Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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, 22102
MCLEAN, VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 847-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
COMMON STOCK $.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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. [X]
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of March 1, 2000 was approximately
$25,425,000. The number of outstanding shares of the registrant's Common Stock
as of that date was 7,392,850.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 31, 2000 are incorporated herein by reference
into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
PART I
ITEM 1. BUSINESS
OVERVIEW
APACHE Medical Systems, Inc. ("APACHE" or the "Company") provides
clinically based decision support information systems, research and consulting
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
the containment of costs, and the delivery of more consistent, high-quality
care, including the potential reduction of medical errors. APACHE's products and
services are focused on high-risk, high-cost patients, such as critical care,
acute care, cardiovascular care, HIV/AIDS and certain chronically-ill patients,
who typically account for a disproportionately large share of healthcare
expenditures.
THE APACHE(R) SOLUTIONS
APACHE believes that its products and services address the healthcare
industry's need for sophisticated outcomes-based clinical decision support
information. The APACHE solutions bridge the gap between the information needs
of healthcare practitioners and those of hospital administrators by enabling
joint access to clinical and cost information, which facilitates the containment
of cost, improvement in quality outcomes and the consistent delivery of high
quality care.
The Company's primary decision support system is focused on critical care
and targets hospitals and health systems with over 200 beds. For this market, in
1998 the Company introduced a new product line, the APACHE Critical Care Series
("CCS"), and a companion set of clinical consulting services marketed under the
APACHE Best Care (TM) Services label. These replaced the Company's previous
Medical Cost Management Program ("MCMP") and related Critical Care System
offerings. The CCS is compromised of two major 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 are designed to enable providers to:
- Determine appropriate cost-effective treatment plans for individual
patients.
- Compare actual individual patient outcomes with both predicted patient
outcomes and statistically relevant similar hospital, regional and national
norms to identify areas for improvement.
- Analyze the performance of physicians by using clinically based,
peer-reviewed, severity-adjustment methods.
- Analyze and measure quantifiable improvements in the clinical and cost
outcomes of specified groups of patients.
- Plan staffing, number of beds and bed mix given the severity-adjusted mix
of patients in an intensive care unit.
APACHE's products and services are differentiated from many other
healthcare decision support systems in the following important ways:
- Detailed Clinical Data. APACHE's products and services utilize detailed
clinical data on a variety of health parameters and outcomes data. In addition,
APACHE's products and services utilize administrative and utilization data.
- Patient-specific, Severity-adjusted Data. APACHE's products and services
utilize clinical, demographic and financial data for individual patients, in
addition to patient groups. APACHE's methodologies are designed to
severity-adjust these data to enable the assessment of the overall health status
of the patient. Severity adjustment is a technique for weighting the relative
factors affecting the degree of illness of a patient. Physicians use APACHE's
patient-specific clinical decision support systems to develop individual patient
care plans incorporating APACHE's severity-adjusted outcomes predictions.
2
- Concurrent, Predictive Outcomes Information. APACHE's systems support
physician decision making by providing outcomes information in three timeframes:
(i) predictions of the patient's outcomes (e.g., mortality, adverse occurrences
and length of stay); (ii) current information, such as the patient's daily
health status; and (iii) historical or retrospective information about the
patient or groups of similar patients. In contrast to retrospective systems,
APACHE's ability to provide concurrent information permits the generation of
predictive information during the course of a patient's care, thereby enhancing
a physician's ability to direct treatment resources as the patient's health
status changes.
- High-risk, High-cost Patient Focus. Unlike decision support systems that
focus primarily on general hospital patients, APACHE's systems are specifically
designed to help predict outcomes for high-risk, high-cost patients, such as
critical care patients. These patients typically represent a disproportionately
large share of hospital costs.
APACHE's solutions are derived from the Company's clinical outcomes
methodologies and proprietary databases.
Clinical Outcomes Methodologies. APACHE's methodologies include algorithms
that apply relative weightings to selected physiological variables to define a
patient's health status. APACHE's methods of measuring variations in a patient's
health status and outcomes in critical care have been utilized in connection
with more than 1,600 peer-reviewed articles in professional journals. APACHE has
acquired rights to and refined these methodologies, which were originally
developed by leading academic medical centers such as The George Washington
University Hospital and Dartmouth-Hitchcock Medical Center.
Proprietary Databases. The Company's databases include data on a variety
of health parameters, such as vital signs, laboratory results and measures of
physiological function, as well as outcomes data, such as adverse occurrences,
morbidity and mortality. The databases contain information from more than
1,500,000 patients, most of whom are high-risk, high-cost patients. The Company
created, and continues to refine, the critical care 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, consulting services, and health
outcomes research in HIV/AIDS and is considering adding additional categories in
the future.
APACHE PRODUCTS AND SERVICES
The following tables summarize the major products and services currently
offered by the Company.
APACHE PRIMARY INFORMATION SYSTEMS PRODUCTS:
PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
- ---------------- ----------------------------- -------------------------- ------------------------
Benchmark Study Critical care; cardiovascular Acute care hospitals with One-time comparative
care ICU's; acute care analysis and report of a
hospitals with heart provider's clinical and
centers financial performance;
used to identify and
quantify opportunities
for cost or quality
improvement.
APACHE Critical care Acute care hospitals with Point-of-care
Critical Care ICU's information system,
Series: providing daily and
Discover+ prospective outcomes
predictions, as well as,
response to treatment
trending and reporting.
These tools support the
case management of
individuals and patient
groups.
3
APACHE Critical care Acute care hospitals with Multi-dimensional
Critical Care ICU's analytical tools
Series: Voyager+ providing severity
adjusted outcomes
compared to normative
standards, integration
of financial and
clinical outcomes and
standard reports.
APACHE Acute Acute care Acute care hospitals, Used for quality
Care Voyager+ business coalitions assurance and to
identify priorities for
clinical process
improvement and assess
results of these
initiatives. Both
Critical Care and Acute
Care Voyager+ products
include JCAHO
ORYX-certified outcomes
measures.
HIV Manager HIV/AIDS Physicians and Physicians' Physician practice
Groups management tool
including electronic
medical record and
outcomes comparisons to
national and group
norms.
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
Support biotechnology, medical design; severity adjusted
device/diagnostic companies; risk prediction modeling in
contract research support of efficacy testing
organizations and reporting.
Product Marketing All Product Lines Pharmaceutical, Outcomes research; market
Information Tools biotechnology, medical analysis; data sets; data
device/diagnostic companies; analysis; reporting and
contract research related services.
organizations
Disease Management All Product Lines Pharmaceutical, Short and long-term cost
Programs biotechnology, medical benefit analysis; risk
device/diagnostic companies; prediction
contract research models/methodologies; best
organizations; healthcare practice norms/protocols.
providers
Custom Analysis, All Product Lines Pharmaceutical, Data management, analysis
Report Cards, biotechnology, medical and reporting services
Registries device/diagnostic companies; offering comparisons to
contract research best demonstrated
organizations; healthcare practices, regional norms,
providers national norms.
APACHE BEST CARE CLINICAL CONSULTING SERVICES:
PRODUCT
PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
- ------------------ ------------- ------------------- ----------------------------------------
Clinical Process Critical Care Hospitals and IDS's Assesses the organization's performance
Improvement against national norms and best
Program practices; determines organization
readiness for change, and implements one
process improvement project delivered
simultaneously with a hospital's
implementation of CCS products.
4
Annual Performance Critical Care Hospitals and IDS's Assesses the organization's performance
in light of both national norms, best
practices and new medical practice and
care process developments uncovered by
APACHE database analysis and outcomes
research; can be used in conjunction
with client's budgeting process to plan
priorities, staffing and investment.
Bed Planning Study Critical Care Hospitals and IDS's Projects and plans for the hospital's
daily demand for intensive care and/or
step-down unit beds in light of planned
or potential APACHE recommended care
management changes.
Operations Hospital wide Hospitals and IDS's Rapid redesign of hospital operations
Improvement and care delivery infrastructure.
APACHE/NATIONAL HEALTH ADVISORS STRATEGIC CONSULTING SERVICES:
PRODUCT TARGET MARKET SERVICE DESCRIPTION
- -------------------- ------------------------- -----------------------------------------------
e-Health Strategies Acute Care Hospitals Development of Internet positioning strategies.
Regional Delivery Systems
Strategic Planning Acute Care Hospitals Three to five year strategic plans, vision
Studies Regional Delivery Systems development, product line analyses, and
implementation plans.
Integrated Delivery Acute Care Hospitals Partners' analyses and development and
Network (IDN) implementation of mergers/post-merger
Development & integration.
Implementation
Growth Strategies Acute Care Hospitals Development of revenue enhancing initiatives.
Regional Delivery Systems
Leadership Retreats Acute Care Hospitals Annual leadership meeting of governance,
Regional Delivery Systems medical staffs, and management which address
critical governance, management, and medical
issues.
Clinical Service Acute Care Hospitals Development of discrete, branded service lines.
Line Development . . Regional Delivery Systems
CUSTOMER TRAINING AND SUPPORT
The Company provides standard and custom training programs to customers on
the use of APACHE's products. In addition to direct user training, APACHE trains
customer representatives to train their own personnel. Following initial
standard training, the Company provides customer software support, a toll-free
customer service hotline and periodic standard product upgrades. Customers pay
an annual software support service fee approximately equal to 18% of the
software license portion of the product price for ongoing software support
services.
CUSTOMERS
APACHE currently markets its products and services to three types of
customers: healthcare providers, healthcare suppliers, and government. The
Company's healthcare customers include hospital-based integrated delivery
systems, academic and teaching hospitals and individual not-for-profit hospitals
within integrated systems. In addition, APACHE's provider customers include
Vencor, Inc., a multi-facility provider of long-term healthcare and medical
coalitions. The Company's healthcare supplier customers are pharmaceutical
manufacturers, biotechnology firms, and medical device companies. The Company
also offers health outcomes research and database services to federal and state
government agencies such as The Centers for Disease Control ("CDC").
No customer accounted for more than 10% of the Company's revenue in 1999.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and the
enhancement of existing product lines are important to continue to build on its
competitive position. APACHE releases enhancements, standard upgrades, revisions
and new products on an ongoing basis.
