Back to GetFilings.com
1
- --------------------------------------------------------------------------------
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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-20805
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
--------------
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
----
The aggregate market value of the voting common equity held by non-affiliates
of the registrant as of March 20, 1998 was approximately $20,934,516. The
number of outstanding shares of the registrant's Common Stock as of that date
was 7,281,571.
Documents Incorporated by Reference:
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1998 are incorporated herein by reference
into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
OVERVIEW
APACHE Medical Systems, Inc. ("APACHE" or the "Company") provides
clinically based decision support information systems and services to the
healthcare industry. The Company provides hospitals and physicians with
patient-specific, concurrent and predictive outcomes information at the point
of care that can be used to assist them in making clinical and resource
utilization decisions. APACHE's products and services address the information
needs of both healthcare practitioners and administrators by enabling joint
access to clinical and utilization information, which facilitates 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 critical
care, acute care, cardiovascular care and certain chronically-ill patients, who
typically account for a disproportionately large share of healthcare
expenditures.
INDUSTRY BACKGROUND
The $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. The next 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 billing systems and claims forms. These 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) physicians' skepticism of
data derived only from financial records.
In recent years, it has become possible to develop clinical decision
support systems that overcome these limitations. The collection of clinical
information has been made more affordable by the development of interface
technology which allows the information to be drawn from patient record keeping
systems. Extensive databases comprised of clinical outcomes information have
been created. Finally, more powerful software and hardware have become
available to collect, retrieve and analyze patient-specific clinical outcomes
data.
1
3
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.
The Joint Commission on the Accreditation of Healthcare Organizations
("JCAHO"), through its ORYX initiative, is requiring that providers report
comparative performance data beginning in 1999. In addition to their use for
reporting and retrospective analysis, the Company believes that the most
effective clinical decision support systems become true real-time care
management tools that assist health providers directly at the time care and
resource decisions are made. The Company has demonstrated that this approach
facilitates 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 healthcare practitioners 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 preeminent decision support/care management system is in
critical care and targets hospitals and health systems with over 200 beds. For
this market, the Company has introduced a new product line, the APACHE III
Critical Care Series(TM)("CCS"), and a companion set of clinical consulting
services marketed under the APACHE Best Care (TM) Services label. These
replace the Company's previous Medical Cost Management Program ("MCMP") and
related Critical Care System offerings. The CCS has two primary modules, -
Voyager+ and Discover+, which are described below.
Generally, the Company's systems, which incorporate software and
related consulting services, generate information to assist providers
concurrently in making informed clinical resource utilization and patient care
decisions. These clinical decision support systems enable providers to:
- Determine appropriate cost-effective treatment plans for
individual patients.
- Compare actual individual patient outcomes with both
predicted patient outcomes and statistically relevant similar
hospital, regional and national norms to identify areas for
improvement.
- Analyze the performance of physicians by using clinically
based, peer-reviewed, severity-adjustment methods.
- Analyze and measure quantifiable improvements in the clinical
and cost outcomes of specified groups of patients.
- Plan staffing, number of beds and bed mix given the
severity-adjusted mix of patients in an intensive care unit.
APACHE's products and services are differentiated from many other
healthcare decision support systems in the following important ways:
- Detailed Clinical Data. APACHE's products and services
utilize detailed clinical data on a variety of health
parameters and outcomes data. In addition, APACHE's products
and services utilize administrative and utilization data.
2
4
- 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 in three timeframes: (i) predictions of
the patient's outcomes (e.g., mortality, adverse occurrences
and length of stay); (ii) current information, such as the
patient's daily health status; and (iii) historical or
retrospective information about the patient or groups of
similar patients. In contrast to retrospective systems,
APACHE's ability to provide concurrent information permits
the generation of predictive information during the course of
a patient's care, thereby enhancing a physician's ability to
direct treatment resources as the patient's health status
changes.
- High-risk, High-cost Patient Focus. Unlike decision support
systems that focus primarily on general hospital patients,
APACHE's systems are specifically designed to help predict
outcomes for high-risk, high-cost patients, such as critical
care patients. These patients typically represent a
disproportionately large share of hospital costs.
APACHE's solutions are derived from the Company's clinical outcomes
methodologies and proprietary databases.
Clinical Outcomes Methodologies. APACHE's methodologies include
algorithms that apply relative weightings to selected physiological variables
to define a patient's health status. APACHE's methods of measuring variations
in a patient's health status 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 eighteen by leading academic medical centers such
as The George Washington University Hospital and Dartmouth-Hitchcock Medical
Center.
Proprietary Databases. The Company's databases include data on a
variety of health parameters, such as vital signs, laboratory results and
measures of physiological function, as well as outcomes data, such as adverse
occurrences, morbidity and mortality. The databases contain information from
more than 700,000 patients, most 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, acute
care, HIV/AIDS, and neonatal databases. In cardiovascular and acute care,
APACHE also acquired the rights to related methodologies. APACHE's databases
are periodically updated with patient data from customers as well as special
studies, with the goal of ensuring that the databases reflect the results of
current medical practice on a national basis.
APACHE's products and services are currently focused on coverage of
patients in the critical, acute, sub-acute, and cardiovascular care categories.
The Company also currently offers products, services, and health outcomes
research in HIV/AIDS, has a research and development project underway in the
area of neonatal intensive care, and intends to add additional categories in
the future.
3
5
THE APACHE STRATEGY
The Company's objective is to become the leading provider of clinical
decision support systems and clinical outcomes data and services to healthcare
providers and suppliers. APACHE intends to achieve this objective through the
implementation of the following strategies:
- Leverage Existing Customer Base. APACHE's emphasis on
continuous clinical performance improvement provides
opportunities for the Company to market new products and
services to its existing customer base. Historically, many
Benchmark Study customers have purchased the Company's
comprehensive Critical Care products when the opportunities
for cost savings and/or quality improvement have been
identified and a return on investment has been proven.
- Expand Market Share in the Hospital Market. APACHE
currently provides clinical decision support systems or
service bureau-based information services to over 115 of the
approximately 5,200 community hospitals throughout the
United States. Therefore, the Company believes it has a
significant opportunity to expand its market share by (i)
increasing its direct marketing and sales programs; (ii)
targeting the growing multi-hospital IDS market; (iii)
utilizing alternate distribution relationships with other
clinical information system and decision support vendors;
and (iv) continuing to leverage its relationship with an
affiliate of Premier, Inc. ("Premier") for increased market
awareness, national Benchmark studies, and hospital
return-on-investment case studies. During 1997, the Company
continued its marketing agreement with an affiliate of
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. Five of thirteen sales
of APACHE's CCS in 1997 were to Premier member facilities.
- Expand Market Share in the Supplier Market. APACHE has
performed clinical trial services, market research studies,
and disease management projects for pharmaceutical and
biotechnology companies and plans to expand its presence in
the supplier market.
- 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 consider
the acquisition of product lines, medical data resources and
complementary businesses.
4
6
APACHE PRODUCTS AND SERVICES
The following tables summarize the primary products and services
offered or being developed by the Company and includes new product names
introduced in 1997 to reflect updates of the product line.
APACHE PRIMARY INFORMATION SYSTEMS PRODUCTS:
- ----------------------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------------
Benchmark Study Critical care; cardiovascular Acute care hospitals with One-time comparative analysis and report of a
care ICU's; acute care provider's clinical and financial performance;
hospitals with heart used to identify and quantify opportunities for
centers cost or quality improvement.
- ----------------------------------------------------------------------------------------------------------------------------------
APACHE III Critical care Acute care hospitals with Point-of-care information system, providing
Critical Care ICU's daily and prospective outcomes predictions, as
Series: well as, response to treatment trending and
Discover + reporting. These tools support the case
management of individuals and patient groups.
- ----------------------------------------------------------------------------------------------------------------------------------
APACHE III Critical care Acute care hospitals, Multi-dimensional analytical tools providing
Critical Care hospital systems, with severity adjusted outcomes compared to normative
Series: ICUs standards, integration of financial and clinical
Voyager + outcomes and standard reports.
APACHE Acute Acute care Acute care hospitals, Used for quality assurance and to identify
Care Voyager+ business coalitions priorities for clinical process improvement and
assess results of these initiatives.
APACHE Heart Cardiovascular care Both Critical Care and Acute Care Voyager+
Care Voyager+ products include JCAHO ORYX-certified outcomes
measures.
- ----------------------------------------------------------------------------------------------------------------------------------
Heart Center Cardiovascular care Acute care hospitals with Provides clinicians with point-of-care data
Departmental heart centers capture, reporting and clinical decision
Information support.
System
- ----------------------------------------------------------------------------------------------------------------------------------
HIV Manager HIV/AIDS Physicians and Physician practice management tool including
Physicians' Groups electronic medical record and outcomes
comparisons to national and group norms.
- ----------------------------------------------------------------------------------------------------------------------------------
5
7
APACHE HEALTH OUTCOMES RESEARCH AND DISEASE MANAGEMENT PRODUCTS SERVICES:
- ----------------------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------------
Clinical Trial All Product Lines Pharmaceutical, Protocol/analytic study design; severity adjusted risk
Support biotechnology, medical prediction modeling in support of efficacy testing and
device/diagnostic reporting.
companies; contract
research organizations
- ----------------------------------------------------------------------------------------------------------------------------------
Product All Product Lines Pharmaceutical, Outcomes research; market analysis; data sets; data
Marketing biotechnology, medical analysis; reporting and related services.
Information device/diagnostic
Tools companies; contract
research organizations
- ----------------------------------------------------------------------------------------------------------------------------------
Disease All Product Lines Pharmaceutical, Short and long-term cost benefit analysis; risk
Management biotechnology, medical prediction models/methodologies; best practice
Programs device/diagnostic norms/protocols.
companies; contract
research organizations;
healthcare providers
- ----------------------------------------------------------------------------------------------------------------------------------
Custom All Product Lines Pharmaceutical, Data management, analysis/and reporting services
Analysis, biotechnology, medical offering comparisons to best demonstrated practices,
Report Cards, device/diagnostic regional norms, national norms.
Registries companies; contract
research organizations;
healthcare providers
- ----------------------------------------------------------------------------------------------------------------------------------
APACHE BEST CARE CLINICAL CONSULTING SERVICES:
- ----------------------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------------
Clinical Critical Care Hospitals and IDSs Assesses the organization's performance against
Process national norms and best practices; determines
Improvement organization readiness for change, and implements one
Program process improvement project
delivered simultaneously with a hospital's
implementation of CCS products.
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Critical Care Hospitals and IDSs Assesses the organization's performance in light of
Performance both national norms, best practices and new medical
Review practice and care process developments uncovered by
APACHE database analysis and outcomes research; can be
used in conjunction with client's budgeting process to
plan priorities, staffing and investment.
