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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-20805
APACHE MEDICAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 23-2476415
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1650 Tysons Boulevard, McLean, Virginia 22102
(Address of principal executive offices and zip code)
(703) 847-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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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.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 1997 was approximately $36,428,272. The number of
outstanding shares of Registrant's Common Stock as of that date was 6,871,353.
Documents Incorporated by Reference:
Portions of the Proxy Statement for the annual stockholders' meeting to be held
on May 6, 1997 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
APACHE provides clinically-based decision support information systems
and services to the healthcare industry. The Company believes that it is the
only healthcare information company that can provide 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 clinicians and healthcare administrators by enabling joint access
to clinical and cost information, which facilitates both the containment of
costs and the delivery of high-quality care. APACHE's products and services
are focused on high-risk, high-cost patients, such as cardiovascular care,
critical care and certain chronically-ill patients, who typically account for a
disproportionately large share of healthcare expenditures.
INDUSTRY BACKGROUND
The nearly $1 trillion healthcare industry in the United States has
undergone rapid changes during the past decade. Government regulators and the
private sector have instituted various measures intended to lower the rate of
increase in healthcare expenditures, including the institution of prospective
payment programs, reductions in reimbursement rates, discounted fee-for-service
programs and capitation payments. As a result of the continued migration from
fee-for-service towards managed care, significant components of the financial
risk inherent in the provision of healthcare have been transferred from payers
to providers. Providers include hospitals, physicians and integrated delivery
systems ("IDSs"), which are combinations of hospitals and physicians for
managed care contracting purposes. In response to the transfer of financial
risk, healthcare providers have increasingly focused their efforts on reducing
costs while continuing to meet expectations for high-quality care.
Hospitals initially responded to the increasing financial pressure by
pursuing administrative cost savings. These cost savings, such as those
resulting from negotiating discounted purchases and optimizing staff and
inventory, were facilitated in part through the analysis of data generated by
administrative and financial information systems. Although many of these
administrative savings initiatives have been implemented, the financial
pressures on providers continue to increase. The next opportunity to realize
significant savings is in more efficiently managing utilization of clinical
resources, such as controlling the number and type of procedures performed and
the length of a patient's stay. In order to realize such savings while
maintaining the quality of care, providers have sought access to sophisticated
clinical information.
Initial efforts to develop decision support tools were based on the
use of data derived from charge-based information such as billing and claims
forms. Charge-based systems have a number of limitations, including: (i) the
lack of clinical detail that is inherent in charge data; (ii) the lack of
statistically significant comparative clinical information against which
individual cases can be measured; (iii) the retrospective nature of the
information, which is unable to support medical decision makers during the care
process; and (iv) clinicians' skepticism of clinical data derived from
financial records. Moreover, such systems generally have not been designed to
focus on high-risk, high-cost patients, who typically account for a
disproportionately large share of hospital costs.
In recent years, it has become possible to develop clinical decision
support systems that overcome these limitations. Methodologies have been
developed that incorporate complex techniques of data collection and analysis
to allow the assessment and prediction of clinical outcomes, or results, of
patient treatment. Using these methodologies, extensive databases comprised of
clinical outcomes information have been created. The collection of information
for these databases has been made more affordable by the development of
integration technology, which allows the information to be drawn directly from
patient record keeping systems. Finally, more powerful software and hardware
have become available to collect, retrieve and analyze patient-specific
clinical outcomes data.
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In response to these technological advancements and continued
healthcare industry trends, healthcare providers and suppliers are seeking more
sophisticated, outcomes-based clinical decision support information systems.
Such systems could provide timely access to patient-specific and
severity-adjusted clinical outcomes information to assist healthcare providers
in making critical point-of-care decisions. Ultimately, the Company believes
that the availability of decision support tools that measure the current health
status of patients and help predict clinical outcomes will facilitate the
delivery of high-quality care at a lower cost.
THE APACHE 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 clinicians and those of hospital administrators by enabling joint access to
clinical and cost information, which facilitates both the containment of costs
and the delivery of high-quality care. The Company's systems, which
incorporate software, hardware and related consulting services, generate
information to assist providers in making timely and 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.
- 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.
- Relate staffing and bed mix to the severity-adjusted mix of
patients in a hospital unit.
APACHE's products and services are differentiated from other
healthcare decision support systems by the combination of the following
factors:
- Detailed Clinical Data. APACHE's products and services
utilize detailed clinical data on a variety of health
parameters (e.g., vital signs, laboratory results and
measures of physiological function) and outcomes data (e.g.,
adverse occurrences, morbidity and mortality). In addition,
APACHE's products and services utilize administrative and
cost data, such as active treatment data and patient length
of stay data.
- Patient-specific, Severity-adjusted Data. APACHE's products
and services utilize clinical and cost data for individual
patients, in addition to patient groups. APACHE's
methodologies 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 outcomes
predictions.
- Concurrent, Predictive Outcomes Information. APACHE's
systems support physician decision making by providing
outcomes information to the physician 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.
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- Continuum of Care Capability. APACHE's products and services
provide information to the physician throughout a patient's
hospital stay by tracking the patient's outcomes with
predictions on clinical and cost results, both pre- and
post-procedure, thereby enabling physicians to better measure
the appropriateness and adequacy of the care.
- 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
cardiovascular care and 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 have been utilized in connection with more than
600 peer-reviewed articles in professional journals. APACHE has acquired
rights to and refined these methodologies, which were originally developed over
periods ranging from six to 18 years by leading academic medical centers such
as The George Washington University Hospital, Dartmouth-Hitchcock Medical
Center and The Cleveland Clinic Foundation. APACHE acquired rights to its
first methodology, the critical care methodology, in 1988 through an exclusive
commercial license agreement with The George Washington University.
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 550,000 patients, many of whom are high-risk, high-cost patients.
The Company created, and continues to refine, the critical care and sub-acute
care databases. APACHE acquired rights to its cardiovascular care and acute
care databases in connection with the acquisition of the rights to related
methodologies and has subsequently expanded and refined these databases.
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 currently include coverage of patients
in the cardiovascular, critical, acute and sub-acute care categories. The
cardiovascular care category includes angioplasty, open heart surgery, cardiac
catheterization and other heart patient therapies. Examples of the critical
care category are acute myocardial infarction, lung cancer and drug overdose
patients. The acute care category includes congestive heart failure, stroke
and hysterectomy patients and other therapies of similar severity. The
sub-acute category includes emphysema, pneumonia and ventilator-dependent
patients, among others.
APACHE's products and services are currently focused on coverage of
patients in the cardiovascular care and critical care categories. The Company
also currently offers products and services for patients in the acute care and
sub-acute care categories and intends to add additional categories in the
future.
THE APACHE STRATEGY
The Company's objective is to become the leading provider of clinical
outcomes data and decision support systems and services to healthcare
providers, suppliers and payers. APACHE intends to achieve this objective
through the implementation of the following strategies:
- Leverage Existing Customer Base. APACHE's comprehensive and
integrated product line provides opportunities for the
Company to market additional products and services to its
existing customer base. The modular nature of APACHE's
Medical Cost Management Program ("MCMP"), which is discussed
in "APACHE Products and Services", allows healthcare
providers to add to an existing system as APACHE introduces
new products and services or as customers needs expand. The
Company believes that many of its
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existing Benchmark Study and Consulting Study customers will
purchase the Company's more sophisticated MCMP systems as
they experience the benefits of APACHE's products and
services.
- Expand Market Share in the Provider Market. APACHE has
provided products or services to over 500 of the
approximately 5,200 community hospitals throughout the United
States and, therefore, believes it has a significant
opportunity to expand its market share. The Company plans to
expand its market share by further increasing (i) the range
of products and services offered; (ii) the size of the direct
sales force; (iii) its marketing budget; and (iv) its
utilization of distribution relationships.
- Expand Market Share in the Supplier Market and Enter the
Payer Market. APACHE has performed clinical trial studies
and disease management projects for leading pharmaceutical
and biotechnology companies and plans to expand its presence
in the supplier market. In addition, while the Company
currently markets its products and services primarily to
providers and suppliers, APACHE intends to pursue
opportunities in the healthcare payer market by leveraging
existing methodologies and databases to develop products and
services for healthcare payers.
- Add Methodologies, Databases, Products and Services. APACHE
seeks to acquire, license or develop new methodologies,
databases, software and technologies in order to enhance
existing products as well as to offer new products and
services across the continuum of care, both within and
outside of the hospital. In addition to its internal product
development activities, the Company will continue to pursue
the acquisition of product lines and medical data resources
and will consider the acquisition of complementary
businesses. Potential complementary business acquisitions
may include professional services consulting firms, disease
management firms or other companies with unique technologies
or applications.
- Continue to Develop Relationships with Key Industry
Participants. The Company believes that relationships with
key industry participants (i.e., Cerner Corporation and an
affiliate of Premier, Inc. (Premier, Inc. is the largest
healthcare alliance enterprise in the United States))
enhance APACHE's ability to develop new products, increase
penetration of existing markets and gain access to new
markets. APACHE intends to pursue strategic relationships
with other healthcare information systems companies,
providers, suppliers and payers.
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APACHE PRODUCTS AND SERVICES
APACHE offers products and services that are focused primarily on
high-risk, high-cost patient categories, in particular cardiovascular care and
critical care patients. In addition, the Company currently offers products and
services in the acute care and sub-acute care categories. As a result of a
recent acquisition, APACHE offers products in the chronic disease category
relating to HIV/AIDS disease management. The Company believes that it has a
competitive advantage, and that its greatest opportunities exist, in the area
of high-risk, high-cost patient categories. Accordingly, APACHE plans to
emphasize the marketing of its cardiovascular care and critical care products
and services, while continuing to offer and support acute care and sub-acute
care products and services and expanding into new categories, such as chronic
disease management.
The following tables summarize the products and services offered or
being developed by the Company and includes new product names introduced in
1996 to reflect updates of the product line.
INFORMATION SYSTEMS PRODUCTS:
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PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
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Benchmark Study Critical care; Acute care hospitals with Comparative analysis and report of a
cardiovascular care ICU's; acute care provider's clinical and financial
hospitals with heart performance.
centers
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Discover + Critical care; Acute care hospitals with Point-of-care information system,
cardiovascular care ICU's; acute care providing daily and prospective outcomes
hospitals with heart predictions, as well as, response to
centers treatment trending and reporting. These
tools support the case management of
individuals and patient groups.
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Voyager + Critical care; Acute care hospitals with Multi-dimensional analytical tool,
cardiovascular care ICU's; acute care providing severity adjusted outcomes
hospitals with heart compared to normative standards,
centers integration of financial and clinical
outcomes and standard reports.
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Surveyor+ Critical care; Acute care hospitals with Point-of-care information system,
cardiovascular care ICU's; acute care providing pre- and post interventional
hospitals with heart severity adjusted outcomes, predictions,
centers analytical capabilities and reporting.
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Heart Center Cardiovascular care Acute care hospitals with Provides clinicians with point-of-care
Departmental heart centers data capture, reporting and clinical
Information decision support.
System
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Medical Cost Critical care; Acute care hospitals with An integrated set of APACHE products and
Management cardiovascular care ICU's; acute care services, providing comprehensive
Program hospitals with heart clinical decision support.
centers
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HIV Manager HIV/AIDS Physicians and Physician practice management tool
Physicians' Groups including electronic medical record and
outcomes comparisons to national and
group norms.
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DISEASE MANAGEMENT PRODUCTS AND SERVICES:
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PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
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Clinical Trial All Product Lines Pharmaceutical, Protocol/analytic study design;
Support biotechnology, medical severity adjusted risk prediction
device/diagnostic modeling in support of efficacy testing
companies; contract and reporting.
research organizations;
etc.
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Product All Product Lines Pharmaceutical, Outcomes research; market analysis;
Marketing biotechnology, medical data sets; data analysis; reporting and
Information device/diagnostic related services.
Tools companies; contract
research organizations;
etc.
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Disease All Product Lines Pharmaceutical, Short and long term cost benefit
Management biotechnology, medical analysis; defining product roles in
Programs device/diagnostic determining outcomes from therapeutic
companies; contract interventions.
research organizations;
etc.
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CONSULTING SERVICES:
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PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
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Various Information systems APACHE system clients; Clinical process improvement; outcomes
related acute care hospitals with management; focused reviews, analytical
ICU's; acute care services; data information; Joint
hospitals with heart Commission on Accreditation of
centers Healthcare Organizations readiness
assessments, etc.
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Custom Clinical Custom analysis and Providers of care Focused point-of-care information
Decision design systems development services.
Support Tools
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Custom Clinical Custom analysis and Acute care hospitals with Focused professional service, supporting
Process design public quality issues standards based clinical practice
Improvement change.
