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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30,
1996.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
Commission File Number: 0-28170
OACIS HEALTHCARE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0012790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 DRAKE'S LANDING RD., SUITE 100
GREENBRAE, CA 94904
(Address of principal executive offices, including zip code)
(415) 925-0121
(Registrant's telephone number, including area code)
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 [ ] No [X]
At November 11, 1996, there were 10,056,176 shares or the Registrant's Common
Stock outstanding.
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OACIS HEALTHCARE HOLDINGS CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995 3
Consolidated Statements of Operations (unaudited) for the
three months And nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
Exhibit 11.1 Calculation of Pro Forma Net Loss Per SharE 21
Exhibit 27.1 Financial Data Schedule 22
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,900 $3,966
Short-term investments 20,801
-
Accounts receivable 5,105 6,345
Other current assets 327 282
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Total current assets 9,332 31,394
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Property and equipment, net 2,296 2,229
Other assets, net 250 411
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$11,878 $34,034
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,725 $1,403
Accrued expenses 2,652 4,683
Unearned revenues 3,251 2,304
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Total current liabilities 7,628 8,390
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Long-term obligations 3,000 528
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Stockholders' equity:
Series A Preferred Stock, $0.01 par value; 3,862,000 shares
authorized; 3,838,000 and 0 shares issued and outstanding 38 -
Series B Preferred Stock, $0.01 par value; 6,538,000 shares
authorized; 6,229,000 and 0 shares issued and outstanding 62 -
Common Stock, $0.01 par value; 30,000,000 shares authorized;
1,732,000 and 10,011,000 shares issued and outstanding 17 100
Additional paid-in capital 18,631 47,562
Accumulated deficit (17,298) (22,383)
Deferred stock compensation (200) (163)
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Total stockholders' equity 1,250 25,116
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$11,878 $34,034
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER, 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 1,038 $2,080 $ 2,503 $ 4,961
Installation and support services 1,917 1,524 4,530 4,752
Third party hardware and software 1,609 3,047 3,204 4,940
----- ----- ----- -----
Total revenues 4,564 6,651 10,237 14,653
----- ----- ------ ------
Cost of revenues:
Software licenses 37 89 88 167
Installation and support services 1,383 1,486 3,996 4,175
Third party hardware and software 1,405 2,188 2,842 3,817
----- ----- ----- -----
Total cost of revenues 2,825 3,763 6,926 8,159
----- ----- ----- -----
Gross profit 1,739 2,888 3,311 6,494
----- ----- ----- -----
Operating expenses:
Sales and marketing 1,056 1,344 2,963 4,180
Research and development 1,466 1,404 4,192 5,169
General and administrative 705 767 1,792 2,720
--- --- ----- -----
Total operating expenses 3,227 3,515 8,947 12,069
----- ----- ----- ------
Loss from operations (1,488) (627) (5,636) (5,575)
Interest expense, net 4 381 (115) 490
Net loss $(1,484) $ (246) $(5,751) $(5,085)
------- ----- ------- -------
Pro forma:
Net loss per common and
common equivalent shares $ (0.19) $ (0.02) $ (0.77) $ (0.58)
------ ------ ------ ------
Weighted average number of
common and common
equivalent shares 7,667,243 10,008,542 7,503,131 8,789,384
--------- ---------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,751) $(5,085)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,128 909
Stock compensation expense - 37
Acquired in-process research and development - 700
Changes in assets and liabilities:
Accounts receivable (2,452) (1,240)
Other current assets (172) 45
Accounts payable 27 (322)
Accrued expenses 33 1,544
Unearned revenues 1,170 (947)
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Net cash used in operating activities (6,017) (4,359)
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Cash flows from investing activities:
Purchases of short-term investments - (20,801)
Sale of short-term investments - -
Purchases of property and equipment (528) (463)
Capitalized software development costs (275) (206)
------- --------
Net cash used in investing activities (803) (21,470)
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Cash flows from financing activities:
Net proceeds from common stock issuance 12,644 28,905
Proceeds from option exercises - 9
Principal payment on notes payable (1,735) (4,000)
Proceeds from note payable - 1,000
Payments under capital lease obligations - (19)
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Net cash provided by financing activities 10,909 25,895
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Increase in cash and cash equivalents 4,089 66
Cash and cash equivalents, beginning of period 201 3,900
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Cash and cash equivalents, end of period $ 4,290 $ 3,966
======= =======
Supplemental disclosure:
Cash paid for interest $ 193 $ 139
======= =======
Capital equipment lease additions $ - $ 334
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
The financial statements included herein for Oacis Healthcare Holdings
Corp. (the "Company") have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In management's opinion, the interim financial data presented
includes all adjustments (which include only normal and recurring adjustments)
necessary for a fair presentation. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to understand the information presented. The results
of operations for the three months and the nine months ended September 30, 1996
are not necessarily indicative of the operating results expected for the entire
year. The financial statements included herein should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
1995, included in the Company's Registration Statement on Form SB-2 (No.