- ----------------------------------------------------------------------------------------------------------------------------------
Bed Planning Critical Care Hospitals and IDSs Projects and plans for the hospital's daily demand for
Study intensive care and/or step-down unit beds in light of
planned or potential APACHE recommended care management
changes.
- ----------------------------------------------------------------------------------------------------------------------------------
6
8
APACHE/NATIONAL HEALTH ADVISORS STRATEGIC CONSULTING SERVICES:
- ----------------------------------------------------------------------------------------------------------
PRODUCT TARGET MARKET SERVICE DESCRIPTION
- ----------------------------------------------------------------------------------------------------------
Strategic Acute Care Hospitals Three to five year strategic plans,
Planning Regional Delivery Systems vision development,
Studies product line analyses, and
implementation plans.
- ----------------------------------------------------------------------------------------------------------
Integrated Acute Care Hospitals Partners' analyses and
Delivery development and implementation of mergers.
Network (IDN)
Development &
Implementation
- ----------------------------------------------------------------------------------------------------------
Physician Acute Care Hospitals Development of Physician Hospital Organization's,
Integration Networks practice acquisition, and related economic vehicles
Studies designed to align economic incentives between
physicians and hospital/networks.
- ----------------------------------------------------------------------------------------------------------
Leadership Acute Care Hospitals Annual leadership meeting of governance, medical
Retreats Networks staffs, and management which address critical governance,
management, and medical issues.
- ----------------------------------------------------------------------------------------------------------
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 customer support including follow-up training, a toll-free
customer service hotline and periodic product upgrades. Customers pay an
annual support service fee approximately equal to 15% of the software portion
of the product price for these ongoing support services.
7
9
CUSTOMERS
APACHE currently markets its products and services to three types of
customers: healthcare providers, healthcare suppliers, and government. The
Company's healthcare customers include hospital-based integrated delivery
systems such as Memorial Hospital System of Houston; academic and teaching
hospitals, such as the University of Michigan; individual not-for-profit
hospitals within integrated systems, such as Kaiser Foundation Hospitals and
New Hanover Regional Medical Center; and hospitals within investor-owned
hospital chains, such as Doctor's Hospital of Dallas, a member of Tenet
Healthcare Corporation. In addition, APACHE's provider customers include
Vencor, Inc., a multi-facility provider of long-term healthcare and medical
coalitions, such as the Cleveland Health Quality Choice Program and the Lake
Erie Health Alliance. The Company's healthcare supplier customers are
pharmaceutical manufacturers, biotechnology firms, and medical device
companies. The Company also offers health outcomes research and database
services to federal and state government agencies such as The Centers for
Disease Control ("CDC").
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 includes creating new
products that: (i) leverage APACHE's databases; (ii) increase the functionality
of current products; and (iii) expand coverage along the continuum of care to
additional disease or procedure groups. The Company's primary products are
internally developed software and analytical studies. Late in 1997, the
Company discontinued the practice of selling hardware products sourced from
other vendors. The software products are generally built on a client/server
architecture that includes UNIX or Windows NT-based servers, Windows
95/NT-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") 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 Health Level 7 information exchange
protocols.
SALES AND MARKETING
The Company markets and sells its products and services generally
through its eight-person direct sales force. APACHE believes that the most
effective use of its direct sales force is in marketing the CCS and Best Care
program to individual hospitals with 200 or more licensed beds and hospital
systems or alliances.
APACHE's consulting services are marketed both as part of the Best
Care program and separately by the Company's consultants. The Company's Health
Outcomes Research and strategic consulting services are marketed by the
developers of those programs and other Company professionals directly to
suppliers and providers as well as through IMS America.
8
10
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 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.
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 reliable product maintenance and
support are integral to establishing and maintaining a leadership position
within the healthcare industry. In addition, although the Company believes
that its products do not infringe upon the proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that a license or similar agreement
will be available on reasonable terms in the event of an unfavorable ruling on
any such claim.
9
11
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 achieving documented
success in impacting cost and quality and demonstrating an attractive payback
on the decision support system investment. Other differentiating factors
include quality and depth of the underlying clinical outcomes databases, the
proprietary nature of methodologies, databases and technical resources,
customer service and support, compatibility with the customer's existing
information systems, potential for product enhancement, vendor reputation,
price and the effectiveness of marketing and sales efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as 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. A number of these companies both compete for the
health system's information investment dollars and represent potentially
attractive distribution channels for the Company. The Company's products and
services differ from the products and services offered by competitors by the
focus on both high-risk, high-cost patients, both concurrent and predictive
outcomes information, and are clinically data-based. 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 potential competition from
industry associations who may collect data from their member physicians in
order to build registry services and comparative reports. As the market for
decision support systems develops, additional competitors may enter the market
and competition may intensify. While the Company believes that it successfully
has 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.
10
12
Certain products, including software applications, intended for use in
the diagnosis of disease or other conditions, or in the cure, treatment,
mitigation or prevention of disease, are subject to regulation by the Food and
Drug Administration ("FDA") under the Federal Food, Drug and Cosmetic Act of
1938 ("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 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.
11
13
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.
ACQUISITIONS IN THE FIRST HALF OF 1997
To expand its share of the market, add databases and new technologies
and develop relationships with key industry partners, the Company completed
three acquisitions during the first half of 1997.
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 percutaneous transluminal coronary angioplasy
("PTCA") and coronary artery bypass graft ("CABG") patients. At the time of
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 approximately $1.1 million.
During the third quarter of 1997, the Company decided to postpone
sales of the CardioMac product, and any further development initiatives relative
to this product and the assets purchased from CardioMac. As a result of this
decision, the Company wrote-off the intangible assets relating to the
acquisition totaling $436,000. This write-off is included in the restructuring
charge.
12
14
On June 2, 1997, the Company acquired National Health Advisors, Ltd.
("NHA"), a healthcare management consulting firm focused on strategy and
management support services for progressive healthcare organizations and
networks. The former shareholders of NHA received 367,569 shares
of Common Stock of APACHE in exchange for all the common stock of NHA. The
acquisition was accounted for as a pooling of interests and, as such, the
accompanying consolidated financial statements reflect the combined results of
the pooled businesses for the respective periods presented. In connection with
the acquisition, the Company recorded a one-time charge in the second quarter
of 1997 for acquisition-related costs of $732,000. These costs consisted
primarily of professional fees.
On June 24, 1997, the Company purchased a neonatal database from the
Vermont-Oxford Network, Inc. The Company plans to develop new products and
services using the database which will provide the company with offerings in
the prenatal market. At the time of the acquisition, the Company recorded a
non-recurring charge of $500,000 related to acquired in-process research and
development costs.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 92 full-time
employees. None of the Company's employees is represented by a labor union.
The Company has experienced no work stoppages and believes that its employee
relations are satisfactory.
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, Des Moines, Iowa and
Burlington, Massachusetts. 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
Des Moines, Iowa 650 February 28, 1998
Burlington, Massachusetts 160 August 31, 1998
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. SUBMISSION 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, 1997.
13
15
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are the executive officers of the Company who
have been elected to their respective offices by the Board of Directors of the
Company to serve until the election and qualification of their respective
successors:
Names Age Position
Thomas W. Hodson 51 Acting Chief Executive Officer
James L. Elder, Jr. 36 Vice President of Sales
Scott A. Mason 46 Secretary and Executive Vice President
Donna J. Myers 37 Vice President of Operations
Violet L. Shaffer 49 Vice President of Marketing
Donald W. Seymour 47 Vice President of Consulting
Thomas W. Hodson has served as Acting Chief Executive Officer of the Company
since December 31, 1997 but is not an employee of the Company. Mr. Hodson has
been Chairman of the Board of the Company since November 5, 1997 and is
presently Vice Chairman and Chief Executive Officer of NeuroSource, Inc. since
September 1, 1997. Prior to this, Mr. Hodson was an independent
financial/strategic consultant from October 1996 through August 31, 1997. Mr.
Hodson was employed by Caremark International Inc. as Senior Vice President,
Chief Financial Officer and a director of Caremark International Inc. from
August 1992 through October 1996.
James L. Elder, Jr. has served as Vice President of Sales since June 23, 1997.
Prior to joining the Company, Mr. Elder served as National Director, Sales and
Marketing for ActaMed Corporation from March 1995 through June 1997. Mr. Elder
held several sales and consulting management positions with IBM's Health
Industries Group from September 1983 through March 1995.
Scott A. Mason has served as Secretary and Executive Vice President since June
2, 1997. Prior to joining the Company, Dr. Mason served as Managing Partner and
Founder of National Health Advisors from 1981 through June 1997. Since 1981, he
has consulted to over 300 healthcare organizations in 37 states.
Donna J. Myers was appointed Vice President of Operations of the Company in
October 1997. Prior to holding this office, Ms. Myers served as Director of
Disease Management/Health Outcomes Research for the Company from October 1996.
Before joining the Company, Ms. Myers was employed by Hill Top Research Inc.
where Ms. Myers served as Executive Vice President in charge of the Clinical
Trial division from December 1995 through October 1996 and President and Chief
Operating officer of Future Healthcare, Inc., which was acquired by Hill Top
Research Inc., from March 1995 through December 1995 and Executive Vice
President in charge of Business and Corporate Development from August 1993
through March 1995 and Vice President of Business Development from January 1990
through July 1993.
14
16
Violet L. Shaffer has served as Vice President of Marketing for the Company
since September 22, 1997. Prior to joining the Company, from January 1, 1997
through September 1997, Ms. Shaffer served as President and Chief Executive
Officer of Competitive Advantage Services, Inc. Ms. Shaffer served as Vice
President of Business Development for Nichols Research Corporation and of
HealthGate Data Corporation, partially owned by Nichols, from September 1995
through December 31, 1996. Ms. Shaffer served as Corporate Vice President of
the MEDSTAT Group from November 1993 through August 31, 1995. From July of 1990
through October of 1993, Ms. Shaffer was Vice President of Marketing for Bell
Atlantic Healthcare Systems (now Oacis Healthcare) and served in various sales
and marketing management positions with AT&T/Bell Atlantic from August 1981
until the formation of Bell Atlantic Healthcare Systems via the acquisition by
Bell Atlantic of Simborg Systems Corporation in 1990.
Donald W. Seymour has served as Vice President, Consulting since the
acquisition of NHA by the Company on June 2, 1997. Prior to joining the
Company, Mr. Seymour served as a Partner with NHA from January 1995 through
June 1997 and as a Principle for NHA from September 1993 through December
1995.
ITEM 4B. DIRECTORS OF THE REGISTRANT
The following persons are the directors of the Company who have been
elected to serve a one-year term which ends with the Annual Meeting of
Stockholders scheduled for May 19, 1998:
Names Age
Thomas W. Hodson 51 Vice Chairman and Chief Executive Officer
NeuroSource, Inc.
