<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 June 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
---------------------------------------------------------
APACHE MEDICAL SYSTEMS, INC.
- -------------------------------------------------------------------------------
(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
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
</TABLE>
(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
--- ---
7,299,735
---------
(Number of shares of common stock, $.01 par value per share,
outstanding as of August 5, 1998)
<PAGE> 2
APACHE MEDICAL SYSTEMS, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for
the Three Months and Six Months Ended June 30, 1998
and 1997 1
Consolidated Balance Sheets for the Six Months Ended
June 30, 1998 (unaudited) and Year Ended December 31,
1997 2
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the Six Months Ended June 30,
1998 (unaudited) and Year Ended December 31, 1997 3
Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements (unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Index to Exhibits 13
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue $ 2,277 $ 2,452 $ 5,749 $ 5,518
Expenses:
Cost of goods sold 985 1,441 1,897 2,975
Selling, general and administrative 2,045 4,507 4,329 7,658
Research and development 360 700 786 1,371
Write-off of acquired in-process
research and development costs - 500 - 1,612
------- ------- ------- -------
Total expenses 3,390 7,148 7,012 13,616
Loss from operations (1,113) (4,696) (1,263) (8,098)
Other income (expense):
Interest income 132 228 286 465
Interest expense (8) (7) (17) (15)
Other, net - 9 - 10
------- ------- ------- -------
Net loss $ (989) $(4,466) $ (994) $(7,638)
======= ======= ======= =======
Basic and diluted net loss per share $ (0.14) $ (0.62) $ (0.14) $ (1.05)
======= ======= ======= =======
Weighted average number of shares used for
calculation of net loss per share 7,289 7,245 7,289 7,242
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE> 4
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------- --------
(IN THOUSANDS EXCEPT
SHARE DATA)
ASSETS (unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,068 $ 5,634
Short-term investments 2,194 5,683
Accounts receivable, net 3,022 1,235
Other trade receivables 52 51
Prepaid expenses and other 457 405
-------- --------
TOTAL CURRENT ASSETS 11,793 13,008
Other trade receivables, net of current maturities 31 57
Furniture and equipment 3,518 3,355
Less accumulated depreciation and amortization (2,401) (2,095)
-------- --------
1,117 1,260
Intangible assets, net 552 611
-------- --------
TOTAL ASSETS $ 13,493 $ 14,936
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 561 $ 553
Accrued expenses 4,425 5,580
Deferred revenue 2,391 1,630
Current maturities of obligations under capital leases 17 16
Current maturities of notes payable - other 56 95
-------- --------
TOTAL CURRENT LIABILITIES 7,450 7,874
Deferred rent benefit 93 117
Obligations under capital leases, net of current maturities 38 47
Notes payable - other, net of current maturities 8 32
-------- --------
TOTAL LIABILITIES 7,589 8,070
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000 at June 30,
1998 and December 31, 1997; issued and outstanding shares, 7,299,735
at June 30, 1998 and 7,267,756 at December 31, 1997. 73 73
Additional paid-in capital 45,735 45,703
Accumulated deficit (39,904) (38,910)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,904 6,866
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,493 $ 14,936
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 5
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
(in thousands, except share data) 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 31,979 - 32 - 32
Net loss - - - (994) (994)
--------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 1998 (UNAUDITED) 7,299,735 $ 73 $ 45,735 ($ 39,904) $ 5,904
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (994) $(7,638)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 364 530
Provision for doubtful accounts 30 370
Stock options issued - 21
Write-off of acquired in-process research and development costs - 1,612
Cost of acquisition - 732
Changes in operating assets and liabilities:
Accounts receivable (1,817) 137
Other trade receivables 25 173
Other current assets (52) (70)
Intangible assets (1) (35)
Accounts payable and accrued expenses (1,147) 620
Deferred rent (24) (17)
Deferred revenue 761 196
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,855) (3,369)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs - (308)
Purchase of furniture and equipment (163) (408)
Purchase acquisitions - (2,915)
Decrease in short-term investments 3,489 -
-------- --------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 3,326 (3,631)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (8) (56)
Principal payments on borrowings (63) (178)
Proceeds from issuance of notes payable - 20
Proceeds from issuance of common stock under employee stock purchase plan 32 -
Proceeds from issuance of common stock upon exercise of options 59
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (39) (155)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS 434 (7,155)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,634 20,928
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,068 $13,773
======== ========
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 18 $ 17
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 7
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 provided that no significant vendor obligations
remain. 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.