333-02804-LA) filed with the Securities and Exchange Commission.
2. INITIAL PUBLIC OFFERING
On May 16, 1996, the Company completed an initial public offering in
which it sold 3,220,000 shares of Common Stock at $10.00 per share. Upon the
closing of this offering, all of the Company's Preferred Stock converted to
approximately 5,034,000 shares of Common Stock. After the offering, the
Company's authorized capital consists of 5,000,000 shares of undesignated
Preferred Stock and 30,000,000 authorized shares of Common Stock of which
10,056,176 shares are outstanding at November 11, 1996. A portion of the
proceeds from this offering were used to repay substantially all of the
Company's long-term obligations.
3. PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period. In
the period subsequent to the effective date of the Company's initial public
offering, common equivalent shares consisting of stock options and stock
warrants are antidilutive and have been excluded from the weighted average
share computation. Common equivalent shares for the period before the effective
date of the Company's initial public offering consist of convertible preferred
stock (using the if-converted method), and stock options and warrants (using
the treasury stock method), even though their effect is antidilutive, pursuant
to a Securities and Exchange Commission Staff Accounting Bulletin.
4. STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS 123"). The Company will be required to adopt SFAS 123 in
the year ending December 31, 1996. It is the Company's intention to continue to
account for employee stock options in accordance with Accounting Principles
Bulletin No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and to
adopt the "disclosure only" alternative allowed by SFAS 123.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Background
Oacis Healthcare Holdings Corp., through its wholly owned subsidiary
Oacis Healthcare Systems, Inc. (collectively the "Company"), develops, markets,
licenses, installs, and supports clinical information systems primarily for
major medical centers, hospitals, integrated health care networks and community
based health care networks. In 1986, the Company introduced StatLAN, the
initial version of the Company's clinical information system. In 1994, the
Company introduced Oacis. Oacis is comprised of the Oacis Healthcare Network,
which includes an interface engine and a clinical data repository, and Clinical
Care applications, which facilitate the input and delivery of information at
the point of care.
Substantially all of the Company's revenues are currently derived from
licenses of Oacis. Therefore, any significant reduction in licensing of Oacis
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company intends to focus
its sales and marketing efforts on Integrated Delivery Systems ("IDSs"), which
are a relatively new type of organization and which currently account for a
small portion of the overall market for clinical information systems. There can
be no assurance that IDSs will continue to form or will invest in advanced
clinical information systems of the nature offered by the Company. The
Company's future success and financial performance also will depend in large
part upon the Company's ability to provide the increasing system functionality
required by its customers through the timely development and successful
introduction of new applications and enhancements to Oacis. The Company has
historically devoted significant resources to system enhancements and research
and development and believes that significant continuing development efforts
will be required to sustain the Company's operations. There can be no assurance
that the Company will successfully develop, introduce and market new system
enhancements or applications, or that system enhancements or new applications
developed by the Company will meet the requirements of health care providers
and achieve market acceptance. Further, the Company's systems are dependent
upon a number of third-party computer hardware and software products, and
include a number of embedded software products licensed from third parties.
Failure of such third parties to maintain or enhance their products could
impair the functionality of Oacis and could require the Company to obtain
alternative products from other sources or to develop such software internally,
either of which could involve costs and delays as well as diversion of
engineering resources.
Revenue Recognition
The Company's revenues consist of license fees for the perpetual use
of its software, installation revenues associated with installing and
configuring the software to meet specific customer needs, revenues from the
sale of third-party hardware and software, and ongoing support services. The
price of an Oacis system varies depending on a number of factors, including the
modules licensed, the volume of outpatient visits and inpatient days and the
number of workstations from which the system may be accessed, and generally
ranges from more than six hundred thousand dollars to a few million dollars.
The Company resells third-party hardware and software pursuant to standard
reseller agreements.
Revenues from contracts where Oacis is actively involved in the
installation of the system, which are primarily in the United States and
Canada, are recognized for software license fees and installation services on a
percentage of completion basis measured by the ratio of (i) labor hours
incurred to install and configure the system to (ii) total estimated labor
hours. The Company generally bills its installation services as the services
are provided. Software license fees are generally billed in accordance with
installation milestones. Accordingly, revenues recognized in advance of
achieving billing milestones are
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recorded as unbilled accounts receivable and collections resulting from billing
milestones achieved in advance of recognizing revenues are recorded as unearned
revenues on the consolidated balance sheet. If the total estimated cost of a
contract is expected to exceed the contract price, determined primarily by the
installation component of the contract, the total estimated loss is charged to
expense in the period the loss is identified. Because the Company does not
recognize revenues on a contract before the contract is signed, and because of
the long sales and installation cycles associated with Oacis, the Company is
unable to accurately predict the amount of revenues it expects to recognize
from software licenses or system installations in any particular period.