Projects
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Cost and Custom analysis and Providers of care Focused services, providing credible
Quality Studies design investigating and reporting of quality
and cost of care delivery.
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Medical Cost Management Program. The MCMP encompasses a variety of
APACHE's family of products and services tailored to the needs of the
individual client. It is an integrated approach to decision support comprised
of software, hardware and related consulting and disease management services
designed to provide point-of-care, severity-adjusted clinical and financial
information to physicians within the hospital.
Healthcare providers can use the Company's MCMP to: (i) manage the
quality and cost of care for high-risk, high-cost patients; (ii) compare actual
individual patient outcomes with both predicted patient outcomes and
statistically relevant similar hospital, regional and national norms; (iii)
analyze and compare the performance of physicians using clinically-based,
peer-reviewed severity-adjustment methods; (iv) analyze and measure
quantifiable improvements in the clinical and cost outcomes of specified groups
of patients; and (v) relate staffing and bed mix to the severity-adjusted mix
of patients in a hospital unit. Through the MCMP, a provider can develop a
customized outcomes-based clinical decision support program.
The technical capabilities of the MCMP are combined with a four-step
clinical process improvement strategy that provides clinicians with a
structured approach for using information generated by a Company system to
match the patient's health status with the most appropriate care plan. First,
the MCMP analyzes and compares, initially through benchmarking, the clinical
and financial data of a select group of the provider's patients who all suffer
from the same disease to the best demonstrated practices identified in APACHE's
database. Second, providers combine these guidelines with their patients'
severity-adjusted clinical data to target specific patients for active practice
management. Third, providers utilize the results from this analysis to develop
severity-adjusted guidelines and practice management strategies. In the final
step, the MCMP
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generates real-time, severity-adjusted information through the use of a variety
of APACHE products, that the provider can use to improve the cost effectiveness
and appropriateness of an individual patient's care.
CUSTOMER TRAINING AND SUPPORT
The Company provides training 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 training, the
Company provides a high level of customer support including follow-up training,
a toll-free, 24-hour-per-day, seven-day-per-week customer service hotline and
periodic product upgrades. Customers pay an annual support service fee
approximately equal to 15% of the hardware and software portion of the product
price for these ongoing support services. The Company continues to expand its
suite of customer services in order to address the dynamic and growing needs of
its customers.
CUSTOMERS
APACHE currently markets its products and services to two types of
customers: healthcare providers and healthcare suppliers. To date, APACHE has
sold its products and services to over 400 customers. The Company's healthcare
provider customers are primarily medium to large individual hospitals, hospital
systems or alliances and physician group practices. The Company's healthcare
supplier customers are primarily pharmaceutical manufacturers and biotechnology
companies. In addition, as the Company increases the range of products and
services offered, the Company intends to market to insurance companies, health
maintenance organizations and other managed care companies, and other
healthcare payers.
The Company's provider customer base is geographically diverse,
including urban and rural hospitals located primarily throughout the United
States. The Company has also sold an MCMP to a hospital in Australia and
consulting services to hospital groups in the United Kingdom and Japan.
APACHE's supplier customers are located primarily in the United States. While
foreign activity has not been material to date, the Company intends to continue
the development of these markets in the future.
The Company's provider customers include hospitals within
investor-owned hospital chains, such as Doctor's Hospital of Dallas, a member
of Tenet Healthcare Corporation, and St. Vincent Charity Hospital, a member of
Columbia/HCA Healthcare Corporation; academic and teaching hospitals, such as
The Cleveland Clinic Foundation and The Mayo Foundation; not-for-profit
hospitals within integrated systems, such as Kaiser Foundation Hospitals; and
community hospitals. In addition, APACHE's provider customers include Vencor,
Inc., a multi-facility provider of long-term acute and sub-acute care; medical
professional organizations, such as the American College of Cardiology, with
which the Company contracted to provide data analysis and risk modeling
services for approximately 200 hospitals; medical consortiums, such as the
University HealthSystem Consortium, with which the Company contracted to
conduct Benchmark Studies at approximately 40 hospitals; and medical
coalitions, such as the Cleveland Health Quality Choice Program.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and
the enhancement of existing products are important to continue to build on its
competitive position. APACHE releases upgrades and new products on a periodic
basis.
The Company's product development strategy is directed toward creating
new products that: (i) leverage APACHE's databases; (ii) increase the
functionality of current products; (iii) expand coverage along the continuum of
care and to additional disease or procedure groups; and (iv) provide customers
with a selection of decision support systems at various price points. The
Company's products are primarily internally developed software and analytical
studies. Hardware products offered by the Company are sourced from other
vendors and resold by APACHE as components of an integrated system
incorporating the Company's software. The software products are generally
built on a client/server architecture that includes UNIX workstation servers,
Windows-based PCs, graphical user interfaces and other software developed by
third-party vendors. The server hosts a comprehensive data repository using
relational database management system ("RDBMS") technologies and
multidimensional database ("MDDB") technologies. The server can interface with
hospital systems, such as the laboratory, admission and bedside charting
systems, and uses the current versions of the industry standard healthcare
information protocols.
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In addition, the Company has developed relationships with key industry
participants to enhance its product offerings. For example, the Company has
cooperated with Hewlett-Packard Company and EMTEK Motorola Healthcare Company
to incorporate APACHE's software into their critical care products.
APACHE's consultants offer guidance to the Company's research and
development process by providing current market research regarding customer
preferences. Consulting services build on the Company's databases, software
products and broad disease coverage. As these products and services continue
to evolve, additional consulting applications will be developed and marketed to
existing and new customers.
SALES AND MARKETING
The Company markets and sells its products and services generally
through its thirteen-person direct sales force, each of whom focuses on a
specific geographic region of the country. The Company has developed a
customer profiling process based upon criteria established by the Company that
is designed to identify healthcare providers that have the greatest
opportunities for cost savings. APACHE's direct sales force targets its
marketing efforts at those healthcare providers that are highlighted through
this profiling process.
APACHE believes that the most effective use of its direct sales force
in marketing provider programs is to focus on individual hospitals, typically
having 250 or more licensed beds, hospital systems or alliances and large
physician group practices. The Company markets some of its provider programs
to smaller individual hospitals and other healthcare providers through focused
print advertising and telemarketing, as well as through medical professional
organizations, medical consortiums and trade shows. In addition, the Company
has formed a relationship with Cerner Corporation ("Cerner") pursuant to which
Cerner has agreed to market one of APACHE's methodologies as a component of
Cerner's product line.
APACHE's consulting services are marketed both as part of the MCMP and
separately by the Company's consultants as stand-alone products. The Company's
Disease Management programs are marketed by the developers of those programs
and other Company professionals directly to pharmaceutical and biotechnology
companies as well as through IMS America and other strategic partners and
resellers.
The Company is using a portion of the proceeds of its initial public
offering to expand its direct sales force. During 1996, the sales force was
expanded from seven to 12 representatives. This increase reduced the
geographic responsibility for each salesperson, thereby allowing more intense
coverage in each region. In addition, APACHE may rely on strategic
relationships in the future to market certain of its provider programs, both
domestically and internationally.
During 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. During the latter half of 1996, the Company conducted a marketing
program with Premier which resulted in the sale of approximately 100 benchmark
studies to its membership hospitals.
PROPRIETARY RIGHTS
The Company has made significant investments in the development and
maintenance of its risk-adjustment methodologies and its proprietary clinical
and financial 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 highly
statistically relevant databases. The Company believes that the sophistication
of its risk-adjustment methodologies, the richness of its corresponding
proprietary databases and the usefulness of its software provide better
outcomes measurements and utilization control than competitive systems.
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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 protectible, the
actual data are not, and others are free to create databases that perform the
same function. The Company believes, however, that the creation of competing
databases would be very time consuming and costly.
"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, Benelux, 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 ongoing reliable product
maintenance and support are integral to establishing and maintaining its
leadership position within the healthcare industry due to the rapid pace of
innovation within the software 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 are the quality and depth of
the underlying clinical outcomes databases, the proprietary nature of
methodologies, databases and technical resources, the usefulness of the data
and reports generated by the software, 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 Impath Laboratories Inc., Mecon, Inc., HCIA
Inc., Summit Medical Systems, Inc., Transition Systems Inc. and Oacis Health
Care Holdings, Corp. Other companies that provide healthcare information
systems include Cerner Corporation, HBO & Company, Shared Medical Systems
Corporation, Phamis Inc., HPR Inc. and Vitalcom. However, the Company's
products and services are differentiated from the products and services offered
by competitors by virtue of the fact that the Company's products and services,
unlike competing products and services, focus primarily on high-risk, high-cost
patients and provide both concurrent and predictive outcomes information.
Moreover, the Company believes that there are no dominant competitors to the
Company in the field of healthcare information systems that focus on high-risk,
high-cost patients or that provide concurrent and predictive outcomes
information. Many of the Company's competitors and potential competitors 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
significant competition from internal information services at individual
hospitals, large hospital alliances, for-profit hospital chains and managed
care companies, many of which have developed their own outcomes databases. As
the market for decision support systems develops, additional competitors
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may enter the market and competition may intensify. While the Company believes
that it has successfully differentiated itself from competitors, there can be
no assurance that future competition would not have a material adverse effect
on the Company.
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 databases omit any patient identifiers, including
name, address, hospital and physician. The Company believes that its
procedures comply with the 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 legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation 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.
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 FDA under
the Federal Food, Drug and Cosmetic Act of 1938 (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 "1989
Policy Statement"), 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
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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 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.
RECENT ACQUISITIONS
In furtherance of the Company's strategies to expand its share of the
provider and supplier markets, add databases and new technologies and develop
relationships with key industry partners, the Company has completed two
acquisitions since its IPO in July 1996.
In December 1996, the Company completed the acquisition of the assets
and certain liabilities of Health Research Network, a unit of Dun and
Bradstreet Health Care Information, Inc., a division of Cognizant Corporation
("HRN") for cash consideration totaling $1,565,000. This acquisition provides
the Company with chronic illness medical information service capabilities
initially related to HIV/AIDS disease management. HRN's proprietary patient
level database and practice management software provide detailed information
regarding treatment patterns and clinical outcomes. HRN manages an ongoing
epidemiological study under a cooperative agreement with the Centers for
Disease Control and Prevention and provides HIV-related information services
and studies distributed through IMS America to the pharmaceutical industry.
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In January 1997, the Company acquired the assets of CardioMac, a
point-of-care data collection and reporting tool for the cardiac
catheterization laboratory and cardiovascular operating room, from Iowa Health
Centers, the Iowa Heart Institute, Mercy Hospital Medical Center and Mark
Tannenbaum, M.D., its primary developer, for $1,350,000 in cash and options to
purchase 150,000 shares of APACHE Common Stock. These assets have unique
capabilities including the provision of standard and customized individual
patient and group reports for PTCA and CABG patients.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 88 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 excellent.
ITEM 2. PROPERTIES
The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 1999. The
Company also leases office space in Chicago, Illinois. These facilities are
considered suitable and adequate for their intended uses.
Description of Facility Square Footage Lease Expiration Date
----------------------- -------------- ---------------------
McLean, Virginia 21,000 November 30, 1999
Chicago, Illinois 3,500 December 31, 1997
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 is subject to, any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which required a vote of security holders during
the three months ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National 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 National Market.
High Low
---- ---
Year Ended December 31, 1996
Second Quarter (from June 28, 1996) . . . . . . . . . . . . . . . $13.000 $12.125
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 15.125 10.750
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 13.500 6.625
As of March 10, 1997, the Company had approximately 50 holders of
record of its Common Stock. The number of record holders is not representative
of the number of beneficial holders since many shares are held by depositories,
brokers or other nominees.
