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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 March 31, 1997.
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 /x/ No / /
At April 15, 1997, there were 10,070,279 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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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1997 3
(unaudited) and December 31, 1996
Consolidated Statement of Operations (unaudited) 4
for the three months ended March 31, 1997 and 1996
Consolidated Statement of Cash Flows (unaudited) 5
for the three months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
INDEX TO EXHIBITS 18
Exhibit 11.1 Calculation of Pro Forma Net Loss Per Share 19
Exhibit 27.1 Financial Data Schedule 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,951 $ 4,307
Short-term investments 20,109 18,834
Accounts receivable, net 5,170 6,449
Other current assets 1,185 308
-------- --------
Total current assets 28,415 29,898
-------- --------
Property and equipment, net 2,480 2,143
Other assets, net 1,211 671
-------- --------
$ 32,106 $ 32,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,082 $ 620
Accrued expenses 3,397 3,113
Unearned revenues 2,328 2,325
-------- --------
Total current liabilities 6,807 6,058
-------- --------
Long-term obligations 941 669
-------- --------
Stockholders' equity:
Common Stock, $0.01 par value; 30,000,000 shares authorized;
10,070,000 and 10,064,000 shares issued and outstanding 101 101
Additional paid-in capital 47,909 47,905
Accumulated deficit (23,516) (21,871)
Deferred stock compensation (136) (150)
-------- --------
Total stockholders' equity 24,358 25,985
-------- --------
$ 32,106 $ 32,712
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues:
Software licenses $ 1,738 $ 1,396
Installation and support services 1,660 1,584
Third party hardware and software 1,399 925
------------ -----------
Total revenues 4,797 3,905
------------ -----------
Cost of revenues:
Software licenses 63 39
Installation and support services 1,465 1,320
Third party hardware and software 1,208 811
------------ -----------
Total cost of revenues 2,736 2,170
------------ -----------
Gross profit 2,061 1,735
------------ -----------
Operating expenses:
Sales and marketing 1,709 1,358
Research and development 1,364 2,394
General and administrative 957 800
------------ -----------
Total operating expenses 4,030 4,552
------------ -----------
Loss from operations (1,969) (2,817)
Interest income, net 324 (33)
------------ -----------
Net loss $ (1,645) $ (2,850)
============ ===========
Pro forma:
Net loss per common and common equivalent share $ (0.16) $ (0.37)
============ ===========
Weighted average number of common and common
equivalent shares 10,067,113 7,667,243
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,645) $(2,850)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 288 317
Stock compensation expense 14 13
Acquired in-process research and
development -- 700
Changes in assets and liabilities:
Accounts receivable, net 1,279 461
Other current assets (880) (45)
Accounts payable 462 (158)
Accrued expenses 308 (15)
Unearned revenues 3 (322)
------- -------
Net cash used in operating activities (171) (1,899)
------- -------
Cash flows from investing activities:
Purchases of short-term investments (4,689) --
Sale of short-term investments 3,414 --
Purchases of property and equipment (302) (89)
Capitalized software development costs (574) --
------- -------
Net cash used in investing activities (2,151) (89)
------- -------
Cash flows from financing activities:
Proceeds from option exercises 4 4
Payments on capital lease obligations (38) --
------- -------
Net cash provided by (used in) financing
activities (34) 4
------- -------
Decrease in cash and cash equivalents (2,356) (1,984)
Cash and cash equivalents, beginning of period 4,307 3,900
------- -------
Cash and cash equivalents, end of period $ 1,951 $ 1,916
======= =======
Supplemental disclosure:
Cash paid for interest $ 11 $ 60
======= =======
Capital equipment lease additions $ 286 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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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 in accordance with generally accepted accounting principles.
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 ended
March 31, 1997 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, 1996, included on Form 10-KSB filed with the Securities and
Exchange Commission.
