direct sales
force; ability to protect proprietary information and to obtain necessary
licenses on commercially reasonable terms; ability to comply with and adopt
products and services to potential regulatory changes, including HIPAA, and
ability to adapt to economic, political and regulatory conditions affecting the
healthcare industry.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to continue to vary from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including: the Company's relatively long sales
cycle; variable customer demand for its products and services; changes in the
Company's product mix and the timing and relative prices of product sales; the
loss of customers due to consolidation in the healthcare industry; changes in
customer budgets; investments by the Company in marketing or other corporate
resources; acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs,
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which primarily include personnel costs, as well as facilities costs, any
unanticipated shortfall in revenue in any fiscal quarter would have an adverse
effect on the Company's results of operations in that quarter. Accordingly, the
Company's operating results for any particular quarterly period may not
necessarily be indicative of results for future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain financial market risks, the most
predominate being fluctuations in interest rates; however, the Company does not
believe that it is currently exposed to material financial market risks.
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Public Accountants, Ernst & Young
LLP....................................................... 21
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... 22
Consolidated Balance Sheets for the Years Ended December 31,
2000 and 1999............................................. 23
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998...... 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 25
Notes to Consolidated Financial Statements.................. 26
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for the
Years Ended December 31, 2000, 1999 and 1998........... 39
All other financial statement schedules not included have been omitted
because they are not applicable or because the required information is otherwise
furnished.
20
22
REPORT OF INDEPENDENT AUDITORS
Board of Directors
APACHE Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of APACHE
Medical Systems, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a) as
of December 31, 2000, 1999 and 1998. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of APACHE Medical
Systems, Inc., at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 9, 2001, except for the
fourth paragraph of Note 16, as
to which the date is March 21, 2001
21
23
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Systems................................................ $ 618 $ 5,046 $ 2,384
Support................................................ 2,068 2,330 2,117
Professional services.................................. 3,974 4,647 5,705
------- ------- -------
Total revenue..................................... 6,660 12,023 10,206
Expenses:
Cost of operations..................................... 2,814 3,142 4,378
Research and development............................... 659 701 1,317
Selling, general and administrative.................... 6,772 7,125 8,145
Restructuring charge................................... 1,389 -- --
------- ------- -------
Total expenses.................................... 11,634 10,968 13,840
------- ------- -------
Income (loss) from operations............................... (4,974) 1,055 (3,634)
Other income (expense):
Interest income........................................ 216 321 477
Interest expense....................................... (39) (30) (38)
Other, net............................................. 4 5 2
------- ------- -------
Total other income (expense)...................... 181 296 441
------- ------- -------
Net income (loss)........................................... $(4,793) $ 1,351 $(3,193)
======= ======= =======
Basic and diluted net income (loss) per share............... $ (0.64) $ 0.18 $ (0.44)
======= ======= =======
Weighted average number of shares used for calculation of
Basic Net income (loss) per share......................... 7,440 7,356 7,301
======= ======= =======
Weighted average number of shares used for calculation of
Diluted Net income (loss) per share....................... 7,440 7,597 7,301
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
22
24
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------
2000 1999
-------- -------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,420 $ 5,194
Short-term investments...................................... 642 1,048
Accounts receivable, net of allowance for doubtful accounts
of $173 in 2000 and $531 in 1999.......................... 2,105 3,012
Other trade receivables..................................... 55 --
Prepaid expenses and other.................................. 238 499
-------- -------
TOTAL CURRENT ASSETS................................... 4,460 9,753
-------- -------
Furniture and equipment..................................... 3,937 3,661
Less accumulated depreciation and amortization.............. (3,587) (3,222)
-------- -------
350 439
-------- -------
Other trade receivables, net of current maturities.......... 49 104
Capitalized software development costs, net................. 583 793
Intangible assets, net...................................... -- 377
-------- -------
TOTAL ASSETS........................................... $ 5,442 $11,466
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Account payable............................................. $ 497 $ 1,142
Restructuring cost.......................................... 595 --
Accrued expenses............................................ 1,131 1,780
Current maturities of long term obligations................. 111 163
Deferred revenue............................................ 2,482 3,220
-------- -------
TOTAL CURRENT LIABILITIES.............................. 4,816 6,305
-------- -------
Deferred rent benefit....................................... 65 5
Maturities of long term obligations......................... 76 43
-------- -------
TOTAL LIABILITIES...................................... 4,957 6,353
-------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000
at December 31, 2000 and December 31, 1999: issued and
outstanding shares, 7,466,966 at December 31, 2000 and
7,381,985 at December 31, 1999............................ 75 74
Additional capital.......................................... 45,954 45,818
Accumulated other comprehensive income-unrealized gain
(loss) on available-for-sale securities................... 1 (27)
Accumulated deficit......................................... (45,545) (40,752)
-------- -------
TOTAL STOCKHOLDERS' EQUITY............................. 485 5,113
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 5,442 $11,466
======== =======
See accompanying Notes to Consolidated Financial Statements.
