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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, 1998.
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 May 6, 1998, there were 10,497,579 shares of 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
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998 3
(unaudited) and December 31, 1997
Consolidated Statement of Operations (unaudited) 4
for the three months ended March 31, 1998 and 1997
Consolidated Statement of Cash Flows (unaudited) 5
for the three months ended March 31, 1998 and 1997
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 15
Signatures 16
INDEX TO EXHIBITS 17
Exhibit 27.1 Financial Data Schedule 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 6,615 $ 5,962
Short-term investments....................... 7,698 9,687
Accounts receivable, net..................... 7,329 8,276
Other current assets......................... 1,295 1,149
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Total current assets.................... 22,937 25,074
Property and equipment, net...................... 3,635 3,341
Capitalized software, net........................ 2,891 2,382
Other assets..................................... 294 394
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Total assets............................ $29,757 $31,191
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 1,025 $ 1,784
Accrued expenses............................. 2,495 2,818
Unearned revenue............................. 4,187 3,585
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Total current liabilities............... 7,707 8,187
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Long-term obligations............................ 421 461
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Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000
shares authorized; none issued and
outstanding................................ -- --
Common Stock, $0.01 par value, 30,000,000
shares authorized; 10,346,000 and
10,330,000, shares issued and outstanding.. 103 103
Additional paid-in capital.................... 48,592 48,542
Accumulated deficit........................... (26,979) (26,002)
Deferred stock compensation................... (87) (100)
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Total stockholders' equity.............. 21,629 22,543
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Total liabilities and stockholders'
equity............................... $29,757 $31,191
======= =======
</TABLE>
The accompanying notes are an integral part
of these 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
MARCH 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Software licenses $ 2,846 $ 1,738
Installation and support services 2,216 1,660
Third-party hardware and software 1,367 1,399
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Total revenues 6,429 4,797
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Cost of revenues:
Software licenses 529 63
Installation and support services 1,631 1,465
Third-party hardware and software 1,142 1,208
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Total cost of revenues 3,302 2,736
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Gross profit 3,127 2,061
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Operating expenses:
Sales and marketing 1,756 1,709
Research and development 1,682 1,364
General and administrative 841 957
---------- ----------
Total operating expenses 4,279 4,030
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Loss from operations (1,152) (1,969)
Interest income, net 175 324
---------- ----------
Net loss $ (977) $ (1,645)
========== ==========
Basic and diluted net loss per share $ (0.09) $ (0.16)
========== ==========
Weighted average common shares
outstanding 10,331,588 10,067,113
========== ==========
</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,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (977) $(1,645)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 414 288
Stock compensation expense 13 14
Changes in assets and liabilities:
Accounts receivable, net 947 1,279
Other current assets (146) (880)
Other assets 100 --
Accounts payable (759) 462
Accrued expenses (295) 308
Unearned revenues 602 3
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Net cash used in operating activities (101) (171)
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Cash flows from investing activities:
Purchase of short-term investments (1,477) (4,689)
Sale of short-term investments 3,466 3,414
Purchases of property and equipment (669) (302)
Capitalized software development costs (548) (574)
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Net cash provided by (used in) investing activities 772 (2,151)
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Cash flows from financing activities:
Proceeds from option exercises 50 4
Payments on capital lease obligations (68) (38)
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Net cash used in financing activities (18) (34)
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Increase (decrease) in cash and cash equivalents 653 (2,356)
Cash and cash equivalents, beginning of period 5,962 4,307
------- -------
Cash and cash equivalents, end of period $ 6,615 $ 1,951
======= =======
Supplemental disclosure:
Cash paid for interest $ 15 $ 11
======= =======
Capital equipment lease additions $ -- $ 286
======= =======
</TABLE>
The accompanying notes are an integral part of these 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 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, 1998 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, 1997, included on Form 10-KSB filed with the Securities and
Exchange Commission.
2. BASIC AND DILUTED NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earning per Share" (SFAS 128) and Staff Accounting Bulletin No. 98 during the
year ended December 31, 1997 and retroactively restated all prior periods. Basic
net loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period except that common equivalent shares are excluded
from the computation if the effect is anti-dilutive. Common equivalent shares
consist of the incremental shares issuable upon the conversion of preferred
stock and the exercise of stock options and warrants (using the treasury stock
method).
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements. Adoption of SFAS 130 did not have a
material effect on the Company's financial statements for the quarter ended
March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The disclosures prescribed by SFAS 131 will be reflected in the
Company's financial statements for the year ending December 31, 1998.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statement of Positions Nos. 97-2 and 98-4 ("SOP 97-2" and
"SOP 98-4") respectively,relating to software revenue recognition which the
Company has adopted for transactions entered into in the fiscal year beginning
January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue
on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition". Historically, the Company has accounted for the majority of its
software license fee revenue under Statement of Position 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,"
accordingly the Company believes that the adoption of SOP 97-2 and SOP 98-4
will not have a significant impact on its revenue recognition accounting
policies.
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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 networks ("IDNs"). 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 and 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 derived from the licensing
and installation of Oacis. The Company intends to focus its sales and marketing
efforts on IDNs which currently account for a growing portion of the overall
market for clinical information systems. The formation of IDNs and a 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 IDNs 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.
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
development and believes that significant continuing development efforts
together with an increased focus on integration of third party applications will
be required to sustain and enhance the Company's competitive market position.
Additionally, the Company's ability to develop, market, sell and install its
systems depends on the Company's ability to recruit, hire and retain highly
skilled personnel in a number of technical and clinical fields particularly in
the area of installation services. 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 before the effect of
capitalized software reflect the 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 revenues from 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 nine hundred thousand dollars
to a few million dollars. The Company resells third-party hardware and software
pursuant to standard reseller agreements.
Software license fee and installation services revenues from contracts
where the Company 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 attain
certain installation milestones or software acceptance milestones 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 or software acceptance 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
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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. In addition, in certain transactions where existing customers
seek to expand the license rights of previously licensed software, the Company
recognizes license fee revenue from certain software components upon the
granting of these expanded rights and when collection of the additional license
fees are probable.
Software license revenues from contracts where the Company 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 by the
international partner typically on a milestone basis. In addition, revenue
recognition on a contract milestone basis can cause quarterly revenue and
earnings variability due to the size and timing of such milestones. Because the
Company 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 the
Company's international integration partner, both of which are beyond the
control of the Company.
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, 1998 AND 1997
Revenues
In the three months ended March 31, 1998, total revenues increased 34% to
$6.4 million from $4.8 million in the three months ended March 31, 1997. Of
these amounts, software license fee revenues increased 64% to $2.8 million,
installation and support services revenues increased 33% to $2.2 million and
third-party hardware revenue decreased 2% to $1.4 million. The increase in
software license fee revenue was due to the timing of recognition of software
license fees from international contracts which represented approximately 23% of
total revenue for the quarter as compared to 6% in the prior year quarter. The
Company expects international revenues will continue to contribute to quarterly
variability during the remainder of the year and may decline as a percentage of
total revenues in future quarters, dependent upon the timing of international
contracts and milestone attainment. The increase in installation and support
services revenues from the same quarter in 1997 was due to an increase in
billable installation hours as well as increased maintenance revenue resulting
from new sites that have initiated maintenance since the prior year quarter. The
decrease in third-party hardware and software revenues resulted primarily from
the timing of these transactions as well as the mix of third-party products
sold.
Cost of Revenues
Cost of revenues were $3.3 million, or 51% of total revenues, in the three
months ended March 31, 1998, compared to $2.7 million, or 57% of total revenues,
in the three months ended March 31, 1997. Cost of installation and support
services increased 11% to $1.6 million in the three months ended March 31, 1998
from $1.5 million in the three months ended March 31, 1997 as a result of an
increase in the average number of installation personnel including third-party
installation consultants. Gross profit as a percentage of total revenues
increased to 49% in the three months ended March 31, 1998 from 43% in the three
months ended March 31 1997. Gross profit on software license fees decreased to
81% from 96% due to increases in international distributor fees and, to a much
lesser degree, increased amortization of software development costs. The Company
anticipates that gross margins on software license fees will continue to
fluctuate on a quarterly basis as a result of the timing of international
revenues and the distributor fees associated with those revenues however, the
Company expects that gross margins on software license fees will be higher in
future quarters but remain below historical levels due to increases in
amortization of software development costs. Gross profit on installation and
support services increased to 26% for the first quarter 1998 from 12% in the
prior year period due to improved margins in both the support and installation
organizations, with the principal improvement in margins resulting from the
support organization where revenues have increased as more clients have
initiated support services while expenses were lower during the quarter due in
part to the restructuring of the support organization as well as timing of
expenses. Gross profit on third-party hardware and software increased to
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16% in the three months ended March 31, 1998 from 14% in the three months ended
March 31, 1997 principally due to the mix of third-party products sold.
Sales and Marketing
Sales and marketing expenses increased 3% to $1.8 million in the three
months ended March 31, 1998 from $1.7 million in the three months ended March
31, 1997 but decreased as a percentage of total revenues to 27% in the three
months ended March 31, 1998 from 36% in the three months ended March 31, 1997.
The increase in sales and marketing expenses was attributable in part to
marketing fees due the Volunteer Hospital Association ("VHA") associated with
their involvement in marketing Oacis' products to the VHA membership offset by
lower sales commission expenses during the quarter. The marketing fees are
expensed in the same period revenue is recognized on VHA contracts and are paid
upon collection of billing milestones.
Research and Development
Research and development expenses, before software capitalization,
increased 15% to $2.2 million in the three months ended March 31, 1998 from $1.9
million in the three months ended March 31, 1997. The increase was a result of
an overall increase in personnel as well as an increase in the average cost of
personnel. Software Capitalization totaled $548,000, or 25% of total research
and development costs, for the three months ended March 31, 1998 as compared to
$574,000, or 30% of research and development costs, for the three months ended
March 31, 1997. Research and development costs, before software capitalization,
decreased as a percentage of total revenue to 35% for the three months ended
March 31, 1998 from 40% for the three months ended March 31, 1997.
General and Administrative
General and administrative expenses decreased 12% to $0.8 million in the
three months ended March 31, 1998 from $1.0 million in the three months ended
March 31, 1997, and decreased as a percentage of revenue to 13% for the three
months ended March 31, 1998 from 20% for the three months ended March 31, 1997.
The decrease was due to timing of expenses as well as lower salary related
expenses. The Company expects General and Administrative expenses to modestly
increase during the remainder of the year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company's cash and cash equivalents and short-term
investments totaled $14.3 million as compared to $15.6 million at December 31,
1997.
During 1997, the Company invested $2,253,000 in capital expenditures
primarily related to computers and office equipment. Of this amount $423,000,
was acquired under a capital lease agreement with Comdisco, Inc. ("Comdisco").
The Company expects that its capital expenditures will increase in 1998 due
primarily to anticipated expenditures for leasehold improvements associated with
the relocation of the Company's corporate headquarters as well as continued
investment in computers and technology in support of the Company's product
development and operation objectives. The Company expects its capital
expenditures in 1998 to approximate $3.5 million, the majority of which is
expected to be financed through a $3.0 million non-revolving term loan that is
secured by the Company's cash and short-term cash investments.
In April 1996, the Company entered into a master lease agreement with
Comdisco which enabled 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, 1998, $1,000,000 of new equipment was
financed under this agreement.
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 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.
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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 $4.1 million for the year ended December 31, 1997 and
$977,000 for the three months ended March 31, 1998, and as of March 31, 1998 had
an accumulated deficit of $27.0 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 IDNs, 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 IDNs. Many health care providers are consolidating to create
larger health care networks and IDNs with greater market concentration. The
Company focuses its sales and marketing efforts primarily on IDNs, which
currently account for a growing portion of the overall market for clinical
information systems. The Company believes that consolidation and formation of
IDNs 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 IDNs 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 would 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 or
integration of new applications and enhancements and the successful introduction
of such 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 and enhance the Company's competitive market position. There
can be no assurance that the Company will successfully develop or integrate,
introduce, market and sell new system enhancements or applications, or that
system enhancements or new applications developed or integrated 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
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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, if the Company is
unable to contract with third parties to provide supplemental installation
resources, 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 installation
or software acceptance milestones, the achievement of which can be dependent
upon the customer and other third-parties. If installation is delayed, then
payments and revenue recognition may 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 1995, revenues from international
customers were immaterial, however, revenues from international customers
accounted for approximately 4% and 16% of the total revenues in 1996 and 1997,
respectively. In the first three months of 1998, international revenues
accounted for 23% of total revenues. The Company expects that international
revenues may continue to be a significant component of total revenues in future
quarters. 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. Additionally, due to the revenue recognition model used for
international sales (sales outside of North America) this increasing reliance on
international sales may result in higher quarter to quarter variability of
software revenues.
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; increasing dependence on
international revenues; 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 attainment of software acceptance
or installation milestones. 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
11
<PAGE> 12
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, 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 additional installation, research and development and sales personnel in
1998 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. The Company has historically 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. The Company is seeking to supplement its service delivery
capability through partnerships with healthcare related consulting firms. There
can be no assurance that the Company will be successful in incorporating
third-party consulting services into its existing services operations. Failure
by the Company to incorporate third-party consulting services into its existing
services operations could have a material adverse affect 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.
12
<PAGE> 13
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.
YEAR 2000. Many computer systems experience problems handling dates beyond
the year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company along
with an independent third-party consultant is assessing both the internal
readiness of its computer systems and the compliance of its computer products
and software sold to customers for handling the Year 2000. The Company expects
to implement successfully the systems and programming changes necessary to
address year 2000 issues, and does not believe that the cost of such actions
will have a material effect on the Company's results of operations or financial
condition. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could impact the timing of
installations and have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors. The
Company's reliance on suppliers and subcontractors, and, therefore, on the
proper functioning of their information systems and software, means that failure
to address year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time. Additionally, Oacis' customers are currently
assessing their own systems and those of vendors for compliance with Year 2000.
Installation work required by customers to implement Year 2000 releases may
distract customers attention from acquiring and installing Oacis' Systems. Such
distraction could have a material adverse affect 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 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 AND MEDICAL MALPRACTICE. 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,
13
<PAGE> 14
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 or medical malpractice 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.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
3.1(1) Certificate of Incorporation of Registrant
3.2(2) Bylaws of Registrant.
4.1(3) Form of Common Stock certificate.
10.1(4) 1996 Stock Plan and form of agreement thereunder.
10.2(3) 1996 Director Option Plan and form of option agreement thereunder.
10.3(5) 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(6) Lease dated March 19, 1997 for Facility located at 1101 5th Avenue,
San Rafael, Marin County, California
21.1(3) Subsidiaries of the Registrant.
27.1 Financial Data Schedule
</TABLE>
- ----------
(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 herein by reference to the Company's 1996 Stock Plan, as filed
with the Commission on April 30, 1998 with the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders and to the form of
agreement thereunder, as previously filed as Exhibit 10.1 with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA).
(5) Incorporated herein by reference to the Company's 1996 Employee Stock
Purchase Plan and form of subscription agreement thereunder, as filed with
the Commission on April 30, 1997 with the Company's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
(6) Incorporated by reference to the same numbered exhibit previously filed
with the Company's 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, 1998.
15
<PAGE> 16
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 13, 1998 /s/ Stephen F. Ghiglieri
-------------------- ----------------------------------------
Stephen F. Ghiglieri Vice President,
Finance and Administration,
Chief Financial Officer and
Secretary (Principal Financial and
Accounting Officer)
Date May 13, 1998 /s/ Jim McCord
-------------------- ----------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ----------- ----
<S> <C> <C>
27.1 Financial Data Schedule 18
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,615
<SECURITIES> 7,698
<RECEIVABLES> 7,329
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,937
<PP&E> 3,635
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,757
<CURRENT-LIABILITIES> 7,707
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 21,526
<TOTAL-LIABILITY-AND-EQUITY> 29,757
<SALES> 4,213
<TOTAL-REVENUES> 6,429
<CGS> 1,617
<TOTAL-COSTS> 3,302
<OTHER-EXPENSES> 4,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (977)
<INCOME-TAX> 0
<INCOME-CONTINUING> (977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (977)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