5
The Company's development strategy includes products and services that: (i)
leverage APACHE's databases; (ii) increase the functionality of current
products; and (iii) expand coverage along the continuum of care to additional
disease or procedure groups. The Company's major products are based on
internally developed software and analytical studies. Late in 1998, the Company
began selling turnkey systems including computer hardware sourced from the
manufacturers. 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 an open standard
HIE, Inc. interface engine to support the current versions of the industry
standard Health Level 7 information exchange protocols.
In 1998, the Company commissioned an independent third party to undertake a
feasibility study concerning development by the Company of an architecture
pursuant to which the Company could provide its clients with Internet-based
access to certain of the Company's products. In 1999, the Company proceeded
with development of Internet based decision support products and services. The
Company has implemented a functional fault tolerant Internet architecture
Residing on computer platforms from Data General, a division of EMC Corporation
("DG"), and operating via a backbone provided by UUNET, an MCI Worldcom
Company. The Company intends to introduce the first such Internet based
decision support applications in the year 2000.
SALES AND MARKETING
The Company currently markets and sells its products and services through a
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 hospital systems
and individual hospitals with 200 or more licensed beds.
During 1999, the Company continued its marketing agreement with an
affiliate of Premier, Inc., 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.
Also during 1999, the Company continued the APACHE partnership program.
This is a risk sharing system partnership, including consulting services, which
allows the client access to the APACHE Critical Care system benefits without the
need for outright purchase of the system. The Company believes that this risk
sharing approach has been well received by prospective partnership clients in
1999 resulting in several new installations based on the partnership approach.
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.
PROPRIETARY RIGHTS
The Company continues to make 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 size and richness of its corresponding
proprietary databases and the usefulness of its software provide better outcomes
measurements and utilization control than competitive systems.
The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes its software products under agreements that grant
customers non-exclusive licenses and contain terms and conditions restricting
the disclosure and use of APACHE's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, APACHE
attempts to protect the secrecy of its proprietary databases and other trade
secrets and proprietary information through agreements with employees and
consultants. Portions of APACHE's methodologies are, however, available in
scientific literature and bona fide researchers have been granted access to
portions of APACHE's databases for peer review and other research purposes.
6
The Company also seeks to protect the source code of its software and its
databases as trade secrets and under copyright law. The Company has copyright
registrations for certain of its software, user manuals and databases. The
copyright protection accorded to databases, however, is fairly limited. While
the arrangement and selection of data are protectable, the actual data are not,
and others are free to attempt to create databases that perform the same
function. The Company believes, however, that the creation of competing
databases would be very time consuming and costly. In addition, the Company
expects that the pending implementation of HIPAA, as defined below, could
raise an additional barrier to entry for prospective competitors.
"APACHE" is registered as a trademark and/or service mark in connection
with certain of the Company's current products and services in the United
States, Australia, the Benelux countries, Brazil, Canada, France, Germany,
Italy, Sweden and the United Kingdom. The Company believes that it has developed
substantial goodwill in connection with its mark as an indicator of quality
products and services.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and its reliable product maintenance and
support are integral to establishing and maintaining a leadership position
within the healthcare industry. In addition, although the Company believes that
its products do not infringe upon the proprietary rights of third parties, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim.
COMPETITION
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical outcomes systems and services are achieving
documented success in impacting cost and quality and demonstrating an attractive
payback on the decision support system investment. Other differentiating factors
include quality and depth of the underlying clinical outcomes databases, the
proprietary nature of methodologies, databases and technical resources, customer
service and support, compatibility with the customer's existing information
systems, potential for product enhancement, vendor reputation, price and the
effectiveness of marketing and sales efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as HCIA-Sachs Inc., MIDS, Inc., CareScience,
Inc., HBS International, The MEDSTAT Group, MEDai, Inc. and Iameter. Other
companies that provide healthcare information systems include Cerner
Corporation, McKessonHBOC, Shared Medical Systems Corporation, Eclipsys
Corporation, IDX Systems Corporation, VitalCom Inc. and Medical Information
Technology, Inc. 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 clinically
data-based, acquity adjusted focus on both high-risk, high-cost patients for
both concurrent and predictive outcomes information. Many of the Company's
competitors and potential competitors may have greater financial, product
development, technical and marketing resources than the Company, and currently
have, or may develop or acquire, substantial installed customer bases in the
healthcare industry. The Company also faces potential competition from existing
and new industry associations, such as the Project Impact initiative, sponsored
by the Society for Critical Care Medicine, who are attempting to collect data
from their member physicians in a voluntary association effort to build registry
services and comparative reports. As the market for decision support systems
develops, additional competitors may enter the market and competition may
intensify. While the Company believes that it continues to successfully
differentiate 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 in 1999 its
procedures complied with the then current laws and regulations regarding the
collection of patient data in substantially all jurisdictions, but regulations
governing patient confidentiality rights are evolving rapidly and are often
difficult to apply. Additional 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.
7
Patient Data and Confidentiality: The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA" or the "Act") mandates administrative
simplification by requiring certain standardized information transactions
through the use of uniform elements. To date, proposed regulations under the Act
have been issued for public comment but have not yet been finalized. The Act and
the proposed regulations would impose a number of stringent requirements on
health plans, health care providers, health care clearinghouses, and their
"business partners." In particular, the regulations mandate the use of certain
safeguards to secure the confidentiality of electronic medical records. The
regulations implement required security standards for all "health information"
pertaining to an individual that is electronically maintained or electronically
transmitted. The basic standards require entities to (1) assess their risks and
vulnerabilities, (2) maintain appropriate security measures, and (3) document
these methods. At a minimum, the methods must include administrative procedures,
physical safeguards, technical security services, and technical security
mechanisms to guard data integrity, confidentiality, and availability of
confidential patient information.
The proposed regulations also impose additional restrictions on the use of
an individual's health information. Under the regulations, health plans, health
care providers, health care clearinghouses and their business partners must:
(i) not use or disclose an individual's "protected health information" without
first obtaining an authorization from that individual, except for treatment,
payment, or health care operations, (ii) provide individuals with specific
rights relating to obtaining and correcting their protected health information,
and (iii) adhere to the administrative requirements of the regulations, which
include designating a privacy official; creating a contact person or office to
handle complaints; training employees regarding the entity's policies and
procedures; implementing appropriate administrative, technical, and physical
safeguards to protect protected health information; providing a process for
individuals to make complaints; and documenting compliance with the regulations
through policies and procedures.
The requirements of the Act and regulations will not be effective until two
years after the regulations are finalized, which is not currently expected to
occur until the summer of 2000. To the extent that uncertainty regarding the
application of the Act impacts our customers' purchasing decisions and the
Company incurs the incremental cost for system modifications required to comply
with the Act, the Act may have a material adverse effect on the Company and its
operations beginning in 2000 and continuing for the next few years. To the
extent that the Company has access to confidential patient information as
defined under the Act and regulations, it will be required to be in compliance
with such regulations if and when the Act goes into effect. The Company is
closely monitoring the status of the proposed regulations and intends be in full
compliance with them when they become final and effective. However, compliance
cannot be assured and the cost of achieving compliance is not known at this
time.
Patient Safety: In November of 1999, the Institute of Medicine (IOM) of the
National Academies issued a report compiling findings of major studies of
medical errors that pointed to high rates of medical errors resulting in
deaths, permanent disability, and unnecessary suffering. The document also laid
out suggestions for a comprehensive strategy for government, industry,
consumers, and health providers to reduce medical errors, and called on Congress
to create a national patient safety center to develop new tools and systems
needed to address these problems.
In response to this study, the Clinton Administration in February 2000,
announced several new edicts not requiring Congressional action, including:
immediate mandatory reporting requirement for the 500 Defense
Department-administered hospitals, a Health Care Financing Administration
requirement for error reduction plans in all hospitals that participate in
Medicare, and giving the Food and Drug Administration one year to develop new
standards to help prevent medical mistakes caused by sound-alike drug names or
look-alike products.
It is not known what impact, if any, final regulations or legislation may
have on the Company.
Other Government Regulation: The healthcare industry is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operations of healthcare industry participants. During
the past several years, government regulation of reimbursement rates and capital
expenditures in the United States healthcare industry has increased. Lawmakers
continue to propose programs to reform the United States healthcare system,
which may contain proposals to increase governmental involvement in healthcare,
lower reimbursement rates and otherwise change the operating environment for the
Company's customers. Healthcare industry participants may react to these
proposals by curtailing or deferring investments, including investments in the
Company's products. The Company cannot predict what impact, if any, such factors
may have on its business, financial condition and results of operations or on
the price of the Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the Food and Drug
Administration ("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
8
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.
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.
9
EMPLOYEES
As of December 31, 1999, the Company employed a total of 69 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are satisfactory and in keeping with industry norms.
ITEM 2. PROPERTIES
The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 2006. These
facilities are considered suitable and adequate for their intended use.
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, 1999.
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
- ------ ---- ---------
Peter Gladkin 52 President and Chief Executive Officer
Scott A. Mason 48 Secretary and Executive Vice President
Karen C. Miller 40 Vice President, Finance and CFO
Regina M. Campbell 49 Vice President and General Counsel
Donald W. Seymour 50 Vice President of Consulting
Sean Seerey 35 Vice President of Sales
Violet L. Shaffer 51 Vice President of Marketing
Peter Gladkin has served as President and Chief Executive Officer since
July 1998. Prior to joining the Company, Mr. Gladkin was President and Chief
Operating Officer of Health Data Sciences Corporation ("HDS") from 1994 to 1997.
Mr. Gladkin was with Hewlett Packard Company ("HP") from 1971 to 1994 during
which time he was responsible for various sales, marketing, and business
entities throughout the U.S., Europe and worldwide. From 1987 to 1994, while at
HP, he was General Manager of Healthcare Information Systems, a strategic
business unit of HP's Medical Products Group.
Scott A. Mason has served as Secretary and Executive Vice President of the
Company since June 1997. Dr. Mason served as Managing Partner and Founder of
National Health Advisors ("NHA") from 1981 through June 1997 when NHA was
acquired by the Company.
Karen C. Miller has served as Vice President of Finance and Chief Financial
Officer of the Company since October 1998. From 1997 to 1998, Ms. Miller served
as Controller of the Per-Se Technologies Division of Medaphis Corporation. Prior
to assuming this role, Ms. Miller was Chief Financial Officer, Vice President of
Finance and Controller of HDS, which she co-founded in 1983 and which was
acquired by Medaphis in 1996.