5
<PAGE> 8
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 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 Company has adopted SOP 97-2 and the changes contained in SOP 97-2
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.
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.
6
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
On June 2, 1997, the Company acquired all 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 June 30, 1998 decreased 7% to $2.3
million from $2.5 million in the prior year period. Revenue for the six
months ended June 30, 1998 increased 4% to $5.7 million from $5.5 million in
the prior year period. This decrease is a result of changes in the
implementation schedule of Critical Care Series ("CCS") products offset by
increases in volume of the Health Outcomes Research services. These changes to
the CCS products included strategic product decisions to transition the systems
interface engine from a proprietary product to a commercially available product
thereby impacting the milestones under which the Company recognizes revenue.
COST OF GOODS SOLD. Cost of goods sold for the quarter ended June 30, 1998
decreased 32% to $985,000 from $1.4 million in the prior year period. Cost of
goods sold for the six months ended June 30, 1998 decreased 36% to $1.9
million from $3.0 million in the prior year period. This decrease from the
prior year was due to decreases in revenues, 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 June 30, 1998 decreased 55% to $2.0 million
from $4.5 million in the prior year period. Selling, general and
administrative expenses for the six months ended June 30, 1998 decreased 43%
to $4.3 million from $7.7 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 June 30, 1998 decreased 49% to $360,000 from $700,000 in the prior year
period. Research and development expenses for the six months ended June 30,
1998 decreased 43% to $786,000 from $1.4 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 six months ended June 30, 1998, no
product development costs were capitalized, compared to $308,000 in the prior
year period, as technological feasibility on the Company's products under
development had not been achieved.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In January
1997, the Company acquired the assets of CardioMac, a point-of-care data
collection and reporting tool for the cardiac
7
<PAGE> 10
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.
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 $230,000 for
the quarter ended June 30, 1997 to $124,000 for the quarter ended June 30,
1998. Other income (expense) decreased from $460,000 for the six months ended
June 30, 1997 to $269,000 for the six months ended June 30, 1998. The
decrease is due to a decrease in interest income as a result of a reduction
in cash.
YEAR 2000 READINESS. 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, that was sold to
customers prior to 1997 will not function properly as January 1, 2000
approaches. The Company has focused its attention on its next generation CCS
product (for which the Company has taken orders in 1997). It is Year 2000
ready and includes new features and enhancements. The CCS product operates on
a PC based client/UNIX server platform, supporting Windows 95. The costs
expended for CCS product development are being expensed as incurred.
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 two years on favorable terms. A majority of the
clients using the old UNIX version of the MCMP product have indicated an
intent to migrate to the new CCS product. A few have indicated that they
intend to discontinue use of the product completely, and, like many
participants in the health care 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. The use of existing
company resources augmented by this third party vendor is expected to provide
sufficient resources to enable all 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.
Currently, the Company has identified several internal computer systems that
are not Year 2000 ready. It is not expected that upgrading or replacing other
internal systems that are not Year 2000 ready will have a material effect in
1998 on the Company's financial statements taken as a whole.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $8.2 million as of June 30, 1998
compared to $11.3 million as of December 31, 1997.
8
<PAGE> 11
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 working capital requirements and to finance planned product
development, sales and marketing activities and capital acquisitions through
1998. Through June 30, 1998, the Company has incurred cumulative net operating
losses of approximately $39.9 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. The Company believes that
its current operating funds will be sufficient to meet its planned ongoing
operating and working capital requirements and to finance planned product
development, sales and marketing activities through 1998. 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.
9
<PAGE> 12
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 attract and retain key employees and to successfully replace its
chief financial officer; 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; ability to
correctly estimate and manage its Year 2000 costs and liabilities; 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; and ability to
comply with and adopt products and services to potential regulatory changes.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 19, 1998.
(b) Not applicable.