Software license revenues from contracts where Oacis is not actively
involved in the installation of the system, typically international contracts,
are recognized as contract amounts become due and payable, typically on a
milestone basis. Because Oacis is not actively involved in international
installations, milestone attainment and consequently revenue recognition on
these contracts may be delayed for reasons which include delays caused by the
customer, or Oacis' international partner, both of which are beyond the control
of Oacis.
The Company also recognizes revenues from support fees and sales of
third-party hardware and software. Support agreements generally cover a one
year period and the associated revenues are recognized ratably over the period
of the support agreement. Third-party hardware and software revenues are
recognized upon delivery of the related hardware and software. Third-party
hardware and software are generally sold pursuant to a purchase order and are
not governed by the terms of the software license and services agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues
In the three months ended September 30, 1996, total revenues increased
46% to $6.7 million from $4.6 million in the three months ended September 30,
1995. Of these amounts, software license fee revenues increased 100% to $2.1
million, installation and support service revenues decreased 21% to $1.5
million and third party hardware and software revenues increased 89% to $3.0
million. The increase in software license fee revenue was due in part to the
timing of recognition of software license fees from international contracts
which represented 22% of total software license fees during the quarter.
The decrease in installation and support service revenues from the same quarter
in 1995 was due to the third quarter 1995 having a larger than normal component
of nontypical service activities. Additionally, during the 1996 quarter,
service revenues were lower due to the impact of delays in closing new business,
the hiring and training of new employees for the installation organization
resulting in reduced billable hours during the quarter and a focus on
methodology development for scheduled new product releases resulting in a
diversion of resources to nonbillable activities. Third party hardware and
software revenues increased due to the timing of hardware sales and an increase
in the average size of such sales during the quarter. The increase in the
average size of such transactions experienced during the quarter is not
indicative of a general trend to higher average sales for such products.
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Cost of Revenues
Cost of revenues were $3.8 million, or 57% of total revenues, in the
three months ended September 30, 1996, compared to $2.8 million, or 62% of
total revenues, in the three months ended September 30, 1995. Cost of
installation and support services increased 7% to $1.5 million in the three
months ended September 30, 1996 from $1.4 million in the three months ended
September 30, 1995 as a result of an increase in the number of service
personnel and an increase in the average cost of such personnel during the
quarter. Gross profit as a percentage of total revenues increased from 38% in
the three months ended September 30, 1995 to 43% in the three months ended
September 30, 1996 due to an increase in the margins on third party hardware
and software products and an increase in the percentage of total revenue
resulting from software license fee revenue. The gross profit on third party
hardware and software increased to 28% in the three months ended September 30,
1996 from 13% in the three months ended September 30, 1995 due primarily to
improved pricing programs from third party hardware and software vendors and
the mix of third-party products sold. The Company anticipates that its
hardware margins will decrease to historical levels in future quarters. Gross
profit on installation and support services revenues decreased to 2% from 28%
in the year earlier period as a result of reduced revenue from these services
resulting from the impact of delays in closing new business, the hiring and
training of new employees for the installation and a focus on methodology
development for scheduled new product releases during the quarter.
Sales and Marketing
Sales and marketing expenses increased 27% to $1.3 million in the
three months ended September 30, 1996 from $1.1 million in the three months
ended September 30, 1995 and decreased as a percentage of total revenues to 20%
in the three months ended September 30, 1996 from 23% in the three months ended
September 30, 1995. The increase in sales and marketing expense was primarily
the result of hiring related activities in both the sales and marketing
functions and reflected an increased emphasis on infrastructure to support the
increased activities of these departments. Additionally, commission expense
increased during third quarter of 1996 due to an increase in the average
selling price of the deals closed.
Research and Development
Research and development expenses, net of software capitalization
decreased 4% to $1.4 million in the three months ended September 30, 1996
compared to $1.5 million in the three months ended September 30, 1995 and
decreased as a percentage of total revenues to 21% in the three months ended
September 30, 1996 from 32% in the three months ended September 30, 1995 due to
growth in total revenue. The decrease is due to the capitalization of $.13
million associated with the development of a component of Oacis after
technological feasibility had been established representing 8% of total
research and development expenditures during the quarter. There were no
software development costs capitalized during the third quarter of 1995. The
Company anticipates an increase in the capitalization of software development
costs in future periods.
General and Administrative
General and administrative expenses increased 9% to $.8 million in the
three months ended September 30, 1996 from $.7 million in the three months
ended September 30, 1995 but decreased as a percentage of revenue to 12% in the
third quarter of 1996 from 15% in the third quarter of 1995. The increase in
general and administrative expense was a result of an increase in personnel and
other expenses as the Company continued to build corporate infrastructure, as
well as costs associated with being a public company and its continuing
investment in process improvement and strategic planning.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues
In the nine months ended September 30, 1996, total revenues increased 43% to
$14.7 million from $10.2 million in the nine months ended September 30, 1995.