Regina M. Campbell has served as Vice President and General Counsel of the
Company since September 1998. Prior to joining the Company, Ms. Campbell was
Corporate Counsel for Medaphis Corporation from 1997 to 1998. She was director
of corporate contracting at HDS from 1995 to 1997. Ms. Campbell attended law
school from 1991 to 1995.
Donald W. Seymour has served as Vice President, Consulting of the Company
since the acquisition of NHA by the Company in June 1997. Prior to joining the
Company, Mr. Seymour served as a Partner with NHA from January 1995 through June
1997 and from 1985 to 1995 was a consultant for numerous national healthcare
consulting companies.
10
Sean Seerey has served as Vice President of Sales of the Company since May
1999. Prior to assuming this position, Mr. Seerey served in various sales and
sales management roles within the Company for the past seven years. Prior to
joining the Company Mr. Seerey was District Sales Manager at Oracle from 1989 to
1991.
Violet L. Shaffer has served as Vice President of Marketing for the
Company since September 1997. Prior to joining the Company, from January 1997
Through September 1997, Ms. Shaffer served as President and Chief Executive
Officer of Competitive Advantage Services, Inc. Ms. Shaffer served as Vice
President of Business Development for Nichols Research Corporation and of
HealthGate Data Corporation, an entity partially owned by Nichols, from
September 1995 through December 1996. Ms. Shaffer served as Corporate Vice
President of The MEDSTAT Group from November 1993 through August 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "AMSI." The following table sets forth, for the periods indicated,
the range of high and low sale prices for the Common Stock as reported by the
Nasdaq SmallCap Market.
HIGH LOW
------ ------
Year Ended December 31, 1999
First Quarter $ 7.94 $ 0.38
Second Quarter 1.63 0.94
Third Quarter 2.00 1.00
Fourth Quarter 2.13 0.88
Year Ended December 31, 1998
First Quarter $ 4.38 $ 0.94
Second Quarter 3.50 1.86
Third Quarter 2.75 0.88
Fourth Quarter 2.13 0.38
As of March 1, 2000, the Company had approximately 3,412 holders of record
of its Common Stock.
The Company has never paid or declared any cash dividends and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain its future earnings, if any, to fund the
development and finance the growth of its business. The amount and timing of any
future dividends will depend on improvements in Company operations as well as
general business conditions encountered by the Company, as well as the financial
condition, earnings and capital requirements of the Company and such other
factors as the Company's Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Systems. . . . . . . . . . . . . . . . . . . . $ 5,046 $ 2,384 $ 935 $ 4,459 $ 2,865
Support. . . . . . . . . . . . . . . . . . . . 2,330 2,117 1,961 1,486 1,352
Professional services. . . . . . . . . . . . . 4,647 5,705 5,732 5,649 5,548
-------- -------- --------- -------- --------
Total revenue . . . . . . . . . . . . . . 12,023 10,206 8,628 11,594 9,765
Expenses:
Cost of operations . . . . . . . . . . . . . . $ 3,142 $ 4,378 $ 5,404 $ 4,159 $ 3,638
Research and development . . . . . . . . . . . 701 1,317 2,704 1,723 1,919
Selling, general and
administrative . . . . . . . . . . . . . . . 7,125 8,145 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. . . . . . . . . . . . . . 10,968 13,840 25,371 17,539 13,075
-------- -------- --------- -------- --------
11
Income (loss) from operations . . . . . . . . . . . 1,055 (3,634) (16,743) (5,945) (3,310)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . 321 477 859 717 81
Interest expense . . . . . . . . . . . . . . . (30) (38) (44) (370) (486)
Other, net . . . . . . . . . . . . . . . . . . 5 2 10 1 9
-------- -------- --------- -------- --------
Total other income (expense). . . . . . . 296 441 825 348 (396)
Net Income (loss) . . . . . . . . . . . . . . . . . $ 1,351 $(3,193) $(15,918) $(5,597) $(3,706)
======== ======== ========= ======== ========
Basic and diluted net income (loss) per share. . . $ 0.18 $ (0.44) $ (2.20) $ (0.87) $ (0.72)
======== ======== ========= ======== ========
Weighted average number of shares used for
calculation of basic net income (loss) per share. 7,356 7,301 7,251 6,074 4,905
======== ======== ========= ======== ========
Weighted average number of shares used for
Calculation of diluted net income (loss) per share. 7,597 7,301 7,251 6,074 4,905
======== ======== ========= ======== ========
DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------------- ------- ------- ------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments. . . $ 6,242 $ 6,532 $11,317 $21,987 $ 4,370
Working capital. . . . . . . . . . . 3,448 2,119 5,134 20,332 1,958
Total assets . . . . . . . . . . . . 11,466 12,142 14,936 29,137 9,113
Long-term obligations, less current
maturities . . . . . . . . . . . . 43 206 79 231 1,079
Redeemable convertible preferred
stock. . . . . . . . . . . . . . . - - - - 20,732
Total stockholders' equity
(deficit). . . . . . . . . . . . . 5,113 3,740 6,866 22,405 (17,794)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consistent with the change in business strategy developed during the third
quarter of 1997, throughout 1999 the Company continued to manage and contain
costs, conserve cash and further intensified the Company's focus on the
high-risk, high-cost patient market particularly in critical care medicine.
During the year, the Company launched its Internet healthcare initiative,
APACHE 2000. The initiative is designed to position the Company as an
application service provider ("ASP") in the field of Internet-based healthcare
decision support. The Company will develop Internet versions of both new
decision support applications as well as selected existing applications on DG
platforms. The roll out of these Internet products is expected to begin
in 2000. The Company estimates the cost of the development of APACHE 2000
to be in excess of $1.5 million. The Company is now in the product introduction
phases of development and is not currently in a position to fully assess the
financial or other impacton the Company's operations.
During 1999 the Company's Internet project and accompanying partnership
discussions have remained on budget and on schedule resulting in a functional
fault tolerant Internet architecture running on DG computer platforms and
currently serving as a test bed for further development of various critical and
acute care, neonatal and cardiovascular decision support applications.
The Company is a Value Added Reseller of both DG and Sun Microsystems
computer hardware related to its CCS product. In 1999 the sale of turnkey
systems provided the company with incremental sources of revenue from
hardware sales and, accordingly, incremental sources of contribution margin.
The sales of this computer hardware had a material affect on the Company's
order rates throughout 1999.
12
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
------------- ---------------- -----
Revenue:
Systems . . . . . . . . . . . . . . . . . . . . . . 42% 23% 11%
Support . . . . . . . . . . . . . . . . . . . . . . 19 21 23
Professional services . . . . . . . . . . . . . . . 39 56 66
------------- ---------------- -----
Total revenue. . . . . . . . . . . . . . . . . 100 100 100
Expenses:
Cost of operations. . . . . . . . . . . . . . . . . 26 43 63
Research and development. . . . . . . . . . . . . . 6 13 31
Selling, general and administrative . . . . . . . . 59 80 162
Restructuring Charge. . . . . . . . . . . . . . . . - - 19
Write-off of acquired in-process research and
development costs. . . . . . . . . . . . . . . . . - - 19
Write-off of product development and related costs. - - -
------------- ---------------- -----
Total expenses . . . . . . . . . . . . . . . . 91 136 294
------------- ---------------- -----
Income (loss) from operations. . . . . . . . . . . . . . 9 (36) (194)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . 2 5 10
Interest expense. . . . . . . . . . . . . . . . . . - - -
Other, net. . . . . . . . . . . . . . . . . . . . . - - -
------------- ---------------- -----
Total other income (expense) . . . . . . . . . 2 5 10
Net income (loss). . . . . . . . . . . . . . . . . . . . 11% (31)% (184)%
------------- ---------------- -----
1999 Compared to 1998
Revenue. Revenue for 1999 increased 18% to $12 million from $10.2 million
in the prior year period. Systems revenue for 1999 increased 112% to $5.0
million from $2.4 in the prior year period. Increased Systems revenue was
primarily related to the delivery and implementation of the new CCS to new
customers and the sale of this system to existing customers. Systems revenue
included revenue related to the accompanying sales of associated third party
hardware and software. Support revenue for 1999 increased 9% to $2.3 million
from $2.1 million in the prior year period, due to contractual price increases
and an increase in the number of clients utilizing the Company's systems.
Professional services revenue for 1999 declined 19% to $4.7 million from $5.7;
the decline was due, in part, to a decrease in Health Outcomes Research
revenues following the bankruptcy of one of the Company's largest customers.
Consulting Services revenue also declined; this was primarily attributed to
customers' concerns over addressing their own Y2K issues and the impact of
the Balanced Budget Act on their operations.
Cost of Operations. Cost of operations for 1999 decreased 28% to $3.1
million from $4.4 million in the prior year period. This decrease was due
to the Company's continued corporate reorganization resulting in productivity
improvements and related decreases in costs associated with the delivery of
systems, support and professional services. Cost of operations for 1999
decreased to 26% of revenue from 43% in the prior year period, due to the
reasons mentioned here and the increase in revenue during the same period. Cost
of operations consists primarily of personnel costs, costs of media, production
manuals, telephone support, third party equipment, licenses sold, and other
direct costs related to providing systems, support and professional services.
Research and Development. Research and development expenses for 1999
decreased 47% to $701,000 from $1.3 million in the prior year period, due
primarily to a decrease in staffing requirements related to the development of
new, non-core, peripheral products and services that the Company had previously
discontinued. During 1999, $501,000 of software development costs were
capitalized, compared to $556,000 in the prior year period. Research and
development expenses for 1999 decreased to 6% of revenue from 13% in the prior
year period, due to decreased staffing and other costs as well as the increase
in revenue during the same period.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 decreased 13% to $7.1 million from $8.1 million in the prior
year period. This decrease was due primarily to a decrease in overall general
and administrative expenses including decreases in staffing and consulting
expenses. The reduction in general and administrative expenses were partially
offset by increases in costs associated with sales and marketing.
Selling, general and administrative expenses for 1999 decreased to 59% of
revenue from 80% for the prior year period, due primarily to the increase in
revenue during the same period.