Gerald E. Bisbee, Jr. Ph.D. 55 President
The Bisbee Group
Edward J. Connors 69 President
Connors, Roberts & Associates
William A. Knaus, M.D. 51 Evelyn Troup Hobson Professor and Chair
Department of Health Evaluation Sciences
University of Virginia School of Medicine
Lawrence S. Lewin 59 Chairman and Chief Executive Officer
Lewin/VHI
Francis G. Ziegler 57 President and Chief Executive Officer
Claneil Enterprises, Inc.
15
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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, 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $10.25 $5.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 6.69 4.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25 3.13
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50 1.00
Year Ended December 31, 1996
Second Quarter (from June 28, 1996) . . . . . . . . . . . . . . . . $13.00 $12.13
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.13 10.75
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 13.50 6.63
As of March 20, 1998, the Company had approximately 1,051 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.
Within the past year, the Company has issued securities without
registration under the Securities Act of 1933 (the "Securities Act") as
follows:
(a) On January 7, 1997, the Company issued options to purchase
an aggregate of 150,000 shares of Common Stock and paid
$1,350,000 in cash to Iowa Health Centers, Iowa Heart
Institute, Mercy Hospital Medical Center, and Mark A.
Tannenbaum, M.D. for all of the assets of CardioMac, a
point-of-care data collection and reporting tool for the
cardiac catheterization laboratory and cardiovascular
operating room. In each case, the stock was valued at
$7.75 per share.
(b) On June 2, 1997, the Company issued 367,569 shares of
Common Stock valued at $6.88 per share in exchange for all
of the common stock of NHA as described in Note 13 to the
Financial Statements.
(c) On November 5, 1997, the Company granted Thomas W. Hodson
an option to purchase 10,000 shares of Common Stock at
an exercise price of $2.47 per share.
The issuances of Common Stock in the above transactions were deemed to
be exempt under the Securities Act by virtue of Section 4(2) and/or Regulation D
of the Securities Act. The recipients in each case represented their intention
to accquire the Common Stock for investment only and not with a view to the
distribution thereof. Appropriate legends were affixed to the stock
certificates issued in these transactions. The Company believes that all
recipients had adequate access to information about the Company to make an
informed investment decision. In addition, the option described in (c) above
was granted in a transaction not involving a "sale" of securities as such term
is used in Section 2(3) of the Securities Act.
16
18
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
------------ ------------ ---------- -------------- --------
STATEMENT OF OPERATIONS DATA:
Revenue:
Systems ............................................... $ 2,278 $ 6,323 $ 4,096 $ 3 ,587 $ 2,004
Support ............................................... 1,961 1,486 1,352 836 486
Professional services ................................. 4,389 3,785 4,317 3,932 3,910
------------ ------------ ----------- ------------- -----------
Total revenue ................................. 8,628 11,594 9,765 8,355 6,400
Expenses:
Cost of operations .................................... 5,404 4,159 3,638 4,690 2,969
Research and development .............................. 2,704 1,723 1,919 1,813 1,017
Selling, general and administrative ................... 14,028 9,704 7,518 8,069 4,680
Restructuring Charge .................................. 1,623 - - - -
Write-off of acquired in-process research and
development costs .................................... 1,612 853 - - -
Write-off of product development and related costs..... - 1,100 - - -
------------ ------------ ----------- ------------- -----------
Total expenses ................................ 25,371 17,539 13,075 14,572 8,666
------------ ------------ ----------- ------------- -----------
Loss from operations .................................... (16,743) (5,945) (3,310) (6,217) (2,266)
Other income (expense):
Interest income ....................................... 859 717 81 110 83
Interest expense ...................................... (44) (370) (486) (73) (103)
Other, net ............................................ 10 1 9 27 (45)
------------ ------------ ----------- ------------- -----------
Total other income (expense) .................. 825 348 (396) 64 (65)
Net loss ................................................ $ (15,918) $ (5,597) $ (3,706) $ (6,153) $ (2,331)
============ ============ =========== ============= ===========
Basic and diluted net loss per share..................... $ (2.20) $ (0.87) $ (0.72) $ (6.36)
============ ============ =========== =============
Weighted average number of shares
used for calculation of net loss per share .............. 7,251 6,074 4,905 1,072
============ ============ =========== =============
DECEMBER 31,
--------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
------------ ------------ ---------- -------------- -----------
BALANCE SHEET DATA:
Cash and short-term investments ....................... $ 11,317 $ 21,987 $ 4,370 $ 592 $ 842
Working capital (deficiency) .......................... 5,134 20,332 1,958 (1,551) (3)
Total assets .......................................... 14,936 29,137 9,113 5,567 3,316
Long-term obligations, less current maturities ........ 79 231 1,079 566 848
Redeemable convertible preferred stock................. - - 20,732 14,515 8,124
Total stockholders' equity (deficit) .................. 6,866 22,405 (17,794) (13,982) (7,459)
17
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company provides clinically-based decision support information
systems and consulting services to the healthcare industry. The Company
currently offers its information systems on two technology platforms: Medical
Cost Management Program ("MCMP") software and Critical Care Series ("CCS")
software as an integrated decision support system that provides physicians and
healthcare administrators point-of-care, severity-adjusted clinical and
financial information on high-cost, high-risk patients. The Company also
provides a range of consulting services to health care providers and suppliers
including clinical trial design support, data to support market research,
marketing tools, disease management programs, and strategic and clinical
consulting.
The Company went through a significant transition during 1997. Early
in the year the Company pursued a strategy of expanding its product and service
offerings. In January 1997, the Company acquired the assets of CardioMac, a
point-of-care data collection and reporting tool for the cardiac catherization
laboratory and cardiovascular operating room and, in June 1997, purchased a
neonatal Intensive Care Unit database. The Company also acquired NHA in June.
During the third quarter of 1997, the Company revised significantly
its information systems business strategy for the remainder of 1997 and 1998.
The Company decided to focus primarily on products for critical care patients,
the Company's core strength, and to discontinue or postpone the development of
certain other products. As a result, the Company recorded a restructuring
charge of $1.6 million during the third quarter.
During 1997, the Company also restructured its senior management.
Several vice presidents left during the summer months, the Company's Chief
Financial Officer resigned during October, and the Company's Chief Executive
Officer resigned effective December 31, 1997. Until a new chief executive
officer is recruited, the Company is being managed on an interim basis through
a management committee consisting of the Company's Chairman of the Board and
acting Chief Executive Officer, another director, and two senior officers of
the Company. During the fourth quarter of 1997, the Company put in place a
senior management staff consisting of Vice Presidents in Operations, Sales,
Marketing, and Consulting.
18
20
The results of operations for 1997 reflect the events summarized
above. Revenues totaled $8.6 million, down 26% from 1996. Operating expenses
totaled $25.4 million, up 145% and the Company's net loss totaled ($15.9)
million, up 284% from 1996. The June 1997 acquisition of NHA was accounted for
as a pooling of interests, and the Company's consolidated financial statements
reflect the combined results of the pooled businesses for the respective
periods presented.
Reasons for the decreases in the Company's revenues during 1997
included:
- - Sales of critical care systems were adversely affected by lack of strong
sales and marketing leadership in the Company in the first half of 1997,
and a resulting high turnover in the direct sales force. In response, in
June and September of 1997, APACHE hired experienced healthcare information
systems executives and focused on the recruitment and retention of
experienced sales personnel, in order to close system sales and build the
sales pipeline.
- - In response to customer requests for new features and enhancements and to
take advantage of technology advances, the Company developed a new
critical care product line, the CCS. As a consequence of this transition,
the Company deferred revenue recognition on contracts for nine new CCS
systems (for which the Company had taken orders in 1997), which impacted
the Company's systems and related product revenues during the second half
of 1997. Software license revenue recognition was deferred until the new
CCS is fully installed which is expected to occur in early 1998.
- - In 1996, the Company announced a strategic relationship with Premier Inc.
to provide outcomes data and decision support systems to Premier owners and
affiliates. The initial marketing efforts associated with this relationship
focused on the sale of one-time Critical Care Benchmark services, with
plans to convert these to system sales once the potential savings
opportunities were presented. The conversion of Benchmark studies to
critical care system sales was much slower than expected, due to poor
positioning of the project with decision makers and the sales issues
mentioned above. In the second half of 1997, the Company redirected its
direct sales focus toward sales of the Company's CCS, incorporating
Benchmark projects within that sales framework. Five of the Company's CCS
sales during 1997, all of which included a Benchmark study, were to
Premier-owned or affiliated hospitals, and this relationship is expected
to continue to generate a significant percentage of the Company's CCS
sales in 1998.
19
21
Factors contributing to the increase in operating expenses in 1997
included:
- - The third quarter, a restructuring charge of $1.6 million referred to
above, including write-off of $600,000 of capitalized product development
costs related to discontinued products, write-off of $436,000 intangible
assets related to the January 1997 CardioMac acquisition and $587,000 of
termination costs, including severance pay and related benefits. In
preparation for the development and support of the CCS product, the Company
hired additional technical personnel and consultants in 1997.
- - The Company increased the number of direct sales personnel, including a
Vice President of Sales, in anticipation of the CCS product introduction.
- - The Company also expanded its client service and technical support
departments to support anticipated growth in CCS product sales.
- - The acquisition of NHA in June 1997, which was accounted for as a pooling
of interest, involved acquisition related costs of $732,000. Under pooling
rules such costs are expensed when incurred.
- - In connection with its June 1997, purchase of the neonatal Intensive Care
Unit license referred to above, the Company recorded a $500,000
non-recurring charge resulting from the write-off of the acquired
in-process research and development costs.
- - At the time of the January 1997 CardioMac acquisition, the Company recorded
a $1.1 million non-recurring charge resulting from the write-off of the
acquired in-process research and development costs.
As a result of the change in business strategy developed during the
third quarter of 1997, the Company undertook several initiatives to manage and
contain costs, conserve cash and maintain the Company's focus on the high-risk,
high-cost patient market particularly in critical care medicine. Backlog is
strong at December 31, 1997 and the sales pipeline is very active for systems,
support and consulting services.