23
25
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK OTHER
------------------ ADDITIONAL COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL INCOME (LOSS)
--------- ------ ---------- ------------- ----------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT DECEMBER 31, 1997........... 7,267,756 $73 $45,703 $ -- $(38,910) $ 6,866 $(15,918)
========
Issuance of common stock under Employee
Stock Purchase Plan.................. 62,717 -- 67 -- -- 67 --
Net loss............................... -- -- -- -- (3,193) (3,193) (3,193)
--------- --- ------- ---- -------- -------- --------
BALANCE AT DECEMBER 31, 1998........... 7,330,473 73 45,770 -- (42,103) 3,740 $ (3,193)
========
Exercise of common stock options....... 12,600 -- 12 -- -- 12 --
Issuance of common stock under Employee
Stock Purchase Plan.................. 38,912 1 36 -- -- 37 --
Unrealized loss on available for-sale
securities........................... -- -- -- (27) -- (27) (27)
Net income............................. -- -- -- -- 1,351 1,351 1,351
--------- --- ------- ---- -------- -------- --------
BALANCE AT DECEMBER 31, 1999........... 7,381,985 74 45,818 (27) (40,752) 5,113 $ 1,324
========
Issuance of common stock under Employee
Stock Purchase Plan.................. 26,435 -- 23 -- -- 23 --
Exercise of common stock options....... 76,661 1 142 -- -- 143 --
Treasury stock purchase................ (18,115) -- (29) -- -- (29) --
Unrealized gain on available for-sale
securities........................... -- -- -- 28 -- 28 28
Net loss............................... -- -- -- -- (4,793) (4,793) (4,793)
--------- --- ------- ---- -------- -------- --------
BALANCE AT DECEMBER 31, 2000........... 7,466,966 $75 $45,954 $ 1 $(45,545) $ 485 $ (4,765)
========= === ======= ==== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
24
26
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------- ------ -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $(4,793) $1,351 $(3,193)
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities:
Depreciation...................................... 287 490 611
Amortization...................................... 573 331 167
Restructuring costs............................... 683 -- --
Provision for doubtful accounts................... 86 17 30
Changes in operating assets and liabilities:
Accounts receivable.......................... 822 (57) (1,766)
Other trade receivables...................... -- (100) 51
Other current assets......................... 261 250 (293)
Restructuring costs.......................... 595 -- --
Accounts payable and accrued expenses........ (1,294) (1,874) (1,337)
Deferred rent................................ 60 (57) (55)
Deferred revenue............................. (738) 62 1,528
------- ------ -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES...... (3,458) 413 (4,257)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software development costs................. (593) (501) (556)
Purchase of furniture and equipment.................... (82) (72) (235)
Redemption (Purchase) of short-term investments........ 406 (48) 4,683
------- ------ -------
NET CASH FROM (USED IN) FROM INVESTING
ACTIVITIES..................................... (269) (621) 3,892
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations........ (71) (18) (16)
Principal payments on borrowings....................... (142) (161) (179)
Proceeds from issuance of notes payable................ -- -- 391
Proceeds from issuance of common stock upon exercise of
options............................................... 143 12 --
Proceeds from issuance of stock under employee stock
purchase plan......................................... 23 37 67
------- ------ -------
NET CASH (USED IN) FROM FINANCING ACTIVITIES...... (47) (130) 263
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,774) (338) (102)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 5,194 5,532 5,634
------- ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 1,420 $5,194 $ 5,532
======= ====== =======
See accompanying Notes to Consolidated Financial Statements.
25
27
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(1) NATURE OF THE BUSINESS
APACHE Medical Systems, Inc. (the "Company"), a Delaware corporation, was
incorporated on September 1, 1987. In 2000, the Company was a leading provider
of clinically based decision support information systems and consulting services
to the healthcare industry offering healthcare providers and suppliers a
comprehensive line of outcomes-based products and services, encompassing
software, hardware, and related consulting and disease management services. In
2001, the Company signed a non-binding letter of intent with Cerner Corporation
to sell the traditional clinical outcomes business and has purchased
MetaContent, Inc., a company that specializes in "mission critical" applications
including database development, medical coding strategy and related services
(see Note 16).
Operations of the Company are subject to certain risks and uncertainties
including, among others, uncertainties relating to product development,
significant operating losses, competition and market acceptance of its products.
The market for the Company's healthcare information systems and services is
highly competitive and characterized by continued and rapid technological
advances and substantial changes. The Company's success is dependent upon market
acceptance of its products in preference to competing products and products that
may be developed by others. The healthcare industry is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of the Company's customers. There can be no assurance
that the Company's products and services will achieve a sufficient level of
market acceptance to result in profitable operations.
Through December 31, 2000, the Company has incurred cumulative net
operating losses of approximately $45.5 million. There can be no assurance that
the Company will be profitable in the future or that present capital will be
sufficient to fund the Company's ongoing operations through December 31, 2001.
The Company believes that its current operating funds will be sufficient to meet
its planned ongoing operating and working capital requirements and to finance
planned product development, sales and marketing activities through the fourth
quarter of year 2001. If additional financing is required to fund operations,
there can be no assurance that such financing can be obtained or obtained on
terms acceptable to the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Revenue Recognition
Revenues for sales of systems and products are recognized at delivery. For
systems where services are critical to the functionality of the system, revenue
is recognized using contract accounting. Systems support fees are recognized
ratably over the period of performance. Professional services revenue is
recognized as these services are provided and is generally billed on a time and
material basis. Professional services do not involve significant customization,
modification or production of the licensed software. Amounts received prior to
the performance of service or completion of a milestone are deferred. Revenue
recognized for work performed for which billings have not been presented to
customers is recorded as unbilled.
26
28
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cost of Operations
Cost of operations consists primarily of personnel costs, costs of media,
production manuals, telephone support, third party equipment, licenses, software
and other direct costs related to providing systems, support, and professional
services.
Furniture and Equipment
Furniture and equipment are stated at cost. Furniture and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization are calculated on the straight-line basis over the
estimated useful lives of the assets ranging from 3 to 7 years. Balance of major
depreciable assets at December 31, 2000 are as follows (in thousands):
Office furniture and Equipment.............................. $ 1,129
Computer software and equipment............................. 2,258
Leasehold improvements...................................... 53
Furniture and Equipment under Capital leases................ 497
-------
Gross Furniture and Equipment............................... 3,937
Accumulated depreciation and Amortization................... (3,587)
-------
Net Furniture and Equipment................................. $ 350
=======
Amortization of equipment held under capital leases is provided on the
straight-line basis over the shorter of the estimated useful life of the assets
or the life of the lease. Depreciation and amortization expense for the years
ended December 31, 2000 and 1999 were $287,000, $78,000 and $500,000, $18,000,
respectively.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
2000, cash equivalents and short-term investments consisted of money market
instruments, commercial paper and government agency securities maturing during
June 2001. Cash equivalents are carried at lower of cost or market. In
accordance with the requirements of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified its short-term investments as "available-for-sale". Such
investments are recorded at fair value, with unrealized gains and losses, deemed
by the Company as temporary in nature, reported as a separate component of
stockholders' equity. At December 31, 2000 there were $1,000 in unrealized
gains; at December 31, 1999 there were $27,000 in unrealized losses.
