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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, 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 000-20805
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APACHE MEDICAL SYSTEMS, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2476415
- - -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Tysons Boulevard, McLean, Virginia 22102
- - --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(703) 847-1400
--------
(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 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
--- ---
7,307,133
---------
(Number of shares of common stock, $.01 par value per share,
outstanding as of October 15, 1998)
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APACHE MEDICAL SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the Three
Months and Nine Months Ended September 30, 1998 and 1997 1
Consolidated Balance Sheets for the Nine Months Ended September
30, 1998 (unaudited) and Year Ended December 31, 1997 2
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Nine Months Ended September 30, 1998 (unaudited)
and Year Ended December 31, 1997 3
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
PART II - OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Exhibits 14
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue $ 2,153 $ 1,671 $ 7,903 $ 7,189
Expenses:
Cost of goods sold 1,084 1,296 2,980 4,271
Selling, general and administrative 2,355 3,275 6,686 10,933
Research and development 514 727 1,300 2,098
Restructuring Charge 1,623 1,623
Write-off of acquired in-process
research and development costs - - - 1,612
----------- ----------- ----------- ------------
Total expenses 3,953 6,921 10,966 20,537
Loss from operations (1,800) (5,250) (3,063) (13,348)
Other income (expense):
Interest income 107 229 394 694
Interest expense (9) (17) (28) (32)
Other, net 3 - 3 10
----------- ----------- ----------- ------------
Net loss $ (1,699) $ (5,038) $ (2,694) $ (12,676)
=========== =========== =========== ============
Basic and diluted net loss per share $ (0.23) $ (0.69) $ (0.37) $ (1.75)
=========== =========== =========== ============
Weighted average number of shares used for calculation of net
per share 7,292 7,258 7,292 7,247
=========== =========== =========== ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
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APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,193 $ 5,634
Short-term investments 1,450 5,683
Accounts receivable, net 2,692 1,235
Other trade receivables 52 51
Prepaid expenses and other 858 405
---------------- ----------------
TOTAL CURRENT ASSETS 10,245 13,008
Other trade receivables, net of current maturities 18 57
Furniture and equipment 3,574 3,355
Less accumulated depreciation and amortization (2,553) (2,095)
---------------- ----------------
1,021 1,260
Intangible assets, net 523 611
---------------- ----------------
TOTAL ASSETS $ 11,807 $ 14,936
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 580 $ 553
Accrued expenses 4,283 5,580
Deferred revenue 2,212 1,630
Current maturities of obligations under capital leases 18 16
Current maturities of notes payable - other 163 95
---------------- ----------------
TOTAL CURRENT LIABILITIES 7,256 7,874
Deferred rent benefit 78 117
Obligations under capital leases, net of current maturities 33 47
Notes payable - other, net of current maturities 217 32
---------------- ----------------
TOTAL LIABILITIES 7,584 8,070
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000 at
September 30, 1998 and December 31, 1997; issued and outstanding
shares, 7,307,133 at September 30, 1998 and 7,267,756 at December 31,
1997. 73 73
Additional paid-in capital 45,754 45,703
Accumulated deficit (41,604) (38,910)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 4,223 6,866
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,807 $ 14,936
================ ================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
(in thousands) SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------- ------------ -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997, AS PREVIOUSLY REPORTED 7,238,922 72 45,325 (22,992) 22,405
Issuance of common stock options - - 291 - 291
Exercise of common stock options 10,490 - 30 - 30
Issuance of common stock under Employee Stock
Purchase Plan 18,344 1 57 - 58
Net loss - - - (15,918) (15,918)
-------------- ------------ -------------- -------------- ----------
BALANCE AT DECEMBER 31, 1997 7,267,756 73 45,703 (38,910) 6,866
Issuance of common stock under Employee Stock
Purchase Plan 39,377 - 51 - 51
Net loss - - - (2,694) (2,694)
-------------- ------------ -------------- -------------- ----------
BALANCE AT SEPTEMBER 30,1998 7,307,133 $73 $45,754 ($41,604) $4,223
============== ============ ============== ============== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
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APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,694) $ (12,676)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 546 797
Provision for doubtful accounts 30 570
Stock options issued - 67
Write-off of acquired in-process research and development costs - 1,612
Write-off of product development costs - 620
Write-off of intangible assets - 436
Cost of acquisition - 732
Changes in operating assets and liabilities:
Accounts receivable (1,487) 510
Other trade receivables 38 174
Other current assets (453) (181)
Intangible assets - (35)
Accounts payable and accrued expenses (1,270) 547
Deferred rent (39) (29)
Deferred revenue 582 484
------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (4,747) (6,372)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs - (308)
Purchase of furniture and equipment (219) (493)
Purchase acquisitions - (2,915)
Decrease (increase) in short-term investments 4,233 (4,923)
------------- --------------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 4,014 (8,639)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (12) (64)
Principal payments on borrowings (138) (225)
Proceeds from issuance of notes payable 391 20
Proceeds from issuance of common stock under employee stock purchase plan 51 -
Proceeds from issuance of common stock upon exercise of options 73
------------- --------------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 292 (196)
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (441) (15,207)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,634 20,928
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,193 $ 5,721
============= ==============
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 30 $ 31
============= ==============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by APACHE
Medical Systems, Inc. (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, 1997 included in the Company's Form
10-K. Results for interim periods are not necessarily indicative of the results
for any other interim period or for the full fiscal year.
Revenue for sales of systems and products requiring production activities both
before and subsequent to delivery is recognized by the percentage-of-completion
method using significant milestones to estimate progress toward completion.
Sales of other systems and products are recognized at delivery. Systems support
fees are recognized ratably over the period of performance. Professional
services revenue is recognized as these services are provided and is generally
billed on a time and material basis. Professional services do not involve
significant customization, modification or production of the licensed software.
Amounts received prior to the performance of service or completion of a
milestone are deferred. Revenue recognized for work performed for which billings
have not been presented to customers is recorded as unbilled.
2. BASIC AND DILUTED NET LOSS PER SHARE
The Company has implemented Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") Statement No. 128,
"Earnings Per Share," which requires dual presentation of basic and diluted
earnings per share. Basic loss per share includes no dilution and is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss per share
includes the potential dilution that could occur if securities or other
contracts were exercised or converted into common stock. Options and warrants
outstanding were not included in the computation of diluted net loss per share
as their effect would be anti-dilutive. Diluted net loss per share and basic
earnings per share are identical for all periods presented.
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3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 130 is currently effective and does not have a material impact on the
Company. SFAS No. 131 becomes effective for the Company's 1998 financial
statements. The Company has evaluated SFAS No. 131 and determined there is no
impact on its reporting and disclosure requirements.
The American Institute of Certified Public Accountants ("AICPA") has issued
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") that
supersedes Statement of Position 91-1. SOP 97-2 is effective for revenue
transactions entered into by the Company in fiscal years beginning after
December 15, 1997. The AICPA has also issued Statement of Position 98-4
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" ("SOP 98-4"). The Company has adopted SOP 97-2 and SOP 98-4. The
changes contained therein do not have a material financial impact on the
Company.
In February 1997, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits." The Company will adopt the
disclosure requirements for the year ending December 31, 1998 and does not
expect it will have a material financial impact on the Company.
4. STOCKHOLDERS' EQUITY
Stock Options
On January 2, 1998, the Board of Directors authorized a repricing program which
allowed active current employees to reprice all their outstanding options to
purchase Common Stock of the Company for a like number of shares at an exercise
price of $2 per share. Options to purchase approximately 480,044 shares of
Common Stock were repriced. Stock options that have been repriced may not be
exercised until July 2, 1998. The vesting schedule will be as follows: 20% would
vest immediately for employees with the Company for at least one year; 20% would
vest on each anniversary over the next five years; and for employees with the
Company less than one year, options will vest ratably over five years from the
date of grant.
On January 2, 1998, the Board of Directors authorized a repricing of stock
options to a Financial Advisor. Options to purchase approximately 22,029 shares
of Common Stock granted were cancelled and newly issued at $2.00 per share and
vest immediately as of January 2, 1998.
Effective January 28, 1998, the Board of Directors granted an aggregate of
156,000 performance-based incentive stock options to twelve members of the
Company's senior staff. The exercise price of these options is equal to the fair
market value of the Company's Common Stock on January 28, 1998 or $1.28 per
share. The options will vest on a quarterly basis, based upon the Company's
realization of the 1998 operating budget. The options will vest on January 28,
2003, regardless of whether the 1998 performance criteria have been satisfied,
if the employee remains employed by the Company at that time.
On July 1, 1998, the Board of Directors granted 500,000 incentive stock options
to Peter Gladkin, President and Chief Executive Officer of the Company. The
exercise price of these options is $2.51 per share. The vesting
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schedule will be fixed over the next 5 years. Vesting may be accelerated if
certain performance targets are satisfied during the 5-year period.
Effective July 1, 1998, the Board of Directors granted an aggregate of 20,000
incentive stock options to employees of the Company who have been with the
Company at least one year. The exercise price of these options is $2.00 per
share. The options will vest ratably over five years from the date of grant.
On September 14, 1998, the Board of Directors granted 50,000 incentive stock
options to an officer of the Company. The exercise price of these options is
$1.22 per share. The vesting schedule will be fixed over the next 5 years.
Vesting may be accelerated if certain performance targets are satisfied during
the 5-year period.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
On June 2, 1997, the Company acquired all of the common stock of National Health
Advisors, Ltd. ("NHA") in exchange for 367,564 shares of the Company's Common
Stock. NHA is a healthcare management consulting firm focused on strategy and
management support services for progressive healthcare organizations and
networks. The merger was accounted for as a pooling-of-interests. Accordingly,
the Company's financial statements were previously restated to include the
results of NHA for all periods presented.
REVENUE. Revenue for the quarter ended September 30, 1998 increased 29% to $2.2
million from $1.7 million in the prior year period. Revenue for the nine months
ended September 30, 1998 increased 10% to $7.9 million from $7.2 million in the
prior year period. This increase is related to an increase in revenue from
sales of its Critical Care Series ("CCS") product made during 1998 compared to
the prior year when systems revenue was nominal as the Company developed its
CCS product.
COST OF GOODS SOLD. Cost of goods sold for the quarter ended September 30, 1998
decreased 16% to $1.1 million from $1.3 million in the prior year period. Cost
of goods sold for the nine months ended September 30, 1998 decreased 30% to $3.0
million from $4.3 million in the prior year period. This decrease from the prior
year was due to decreases in staffing requirements, and third party license fees
for systems and related products; services that the Company has discontinued or
postponed; the development of certain other products; and the decision to focus
primarily on products for critical care patients, which resulted in the
Company's restructuring charge of $1.6 million during the third quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the quarter ended September 30, 1998 decreased 28% to $2.4 million
from $3.3 million in the prior year period. Selling, general and administrative
expenses for the nine months ended September 30, 1998 decreased 39% to $6.7
million from $10.9 million in the prior year period. This was due primarily to a
decrease in overhead costs associated with the Company's restructuring during
the third quarter of 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses for the quarter
ended September 30, 1998 decreased 29% to $514,000 from $727,000 in the prior
year period. Research and development
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expenses for the nine months ended September 30, 1998 decreased 38% to $1.3
million from $2.1 million in the prior year period. The decrease was due
primarily to a decrease in staffing requirements related to the development of
new products and services that the Company has discontinued or postponed as a
result of the Company's restructuring during the third quarter of 1997. During
the nine months ended September 30, 1998, no product development costs were
capitalized, compared to $308,000 in the prior year period, as technological
feasibility of the Company's products under development had not been achieved.
SALE OF ASSETS AND WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
COSTS. During the quarter, the Company sold its CardioMac assets to Intelligent
Business Solutions, Inc. The sale had no material impact on the financial
statements of the Company. The Company had 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, in January 1997. 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.
In June 1997, the Company purchased a neonatal database from the Vermont-Oxford
Network, Inc. In connection with the acquisition, the Company recorded a
one-time charge related to in-process research and development costs of
approximately $500,000.
OTHER INCOME (EXPENSE). Other income (expense) decreased from $212,000 for the
quarter ended September 30, 1997 to $101,000 for the quarter ended September 30,
1998. Other income (expense) decreased from $672,000 for the nine months ended
September 30, 1997 to $369,000 for the nine months ended September 30, 1998. The
decrease is due to a decrease in interest income as a result of a reduction in
cash.
YEAR 2000 READINESS. The Year 2000 computer problem originated from programmers
writing software code that used two digits instead of four to represent the
year. After December 31, 1999, computers and software may incorrectly assume
that the year is "1900" rather than "2000." This could lead to system failures
and disruptions to activities and operations. In addition, the Year
2000 is a leap year, which may further exacerbate incorrect calculations,
functions or system failures. At this time it is difficult to predict the
effects such disruptions could have and the liabilities that any company may
face as a result of these failures. Moreover, companies must not only consider
their own products and computer systems, but also the Year 2000 readiness of any
third parties, including principal vendors. The Company has identified the
following five phases to describe its process of achieving Year 2000 readiness:
awareness, assessment, renovation, validation and implementation.
State of Readiness
The Company became aware in early 1997 of its potential Year 2000 issues and
established a Year 2000 team with outside consultants to assess its Year 2000
issues and develop an overall strategy. In 1997, the Company began an
assessment of its products, and its own information technology ("IT") and non-IT
systems and the Company's vendors to determine whether they are or will be Year
2000 ready. To ensure that the IT and non-IT systems are, or will be, Year 2000
ready, surveys of the Company's products, services and systems were conducted.
These included but were not limited to: audits and analyses of the Company's
internal IT systems including hardware and software; assessment of critical
non-IT systems, including real estate and other embedded technologies; and
surveys of principal vendors as to Year 2000 readiness. The Company identified
several internal IT and non-IT systems that were not Year 2000 ready. These
internal systems have either been replaced with Year 2000 ready systems or will
be upgraded to the Year 2000 ready product. All internal system upgrades are
expected to be completed by the third quarter of 1999. The Company has received
written assurances from material principal vendors as to Year 2000 readiness
within that timeframe.
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The majority of the Company's efforts regarding Year 2000 readiness focused on
the Company's products, including software applications, operating systems,
relational database management systems, tools and utilites sold to clients. The
assessments indicated that the version of the Company's Medical Cost Management
Program ("MCMP") product, an application using UNIX based terminals/clients and
UNIX based servers requiring stand alone equipment, its operating system,
database releases and relational database management systems, that was sold to
customers prior to 1998, was not Year 2000 ready. The Company accordingly, has
focused its attention on its next generation CCS product (for which the Company
has taken orders in 1997). The Company believes the application, operating
systems and relational database management system release, tools and utilities
are Year 2000 ready. The CCS product also includes new features and
enhancements. The CCS product operates on a PC based client/UNIX server
platform, supporting Windows 95. The Company is now performing renovation and
validation activities on modules of the CCS product as they are being developed
and has begun to implement completed modules into the CCS product.
The assessment is complete for two other software applications that the
Company sold to clients. The Company is presently renovating and validating its
Acute Care Voyager+ product and HIV Manager product. The renovation and
validation of these products is scheduled to be completed in January 1999 and
implementation will begin in the first quarter of 1999.
Other software applications products sold by the Company are presently in the
assessment phase. The assessments of these products will be completed by
December 1998. Upon the completion of these assessments, an action plan will be
created for the renovation, validation, and implementation of changes to
deliver Year 2000 ready products by late 1999.
As an integral part of the Company's assessment, independent consulting firms
have been hired to provide additional testing and validation of the Company's
Year 2000 readiness of its software products currently being sold to its
customers. The goals and objectives of this assessment are to: validate that
software and hardware is Year 2000 ready; ensure that applications accurately
store and calculate information based on date fields which contain dates before
and after the Year 2000; ensure that communications software and hardware is
Year 2000 ready; ensure that appropriate stored and archived data will be
consistent with Year 2000 certified software; and engineer a test facility that
will be available to the Company's personnel, as well as its customers, to
verify that such certified systems are in fact Year 2000 ready. This additional
validation and testing has two phases. The first phase, consisting of
reassessment and renovation started during the third quarter of 1998, is
currently on schedule and in process. The second phase will repeat the process
of ongoing assessment, renovation of problems, and validation of corrections.
Validation of Year 2000 readiness will be completed during the first quarter of
1999.
Costs to Address Year 2000 Issues
The calculation of costs incurred has been limited to costs to bring the
Company's products, and its own IT and non-IT systems to Year 2000 readiness or
to accelerate replacement systems to become Year 2000 ready. Costs incurred in
the normal maintenance of the Company's IT and non-IT
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systems are not included. The Company estimates it has incurred approximately
$800,000 to date for Year 2000 assessment, renovation, validation, and
implementation and accelerated development costs, and that total costs through
implementation will be approximately $1.1 million.
Risks of the Company's Year 2000 Issues
As the existing MCMP product operating system and relational database
management system releases could not be confirmed Year 2000 ready, the Company
has decided not to support the MCMP product beyond October 1999. The Company
has offered existing clients the ability to migrate to the new CCS product
during the next year on favorable terms. A majority of the clients using the
old UNIX version of the MCMP product have previously indicated an intent to
migrate to the new CCS product. A few have indicated that they intend to
discontinue use of the existing product completely, and, like many participants
in the healthcare industry, several are still assessing their systems and
migration options. The Company has entered into an agreement with a vendor to
perform additional migration activities. Provided sufficient migration
contracts are executed in the fourth quarter of 1998 and first quarter of 1999,
the use of existing company resources augmented by this third party vendor are
expected to provide sufficient resources to enable essential migration
activities to be completed by October 1999. The favorable terms and migration
services offered to customers to encourage migration to the new CCS product are
not expected to have a material impact on the Company's future operating
results or financial position. Because the Company is not yet aware of the
plans of customers who have not yet accepted the Company's terms for migration
to the new CCS product, the Company is not yet able to fully evaluate the
impact of Year 2000 issues associated with the UNIX version of the MCMP
product. If a majority of existing customers do not in fact migrate to the new
CCS product, this would have a material adverse effect on the financial
position, results of operations, and liquidity of the Company. Due to the
uncertain nature of Year 2000 issues and their impact on the industry, the
outcome cannot be predicted at this time. This uncertainty should be resolved
and clarified by the fourth quarter of 1999.
Company's Contingency Plans
At the current time, the Company anticipates that essential products and IT and
non-IT systems will be validated as Year 2000 ready in all material respects.
This belief is based on the progress to date and the assessed degree of
difficulty associated with the remaining phases to achieve Year 2000 readiness,
the representations made by vendors and, where possible, testing. There can be
no assurance, however, of complete Year 2000 readiness. Contingency plans are
under development and the Company anticipates that acceptable alternatives will
be available in the event that a contingency arises. These contingency plans
generally anticipate use of alternative vendors for hardware and operating
systems. Nonetheless, it is not possible for the Company to fully assess the
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likelihood or magnitude of consequences of Year 2000 issues, should
representations made by vendors prove to be in error.
Year 2000 Information and Readiness Disclosure Act
This section captioned "Year 2000 Readiness," as well as other statements
herein or otherwise relating to the Year 2000 issues, are "Year 2000 Readiness
Disclosures" pursuant to the "Year 2000 Information and Readiness Disclosure
Act."
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $6.6 million as of September 30, 1998
compared to $11.3 million as of December 31, 1997.
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 expired
on May 31, 1998.
The Company anticipates that remaining net proceeds from the initial public
offering and funds generated from operations will be sufficient to meet its
planned ongoing operating and working capital requirements and to finance
planned product development, sales and marketing activities and capital
acquisitions through 1998. Through September 30, 1998, the Company has incurred
cumulative net operating losses of approximately $41.6 million. There can be no
assurance that the Company will be profitable in the future or that present
capital will be sufficient to fund the Company's ongoing operations. If
additional financing is required to fund operations, there can be no assurance
that such financing can be obtained or obtained on terms acceptable to the
Company.
The Company does not believe the impact of inflation has significantly affected
the Company's operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are forward-looking
statements under provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements involve risks and uncertainties. The
Company wishes to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect the
Company's actual results and could cause its actual results in fiscal 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Important factors that could cause actual results to differ materially include
but are not limited to the Company's: having sufficient sales and timely
collections to meet cash requirements and achieve profitability; ability to
correctly estimate and address its Year 2000 costs and liabilities; ability to
attract and retain key employees; success of its strategy to concentrate its
product offerings on high-risk, high-cost patients; ability to timely develop
new products and enhance existing products; ability to compete in the
competitive and rapidly evolving healthcare information technology industry;
success of its marketing and consulting efforts and ability to effectively
utilize its direct sales force; ability to protect proprietary information and
to obtain necessary licenses on commercially reasonable terms; ability to
comply with and adopt products and services to potential regulatory changes;
and ability to adapt to economic, political and regulatory conditions affecting
the healthcare industry.
11
<PAGE> 14
The Company's quarterly revenues and operating results have varied significantly
in the past and are likely to vary from quarter to quarter in the future.
Quarterly revenues and operating results may fluctuate as a result of a variety
of factors, including: the Company's relatively long sales cycle; variable
customer demand for its products and services; changes in the Company's product
mix and the timing and relative prices of product sales; the loss of customers
due to consolidation in the healthcare industry; changes in customer budgets;
investments by the Company in marketing or other corporate resources;
acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel costs,
as well as facilities costs, any unanticipated shortfall in revenue in any
fiscal quarter would have an adverse effect on the Company's results of
operations in that quarter. Accordingly, the Company's operating results for any
particular quarterly period may not necessarily be indicative of results for
future periods.
PART II - OTHER INFORMATION
Item 5. Other Information
On August 24, 1998, Regina M. Campbell was appointed Vice President and General
Counsel of the Company effective September 14, 1998. Most recently, Ms.
Campbell was Corporate Counsel for Medaphis Corporation and Health Data
Sciences Corporation.
On September 30, 1998, Karen C. Miller was appointed Vice President and Chief
Financial Officer of the Company effective October 1, 1998. Ms. Miller comes to
the Company from Medaphis Corporation where she was Controller of the Company's
Per-Se Technologies Division. Prior to that, she was Chief Financial Officer,
Vice President of Finance, Controller and co-founder of Health Data Sciences
Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ----- -----------
<S> <C>
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the quarterly
period ended September 30, 1998.
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 16, 1998 /s/Peter Gladkin
------------------- -------------------------------------------
Peter Gladkin
President and Chief Executive Officer
(Duly Authorized Officer and Chief
Financial Officer and Accounting Officer)
13
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C>
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
</TABLE>
14
<PAGE> 1
APACHE MEDICAL SYSTEMS, INC.
EXHIBIT 11.1-COMPUTATION OF EARNINGS(LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Income applicable to common shares:
Net loss $(1,699) $(5,038) $(2,694) $(12,676)
------------ ------------ ----------- ----------
Loss applicable to common shares $(1,699) $(5,038) $(2,694) $(12,676)
============ ============ =========== ==========
Weighted average number of common shares outstanding 7,292 7,258 7,292 7,258
Weighted average common shares 7,292 7,258 7,292 7,258
============ ============ =========== ==========
Basic and diluted net loss per common share $(0.23) $(0.69) $(0.37) $(1.75)
============ ============ =========== ==========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS FILED AS
PART OF THE APACHE MEDICAL SYSTEMS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,193
<SECURITIES> 1,450
<RECEIVABLES> 3,257
<ALLOWANCES> (513)
<INVENTORY> 0
<CURRENT-ASSETS> 10,245
<PP&E> 3,574
<DEPRECIATION> (2,553)
<TOTAL-ASSETS> 11,807
<CURRENT-LIABILITIES> 7,256
<BONDS> 78
0
0
<COMMON> 73
<OTHER-SE> 4,150
<TOTAL-LIABILITY-AND-EQUITY> 11,807
<SALES> 7,903
<TOTAL-REVENUES> 7,903
<CGS> 2,980
<TOTAL-COSTS> 2,980
<OTHER-EXPENSES> 7,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366
<INCOME-PRETAX> (2,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,694)
<EPS-PRIMARY> ($0.37)
<EPS-DILUTED> ($0.37)
</TABLE>