Other Income (Expense). Other income decreased from $441,000 in 1998 to
$296,000 in 1999. This decrease was attributable to a decrease in interest
income related to the decrease in the amount of short-term investments.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses in prior years for tax purposes.
13
1998 Compared to 1997
Revenue. Revenue for 1998 increased 18% to $10.2 million from $8.6 million
in the prior year period. Systems revenue for 1998 increased 155% to $2.4
million from $935,000 in the prior year period. Increased Systems revenue was
primarily related to the delivery of the CCS in early 1998. Support revenue for
1998 increased 8% to $2.1 million from $2.0 million in the prior year period,
due to contractual price increases and an increase in the number of clients
utilizing the Company's systems. Professional services revenue for 1998 remained
constant at $5.7 million.
Cost of Operations. Cost of operations for 1998 decreased 19% to $4.4
million from $5.4 million in the prior year period. This decrease was due to
process improvements relating to systems implementations, support, and software
engineering and resulting decreases in staffing requirements, third party
licenses fees for systems and related products, services that the Company has
discontinued or postponed, the development of certain other products, and the
decision to focus primarily on products for critical care patients, which
resulted in the Company's restructuring charge of $1.6 million during the third
quarter of 1997. Cost of operations for 1998 decreased to 43% of revenue from
63% in the prior year period, due to the reasons mentioned here and the increase
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 1998
decreased 51% to $1.3 million from $2.7 million in the prior year period, due
primarily to a decrease in staffing requirements related to the development of
new products and services that the Company has discontinued or postponed as a
result of the Company's restructuring during third quarter of 1997. During 1998,
$556,000 of product development costs were capitalized, compared to $308,000 in
the prior year period. Research and development expenses for 1998 decreased to
13% of revenue from 31% in the prior year period, due to decreased staffing as
well as the increase in revenue from 1997 to 1998.
Selling, General and Administrative. Selling, general and administrative
expenses for 1998 decreased 42% to $8.1 million from $14 million in the prior
year period. This decrease was due primarily to a decrease in overhead costs
associated with the Company's restructuring during the third quarter of 1997,
the elimination of a number of outside consulting relationships and the
implementation of enhanced expense controls. Selling, general and administrative
expenses for 1998 decreased to 80% of revenue from 162% for the prior year
period, due primarily to the same factors as noted above.
Other Income (Expense). Other income decreased from $825,000 in 1997 to
$441,000 for 1998. This decrease was attributable to a decrease in interest
income related to the decrease in the amount of short-term investments.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses for tax purposes.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data,
for fiscal 1999 and 1998. 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 1999 FISCAL YEAR 1998
-------------------------------------- ------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- ------- ------- -------- --------
(IN THOUSANDS)
Revenue. . . . . . . . . . . . 3,309 3,629 2,972 2,113 3,472 2,278 2,153 2,303
Expenses:
Cost of operations . . . . 261 1,220 927 734 909 976 1,081 1,412
Research and
development. . . . . . . 251 200 131 119 428 223 384 282
Selling, general and
administrative . . . . . 2,426 1,819 1,630 1,250 2,285 2,020 2,308 1,532
-------- ------- --------- -------- ------- -------- -------- --------
Total expenses. . . . 2,938 3,239 2,688 2,103 3,622 3,219 3,773 3,226
-------- ------- --------- -------- ------- -------- -------- --------
Income (loss) from operations. 371 390 284 10 (150) (941) (1,620) (923)
Total other income
(expense) . . . . . 85 81 65 65 145 124 101 71
-------- ------- --------- -------- -------- ------- -------- --------
Net income (loss). . . . . . . $ 456 $ 471 $ 349 $ 75 $ (5) $ (817) $(1,519) $ (852)
======== ======= ========= ======== ======== ======= ======== ========
14
In addition, the Company's quarterly results have been, and may continue to
be, affected by supplier and provider budgeting practices that cause many
discretionary purchase decisions to be made before certain quarter and year
ends. The timing of quarterly revenue is also affected by the ability of the
Company to perform on its contracts, which is subject to the availability of the
client personnel as well as the availability of the Company's personnel.
Although the Company has not historically experienced any material seasonality
in its operating results, the Company could experience such seasonality in the
future, which could cause fluctuations in the Company's quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
Until 1999 the Company had funded its operations primarily through its
initial public offering of the Company's Common Stock in July 1996. During 1999
the Company's operating activities generated a positive cash flow. At December
31, 1999, the Company had cash and cash equivalents and short-term investments
of $6,242,000 representing a decrease of $290,000 from the total of $6,532,000
at December 31, 1998.
During 1999, the Company's operating activities generated approximately
$413,000 in cash. Net cash generated in 1999 was composed primarily of net
income, increased by depreciation and amortization, decreases in accounts
receivable and accrued expenses and increases in deferred revenues.
The Company's investing activities used cash of $621,000 in 1999. The
primary use of cash for investing activities was due to an increase in software
development costs.
Net cash used by financing activities during 1999 was $130,000 and was primarily
related to the repayment of notes payable and capital leases.
During 1999 the Company made capital expenditures totaling $72,000. As of
December 31, 1999, the Company had net working capital of $3.4 million including
cash and short-term investments in the amount of $6.2 million.
The Company anticipates that funds generated from operations will be
sufficient to meet its planned ongoing operating and working capital
requirements and to finance planned product development, sales and marketing
activities and capital acquisitions for the next twelve months. Through December
31, 1999, the Company has incurred cumulative net operating losses of
approximately $40.8 million. There can be no assurance that the Company will be
profitable in the future or that present capital will be sufficient to fund the
Company's ongoing operations. If additional financing is required to fund
operations, there can be no assurance that such financing can be obtained or
obtained on terms acceptable to the Company.
The Company does not believe the impact of inflation has significantly
affected the Company's operations.
YEAR 2000 COMPLIANCE
During 1999 the Company completed required modifications to its critical
systems and applications relating to year 2000 issues. The majority of the
Company's efforts regarding Year 2000 readiness focused on the Company's
products, including software applications, operating systems, relational
database management systems, tools and utilities sold to clients. The
assessments indicated that the version of the Company's Medical Cost Management
Program ("MCMP") product, an application using UNIX based terminals/clients and
UNIX based servers requiring stand alone equipment, its operating systems,
database releases and relational database management systems, that was sold to
customers prior to 1998, was not Year 2000 ready. The Company accordingly,
focused its attention on developing and ensuring Y2K compliance of its next
generation CCS product. As a result, the CCS application, hardware, operating
systems and relational database management system release, tools and utilities
are Year 2000 ready. The CCS product also includes significant new features and
enhancements. The CCS product utilizes industry standard operating systems,
tools and utilities and operates on a PC based client/UNIX server platform,
supporting Windows 95/NT/98.
As the existing MCMP product operating system and relational database
management system releases could not be confirmed Year 2000 ready, the Company
discontinued support of the MCMP product beyond December 1999. The Company
offered existing customers the ability to migrate to the new CCS product on
favorable terms. A majority of the clients using the old UNIX version of the
MCMP product have migrated to the new CCS product. The remainder have
discontinued use of the existing product. The favorable terms and migration
services offered to existing customers to encourage migration to the new CCS
product did not have a material negative impact on the Company's future
operating results or financial position. The fact that a majority of the
Company's existing customers made the decision to move on to the new CCS has a
positive material impact on the Company's 1999 operating results and financial
position.
15
The renovation and implementation is complete for two other software
applications, the Acute Care Voyager+ and the HIV Manager products, that the
Company sold to its clients. Other software applications products sold by the
Company have been renovated and where necessary, the changes have been
implemented to delivery Year 2000 ready products.
The Company also completed its survey of its significant suppliers to
assess its vulnerability if these companies were to fail to remediate their year
2000 issues. The responses received indicated that these suppliers were aware
of the year 2000 issue and were implementing the necessary changes prior to the
end of calendar year 1999. The Company also formulated contingency plans to
ensure that business-critical processes were protected from disruption and would
continue to function during and after the year 2000 and to ensure that the
ability to produce an acceptable level of products and services was safeguarded
in the event of failures of external systems and services. The Company incurred
approximately $990,000 of incremental costs in connection with identifying,
evaluating and remediating year 2000 issues. These costs were expensed as
incurred.
The Company experienced no material or adverse effects from the calendar
change to the year 2000 or from the leap year that occurred in 2000. The
Company has not been notified of any disruptions to or failures in the systems
of any of its suppliers.
The Company will continue to monitor the information and non-information
technology systems and those of third parties with whom the Company conducts
business throughout the year 2000 to ensure that any latent year 2000 issues
that may arise are addressed promptly. Although we do not anticipate any
additional expenditures relating to year 2000 compliance, we cannot provide any
assurance as to the magnitude of any future costs until significant time has
passed.
This section captioned "Year 2000 Compliance," as well as other statements
herein or otherwise relating to the Year 2000 issues, are "Year 2000 Readiness
Disclosures" pursuant to the "Year 2000 Information and Readiness Disclosure
Act."
NEW ACCOUNTING PRONOUNCEMENTS
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.
The Company has adopted SOP 97-2 and it did not have a material impact on the
financial statements of the Company. In March 1998, AcSEC issued SOP 98-4, which
defers for one year the implementation of certain provision of SOP 97-2. The
issuance of SOP 98-4 had no effect on the Company. In December 1998, the AICPA
issued SOP 98-9, which extends the deferral date of implementation of certain
provisions of SOP 97-2 to 2000 and amends the method of revenue recognition in
some circumstances. The adoption of this SOP did not have a significant effect
on its results of operations or financial position.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
without limitation, statements regarding our expectations, beliefs, intentions
or future strategies that are signified by the words "expects,""anticipates,"
believes" or similar language. All forward-looking statements involve risks and
uncertainties. The Company wishes to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause its actual results in
fiscal 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially
include but are not limited to the Company's: having sufficient sales and timely
collections to meet cash requirements and achieve profitability; ability to
attract and retain key employees ; success of concentrating its product
offerings on high-risk, high-cost patients; ability to timely develop new
products and enhance existing products; ability to compete in the competitive
and rapidly evolving healthcare information technology industry; success of its
marketing and consulting efforts and ability to effectively utilize its direct
sales force; ability to protect proprietary information and to obtain necessary
licenses on commercially reasonable terms; ability to comply with and adopt
products and services to potential regulatory changes, including HIPAA, and
ability to adapt to economic, political and regulatory conditions affecting the
healthcare industry.