Included in Cash and Cash Equivalents at December 31, 2000 and 1999, is
approximately $105,000 and $123,000, respectively, for a security deposit
controlled by the lessor of the office building that the Company currently
occupies.
Software Capitalization
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and are
included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products are
available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
27
29
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that current revenues bear to the total of the current and future anticipated
revenues, or (b) the straight-line method over the remaining estimated economic
life of the product, not to exceed five years. Such costs are reflected in Cost
of Operations in the Company's consolidated statement of operations.
The Company capitalized approximately $593,000, $501,000, and $556,000, in
software development costs during 2000, 1999, and 1998, respectively.
Amortization of software development costs approximated $378,000, $196,000 and
$51,000 in 2000, 1999, and 1998, respectively. In the fourth quarter of 2000,
the Company wrote-off, as part of its restructuring charge, $423,000 of
capitalized software development costs related to certain non-Internet products.
(See Note 3).
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Current Vulnerability Due to Certain Concentrations
The Company currently depends on certain suppliers for the provision of
computer hardware to its customers. The Company has not experienced and does not
expect any disruption of such services and the Company believes that
functionally equivalent computer hardware is available from other sources. One
customer accounted for approximately 10% of the Company's revenue in 2000.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and trade receivables. Concentrations of credit risk
with respect to trade receivables result from the Company's customer base,
comprising primarily hospitals and other healthcare industry companies.
Management regularly monitors the creditworthiness of its customers and believes
that it has adequately provided for any exposure to potential credit losses.
Impairment of Long-Lived Assets
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." The Company reviews its long-lived assets,
including intangible assets and property plant and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates whether future undiscounted net cash
flows will be less than the carrying amount of the assets and adjusts the
carrying amount of its assets to fair value.
Reclassification
Certain amounts have been reclassified from prior years to conform to the
current year presentation.
(3) RESTRUCTURING CHARGE
During the third and fourth quarters of 2000, the Company recognized
restructuring charges of $1.4 million primarily related to the Company's
decision to revise its business strategy. The Company has
28
30
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
decided to focus on the development and selling of its Internet based products
and will no longer pursue the development and selling of certain products and
strategic consulting services. As a result, the Company has written-off the
unamortized development costs and intangible assets associated with those
products and its purchase of Health Research Network. In addition, the Company
eliminated approximately 30 positions and has taken steps to downsize its
corporate office. The revenue related to these discontinued products and the
costs related to the eliminated positions and excess office rent was $2.1
million and $2.9 million, respectively, for the year ended December 31, 2000.
The following table summarizes the activity in 2000 related to the
restructuring. The balance of the restructuring accrual at December 31, 2000 is
anticipated to be paid within 12 months.
NON BALANCE
RESTRUCTURING CASH DECEMBER 31,
CHARGES ITEMS PAYMENTS 2000
------------- ----- -------- ------------
(IN THOUSANDS)
Severance costs..................................... $ 411 $ -- $(111) $300
Development costs write-off......................... 423 (423) -- --
Intangibles write-off............................... 260 (260) -- --
Excess rent......................................... 295 -- -- 295
------ ----- ----- ----
Total..................................... $1,389 $(683) $(111) $595
====== ===== ===== ====
(4) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
DECEMBER 31,
---------------
2000 1999
------ ------
Billed accounts............................................. $2,179 $2,895
Unbilled accounts........................................... 99 648
------ ------
2,278 3,543
Less allowance for doubtful accounts........................ (173) (531)
------ ------
$2,105 $3,012
====== ======
Unbilled accounts represent revenue that has been recognized for work
performed for which billings had not been presented to customers, as such
accounts were not billable under contract terms at the balance sheet date. It is
anticipated that substantially all of these accounts will be billed and
collected within one year of the respective balance sheet date.
29
31
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
---------------
2000 1999
------ ------
Accrued salaries, bonuses and benefits...................... $ 293 $ 133
Discontinued product reserve................................ 189 266
Accrued commissions......................................... 5 16
Other accrued license fees.................................. 13 64
Other accrued expenses...................................... 631 1,301
------ ------
$1,131 $1,780
====== ======
(6) NOTES PAYABLE
DECEMBER 31,
--------------
2000 1999
----- ------
(IN THOUSANDS)
Note payable, 7.58% interest payable in monthly installment
of principal and interest through March 2001.............. $ 35 $ 177
Less current maturities..................................... (35) (142)
---- -----
$ 0 $ 35
==== =====
(7) INTANGIBLE ASSETS
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of Health Research Network ("HRN") for $1.57 million in
cash. The acquisition has been accounted for using the purchase method of
accounting and resulted in intangible assets totaling $728,000. These assets
were amortized under the straight line method over 5 to 15 years.
At December 31, 2000, the Company, as part of its restructuring charge,
wrote-off $260,000, which represented the net book value of these assets.
Amortization expense was $117,000 in 2000 and 1999.