20
22
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of revenue for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994
--------- -------- -------- --------
Revenue:
Systems ..................................... 26% 54% 42% 43%
Support ..................................... 23 13 14 10
Professional services ....................... 51 33 44 47
--------- -------- -------- --------
Total revenue ....................... 100 100 100 100
Expenses:
Cost of operations .......................... 63 36 37 56
Research and development .................... 31 15 20 22
Selling, general and administrative ......... 162 84 77 97
Restructuring Charge......................... 19 -
Write-off of acquired in-process
research and development costs ........... 19 7 - -
Write-off of product development
and related costs......................... - 9 - -
--------- -------- -------- --------
Total expenses ...................... 294 151 134 174
--------- -------- -------- --------
Loss from operations .......................... (194) (51) (34) (74)
Other income (expense):
Interest income ............................. 10 6 1 1
Interest expense ............................ - (3) (5) (1)
Other, net .................................. - - - -
--------- -------- -------- --------
Total other income (expense) ........ 10 3 (4) -
Net loss ...................................... (184)% (48)% (38)% (74)%
========= ======== ======== ========
21
23
1997 COMPARED TO 1996
Revenue. Revenue for 1997 decreased 26% to $8.6 million from $11.6
million in the prior year period. Systems revenue for 1997, decreased 63% to
$2.3 million from $6.3 million in the prior year period. The Company is
currently developing its next generation of CCS products and it has entered
into several sales contracts with clients. These products have not yet been
fully developed. Accordingly, systems and related product revenue have been,
and will continue to be, nominal until such products are fully installed by
clients, which is expected to be in early 1998. Support revenue for 1997
increased 33% to $2.0 million from $1.5 million in the prior year period, due
to an increase in the number of clients utilizing the Company's systems.
Professional services revenue for 1997 increased 16% to $4.4 million from $3.8
million for the prior year period. The increase in professional services
revenue was due to increases in the volume of Health Outcomes Research
services.
Cost of Operations. Cost of operations for 1997 increased 29% to $5.4
million from $4.2 million in the prior year period, due to expansion of the
client services department to support the anticipated growth in systems sales.
Cost of operations for 1997 increased to 63% of revenue from 36% in the prior
year period, due to the decrease in revenue. Cost of operations consists
primarily of personnel costs, costs of media, production manuals, telephone
support, third party equipment, licenses sold, and other direct costs
related to providing systems, support and professional services.
Research and Development. Research and development expenses for
1997 increased 57% to $2.7 million from $1.7 million in the prior year period,
due primarily to an increase in staffing requirements related to the
enhancement of current product lines as well as development activities for new
products and services. During 1997, $308,000 of product development costs were
capitalized, compared to $279,000 in the prior year period. Research and
development expenses for 1997 increased to 31% of revenue from 15% in the prior
year period, due to increased staffing as well as decreases in revenue during
the same period.
Selling, General and Administrative. Selling, general and
administrative expenses for 1997 increased 44% to $14.0 million from $9.7
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, an increase in expenses associated with public
reporting requirements, expenses associated with the acquisition of NHA and
severance associated with the resignation of the Company's CEO. Selling,
general and administrative expenses for 1997 increased to 162% of revenue from
84% for the prior year period, due primarily to the same factors as noted
above.
Restructuring Charge. During the third quarter of 1997, the Company
recorded a non-recurring charge totaling $1.6 million, or 19% of revenue,
relating to the Company's decision to revise its business strategy for the
remainder of 1997 and 1998. The Company has decided to focus on products for
high-cost, high-risk patients, particularly in critical care medicine, the
Company's core strength, and to discontinue or postpone the development of
certain products, including certain cardiovascular products, resulting in the
reduction of the current workforce. The main components of the charge are as
follows: write-off of capitalized product development costs related to
discontinued products, write-off of intangible assets related to the CardioMac
acquisition in January 1997 and termination costs, including severance pay and
related benefits.
22
24
Write-off of Acquired In-Process Research and Development Costs. During
1997, the Company recorded a total non-recurring charge totaling $1.6 million,
or 19% of revenue, relating to the write-off of the acquired in-process
research and development costs of $1.1 million from the January 1997 acquired
assets of CardioMac, a point-of-care data collection and reporting tool for the
catheterization laboratory and cardiovascular operating room and $500,000 from
the June 1997 acquired assets of Vermont-Oxford Network, Inc., a neo-natal
database. In 1996, the Company recorded a non-recurring charge of $853,000, or
7% of revenue, related to the write-off of the acquired in-process research and
development costs of the HIV/AIDS database and physician practice management
software applications acquired with the December 1996 HRN acquisition.
Other Income (Expense). Other income (expense) increased from $348,000
in 1996 to $825,000 for 1997. 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 and a decrease in
interest-bearing notes payable.
Taxes. The Company has not incurred income taxes as a result of
generating net operating losses for tax purposes.
Year 2000 Readiness. The version of the Company's MCMP product, an
application using UNIX based terminals/clients and UNIX based servers requiring
stand alone equipment, that was sold to customers prior to 1997 will not
function properly as January 1, 2000 approaches. The Company has focused its
attention on its next generation CCS product (for which the Company has taken
orders in 1997) which was completed in March 1998. It is Year 2000 ready and
includes new features and enhancements. The CCS product operates on a PC based
client/UNIX server platform, supporting Windows 95 and Windows NT. The costs
expended for CCS product development are being expensed as incurred. The
estimated costs to be incurred during 1998 for development of CCS are $500,000.
The Company has decided not to support the older version of the MCMP
beyond October 1999. The Company has offered existing clients the ability to
migrate to the new CCS product during the next two years on favorable terms.
Nearly half of the clients using the old UNIX version of the MCMP product have
indicated an intent to migrate to the new CCS product. A few have indicated
that they intend to discontinue use of the product completely, and, like many
participants in the health care industry, a majority are still assessing their
systems and migration options. The Company has entered into an agreement with a
vendor to perform the migration activities. The use of this third party vendor
is expected to enable all migration activities to be completed by October 1999.
The favorable terms and migration services offered to customers to encourage
migration to the new CCS product are not expected to have a material impact on
the Company's future operating results or financial position. Because the
Company is not yet aware of the plans of customers who have not yet accepted
the Company's terms for migration to the new CCS product, the Company is not
yet able to fully evaluate the impact of Year 2000 issues associated with the
UNIX version of the MCMP product.
As of December 31, 1997, the Company has identified several internal
computer systems that are not Year 2000 ready. During 1997, the Company
replaced its financial system to a product that is Year 2000 ready. It is not
expected that upgrading or replacing other internal systems that are not Year
2000 ready will have a material effect in 1998 on the Company's financial
statements taken as a whole.
23
25
1996 COMPARED TO 1995
Revenue. Revenue for 1996 increased 18% to $11.6 million from $9.8
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 renegotiations 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 13% to
$3.8 million from $4.3 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.
Cost of Operations. Cost of operations for 1996 increased 15% to $4.2
million from $3.6 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 36%
of revenue from 37% 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 15% of revenue from 20% 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 29% to $9.7 million from $7.5
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 84% of revenue from 77% 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 nonrecurring charge totaling $1.1
million, or 9% 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 Quality Information Management
Corporation ("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.
24
26
Write-off of Acquired In-Process Research and Development Costs. In
December 1996, the Company completed the acquisition of Health Research
Network, a unit of Dun and Bradstreet Health Care Information, Inc., a division
of Cognizant Corporation ("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 7%
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.
Other Income (Expense). Other income (expense) increased from
($396,000) in 1995 to $348,000 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.
25
27
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial
data, for fiscal 1997 and 1996. 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 1997 FISCAL YEAR 1996
-------------------------------------------------------------------------------------
(in thousands) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------ ------- ------ ----- ----- -------
Revenue:
Systems ............................... $1,445 $ 657 $ 75 $ 101 $1,242 $1,567 $1,726 $ 1,788
Support ............................... 477 469 550 465 330 375 354 427
Professional services ................. 1,144 1,326 1,046 873 712 862 1,199 1,012
------ ----- ------ ------ ------- ------ ------ --------
Total revenue ................. 3,066 2,452 1,671 1,439 2,284 2,804 3,279 3,227
Expenses:
Cost of operations .................... 1,534 1,441 1,296 1,133 940 1,016 900 1,303
Research and development ............. 671 700 727 606 364 297 550 512
Selling, general and administrative ... 3,151 4,507 3,275 3,095 1,823 2,050 2,602 3,229
Restructuring Charge .................. - - 1,623 - - - - -
Write-off of acquired in-process
research and development costs .... 1,112 500 - - - - - 853
Write-off of product development
and related costs ................ - - - - - - - 1,100
------ ------ ------ ------- ------ ------ ------ -------
Total expenses ................ 6,468 7,148 6,921 4,834 3,127 3,363 4,052 6,997
------ ------ ------ ------- ------ ------ ------ -------
Loss from operations .................... (3,402) (4,696) (5,250) (3,395) (843) (559) (773) (3,770)
Total other income (expense) .. 230 230 212 153 (45) (82) 182 293
------ ------ ------ ------- ------ ------ ------ -------
Net loss ................................ $(3,172) $(4,466) $(5,038) $(3,242) $ (888) $ (641) $ (591) $(3,477)
====== ====== ====== ======= ====== ====== ====== =======
26
28
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.
27
29
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through its
initial public offering of the Company's Common Stock in July 1996. At
December 31, 1997, the Company had cash and cash equivalents and short-term
investments of $11,317,000 representing a decrease of $10,670,000 from the
total of $21,987,000 at December 31, 1996.
During the first quarter of 1997, the Company obtained a line of credit
commitment from a Crestar 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 are collateralized by the Company's accounts receivable and all
other uncommitted assets. The line of credit expires on May 31, 1998. There
are currently no borrowings under the line of credit. Pursuant to the
covenants under the line of credit, the Company is not currently eligible to
borrow funds under the line.
During 1997, 1996 and 1995, the Company used approximately $6.7
million, $4.8 million and $2.4 million, respectively, in operating activities.
Net cash used in 1997 was composed primarily of net loss offset by depreciation
and amortization, write-off of acquired in-process research and development
costs, write-off of product development and related costs and increases in
accounts payable and accrued expenses and decreases in accounts receivables and
deferred revenues.
The Company's investing activities used cash of $8.4 million and $1.6
million in 1997 and 1996. In 1997, the primary use of cash was for the January
1997 acquired assets of CardioMac, a point-of-care data collection and
reporting tool for the cardiac catheterization laboratory and cardiovascular
operating room, from Iowa Health Center, P.C. d/b/a Iowa Heart Center, P.C.,
Mercy Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa Heart
Institute. The purchase price for this acquisition was $1.35 million in cash
and options to purchase 150,000 shares of APACHE Common Stock for a total value
of $1.57 million.
Net cash provided by financing activities during 1997, 1996 and 1995
was ($197,000), $23.0 million and $6.5 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.
During 1997, 1996 and 1995, the Company made capital expenditures
totaling $555,000, $331,000, and $81,000, respectively. As of December 31,
1997, the Company had net working capital of $5.1 million including cash and
short-term investments in the amount of $11.3 million.
The Company anticipates that remaining 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. Through December 31, 1997, the Company has incurred
cumulative net operating losses of approximately $38.9 million. There can be no
assurance that the Company will be profitable in the future or that present
capital will be sufficient to fund the Company's ongoing operations. The
Company believes that its current operating funds will be sufficient to meet
its planned ongoing operating and working capital requirements and to finance
planned product development, sales and marketing activities through 1998. If
additional financing is required to fund operations, there can be no assurance
that such financing can be obtained or obtained on terms acceptable to the
Company.