16
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to continue to vary from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including: the Company's relatively long sales
cycle; variable customer demand for its products and services; changes in the
Company's product mix and the timing and relative prices of product sales; the
loss of customers due to consolidation in the healthcare industry; changes in
customer budgets; investments by the Company in marketing or other corporate
resources; acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel costs,
as well as facilities costs, any unanticipated shortfall in revenue in any
fiscal quarter would have an adverse effect on the Company's results of
operations in that quarter. Accordingly, the Company's operating results for any
particular quarterly period may not necessarily be indicative of results for
future periods.
ITEM 7A.-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain financial market risks, the most
predominate being fluctuations in interest rates; however, the Company does not
believe that it is currently exposed to material financial market risks.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
----------
Report of Independent Public Accountants, Ernst & Young
LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Report of Independent Public Accountants, Arthur Andersen
LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . 21
Consolidated Balance Sheets for the Years Ended December 31,
1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 1999, 1998 and
1997 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . 25
Financial Statement Schedule:
Report of Independent Public Accountants, Arthur Andersen
LLP, on Financial Statement Schedule. . . . . . . . . . 36
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 1999, 1998 and 1997. . . . . . 37
All other financial statement schedules not included have been omitted
because they are not applicable or because the required information is otherwise
furnished.
18
REPORT OF INDEPENDENT AUDITORS
Board of Directors
APACHE Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of APACHE
Medical Systems, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 14(a) as of December 31, 1999 and 1998. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of APACHE Medical
Systems, Inc., at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 28, 2000
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To APACHE Medical Systems, Inc.:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of APACHE Medical Systems, Inc.
(the "Company") for the year ended December 31, 1997. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 results of operations and
cash flows of APACHE Medical Systems, Inc. for the year ended December
31, 1997 in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Vienna, VA
March 27, 1998
20
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Systems . . . . . . . . . . . . . . . . . . . . . . . $ 5,046 $ 2,384 $ 935
Support . . . . . . . . . . . . . . . . . . . . . . . 2,330 2,117 1,961
Professional services . . . . . . . . . . . . . . . . 4,647 5,705 5,732
--------- -------- ---------
Total revenue. . . . . . . . . . . . . . . . . . 12,023 10,206 8,628
Expenses:
Cost of operations. . . . . . . . . . . . . . . . . . 3,142 4,378 5,404
Research and development. . . . . . . . . . . . . . . 701 1,317 2,704
Selling, general and administrative . . . . . . . . . 7,125 8,145 14,028
Restructuring charge. . . . . . . . . . . . . . . . . - - 1,623
Write-off of acquired in-process research and
development costs . . . . . . . . . . . . . . . . . - - 1,612
--------- -------- ---------
Total expenses . . . . . . . . . . . . . . . . . 10,968 13,840 25,371
--------- -------- ---------
Income (loss) from operations. . . . . . . . . . . . . . . 1,055 (3,634) (16,743)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . 321 477 859
Interest expense. . . . . . . . . . . . . . . . . . . ( 30) (38) (44)
Other, net. . . . . . . . . . . . . . . . . . . . . . 5 2 10
--------- -------- ---------
Total other income (expense) . . . . . . . . . . 296 441 825
--------- -------- ---------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 1,351 $(3,193) $(15,918)
========= ======== =========
Basic and diluted net income (loss) per share. . . . . . . $ 0.18 $ (0.44) $ (2.20)
========= ======== =========
See accompanying Notes to Consolidated Financial Statements.
21
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 1998
-------------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,194 $ 5,532
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048 1,000
Accounts receivable, net of allowance for doubtful accounts of $531
in 1999 and $514 in 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,012 2,972
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499 749
-------------- ---------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,753 10,253
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,661 3,589
Less accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . (3,222) (2,704)
-------------- ---------
439 885
Other trade receivables, net of current maturities. . . . . . . . . . . . . . . . . 104 4
Capitalized software development costs, net . . . . . . . . . . . . . . . . . . . . 793 506
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377 494
-------------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,466 $ 12,142
============== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,142 $ 1,129
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,780 3,667
Current maturities of long term obligations . . . . . . . . . . . . . . . . . . . . 163 180
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,220 3,158
-------------- ---------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,305 8,134
Deferred rent benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 62
Maturities of long term obligations, net of current maturities. . . . . . . . . . . 43 206
-------------- ---------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,353 8,402
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000 at
December 31, 1999 and December 31, 1998: issued and outstanding
shares, 7,381,985 at December 31, 1999 and 7,330,473 at December 31, 1998 . . . . 74 73
Additional capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,818 45,770
Accumulated comprehensive income--unrealized loss on available-for-sale securities. (27) -
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,752) (42,103)
-------------- ---------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . 5,113 3,740
-------------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . $ 11,466 $ 12,142
============== =========
See accompanying Notes to Consolidated Financial Statements.
22
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 1998 and 1997
COMMON STOCK ACCUMULATED
------------------------- ADDITIONAL COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL INCOME (LOSS)
------------ ----------- -------------- -------------- --------------- --------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT
DECEMBER 31, 1996. . . . 7,238,922 $ 72 $ 45,325 $ - $ (22,992) $ 22,405 $ -
Issuance of common
stock options . . . . . - - 291 - - 291 -
Exercise of common
stock options. . . . . . 10,490 - 30 - - 30 -
Issuance of common stock
under Employee
Stock Purchase Plan. . . 18,344 1 57 - - 58 -
Net loss . . . . . . . . - - - - (15,918) (15,918) (15,918)
------------ ----------- -------------- -------------- --------------- --------- --------------
BALANCE AT
DECEMBER 31, 1997. . . . 7,267,756 73 45,703 - (38,910) 6,866 $ (15,918)
Issuance of common stock ==============
under Employee
Stock Purchase Plan 62,717 - 67 - - 67 -
Net loss . . . . . . . . - - - - (3,193) ( 3,193) (3,193)
------------ ----------- -------------- -------------- --------------- --------- --------------
BALANCE AT
DECEMBER 31, 1998. . . . 7,330,473 73 45,770 - (42,103) 3,740 $ (3,193)
Exercise of common ==============
stock options. . . . . . 12,600 - 12 - - 12 -
Issuance of common stock
under Employee
Stock Purchase Plan . . 38,912 1 36 - - 37 -
Unrealized loss on
available for-sale securities - - - (27) - (27) (27)
Net income . . . . . . . - - - - 1,351 1,351 1,351
------------ ----------- -------------- -------------- --------------- --------- --------------
BALANCE AT
DECEMBER 31, 1999. . . . 7,381,985 $ 74 $ 45,818 $ (27) $ (40,752) $ 5,113 $ 1,324
============= =========== ============== ============== ================ ========= ==============
See accompanying Notes to Consolidated Financial Statements.
23
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,351 $(3,193) $(15,918)
Adjustments to reconcile net income (loss) to net cash from (used
in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 490 611 595
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . 331 167 563
Provision for doubtful accounts. . . . . . . . . . . . . . . . 17 30 611
Expense for nonemployee stock options issued . . . . . . . . . - - 67
Write-off of product development and related costs . . . . . . - - 620
Write-off of acquired in-process research and
development costs. . . . . . . . . . . . . . . . . . . . . . - - 1,612
Write-off of intangible assets . . . . . . . . . . . . . . . . - - 436
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (57) (1,766) 1,970
Other trade receivables . . . . . . . . . . . . . . . . . (100) 51 236
Other current assets. . . . . . . . . . . . . . . . . . . 250 (293) (103)
Accounts payable and accrued expenses . . . . . . . . . . (1,874) (1,337) 2,168
Deferred rent . . . . . . . . . . . . . . . . . . . . . . (57) (55) (42)
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 62 1,528 490
-------- -------- ---------
NET CASH FROM (USED IN) OPERATING ACTIVITIES . . . . . . . . . 413 (4,257) (6,695)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs. . . . . . . . . . . . . . . (501) (556) (308)
Purchase of furniture and equipment, net of disposals . . . . . . . (72) (235) (555)
Purchase acquisitions . . . . . . . . . . . . . . . . . . . . . . . - - (2,915)
Redemption (Purchase) of short-term investments . . . . . . . . . . ( 48) 4,683 (4,624)
-------- -------- ---------
NET CASH (USED IN) FROM INVESTING ACTIVITIES . . . . . . . . . (621) 3,892 (8,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations . . . . . . . . . . (18) (16) (68)
Principal payments on borrowings. . . . . . . . . . . . . . . . . . (161) (179) (237)
Proceeds from issuance of notes payable . . . . . . . . . . . . . . - 391 20
Proceeds from issuance of common stock upon exercise of options . . 12 - 30
Proceeds from issuance of stock under employee stock purchase plan. 37 67 58
-------- -------- ---------
NET CASH (USED IN) FROM FINANCING ACTIVITIES . . . . . . . . . (130) 263 (197)
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . (338) (102) (15,294)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . . . 5,532 5,634 20,928
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . $ 5,194 $ 5,532 $ 5,634
======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
24
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(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 and consulting services 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.
Through December 31, 1999, the Company has incurred cumulative net
operating losses of approximately $40.8 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 the first quarter of year
2001. If additional financing is required to fund operations, there can be no
assurance that such financing can be obtained or obtained on terms acceptable to
the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates.
Revenue Recognition
Revenues for sales of systems and products are recognized at delivery. For
systems where services are critical to the functionality of the system, revenue
is recognized using contract accounting. Systems support fees are recognized
ratably over the period of performance. Professional services revenue is
recognized as these services are provided and is generally billed on a time and
material basis. Professional services do not involve significant customization,
modification or production of the licensed software. Amounts received prior to
the performance of service or completion of a milestone are deferred. Revenue
recognized for work performed for which billings have not been presented to
customers is recorded as unbilled.
25
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,
1999, cash equivalents and short-term investments consisted of money market
instruments, commercial paper and government agency securities. Cash equivalents
are carried at lower of cost or market. In accordance with the requirements of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has classified its
short-term investments as "available-for-sale". Such investments are recorded at
fair value, with unrealized gains and losses, deemed by the Company as temporary
in nature, reported as a separate component of stockholders' equity. At December
31, 1999 there were $27,000 in unrealized losses; at December 31, 1998 there
were no unrealized gains or losses.