The components of intangibles are as follows (in thousands):
DECEMBER 31,
------------
2000 1999
---- -----
Goodwill.................................................... $ -- $ 138
Assembled Workforce......................................... -- 102
Database.................................................... -- 488
---- -----
-- 728
Accumulated Amortization.................................... -- (351)
---- -----
$ -- $ 377
==== =====
30
32
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LEASE COMMITMENTS
Future minimum lease payments at December 31, 2000, under non-cancelable
operating and capital leases are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
2001........................................................ $ 82 $ 672
2002........................................................ 74 692
2003........................................................ 12 713
2004........................................................ -- 734
2005........................................................ -- 756
Thereafter.................................................. -- 713
---- ------
Total............................................. $168 $4,280
======
Less interest at 10.00%..................................... (16)
----
Present value of net minimum lease payments................. 152
Less current maturities..................................... (76)
----
$ 76
====
OPERATING LEASES
In November 1999 the Company renewed the lease for their current office
space for an additional 7 years. The lease expires in November 2006. Rent
expense is recorded on a straight-line basis over the term of the lease. The
difference between rent payments and rent expense resulted in a deferred rent
benefit. The Company is currently considering alternatives in order to reduce
its office space. These alternatives include terminating its lease and
relocating to smaller facilities.
Total rent expense under all operating leases was approximately $741,000,
$452,000, and $474,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
CAPITAL LEASES
In 1997, the Company negotiated a new capital lease for certain office
equipment. The resulting capital lease will expire in 2001. In 2000, the Company
entered into a new capital lease for computer hardware. The resulting capital
lease will expire in 2003.
Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 2000 is as follows (in thousands):
Office equipment............................................ $ 267
Less accumulated amortization............................... (128)
-----
$ 139
=====
31
33
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
The Company had no provision for income taxes in 2000, 1999 or 1998 as a
result of its net losses for income tax purposes. The difference between the tax
provision and the amount that would be computed by applying the statutory
federal income tax rate to income before taxes is attributable to the following
(in thousands):
2000 1999
------- -----
Federal tax at 34% statutory rate........................... $(1,630) $ 459
Permanent items............................................. 4 10
State taxes, net of federal benefit......................... (189) 64
Change in valuation allowance............................... 1,827 (520)
Other....................................................... (12) (13)
------- -----
Total............................................. $ -- $ --
======= =====
The approximate tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Deferred tax liabilities:
Accrual to cash adjustment............................. $ 0 $ (57)
Capitalized software development costs................. (221) (301)
-------- --------
Gross deferred tax liabilities......................... (221) (358)
Deferred tax assets:
Accrued vacation....................................... 6 51
Accrued bonuses........................................ 25 78
Accrued commissions.................................... -- 6
Allowance for doubtful accounts........................ 66 201
Accrued licensing fees................................. 3 --
Deferred rent benefit.................................. 25 2
Tax basis of equipment in excess of book value......... 6 6
Intangible assets...................................... 874 824
Other accruals......................................... 460 329
Net operating loss carryforwards....................... 14,841 13,119
-------- --------
Gross deferred tax assets................................... 16,306 14,616
-------- --------
Net deferred tax assets before valuation allowance.......... 16,085 14,258
-------- --------
Less valuation allowance.................................... (16,085) (14,258)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 2000 of approximately $39,100,000, which expires
beginning in 2003. The Company's ability to use the carryforwards is subject to
limitations resulting from changes in ownership, as defined by the Internal
Revenue Code. Lack of future earnings, a change in the ownership of the Company,
or the application of the alternative minimum tax rules could adversely affect
the Company's ability to utilize the net operating loss carryforwards.
32
34
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCKHOLDERS' EQUITY
Stock Options
The Company has an Employee Stock Option Plan (the "Plan") that provides up
to 2,700,000 options to be issued to employees and Directors (prior to the
adoption of the Non-Employee Director Stock Option Plan in April 1996) of the
Company. The Plan was amended in March 1999 to increase the number of shares
reserved for issuance under the plan from 2,200,000 to 2,700,000. All options
are subject to forfeiture until vested, and unexercised options expire on the
tenth anniversary of the year granted. Vesting is generally over five years. All
employee stock options issued by the Company have been granted with exercise
prices equal to or greater than the fair market value of the Common Stock on the
date of grant; accordingly, the Company has recorded no compensation expense
related to such grants. At December 31, 2000, options for 1,888,025 shares were
available for grant under the Plan.
In June 1996, the Company entered into a marketing agreement with an
affiliate of Premier Inc. ("Premier"), which provides buying services to a group
of approximately 1,800 hospitals. Pursuant to the agreement, the Premier
affiliate has designated the Company as the exclusive supplier to the hospitals
purchasing through the Premier buying group of clinically-based outcomes data
systems for high-risk, high-cost patients, including critical care,
cardiovascular care and medical-surgical care patients, through December 31,
1999. In return, the Company agreed to provide certain discounts to these
hospitals and, granted to the Premier affiliate in June 1996, three options to
purchase up to a total of 366,294 shares of Common Stock. Each of the options
have a ten-year term. One of the options vested upon grant and permits the
Premier affiliate to purchase 65,488 shares of Common Stock at an exercise price
of $8.18 per share. The Company valued these options at $369,000, which is being
amortized over the life of the Premier contract. The other two options vested,
if at all, based on the volume of products and services sold to Premier
hospitals and allowed the Premier affiliate to purchase up to 300,806 shares of
Common Stock at an exercise price of $13.00 per share. Performance options
earned through December 31, 1999 totaled 45,695 shares. Valuation of the related
stock options was calculated utilizing the Black-Scholes option pricing model.
Expenses related to the performance options are recorded when earned. Expense
for options earned was $0 in 2000, 1999 and 1998.
In January 1997, the Company acquired the assets of CardioMac, including a
point-of-care data collection and reporting tool for the cardiac catheterization
laboratory and cardiovascular operating room from Mercy Hospital Medical Center,
Iowa Health Centers, the Iowa Heart Institute and Mark Tannenbaum, MD (its
primary developer) for a payment of $1.35 million in cash and options to
purchase up to 150,000 shares of APACHE Common Stock at an exercise price of
$7.75 per share. The options were valued at approximately $224,000 and vested
immediately.