2. 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 which
occurred on May 16, 1996, 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. In
February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." The statement redefines earnings per share under
generally accepted accounting principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully diluted
earnings per share is replaced by diluted earnings per share. The Company will
adopt the new standard in connection with its annual financial statements for
the year ending December 31, 1997. The pro forma effect of adopting this
statement for the three months ended March 31, 1997 and 1996, was immaterial.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Background
The Company develops, markets, licenses, installs, and supports clinical
information systems primarily for major medical centers, hospitals and
integrated healthcare delivery systems. 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, a clinical data repository, an Enterprise
Member/Patient Index, 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. 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. The formation of IDSs and in general
consolidation in the healthcare industry, has a number of effects which include
the creation of larger healthcare networks with greater market concentration.
The Company believes that while such consolidation may result in an increase in
demand for open architecture clinical information systems such as the Company
provides, the near term effect of such consolidation reduces the resources
available for IDSs to invest in clinical information systems until such time as
the rate of consolidation slows. Accordingly, the Company believes that the
market for the Company's product may continue to develop slowly in the near term
and that sales cycles will continue to be long.
The Company's future success and financial performance depends 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. Additionally, the
Company's ability to develop, market, sell and install its systems depends on
the Company's ability to retain, recruit and hire highly skilled personnel in a
number of technical and clinical fields. The market for this highly skilled
workforce is extremely competitive.
The Company's cost of revenues for installation and support services, as
well as its operating expenses, are primarily comprised of personnel and
personnel related costs. These costs are impacted by a number of factors
including increases in personnel and adjustments in compensation levels to
remain competitive in the markets in which the Company operates. The Company
regularly appraises its competitive position with regard to compensation
strategies and makes adjustments when and as required. Additionally, the Company
adjusts salary levels, generally at the beginning of its reporting year, for all
personnel based on merit and other factors including increases in the cost of
living. As a result, the year over year quarterly results reflect increased
operating expenses resulting from increased personnel and personnel related
expenses.
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 and the volume of outpatient visits and inpatient days for the customer
organization, 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.
7
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Software license fee and installation services 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 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
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.
Software license revenues from contracts where Oacis is not actively
involved in the installation of the system, typically contracts outside of North
America, are recognized as contract amounts become due and payable, typically on
a milestone basis. Because Oacis is not actively involved in these 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 MARCH 31, 1997 AND 1996
Revenues
In the three months ended March 31, 1997, total revenues increased 23% to
$4.8 million from $3.9 million in the three months ended March 31, 1996. Of
these amounts, software license fee revenues increased 25% to $1.7 million,
installation and support services revenues increased 5% to $1.7 million and
third-party hardware revenue increased 51% to $1.4 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
approximately 6% of total revenue for the quarter. The increase in installation
and support services revenues from the same quarter in 1996 was primarily due to
higher maintenance revenues. Installation revenues were relatively unchanged due
to longer than normal start up periods for certain new contracts. The increase
in third-party hardware and software revenues over the prior year first quarter
resulted from the number and timing of third-party product sales.
Cost of Revenues
Cost of revenues were $2.7 million, or 57% of total revenues, in the three
months ended March 31, 1997, compared to $2.2 million, or 56% of total revenues,
in the three months ended March 31, 1996. Cost of installation and support
services increased 11% to $1.5 million in the three months ended March 31, 1997
from $1.3 million in the three months ended March 31, 1996 as a result of an
increase in the average number of installation personnel and an increase in the
average cost of such personnel during the quarter which includes the annual
merit increases awarded in January 1997. Gross profit as a percentage of total
revenues decreased slightly to 43% in the three months ended March 31, 1997 from
44% in the three months ended March 31 1996. Gross profit on software license
fees decreased to 96% from 97% due to increases in international distributor
fees and increased amortization of software development costs. The Company
anticipates that gross margins on software license fees will continue to
decrease slightly in future periods due to increases in amortization of software
development costs and may fluctuate on a quarter to quarter basis due
8
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to timing of recognition of license fees and related distribution fees for
international customers. Gross profit on installation and support services
decreased to 12% for the first quarter 1997 from 17% in the prior year period
due to longer than normal start up periods for certain new contracts and the
hiring and training of new installation and support services personnel. Gross
profit on third-party hardware and software increased to 14% in the three months
ended March 31, 1997 from 12% in the three months ended March 31, 1996. The
Company anticipates that third-party hardware and software gross margins in the
three months ended March 31, 1997 are indicative of future third-party product
margins, although quarterly third-party product gross margins are expected to
continue to fluctuate due to changes in third-party product mix and pricing
programs.