Of these amounts, software license fee revenues increased 98% to $5.0 million,
installation and support service revenues increased 5% to $4.8 million and
third party hardware and software revenue increased 54% to $4.9 million. The
increase in software license revenue is due to an increase in the number of
installations in progress combined with an increase in the average contract
value of those installations as well as an increase international software
license fee revenue. Installation and support services revenues increased due
to an increase in the number of installations in progress during the nine
months ended September 30, 1996, and a generally higher level of productivity
on those installations Third party hardware and software revenues increased
due to an increase in sales activity for third party products as well as an
increase in the average sales price, primarily for third party hardware
products.
Cost of Revenues
Cost of revenues were $8.2 million, or 56% of total revenues, in the
nine months ended September 30, 1996, compared to $6.9 million, or 68% of total
revenues, in the nine months ended September 30, 1995. Cost of installation and
support services increased 4% to $4.2 million in the nine months ended
September 30, 1996 from $4.0 million in the nine months ended September 30,
1995 as a result of an increase in personnel and an increase in the average
cost of such personnel. Gross profit as a percentage of total revenues
increased from 32% in the nine months ended September 30, 1995 to 44% in the
nine months ended September 30, 1996 due to a shift in revenue mix to higher
margin software license fee revenue as well as an increase in the margin on
third party hardware and software products. During the nine months ended
September 30, 1996, software license fee revenue represented 34% of total
revenue as compared to 24% during the nine months ended September 30, 1995.
Gross profit on third party hardware and software increased to 23% in the nine
months ended September 30, 1996 from 11% in the nine months ended September 30,
1995 due primarily to improved pricing programs from third party hardware and
software vendors and the mix of third-party products sold. Gross profit on
installation and support services remained unchanged for the year to date
period, primarily due to the impact of delays in closing new business, the
hiring and training of new employees for the installation and a focus on
methodology development for scheduled new product releases during the quarter.
Sales and Marketing
Sales and marketing expenses increased 41% to $4.2 million in the nine
months ended September 30, 1996 from $3.0 million in the nine months ended
September 30, 1995 and remained consistent as a percentage of total revenues at
29% in the nine months ended September 30, 1996 compared to 29% in the nine
months ended September 30, 1995. The increase in sales and marketing expense
was a result of an increase in personnel, an increase in commission and bonus
expenses resulting from increased sales activity, as well as the average
selling price of deals closed, and an increase in consulting and advertising
related expenses.
Research and Development
Research and development expenses increased 23% to $5.2 million in the
nine months ended September 30, 1996 from $4.2 million in the nine months ended
September 30, 1995 and decreased as a percentage of total revenues to 35% in
the nine months ended September 30, 1996 from 41% in the nine
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months ended September 30, 1995. The increase in research and development
expense was primarily attributable to the acquisition of certain technology
during the nine months ended September 30, 1996 as described below, and the
costs associated with the continuing development of that technology. During
the nine months ended September 30, 1996, the Company acquired through a
license, technology which forms the basis of Enterprise Member/Patient Index
("EMPI"), a component of the Oacis Healthcare Network. Because this technology
had not reached technological feasibility when it was acquired, the $700,000
license fee was charged to expense in the first quarter of 1996. Excluding the
impact of the licensed technology, research and development expenses increased
7% in the nine months ended September 30, 1996 over the same period in 1995 as
a result of generally higher expenditures for system development including the
cost of performing the alpha testing on certain Oacis modules, primarily in the
three months ended March 31, 1996. During the nine months ended September 30,
1996, the Company capitalized $.21 million of direct costs associated with the
development of a component of Oacis after technological feasibility had been
established which represents 4% of year to date development expenditures.
During the nine months ended September 30, 1995, the company capitalized $.28
million of software development costs representing 7% of year to date
development expenditures. The Company anticipates an increase in the
capitalization of software development costs in future periods.
General and Administrative
General and administrative expenses increased 52% to $2.7 million in
the nine months ended September 30, 1996 from $1.8 million in the nine months
ended September 30, 1995 and increased as a percentage of total revenues to 19%
in the nine months ended September 30, 1996 from 18% in the nine months ended
September 30, 1995. The increase in general and administrative expense was a
result of an increase in personnel, and increased corporate recruiting expenses
as well as increased consulting expenses related in part to certain process
improvement initiatives.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996 the Company's cash and cash equivalents and
short-term investments totaled $24.8 million as compared to cash and
equivalents of $3.9 million at December 31, 1995. The Company completed an
initial public offering of 3,220,000 shares of common stock on May 16, 1996 at
$10.00 per share resulting in net proceeds to the Company of $28.9 million.