The Company does not believe the impact of inflation has significantly
affected the Company's operations.
28
30
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company has implemented SFAS No. 128 for
1997. SFAS No. 128 required dual presentation of basic and diluted earnings per
share. Basic loss per share includes no dilution and is computed by dividing
net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share includes the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The Company has
implemented SFAS 128 and it did not have a material impact.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and No. 131 "Disclosures about Segments of an Enterprise and Related
Information." These statements become effective for the Company's 1998
financial statements. The Company is evaluating these statements to determine
the impact on its reporting and disclosure requirements.
The American Institute of Certified Public Accountants has issued
Statement of Position 97-2 "Software Revenue Recognition," ("SOP 97-2") that
supersedes Statement of Position 91-1. SOP 97-2 is effective for revenue
transactions entered into by the Company in fiscal years beginning after
December 31, 1997. Management believes that the changes contained in SOP 97-2
will not have a material financial impact on the Company.
29
31
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are forward-looking
statements under provisions of the Private Securities Litigation Reform Act of
1995. All forward looking statements involve risks and uncertainties. The
Company wishes to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause its actual results in fiscal 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's: having sufficient sales and
timely collections to meet cash requirements and achieve profitability; ability
to attract and retain key employees and to successfully replace its chief
executive officer and chief financial officer; success of its strategy to
concentrate its product offerings on high-risk, high-cost patients; ability to
timely develop new products and enhance existing products; ability to compete
in the competitive and rapidly evolving healthcare information technology
industry; ability to correctly estimate and manage its Year 2000 costs and
liabilities; success of its marketing and consulting efforts and ability to
effectively utilize its direct sales force; ability to protect proprietary
information and to obtain necessary licenses on commercially reasonable terms;
and ability to comply with and adopt products and services to potential
regulatory changes.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable until fiscal year ending December 1998.
30
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Independent Public Accountants, Arthur Andersen LLP ...................... 32
Report of Independent Public Accountants, KPMG Peat Marwick LLP .................... 33
Report of Independent Public Accountants, Arthur Andersen LLP....................... 34
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 ................................................... 35
Consolidated Balance Sheets for the Years Ended December 31, 1997 and 1996 ......... 36
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 1997, 1996 and 1995...................... 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 ................................................... 38
Notes to Consolidated Financial Statements ......................................... 39
Financial Statement Schedule:
Report of Independent Public Accountants, Arthur Andersen LLP, on Financial
Statement Schedule ..................................................... 59
Report of Independent Public Accountants, KPMG Peat Marwick LLP, on Financial
Statement Schedule Contained in Report of Independent Public Accountants,
KPMG Peat Marwick LLP .................................................. 33
Schedule II - Valuation and Qualifying Accounts for
the Years Ended December 31, 1997, 1996 and 1995 ....................... 60
All other financial statement schedules not included have been omitted
because they are not applicable or because the required information is otherwise
furnished.
31
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To APACHE Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheet of APACHE
Medical Systems, Inc. (the "Company") as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
We previously audited and reported on the balance sheet of National
Health Advisors, Ltd. ("NHA") as of December 31, 1996 and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the two-year period then ended, prior to their restatement
for the 1997 pooling-of-interests with the Company. The contribution of NHA
assets represented 4% of the restated total consolidated assets as of December
31, 1996. The contribution of NHA revenues represented 24% and 28% of the
restated total consolidated revenues for 1996 and 1995, respectively. The
contribution of NHA net income represented 1% and 3% of the restated total
consolidated net loss for 1996 and 1995, respectively. Separate financial
statements of the Company included in the 1996 and 1995 restated consolidated
financial statements were audited by other auditors who have issued their
report thereon dated February 7, 1997. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two-year period then ended, after
restatement for the 1997 pooling-of-interests; and in our opinion such
consolidated statements have been properly combined on the basis described in
Note 2 of the notes to the consolidated financial statements.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
32
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
APACHE Medical Systems, Inc.:
We have audited the consolidated balance sheet of APACHE Medical
Systems, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows, for each of the years in the two-year period ended December 31,
1996, not presented herein, before the restatement described in Note 2 to the
1997 consolidated financial statements of APACHE Medical Systems, Inc. In
connection with our audits of the financial statements, we also have audited
the financial statement Schedule II - Valuation and Qualifying Accounts for
each of the years in the two-year period ended December 31, 1996, not presented
herein (before restatement). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and 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
(not presented herein) present fairly, in all material respects, the financial
position of APACHE Medical Systems, Inc. as of December 31, 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule referred to above (not presented herein), when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
February 7, 1997
McLean, Virginia
33
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the National Health Advisors, Ltd.:
We have audited the balance sheet of National Health Advisors, Ltd., (a
Virginia corporation) as of December 31, 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the two-year period then ended (not presented separately herein),
before the restatement described in Note 2 to the consolidated financial
statements of APACHE Medical Systems, Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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.
As discussed in Note 1, the Company was acquired by APACHE Medical Systems,
Inc. on June 2, 1997.
In our opinion, the financial statements referred to above (not presented
separately herein), present fairly, in all material respects, the financial
position of National Health Advisors, Ltd., as of December 31, 1996, and the
results of its operations and its cash flows for each of the years in the
two-year period then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1998
34
36
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31,
(in thousands, except per share data) 1997 1996 1995
----------- ------------- ------------
Revenue:
Systems .................................................... $ 2,278 $ 6,323 $ 4,096
Support .................................................... 1,961 1,486 1,352
Professional services ...................................... 4,389 3,785 4,317
--------- ---------- ----------
Total revenue ...................................... 8,628 11,594 9,765
Expenses:
Cost of operations ......................................... 5,404 4,159 3,638
Research and development ................................... 2,704 1,723 1,919
Selling, general and administrative ........................ 14,028 9,704 7,518
Restructuring charge ....................................... 1,623 - -
Write-off of acquired in-process
research and development costs ........................ 1,612 853 -
Write-off of product development
and related costs ..................................... - 1,100 -
--------- ---------- ----------
Total expenses ..................................... 25,371 17,539 13,075
Loss from operations ......................................... (16,743) (5,945) (3,310)
Other income (expense):
Interest income ............................................ 859 717 81
Interest expense ........................................... (44) (370) (486)
Other, net ................................................. 10 1 9
--------- ---------- ----------
Total other income (expense) ....................... 825 348 (396)
--------- ---------- ----------
Net loss ..................................................... (15,918) (5,597) (3,706)
Accretion of dividends and issue costs on redeemable
convertible preferred stock ............................. - - (900)
--------- ---------- ----------
Net loss to common stockholders .............................. $ (15,918) $ (5,597) $ (4,606)
========= ========== ==========
Basic and diluted net loss per share ......................... $ (2.20) $ (0.87) $ (0.72)
========= ========== ==========
Weighted average number of shares used for calculation
of net loss per share ................................... 7,251 6,074 4,905
========= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
35
37
APACHE MEDICAL SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except share data) DECEMBER 31,
1997 1996
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 5,634 $ 20,928
Short-term investments ................................................................ 5,683 1,059
Accounts receivable, net of allowance for doubtful accounts of
$485 in 1997 and $102 in 1996 .................................................... 1,235 3,816
Prepaid expenses and other ............................................................ 456 871
----------- ----------
TOTAL CURRENT ASSETS ............................................................. 13,008 26,674
Other trade receivables, net of current maturities .................................... 57 104
Furniture and equipment ............................................................... 3,355 3,062
Less accumulated depreciation and amortization ........................................ (2,095) (1,799)
----------- ----------
1,260 1,263
Capitalized software development costs, net ........................................... - 374
Intangible assets, net ................................................................ 611 722
----------- ----------
TOTAL ASSETS .......................................................................... $ 14,936 $ 29,137
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ...................................................................... $ 553 $ 621
Accrued expenses ...................................................................... 5,580 2,844
Accrued acquisition costs ............................................................. - 1,565
Current maturities of long term obligations ........................................... 111 172
Deferred revenue ...................................................................... 1,630 1,140
----------- ----------
TOTAL CURRENT LIABILITIES ....................................................... 7,874 6,342
Deferred rent benefit ................................................................. 117 159
Obligations under capital leases, net of current maturities ........................... 47 2
Notes payable - stockholders, net of current maturities ............................... - 100
Notes payable - other, net of current maturities ...................................... 32 129
----------- ----------
TOTAL LIABILITIES .............................................................. 8,070 6,732
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000 at December 31,
1997 and December 31, 1996: issued and outstanding shares,
7,267,756 at December 31, 1997 and 7,238,922 at December 31, 1996 ................ 73 72
Additional paid-in capital ............................................................ 45,703 45,325
Accumulated deficit ................................................................... (38,910) (22,992)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY ...................................................... 6,866 22,405
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 14,936 $ 29,137
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
36
38
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1996 and 1995
CUMULATIVE
DIVIDENDS AND
ACCRETED ISSUE
COSTS ON
CUMULATIVE
COMMON STOCK ADDITIONAL REDEEMABLE
------------------------- PAID-IN PREFERRED
(in thousands, except share data) SHARES AMOUNT CAPITAL STOCK
--------- --------- ---------- ---------
BALANCE AT DECEMBER 31, 1994.............................. 1,072,835 $ 11 $ 569 $ (878)
Adjustment for pooling of interest 367,569 3 3 -
--------- --------- --------- --------
BALANCE, AS RESTATED, DECEMBER 31, 1994.................. 1,440,404 14 572 (878)
Issuance of convertible preferred stock warrants.......... - - 787 -
Issuance of common stock.................................. 2,623 - 7 -
Accretion of cumulative dividends and issue costs on
redeemable preferred stock........................... - - - (901)
Net loss.................................................. - - - -
--------- --------- --------- --------
BALANCE AT DECEMBER 31, 1995.............................. 1,443,027 14 1,366 (1,779)
Issuance of common stock.................................. 788 - 7 -
Issuance of common stock through initial public offering . 2,300,000 23 27,577 -
Accretion of cumulative dividends and issue costs on
redeemable preferred stock........................... - - - (679)
Conversion of convertible preferred stock................. 3,294,519 33 20,017 -
Conversion of convertible debt............................ 122,257 1 999 -
Conversion of cumulative dividends on redeemable
preferred stock...................................... 78,331 1 939 -
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) -
Issuance costs of initial public offering................. - - (3,034) -
Issuance of common stock options.......................... - - 438 -
Net loss.................................................. - - - -
--------- --------- --------- --------
BALANCE AT DECEMBER 31, 1996.............................. 7,238,922 72 45,325 -
Issuance of common stock options.......................... - 291 -
Exercise of common stock options.......................... 10,490 30 -
Issuance of common stock under Employee Stock Purchase Plan 18,344 1 57 -
Net loss.................................................. - - - -
--------- --------- --------- --------
BALANCE AT DECEMBER 31, 1997.............................. 7,267,756 $ 73 $ 45,703 $ -
========= ========= ========= ========
ACCUMULATED
(in thousands, except share data) DEFICIT TOTAL
----------- ----------
BALANCE AT DECEMBER 31, 1994.............................. $ (14,100) $ (14,398)
Adjustment for pooling of interest 411 417
--------- ---------
BALANCE, AS RESTATED, DECEMBER 31, 1994.................. (13,689) (13,981)
Issuance of convertible preferred stock warrants.......... - 787
Issuance of common stock.................................. - 7
Accretion of cumulative dividends and issue costs on
redeemable preferred stock........................... - (901)
Net loss.................................................. (3,706) (3,706)
--------- ---------
BALANCE AT DECEMBER 31, 1995.............................. (17,395) (17,794)
Issuance of common stock.................................. - 7
Issuance of common stock through initial public offering . - 27,600
Accretion of cumulative dividends and issue costs on
redeemable preferred stock........................... - (679)
Conversion of convertible preferred stock................. - 20,050
Conversion of convertible debt............................ - 1,000
Conversion of cumulative dividends on redeemable
preferred stock...................................... - 940
Reclass cumulative dividends on redeemable preferred
stock to APIC........................................ - -
Reclass accreted issue costs on redeemable preferred stock
to APIC.............................................. - -
Reclass unaccreted issue costs on redeemable preferred
stock to APIC........................................ - (526)
Issuance costs of initial public offering................. - (3,034)
Issuance of common stock options.......................... - 438
Net loss.................................................. (5,597) (5,597)
--------- ---------
BALANCE AT DECEMBER 31, 1996.............................. (22,992) 22,405
Issuance of common stock options.......................... - 291
Exercise of common stock options......................... - 30
Issuance of common stock under Employee Stock Purchase Plan - 58
Net loss.................................................. (15,918) (15,918)
--------- ---------
BALANCE AT DECEMBER 31, 1997.............................. $ (38,910) $ 6,866
========= =========
See accompanying Notes to Consolidated Financial Statements.