Sales and Marketing
Sales and marketing expenses increased 26% to $1.7 million in the three
months ended March 31, 1997 from $1.4 million in the three months ended March
31, 1996 and increased as a percentage of total revenues to 36% in the three
months ended March 31, 1997 from 35% in the three months ended March 31, 1996.
The increase in sales and marketing expenses was primarily attributable to
higher headcount in both the sales and marketing functions as the Company
continues to build infrastructure both in its sales and product
management-marketing functions. Commission expense also increased during the
first quarter 1997 as compared to the same period in the prior year due to an
increase in the average selling price of contracts signed.
Research and Development
Research and development expenses, net of software capitalization,
decreased 43% to $1.4 million in the three months ended March 31, 1997 from $2.4
million in the three months ended March 31, 1996. The decrease was primarily the
result of two factors. First quarter 1996 research and development expenses
included the acquisition (license) costs of certain technology which forms the
basis of the Oacis Enterprise Member/Patient Index ("EMPI"), a component of the
Oacis Healthcare Network, and the costs associated with the continuing
development of that technology. Because the licensed technology had not reached
technological feasibility and had no alternative future use when it was
acquired, the $700,000 license fee was charged to expense in the first quarter
of 1996. In addition, in the first quarter 1997 capitalization of software
development costs totaled $574,000 compared with no software capitalization in
the first quarter 1996. Excluding the impact of the purchased technology and
software capitalization, research and development expenses in the three months
ended March 31, 1996, as compared to the same period in the prior year,
increased $244,000 primarily due to increases in the number of personnel as well
as increases in personnel costs, and increased consulting cost.
General and Administrative
General and administrative expenses increased 20% to $1.0 million in the
three months ended March 31, 1997 from $800,000 in the three months ended March
31, 1996, but remained unchanged at 20% as a percentage of revenue. The increase
in general and administrative expenses was a result of continued infrastructure
development and consisted primarily of increased personnel as well as increased
"Public Company" costs. These increases were offset in part by lower consulting
expenses in the first quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company's cash and cash equivalents and short-term
investments totaled $22.1 million as compared to cash and equivalents of $23.1
million at December 31, 1996.
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 March 31, 1997, $0.9 million of new
equipment was financed under this agreement, up from $0.6 million at December
31, 1996.
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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 leasehold improvements in part related to its planned
relocation in 1998 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 at least the next 18 months. Thereafter, the
Company may require additional funds to support its operations and may seek to
raise such additional funds through public or private equity financing or from
other sources. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." The statement redefines earnings per
share under generally accepted accounting principles. Under the new standard,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. The
Company will adopt the new standard in connection with its annual financial
statements for the year ending December 31, 1997. The pro forma effect of
adopting this statement for the three months ended March 31, 1997 and 1996, was
immaterial.
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FACTORS AFFECTING OPERATING RESULTS
This report on Form 10-Q 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 has
incurred a net loss of $4.6 million for the year ended December 31, 1996 and
$1.6 million for the three months ended March 31, 1997, and as of March 31, 1997
had an accumulated deficit of $23.5 million. The Company has not achieved
consistent profitability on a quarterly basis and has not achieved annual
profitability. The Company's prior operating history, consolidation and
uncertainty in the healthcare industry, dependence on the emerging market for
IDSs, dependence on Oacis as its principal product, long sales and installation
cycles, and dependence upon key personnel and third parties, competition, 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 consistent profitability on a quarterly or
annual basis.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY, DEPENDENCE ON
EMERGING MARKET FOR IDSS. Many health care providers are consolidating to create
larger health care networks and IDSs with greater market concentration. The
Company focuses its sales and marketing efforts primarily on IDSs, which are a
relatively new type of organization and currently account for a small portion of
the overall market for clinical information systems. The Company believes that
consolidation and formation of IDSs will continue and may ultimately result in
an increase in demand for open architecture clinical information systems such as
the Company provides, and accordingly focuses its sales and marketing efforts on
this market. However, the near term effect of such consolidation includes
reducing the resources available for IDSs to invest in clinical information
systems until such time as the rate of consolidation slows. Accordingly, the
Company believes that the market for the Company's products may continue to
develop slowly in the near term and that sales cycles will continue to be long.