Subsequent to the closing of this offering, the Company repaid $ 4.0 million in
long-term obligations.
In April 1996, the Company entered into a master lease agreement with
Comdisco, Inc. which enables the Company to finance the purchase of new
equipment, or sell and lease back certain existing equipment, up to an
aggregate of $1.0 million. The lease term is 42 months from the date of
funding, and the annual interest rate is 8.5%. As of September 30, 1996, $.3
million of new equipment was financed under this agreement.
In April 1996, the Company borrowed $1.0 million pursuant to a Loan
and Security Agreement with Comdisco, Inc. which was secured by all property
and equipment of the Company. In June 1996, the Company repaid the outstanding
principal balance of this loan with a portion of the proceeds of the initial
public offering.
The Company's working capital and capital requirements will depend
upon numerous factors including possible customer installation delays, lengthy
sales cycles, the Company's plans for developing, acquiring or licensing new
applications and technologies, the Company's requirements to purchase
additional capital equipment and the level of resources that the Company
devotes to its sales and marketing activities. The Company believes that its
existing capital resources and available equipment lease financing arrangements
will be adequate to fund its current operations for the foreseeable future.
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However, there can be no assurance that additional financing will be available
at all or that, if available, such financing will be obtainable on terms
favorable to the Company.
FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking statements as
a result of certain factors including those set forth below.
History of Operating Losses; Uncertain Profitability. The Company
incurred a net loss of $9.3 million for the year ended December 31, 1995 and
$5.1 million for the nine months ended September 30, 1996, and, as of September
30, 1996, had an accumulated deficit of $22.4 million. The Company has not
achieved profitability on a quarterly or annual basis and the Company
anticipates that it will incur a net loss for the current year. The Company's
prior operating history, dependence on Oacis as its principal product, long
sales and installation cycles, and dependence upon key personnel and third
parties, as well as competition, uncertainty in and consolidation of the health
care industry, and general economic and other factors make the prediction of
future operating results difficult. There can be no assurance that any of the
Company's business strategies will be successful or that the Company will be
able to achieve consistent revenue growth or achieve profitability on a
quarterly or annual basis.
Dependence on Oacis and Emerging IDS Market; Market Acceptance; System
Enhancements. Substantially all of the Company's revenues are currently derived
from licenses of Oacis. Therefore, any significant reduction in licensing of
Oacis could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company intends to focus
its sales and marketing efforts on IDSs, which are a relatively new type of
organization and which currently account for a small portion of the overall
market for clinical information systems. There can be no assurance that IDSs
will continue to form or will invest in advanced clinical information systems
of the nature offered by the Company. The Company's future success and
financial performance also will depend in large part upon the Company's ability
to provide the increasing system functionality required by its customers
through the timely development and successful introduction of new applications
and enhancements to Oacis. The Company has historically devoted significant
resources to system enhancements and research and development and believes that
significant continuing development efforts will be required to sustain the
Company's operations. There can be no assurance that the Company will
successfully develop, introduce and market new system enhancements or
applications, or that system enhancements or new applications developed by the
Company will meet the requirements of health care providers and achieve market
acceptance.
Long Sales and Installation Cycles. The sales cycle for large scale
clinical information systems is lengthy. The Company's sales cycle is subject
to delays associated with the lengthy approval process that typically
accompanies significant capital expenditures, customer budgeting cycles and
changes in customer budgets, changes or the anticipation of changes in the
regulatory environment affecting healthcare organizations, changes in the
customer's strategic information system initiatives, competing information
systems projects within the customer organization, consolidation in the health
care industry in general, the highly sophisticated nature of the Company's
products and competition in the market for clinical information systems.
Additionally, during the sales process, the Company expends substantial time,
effort and funds preparing a contract proposal, demonstrating the system,
arranging visits to customer reference sites and negotiating the contract. For
these and other reasons, the Company's sales cycle is lengthy and the Company
does not have the ability to predict when or if the sales process with a
prospective customer will result in a signed contract.
The time required to install the Company's systems can vary
significantly depending on the needs and skill sets of its customers.
Installation of an Oacis system typically requires nine to 18 months,
12
<PAGE> 13
depending on a number of factors including the size of the customer, the system
licensed, the number of legacy systems to be interfaced, the degree of
customization requested by the customer and the customer's installation
schedule. This period may be longer if unforeseen technical, integration or
other problems arise during the installation process, if the Company has
insufficient trained installation personnel to handle several installations
simultaneously or if a customer decides to delay the installation schedule. Due
to this long installation cycle, the Company's future results of operations
depend in large part on maintaining efficient and timely installation
procedures, particularly since a typical system license and installation
contract is relatively large compared to the Company's annual revenues. In
addition, payments to the Company are dependent upon achievement of certain
milestones. If installation is delayed, then payments and revenue recognition
will also be delayed. Any failure by the Company to install its clinical
information systems on a timely basis could have a material adverse effect on
the Company's business, financial condition and results of operations.