33
35
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's option transactions for the
years ending December 31, 2000, 1999 and 1998:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding, December 31, 1997............................ 1,810,167 $6.21
Granted.............................................. 1,117,844 1.78
Forfeited............................................ (503,333) 5.72
Exercised............................................ -- --
---------- -----
Outstanding, December 31, 1998............................ 2,424,678 $3.11
Granted.............................................. 687,100 1.03
Forfeited............................................ (105,230) 1.70
Exercised............................................ (12,600) .94
---------- -----
Outstanding, December 31, 1999............................ 2,993,948 $2.62
Granted.............................................. 221,700 1.24
Forfeited............................................ (1,657,689) 1.42
Exercised............................................ (76,661) 1.84
---------- -----
Outstanding, December, 2000............................... 1,481,298 $3.81
========== =====
Options outstanding at December 31, 2000 have exercise prices between $0.17
and $13.00, with a weighted average exercise price of $3.81 and a weighted
average remaining contractual life of 4.3 years. At December 31, 2000, 1,147,058
options were exercisable with a weighted average exercise price of $4.56.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In April 1996, the Company adopted its Non-Employee Director Option Plan
(the "Director Option Plan"), pursuant to which non-employee directors of the
Company will be granted an option to purchase 2,500 shares of Common Stock on
January 1, of each calendar year for each year of service. The exercise price of
such options shall be at the fair market value of the Company's Common Stock on
the date of grant. Stock options granted under the Director Option Plan may not
be transferred other than by will or by the laws of descent and distribution.
The Company has reserved 70,000 shares of Common Stock for issuance under the
Director Option Plan. The Director Option Plan may be terminated by the Board of
Directors at any time. Upon the occurrence of a Change of Control, as defined in
the Director Option Plan, all outstanding unvested options under the Director
Option Plan immediately vest. During 2000, the Company amended the Director
Option Plan to permit the options of outgoing directors to remain exercisable
more than three months after termination. As of December 31, 2000, 55,000 shares
were outstanding under the Director Option Plan.
At December 31, 2000 options for 15,000 shares were available for grant
under the Director Option Plan.
NON-EMPLOYEE DIRECTOR SUPPLEMENTAL STOCK OPTION PLAN
In May 1999, the Company adopted its Non-Employee Director Supplemental
Stock Option Plan (the "Director Supplemental Option Plan"), that provides up to
250,000 options to be issued to the Directors of the Company. The plan was
amended effective January 1, 2000 to increase the number of shares reserved for
issuance under the plan from 120,000 to 250,000. The exercise price of such
options shall not be less than the fair market value of the Company's Common
Stock on the date of grant. The Director Supplemental Option Plan may be
terminated by the Board of Directors at any time. Upon occurrence of a Change in
Control as defined in the Director Supplemental Option Plan, all outstanding
unvested options under the Director Supplemental Option Plan vest immediately.
During 2000, the Company amended the Director Supplemental Option Plan to permit
the options of outgoing directors to become fully vested and remain exercisable
more
34
36
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
than six months after termination. As of December 31, 2000, options for 145,340
were outstanding under the Director Supplemental Option Plan.
At December 31, 2000, options for 104,660 shares were available for grant
under the Director Supplemental Option Plan.
EMPLOYEE STOCK PURCHASE PLAN
Effective May 1, 1996, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 210,000 shares of Common Stock are available
for purchase under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 8% of an employee's base compensation, including commissions, bonuses and
overtime, at a price equal to 85% of the fair market value of the Common Stock
at the beginning of each offering period or the end of a three month purchase
period, whichever is lower. The Board of Directors has the authority to amend or
terminate the Purchase Plan provided no such action may adversely affect the
rights of any participant.
At December 31, 2000, 63,592 shares were available for purchase under the
Employee Stock Purchase Plan.
STOCK OPTION PLANS
The Company applies APB Opinion No. 25 in accounting for its Stock based
compensation plans and, accordingly, no compensation cost has been recognized
for its stock option plans and employee stock purchase plan in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for these plans under SFAS No. 123 "Accounting for Stock Based
Compensation," the Company's net income would have been reduced to the pro forma
amounts indicated below (in thousands):
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: January 1, 2000 through December 31, 2000 -- expected dividend
yield of 0%, risk-free interest rate of 5.5%, expected volatility factor of
124.54%, and an expected life of 6 years; January 1, 1999 through December 31,
1999 -- expected dividend yield of 0%, risk-free interest rate of 5.86%,
expected volatility factor of 202.34%, and an expected life of 6 years; January
1, 1998 through December 31, 1998 -- expected dividend yield of 0%, risk-free
interest rate of 4.5%, expected volatility factor of 228.70%, and an expected
life of 6 years.
2000 1999 1998
------- ------ -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
Net income (loss)
As reported............................................ (4,793) $1,351 $(3,193)
Pro forma.............................................. (5,728) 667 (4,317)
Net income (loss) per share
As reported............................................ $ (.64) $ .18 $ (.44)
Pro forma.............................................. (.77) .09 (.59)
Pro forma net loss reflects only options granted in 1996 through 2000.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period of
5 years and compensation cost for options granted prior to January 1, 1995 is
not considered.
STOCK WARRANTS
The Company has 17,483 outstanding warrants issued to a stockholder in 1991
with an exercise price of $2.86 per share that expire in 2001.
35
37
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EARNINGS (LOSS) PER SHARE (EPS)
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
------- ------ -------
Net income (loss) available to common share holders....... $(4,793) $1,351 $(3,193)
------- ------ -------
Weighted average shares outstanding....................... 7,440 7,356 7,301
Basic earnings (loss) per share........................... $ (0.64) $ 0.18 $ (0.44)
======= ====== =======
Net income (loss) available to common shareholders........ $(4,793) $1,351 $(3,193)
------- ------ -------
Weighted average shares outstanding....................... 7,440 7,356 7,301
Effect of dilutive securities:
Employee stock options............................... -- 241 --
------- ------ -------
Adjusted weighted average shares.......................... 7,440 7,597 7,301
------- ------ -------
Diluted earnings (loss) per share......................... $ (0.64) $ 0.18 $ (0.44)
======= ====== =======
Options to purchase 1,481,298 shares of common stock were outstanding at
December 31, 2000 but were not included in the computation of diluted EPS
because the options' weighted average exercise price was greater than the
average market price of the common shares and the affect of including such
shares would be anti-dilutive to the per share amount.