It is the present practice of the Company's Board of Directors to
retain earnings for use in the operations, development and growth of the
business and the Company does not anticipate payment of dividends on its Common
Stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994 1993 1992
------------ ------------ -------------- ------------ -------------
STATEMENT OF OPERATIONS DATA:
Revenue:
Systems ......................................... $ 6,323 $ 4,096 $ 3,587 $ 2,004 $ 827
Support ......................................... 1,486 1,352 836 486 277
Professional services ........................... 975 1,576 894 1,351 870
------------- ------------- -------------- ------------ -------------
Total revenue ........................... 8,784 7,024 5,317 3,841 1,974
Expenses:
Cost of operations .............................. 3,354 2,866 3,700 2,152 1,457
Research and development ........................ 1,723 1,919 1,813 1,017 667
Selling, general and administrative ............. 7,754 5,631 6,030 2,976 1,810
Write-off of product development
and related costs ......................... 1,100 - - - -
Write-off of acquired in-process
research and development costs ............ 853 - - - -
------------- ------------- -------------- ------------ -------------
Total expenses .......................... 14,784 10,416 11,543 6,145 3,934
------------- ------------- -------------- ------------ -------------
Loss from operations .............................. (6,000) (3,392) (6,226) (2,304) (1,960)
Other income (expense):
Interest income ................................. 702 62 94 67 65
Interest expense ................................ (363) (483) (69) (102) (106)
Other, net ...................................... - 5 9 (45) (30)
------------- ------------- -------------- ------------ -------------
Total other income (expense) ............ 339 (416) 34 (80) (71)
Net loss .......................................... $ (5,661) $(3,808) $(6,192) $(2,384) $(2,031)
============= ============= ============== ============ =============
Net loss per share ................................ $ (0.93) $ (0.79)
============= =============
Weighted average number of shares
used for calculation of net loss per share ........ 5,762 4,611
============= =============
DECEMBER 31,
--------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
----------- ----------- ------------- ------------ -----------
BALANCE SHEET DATA:
Cash and short-term investments ................... $ 21,664 $ 4,036 $ 209 $ 567 $ 3,342
Working capital (deficiency) ...................... 19,794 1,517 (1,896) (352) 3,271
Total assets ...................................... 27,986 7,909 4,245 2,455 4,301
Long-term obligations, less current maturities .... 193 1,079 549 813 1,013
Redeemable convertible preferred stock............. - 20,732 14,515 8,124 7,944
Total stockholders' equity (deficit) .............. 21,822 (18,313) (14,399) (7,865) (5,290)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1987 for the purpose of developing and marketing
clinically-based decision support products and services incorporating the
APACHE patient level database, severity of illness indices and risk adjusted
prediction methodologies. The Company introduced its Medical Cost Management
Program ("MCMP") in 1992 as an integrated decision support system that provides
physicians and healthcare administrators point-of-care, severity-adjusted
clinical and financial information on critical care patients. Early market
feedback indicated the need to extend the scope of the Company's product
offerings to include non-critical care patients and to develop a product
strategy that would provide for user friendly group and patient-specific
information across the continuum of care, incorporating clinical,
administrative and financial information. In the first quarter of 1996, APACHE
announced the addition of cardiovascular care coverage, and in the second half
of 1996 introduced new products focused on the delivery of clinically-based
decision support information for cardiovascular patient care. Since 1993, the
Company has offered professional services to both healthcare providers and
suppliers. These services draw from APACHE's core clinically oriented
databases and methodologies in order to support effective decision making of
these organizations.
In July 1996, the Company completed an initial public offering of 2.3 million
shares of Common Stock, yielding the Company approximately $24.6 million in net
proceeds.
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of Health Research Network, a unit of Dun and Bradstreet
Health Care Information, Inc., a division of Cognizant Corporation ("HRN"), for
cash consideration totaling $1.57 million. The acquisition provides the
Company with chronic illness medical information service capabilities initially
related to HIV/AIDS disease management. HRN's proprietary patient level
database and practice management software provide detailed information with
regards to treatment patterns and clinical outcomes. HRN manages an ongoing
epidemiological study under a cooperative agreement with the Centers for
Disease Control and Prevention and provides HIV-related information services
and studies distributed through IMS America to the pharmaceutical industry. In
connection with the acquisition, the Company recorded a non-recurring charge
related to acquired in-process research and development costs of approximately
$853,000 during the fourth quarter of 1996.
In January 1997, the Company acquired the assets of CardioMac, a point-of-care
data collection and reporting tool for the cardiac catheterization laboratory
and cardiovascular operating room for $1.35 million in cash and options to
purchase 150,000 shares of APACHE Common Stock. These assets have unique
capabilities including the provision of standard and customized individual
patient and group reports for PTCA and CABG patients. In connection with the
acquisition, the Company recorded a non-recurring charge related to acquired
in-process research and development costs of approximately $1.1 million during
the first quarter of 1997.
The Company's revenue results primarily from: (i) licensing and sales of
information systems; (ii) service fees related to the post implementation
clinical and technical support of its information systems; (iii) professional
consulting, clinical trial support and disease management services; and (iv)
the licensing and sale of data, data analysis and database driven reporting
services. Systems revenue is derived mainly from the licensing and sale of
information system products and related implementation services to individual
hospitals, provider groups, integrated health services providers, physician
practice organizations and long-term sub-acute care facilities. The Company's
support revenue is derived mainly from annual client service or maintenance
fees related to the post implementation clinical and technical support provided
to its information system clients. Professional services revenue relates
primarily to value-added, database-driven consulting services provided to
pharmaceutical, biotechnology and other suppliers as well as clinical process
improvement and custom analysis and design services offered to the providers of
healthcare.
The Company's expense structure includes: (i) the direct cost of operations;
(ii) research and development; and (iii) selling, general and administrative
expenses. Cost of operations includes the cost of hardware and software
purchased for resale, amortization of capitalized software development costs,
and direct staffing and other direct costs required to deliver and
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implement the Company's products and services. Prior to 1996, the Company did
not identify cost of operations by its primary revenue sources and,
accordingly, is unable to develop gross margins, or reliable estimates thereof,
by revenue source for periods prior to 1996. The Company has implemented a
process of identifying such costs, and began to report gross margin by revenue
source beginning with fiscal year 1996 (See Note 13 of Notes to Consolidated
Financial Statements). Research and development costs include the staffing,
third party subcontracting and related costs associated with the development
and refinement of the Company's products and services. Selling, general and
administrative expenses include all selling, marketing, accounting, facilities,
human resources, legal, corporate and all other unallocated overhead expenses.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
Revenue:
Systems ......................................... 72 % 58 % 67 %
Support ......................................... 17 19 16
Professional services ........................... 11 23 17
------- ------ ------
Total revenue ........................... 100 100 100
Expenses:
Cost of operations .............................. 38 41 70
Research and development ........................ 20 27 34
Selling, general and administrative ............. 87 80 113
Write-off of product development
and related costs ......................... 13 - -
Write-off of acquired in-process
research and development costs ............ 10 - -
------- ------ ------
Total expenses .......................... 168 148 217
------- ------ ------
Loss from operations .............................. (68) (48) (117)
Other income (expense):
Interest income ................................. 8 1 2
Interest expense ................................ (4) (7) (1)
Other, net ...................................... - - -
------- ------ ------
Total other income (expense) ............ 4 (6) 1
Net loss .......................................... (64) % (54) % (116) %
======= ====== ======
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1996 COMPARED TO 1995
Revenue. Revenue for 1996 increased 25% to $8.8 million from $7.0 million in
the prior year period. Systems revenue for 1996, increased 54% to $6.3 million
from $4.1 million in the prior year period. This increase was due primarily to
the increase in unit sales of the Company's MCMP product; the introduction and
sale of other systems and benchmark studies; and the recording of revenue
relating to the percentage of completion method of accounting for 1995 MCMP
sales. Support revenue for 1996 increased 10% to $1.5 million from $1.4 million
in the prior year period, due to an increase in the MCMP installed client base,
partially offset by the renegotiation of annual support fees for a significant
client, which resulted in lower annual support fees for the second half of
1996. Professional services revenue for 1996 decreased 38% to $975,000 from
$1.6 million for the prior year period. The decrease in professional services
revenue was due to the reduction of services sold to biotechnology companies,
which resulted from the Company's focus on the sale of MCMP products and other
systems for the first nine months of 1996. The Company, however, has hired two
individuals during the latter half of 1996 who will be devoted to marketing and
selling professional services during 1997.
Cost of Operations. Cost of operations for 1996 increased 17% to $3.4 million
from $2.9 million in the prior year period, due to additional staffing
requirements to support the Company's growth in revenue. Additionally,
amortization of capitalized software development costs increased $167,000 as a
result of new products released by the Company. These cost increases were
partially offset by a reduction of costs resulting from process improvement
programs implemented during 1996. Cost of operations for 1996 decreased to 38%
of revenue from 41% in the prior year period, due to the increase in revenue,
which more than offset the increase in cost of operations.
Research and Development. Research and development expenses for 1996 decreased
10% to $1.7 million from $1.9 million in the prior year period, due primarily
to a reduction in third party research fees, partially offset by an increase in
staffing requirements related to the enhancement of current product lines as
well as development activities for new products and services. During 1996,
$279,000 of product development costs were capitalized, compared to $426,000 in
the prior year period. Research and development expenses for 1996 decreased to
20% of revenue from 27% in the prior year period, due to the same factors
together with an increase in revenue during the same period.
Selling, General and Administrative. Selling, general and administrative
expenses for 1996 increased 38% to $7.8 million from $5.6 million in the prior
year period, due primarily to overhead costs associated with the increase in
staffing throughout the Company, an increase in sales and marketing related
activities and an increase in expenses associated with public reporting
requirements. Selling, general and administrative expenses for 1996 increased
to 87% of revenue from 80% for the prior year period, due primarily to the same
factors as noted above, which were only partially offset by an increase in
revenue.
Write-off of Product Development and Related Costs. During the fourth quarter
of 1996, the Company recorded a non-recurring charge totaling $1.1 million, or
13% of revenue, relating to the write-off of capitalized product development
costs totaling $375,000 and licensing and marketing fees totaling $725,000
arising from an earlier agreement with QIMC, a healthcare focused, business-led
coalition located in Cleveland. During 1994, the Company entered into an
exclusive 10 year licensing agreement with QIMC for its database and
methodologies. As of December 31, 1996, the Company is committed to pay an
aggregate of $500,000 through March 1999 for the license fees associated with
the sale of the Company's product related to these methodologies. As of
December 31, 1996, the Company is also committed to pay an aggregate of
$225,000 through March 1999 for marketing services. The charge was recorded
because the joint marketing arrangement has not met management's expectations,
resulting in limited sales of the related product during 1996. This trend is
expected to continue through 1999 and, therefore, the projected sales for the
related product and support revenue earned from existing clients are not
considered adequate to support the related expenses associated with the QIMC
agreement and the capitalized product development costs.
Write-off of Acquired In-Process Research and Development Costs. In December
1996, the Company completed the acquisition of HRN. At the time of the
acquisition, the Company recorded a non-recurring charge resulting from the
write-off of the acquired in-process research and development costs. This
charge totaled $853,000 or 10% of the Company's revenue for 1996. These costs
related to the development of the HRN HIV/AIDS database and physician practice
management software applications.
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Other Income (Expense). Other income (expense) increased from ($416,000) in
1995 to $339,000 for 1996. The increase was attributable to interest income
earned from the investment of $24.6 million of net proceeds from the initial
public offering of the Company's Common Stock in July 1996.
Taxes. The Company has not incurred income taxes as a result of generating net
operating losses for tax purposes.
1995 COMPARED TO 1994
Revenue. Revenue in 1995 increased 32% to $7.0 million from $5.3 million in
1994. Systems related revenue in 1995 increased 14% to $4.1 million from $3.6
million in 1994. This increase was due primarily to the increase in unit sales
of the Company's MCMP product and the introduction and sale of new MCMP
component products and other systems. Support revenue in 1995 increased 62% to
$1.4 million from $836,000 in 1994 due to an increase in the MCMP installed
client base. Professional services revenue in 1995 increased 76% to $1.6
million from $894,000 in 1994 due to an increase in revenues from supplier
studies contracts in 1995.
Cost of Operations. Cost of operations in 1995 decreased 23% to $2.9 million
from $3.7 million in 1994, due primarily to a decrease in staffing. Staffing
reductions resulted from realizing efficiencies in delivering, installing and
supporting new and existing clients. Cost of operations in 1995 included
$63,000 in amortization of capitalized software development costs. No
amortization was recorded in 1994 as the related products had not yet been
released. Cost of operations in 1995 decreased to 41% of revenue from 70% in
1994, due to the same factors together with an increase in revenue during the
same period.
Research and Development. Research and development expenses in 1995 increased
6% to $1.9 million from $1.8 million in 1994, due to the enhancement of current
product lines as well as development activities for new products and services.
During 1995, $426,000 of product development activity was capitalized, compared
to $338,000 in 1994. Research and development expenses in 1995 decreased to
27% of revenue from 34% in 1994, primarily due to revenue increasing at a
faster pace than development-related activities.
Selling, General and Administrative. Selling, general and administrative
expenses in 1995 decreased 7% to $5.6 million from $6.0 million in 1994.
Staffing levels were lower in 1995 than in 1994, and 1994 included costs
associated with the move of the corporate offices. Selling, general and
administrative expenses in 1995 decreased to 80% of revenue from 113% in 1994
due to the same factors together with an increase in revenue during the same
period.
Other Income (Expense). Other income (expense) decreased from $34,000 in 1994
to ($416,000) in 1995. The decrease from 1994 to 1995 was attributable
primarily to an increase in non-cash imputed interest expense on convertible
debt and a decrease in interest income resulting from lower cash and cash
equivalents balances during the first three quarters of 1995, compared to 1994.