Potential Variability in Quarterly Operating Results. The Company's
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future.
Quarterly revenues and operating results may fluctuate as a result of a variety
of factors, including the following: the Company's long sales cycle; demand for
the Company's systems, applications and services, including variability in
demand and orders for hardware; the number, timing and significance of
announcements and releases of system enhancements and new applications by the
Company and its competitors; the termination of, or a reduction in, offerings
of the Company's systems, applications and services; the loss of customers due
to consolidation in the health care industry; delays in installations requested
by customers or caused by other factors; the timing of revenue recognition; the
amount of backlog at the beginning of any particular quarter; customer
budgeting cycles and changes in customer budgets; investments by the Company in
marketing, sales, research and development, and administrative personnel
necessary to support the Company's anticipated operations; marketing and sales
promotional activities; software defects and other system quality factors; and
general economic conditions. In particular, the timing of revenue recognition
can be affected by many factors, including the timing of customer installation
of the Company's systems. As a result of the relatively large size of each
customer contract, combined with the Company's method of revenue recognition,
quarterly results are likely to be significantly affected by small changes in
the number of customer contracts in process during a particular quarter. There
can be no assurance that the Company will not experience delays in recognizing
revenue in the future, particularly considering the complexity and large scale
of installations of the Company's systems. In addition, since purchase of the
Company's systems generally involves a significant commitment of capital, any
downturn in any potential customer's business or the economy in general,
including changes in the health care market, could have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, the Company's operating expense levels are relatively
fixed and, to a large degree, are based on anticipated revenues. If revenues
are below expectations, net income is likely to be disproportionately affected.
Further, it is likely that in some future quarter the Company's unit sales
volume, revenue, backlog or operating results will be below the expectations of
public market analysts and investors. In such event, the trading price of the
Company's Common Stock would likely be materially adversely affected.
Highly Competitive Market. Competition in the market for clinical
information systems and services is intense and is expected to increase. The
Company's competitors include other providers of health care information
systems and services, and health care consulting firms. The Company's
principal competitors include 3M Health Information Systems, Cerner
Corporation, Epic Systems Corporation, HBO & Company, and Shared Medical
Systems Corporation. Furthermore, other major health care information companies
not presently offering clinical information systems may enter the Company's
markets. Increased competition could result in price reductions, reduced gross
margins, and loss of market share, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
In addition, many of the Company's competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources and market
13
<PAGE> 14
recognition than the Company. Many of the Company's competitors also currently
have, or may develop or acquire, substantial installed customer bases in the
health care industry. As a result of these factors, the Company's competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or to devote greater resources to the development,
promotion and sale of their products than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results
of operations.
Need to Manage Changing Operations; Dependence Upon Key Personnel. The
Company's anticipated future operations may place a strain on its management
systems and resources. The Company expects that it will be required to continue
to improve its financial and management controls, reporting systems and
procedures, and will need to expand, train and manage its work force. There can
be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
intends to hire a significant number of additional installation, research and
development and sales personnel in 1996 and beyond. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain additional highly qualified employees in
the future. If the Company is unable to hire and retain such personnel,
particularly those in key positions, the Company's business, financial
condition and results of operations could be materially adversely affected. The
Company's future success also depends in significant part upon the continued
service of its executive officers and other key sales, marketing, development
and installation employees. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. Since
acquisition of the Predecessor in May 1994, the Company has experienced
turnover in certain key positions of the Company and high turnover in general.
Additions of new and departures of existing personnel can be disruptive and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Third Party Products. The Company's systems are
dependent upon a number of third-party computer hardware and software products.
There can be no assurance that financial or other difficulties experienced by
third-party providers will not have an adverse impact upon the technologies
incorporated by the Company's systems, or that, if such technologies become
unavailable, the Company will be able to find suitable alternatives. In
particular, both the Gateway++ and Oacis Data Repository components of Oacis
incorporate a Sybase relational database. Any significant failure by Sybase to
meet the Company's database requirements could have a material adverse effect
on the Company's business, financial condition and results of operations. A
decline in Sybase's reputation could reduce the appeal of the Company's
products to its potential customers. Although the Company believes that it can
port Oacis to other relational database platforms, such efforts would require
substantial time and investment and would have an adverse affect on the
Company's operations, including its ability to complete other product
development. In addition, Oacis includes a number of embedded software products
licensed from third parties. Failure of such third parties to maintain or
enhance their products could impair the functionality of Oacis and could
require the Company to obtain alternative products from other sources or to
develop such software internally, either of which could involve costs and
delays as well as diversion of engineering resources. In addition,
modifications or enhancements by these third-party vendors often require that
the Company modify its own software products to operate with these enhancements
or modifications. There can be no assurance that the Company will be able to
modify its own software to accommodate third-party changes or that the effort
to make such changes will not adversely affect the Company's other development
projects.