37
39
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
(in thousands) 1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $(15,918) $ (5,597) $ (3,706)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization............................................ 1,158 873 772
Provision for doubtful accounts.......................................... 611 100 48
Loss on sale of furniture and equipment.................................. - - 69
Accretion of interest.................................................... - 265 367
Expense for nonemployee stock options issued............................. 67 69 -
Write-off of product development and related costs....................... 620 1,100 -
Write-off of acquired in-process research and development costs.......... 1,612 853 -
Write-off of intangible assets........................................... 436 - -
Changes in operating assets and liabilities:
Accounts receivable................................................. 1,970 (1,699) (475)
Other trade receivables............................................. 236 (84) 289
Other current assets................................................ (103) (183) 35
Accounts payable and accrued expenses............................... 2,168 407 (556)
Deferred rent....................................................... (42) (28) (16)
Deferred revenue.................................................... 490 (852) 766
-------- --------- --------
NET CASH USED IN OPERATING ACTIVITIES................................... (6,695) (4,776) (2,407)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs....................................... (308) (279) (426)
Purchase of furniture and equipment, net of disposals........................ (555) (331) (81)
Proceeds from sale of furniture and equipment................................ - - 221
Purchase acquisitions........................................................ (2,915) - -
Purchase of short-term investments........................................... (4,624) (989) (13)
-------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES................................... (8,402) (1,599) (299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations.............................. (68) (195) (192)
Principal payments on borrowings............................................. (237) (503) (366)
Proceeds from issuance of notes payable...................................... 20 75 2,350
Proceeds from issuance of preferred stock, net of issuance costs............. - (37) 4,672
Proceeds from issuance of common stock upon exercise of options.............. 30 6 7
Proceeds from issuance of stock under employee stock purchase plan 58 - -
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 (USED IN) FINANCING ACTIVITIES............................ (197) 23,003 6,471
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (15,294) 16,628 3,765
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................... 20,928 4,300 535
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 5,634 $ 20,928 $ 4,300
======== ========= ========
See accompanying Notes to Consolidated Financial Statements.
38
40
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.
Operations of the Company are subject to certain risks and uncertainties
including, among others, uncertainties relating to product development,
significant operating losses, competition and market acceptance of its
products. The market for the Company's healthcare information systems and
services is highly competitive and characterized by continued and rapid
technological advances and substantial changes. The Company's success is
dependent upon market acceptance of its products in preference to competing
products and products that may be developed by others. The healthcare industry
is subject to changing political, economic and regulatory influences that may
affect the procurement practices and operations of the Company's customers.
There can be no assurance that the Company's products and services will achieve
a sufficient level of market acceptance to result in profitable operations.
During 1997, the Company ceased sales of its Medical Cost Management Program
software that had been sold to customers prior to 1997 as it was not Year 2000
ready. Development of the next generation of Critical Care Series (for which
the Company has taken orders in 1997) was completed in March, 1998. The Company
has decided not to support the Medical Cost Management Program beyond the year
1999. The Company is offering its existing clients the option to migrate to the
next generation Critical Care Series software during the next two years. It is
uncertain at this time whether all clients will agree to migrate to the
Critical Care Series software or whether all migrations can be completed by the
Year 2000. In the opinion of management, the development of the Critical Care
Series and the migration to the new Critical Care Series by its existing
customers will not have a material adverse impact on the Company's financial
position or results of future operations. As the new version has not yet been
fully developed, system and related product revenue has been and will continue
to be nominal until such products are delivered.
Through December 31, 1997, the Company has incurred cumulative net operating
losses of approximately $38.9 million. There can be no assurance that the
Company will be profitable in the future or that present capital will be
sufficient to fund the Company's ongoing operations. The Company believes that
its current operating funds will be sufficient to meet its planned ongoing
operating and working capital requirements and to finance planned product
development, sales and marketing activities through 1998. If additional
financing is required to fund operations, there can be no assurance that such
financing can be obtained or obtained on terms acceptable to the Company.
39
41
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business combinations
On June 2, 1997, the Company acquired all the common stock of National Health
Advisors, Ltd. ("NHA") in exchange for 367,569 shares of the Company's Common
Stock. NHA is a healthcare management consulting firm focused on strategy and
management support services for progressive healthcare organizations and
networks. The merger was accounted for as a pooling-of-interests. Accordingly,
the Company's financial statements have been restated to include the results of
NHA for all periods presented.
Combined and separate results of APACHE and NHA during the periods preceding
the merger were as follows (in thousands):
Three Months Ended
March 31, 1997 (unaudited) APACHE NHA INTERCOMPANY TOTAL
------------- ---------- ---------------- ----------
Sales $ 2,401 $ 688 $ (23) $ 3,066
Net Income (loss) (3,282) 113 (3) (3,172)
----------- ---------- --------------- ----------
Fiscal Year 1996
Sales $ 8,784 $ 2,810 $ -- $ 11,594
Net Income (loss) (5,661) 64 -- (5,597)
----------- ---------- --------------- ----------
Fiscal Year 1995
Sales $ 7,024 $ 2,741 $ -- $ 9,765
Net Income (loss) (3,808) 102 -- (3,706)
Transaction costs and one-time charges resulting from the merger of $732,000
include expenses for professional fees and severance related costs.
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with 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.
40
42
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 provided that no
significant vendor obligations remain. Systems support fees are recognized
ratably over the period of performance. Professional services revenue is
recognized as these services are provided and is generally billed on a time and
material basis. Professional services do not involve significant customization,
modification or production of the licensed software. Amounts received prior to
the performance of service or completion of a milestone are deferred. Revenue
recognized for work performed for which billings have not been presented to
customers is recorded as unbilled. Systems and related product revenue on the
Company's next generation Critical Care Series products which are still under
development has been deferred until such time the products are fully developed
and installed.
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2 "Software Revenue Recognition," ("SOP 97-2") that supersedes
Statement of Position 91-1. SOP 97-2 is effective for revenue transactions
entered into by the Company in fiscal years beginning after December 31, 1997.
Management believes that the changes contained in SOP 97-2 will not have a
material impact on the Company.
Cost of Operations
Cost of operations consists primarily of personnel costs, costs of media,
production manuals, telephone support, third party equipment, licenses,
software and other direct costs related to providing systems, support, and
professional services.
Furniture and Equipment
Furniture and equipment are stated at cost. Furniture and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization are calculated on the straight-line basis over
the estimated useful lives of the assets ranging from 3 to 7 years.
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, 1997, cash
equivalents and short-term investments consisted of money market instruments,
commercial paper and government agency securities. 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, 1997 and 1996, there were no unrealized gains or losses.
41
43
Software Capitalization
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and
are included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products
are available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
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 in the Company's consolidated statement of operations.
The Company capitalized approximately $308,000, $279,000, and $426,000 in
software development costs during 1997, 1996 and 1995, respectively.
Amortization of software development costs approximated $82,000, $231,000, and
$63,000 in 1997, 1996 and 1995, respectively. During the third quarter of
1997, the Company recorded a non-recurring charge totaling approximately
$600,000 relating to the write-off of certain capitalized software products
related to discontinued products. No additional costs were capitalized during
1997, as technological feasibility had not been reached on the Company's new
Critical Care Series product.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Current Vulnerability Due to Certain Concentrations
The Company currently depends on certain suppliers for the provision of
computer hardware to its customers. The Company has not experienced and does
not expect any disruption of such services and the Company believes that
functionally equivalent computer hardware is available from other sources.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, short term
investments, and trade receivables. Concentrations of credit risk with respect
to trade receivables result from the Company's customer base, comprising
primarily hospitals and other healthcare industry companies. Management
regularly monitors the creditworthiness of its customers and believes that it
has adequately provided for any exposure to potential credit losses. No single
customer accounted for more than 10% of revenues in 1997, 1996, or 1995.
42
44
Impairment of Long-Lived Assets
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." The Company reviews its long-lived assets, including
intangible assets and property plant and equipment, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates whether future undiscounted net cash
flows will be less than the carrying amount of the assets and adjusts the
carrying amount of its assets to fair value.
Basic and Diluted Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share." SFAS No. 128 is effective for periods ending after
December 15, 1997. The Company has implemented SFAS No. 128 which requires dual
presentation of basic and diluted earnings per share. Basic loss per shares
includes no dilution and is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted loss per share includes the potential dilution that could
occur if securities or other contracts were exercised or converted into Common
Stock. Options and warrants outstanding were not included in the computation of
diluted net loss per share as their effect would be anti-dilutive. Diluted net
loss per share and basic earnings per share are identical for all periods
presented. In February 1998, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 98 on computations of earnings per share.