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QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data, as
well as certain unaudited quarterly financial data as a percentage of revenues,
for fiscal 1996 and 1995. 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 1996
-------------------------------------------------
(in thousands) Q1 Q2 Q3 Q4
-------- -------- ------- ---------
Revenue:
Systems ................................. $1,242 $1,567 $1,726 $ 1,788
Support ................................. 330 375 354 427
Professional services ................... 87 69 434 385
------- ------- ------- --------
Total revenue ................... 1,659 2,011 2,514 2,600
Expenses:
Cost of operations ...................... 753 761 699 1,141
Research and development ................ 364 297 550 512
Selling, general and administrative ..... 1,445 1,588 2,142 2,579
Write-off of product development
and related costs .................. - - - 1,100
Write-off of acquired in-process
research and development costs ...... - - - 853
------- ------- ------- --------
Total expenses .................. 2,562 2,646 3,391 6,185
------- ------- ------- --------
Loss from operations ...................... (903) (635) (877) (3,585)
Total other income (expense) .... (48) (82) 181 288
------- ------- ------- --------
Net loss .................................. $(951) $ (717) $ (696) $(3,297)
======= ======= ======= ========
FISCAL YEAR 1995
--------------------------------------------------------
(in thousands) Q1 Q2 Q3 Q4
--------- -------- -------- ---------
Revenue:
Systems ................................ $ 700 $ 626 $ 1,256 $ 1,514
Support ................................ 318 282 366 387
Professional services .................. 241 408 524 402
--------- -------- -------- --------
Total revenue .................. 1,259 1,316 2,146 2,303
Expenses:
Cost of operations ..................... 733 715 686 732
Research and development ............... 578 497 529 315
Selling, general and administrative .... 1,577 1,379 1,232 1,443
Write-off of product development
and related costs ................. - - - -
Write-off of acquired in-process
research and development costs ..... - - - -
--------- -------- -------- --------
Total expenses ................. 2,888 2,591 2,447 2,490
--------- -------- -------- --------
Loss from operations ..................... (1,629) (1,275) (301) (187)
Total other income (expense) ... (20) (107) (136) (153)
--------- -------- -------- --------
Net loss ................................. $ (1,649) $(1,382) $ (437) $ (340)
========= ======== ======== ========
FISCAL YEAR 1996
------------------------------------------------------
(in thousands) Q1 Q2 Q3 Q4
-------- -------- -------- --------
Revenue:
Systems ................................. 75 % 78 % 69 % 69 %
Support ................................. 20 19 14 16
Professional services ................... 5 3 17 15
-------- -------- -------- ---------
Total revenue ................... 100 100 100 100
Expenses:
Cost of operations ...................... 45 38 28 44
Research and development ................ 22 15 22 20
Selling, general and administrative ..... 87 79 85 99
Write-off of product development
and related costs .................. - - - 42
Write-off of acquired in-process
research and development costs...... - - - 33
-------- -------- -------- ---------
Total expenses .................. 154 132 135 238
-------- -------- -------- ---------
Loss from operations ...................... (54) (32) (35) (138)
Total other income (expense) .... (3) (4) 7 11
Net loss .................................. (57) % (36) % (28) % (127) %
======== ======== ======== =========
FISCAL YEAR 1995
-----------------------------------------------------------
(in thousands) Q1 Q2 Q3 Q4
--------- --------- ---------- --------
Revenue:
Systems ................................ 56 % 48 % 59 % 66 %
Support ................................ 25 21 17 17
Professional services .................. 19 31 24 17
--------- -------- -------- --------
Total revenue .................. 100 100 100 100
Expenses:
Cost of operations ..................... 58 54 32 32
Research and development ............... 46 38 25 13
Selling, general and administrative .... 125 105 57 63
Write-off of product development
and related costs ................. - - - -
Write-off of acquired in-process
research and development costs..... - - - -
--------- -------- -------- --------
Total expenses ................. 229 197 114 108
--------- -------- -------- --------
Loss from operations ..................... (129) (97) (14) (8)
Total other income (expense) ... (2) (8) (6) (7)
Net loss ................................. (131) % (105) % (20) % (15) %
========= ======== ======== ========
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The Company's quarterly revenues and operating results have varied
significantly in the past and are likely 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, 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.
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
In July 1996, the Company completed an initial public offering of its Common
Stock whereby 2.3 million shares were issued at $12 per share resulting in net
proceeds of approximately $24.6 million.
On July 3, 1996 (consummation of the offering), all the outstanding shares of
Series A, B, C, D, E and F redeemable convertible preferred stock were
automatically converted into 3,294,519 shares of Common Stock, and, at the
holders' option, $940,000 of cumulative dividends were converted into 78,331
shares of Common Stock based on the stated preference of the holders. During
the third quarter of 1996, cumulative dividends of $909,000 were paid in cash
with the proceeds of this offering, and $608,000 of accreted issue costs have
been reflected as a decrease in paid-in capital. Additionally, convertible
notes payable with an outstanding balance of $1.0 million and a net carrying
value of approximately $895,000 were converted into 122,257 shares of Common
Stock.
In February 1997, the Company obtained a line of credit commitment from a
commercial bank (the "Bank") providing for a borrowing capacity of $2.0
million. Borrowings will bear interest at a fluctuating rate equal to the
Bank's prime rate plus 0.25%. The Company will also pay an annual fee on the
total borrowing capacity of $2.0 million at a rate of 0.75% per annum.
Borrowings will be collateralized by the Company's assets. The line of credit
commitment will expire on May 31, 1997 and contains an automatic renewal that
will expire on May 31, 1998. There can be no assurance, however, that the
Company will be able to enter into a line of credit under the terms outlined in
the commitment.
During 1996, 1995 and 1994, the Company used approximately $4.8 million, $2.4
million and $3.7 million, respectively, in operating activities. During 1996,
approximately $1.8 million and $915,000 of cash generated from operations was
used to fund the increase in accounts receivable and the decrease in deferred
revenue, respectively. The increase in accounts receivable was due primarily
to sales growth, as well as the timing of receipt of payments from certain
major customers. The decrease in deferred revenue was a result of the timing
difference between the delivery of products to customers and the corresponding
impact on the recording of revenue for those customers, and the contractual
billing terms agreed upon with those customers.
Net cash provided by financing activities during 1996, 1995 and 1994 was $23.0
million, $6.5 million and $5.3 million, respectively, due primarily to the
Company's public offering in July 1996, the issuance of redeemable convertible
preferred stock (subsequently converted to shares of Common Stock) and the
issuance of convertible debt instruments (subsequently converted to shares of
Common Stock or paid in full). The net cash provided by financing activities
has been utilized primarily for operations, research and development
activities, capital expenditures and acquisitions.
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During 1996, 1995 and 1994, the Company made capital expenditures totaling
$293,000, $57,000 and $1.8 million, respectively. As of December 31, 1996, the
Company had net working capital of $19.8 million including cash and short-term
investments in the amount of $21.7 million.
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of HRN for $1.57 million in cash paid in January 1997. In
January 1997, the Company acquired the assets of CardioMac for a payment of
$1.35 million in cash and options to purchase 150,000 shares of APACHE Common
Stock. Each of these acquisitions has been accounted for using the purchase
method of accounting and, accordingly, the assets have been valued at their
estimated fair value. Funding for the acquisitions was provided by the
proceeds of the Company's public offering completed in July 1996.
The Company anticipates that net proceeds from the initial public offering and
funds generated from operations will be sufficient to meet its planned ongoing
working capital requirements and to finance planned product development, sales
and marketing activities and capital acquisitions for the next twelve months.
The Company does not believe the impact of inflation has significantly affected
the Company's operations.
ADDITIONAL ITEM. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company or its representatives from time to time may make or may
have made certain forward-looking statements, orally or in writing, including
without limitation any such statements made or to be made in the Management's
Discussion and Analysis contained in its various filings with the Securities
and Exchange Commission. The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements, so as to ensure to the fullest
extent possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the
following discussion of certain important factors that could cause actual
results to differ materially from those projected in such forward-looking
statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such risk factors, nor can it assess the impact, if any, of such risk
factors on the Company's business or the extent to which any factors, or
combination of factors, may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
History of Operating Losses and Accumulated Deficit; Expected Losses;
Uncertainty of Future Profitability
The Company has never recorded an operating profit and had an
accumulated deficit of approximately $23.6 million as of December 31, 1996.
The Company expects to continue to record losses for at least the next three
quarters. The ability of the Company to achieve profitability in the future
largely depends on its ability to generate revenues from its products and
services. In view of the Company's operating history, there can be no
assurance that the Company will be able to generate revenue that is sufficient
to achieve profitability, to maintain profitability on a quarterly or annual
basis or to sustain or increase its revenue growth in future periods. The
Company's limited capitalization may adversely affect the ability of the
Company to raise additional capital in the future and could impair the
Company's ability to invest in research and development, sales and marketing
programs and other operations, any of which could have a material adverse
effect on the Company's business financial condition and results of operations.
Fluctuations in Quarterly Operating Results
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely 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
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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, which primarily include personnel as
well as facilities costs, an 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 be indicative of results for future periods. 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.
Uncertainty of Market Acceptance
The Company's future success and financial performance will depend in
large part on its ability to successfully market its products and services. To
date, the Company's healthcare provider customers include over 500 of the
approximately 5,200 community hospitals in the United States. Healthcare
providers comprise most of the Company's customers to date. The Company only
recently began to target sales to healthcare suppliers and has not yet
completed any sales to healthcare payers. There can be no assurance that the
Company will be able to achieve more extensive penetration of its target
markets. The failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's future success and financial performance will also
depend on its ability to meet the increasingly sophisticated needs of its
customers through the timely development and successful introduction of new and
enhanced versions of its products and services. The Company believes that
significant continuing product development efforts will be required to sustain
the Company's growth and that such efforts have inherent risks. The Company is
currently expanding its products and services to include additional high-risk,
high-cost disease categories and to broaden coverage across the continuum of
care. There can be no assurance that the Company will be successful in
entering new markets or in developing and marketing new or enhanced products
and services, or that it will not experience significant delays in the
introduction of new products and services. In addition, there can be no
assurance that new or enhanced products or services developed by the Company
will meet the requirements of healthcare providers, suppliers or payers and
achieve market acceptance. The failure to enter new markets successfully, to
develop new products or to achieve market acceptance for new products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
State and Federal Government Regulation
The confidentiality of patient records and the circumstances under
which such records may be released are subject to substantial regulation by
state and federal governments. These state and federal laws and regulations
govern both the disclosure and use of confidential patient medical record
information. To protect patient confidentiality, data entries to APACHE's
databases omit any patient identifiers, including name, address, hospital and
physician. The Company believes that its procedures comply with the 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 unclear and difficult to apply in the rapidly
restructuring healthcare market. Additional legislation governing the
dissemination of medical record information is continually being proposed at
both the state and federal level. This legislation may require holders or
users of such information to implement security measures that may result in
substantial cost to the Company. There can be no assurance that changes to
state or federal laws will not materially restrict the ability of the Company
to obtain or disseminate patient information. The inability to obtain or
disseminate patient information could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 United
States Food and Drug Administration (the "FDA") as medical devices. The laws
administered by the FDA impose substantial regulatory controls over the
manufacturing, labeling, testing, distribution, sale, marketing and promotion
of medical devices and other related activities. These regulatory controls can
include compliance with the following requirements: manufacturer establishment
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registration and device listing; current good manufacturing practices;
completion of premarket notification or premarket approval; medical device
adverse event reporting; and general controls prohibiting misbranding and
adulteration. Violations of the laws concerning medical devices can result in
severe criminal and civil penalties and other sanctions. In its 1989 Policy
for the Regulation of Computer Products (the "1989 Policy Statement"), the FDA
stated that it intended to issue regulations exempting certain clinical
decision support software products from a number of regulatory controls, and
that until those regulations were issued it would not require manufacturers of
such products to comply with requirements other than the general controls. The
Company believes that its products are not medical devices and, thus, are not
subject to the controls imposed on manufacturers of such products. The Company
further believes that to the extent that its products were determined to be
medical devices, the products would fall within the exemptions for decision
support systems provided by the 1989 Policy Statement. The Company has not
taken action to comply with the controls that would otherwise apply if the
Company's products were non-exempt medical devices. The FDA has stated that it
intends to revise its 1989 Policy Statement and that it may eliminate some or
all of the exemptions that it currently allows. Accordingly, 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 nonclinical 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,
results of operations.
In addition to legislation regarding patient records and potential FDA
regulation, state and federal lawmakers have proposed, and are likely to
continue to propose, a number of other legislative initiatives regulating
various aspects of the healthcare industry. The Company is unable to predict
what impact, if any, such legislation could have on the Company's business,
financial condition and results of operations.
Integrity and Reliability of Methodologies and Databases
The Company's success is highly dependent on the integrity and
reliability of its methodologies and databases. The Company's methodologies
have been validated by a large number of academic researchers. The Company
believes that it takes adequate precautions to safeguard the completeness and
consistency of the data in its databases. Moreover, while the Company believes
that the information contained in its databases is representative of the
clinical and financial aspects of various types of hospitals and patients,
there can be no assurance that such information is appropriate for comparative
analysis in all cases or that the databases accurately reflect general or
specific trends in the healthcare industry. If the validity of the Company's
methodologies were challenged in the future or if the information contained in
the databases were found, or were perceived, to be inaccurate or unreliable,
there could be a material adverse effect on the Company's business, financial
condition and results of operations.
Risk of Liability Claims
Customer reliance on the Company's products and services could result
in exposure of the Company to liability claims if the Company's products fail
to perform as intended or if patient care decisions based in part on guidance
from the Company's products or services are challenged. Even unsuccessful
claims could result in the expenditure of funds in litigation, diversion of
management time and resources or damage to the Company's reputation and the
marketability of the Company's products and services. While the Company takes
contractual steps to obtain indemnification for certain liabilities and
maintains general commercial liability insurance, there can be no assurance
that a successful claim could not be made against the Company, that the amount
of indemnification payments or insurance would be adequate to cover the costs
of defending against or paying such a claim or that damages payable by the
Company would not have a material adverse effect on the Company's business,
financial condition and results of operations.
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Technological Change
The healthcare information industry is relatively new and is
experiencing technological change, changing customer needs, frequent new
product introductions and evolving industry standards. In addition, as the
computer and software industries continue to experience rapid technological
change, the Company must be able to quickly and successfully adapt its products
so that they continue to integrate well with the other computer platforms and
software employed by its customers. There can be no assurance that the Company
will not experience difficulties, including lack of necessary capital or
expertise, that could delay or prevent the successful development and
introduction of product enhancements or new products in response to
technological changes. If the Company is unable to respond to technological
changes in a timely and cost-efficient manner, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on Third Party to Market and Distribute Products and Services
In June 1996, the Company entered into an agreement with an affiliate
of Premier Inc. ("Premier"), which provides buying services to a group of
approximately 1,800 hospitals. Pursuant to this agreement, which expires on
December 31, 1999, the Company and Premier are cooperating to market the
Company's products and services to the hospitals in the Premier buying group.
Although the Company continues to market its products and services through
other channels, the relationship with Premier has become an important part of
the Company's marketing and distribution strategy. There can be no assurance
that the Company's relationship with Premier will continue. Furthermore, if
the relationship with Premier is terminated, there can be no assurance that the
Company will be able to replace the Premier relationship with other means of
marketing and distributing its products and services. Failure to continue this
relationship or to develop other means of marketing and distributing its
products and services could have a material adverse effect on the Company's
revenues and operating results. Pursuant to the agreement with the Premier
affiliate, the Company has agreed to provide certain discounts to hospitals in
the Premier buying group. There can be no assurance that the Company's
relationship with Premier or the discounts for Premier buying group members
will not have an adverse effect on the Company's ability to market its products
and services to potential customers outside of the Premier buying group. If
the Company is unable to successfully market its products and services to
customers outside of the Premier buying group, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
Highly Competitive Industry
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical decision support products and services are the
quality and depth of the underlying clinical outcomes databases, the
proprietary nature of methodologies, databases and technical resources, the
usefulness of the data and reports generated by the software, customer service
and support, compatibility with the customer's existing information systems,
potential for product enhancement, vendor reputation, price and the
effectiveness of sales and marketing efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as Impath Laboratories Inc., Mecon, Inc., HCIA
Inc., Summit Medical Systems, Inc., Transition Systems Inc. and Oacis Health
Care Holdings, Corp. Other companies that provide healthcare information
systems include Cerner Corporation, HBO & Company, Shared Medical Systems
Corporation, Phamis Inc., HPR Inc. and Vitalcom. However, the Company's
products and services are differentiated from the products and services offered
by those competitors by virtue of the fact that the Company's products and
services, unlike competing products and services, focus primarily on high-risk,
high-cost patients and provide both concurrent and predictive outcomes
information. Moreover, the Company believes that there are no dominant
competitors to the Company in the field of healthcare information systems that
focus on high-risk, high-cost patients or that provide concurrent and
predictive outcomes information. Many of the Company's competitors 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
significant competition from internal information services at individual
hospitals, large hospital alliances, for-profit hospital chains and managed
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care companies, many of which have developed their own outcomes databases. As
the market for decision support systems develops, additional competitors may
enter the market and competition may intensify. While the Company believes
that it has successfully differentiated itself from competitors, there can be
no assurance that future competition would not have a material adverse effect
on the Company's business, financial condition and results of operations.
Uncertainty and Consolidation in the Healthcare Industry
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, state and
federal 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
Medicare and Medicaid reimbursement rates or 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. In addition, the healthcare industry
has experienced, and could continue to experience, consolidation as a result of
mergers and acquisitions of healthcare providers, suppliers and payers, which
typically puts additional pressure on the consolidated companies to reduce
expenses. The Company cannot predict what impact, if any, such factors would
have on its business, financial condition and results of operations.
In addition, many healthcare providers are consolidating to create
larger healthcare delivery enterprises with greater regional market power.
Such consolidation could erode the Company's existing customer base and reduce
the size of the Company's target market. In addition, the resulting
enterprises could have greater bargaining power, which could lead to price
erosion affecting the Company's products and services. The reduction in the
size of the Company's target market or the failure of the Company to maintain
adequate price levels could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel and Others
The success of the Company and of its business strategy is dependent
in large part on its key management and operating personnel, including its
Chairman and Chief Executive Officer, Gerald E. Bisbee, Jr., Ph.D. The Company
has entered into confidentiality and noncompetition agreements with each of its
executive officers. The Company believes that its success in the future will
also depend upon its ability to attract and retain highly skilled technical,
managerial and marketing personnel. Such individuals are in high demand and
are often subject to competing offers. In particular, the Company's success
will depend on its ability to retain the services of its executive officers and
to hire additional management personnel as needed. The Company will also have
an ongoing need to expand the number of its management and support personnel.
The loss of the services of one or more members of management or key employees,
or the inability to hire additional personnel as needed, could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company maintains a key person life insurance policy on
Dr. Bisbee, the amount of insurance may not be sufficient to offset the impact
of the Company's loss of the services of Dr. Bisbee.
William A. Knaus, M.D., a founder, a director and the Chief Scientific
Advisor of the Company, was instrumental in the creation of the APACHE critical
care methodology. Although the Company has obtained a perpetual license to
this methodology, there can be no assurance that a significant change in Dr.
Knaus's relationship with the Company would not have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence on Proprietary Assets
The Company has made significant investments in its methodologies,
databases and technology and relies on a combination of trade secret and
copyright laws, nondisclosure and other contractual provisions, and technical
measures to protect its proprietary rights. There can be no assurance that
these protections will be adequate or that the Company's competitors will not
independently develop methodologies, databases or technologies that are
substantially equivalent or
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superior to those of the Company. In addition, there can be no assurance that
the legal protections and precautions taken by the Company will be adequate to
prevent infringement or misappropriation of the Company's proprietary assets.
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. In addition, any such
claim may require the Company to incur substantial litigation expenses or
subject the Company to significant liabilities and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's ability to successfully maintain and expand its business
through the acquisition of rights to, and the refinement and development of,
its methodologies and databases is dependent, in large part, upon its
contractual relationships with academic researchers and physicians. There can
be no assurance that a disruption or severance of any one or more of these
relationships would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Identification and Integration of Acquisitions
The Company has expanded its product line through the acquisition of
complementary businesses, products, methodologies, databases and technologies
and may seek additional acquisitions in the future. Acquisitions involve
numerous risks, including difficulties in the assimilation of operations and
products, the ability to manage geographically remote units, the diversion of
management's attention from other business concerns, the risks of entering
markets in which the Company has either limited or no direct experience and the
potential loss of key employees of the acquired companies.
Identifying and pursuing acquisition opportunities, integrating
acquired products and businesses, and managing growth requires a significant
amount of management time and skill. The Company has limited experience in
acquiring businesses and there can be no assurance that the Company will be
effective in identifying and effecting attractive acquisitions or assimilating
such acquisitions in a timely fashion. Any delay or failure to successfully
assimilate such acquisitions could result in the expenditure of money and
increased demands on management's time and could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, acquisitions may involve the expenditure of significant funds and/or
the issuance of additional securities, which may be dilutive to stockholders.
Future Additional Capital Requirements; No Assurance Capital Will be Available
Since its inception, the Company has financed its operations through
cash provided by operations, the sale of equity and the issuance of debt
instruments. If the Company were unable to generate sufficient revenues to
fund its operations in the future, the Company may be required to raise
additional funds to meet its capital and operating requirements through public
or private financing, including equity financing. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
will require payment of interest and may involve restrictive covenants that
could impose limitations on the operating flexibility of the Company. Adequate
funds for the Company's operations may not be available when needed and, if
available, may not be on terms attractive to the Company. The failure to
obtain funding on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
Share Price Volatility
The trading price of the Company's Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the healthcare or software and computer industries,
developments or disputes concerning copyrights or proprietary rights,
regulatory developments and economic or other factors. In addition, in recent
years the stock market in general, and the shares of healthcare and computer
software companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on
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the market prices of securities issued by many companies for reasons unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
Computer Software
Like many companies, APACHE is currently in the process of evaluating its
computer software and databases to determine whether or not modifications will
be required to prevent problems related to the year 2000. These problems,
which have been widely reported in the media, could cause malfunctions in
certain software and databases with respect to dates on or after January 1,
2000, unless corrected. At this time, the Company has not yet determined the
cost of evaluating its computer software or databases or of making any
modifications required to correct any "Year 2000" problems.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ...................................................... 30
Consolidated Statements of Operations -- years ended
December 31, 1996, 1995 and 1994 .................................................. 31
Consolidated Balance Sheets -- December 31, 1996 and 1995 ......................... 32
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) -- years ended December 31, 1996, 1995 and 1994 ......................... 33
Consolidated Statements of Cash Flows -- years ended
December 31, 1996, 1995 and 1994 .................................................. 34
Notes to Consolidated Financial Statements ........................................ 35
Financial Statement Schedule:
Schedule II - Valuation and qualifying accounts for
the years ended December 31, 1996, 1995 and 1994 ......................... 50
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
APACHE Medical Systems, Inc.:
We have audited the consolidated financial statements of APACHE Medical
Systems, Inc., and subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of APACHE Medical
Systems, Inc., and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
McLean, Virginia
February 7, 1997
30
31
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31,
(in thousands, except per share data) 1996 1995 1994
---------- ----------- -----------
Revenue:
Systems ................................................ $ 6,323 $ 4,096 $ 3,587
Support ................................................ 1,486 1,352 836
Professional services .................................. 975 1,576 894
----------- ----------- -----------
Total revenue .................................. 8,784 7,024 5,317
Expenses:
Cost of operations ..................................... 3,354 2,866 3,700
Research and development ............................... 1,723 1,919 1,813
Selling, general and administrative .................... 7,754 5,631 6,030
Write-off of product development
and related costs ................................. 1,100 - -
Write-off of acquired in-process
research and development costs .................... 853 - -
----------- ----------- -----------
Total expenses ................................. 14,784 10,416 11,543
Loss from operations ..................................... (6,000) (3,392) (6,226)
Other income (expense):
Interest income ........................................ 702 62 94
Interest expense ....................................... (363) (483) (69)
Other, net ............................................. - 5 9
----------- ----------- -----------
Total other income (expense) ................... 339 (416) 34
----------- ----------- -----------
Net loss ................................................. (5,661) (3,808) (6,192)
Accretion of dividends and issue costs on redeemable
convertible preferred stock ......................... - (900) (669)
----------- ----------- -----------
Net loss to common stockholders .......................... $ (5,661) $ (4,708) $ (6,861)
=========== =========== ===========
Net loss per share ....................................... $ (0.93) $ (0.79)
=========== ===========
Weighted average number of shares used for calculation
of net loss per share ............................... 5,762 4,611
=========== ===========
See accompanying notes to consolidated financial statements.
31
32
APACHE MEDICAL SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except share data) DECEMBER 31,
1996 1995
--------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 20,671 $ 4,036
Short-term investments ............................................ 993 -
Accounts receivable, net of allowance for doubtful accounts of
$102 in 1996 and $191 in 1995 ................................ 3,117 1,420
Other trade receivables ........................................... 205 162
Prepaid expenses and other ........................................ 620 124
--------------- ----------------
TOTAL CURRENT ASSETS ......................................... 25,606 5,742
Other trade receivables, net of current maturities ................ 104 75
Furniture and equipment ........................................... 2,683 2,887
Less accumulated depreciation and amortization .................... (1,495) (1,496)
--------------- ----------------
1,188 1,391
Capitalized software development costs, net ....................... 374 701
Intangible assets, net ............................................ 714 -
--------------- ----------------
TOTAL ASSETS ...................................................... $ 27,986 $ 7,909
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .................................................. $ 607 $ 922
Accrued expenses .................................................. 2,476 723
Accrued acquisition costs ......................................... 1,565 -
Current maturities of obligations under capital leases ............ 57 191
Current maturities of notes payable - stockholders ................ - 250
Current maturities of notes payable - other ....................... 90 224
Deferred revenue .................................................. 1,017 1,915
--------------- ----------------
TOTAL CURRENT LIABILITIES ................................... 5,812 4,225
Deferred rent benefit ............................................. 159 186
Obligations under capital leases, net of current maturities ....... 2 63
Notes payable - stockholders, net of current maturities ........... 100 835
Notes payable - other, net of current maturities .................. 91 181
--------------- ----------------
TOTAL LIABILITIES .......................................... 6,164 5,490
Redeemable convertible preferred stock ............................ - 20,732
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, authorized shares, 30,000,000
at December 31, 1996 and 5,769,231 at December 31, 1995;
issued and outstanding shares, 6,871,353 at December 31,
1996 and 1,075,458 at December 31, 1995 ...................... 69 11
Additional paid-in capital ........................................ 45,322 1,363
Cumulative dividends and accreted issue costs on redeemable
convertible preferred stock .................................. - (1,779)
Accumulated deficit ............................................... (23,569) (17,908)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ........................ 21,822 (18,313)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ........... $ 27,986 $ 7,909
=============== ================
See accompanying notes to consolidated financial statements.
32
33
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1996, 1995 and 1994
CUMULATIVE
DIVIDENDS AND
ACCRETED
ISSUE COSTS
ON CUMULATIVE
COMMON STOCK ADDITIONAL REDEEMABLE
------------------------- PAID-IN PREFERRED ACCUMULATED
(in thousands, except share data) SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
------------ ----------- ------------ ------------- ------------- -------------
BALANCE AT JANUARY 1, 1994 ....................... 1,064,093 $ 11 $ 242 $ (208) $ (7,908) $ (7,863)
Issuance of common stock ......................... 8,742 - 71 - - 71
Issuance of common stock options ................ - - 256 - - 256
Accretion of cumulative dividends and issue
costs on redeemable preferred stock ........... - - - (670) - (670)
Net loss ......................................... - - - - (6,192) (6,192)
------------- ------- --------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1994 ..................... 1,072,835 11 569 (878) (14,100) (14,398)
Issuance of convertible preferred stock warrants.. - - 787 - - 787
Issuance of common stock ......................... 2,623 - 7 - - 7
Accretion of cumulative dividends and issue
costs on redeemable preferred stock ........... - - - (901) - (901)
Net loss ......................................... - - - - (3,808) (3,808)
------------- ------- --------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1995 ..................... 1,075,458 11 1,363 (1,779) (17,908) (18,313)
Issuance of common stock ......................... 788 - 7 - - 7
Issuance of common stock through initial public
offering....................................... 2,300,000 23 27,577 - - 27,600
Accretion of cumulative dividends and issue
costs on redeemable preferred stock ........... - - - (679) - (679)
Conversion of convertible preferred stock ........ 3,294,519 33 20,017 - - 20,050
Conversion of convertible debt ................... 122,257 1 999 - - 1,000
Conversion of cumulative dividends on redeemable
preferred stock ............................... 78,331 1 939 - - 940
Reclass cumulative dividends on redeemable
preferred stock to APIC .......................... - - (1,850) 1,850 - -
Reclass accreted issue costs on redeemable
preferred stock to APIC .......................... - - (608) 608 - -
Reclass unaccreted issue costs on redeemable
preferred stock to APIC .......................... - - (526) - - (526)
Issuance costs of initial public offering ........ - - (3,034) - - (3,034)
Issuance of common stock options.................. - - 438 - - 438
Net loss ......................................... - - - - (5,661) (5,661)
------------- ------- --------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1996 ..................... 6,871,353 $ 69 $ 45,322 $ - $ (23,569) $ 21,822
============= ======= ========= ========= =========== =========
See accompanying notes to consolidated financial statements.
33
34
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
(in thousands) 1996 1995 1994
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................. $ (5,661) $(3,808) $ (6,192)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ........................................ 839 736 446
Provision for doubtful accounts ...................................... 100 48 78
Loss on sale of furniture and equipment .............................. - 69 -
Accretion of interest ................................................ 265 367 -
Gain on forgiveness of debt .......................................... - - (19)
Stock options issued ................................................. 69 - 256
Write-off of product development and related costs ................... 1,100 - -
Write-off of acquired in-process research and development costs ...... 853 - -
Changes in operating assets and liabilities:
Accounts receivable ............................................. (1,760) (533) 45
Other trade receivables ......................................... (71) 292 (530)
Other current assets ............................................ (180) 32 (65)
Accounts payable and accrued expenses ........................... 632 (370) 1,376
Deferred rent ................................................... (28) (16) 185
Deferred revenue ................................................ (915) 783 673
------------- ----------- -------------
NET CASH USED IN OPERATING ACTIVITIES ............................... (4,757) (2,400) (3,747)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs ................................... (279) (426) (338)
Purchase of furniture and equipment, net of disposals .................... (293) (57) (1,785)
Proceeds from sale of furniture and equipment ............................ - 221 206
Purchase of short-term investments ....................................... (993) - -
------------- ----------- -------------
NET CASH USED IN INVESTING ACTIVITIES ............................... (1,565) (262) (1,917)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations .......................... (195) (192) (25)
Principal payments on borrowings ......................................... (474) (348) (390)
Proceeds from issuance of notes payable .................................. - 2,350 -
Proceeds from issuance of preferred stock, net of issuance costs ......... (37) 4,672 5,721
Proceeds from issuance of common stock upon exercise of options .......... 6 7 -
Proceeds from initial public offering of common stock .................... 27,600 - -
Issuance costs on initial public offering of common stock ................ (3,034) - -
Payments of cumulative dividends ......................................... (909) - -
------------- ----------- -------------
NET CASH FROM FINANCING ACTIVITIES .................................. 22,957 6,489 5,306
------------- ----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 16,635 3,827 (358)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 4,036 209 567
------------- ----------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 20,671 $ 4,036 $ 209
============= =========== =============
See accompanying notes to consolidated financial statements.
34
35
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF THE BUSINESS
APACHE Medical Systems, Inc. (the "Company"), a Delaware corporation, was
incorporated on September 1, 1987. The Company is a leading provider of
clinically-based decision support information systems to the healthcare
industry. The Company offers healthcare providers and suppliers a
comprehensive line of outcomes-based products and services, encompassing
software, hardware, and related consulting and disease management services.
(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. Activities of the
subsidiary to date have been immaterial. The preparation of consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates.
Revenue Recognition
Revenue for sales of systems and products requiring production activities both
before and subsequent to delivery is recognized by the percentage-of-completion
method using significant milestones to estimate progress toward completion.
Sales of other systems and products are recognized at delivery. Systems
support fees are recognized ratably over the period of performance.
Professional services revenue is recognized as these services are provided.
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.
Cost of Operations
Cost of operations consists primarily of third party equipment and licenses
sold, amortization of software development costs, direct personnel costs and
other direct costs.
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.
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.
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, 1996, cash
equivalents and short-term investments consisted of interest bearing overnight
bank investment accounts, money market instruments and government agency
securities. At December 31, 1995, cash equivalents consisted of interest
bearing overnight bank investment accounts. Cash equivalents are carried at
cost which approximates 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, 1996, there were no unrealized gains or losses.
35
36
Software Capitalization
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
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 three years. Such costs are reflected in
cost of operations.
The Company capitalized approximately $279,000, $426,000 and $338,000 in
software development costs during 1996, 1995 and 1994, respectively.
Amortization of software development costs approximated $231,000, $63,000 and
$0 in 1996, 1995 and 1994, respectively. During the fourth quarter of 1996,
the Company recorded a non-recurring charge totaling $375,000 relating to the
write-off of the acute care capitalized software product. This charge is
included in the write-off of product development and related costs totaling
$1.1 million.
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 bases. 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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents 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. No single customer accounted for
more than 10% of revenues in 1996, 1995 or 1994.
Net Loss Per Common Share
The net loss per common share is computed based upon the weighted average
number of common shares and common equivalent shares (using the treasury stock
method) outstanding after certain adjustments described below. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive, except that, in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve-month period prior
to the filing of the initial public offering ("cheap stock") even when
antidilutive, have been included in the calculation as if they were outstanding
for all periods, using the treasury stock method and the initial public
offering price of $12.00 per share. The mandatory conversion of all
outstanding shares of preferred stock, including certain accumulated dividends,
the conversion of certain convertible debt, including the reduction of related
interest, and the cheap stock related to stock options and warrants are
included in the computation for all periods presented. These shares have been
included in the computation for loss periods when such shares would otherwise
not be included as the impact
36
37
would be antidilutive because the preferred stock, accumulated dividends and
convertible debt were converted into Common Stock on the closing of the
Company's initial public offering. In the computation of net loss per share,
accretion of preferred stock to the mandatory redemption amount is not included
as an increase to net loss.
(3) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
DECEMBER 31,
1996 1995
----------- ----------
Billed accounts ....................................................... $ 2,638 $ 1,297
Unbilled accounts ..................................................... 581 314
----------- ----------
3,219 1,611
Less allowance for doubtful accounts................................... (102) (191)
----------- ----------
$ 3,117 $ 1,420
=========== ==========
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.
During 1994 through 1996, the Company sold software systems on trade terms that
allow for payment over an agreed upon period. Amounts due under such
installment terms are included as other trade receivables in the accompanying
financial statements and are as follows (in thousands):
DECEMBER 31,
YEAR 1996
- ---- --------------
1997 ............................................................................ $ 223
1998 ............................................................................ 54
1999 ............................................................................ 54
--------------
Total amounts .................................................................... 331
Less imputed interest at 8% to 14% .............................................. (22)
--------------
Installment trade receivables..................................................... 309
Less current maturities ........................................................ (205)
--------------
Noncurrent installment trade receivables ......................................... $ 104
==============
(4) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
1996 1995
----------- -----------
Accrued expenses ..................................................... $ 1,751 $ 723
QIMC licensing and marketing fees .................................... 725 -
----------- -----------
$ 2,476 $ 723
=========== ===========
37
38
(5) NOTES PAYABLE -- STOCKHOLDERS
Notes payable -- stockholders, which are all unsecured, consist of the
following (in thousands):
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
Convertible notes payable, interest at 10%, interest imputed
at 22%, principal and interest due December 31, 1997 ................. $ - $ 1,000
Less imputed interest .................................................... - (210)
------------ ------------
- 790
Convertible notes payable, non-interest bearing, interest
imputed at 22%, principal due December 31, 1996 ..................... - 250
Less imputed interest .................................................... - (55)
------------ ------------
- 195
Notes payable, non-interest bearing, principal due after cumulative
year-end retained earnings exceeds $200,000 ......................... 100 100
------------ ------------
100 1,085
Less current maturities ................................................. - (250)
------------ ------------
$ 100 $ 835
============ ============
Interest expense relating to notes payable-stockholders was approximately
$316,000, $366,000 and $6,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
In February and April 1995, the Company issued $1,750,000 of convertible
non-interest bearing notes due December 31, 1996, with detachable warrants to
purchase 349,653 shares of the Company's Common Stock at $1.43 per share. The
warrants have been valued at $691,166, which amount has been included as
capital stock and debt discount as of December 31, 1995 and amortized to
interest expense over the life of the note. In December 1995, $600,000 of
these notes were converted to 20,999 shares of Series F redeemable convertible
preferred stock. Further, at that date, $900,000 of these notes were amended
to mature on December 31, 1997, bearing stated interest at 10% beginning
January 1, 1996, payable at maturity. The interest at the stated rate and the
remaining imputed interest has been recognized over the life of the note. At
December 31, 1995, $250,000 of the originally issued non-interest bearing notes
remained outstanding. The interest bearing notes, totaling $900,000, were
converted into 110,030 shares of the Company's Common Stock at the consummation
of the public offering and the related imputed interest was written-off to
interest expense and the stated interest was paid in full. The non-interest
bearing note totaling $250,000 was paid in full in November 1996.
In August 1995, the Company issued $600,000 of convertible notes, with stated
interest at prime plus 2%, due December 31, 1996, with detachable warrants to
purchase 73,356 shares of the Company's Common Stock at $8.18 per share. The
warrants did not become exercisable until 120 days after issuance and were
cancelable if the notes were repaid or converted prior to that date. The
warrants have been valued at $96,000, which amount has been included as capital
stock and debt discount at December 31, 1995 and amortized to interest expense
over the life of the note. In December 1995, subsequent to the warrant
cancellation date, $200,000 of these notes were converted to 7,000 shares of
Series F redeemable convertible preferred stock, $300,000 were repaid and
$100,000 were amended to mature on December 31, 1997, bearing stated interest
at 10% beginning January 1, 1996, payable at maturity. The interest at the
stated rate and the remaining imputed interest has been recognized over the
life of the note. The interest bearing notes, totaling $100,000, were
converted into 12,227 shares of the Company's Common Stock at the consummation
of the public offering and the related imputed interest was written-off to
interest expense and the stated interest was paid in full.
38
39
(6) NOTES PAYABLE -- OTHER
Notes payable -- other consist of promissory notes to various medical and
financial institutions. All the notes are unsecured.
Notes payable -- other consist of the following (in thousands):
DECEMBER 31,
--------------------------
1996 1995
----------- ------------
Note payable, 10% interest payable semi-annually, principal payable in annual
installments of $34,500 and $14,700 in May 1997 and 1998, respectively ....... $ 49 $ 83
Note payable, 10% interest payable semi-annually, principal payable in annual
installments of $34,500 through August 1998 .................................. 69 138
Note payable, prime plus 2% interest (10.25% at December 31, 1996), payable in
monthly installments of principal plus interest through November 1999 ....... 63 105
Note payable, prime plus 2% interest payable in monthly installments of principal
plus interest through January 1999, balance paid in full in April 1996....... - 79
----------- ------------
$ 181 $ 405
----------- ------------
Less current maturities ........................................................... (90) (224)
----------- ------------
$ 91 $ 181
=========== ============
Scheduled maturities of notes payable -- other are as follows (in thousands):
YEAR
----
1997 ............................... $ 90
1998 ............................... 70
1999 ............................... 21
(7) LEASE COMMITMENTS
Future minimum lease payments at December 31, 1996, under non-cancelable
operating and capital leases are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ------------- ------------
1997 ................................................. $ 60 $ 447
1998 ................................................. 2 460
1999 ................................................. - 434
------------- ------------
Total ................................................ $ 62 $ 1,341
------------- ============
Less interest at 12% to 18% .......................... (3)
-------------
Present value of net minimum lease payments .......... 59
-------------
Less current maturities .............................. ( 57)
-------------
$ 2
=============
39
40
Operating Leases
In 1994, the Company entered into a new lease agreement for its current office
space. The lease stipulates a rent abatement period of six months. 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.
Total rent expense under all operating leases was approximately $433,000,
$416,000 and $358,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Capital Leases
During 1994 and 1995, the Company entered into agreements for the sale and
leaseback of certain office equipment. The resulting leases are capital leases
that expire at various dates through 1997.
Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 1996 is as follows (in thousands):
Office equipment .................................. $ 186
Less accumulated amortization ..................... (136)
-------
$ 50
=======
(8) INCOME TAXES
The Company had no provision for income taxes in 1996, 1995 or 1994 as a result
of its net losses for both financial statement and income tax purposes.
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, 1996 and 1995 are as follows (in thousands):
1996 1995
--------- ----------
Deferred tax liabilities:
Book value of equipment in excess of tax basis .............. $ (219) $ (28)
Capitalized software development costs ...................... (170) (263)
--------- ----------
Gross deferred tax liabilities ................................ (389) (291)
Deferred tax assets:
Accrued vacation ............................................ 28 28
Accrued bonuses ............................................. 124 -
Accrued commissions ......................................... 42 -
Allowance for doubtful accounts ............................. 39 72
QIMC licensing and marketing fees ........................... 276 -
Deferred rent benefit ....................................... 60 70
Excess of tax over book revenue recognized .................. 387 998
Net operating loss carryforwards ............................ 5,711 6,715
--------- ----------
Gross deferred tax assets ..................................... 6,667 7,883
--------- ----------
Less deferred tax assets valuation allowance .................. 6,278 7,592
--------- ----------
Net deferred tax assets ....................................... 389 291
--------- ----------
Total deferred tax assets (liabilities) ....................... $ - $ -
========= ==========
40
41
The change in the total valuation allowance for the years ended December 31,
1996 and 1995 was a decrease of $1,314,000 and an increase of $1,857,900,
respectively.
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1996 of $15,029,000, which expires in approximate
amounts as follows: $991,000 in 2003, $1,020,000 in 2004, $951,000 in 2005,
$517,000 in 2006, $1,992,000 in 2007, $867,000 in 2008, $6,438,000 in 2009 and
$2,253,000 in 2010. The Company's ability to use the carryforwards is subject
to limitations resulting from changes in ownership, as defined by the Internal
Revenue Code.
(9) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to the completion of the public offering, the Company had 200,000 shares
of Series A redeemable convertible preferred stock ("Series A"), 211,131 shares
of Series B redeemable convertible preferred stock ("Series B"), 118,110 shares
of Series C redeemable convertible preferred stock ("Series C"), 209,994 shares
of Series D redeemable convertible preferred stock ("Series D"), 174,995 shares
of Series E redeemable convertible preferred stock ("Series E") and 27,999
shares of Series F redeemable convertible preferred stock ("Series F" and,
together with the Series A, Series B, Series C, Series D and Series E, the
"Series Preferred") issued and outstanding. The net proceeds from the issuance
of the preferred stock were as follows: Series A, $2,000,000; Series B,
$3,139,078; Series C, $2,776,120; Series D, $5,721,596; Series E, $4,672,395;
and Series F, $800,000. Issue costs were accreted to stockholders' equity in
amounts relative to increases in redemption values over time. All Series
Preferred were convertible into Common Stock at the option of the holder and
conversion was mandatory in certain circumstances, including the closing of a
public stock offering meeting defined criteria.
On July 3, 1996 (consummation of the public offering), all the outstanding
shares of Series Preferred were automatically converted into 3,294,519 shares
of Common Stock. The Series A, B, C, D, E and F were converted into 699,302
shares, 738,222 shares, 412,973 shares, 734,246 shares, 611,877 shares, and
97,899 shares of the Company's Common Stock, respectively. At the completion
of the initial public offering, $608,000 of accreted issue costs were recorded
as a decrease in paid-in capital.
Cumulative dividends were payable in cash or shares of Common Stock at the
option of each holder of Series Preferred. In conjunction with the public
offering, total cumulative dividends of $1,849,000 were either converted to
Common Stock or paid with the proceeds of the public offering. Of the total
cumulative dividends, $940,000 were converted into 78,331 shares of Common
Stock at the stated preference of the holder and $909,000 were paid in cash
with the proceeds of the public offering.
In conjunction with the 1995 issuance of Series E, the Company issued 36,713
warrants to purchase Common Stock at $8.18 to a stockholder relating to
transaction fees. In the opinion of management, the value of these warrants
does not materially affect the financial statements.
Holders of all Series Preferred had, and as common stockholders continue to
have, certain demand and "piggyback" registration rights with respect to these
securities. All Series Preferred also possessed certain rights relating to
election of Board of Director slots.
(10) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
On June 18, 1996, the Company effected a 1-for-2.86 reverse stock split.
Accordingly, all shares and per share amounts have been adjusted to reflect the
reverse stock split as though it had occurred at the beginning of the initial
period presented. Additionally, the authorized common shares of the Company
were increased to 30,000,000.
In July 1996, the Company completed an initial public offering of its Common
Stock whereby 2,300,000 shares were issued at $12 per share resulting in net
proceeds of approximately $24.6 million.
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On July 3, 1996 (consummation of the offering), all the outstanding shares of
Series A, B, C, D, E and F redeemable convertible preferred stock were
automatically converted into 3,294,519 shares of Common Stock, and at the
holders' option, $940,000 of cumulative dividends were converted into 78,331
shares of Common Stock based on the stated preference of the holders. During
1996, cumulative dividends of $909,000 were paid in cash with the proceeds of
this offering, and $608,000 of accreted issue costs have been reflected as a
decrease in paid-in capital. Additionally, convertible notes payable with an
outstanding balance of $1.0 million and a net carrying value of approximately
$895,000 were converted into 122,257 shares of Common Stock.
Stock Options
The Company has an Employee Stock Option Plan (the "Plan") that provides up to
1,700,000 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. All options are subject to forfeiture until vested, and unexercised
options expire on the tenth anniversary of the year granted. Vesting periods
are from one to five years. All employee stock options issued by the Company
have been granted with exercise prices equal to the average fair market value
of the Common Stock on the date of grant; accordingly, the Company has recorded
no compensation expense related to such grants.
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: July 1, 1996 through December 31, 1996 (post public date) -
expected dividend yield of 0%, risk-free interest rate of 6.38%, expected
volatility factor of 42.50%, and an expected life of 6 years; January 1, 1995
through June 30, 1996 (pre-public date) - expected dividend yield of 0%,
risk-free interest rate of 6.38%, expected volatility factor of 0%, and an
expected life of 6 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its employee stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below (in thousands):
1996 1995
---- ----
Net loss As reported .............. $ (5,661) $ (3,808)
Pro forma ................ (6,105) (3,841)
Net loss per share As reported .............. $ ( 0.93) $ ( 0.79)
Pro forma ................ ( 1.00) ( 0.80)
Pro forma net loss reflects only options granted in 1996 and 1995. 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.
The Company also granted 65,735 vested stock options during 1994 outside the
Plan with an exercise price of $4.29 per share.
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 has 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 will vest, if at all, based on the volume of products and
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services sold to Premier hospitals and allow 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, 1996 totaled 24,411 shares.
Valuation of the related stock options was calculated utilizing the
Black-Scholes option pricing model. Expense related to the performance options
are recorded when earned.
The following is a summary of the option transactions for the years ending
December 31, 1994, 1995 and 1996:
Wtd. Avg.
Shares Ex. Price
---------- -----------
Outstanding, December 31, 1993 ........... 688,909 $ 3.09
Granted ............................. 205,256 6.93
Forfeited ........................... 13,768 7.60
----------- -----------
Outstanding, December 31, 1994 ........... 880,397 $ 3.91
Granted ............................. 93,511 8.18
Forfeited ........................... 102,239 4.46
Exercised ........................... 2,623 2.86
----------- -----------
Outstanding, December 31, 1995 ........... 869,046 $ 4.31
Granted ............................. 876,382 11.58
Forfeited ........................... 112,257 8.79
Exercised ........................... 788 8.18
----------- -----------
Outstanding, December 31, 1996 ........... 1,632,383 $ 7.90
=========== ===========
Options outstanding at December 31, 1996 have exercise prices between $0.72 and
$14.50, with a weighted average exercise price of $7.90 and a weighted average
remaining contractual life of 8.55 years. At December 31, 1996, 910,930
options were exercisable with a weighted average exercise price of $4.69.
At December 31, 1996, options for 473,000 shares were available for grant under
the Plan.
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. No shares
were granted under the Director Option Plan as of December 31, 1996.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") became
effective in May 1996. A total of 210,000 shares of Common Stock has been
reserved for issuance 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. Purchases of shares by
employees pursuant to the Purchase Plan will not commence until May 1997.
43
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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; 349,653
outstanding warrants issued to stockholders in 1995 with an exercise price of
$1.43 per share that expire in 2000; and 110,069 outstanding warrants issued to
stockholders in 1995 with an exercise price of $8.18 per share that expire in
2000.
(11) WRITE-OFF OF PRODUCT DEVELOPMENT AND RELATED COSTS
During the fourth quarter of 1996, the Company recorded a non-recurring charge
totaling $1.1 million relating to the write-off of capitalized product
development costs totaling $375,000 and fees totaling $725,000 arising from an
earlier agreement with QIMC, a healthcare focused, business-led coalition
located in Cleveland. During 1994, the Company entered into an exclusive 10
year licensing agreement with QIMC for its database and methodologies. As of
December 31, 1996, the Company is committed to pay an aggregate of $500,000
through March 1999 for the license fees associated with the sale of the
Company's product related to these methodologies. As of December 31, 1996, the
Company is also committed to pay an aggregate of $225,000 through March 1999
for marketing services. The Company recorded this charge because the joint
marketing arrangement has not met management's expectations, resulting in
limited sales of the related product during 1996. This trend is expected to
continue through 1999 and, therefore, the projected sales for the related
product and support revenue earned from existing clients are not considered
adequate to support the related expenses associated with the QIMC agreement and
the capitalized product development costs. The remaining commitment totaling
$725,000 was included in other accruals as of December 31, 1996.
(12) ACQUISITION
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 paid in January 1997. The acquisition price of $1.57 million is recorded
as an accrual as of December 31, 1996.
The acquisition provides the Company with chronic illness medical information
service capabilities initially related to HIV/AIDS disease management. HRN's
proprietary patient level database and practice management software provide
detailed information with regard to treatment patterns and clinical outcomes.