Risk of System Defects; Failure to Meet Performance Criteria.
Systems as complex as those offered by the Company frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive testing, the Company has in the
14
<PAGE> 15
past released systems that contain defects, has discovered software errors in
certain of its enhancements and applications after their introduction and, as a
result, has experienced delays in recognizing revenues and incurred higher than
expected operating expenses during certain periods in order to correct these
errors. The Company's systems are intended for use in a clinical health care
setting, to collect and display clinical information used in the diagnosis and
treatment of patients. As a result, the Company expects that its customers and
potential customers have a greater sensitivity to system defects than the
market for software products generally. In addition, customer contracts
typically provide that the Oacis system is warranted to meet certain
performance criteria concerning response time and system availability. The
Company also will generally recommend hardware configurations that it believes
will be adequate to achieve user acceptable response time performance and
system availability. Failure of a customer's system to meet these performance
criteria could constitute a material breach under such contracts, and could
delay revenue recognition and require that the Company incur additional expense
in order to make the system meet these performance criteria or to purchase
additional hardware where the recommended hardware configurations have been
determined to be inadequate. Although to date the Company has not experienced
material adverse effects resulting from any software errors or performance
failures, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors or performance failures will not occur
in new enhancements or applications after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, diversion of
development resources, damage to the Company's reputation, or increased service
and warranty costs, any of which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Consolidation and Uncertainty in the Health Care Industry.
Many health care providers are consolidating to create larger health care
networks with greater market concentration. Such consolidation could erode the
Company's existing customer base and reduce the size of the Company's target
market. In addition, the resulting enterprises could have greater bargaining
power, which could lead to price erosion of the Company's systems and services.
The reduction in the size of the Company's target market or the failure of the
Company to maintain adequate price levels could have a material adverse effect
on the Company's business, financial condition and results of operations. The
health care industry also is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation
of health care industry participants. During the past several years, the United
States health care industry has been subject to an increase in governmental
regulation and reform proposals. These reforms may increase governmental
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for the Company's customers. Health care industry
participants may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's systems and services. The failure of the Company to maintain adequate
price levels or sales as a result of legislative or market-driven reforms could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Limited Proprietary Rights; Risk of Infringement. The Company
relies on a combination of trade secrets, copyright and trademark laws,
nondisclosure and other contractual provisions to protect its proprietary
rights. The Company has not filed any patent applications covering its
technology or registered any of its copyrights with state or federal agencies.
There can be no assurance that measures taken by the Company to protect its
intellectual property will be adequate or that the Company's competitors will
not independently develop systems and services that are substantially
equivalent or superior to those of the Company. Substantial litigation
regarding intellectual property rights exists in the software industry, and the
Company expects that software products may be increasingly subject to
third-party infringement claims as the number of competitors in the Company's
industry segment grows and the functionality of systems overlap. Although the
Company believes that its systems and applications 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
15
<PAGE> 16
will be available on reasonable terms in the event of an unfavorable ruling on
any such claim. In addition, any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Liability. The Company's clinical information systems
provide clinical information used by clinicians in the diagnosis and treatment
of patients. Any failure by the Company's systems to provide accurate, reliable
and timely information, or to adequately protect the confidentiality of the
information, could result in claims against the Company. The Company maintains
insurance to protect against claims associated with the use of its systems, but
there can be no assurance that its insurance coverage would adequately cover
any claims asserted against the Company. A successful claim brought against the
Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. Even unsuccessful claims could result in the Company's expenditure
of funds in litigation and diversion of management time and resources. There
can be no assurance that the Company will not be subject to product liability
claims that will result in liability in excess of its insurance coverage, that
the Company's insurance will cover such claims or that appropriate insurance
will continue to be available to the Company in the future at commercially
reasonable rates.
Government Regulation. The United States Food and Drug
Administration (the "FDA") is responsible for assuring the safety and
effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act.
Computer products are subject to regulation when they are used or are intended
to be used in the diagnosis of disease or other conditions, or in the cure,
mitigation, treatment or prevention of disease, or are intended to affect the
structure or function of the body. The FDA could determine in the future that
predictive applications of the Company's systems and applications make them
clinical decision tools subject to FDA regulation. Medical devices are subject
to regulation by the FDA, which requires, among other things, premarket
notifications or approvals and compliance with labeling, registration and
listing requirements, good manufacturing practices and records and reporting
requirements. Compliance with these regulations could be burdensome, time
consuming and expensive. The Company also could become subject to future
legislation and regulations concerning the manufacture and marketing of medical
devices and health care software systems. These could increase the cost and
time necessary to market new products and could affect the Company in other
respects not presently foreseeable. The Company cannot predict the effect of
possible future legislation and regulation.