SAB No.98 supersedes SAB No. 83, which previously required that all issuances of
Common Stock, options and warrants issued within one year of an initial public
offering be included in the calculation of earnings per share as if outstanding
for all periods presented. Under SAB No. 98, only issuances of common stock,
options and warrants issued for nominal consideration in periods preceding an
initial public offering are required to be included in the calculation of
earnings per share as if they were outstanding for all periods presented. In
the periods preceding the Company's initial public offering the Company had no
issuances of Common Stock, options or warrants for nominal consideration. The
mandatory conversion of all outstanding shares of preferred stock, including
certain accumulated dividends, and the conversion of certain convertible debt,
including the reduction of related interest, are included in the computation of
net loss per share for all periods presented preceding the Company's initial
public offering in July 1996. These shares have been included in the
computation for loss periods when such shares would otherwise not be included
as the impact 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 prior to the initial public offering accretion of preferred stock to the
mandatory redemption amount is not included as an increase to net loss.
Earnings per share for all periods presented has been restated to comply with
SFAS No. 128 and SAB No. 98.
(3) RESTRUCTURING CHARGE
During the third quarter of 1997, the Company recorded a restructuring charge
of $1.6 million related primarily to the Company's decision to revise its
business strategy for the remainder of 1997 and 1998. The Company has decided
to focus on products for high-cost, high-risk patients, APACHE's core strength,
and to discontinue or postpone the development of certain products (including
certain cardiovascular products), resulting in the reduction of the current
workforce. The main components of the charge are as follows: write-off of
capitalized product development costs related to discontinued products,
write-off of intangible assets related to the CardioMac acquisition in January
1997 and termination costs, including severance pay and related benefits. As of
December 31, 1997, substantially all the costs associated with the restructuring
charge had been paid.
43
45
(4) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
DECEMBER 31,
1997 1996
-------- --------
Billed accounts ............................... $ 1,460 $ 3,327
Unbilled accounts ............................. 260 591
-------- --------
1,720 3,918
Less allowance for doubtful accounts........... (485) (102)
-------- --------
$ 1,235 $ 3,816
======== ========
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, net of imputed interest are included as other trade
receivables in the accompanying financial statements.
(1) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
1997 1996
----------- ----------
Accrued salaries, bonuses and benefits ....................................... $ 1,493 $ 826
Discontinued product reserve ................................................. 600 -
Accrued commissions........................................................... 349 174
Accrued severance costs....................................................... 600 -
Accrued pension costs......................................................... 107 52
Other accrued license fees.................................................... 402 -
QIMC licensing and marketing fees ............................................ 406 725
Other accrued expenses ....................................................... 1,623 1,067
----------- ----------
$ 5,580 $ 2,844
=========== ==========
44
46
(6) NOTES PAYABLE -- STOCKHOLDERS
Notes payable, non-interest bearing was $0 and $100,000 for the years ended
December 31, 1997 and 1996, respectively. Interest expense relating to notes
payable-stockholders was approximately $0, $316,000, and $366,000 for the years
ended December 31, 1997, 1996 and 1995, 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.
45
47
(7) 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,
-------------------------
1997 1996
---------- ----------
Note payable, 10% interest payable semi-annually, principal payable in annual
installments of $34,500 and $14,700 in May 1997 and 1998, respectively ............. $ 15 $ 49
Note payable, 10% interest payable semi-annually, principal payable in annual
installments of $34,500 through August 1998 ........................................ 35 69
Note payable, prime plus 2% interest (10.50% at December 31, 1997), payable in
monthly installments of principal plus interest through November 1999 ............. 40 63
Note payable, 9.25% interest payable in monthly installments of principal
plus interest through June 1999.................................................... 37 63
------- ---------
$ 127 $ 244
------- ---------
Less current maturities ................................................................. (95) (115)
------- ---------
$ 32 $ 129
======= =========
Scheduled maturities of notes payable -- other are as follows (in thousands):
YEAR
----
1998 ................................................................... $ 95
1999 ................................................................... 32
(8) LEASE COMMITMENTS
Future minimum lease payments at December 31, 1997, under non-cancelable
operating and capital leases are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ -------- ---------
1998 ................................................. $ 23 $ 463
1999 ................................................. 23 434
2000 ................................................. 23 -
2001 ................................................. 9 -
------ --------
Total ................................................ $ 78 $ 897
========
Less interest at 12.75% .............................. (15)
------
Present value of net minimum lease payments .......... 63
Less current maturities .............................. (16)
------
$ 47
======
46
48
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 $497,000,
$523,000 and $501,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Capital Leases
In 1997, the Company negotiated a new capital lease for certain office
equipment and adjusted the terms of existing capital leases scheduled to expire
at various dates through 1997. The resulting capital lease will expire in 2001.
Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 1997 is as follows (in thousands):
Office equipment ............................................. $ 199
Less accumulated amortization ................................ (140)
-------
$ 59
=======
47
49
(9) INCOME TAXES
The Company had no provision for income taxes in 1997, 1996 or 1995 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, 1997 and 1996 are as follows (in thousands):
1997 1996
------------- ----------
Deferred tax liabilities:
Accrual to cash adjustment .................................. $ (228) $ 0
Capitalized software development costs ...................... (28) (142)
------------ --------
Gross deferred tax liabilities ................................ (256) (142)
Deferred tax assets:
Accrued vacation ............................................ 48 48
Accrued bonuses ............................................. 2 2
Accrued commissions ......................................... 63 63
Allowance for doubtful accounts ............................. 191 39
Accrued licensing fees ...................................... 219 219
Deferred rent benefit ....................................... 60 60
Excess of tax over book revenue recognized .................. 481 481
Accrued independent contractors fee ......................... 11 11
Tax basis of equipment in excess of book value .............. 7 7
Intangible assets ........................................... 932 324
Other accruals............................................... 798 -
Net operating loss carryforwards ............................ 11,400 7,208
------------ --------
Gross deferred tax assets ..................................... 14,212 8,462
------------ --------
Net deferred tax assets before valuation allowance............. 13,956 8,320
------------ --------
Less valuation allowance ..................................... (13,956) (8,320)
------------ --------
Net deferred tax assets ...................................... $ - $ -
============ ========
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1997 of approximately $30,000,000, which expires
beginning in 2003. The Company's ability to use the carryforwards is subject
to limitations resulting from changes in ownership, as defined by the Internal
Revenue Code. Lack of future earnings, a change in the ownership of the
Company, or the application of the alternative minimum tax rules could
adversely affect the company's ability to utilize the net operating loss carry
forwards.
48
50
(10) 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.
49
51
(11) STOCKHOLDERS' EQUITY
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.
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
2,200,000 options to be issued to employees and Directors (prior to the
adoption of the Non-Employee Director Stock Option Plan in April 1996) of the
Company. The Plan was amended in February 1997 to increase the number of
shares reserved for issuance under the plan from 1,700,000 to 2,200,000. 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 fair market value of the Common
Stock on the date of grant; accordingly, the Company has recorded no
compensation expense related to such grants.
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 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, 1997 totaled 43,330 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. Expense of $67,000 was recorded during 1997 for options earned.
In January 1997, the Company acquired the assets of CardioMac, including a
point-of-care data collection and reporting tool for the cardiac
catheterization laboratory and cardiovascular operating room from Mercy
Hospital Medical Center, Iowa Health Centers, the Iowa Heart Institute and Mark
Tannenbaum, MD (its primary developer) for a payment of $1.35 million in cash
and options to purchase up to 150,000 shares of APACHE Common Stock at an
exercise price of $7.75 per share. The options were valued at approximately
$224,000 and vested immediately.
The following is a summary of the option transactions for the years ending
December 31, 1995, 1996 and 1997:
50
52
Wtd. Avg.
Shares Ex. Price
--------- ---------
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
Granted ............................................ 873,434 5.57
Forfeited .......................................... (685,160) 9.47
Exercised .......................................... (10,490) 2.86
--------- --------
Outstanding, December 31, 1997........................... 1,810,167 $ 6.21
========= ========
Options outstanding at December 31, 1997 have exercise prices between $0.72 and
$14.50, with a weighted average exercise price of $6.21 and a weighted average
remaining contractual life of 8.54 years. At December 31, 1997, 991,161
options were exercisable with a weighted average exercise price of $5.21.
At December 31, 1997, options for 394,406 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. 25,000
shares were granted under the Director Option Plan as of December 31, 1997.
At December 31, 1997, options for 45,000 shares were available for grant under
the Director Option Plan.
51
53
Employee Stock Purchase Plan
Effective May 1, 1996, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 210,000 shares of Common Stock are available for
purchase under the Purchase Plan. The Purchase Plan permits eligible employees
to purchase Common Stock through payroll deductions, which may not exceed 8% of
an employee's base compensation, including commissions, bonuses and overtime,
at a price equal to 85% of the fair market value of the Common Stock at the
beginning of each offering period or the end of a three month purchase period,
whichever is lower. The Board of Directors has the authority to amend or
terminate the Purchase Plan provided no such action may adversely affect the
rights of any participant.
Stock Option Plans
The Company applies APB Opinion No. 25 in accounting for its Stock based
compensation plans and, accordingly, no compensation cost has been recognized
for its stock option plans and employee stock purchase plan in the financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for these plans under SFAS No. 123 "Accounting for Stock
Based Compensation," the Company's net income would have been reduced to the
pro forma amounts indicated below (in thousands):
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: January 1, 1997 through December 31, 1997 - expected dividend
yield of 0%, risk-free interest rate of 5.71%, expected volatility factor of
105.35%, and an expected life of 6 years; 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.
1997 1996
---- ----
Net loss As reported .............. $ (15,918) $ (5,597)
Pro forma ................ (17,075) (6,041)
Net loss per share As reported .............. $ (2.20) $ ( 0.87)
Pro forma ................ (2.35) ( 0.94)
Pro forma net loss reflects only options granted in 1995 through 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
of 5 years and compensation cost for options granted prior to January 1, 1995
is not considered.
Stock Warrants
The Company has 17,483 outstanding warrants issued to a stockholder in 1991
with an exercise price of $2.86 per share that expire in 2001; 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.
52
54
(12) 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, 1997, the Company is committed to pay an aggregate of $406,000
through March 1999 for the license and marketing services fees associated with
the sale of the Company's product related to these methodologies. 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 $406,000 was included in other accruals as of
December 31, 1997.
(13) ACQUISITIONS
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, P.C. d/b/a Iowa
Heart Center, P.C., Mercy Hospital Medical Center, Mark Tannenbaum, M.D., and
Iowa Heart Institute. 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 $1.1 million.
The acquisition has been accounted for using the purchase method of accounting
and resulted in intangible assets totaling $482,000. The intangible assets
consist of software technology of $271,000, assembled workforce of $15,000 and
goodwill of $196,000. These assets were being amortized over 5 to 15 years. The
purchase price allocation and lives of assets were determined by an independent
appraiser.