In addition, continued consolidation could erode the Company's existing customer
base and reduce the size of the Company's target market. Additionally, 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 resulting from industry consolidation or delays
in purchasing clinical information systems due to industry consolidation 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.
DEPENDENCE ON OACIS; 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. The Company's future success and financial performance depends 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,
market and sell 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.
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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, 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 the achievement of which is generally
dependent upon the customer and other third-parties. 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.
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, revenues from international
customers accounted for approximately 4% of the total revenues in 1996. The
Company anticipates that international revenues may account for a larger
percentage of total revenues in future periods. Accordingly, the Company's
operating results may increasingly 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 including dependence on third-party
distributors and installers of the Company's products.
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, orders for and shipment of 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
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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, HealthVISION, Inc. 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 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 1997 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
13
<PAGE> 14
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 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.
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 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.
14
<PAGE> 15
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 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.
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(1) Certificate of Incorporation of Registrant
3.2(2) Bylaws of Registrant.
4.1(3) Form of Common Stock certificate.
10.1(3) 1996 Stock Plan and form of agreement thereunder.
10.2(3) 1996 Director Option Plan and form of option agreement thereunder.
10.3(3) 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4(3) Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.5(3) Restated Stockholders Agreement dated as of April 8, 1996 between the
Registrant and certain stockholders.
10.6(3) 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(3) Lease dated July 10, 1992 for facilities located in Atlanta, Georgia,
together with an addendum thereto dated March 29, 1993.
10.8(3) Employment Agreement dated May 17, 1995 between Jim McCord and Oacis
Healthcare Systems, Inc., a wholly-owned subsidiary of the Registrant
("Subsidiary").
10.9(3) Master Lease Agreement and Equipment Schedule VL-1, each dated as of
March 1, 1996, between Comdisco, Inc. and Subsidiary.
10.11(3) Standard form of Software License Agreement for the Oacis System.
10.12(4) Leases dated March 19, 1997 for Facilities Located at 1101 5th
Avenues, San Rafael, Marin County, California
11.1 Calculation of Pro Forma and Supplemental Net Loss Per Share.
21.1(3) Subsidiaries of the Registrant.
27.1 Financial Data Schedules.
(1) Incorporated by reference to Exhibit 3.2 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(2) Incorporated by reference to Exhibit 3.3 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(3) Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(4) Incorporated by reference to the same numbered exhibit previously filed with
the Company Form 10-KSB for the year ended December 31, 1996
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended March 31, 1997.
16
<PAGE> 17
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 May 15, 1997 s/ Stephen F. Ghiglieri
------------- ------------------------
Stephen F. Ghiglieri
Vice President, Finance and Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Date May 15, 1997 s/ Jim McCord
------------- --------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<S> <C> <C>
11.1 Computation of Pro Forma Net Loss Per Share 19
27.1 Financial Data Schedule 20
</TABLE>
18
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Weighted Average Common and Common Equivalent Shares:
Series A Preferred Stock -- 1,919,307
Series B Preferred Stock -- 3,114,426
Common Stock 10,067,113 1,745,667
Common Stock Options -- 883,710
Warrants -- 4,133
------------ -----------
10,067,113 $ 7,667,243
============ ===========
Net Loss $ (1,645,000) $(2,850,000)
============ ===========
Pro Forma net loss per common and common equivalent share $ (0.16) $ (0.37)
============ ===========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,951
<SECURITIES> 20,109
<RECEIVABLES> 5,170
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,415
<PP&E> 2,480
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,106
<CURRENT-LIABILITIES> 6,807
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 24,257
<TOTAL-LIABILITY-AND-EQUITY> 32,106
<SALES> 3,137
<TOTAL-REVENUES> 4,797
<CGS> 1,271
<TOTAL-COSTS> 2,063
<OTHER-EXPENSES> 4,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,645)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