Included in Cash and Cash Equivalents at December 31, 1999, is
approximately $123,000, for a security deposit controlled by the lessor of the
office building that the Company currently occupies.
Software Capitalization
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and are
included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products are
available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
that current revenues bear to the total of the current and future anticipated
revenues, or (b) the straight-line method over the remaining estimated economic
life of the product, not to exceed five years. Such costs are reflected in Cost
of Operations in the Company's consolidated statement of operations.
The Company capitalized approximately $501,000, $556,000, and $308,000 in
software development costs during 1999, 1998 and 1997, respectively.
Amortization of software development costs approximated $214,000, $51,000 and
$82,000 in 1999, 1998 and 1997, 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.
26
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
short term investments, and trade receivables. Concentrations of credit risk
with respect to trade receivables result from the Company's customer base,
comprising primarily hospitals and other healthcare industry companies.
Management regularly monitors the creditworthiness of its customers and believes
that it has adequately provided for any exposure to potential credit losses.
Impairment of Long-Lived Assets
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." The Company reviews its long-lived assets,
including intangible assets and property plant and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates whether future undiscounted net cash
flows will be less than the carrying amount of the assets and adjusts the
carrying amount of its assets to fair value.
Reclassification
Certain amounts have been reclassified from prior years to conform to the
current year presentation.
(3) RESTRUCTURING CHARGE
During the third 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, 1998, substantially all the costs associated with the restructuring
charge had been paid.
(4) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
DECEMBER 31,
----------------------
1999 1998
--------- ---------
Billed accounts $ 2,895 $ 3,059
Unbilled accounts 648 427
--------- ---------
3,543 3,486
Less allowance for doubtful accounts (531) (514)
--------- ---------
$ 3,012 $ 2,972
========= ==========
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.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
Accrued salaries, bonuses and benefits $ 133 $ 554
Discontinued product reserve 266 472
Accrued commissions 16 66
Accrued severance costs 0 294
Accrued pension costs 0 82
Other accrued license fees 64 351
QIMC licensing and marketing fees 0 88
Other accrued expenses 1,301 1,760
---------- ----------
$ 1,780 $ 3,667
========== ==========
27
(6) NOTES PAYABLE
DECEMBER 31,
---------------
1999 1998
------- ------
(in thousands)
Note payable, prime plus 2% interest (9.75% at December 31, 1998),
payable in monthly installments of principal plus interest through
November 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 19
Note payable, 7.58% interest payable in monthly installment of
principal and interest through March 2001 . . . . . . . . . . . . . 177 319
------- ------
$ 177 $ 338
------- ------
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . (142) (161)
------- ------
$ 35 $ 177
======= ======
Scheduled maturities of notes payable are as follows (in thousands):
YEAR
-----
2000 142
2001 35
-------
$ 177
=======
(7) INTANGIBLE ASSETS
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of Health Research Network ("HRN") for $1.57 million in
cash. The acquisition has been accounted for using the purchase method of
accounting and resulted in intangible assets totaling $728,000. These assets are
being amortized under the straight line method over 5 to 15 years.
The components of intangibles are as follows (in thousands):
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
Goodwill $ 138 $ 138
Assembled Workforce 102 102
Database 488 488
----------- -----------
728 728
Accumulated Amortization (351) (234)
----------- -----------
$ 377 $ 494
=========== ===========
Amortization of $117,000 was charged to expense in 1999.
28
8) LEASE COMMITMENTS
Future minimum lease payments at December 31, 1999, under non-cancelable
operating and capital leases are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ---------------------------- ------- --------
2000 . . . . . . . . . . . . 23 652
2001 . . . . . . . . . . . . 8 672
2002 . . . . . . . . . . . . 692
2003 . . . . . . . . . . . . 713
2004 and after . . . . . . 2,203
--------
Total . . . . . . $ 31 $ 4,932
Less interest at 12.75% . (2)
-------
Present value of net
minimum lease payments . 29
Less current maturities. . (21)
-------
$ 8
=======
OPERATING LEASES
In November 1999 the company renewed the lease for their current office
space for an additional 7 years. The previous leased was signed in 1994 and
expired in November 1999. The new lease expires in November 2006. Rent expense
is recorded on a straight-line basis over the term of the lease. The difference
between rent payments and rent expense resulted in a deferred rent benefit.
Total rent expense under all operating leases was approximately $452,000,
$474,000 and $497,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
CAPITAL LEASES
In 1997, the Company negotiated a new capital lease for certain office
equipment. 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, 1999 is as follows (in thousands):
Office equipment $ 73
Less accumulated amortization (50)
------
$ 23
======
(9) INCOME TAXES
The Company had no provision for income taxes in 1999, 1998 or 1997 as a
result of its net losses for income tax purposes. The difference between the
tax provision and the amount that would be computed by applying the statutory
federal income tax rate to income before taxes is attributable to the following:
1999 1998
------ --------
(in thousands)
Federal tax at 34% statutory rate. . $ 459 $(1,086)
Permanent items. . . . . . . . . . . 10 29
State taxes, net of federal benefit. 64 (124)
Change in valuation allowance. . . . (520) 1,179
Other. . . . . . . . . . . . . . . . (13) 2
------ --------
Total. . . . . . . . . . . . . . . . $ - $ -
====== ========
29
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, 1999 and 1998 are as follows (in thousands):
1999 1998
--------- ---------
Deferred tax liabilities:
Accrual to cash adjustment . . . . . . . . . . $ (57) $ (115)
Capitalized software development costs . . . . (301) (192)
--------- ---------
Gross deferred tax liabilities . . . . . . . . (358) (307)
Deferred tax assets:
Accrued vacation . . . . . . . . . . . . . . . 51 46
Accrued bonuses. . . . . . . . . . . . . . . . 78 --
Accrued commissions. . . . . . . . . . . . . . 6 25
Allowance for doubtful accounts. . . . . . . . 201 195
Accrued licensing fees . . . . . . . . . . . . -- 33
Deferred rent benefit. . . . . . . . . . . . . 2 24
Excess of tax over book revenue recognized . . -- 481
Accrued independent contractors fee. . . . . . -- 19
Tax basis of equipment in excess of book value 6 --
Intangible assets. . . . . . . . . . . . . . . 824 931
Other accruals . . . . . . . . . . . . . . . . 329 781
Net operating loss carryforwards . . . . . . . 13,119 12,077
--------- ---------
Gross deferred tax assets . . . . . . . . . . . . . 14,616 14,612
--------- ---------
Net deferred tax assets before valuation allowance. 14,258 14,305
--------- ---------
Less valuation allowance. . . . . . . . . . . . . . (14,258) (14,305)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . $ - $ -
========= =========
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1999 of approximately $34,500,000, which expires
beginning in 2003. The Company's ability to use the carryforwards is subject to
limitations resulting from changes in ownership, as defined by the Internal
Revenue Code. Lack of future earnings, a change in the ownership of the Company,
or the application of the alternative minimum tax rules could adversely affect
the Company's ability to utilize the net operating loss carryforwards.
(10) STOCKHOLDERS' EQUITY
Stock Options
The Company has an Employee Stock Option Plan (the "Plan") that provides up
to 2,700,000 options to be issued to employees and Directors (prior to the
adoption of the Non-Employee Director Stock Option Plan in April 1996) of the
Company. The Plan was amended in March 1999 to increase the number of shares
reserved for issuance under the plan from 2,200,000 to 2,700,000. All options
are subject to forfeiture until vested, and unexercised options expire on the
tenth anniversary of the year granted. Vesting periods are from one to five
years. All employee stock options issued by the Company have been granted with
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant; accordingly, the Company has recorded no
compensation expense related to such grants.
In June 1996, the Company entered into a marketing agreement with an
affiliate of Premier Inc. ("Premier"), which provides buying services to a group
of approximately 1,800 hospitals. Pursuant to the agreement, the Premier
affiliate has designated the Company as the exclusive supplier to the hospitals
purchasing through the Premier buying group of clinically-based outcomes data
systems for high-risk, high-cost patients, including critical care,
cardiovascular care and medical-surgical care patients, through December 31,
1999. In return, the Company agreed to provide certain discounts to these
hospitals and, granted to the Premier affiliate in June 1996, three options to
purchase up to a total of 366,294 shares of Common Stock. Each of the options
have a ten-year term. One of the options vested upon grant and permits the
Premier affiliate to purchase 65,488 shares of Common Stock at an exercise price
of $8.18 per share. The Company valued these options at $369,000, which is being
amortized over the life of the Premier contract. The other two options vested,
if at all, based on the volume of products and services sold to Premier
hospitals and allowed the Premier affiliate to purchase up to 300,806 shares of
Common Stock at an exercise price of $13.00 per share. Performance options
earned through December 31, 1999 totaled 45,695 shares. Valuation of the related
stock options was calculated utilizing the Black-Scholes option pricing model.
Expenses related to the performance options are recorded when earned. Expense
for options earned was $0 in 1999 and 1998 and $67,000 in 1997.
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.
30
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 $2.00 per share. Options to purchase approximately 480,044
shares of Common Stock were repriced. The vesting schedule is 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 consultant to the Company. 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. Effective November 18, 1998,
the Board of Directors granted an aggregate of 30,000 options to three
non-employee consultants to the Company. The exercise price of these options is
equal to the fair market value of the Company's Common Stock on November 18,
1998 or $.94. These options have been accounted for in accordance with SFAS 123.
On November 18, 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 $.94 per share. Options to purchase approximately 845,566
shares of Common Stock were repriced. The vesting schedule remained the same.
The following is a summary of the Company's option transactions for the
years ending December 31, 1997, 1998 and 1999:
WTD. AVG.
SHARES EX. PRICE
---------- ----------
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
---------- ----------
Granted . . . . . . . . . 1,117,844 1.78
Forfeited . . . . . . . . (503,333) 5.72
Exercised . . . . . . . . - -
---------- ----------
Outstanding, December 31, 1998 2,424,678 $ 3.11
---------- ----------
Granted . . . . . . . . . 687,100 1.03
Forfeited . . . . . . . . (105,230) 1.70
Exercised . . . . . . . . (12,600) .94
---------- ----------
Outstanding, December 31, 1999 2,993,948 $ 2.62
========== ==========
Options outstanding at December 31, 1999 have exercise prices between $0.59
and $13.00, with a weighted average exercise price of $2.62 and a weighted
average remaining contractual life of 7.0 years. At December 31, 1999, 1,435,141
options were exercisable with a weighted average exercise price of $4.04.