The confidentiality of patient records and the circumstances
under which such records may be released for inclusion in the Company's
databases is subject to substantial regulation by state governments. These
state laws and regulations govern both the disclosure and use of confidential
patient medical record information. Although compliance with these laws and
regulations is principally the responsibility of the hospital, physician or
other health care provider with access to the Company's information system,
regulations governing patient confidentiality rights are evolving rapidly.
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 will not materially restrict
the ability of health care providers to submit information from patient records
to the Company's systems.
Risks Associated With Potential Acquisitions. The Company may
in the future pursue acquisitions of complementary products, technologies or
businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's results of operations. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, products and personnel of the acquired company, the
diversion of
16
<PAGE> 17
management's attention from other business concerns, risks of entering markets
in which the Company has no direct prior experience, and the potential loss of
key employees of the acquired company. There can be no assurance that the
Company will ever successfully complete an acquisition.
International Sales. The Company has licensed clinical
information systems to customers located outside of the United States and
expects to continue marketing its systems to foreign customers In 1994 and
1995, revenues from international customers were immaterial. However, in July,
the Company announced a contract with the South Australian Health Commission
through its Australian distributor, McDonnell Information Systems Pty. Limited
The Company's operating results may be subject to the risks inherent in
international transactions, including difficulties in staffing and managing
foreign sales operations, changes in regulatory requirements, exchange rates,
tariffs or other barriers, and other factors.
17
<PAGE> 18
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
3.1* Certificate of Incorporation of Registrant
3.2x Bylaws of Registrant.
4.1+ Form of Common Stock certificate.
10.1+ 1996 Stock Plan and form of agreement thereunder.
10.2+ 1996 Director Option Plan and form of option agreement thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4+ Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.5+ Restated Stockholders Agreement dated as of April 8, 1996 between the
Registrant and certain stockholders.
10.6+ Lease dated August 30, 1990 for facilities located at 100 Drake's
Landing Road, Greenbrae, California, together with related expansion and
extension agreements and work agreements.
10.7+ Lease dated July 10, 1992 for facilities located in Atlanta, Georgia,
together with an addendum thereto dated March 29, 1993.
10.8+ Employment Agreement dated May 17, 1995 between Jim McCord and Oacis
Healthcare Systems, Inc., a wholly-owned subsidiary of the Registrant
("Subsidiary").
10.9+ Master Lease Agreement and Equipment Schedule VL-1, each dated as of
March 1, 1996, between Comdisco, Inc. and Subsidiary.
10.11+ Standard form of Software License Agreement for the Oacis System.
11.1 Calculation of Pro Forma and Supplemental Net Loss Per Share.
21.1+ Subsidiaries of the Registrant.
27.0+ Financial Data Schedules.
* Incorporated by reference to Exhibit 3.2 previously filed with the Company's
Registration Statement on Form SB-2 (No.333-02804-LA)
x Incorporated by reference to Exhibit 3.3 previously filed with the Company's
Registration Statement on Form SB-2 (No. 333-02804-LA
+ Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form SB-2 (No. 333- 02804-LA)
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OACIS HEALTHCARE HOLDINGS CORP.
(Registrant)
Date November 13, 1996 /s/ Stephen F. Ghiglieri
------------------ -------------------------
Stephen F. Ghiglieri
Vice President, Finance and
Administration
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date November 13, 1996 /s/ Jim McCord
------------------ ---------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<S> <C> <C>
11.1 Computation of Pro Forma Net
Loss Per Share 21
27.1 Financial Data Schedule 22
</TABLE>
20
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Common and Common
Equivalent Shares:
Series A Preferred Stock 1,919,307 - 1,916,661 994,677
Series B Preferred Stock 3,114,426 - 2,955,853 1,614,046
Common Stock 1,745,667 10,008,542 1,742,774 5,720,538
Common Stock Options 883,710 - 883,710 457,981
Warrants 4,133 - 4,133 2,142
---------- ---------- ----------- -----------
7,667,243 10,008,542 7,503,131 8,789,384
============ ========== ============ ============
Net Loss ($1,484,000) ($246,000) ($5,751,000) ($5,085,000)
============ ========== ============ ============
Pro Forma net loss per common and
common equivalent share ($0.19) ($0.02) ($0.77) ($0.58)
======= ======= ======= =======
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,966
<SECURITIES> 20,801
<RECEIVABLES> 6,345
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,394
<PP&E> 2,229
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,034
<CURRENT-LIABILITIES> 8,390
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 25,016
<TOTAL-LIABILITY-AND-EQUITY> 34,034
<SALES> 5,127
<TOTAL-REVENUES> 6,651
<CGS> 2,277
<TOTAL-COSTS> 3,763
<OTHER-EXPENSES> 3,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (246)
<INCOME-TAX> 0
<INCOME-CONTINUING> (246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (246)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