HRN manages an ongoing epidemiological study under a cooperative agreement with
the Centers for Disease Control and Prevention and provides HIV-related
information services and studies distributed through IMS America to the
pharmaceutical industry.
The acquisition has been accounted for using the purchase method of accounting
and resulted in intangible assets totaling $714,000. The intangible assets
consist of a software database of $488,000, assembled workforce of $102,000 and
goodwill of $124,000. These assets are being amortized over 5 to 15 years. No
amortization expense was recorded as of December 31, 1996. In connection with
the acquisition, the Company recorded a non-recurring charge related to
acquired in-process research and development costs of approximately $853,000
during the fourth quarter of 1996. The purchase price allocation and lives of
assets were determined by an independent appraiser based on, among other
things, employee turnover, historical customer retention rates and the
historical rate of change in the products and markets.
Unaudited pro forma combined results of the operations of the Company for the
years ended December 31, 1996 and 1995 are presented below and have been
prepared assuming that the acquisition discussed above had been made as of
January 1, 1995 (in thousands):
1996 1995
------------ -----------
(unaudited)
Revenue ......................................... $ 9,578 $ 7,804
Net loss ........................................ $ (5,141) $ (4,137)
Loss per share .................................. $ (0.84) $ (0.86)
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The pro forma results include the historical accounts of the Company and the
acquired entity adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired and the reversal of the
non-recurring write-off of acquired in-process research and development costs
recorded. The pro forma results are not necessarily indicative of actual
results that might have occurred had the operations and management of the
Company and the acquired entity been combined in 1996 and 1995.
(13) COST OF OPERATIONS AND GROSS MARGIN BY PRIMARY REVENUE SOURCES
Prior to 1996, the Company did not identify cost of operations by its primary
revenue sources and, accordingly, is unable to develop historical gross
margins, or reliable estimates thereof, by revenue code. The following
represents revenues and cost of operations by primary revenue sources for the
year ended December 31, 1996 (in thousands):
DECEMBER 31,
---------------
1996
Revenue:
Systems ........................... $ 6,323
Support ........................... 1,486
Professional services ............. 975
----------------
Total revenue ................. 8,784
Cost of operations:
Systems ........................... 2,387
Support ........................... 615
Professional services ............. 352
----------------
Total cost of operations ...... 3,354
Gross margin .......................... $ 5,430
================
(14) RELATED PARTY TRANSACTION
The Company entered into a license agreement with a stockholder in February
1995. The agreement was amended in December 1996. Under the amended
agreement, the stockholder is licensed to sell a product of the Company for
which the stockholder will pay a royalty after a set number of sales. No sales
of the product were made during 1996. Additionally, the stockholder paid the
Company $250,000 in 1995 for services in building and delivering the product
during 1996.
(15) OTHER COMMITMENTS
In 1994, the Company purchased rights to databases and methodologies from an
unrelated company in exchange for 65,735 irrevocable options to purchase the
Company's Common Stock for $4.29 per share. The estimated fair value of the
stock options, $255,680, was recorded as software license expense. The Company
also committed $200,000, payable in monthly installments through March 1996,
for enhancements to the databases and the methodologies. As of December 31,
1996, the balance of the commitment was paid in full.
The Company has entered into an exclusive 10 year licensing agreement with
QIMC, a healthcare focused, business-led coalition located in Cleveland for its
database and methodologies. The Company is committed to pay $1.0 million from
April 1994 to March 1999 for the license and royalties on the sale of the
Company's product related to these methodologies. The Company is also
committed to pay $100,000 per year from April 1994 to March 1999 for marketing
services. Amounts committed by the Company related to this arrangement are as
follows at December 31, 1996 (in thousands):
1997 ......................................... $ 319
1998 ......................................... 325
1999 ......................................... 81
------
$ 725
======
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During the fourth quarter of 1996, the Company expensed $725,000 related to the
QIMC licensing and marketing fees. The expense is included in the write-off of
product development and related costs totaling $1.1 million. The remaining
commitment totaling $725,000 was included in other accruals as of December 31,
1996.
(16) PROFIT SHARING PLAN
The Company sponsors a profit sharing 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
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.
(17) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $132,000, $33,000 and $67,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The following is supplemental information concerning non-cash investing and
financing activities:
During 1994, the Company issued 8,742 shares of Common Stock in exchange for
the forgiveness of $91,000 of debt. The difference between the amount of debt
forgiven and the estimated fair value of the Common Stock, $71,000, was
recorded as other income.
During 1994, the Company entered into an agreement for the sale and leaseback
of certain equipment. The lease is classified as a capital lease and a capital
lease obligation of $202,247 was recorded.
During 1995, the Company issued 27,999 shares of Series F upon conversion of
$800,000 of convertible debt.
During 1995, the Company entered into two agreements for the sale and leaseback
of certain equipment. The leases are classified as capital leases and a total
capital lease obligation of $219,262 was recorded.
During 1995, the Company issued warrants to acquire Common Stock in connection
with the issuance of convertible notes payable and Series E redeemable
convertible preferred stock. The estimated value of the warrants is included in
additional paid-in capital and $787,166 of debt discount was recorded.
On July 3, 1996 (consummation of the offering), all the outstanding shares of
Series A, B, C, D, E and F redeemable convertible preferred stock were
automatically converted into 3,294,519 shares of Common Stock and, at the
holders' option, $940,000 of cumulative dividends were converted into 78,331
shares of Common Stock based on the stated preference of the holders. During
1996, cumulative dividends of $909,000 were paid in cash with the proceeds of
this offering, and $608,000 of accreted issue costs have been reflected as a
decrease in paid-in capital. Additionally, notes payable with an outstanding
balance of $1.0 million and a net carrying value of approximately $895,000 were
converted into 122,257 shares of Common Stock.
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of HRN for $1.57 million in cash paid in January 1997.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments included in current assets and current liabilities
include cash and cash equivalents, short-term investments, accounts and trade
receivables, accounts payable and accrued expenses. The carrying amounts of
these instruments approximate fair value because of the short maturity of the
instruments.
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Notes payable - stockholders and 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.
(19) SUBSEQUENT EVENTS
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. These
assets have unique capabilities including being able to provide standard and
customized individual patient and group reports for PTCA and CABG patients.
The Company accounted for the acquisition using the purchase method of
accounting. In connection with the acquisition, the Company recorded a
non-recurring charge related to acquired in-process research and development
costs of approximately $1.1 million during the first quarter of 1997.
In February 1997, the Company obtained a line of credit commitment from a
commercial bank (the "Bank") providing for a borrowing capacity of $2.0
million. Borrowings will bear interest at a fluctuating rate equal to the
Bank's prime rate plus 0.25%. The Company will also pay an annual fee on the
total borrowing capacity of $2.0 million at a rate of 0.75% per annum.
Borrowings will be collateralized by the Company's assets. The line of credit
commitment will expire on May 31, 1997 and contains an automatic renewal that
will expire on May 31, 1998. There can be no assurance, however, that the
Company will be able to enter into a line of credit under the terms outlined in
the commitment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG Peat Marwick LLP ("KPMG") served as the Company's independent
public accountants for the 1996 fiscal year. In February 1997, following a
review of the services provided by KPMG and of proposals from a variety of
other independent public accountants, management and the Company's Board of
Directors, acting on the recommendation of the Company's Audit Committee,
decided to replace KPMG with Arthur Andersen LLP ("Arthur Andersen") as soon as
practicable following the completion of the audit for fiscal year 1996. There
were no disagreements with KPMG on any matter of accounting principle or
practice, of financial statement disclosure or of auditing scope or procedure
during fiscal years 1995 and 1996 or during the interim period from January 1,
1997 to the date on which the audit was completed. KPMG's report on the
financial statements of the Company for fiscal years 1995 and 1996 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. The Company provided
notice to KPMG on February 14, 1997 of its dismissal and received a response
from KPMG to the statements of the Company in accordance with the requirements
of Rule 304 of Regulation S-K. Effective February 20, 1997, the Company
engaged Arthur Andersen as the Company's principal accountants to audit the
Company's financial statements for the year ending December 31, 1997. Prior to
February 20, 1997, neither the Company nor anyone on its behalf has consulted
with Arthur Andersen regarding (A) the application of accounting principles to
a specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, or (B)
any matter that was either the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item
304(a)(1)(v) of Regulation S-K).
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the
Registrant is incorporated herein by reference from the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders under the captions
"Election of Directors," "Nominees for Directorships," "Information Concerning
the Board of Directors and its Committees," "Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management compensation is incorporated herein
by reference from the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders under the captions "Executive Compensation," "Director
Compensation," "Report of the Compensation Committee of the Board of Directors"
and "Company Performance".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference from the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders under the caption "Security
Ownership".
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
1997 Annual Meeting of Stockholders under the caption "Certain Relationships".
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
Exhibit
Number 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*
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*
3.1 Amended and Restated Certificate of Incorporation**
3.2 By-Laws**
4.1 Specimen Common Stock Certificate**
48
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10.1 APACHE Medical Systems, Inc. Employee Stock Option
Plan+**
10.2 APACHE Medical Systems, Inc. Non-Employee Director
Option Plan+**
10.3 Sublease Agreement between the Company and First
Union National Bank of Virginia, dated March 17,
1994**
10.4 Registration Agreement between the Company and
Certain Stockholders, dated December 28, 1995**
10.5 Form of Warrant Agreement relating to warrants issued
in 1995**
10.6 Warrant Agreement between the Company and Venture
Fund of Washington, dated May 13, 1991**
10.7 Licensing Agreement between the Company and Cerner
Corporation, dated February 2, 1995**
10.8 Nonqualified Stock Option Agreement between the
Company and The Cleveland Clinic Foundation, dated
August 19, 1994**
10.9 Agreement between the Company and The George
Washington University, dated August 19, 1994**
10.10 Letter Agreement between the Company and the Northern
New England Cardiovascular Disease Study Group, dated
March 13, 1995**
10.11 Licensing Agreement between the Company and Quality
Information Management Corporation, dated March 24,
1994**
10.12 Marketing Agreement between the Company and American
Healthcare Systems Purchasing Partners, L.P., dated
as of June 3, 1996**
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*
11.1 Computation of Earnings Per Share
21.1 List of Subsidiaries of the Company**
27.1 Financial Data Schedule
----------------
+ Denotes compensatory plan.
* Incorporated herein by reference from the Company's Report on
Form 8-K filed on January 14, 1997.
** Incorporated herein by reference from the Company's
Registration Statement on Form S-1, SEC file no. 333-4106,
initially filed on April 26, 1996.
(b) Reports on Form 8-K
December 30, 1996 (filed January 14, 1997) - Item 2. Acquisition or
Disposition of Assets. Re: Acquisition of assets of Dun & Bradstreet
HealthCare Information, Inc. and 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.
49
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APACHE MEDICAL SYSTEMS, INC. AND CONSOLIDATED SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT END
BEGINNING OF COSTS AND OTHER ACCOUNTS OF PERIOD
PERIOD EXPENSES
DESCRIPTION
- -----------
Allowance for doubtful accounts
receivable
1994 $ 64,500 $ 78,500 $ - $ - $ 143,000
1995 143,000 126,300 - 78,500 190,800
1996 190,800 100,000 - 188,508 102,292
Deferred tax assets valuation
allowance
1994 2,221,500 - 3,512,500 - 5,734,000
1995 5,734,000 - 1,857,900 - 7,591,900
1996 7,591,900 - - 1,313,675 6,278,225
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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 MARCH 20, 1997.
APACHE MEDICAL SYSTEMS, INC.
/s/ Gerald E. Bisbee, Jr., Ph.D.
-------------------------------------------
Gerald E. Bisbee, Jr., Ph.D.
Chairman and Chief Executive Officer
/s/ Brion D. Umidi
-------------------------------------------
Brion D. Umidi
Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
(Chief Financial and Accounting Officer)
/s/ Lisa M. Clements
-------------------------------------------
Lisa M. Clements
Controller and Assistant Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 20, 1997 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED.
/s/ Edward J. Connors /s/ Lawrence S. Lewin
- ------------------------------------------- --------------------------------------------
Edward J. Connors Lawrence S. Lewin
Director Director
/s/ Thomas W. Hodson /s/ Francis G. Ziegler
- ------------------------------------------- --------------------------------------------
Thomas W. Hodson Francis G. Ziegler
Director Director
/s/ William A. Knaus, M.D. /s/ Gerald E. Bisbee, Jr., Ph.D.
- ------------------------------------------- --------------------------------------------
William A. Knaus, M.D. Gerald E. Bisbee, Jr., Ph.D.
Director Chairman and Chief Executive Officer
S-1
52
INDEX TO EXHIBITS
Exhibit
Number Description
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
E-1