At December 31, 1999, options for 347,215 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. As of December 31, 1999, 42,500 shares were
granted under the Director Option Plan.
At December 31, 1999 options for 27,500 shares were available for grant
under the Director Option Plan.
NON-EMPLOYEE DIRECTOR SUPPLEMENTAL STOCK OPTION PLAN
In May 1999, the Company adopted its Non-Employee Director Supplemental
Stock Option Plan (the "Director Supplemental Option Plan"), that provides up to
120,000 options to be issued to the Directors of the Company. The exercise
price of such options shall not be less than the fair market value of the
Company's Common Stock on the date of grant. The Director Supplemental Option
Plan may be terminated by the Board of Directors at any time. Upon occurrence
of a Change in Control as defined in the Director Supplemental Option Plan, all
outstanding unvested options under the Director Supplemental Option Plan vest
immediately. As of December 31, 1999, options for 115,200 were granted under
the Director Supplemental Option Plan.
31
At December 31, 1999, options for 4,800 shares were available for grant
under the Director Supplemental Option Plan.
EMPLOYEE STOCK PURCHASE PLAN
Effective May 1, 1996, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 210,000 shares of Common Stock are available
for purchase under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 8% of an employee's base compensation, including commissions, bonuses and
overtime, at a price equal to 85% of the fair market value of the Common Stock
at the beginning of each offering period or the end of a three month purchase
period, whichever is lower. The Board of Directors has the authority to amend or
terminate the Purchase Plan provided no such action may adversely affect the
rights of any participant.
At December 31, 1999, 90,027 shares were available for purchase under the
Employee Stock Purchase Plan.
STOCK OPTION PLANS
The Company applies APB Opinion No. 25 in accounting for its Stock based
compensation plans and, accordingly, no compensation cost has been recognized
for its stock option plans and employee stock purchase plan in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for these plans under SFAS No. 123 "Accounting for Stock Based
Compensation," the Company's net income would have been reduced to the pro forma
amounts indicated below (in thousands):
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: January 1, 1999 through December 31, 1999 - expected dividend yield
of 0%, risk-free interest rate of 5.86%, expected volatility factor of 202.34%,
and an expected life of 6 years; January 1, 1998 through December 31, 1998 -
expected dividend yield of 0%, risk-free interest rate of 4.5%, expected
volatility factor of 228.70%, and an expected life of 6 years; 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.
1999 1998 1997
------ -------- ---------
Net income (loss)
As reported . . . . . . $1,351 $(3,193) $(15,918)
Pro forma . . . . . . . 667 (4,317) (17,075)
Net income (loss) per share
As reported . . . . . . $ .18 $ (.44) $ (2.20)
Pro forma . . . . . . . .09 (.59) (2.35)
Pro forma net loss reflects only options granted in 1996 through 1999.
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.
32
(11) EARNINGS (LOSS) PER SHARE (EPS)
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended December 31, 1999, 1998, and 1997:
1999 1998 1997
------ -------- ---------
Basic earnings per share:
- --------------------------------------------------
Net income (loss) available to common shareholders $1,351 $(3,193) $(15,918)
------ -------- ---------
Weighted average shares outstanding .. . . . . 7,356 7,301 7,251
Basic earnings (loss) per share. . . . . . . . . . $ 0.18 $ (0.44) $ (2.20)
------ -------- ---------
Diluted earnings per share:
- --------------------------------------------------
Net income (loss) available to common shareholders $1,351 $(3,193) (15,918)
------ -------- ---------
Weighted average shares outstanding. . . . . . . . 7,356 7,301 7,251
Effect of dilutive securities:
Employee stock options. . . . . . . . . . . . . 241 - -
------ -------- ---------
Adjusted weighted average shares . . . . . . . . . 7,597 7,301 7,251
------ -------- ---------
Diluted earnings (loss) per share. . . . . . . . . $ 0.18 $ (0.44) $ (2.20)
------ -------- ---------
Options to purchase 2,405,041 shares of common stock were outstanding at
December 31, 1999 but were not included in the computation of diluted EPS
because the options' weighted average exercise price was greater than the
average market price of the common shares and the affect of including such
shares would be anti-dilutive to the per share amount.
The Company has 477,205 warrants outstanding at December 31, 1999 that were
not included in the computation of diluted EPS because the warrants' weighted
average exercise price was greater than the average market price of the common
shares and the affect of including such shares would be anti-dilutive to the per
share amount.
(12) 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 was 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 was 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 $87,500 was included in other accruals as of December 31,
1998. At December 31, 1999 that commitment had been satisfied.
(13) COST OF OPERATIONS AND GROSS MARGIN BY PRIMARY REVENUE SOURCES
The following represents revenues and cost of operations by primary revenue
sources for the year ended December 31, 1999, 1998 and 1997 (in thousands):
33
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Revenue:
Systems . . . . . . . . . . . $ 5,046 $ 2,384 $ 935
Support . . . . . . . . . . . 2,330 2,117 1,961
Professional services . . . . 4,647 5,705 5,732
------------- ------------- -------------
Total revenue. . . . . . 12,023 10,206 8,628
Cost of operations:
Systems . . . . . . . . . . . 727 1,493 1,206
Support . . . . . . . . . . . 555 686 638
Professional services . . . . 1,860 2,199 3,560
------------- ------------- -------------
Total cost of operations 3,142 4,378 5,404
------------- ------------- -------------
Gross margin . . . . . . . . . . . $ 8,881 $ 5,828 $ 3,224
============= ============= =============
(14) RELATED PARTY TRANSACTION
The Company entered into a license agreement with a stockholder in February
1995. The agreement was amended in December 1996. Under the amended agreement,
the stockholder is licensed to sell a product of the Company for which the
stockholder will pay a royalty after a set number of sales. No sales of the
product have been made since 1995. The Company entered into a reseller agreement
with this stockholder in March 1998. Under the agreement, the stockholder may
resell certain products of the Company to a named hospital system.
(15) 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. The pension plan was
amended to freeze benefit accruals and the entry of new participants effective
October 31, 1997. Because the expected future service of participants under the
pension plan was eliminated during 1997, this constitutes a curtailment under
the provisions of SFAS No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits".
The benefits are based on final average compensation and are offset by each
employee's interest in the Company's profit sharing plan. The Company's funding
policy is to contribute annually an amount that can be deducted for federal
income tax purposes and meets minimum funding standards, using an actuarial cost
method and assumptions which are different from those used for financial
reporting.
DEFINED BENEFIT
PENSION PLAN
-----------------------------
1999 1998
----------------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year. . . . . . $ 173,512 $ 293,744
Service cost . . . . . . . . . . . . . . . . . . . 8,581 149,570
Interest cost. . . . . . . . . . . . . . . . . . . 13,013 22,031
Plan participants' contributions . . . . . . . . . - -
Actuarial gain/loss. . . . . . . . . . . . . . . . (21,567) (310,634)
Benefits paid. . . . . . . . . . . . . . . . . . . - -
Amendments . . . . . . . . . . . . . . . . . . . . - -
Business combinations. . . . . . . . . . . . . . . - -
Divestitures . . . . . . . . . . . . . . . . . . . - -
Curtailments . . . . . . . . . . . . . . . . . . . - -
Settlements. . . . . . . . . . . . . . . . . . . . - -
----------------- ----------
Benefit obligation at end of year. . . . . . . . . $ (173,539) $(154,711)
----------------- ----------
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning of year . . 210,923 186,540
Actual return on plan assets . . . . . . . . . . . 41,336 (71,161)
Employer contribution. . . . . . . . . . . . . . . 2,009 95,544
Plan participants' contributions . . . . . . . . . - -
Benefits paid. . . . . . . . . . . . . . . . . . . - -
34
Business combinations. . . . . . . . . . . . . . . - -
Divestitures . . . . . . . . . . . . . . . . . . . - -
Settlements. . . . . . . . . . . . . . . . . . . . - -
Fair value of plan assets at end of year . . . . . $ 254,268 $ 210,923
----------------- ----------
FUNDED STATUS
Unrecognized net actuarial gain/loss . . . . . . . (244,389) (225,482)
----------------- ----------
Unrecognized prior service cost. . . . . . . . . . - -
Unrecognized net obligation. . . . . . . . . . . . 43,126 37,411
Intangible asset . . . . . . . . . . . . . . . . . - -
----------------- ----------
Prepaid (accrued) benefit cost . . . . . . . . . . $ (201,263) $(188,071)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate. . . . . . . . . . . . . . . . . . . 7.50% 7.50%
Expected return on plan assets . . . . . . . . . . 7.50% 7.50%
Rate of compensation increase. . . . . . . . . . . 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost . . . . . . . . . . . . . . . . . . . 8,581 149,570
Interest cost. . . . . . . . . . . . . . . . . . . 13,013 22,031
Expected return on plan assets . . . . . . . . . . (16,779) (13,991)
Asset loss deferred. . . . . . . . . . . . . . . . - -
Amortization of unrecognized transition obligation - -
Amortization of recognized gain/loss . . . . . . . (8,415) -
Amortization of prior service cost . . . . . . . . 18,801 18,801
Settlement or curtailment recognized gain/loss . . - -
----------------- ----------
Net periodic benefit cost. . . . . . . . . . . . . $ 15,201 $ 176,411
----------------- ----------
(16) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $ 30,000, $38,000 and $46,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments included in current assets and current liabilities,
which include cash and cash equivalents, accounts and trade receivables,
accounts payable and accrued expenses, approximate fair value.
Obligations under capital leases have carrying values that approximate fair
values as the significant notes are carried net of imputed interest calculated
at approximate current market rates.
35
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
Vienna, VA
March 27, 1998
36
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
1997. . . . . . . . . . . . . . . . . 102,292 611,222 228,503 485,011
1998. . . . . . . . . . . . . . . . . 485,011 60,021 30,739 514,293
1999. . . . . . . . . . . . . . . . . 514,293 91,708 75,311 530,690
37
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
2000 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 29, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management compensation is incorporated herein by
reference from the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission by April
29, 2000.
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 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission by April 29, 2000.
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 2000
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 29, 2000.
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, 1999.
(c) Exhibits
EXHIBIT NO. DESCRIPTION
- ------------ ---------------------------------------------------------------
2.1 Asset Purchase Agreement by and among the Company and Dun &
Bradstreet HealthCare Information, Inc. and Cognizant
Corporation dated as of December 30, 1996 (1)
2.2 Asset Purchase Agreement by and among the Company and Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated as of January 7, 1997 (1)
2.3 Agreement and Plan of Merger among the Company, NHA
Acquisition Corporation, National Health Advisors, Ltd.,
Scott A. Mason and Donald W. Seymour dated as of June 2,
1997 (5)
3.1 Amended and Restated Certificate of Incorporation (5)
3.2 By-Laws (2)
4.1 Specimen Common Stock Certificate (2)
38
4.2 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated as of May 6, 1997 (3)
10.1 APACHE Medical Systems, Inc. Employee Stock Option Plan * (5)
10.2 APACHE Medical Systems, Inc. Non-Employee Director Option Plan * (5)
10.3 Sublease Agreement between the Company and First Union
National Bank of Virginia, dated March 17, 1994 (2)
10.4 Registration Agreement between the Company and Certain
Stockholders, dated December 28, 1995 (2)
10.5 Form of Warrant Agreement relating to warrants issued in
1995 (2)
10.6 Warrant Agreement between the Company and Venture Fund of
Washington, dated May 13, 1991 (2)
10.7 Licensing Agreement between the Company and Cerner
Corporation, dated February 2, 1995 (2)
10.8 Nonqualified Stock Option Agreement between the Company and
The Cleveland Clinic Foundation, dated August 19, 1994 (2)
10.9 Agreement between the Company and The George Washington
University, dated August 19, 1994 (2)
10.10 Letter Agreement between the Company and the Northern New
England Cardiovascular Disease Study Group, dated March 13,
1995 (2)
10.11 Licensing Agreement between the Company and Quality
Information Management Corporation, dated March 24, 1994 (2)
10.12 Marketing Agreement between the Company and American
Healthcare Systems Purchasing Partners, L.P., dated as of
June 3, 1996 (2)
10.13 Registration Agreement between the Company and each of Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated January 7, 1997 (1)
10.14 Nonqualified Stock Option Agreements between the Company and
each of Iowa Health Centers, P.C. d/b/a Iowa Heart Center,
P.C., Mercy Hospital Medical Center and Mark A. Tannenbaum,
M.D., dated January 7, 1997 (4)
10.15 Security Agreement dated February 11, 1997 made by the
Company for the use and benefit of Crestar Bank and
corresponding Commercial Note (5)
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 ** (5)
10.17 Employment Agreement by and between the Company and Gerald
E. Bisbee, Jr., Ph.D., dated May 5, 1997 * (5)
10.18 Employment Agreement by and between the Company and Scott A.
Mason, dated June 2, 1997 * (5)
10.19 Nonqualified Stock Option Agreement between the Company and
William A. Knaus, M.D. dated May 29, 1997 * (5)
10.20 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated February 23, 1998, including forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement * (6)
10.21 Form of 1998 Employment Agreement * (6)
10.22 Form of Nonqualified Director Stock Option Agreement * (6)
10.23 Employment Agreement by and between Peter Gladkin and the
Company, dated May 30, 1998 * (7)
10.24 Employment Agreement by and between Gina Campbell and the
Company, dated August 24, 1998 * (8)
10.25 Employment Agreement by and between Karen Miller and the
Company, dated September 30, 1998 * (8)
10.26 Lease between Tysons II Development Co. Limited Partnership
and the Company, dated August 16, 1999
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission staff.
39
(1) Incorporated herein by reference to the Company's Report on Form 8-K
filed on January 14, 1997 (File No. 0-20805)
(2) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 333-04106)
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on June 4, 1997 (File No. 0-20805)
(4) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 0-20805)
(5) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-20805)
(6) Incorporated herein by reference to the Company's Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-20805)
(7) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 0-20805)
(8) Incorporatd herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-20805)
(d) Financial Statement Schedules
The financial statement schedules required by Part IV, Item 14 are
included in Part II, Item 8.
40
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, 2000.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ PETER GLADKIN
------------------------------
Peter Gladkin
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2000 by the following persons on
behalf of the Registrant in the capacities indicated.
SIGNATURE CAPACITY
- -------------------------------- -------------------------
/s/ PETER GLADKIN President and Chief
- -------------------------------- Executive Officer
Peter Gladkin
/s/ KAREN C. MILLER Vice President, Finance and Chief Financial Officer
- -------------------------------- (Princial Finance and Accounting Officer)
Karen C. Miller
/s/ EDWARD J. CONNORS Director
- --------------------------------
Edward J. Connors
/s/ THOMAS W. HODSON Director
- --------------------------------
Thomas W. Hodson
/s/ WILLIAM A. KNAUS, M.D. Director
- --------------------------------
William A. Knaus, M.D.
/s/ LAWRENCE S. LEWIN Director
- --------------------------------
Lawrence S. Lewin
/s/ RICHARD E. DESSIMOZ Director
- --------------------------------
Richard E. Dessimoz
/s/ GERALD E. BISBEE, JR., PH.D. Director
- --------------------------------
Gerald E. Bisbee, Jr., Ph.D.
41
APACHE MEDICAL SYSTEMS, INC.
BOARD OF DIRECTORS
Gerald E. Bisbee, Jr., Ph.D.
President, Chairman &
Chief Executive Officer
ReGen Biologics, Inc.
Edward J. Connors
President
Connors/Roberts & Associates
Richard Dessimoz
Vice President & Chief Executive Officer
Wabash National Finance Corporation
Peter Gladkin
President & Chief Executive Officer
APACHE Medical Systems, Inc.
Thomas W. Hodson
Vice Chairman & Chief Executive Officer
NeuroSource, Inc.
William A. Knaus, M.D.
University of Virginia School of Medicine,
Chairman of the Department of Health Evaluation Sciences
Chief Scientific Advisor,
APACHE Medical Systems, Inc.
Lawrence S. Lewin
Chief Executive Officer
Lewin Group
To obtain additional copies of the Company's
Annual Report on Form 10-K, contact
the Investor Relations Department at
the Company's corporate headquarters.
42
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------ ---------------------------------------------------------------
2.1 Asset Purchase Agreement by and among the Company and Dun &
Bradstreet HealthCare Information, Inc. and Cognizant
Corporation dated as of December 30, 1996 (1)
2.2 Asset Purchase Agreement by and among the Company and Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated as of January 7, 1997 (1)
2.3 Agreement and Plan of Merger among the Company, NHA
Acquisition Corporation, National Health Advisors, Ltd.,
Scott A. Mason and Donald W. Seymour dated as of June 2,
1997 (5)
3.1 Amended and Restated Certificate of Incorporation (5)
3.2 By-Laws (2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated as of May 6, 1997 (3)
10.1 APACHE Medical Systems, Inc. Employee Stock Option Plan * (5)
10.2 APACHE Medical Systems, Inc. Non-Employee Director Option Plan * (5)
10.3 Sublease Agreement between the Company and First Union
National Bank of Virginia, dated March 17, 1994 (2)
10.4 Registration Agreement between the Company and Certain
Stockholders, dated December 28, 1995 (2)
10.5 Form of Warrant Agreement relating to warrants issued in
1995 (2)
10.6 Warrant Agreement between the Company and Venture Fund of
Washington, dated May 13, 1991 (2)
10.7 Licensing Agreement between the Company and Cerner
Corporation, dated February 2, 1995 (2)
10.8 Nonqualified Stock Option Agreement between the Company and
The Cleveland Clinic Foundation, dated August 19, 1994 (2)
10.9 Agreement between the Company and The George Washington
University, dated August 19, 1994 (2)
10.10 Letter Agreement between the Company and the Northern New
England Cardiovascular Disease Study Group, dated March 13,
1995 (2)
10.11 Licensing Agreement between the Company and Quality
Information Management Corporation, dated March 24, 1994 (2)
10.12 Marketing Agreement between the Company and American
Healthcare Systems Purchasing Partners, L.P., dated as of
June 3, 1996 (2)
10.13 Registration Agreement between the Company and each of Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated January 7, 1997 (1)
10.14 Nonqualified Stock Option Agreements between the Company and
each of Iowa Health Centers, P.C. d/b/a Iowa Heart Center,
P.C., Mercy Hospital Medical Center and Mark A. Tannenbaum,
M.D., dated January 7, 1997 (4)
10.15 Security Agreement dated February 11, 1997 made by the
Company for the use and benefit of Crestar Bank and
corresponding Commercial Note (5)
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 ** (5)
10.17 Employment Agreement by and between the Company and Gerald
E. Bisbee, Jr., Ph.D., dated May 5, 1997 * (5)
10.18 Employment Agreement by and between the Company and Scott A.
Mason, dated June 2, 1997 * (5)
10.19 Nonqualified Stock Option Agreement between the Company and
William A. Knaus, M.D. dated May 29, 1997 * (5)
10.20 APACHE Medical Systems, Inc. Employee Stock Option Plan,
Amended and Restated February 23, 1998, including forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement * (6)
10.21 Form of 1998 Employment Agreement * (6)
10.22 Form of Nonqualified Director Stock Option Agreement * (6)
43
10.23 Employment Agreement by and between Peter Gladkin and the
Company, dated May 30, 1998 * (7)
10.24 Employment Agreement by and between Gina Campbell and the
Company, dated August 24, 1998 * (8)
10.25 Employment Agreement by and between Karen Miller and the
Company, dated September 30, 1998 * (8)
10.26 Lease between Tysons II Development Co. Limited Partnership
and the Company, dated August 16, 1999
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- -------------
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission staff.
(1) Incorporated herein by reference to the Company's Report on Form 8-K
filed on January 14, 1997 (File No. 0-20805)
(2) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 333-04106)
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on June 4, 1997 (File No. 0-20805)
(4) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 0-20805)
(5) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-20805)
(6) Incorporated herein by reference to the Company's Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-20805)
(7) Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 0-20805)
(8) Incorporatd herein by reference to the Company's Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-20805)
44