In June 1997, the Company purchased a neonatal database from the Vermont-Oxford
Network, Inc. In connection with the acquisition, the Company recorded a
one-time charge related to in-process research and development costs of
approximately $500,000.
In June 1997, the Company acquired National Health Advisors Ltd. ("NHA"); a
healthcare management consulting firm focused on strategy and management support
services for progressive healthcare organizations and networks. The former
shareholders of NHA received 367,569 shares of Common Stock of APACHE in
exchange for all the common stock of NHA. The acquisition was accounted for as
a pooling of interests and, as such, the accompanying consolidated financial
statements reflect the combined results of the pooled businesses for the
respective periods presented. In connection with the acquisition, the Company
recorded a one-time charge in the second quarter of 1997 for acquisition-related
costs of $732,000. These costs consisted primarily of professional fees and
severance related costs.
53
55
(14) 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, 1997 and 1996 (in thousands):
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Revenue:
Systems .......................................... $ 2,278 $ 6,323
Support .......................................... 1,961 1,486
Professional services ............................ 4,389 3,785
--------- ---------
Total revenue ................................ 8,628 11,594
Cost of operations:
Systems .......................................... 2,196 2,387
Support .......................................... 638 615
Professional services ............................ 2,570 1,157
--------- ---------
Total cost of operations ..................... 5,404 4,159
Gross margin ......................................... $ 3,224 $ 7,435
========= =========
(15) 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 1997 or 1996. Additionally, the stockholder
paid the Company $250,000 in 1995 for services in building and delivering the
product during 1996.
(16) EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing plan (the "Plan") intended to qualify
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate in the Plan after three months of service. Employees may
contribute a portion of their salary to the Plan, subject to annual limitations
imposed by the Internal Revenue Code. The Company may make matching or
discretionary contributions to the Plan at the discretion of the Board of
Directors, but has made no such contribution to date. Employer contributions
generally vest over seven years.
The Company sponsors a defined benefit pension plan (the "pension plan")
covering all former employees of National Health Advisors. Total pension
expense for the years December 31, 1997, 1996 and 1995 were $169,413, $160,726,
and $0, respectively. The pension plan was implemented in November of 1995.
As of December 31, 1995, no benefits had been earned as no employees had met
the hours of service requirement under the pension plan. As of December 31,
1997, the pension plan assets consist principally of mutual funds, money market
funds and government bonds.
The pension plan was amended to freeze benefit accruals and the entry of new
participants effective October 31, 1997. Because the expected future service
of participants under the pension plan was eliminated during 1997, this
constitutes a
54
56
curtailment under the provisions of SFAS No. 88, "Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits".
The benefits are based on final average compensation and are offset by each
employee's interest in the Company's profit sharing plan. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes and meets minimum funding standards, using an
actuarial cost method and assumptions which are different from those used for
financial reporting.
Net periodic pension cost consisted of the following for the year endings
December 31, 1997 and 1996:
1997 1996
---- ----
Service cost $139,135 $115,067
Interest cost 47,494 36,673
Actual loss on plan assets 1,116 40,279
Net amortization and deferral:
Asset loss deferred (13,665) (50,094)
Amortization of:
Prior service cost 18,801 18,801
Translation obligation 5,136 (31,293)
Less: curtailment gain (23,468) -
-------- --------
Net periodic pension cost $169,413 $160,726
======== ========
The pension plan was implemented in November of 1995, and as of December 31,
1995 no benefits had been earned under the pension plan. Pursuant to the
provisions of SFAS No. 87, "Employers' Accounting for Pensions," intangible
assets of $48,709 were recorded as of December 31, 1996 in order to recognize
the required minimum liability. There was no amount recognized as intangible
assets as of December 31, 1997.
The funded status of the pension plan at December 31 was as follows.
1997 1996
---- ----
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefit obligation of $0 $(293,744) $(174,156)
Projected benefit obligation for service rendered
to date (293,744) (583,970)
Plan assets at fair value 186,540 122,656
--------- ---------
Plan assets in excess of projected benefit
obligation (107,204) (461,314)
Unrecognized net gain - (41,583)
Unrecognized prior service cost - 500,106
Cumulative adjustment required to recognized
minimum liability - (48,709)
--------- ---------
55
57
Accrued pension cost included in accrued expenses $(107,204) $(51,500)
========== =========
56
58
The key assumptions used in developing the projected benefit obligation as of
December 31 were as follows:
1997 1996
---- ----
Discount rate 7.0% 7.0%
Salary scale 5.0% 5.0%
Expected return on assets 7.5% 7.5%
Market-related value Market Market
(17) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $46,000, $139,000 and $36,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The following is supplemental information concerning non-cash investing and
financing activities:
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.
(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.
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.
57
59
(19) SUBSEQUENT EVENTS
On January 2, 1998, the Board of Directors authorized a repricing
program which allowed active current employees to reprice all their outstanding
options to purchase Common Stock of the Company for a like number of shares at
an exercise price of $2 per share. Options to purchase approximately 480,044
shares of Common Stock were repriced. Stock options that have been repriced may
not be exercised until July 2, 1998. The vesting schedule will be as follows:
20% would vest immediately for employees with the Company for at least one
year; 20% would vest on each anniversary over the next five years; and
employees with the Company less than one year, options will vest ratably over
five years from the date of grant. The options granted to employees as
performance-based options are excluded from this action.
On January 2, 1998, the Board of Directors authorized a repricing of
stock options to a Financial Advisor. Options to purchase approximately 22,029
shares of Common Stock granted were cancelled and newly issued at $2.00 per
share and vest immediately as of January 2, 1998. The fair value of the new
options will be expensed in the first quarter of 1998.
Effective January 28, 1998, the Board of Directors granted an
aggregate of 156,000 performance-based incentive stock options to twelve
members of the Company's senior staff. The exercise price of these options is
equal to the fair market value of the Company's Common Stock on January 28,
1998 or $1.28. The options will vest on a quarterly basis, based upon the
Company's realization of the 1998 operating budget. The options will vest on
January 28, 2003, regardless of whether the 1998 performance criteria have been
satisfied, if the employee remains employed by the Company at that time.
58
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To APACHE Medical Systems, Inc.:
We have audited in accordance with generally accepted auditing
standards the December 31, 1997 consolidated financial statements of APACHE
Medical Systems, Inc. included in this Form 10-K and have issued our report
thereon dated March 27, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a part of the basic financial statements. The information as of and
for the year ended December 31, 1997 included in the schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
59
61
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------- ------ -------- ---------- ---------
Allowance for doubtful accounts
receivable
1995 $ 143,000 $ 126,300 $ 78,500 $ 190,800
1996 190,800 100,000 188,508 102,292
1997 102,292 611,222 228,503 485,011
60
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the
Company is incorporated herein by reference from the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the captions
"Election of Directors," "Nominees for Directorships," "Information Concerning
the Board of Directors and its Committees," and "Section 16(a) Beneficial
Ownership Reporting Compliance" and is included in Items 4A and 4B in Part I
of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management compensation is incorporated herein
by reference from the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders under the captions "Executive Compensation," "Information
Concerning the Board of Directors and its Committees--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 herein by reference from the Company's Proxy
Statement for the 1998 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
1998 Annual Meeting of Stockholders under the caption "Compensation Committee
Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this report.
1. The consolidated financial statements required by Part IV, Item
14 are included in Part II, Item 8.
2. The financial statement schedules required by Part IV, Item 14
are included in Part II, Item 8.
(b) Reports on Form 8-K.
The Company has not filed any reports on Form 8-K for the quarterly
period ended December 31, 1997.
(c) 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 *
61
63
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 *
2.3 Agreement and Plan of Merger among the Company, NHA Acquisition
Corporation, National Health Advisors, Ltd., Scott A. Mason and Donald
W. Seymour dated as of June 2, 1997 *****
3.1 Amended and Restated Certificate of Incorporation *****
3.2 By-Laws **
4.1 Specimen Common Stock Certificate **
4.2 Rights Agreement between the Company and First Chicago Trust Company
of New York, dated as of May 6, 1997 ***
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 **
62
64
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 *
10.14 Nonqualified Stock Option Agreements between the Company and each of
Iowa Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center and Mark A. Tannenbaum, M.D., dated January 7,
1997 ****
10.15 Security Agreement dated February 11, 1997 made by the Company for the
use and benefit of Crestar Bank and corresponding Commercial
Note *****
10.16 License Agreement between the Company and Vermont Oxford Network,
Inc., Related Services Agreement between the Company and Vermont
Oxford Network, Inc. and Consulting Agreement between the Company and
Clinimetrics, Inc. each effective as of June 24, 1997 ++ *****
10.17 Employment Agreement by and between the Company and Gerald E. Bisbee,
Jr., Ph.D., dated May 5, 1997 + *****
10.18 Employment Agreement by and between the Company and Scott A. Mason,
dated June 2, 1997 + *****
10.19 Employment Agreement by and between Robert Joseph Sullivan and the
Company, dated June 16, 1997 + *****
63
65
10.20 Nonqualified Stock Option Agreement between the Company and William A.
Knaus, M.D. dated May 29, 1997 + *****
10.21 APACHE Medical Systems, Inc. Employee Stock Option Plan, Amended and
Restated February 23, 1998, including forms of Incentive Stock Option
Agreement and Nonqualified Stock Option Agreement + ******
10.22 Form of 1998 Employment Agreement + ******
10.23 Form of Nonqualified Director Stock Option Agreement + ******
11.1 Computation of Earnings (Loss) Per Share ******
23.1 Consent of Arthur Andersen LLP ******
23.2 Consent of KPMG Peat Marwick LLP ******
27.1 Financial Data Schedule ******
- ------------
64
66
+ Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
this Form 10-K
++ Confidential treatment was requested for a portion of this
Exhibit
* Incorporated herein by reference to the Company's Report on
Form 8-K filed on January 14, 1997 (File No. 0-20805)
** Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04106)
*** Incorporated herein by reference to the Company's Current
Report on Form 8-K filed on June 4, 1997 (File No. 0-20805)
**** Incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended March 31, 1997 (File No.
0-20805)
***** Incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended June 30, 1997 (File No.
0-20805)
****** Filed herewith
65
67
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 30, 1998.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ Thomas W. Hodson
-----------------------------------------------
Thomas W. Hodson
Acting Chief Executive Officer and
Chairman of the Board of Directors
(Duly Authorized Officer and
Chief Financial and Accounting Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 30, 1998 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 Director
S-1
68
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.21 APACHE Medical Systems, Inc. Employee Stock Option Plan, Amended and
Restated February 23, 1998, including forms of Incentive Stock Option
Agreement and Nonqualified Stock Option Agreement
10.22 Form of 1998 Employment Agreement
10.23 Form of Nonqualified Director Stock Option Agreement
11.1 Computation of Earnings (Loss) Per Share
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule