<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-20805
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APACHE MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 23-2476415
- ---------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Tysons Boulevard, McLean, Virginia 22102
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(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 847-1400
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 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
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7,259,907
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(Number of shares of common stock, $.01 par value per share,
outstanding as of November 10, 1997)
<PAGE> 2
APACHE MEDICAL SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Operations (unaudited) - three months and nine months ended September 30,
1997 and 1996 1
Consolidated Balance Sheets (unaudited) - September 30, 1997 and December 31, 1996 2
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (unaudited) - nine months ended
September 30, 1997 and year ended December 31, 1996 3
Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements (unaudited) 5-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11
Part II - Other Information
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8--K 12
Signatures 13
</TABLE>
<PAGE> 3
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands, except per share data) 1997 1996 1997 1996
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Systems and related products $ 75 $ 1,726 $ 2,177 $ 4,535
Support 550 354 1,496 1,059
Professional services 1,046 1,199 3,516 2,773
--------- -------- ---------- ---------
Total revenue 1,671 3,279 7,189 8,367
Expenses:
Cost of systems and related products 520 479 1,758 1,586
Cost of support 170 137 481 415
Cost of professional services 606 284 2,032 855
Research and development 727 550 2,098 1,211
Selling, general and administrative 3,275 2,602 10,933 6,475
Restructuring charge 1,623 - 1,623 -
Write-off of acquired in-process
research and development costs - - 1,612 -
--------- -------- ---------- ---------
Total expenses 6,921 4,052 20,537 10,542
Loss from operations (5,250) (773) (13,348) (2,175)
Other income (expense):
Interest income 229 315 694 402
Interest expense (17) (133) (32) (347)
Other, net - - 10 -
--------- -------- ---------- ---------
Total other income (expense) 212 182 672 55
Net loss $ (5,038) $ (591) $ (12,676) $ (2,120)
========= ======== ========== =========
Net loss per share $ (0.69) $ (0.07) $ (1.75) $ (0.32)
========= ======== ========== =========
Weighted average number of shares used for calculation of
net loss per share 7,258 7,219 7,247 5,749
========= ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
(in thousands except share data) SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,721 $ 20,928
Short-term investments 5,982 1,059
Accounts receivable, net 2,737 3,816
Other trade receivables 99 240
Prepaid expenses and other 725 631
---------- ----------
TOTAL CURRENT ASSETS 15,264 26,674
Other trade receivables, net of current maturities 70 104
Furniture and equipment 3,300 3,062
Less accumulated depreciation and amortization (1,976) (1,799)
---------- ----------
1,324 1,263
Capitalized software development costs, net - 374
Intangible assets, net 640 722
---------- ----------
TOTAL ASSETS $ 17,298 $ 29,137
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 484 $ 621
Accrued expenses 4,761 2,844
Purchase acquisition costs - 1,565
Current maturities of obligations under capital leases 16 57
Current maturities of notes payable - other 96 115
Deferred revenue 1,625 1,140
---------- ----------
TOTAL CURRENT LIABILITIES 6,982 6,342
Deferred rent benefit 129 159
Obligations under capital leases, net of current maturities 51 2
Notes payable - stockholders, net of current maturities - 100
Notes payable - other, net of current maturities 43 129
---------- ----------
TOTAL LIABILITIES 7,205 6,732
STOCKHOLDERS' EQUITY :
Preferred stock, $.01 par value, authorized shares, 10,000,000
at September 30, 1997 and none at December 31, 1996; no shares
issued and outstanding at September 30, 1997 and December 31, 1996 - -
Common stock, $.01 par value, authorized shares, 30,000,000 at
September 30, 1997 and December 31, 1996; issued and outstanding
shares, 7,259,907 at September 30, 1997 and 7,238,922 at December 31, 1996 73 72
Additional paid-in capital 45,688 45,325
Accumulated deficit (35,668) (22,992)
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TOTAL STOCKHOLDERS' EQUITY 10,093 22,405
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,298 $ 29,137
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
APPACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unuadited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN
(in thousands, except share data) SHARES AMOUNT CAPITAL
------------ ---------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY REPORTED 1,072,835 $ 11 $ 569
Adjustment for pooling of interest 367,569 3 3
------------ ---------- ----------
Balance, as restated 1,440,404 14 572
Issuance of convertible preferred stock warrants - - 787
Issuance of common stock 2,623 - 7
Accretion of cumulative dividends and issue costs on
redeemable preferred stock - - -
Net loss - - -
------------ ---------- ----------
BALANCE AT DECEMBER 31, 1995 1,443,027 14 1,366
Issuance of common stock 788 - 7
Issuance of common stock through initial public offering 2,300,000 23 27,577
Accretion of cumulative dividends and issue costs on
redeemable preferred stock - - -
Conversion of convertible preferred stock 3,294,519 33 20,017
Conversion of convertible debt 122,257 1 999
Conversion of cumulative dividends on redeembable preferred stock 78,331 1 939
Reclass cumulative dividends on redeemable preferred stock to APIC - - (1,850)
Reclass accreted issue costs on redeemable preferred stock to APIC - - (608)
Reclass unaccreted issue costs on redeemable preferred stock to APIC - - (526)
Issuance costs of initial public offering - - (3,034)
Issuance of common stock options - - 438
Net loss - - -
------------ ---------- ----------
BALANCE AT DECEMBER 31, 1996 7,238,922 $72 $45,325
Issuance of common stock options - - 291
Exercise of common stock options 20,985 1 72
Net loss - - -
------------ ---------- ----------
BALANCE AT SEPTEMBER 30,1997 7,259,907 $73 $45,688
============ ========== ==========
<CAPTION>
CUMULATIVE
DIVIDENDS AND
ACCRETED ISSUE
COSTS ON
CUMULATIVE
REDEEMABLE ACCUMULATED
(in thousands, except share data) PREFERRED STOCK DEFICIT TOTAL
--------------- ----------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY REPORTED $ (878) $ (14,100) $ (14,398)
Adjustment for pooling of interest - 411 417
--------------- ----------- ------------
Balance, as restated (878) (13,689) (13,981)
Issuance of convertible preferred stock warrants - - 787
Issuance of common stock - - 7
Accretion of cumulative dividends and issue costs on
redeemable preferred stock (901) - (901)
Net loss - (3,706) (3,706)
--------------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 (1,779) (17,395) (17,794)
Issuance of common stock - - 7
Issuance of common stock through initial public offering - - 27,600
Accretion of cumulative dividends and issue costs on
redeemable preferred stock (679) - (679)
Conversion of convertible preferred stock - - 20,050
Conversion of convertible debt - - 1,000
Conversion of cumulative dividends on redeembable preferred stock - - 940
Reclass cumulative dividends on redeemable preferred stock to APIC 1,850 - -
Reclass accreted issue costs on redeemable preferred stock to APIC 608 - -
Reclass unaccreted issue costs on redeemable preferred stock to APIC - - (526)
Issuance costs of initial public offering - - (3,034)
Issuance of common stock options - - 438
Net loss - (5,597) (5,597)
--------------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 - ($22,992) $22,405
Issuance of common stock options - - 291
Exercise of common stock options - - 73
Net loss - (12,676) (12,676)
--------------- ----------- ------------
BALANCE AT SEPTEMBER 30,1997 - ($35,668) $10,093
=============== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(in thousands) 1997 1996
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,676) $ (2,120)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 797 665
Provision for doubtful accounts 570 75
Accretion of interest - 252
Stock options issued 67 5
Write-off of acquired in-process research and development costs 1,612 -
Write-off of product development costs 620 -
Cost of Acquisition 732 -
Write-off of intangible assets 436 -
Changes in operating assets and liabilities:
Accounts receivable 510 (1,489)
Other trade receivables 174 21
Other current assets (181) (263)
Intangible assets (35) -
Accounts payable and accrued expenses 547 (249)
Deferred rent (29) (19)
Deferred revenue 484 (690)
-------------------- --------------------
NET CASH USED IN OPERATING ACTIVITIES (6,372) (3,812)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (308) (131)
Purchase of furniture and equipment (493) (91)
Purchase acquisitions (2,915) -
Increase in short-term investments (4,923) (8)
-------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (8,639) (230)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (64) (153)
Principal payments on borrowings (225) (239)
Proceeds from issuance of preferred stock, net of issuance costs - (37)
Proceeds from issuance of common stock upon exercise of options 73 6
Proceeds from issuance of notes payable 20 75
Proceeds from initial public offering of common stock - 27,600
Issuance costs on initial public offering of common stock - (3,034)
Payments of cumulative dividends - (909)
-------------------- --------------------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (196) 23,309
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,207) 19,267
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,928 4,300
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,721 $ 23,567
==================== ====================
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 14 $ 128
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The financial information included herein is unaudited,
however, in the opinion of management, all adjustments (which include normal
recurring adjustments) considered necessary for a fair presentation have been
made. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, but the Company believes that the disclosures made are adequate to
make the information presented not misleading. For more complete financial
information, these financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1996 included in the Company's annual report. Results for interim periods are
not necessarily indicative of the results for any other interim period or for
the full fiscal year.
2. RESTRUCTURING CHARGE
During the third quarter, the Company recorded a restructuring charge of $1.6
million related primarily to the Company's decision to revise its business
strategy for the remainder of 1997 and 1998. The Company has decided to focus
on products for high-cost, high-risk patients, APACHE's core strength, and to
discontinue or postpone the development of certain products (including certain
cardiovascular products), resulting in the reduction of the current workforce.
The main components of the charge are as follows: write-off of capitalized
product development costs related to discontinued products, write-off of
intangible assets related to the CardioMac acquisition in January 1997 and
termination costs, including severance pay and related benefits. As of
September 30, 1997, substantially all the costs associated with the
restructuring charge had been paid.
3. ACQUISITIONS
On June 24, 1997, the Company purchased a neonatal database from the
Vermont-Oxford Network, Inc. The Company plans to develop new products and
services using the database which will provide the Company with strong
product/service offerings in the perinatal market. In connection with the
acquisition, the Company recorded a non-recurring charge related to acquired
in-process research and development costs of approximately $500,000 during the
second quarter of 1997.
On June 2, 1997, the Company acquired National Health Advisors Ltd. (NHA); a
healthcare management consulting firm focused on strategy and management
support services for progressive healthcare organizations and networks. The
former shareholders of NHA received approximately 368,000 shares of common
stock of APACHE in exchange for all the common stock of NHA. The acquisition
was accounted for as a pooling of interests and, as such, the accompanying
consolidated financial statements reflect the combined results of the pooled
businesses for the respective periods presented. In connection with the
acquisition, the Company recorded a one-time charge in the second quarter of
1997 for acquisition-related costs of $732,000. These costs consisted
primarily of professional fees.
5
<PAGE> 8
Separate results of APACHE and NHA for the periods preceding the acquisition
are as follows (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 1997 1996 1995
-------------- ---- ----
<S> <C> <C> <C>
REVENUE:
APACHE, previously
reported $ 2,401 $ 8,784 $ 7,024
NHA 665 2,810 2,741
------- ------- -----
Total, as restated $ 3,066 $11,594 $ 9,765
======= ======= =======
NET INCOME (LOSS):
APACHE, previously
reported $(3,282) $(5,661) $(3,808)
NHA 110 64 102
------ ------- ------
Total, as restated $(3,172) $(5,597) $(3,706)
======== ======== ========
</TABLE>
In January 1997, the Company acquired the assets of CardioMac, a point-of-care
data collection and reporting tool for the cardiac catheterization laboratory
and cardiovascular operating room, from Iowa Health Centers, P.C. d/b/a Iowa
Heart Center, P.C., Mercy Hospital Medical Center, Mark A. Tannenbaum, M.D. and
Iowa Heart Institute. The purchase price for this acquisition was $1.35
million in cash and options to purchase 150,000 shares of APACHE Common Stock
for a total value of $1.57 million.
The acquisition has been accounted for using the purchase method of accounting
and resulted in intangible assets totaling $482,000. The intangible assets
consist of software technology of $271,000, assembled workforce of $15,000 and
goodwill of $196,000. These assets were being amortized over 5 to 15 years.
In connection with the acquisition, the Company also acquired and recorded a
non-recurring charge related to acquired in-process research and development
costs of approximately $1.1 million during the first quarter of 1997. The
purchase price allocation and lives of assets were determined by an independent
appraiser.
During the third quarter of 1997, the Company decided to postpone the sale of
the CardioMac product, and any further development initiatives relative to this
product and the assets purchased from CardioMac. As a result of this decision,
the Company wrote-off the intangible assets relating to the acquisition
totaling $436,000. This write-off is included in the restructuring charge as
noted above.
4. LOSS PER SHARE
Loss per share is computed based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
period. Stock options and warrants were excluded because the effects would be
antidilutive.
6
<PAGE> 9
5. NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
changes the reporting requirements for earnings per share ("EPS") for publicly
traded companies by replacing primary EPS with basic EPS. The Company is
required to adopt this standard for its December 31, 1997 year-end. Since the
effect of outstanding options and warrants is antidilutive, management does not
believe that statement No. 128 will have an impact on net loss per share as
reported.
7
<PAGE> 10
APACHE MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 and 1996
On June 2, 1997, the Company acquired National Health Advisors Ltd. (NHA); a
healthcare management consulting firm focused on strategy and management
support services for progressive healthcare organizations and networks. The
acquisition was accounted for as a pooling of interests and, as such, the
accompanying consolidated financial statements and the following discussion of
results of operations reflect the combined results of the pooled businesses for
the respective periods presented.
CONSOLIDATED REVENUE. Revenue for the quarter ended September 30, 1997
decreased 49% to $1.7 million from $3.3 million in the prior year period.
Revenue for the nine months ended September 30, 1997 decreased 14% to $7.2
million from $8.4 million in the prior year period.
SYSTEMS AND RELATED PRODUCTS REVENUE. Systems and related products revenue for
the quarter ended September 30, 1997, decreased 96% to $75,000 from $1.7
million in the prior year period. Systems and related products revenue for the
nine months ended September 30, 1997, decreased 52% to $2.2 million from $4.5
million in the prior year period. The Company is currently developing and
producing its next generation of critical care products and it has entered into
several sales contracts with clients. These products have not yet been fully
developed. Accordingly, systems and related product revenue have been, and
will continue to be, nominal until such products are delivered, which is
expected to be in early 1998.
SUPPORT REVENUE. Support revenue for the quarter ended September 30, 1997
increased 55% to $550,000 from $354,000 in the prior year period. Support
revenue for the nine months ended September 30, 1997 increased 41% to $1.5
million from $1.1 million in the prior year period. Increase in support
revenue was due to the increase in the number of clients utilizing the
Company's systems.
PROFESSIONAL SERVICES REVENUE. Professional services revenue for the quarter
ended September 30, 1997 decreased 13% to $1.0 million from $1.2 million for
the prior year period. The decrease in professional services revenue was due
to the reduction of services sold to biotechnology companies, partially offset
by an increase in services and studies provided by Health Research Network
(HRN), which was acquired by APACHE in December 1996.
Professional services revenue for the nine months ended September 30, 1997
increased 27% to $3.5 million from $2.8 million for the prior year period. The
increase in professional services revenue was due primarily to the services and
studies provided by HRN, which was acquired by APACHE in December 1996.
8
<PAGE> 11
COST OF SYSTEMS AND RELATED PRODUCTS. Cost of systems and related products for
the quarter ended September 30, 1997 increased 9% to $520,000 from $479,000 in
the prior year period. Cost of systems and related products for the nine
months ended September 30, 1997 increased 11% to $1.8 million from $1.6 million
in the prior year period. The increase from the prior year was due to the
expansion of the Company's client service department to support the
implementation of systems contracted for during 1996 and the anticipated growth
in system sales during 1997 and 1998.
Cost of systems and related products for the third quarter increased to 693% of
systems and related products revenue from 28% in the prior year period. Cost
of systems and related products for the first nine months increased to 81% of
systems and related products revenue from 35% in the prior year period. The
increase as a percentage of revenue is primarily attributable to the decrease
in revenue for the periods combined with maintaining staffing levels to support
anticipated sales volume in the current and future periods.
COST OF PROFESSIONAL SERVICES. Cost of professional services for the quarter
ended September 30, 1997 increased 113% to $606,000 from $284,000 in the prior
year period. Cost of professional services for the nine months ended September
30, 1997 increased 138% to $2.0 million from $855,000 in the prior year period.
The increase was due to the costs associated with the services and studies
provided and additional staffing required to support anticipated sales volume
in the current and future periods.
RESEARCH AND DEVELOPMENT. Research and development expenses for the quarter
ended September 30, 1997 increased 32% to $727,000 from $550,000 in the prior
year period. Research and development expenses for the nine months ended
September 30, 1997 increased 73% to $2.1 million from $1.2 million in the prior
year period. The increase was due primarily to an increase in staffing
requirements related to the enhancement of current product lines as well as
development activities for new products and services. During the third quarter
of 1997, no product development costs were capitalized, compared to $55,000 in
the prior year period. As part of the restructuring charge, as noted below,
the Company wrote-off $620,000 related to capitalized product development
costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the quarter ended September 30, 1997 increased 26% to $3.3 million
from $2.6 million in the prior year period. This was due primarily to an
increase in the bad debt provision related to potential uncollectible accounts,
an increase in sales and marketing related activities and overhead costs
associated with the increase in staffing throughout the Company.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 increased 69% to $10.9 million from $6.5 million in the
prior year period. This was due primarily to acquisition costs related to the
NHA merger totaling $732,000, an increase in the bad debt provision related to
potential uncollectible accounts, overhead costs associated with the increase
in staffing throughout the Company, an increase in sales and marketing related
activities and an increase in expenses associated with public reporting
requirements.
9
<PAGE> 12
RESTRUCTURING CHARGE. During the third quarter, the Company recorded a
restructuring charge of $1.6 million related primarily to the Company's
decision to revise its business strategy for the remainder of 1997 and 1998.
The Company has decided to focus on products for high-cost, high-risk patients,
APACHE's core strength, and to discontinue or postpone the development of
certain products (including certain cardiovascular products), resulting in the
reduction of the current workforce. The main components of the charge are as
follows: write-off of capitalized product development costs related to
discontinued products, write-off of intangible assets related to the CardioMac
acquisition in January 1997 and termination costs, including severance pay and
related benefits.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In June 1997,
the Company purchased a neonatal database from the Vermont-Oxford Network, Inc.
The Company plans to develop new products and services with the database which
will provide the Company with strong product/service offerings in the perinatal
market. At the time of the acquisition, the Company recorded a non-recurring
charge resulting from the write-off of the acquired in-process research and
development costs. This charge totaled $500,000.
In January 1997, the Company acquired the assets of CardioMac, a point-of-care
data collection and reporting tool for the cardiac catheterization laboratory
and cardiovascular operating room, from Iowa Health Centers, P.C. d/b/a Iowa
Heart Center, P.C., Mercy Hospital Medical Center, Mark A. Tannenbaum, M.D. and
Iowa Heart Institute. At the time of the acquisition, the Company recorded a
non-recurring charge resulting from the write-off of the acquired in-process
research and development costs. This charge totaled $1.1 million.
OTHER INCOME(EXPENSE). Other income (expense) increased from $182,000 for the
quarter ended September 30, 1996 to $212,000 for the quarter ended September
30, 1997. The increase is due to a decrease in interest-bearing notes payable,
partially offset by a reduction in cash.
Other income (expense) increased from $55,000 for the nine months ended
September 30, 1996 to $672,000 for the nine months ended September 30, 1997.
The increase is attributable to interest income earned from the investment of
the net proceeds from the initial public offering of the Company's Common Stock
in July 1996 and a decrease in interest-bearing notes payable.
YEAR 2000 COMPLIANCE. The version of the Company's critical care system that
was sold to customers prior to 1997 is not year 2000 compliant. The new
version of the critical care system (for which the Company has taken orders in
1997) is currently under development and it is expected to be completed in
early 1998. The Company has redesigned its critical care system to include new
technical architecture and important new features and enhancements and it is
year 2000 compliant. The Company has decided not to support the older version
of the critical care system beyond the year 1999. The Company is offering to
existing clients the option to migrate to the new version of the critical care
system during the next two years. It is uncertain at this time whether all
clients will agree to migrate to the new version or whether all migrations can
be completed by the year 2000. As a result, the impact on the Company's future
operating results or financial position is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $11.7 million as of September 30, 1997
compared to $22.0 million as of December 31, 1996.
10
<PAGE> 13
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of Health Research Network for $1.57 million in cash paid
in January 1997. In January 1997, the Company acquired the assets of CardioMac
from Iowa Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy Hospital
Medical Center, Mark A. Tannenbaum, M.D. and Iowa Heart Institute for a payment
of $1.35 million in cash and options to purchase 150,000 shares of APACHE
Common Stock. Each of these acquisitions has been accounted for using the
purchase method of accounting and, accordingly, the assets have been valued at
their estimated fair value. Funding for the acquisitions was provided by the
proceeds of the Company's public offering completed in July 1996.
In June 1997, the Company acquired National Health Advisors Ltd. (NHA) for
approximately 368,000 shares of Common Stock of APACHE in exchange for all the
Common Stock of NHA. The acquisition was accounted for as a pooling of
interests and, as such, the accompanying consolidated financial statements
reflect the combined results of the pooled businesses for the respective
periods presented.
In April 1997, the Company entered into a secured revolving line of credit from
Crestar Bank providing for a borrowing capacity of $2.0 million. Borrowings
bear interest at a fluctuating rate equal to the Bank's prime rate plus 0.25%.
The Company also pays an annual fee on the total borrowing capacity of $2.0
million at a rate of 0.75% per annum. Borrowings are collateralized by the
Company's accounts receivable and all other uncommitted assets. The line of
credit expires on May 31, 1998. There are currently no borrowings under the
line of credit. Pursuant to the covenants under the line of credit, the
Company is not currently eligible to borrow funds under the line.
The Company anticipates that net proceeds from the initial public offering will
be sufficient to meet its planned ongoing operating and working capital
requirements and to finance planned product development, sales and marketing
activities and capital acquisitions for the next twelve months.
11
<PAGE> 14
PART II - OTHER INFORMATION
Item 5: Other Information
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company believes that a number of
important factors could cause the Company's actual results to differ from those
that may have been or may be projected in forward-looking statements made by or
on behalf of the Company from time to time. These factors are described under
the heading "Additional Item. Safe Harbor For Forward-Looking Statements" in
the Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 20, 1997.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
Exhibit
Number Description
- ------ -----------
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
(a) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended September 30, 1997.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
APACHE MEDICAL SYSTEMS, INC.
Date: November 10, 1997 /s/Gerald E. Bisbee, Jr., Ph.D.
------------------- --------------------------------------------
Gerald E. Bisbee, Jr., Ph.D.
Chief Executive Officer and President (Duly
Authorized Officer and Chief Financial
Officer)
13
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Description
- -------- -----------
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
14
<PAGE> 1
APACHE MEDICAL SYSTEMS, INC.
EXHIBIT 11-COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
------------------- -------------------
<S> <C> <C>
Income applicable to common shares:
Net loss $(5,038) $(591)
Increase in earnings resulting from conversion of convertible debt (1) - 119
=================== ===================
Loss applicable to common shares $(5,038) $(472)
------------------- -------------------
Weighted average number of common shares outstanding 7,258 3,674
Conversion of preferred shares and convertible debt (2) - 3,495
Cheap stock options and warrants (2) - 50
------------------- -------------------
Weighted average common shares 7,258 7,219
=================== ===================
Loss per common share $(0.69) $(0.07)
=================== ===================
<CAPTION>
Nine Months Ended September 30,
1997 1996
------------------ ------------------
<S> <C> <C>
Income applicable to common shares:
Net loss $(12,676) $(2,120)
Increase in earnings resulting from conversion of convertible debt (1) - 302
------------------ ------------------
Loss applicable to common shares $(12,676) $(1,818)
================== ==================
Weighted average number of common shares outstanding 7,247 2,193
Conversion of preferred shares and convertible debt (2) - 3,489
Cheap stock options and warrants (2) - 67
------------------ ------------------
Weighted average common shares 7,247 5,749
================== ==================
Loss per common share $(1.75) $(0.32)
================== ==================
</TABLE>
(1) Assumes the conversion took place January 1, 1996.
(2) Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common and common equivalent shares issued during
the twelve-month period prior to the filing of the initial public
offering, even when antidilutive, have been included in the calculation
as if they were outstanding for all periods, using the treasury stock
method and the initital public offering price of $12.00 per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QULAIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,721
<SECURITIES> 5,982
<RECEIVABLES> 3,367
<ALLOWANCES> (630)
<INVENTORY> 0
<CURRENT-ASSETS> 15,264
<PP&E> 3,300
<DEPRECIATION> (1,976)
<TOTAL-ASSETS> 17,298
<CURRENT-LIABILITIES> 6,982
<BONDS> 43
0
0
<COMMON> 73
<OTHER-SE> 10,020
<TOTAL-LIABILITY-AND-EQUITY> 17,298
<SALES> 7,189
<TOTAL-REVENUES> 7,189
<CGS> 0
<TOTAL-COSTS> 4,271
<OTHER-EXPENSES> 16,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> (12,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,676)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