The Company has 17,483 warrants outstanding at December 31, 2000 that were
not included in the computation of diluted EPS because the warrants' weighted
average exercise price was greater than the average market price of the common
shares and the affect of including such shares would be anti-dilutive to the per
share amount.
(12) COST OF OPERATIONS AND GROSS MARGIN BY PRIMARY REVENUE SOURCES
The following represents revenues and cost of operations by primary revenue
sources for the year ended December 31, 2000, 1999 and 1998 (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Revenue:
Systems.................................... $ 618 $5,046 $2,384
Support.................................... 2,068 2,330 2,117
Professional services...................... 3,974 4,647 5,705
------ ------ ------
Total revenue......................... 6,660 12,023 10,206
------ ------ ------
Cost of operations:
Systems.................................... 547 727 1,493
Support.................................... 643 555 686
Professional services...................... 1,624 1,860 2,199
------ ------ ------
Total cost of operations.............. 2,814 3,142 4,378
------ ------ ------
Gross margin.................................... $3,846 $8,881 $5,828
====== ====== ======
(13) EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing plan (the "Plan") intended to qualify
under Section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the Plan after three months of service. Employees may contribute
a portion of their salary to the Plan, subject to annual limitations imposed by
the
36
38
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Internal Revenue Code. The Company may make matching or discretionary
contributions to the Plan at the discretion of the Board of Directors, but has
made no such contribution to date. Employer contributions generally vest over
seven years.
The Company sponsors a defined benefit pension plan (the "pension plan")
covering all former employees of National Health Advisors. The pension plan was
amended to freeze benefit accruals and the entry of new participants effective
October 31, 1997. Because the expected future service of participants under the
pension plan was eliminated during 1997, this constitutes a curtailment under
the provisions of SFAS No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits".
The benefits are based on final average compensation and are offset by each
employee's interest in the Company's profit sharing plan. The Company's funding
policy is to contribute annually an amount that can be deducted for federal
income tax purposes and meets minimum funding standards, using an actuarial cost
method and assumptions which are different from those used for financial
reporting.
DEFINED BENEFIT
PENSION PLAN
---------------------
2000 1999
--------- ---------
CHANGED IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $(211,141) $(173,512)
Service cost................................................ (9,985) (8,581)
Interest cost............................................... (15,836) (13,013)
Actuarial gain.............................................. 103,155 21,567
--------- ---------
Benefit obligation at end of year........................... $(133,807) $(173,539)
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ 254,268 $ 210,923
Actual return on plan assets................................ 47,405 41,336
Employer contribution....................................... 12,856 2,009
--------- ---------
Fair value of plan assets at end of year.................... $ 314,529 $ 254,268
========= =========
FUNDED STATUS
Unrecognized net actuarial gain/loss........................ (326,698) (244,389)
Unrecognized net obligation................................. 124,319 43,126
--------- ---------
Prepaid (accrued) benefit costs............................. $(202,379) $(201,263)
========= =========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate............................................... 7.50% 7.50%
Expected return on plan assets.............................. 7.50% 7.50%
Rate of compensation increase............................... 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $ 9,985 $ 8,581
Interest cost............................................... 15,836 13,013
Expected return on plan assets.............................. (19,246) (16,779)
Amortization of recognized gain/loss........................ (11,404) (8,415)
Amortization of prior service cost.......................... 18,801 18,801
--------- ---------
Net periodic benefit cost................................... $ 13,972 $ 15,201
========= =========
37
39
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $41,000, $30,000 and $38,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments included in current assets and current liabilities,
which include cash and cash equivalents, accounts and trade receivables,
accounts payable and accrued expenses, approximate fair value.
Obligations under capital leases have carrying values that approximate fair
values as the significant notes are carried net of imputed interest calculated
at approximate current market rates.
(16) SUBSEQUENT EVENTS
On January 31, 2001, the Company and Cerner Corporation signed a
non-binding letter of intent under which Cerner would acquire substantially all
of the assets and certain liabilities relating to the Company's Clinical
Outcomes business, which accounts for a majority of its operations, for cash.
The transaction is subject to the execution of an asset purchase agreement and
shareholder approval.
On February 7, 2001, H-Quotient, Inc. and Henry M. Cohn made an unsolicited
tender offer to acquire a minimum of fifty-one percent (51%) of the outstanding
shares of the Company. On February 12, 2001, H-Quotient, Inc. announced that the
tender offer was being withdrawn.
During the first quarter of 2001, the Company granted to the Company's
Chairman 500,000 shares of restricted stock that will become fully vested by
December 31, 2001. In addition, the Company granted an aggregate of
approximately 425,000 options to Directors, members of Management, employees and
consultants. The exercise price of those options is equal to the fair market
value of the Company's stock on the date of grant. Approximately 400,000 of
those options become fully vested by December 31, 2001 and the remainder vest
ratably over a five year period.
On March 21, 2001, the Company acquired MetaContent, Inc., a Delaware
corporation engaged in the business of providing medical coding products and
services to the healthcare industry, whereby MetaContent, Inc. became a wholly
owned subsidiary. The Company intends to pursue opportunities in the medical
coding industry. The Company exchanged one million shares of its common stock
and warrants to purchase one million shares of the Company's common stock at
$0.50 per share for all of the outstanding shares of MetaContent. The Company's
Chairman and its financial advisor were two of several owners of MetaContent and
received 32.5% and 28% respectively, of the purchase price. MetaContent develops
and markets data management solutions for healthcare providers. MetaContent
specializes in "mission critical" applications including database development,
medical coding strategy and related services. It has particular expertise in the
application and use of clinical and financial standards.
38
40
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ------------ ----------------- ---------- --------------
Allowance for doubtful accounts receivable
1998................................. 485,011 60,021 30,739 514,293
1999................................. 514,293 91,708 75,311 530,690
2000................................. 530,690 86,494 444,272 172,912
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the Company
is incorporated herein by reference from the Company's Proxy Statement for the
2001 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management compensation is incorporated herein by
reference from the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
1. The consolidated financial statements required by Part IV, Item 14
are included in Part II, Item 8.
2. The financial statement schedules required by Part IV, Item 14 are
included in Part II, Item 8.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2000, APACHE filed the following
current reports on Form 8-K:
1. Date of Report: December 12, 2000 (filed December 20, 2000); Items 5
and 7(c).
2. Date of Report: December 29, 2000 (filed December 29, 2000); Items 5
and 7(c).
39
41
(c) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Asset Purchase Agreement by and among the Company and Dun &
Bradstreet HealthCare Information, Inc. and Cognizant
Corporation dated as of December 30, 1996 (1)
2.2 Asset Purchase Agreement by and among the Company and Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated as of January 7, 1997 (1)
2.3 Agreement and Plan of Merger among the Company, NHA
Acquisition Corporation, National Health Advisors, Ltd.,
Scott A. Mason and Donald W. Seymour dated as of June 2,
1997 (5)
3.1 Amended and Restated Certificate of Incorporation (5)
3.2 Amended and Restated By-Laws
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated as of May 6, 1997 (3)
10.1 APACHE Medical Systems, Inc. Employee Stock Option Plan *
(5)
10.2 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated Effective May 12, 1999 * (9)
10.3 APACHE Medical Systems, Inc. Non-Employee Director Option
Plan * (5)
10.4 Registration Agreement between the Company and Certain
Stockholders, dated December 28, 1995 (2)
10.5 Form of Warrant Agreement relating to warrants issued in
1995 (2)
10.6 Warrant Agreement between the Company and Venture Fund of
Washington, dated May 13, 1991 (2)
10.7 Licensing Agreement between the Company and Cerner
Corporation, dated February 2, 1995 (2)
10.8 Nonqualified Stock Option Agreement between the Company and
The Cleveland Clinic Foundation, dated August 19, 1994 (2)
10.9 Agreement between the Company and The George Washington
University, dated August 19, 1994 (2)
10.10 Letter Agreement between the Company and the Northern New
England Cardiovascular Disease Study Group, dated March 13,
1995 (2)
10.11 Licensing Agreement between the Company and Quality
Information Management Corporation, dated March 24, 1994 (2)
10.12 Marketing Agreement between the Company and American
Healthcare Systems Purchasing Partners, L.P., dated as of
June 3, 1996 (2)
10.13 Registration Agreement between the Company and each of Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated January 7, 1997 (1)
10.14 Nonqualified Stock Option Agreements between the Company and
each of Iowa Health Centers, P.C. d/b/a Iowa Heart Center,
P.C., Mercy Hospital Medical Center and Mark A. Tannenbaum,
M.D., dated January 7, 1997 (4)
10.15 License Agreement between the Company and Vermont Oxford
Network, Inc., Related Services Agreement between the
Company and Vermont Oxford Network, Inc. and Consulting
Agreement between the Company and Clinimetrics, Inc. each
effective as of June 24, 1997 ** (5)
10.16 Employment Agreement by and between the Company and Gerald
E. Bisbee, Jr., Ph.D., dated May 5, 1997 * (5)
10.17 Employment Agreement by and between the Company and Scott A.
Mason, dated June 15, 1999 * (10)
10.18 Nonqualified Stock Option Agreement between the Company and
William A. Knaus, M.D. dated May 29, 1997 * (5)
10.19 Form of 1998 Employment Agreement * (6)
10.20 Form of Nonqualified Director Stock Option Agreement * (6)
10.21 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated February 23, 1998, including forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement * (6)
40
42
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.22 Employment Agreement by and between Gina Campbell and the
Company, dated August 16, 2000 * (12)
10.23 Employment Agreement by and between Karen Miller and the
Company, July 28, 2000 * (12)
10.24 Employment Agreement by and between Sean Seerey and the
Company, dated May 11, 1999 * (10)
10.25 Employment Agreement by and between William A. Knaus and the
Company, dated July 28, 2000 * (12)
10.26 Employment Agreement by and between Violet L. Shaffer and
the Company, dated September 20, 2000 * (12)
10.27 Lease between Tysons II Development Co. Limited Partnership
and the Company, dated August 16, 1999 (11)
10.28 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective May 12, 1999 * (9)
10.29 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective January 1, 2000 * (3)
10.30 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective December 9, 2000
10.31 APACHE Medical Systems, Inc. Non-Employee Director Stock
Option Plan, Amended and Restated Effective December 9, 2000
23.1 Consent of Ernst & Young LLP
- ---------------
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission staff.
(1) Incorporated herein by reference to the Company's Report on Form 8-K filed
on January 14, 1997 (File No. 0-20805)
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04106)
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on June 4, 1997 (File No. 0-20805)
(4) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended March 31, 1997 (File No. 0-20805)
(5) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-20805)
(6) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1997 (File No. 0-20805)
(7) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 (File No. 0-20805)
(8) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-20805)
(9) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended March 31, 1999 (File No. 0-20805)
(10) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended September 30, 1999 (File No. 0-20805)
(11) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1999 (File No. 0-20805)
(12) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 2000 (File No. 0-20805)
(d) Financial Statement Schedules
Not applicable.
41
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on April 2, 2001.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ VIOLET L. SHAFFER
------------------------------------
Violet L. Shaffer
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 2, 2001 by the following persons on behalf
of the Registrant in the capacities indicated.
SIGNATURE CAPACITY
--------- --------
/s/ VIOLET L. SHAFFER President and Chief Operating
- --------------------------------------------------- Officer
Violet L. Shaffer
/s/ KAREN C. MILLER Vice President, Finance and Chief
- --------------------------------------------------- Financial Officer (Principal
Karen C. Miller Finance and Accounting Officer)
/s/ GERALD E. BISBEE, JR., PH.D Director and Chairman of the
- --------------------------------------------------- Board
Gerald E. Bisbee, Jr., Ph.D.
/s/ WILLIAM R. LEWIS Director
- ---------------------------------------------------
William R. Lewis
/s/ ALAN W. BALDWIN Director
- ---------------------------------------------------
Alan W. Baldwin
44
APACHE MEDICAL SYSTEMS, INC.
BOARD OF DIRECTORS
Gerald E. Bisbee, Jr., Ph.D.
President, Chairman &
Chief Executive Officer
ReGen Biologics, Inc.
William R. Lewis
Financial Consultant
Alan W. Baldwin
President & Chief Executive Officer
CopperGlass Optical Solutions Inc.
To obtain additional copies of
the Company's Annual Report on
Form 10-K, contact
the Investor Relations
Department at
the Company's corporate
headquarters.
45
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Asset Purchase Agreement by and among the Company and Dun &
Bradstreet HealthCare Information, Inc. and Cognizant
Corporation dated as of December 30, 1996 (1)
2.2 Asset Purchase Agreement by and among the Company and Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated as of January 7, 1997 (1)
2.3 Agreement and Plan of Merger among the Company, NHA
Acquisition Corporation, National Health Advisors, Ltd.,
Scott A. Mason and Donald W. Seymour dated as of June 2,
1997 (5)
3.1 Amended and Restated Certificate of Incorporation (5)
3.2 Amended and Restated By-Laws
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated as of May 6, 1997 (3)
10.1 APACHE Medical Systems, Inc. Employee Stock Option Plan *
(5)
10.2 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated Effective May 12, 1999 * (9)
10.3 APACHE Medical Systems, Inc. Non-Employee Director Option
Plan * (5)
10.4 Registration Agreement between the Company and Certain
Stockholders, dated December 28, 1995 (2)
10.5 Form of Warrant Agreement relating to warrants issued in
1995 (2)
10.6 Warrant Agreement between the Company and Venture Fund of
Washington, dated May 13, 1991 (2)
10.7 Licensing Agreement between the Company and Cerner
Corporation, dated February 2, 1995 (2)
10.8 Nonqualified Stock Option Agreement between the Company and
The Cleveland Clinic Foundation, dated August 19, 1994 (2)
10.9 Agreement between the Company and The George Washington
University, dated August 19, 1994 (2)
10.10 Letter Agreement between the Company and the Northern New
England Cardiovascular Disease Study Group, dated March 13,
1995 (2)
10.11 Licensing Agreement between the Company and Quality
Information Management Corporation, dated March 24, 1994 (2)
10.12 Marketing Agreement between the Company and American
Healthcare Systems Purchasing Partners, L.P., dated as of
June 3, 1996 (2)
10.13 Registration Agreement between the Company and each of Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated January 7, 1997 (1)
10.14 Nonqualified Stock Option Agreements between the Company and
each of Iowa Health Centers, P.C. d/b/a Iowa Heart Center,
P.C., Mercy Hospital Medical Center and Mark A. Tannenbaum,
M.D., dated January 7, 1997 (4)
10.15 License Agreement between the Company and Vermont Oxford
Network, Inc., Related Services Agreement between the
Company and Vermont Oxford Network, Inc. and Consulting
Agreement between the Company and Clinimetrics, Inc. each
effective as of June 24, 1997 ** (5)
10.16 Employment Agreement by and between the Company and Gerald
E. Bisbee, Jr., Ph.D., dated May 5, 1997 * (5)
10.17 Employment Agreement by and between the Company and Scott A.
Mason, dated June 15, 1999 * (10)
10.18 Nonqualified Stock Option Agreement between the Company and
William A. Knaus, M.D. dated May 29, 1997 * (5)
10.19 Form of 1998 Employment Agreement * (6)
10.20 Form of Nonqualified Director Stock Option Agreement * (6)
10.21 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated February 23, 1998, including forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement * (6)
46
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.22 Employment Agreement by and between Gina Campbell and the
Company, dated August 16, 2000 * (12)
10.23 Employment Agreement by and between Karen Miller and the
Company, July 28, 2000 * (12)
10.24 Employment Agreement by and between Sean Seerey and the
Company, dated May 11, 1999 * (10)
10.25 Employment Agreement by and between William A. Knaus and the
Company, dated July 28, 2000 * (12)
10.26 Employment Agreement by and between Violet L. Shaffer and
the Company, dated September 20, 2000 * (12)
10.27 Lease between Tysons II Development Co. Limited Partnership
and the Company, dated August 16, 1999 (11)
10.28 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective May 12, 1999 * (9)
10.29 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective January 1, 2000 * (3)
10.30 APACHE Medical Systems, Inc. Non-Employee Director
Supplemental Stock Option Plan, Amended and Restated
Effective December 9, 2000
10.31 APACHE Medical Systems, Inc. Non-Employee Director Stock
Option Plan, Amended and Restated Effective December 9, 2000
23.1 Consent of Ernst & Young LLP
- ---------------
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission staff.
(1) Incorporated herein by reference to the Company's Report on Form 8-K filed
on January 14, 1997 (File No. 0-20805)
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04106)
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on June 4, 1997 (File No. 0-20805)
(4) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended March 31, 1997 (File No. 0-20805)
(5) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-20805)
(6) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1997 (File No. 0-20805)
(7) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 (File No. 0-20805)
(8) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-20805)
(9) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended March 31, 1999 (File No. 0-20805)
(10) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended September 30, 1999 (File No. 0-20805)
(11) Incorporated herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1999 (File No. 0-20805)
(12) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarter ended June 30, 2000 (File No. 0-20805)