(c) At such meeting all six of the nominees for election as directors were
elected to hold office until the next Annual Meeting. The votes
cast with respect to each nominee for election as a director were as
follows:
<TABLE>
<S> <C> <C>
Nominee For Withheld
Gerald E. Bisbee, Jr., Ph.D. 5,534,693 180,677
Edward J. Connors 5,674,977 40,393
Thomas W. Hodson 5,674,977 40,393
William A. Knaus 5,653,477 61,893
Lawrence S. Lewin 5,674,977 40,393
Francis G. Ziegler 5,674,977 40,393
</TABLE>
10
<PAGE> 13
At such meeting the stockholders ratified the appointment of Arthur
Andersen LLP as the Company's independent accountants for the year
ending December 31, 1998. The votes cast with respect to such matters
were as follows:
For 5,704,129
Against 5,301
Abstain 5,940
Item 5. Other Information
On June 3, 1998 Peter Gladkin was appointed President and Chief Executive
Officer of the Company effective July 1, 1998. Most recently, Mr. Gladkin,
was President and Chief Operating Officer of Health Data Sciences
Corporation, a leading provider of clinical information systems. As a result
of Mr. Gladkin's appointment, the Company's interim management committee
consisting of the Company's Chairman of the Board, another director, and two
senior officers of the Company was dissolved effective June 30, 1998.
Effective July 15, 1998, Mr. Francis G. Ziegler resigned his position on the
Company's Board of Directors. Mr. Ziegler had been a director since 1994.
The Company has begun a search to replace this position.
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>
10.24 Consulting Agreement by and between Peter Gladkin and the Company,
dated May 12, 1998
10.25 Employment Agreement by and between Peter Gladkin and the Company,
dated May 30, 1998
10.26 Incentive Stock Option Agreement by and between the Company and Peter
Gladkin, dated April 17, 1998
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 for the quarterly
period ended June 30, 1998.
11
<PAGE> 14
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.
<TABLE>
<S> <C>
Date: August 14, 1998 /s/ Peter Gladkin
------------------------- -----------------
Peter Gladkin
President and Chief Executive Officer
(Duly Authorized Officer and Chief
Financial Officer and Accounting Officer)
</TABLE>
12
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.24 Consulting Agreement by and between Peter Gladkin and the Company,
dated May 12, 1998
10.25 Employment Agreement by and between Peter Gladkin and the Company,
dated May 30, 1998
10.26 Incentive Stock Option Agreement by and between the Company and Peter
Gladkin, dated April 17, 1998
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
13
<PAGE> 1
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of the 12th
day of May, 1998, between PETER GLADKIN, a resident of the State of California
("Consultant"), and APACHE MEDICAL SYSTEMS, INC., a Delaware corporation
("APACHE").
WHEREAS, APACHE desires to retain Mr. Gladkin to provide certain
management consulting services;
WHEREAS, Mr. Gladkin desires to provide such consulting services to
APACHE;
NOW, THEREFORE, in consideration of the mutual promises, conditions, and
covenants herein, the Parties agree as follows:
1. Term of Agreement. Subject to Section 10 of this Agreement, the term
of this Agreement shall be May 4, 1998, through June 30, 1998, unless extended
in writing by the Parties.
2. Services to be Provided. Consultant shall devote approximately 50 to
80 percent of his professional time assisting APACHE in developing strategic
planning initiatives, developing and achieving financial projections, and
evaluating APACHE's management and organizational needs as requested by, and in
accordance with direction received from, APACHE's Board of Directors.
3. Compensation for Services Rendered. APACHE agrees to pay the
Consultant a fixed per diem amount of $600.00 per day for each day that he
spends a substantial amount of time traveling and performing services under this
Agreement, irrespective of whether those services are rendered in Virginia,
California, Illinois or elsewhere.
a. Consultant shall not be eligible to participate in or receive
benefits under the employee benefit plans that APACHE maintains for its
employees during the term of this Agreement, including, but not limited to,
health benefits, paid vacation and sick leave, life insurance and medical
benefits.
b. APACHE shall pay Consultant $20,000.00 ($10,000.00 on May 15 and
$10,000.00 on June 15) as reimbursement for his air travel expenses between
Washington and California during the term of this Agreement, and for which
receipts will not be required. Additionally, APACHE shall reimburse Consultant
for verified and reasonable expenses that he incurs while performing services
for APACHE during the term of the Agreement, including expenditures for hotels,
meals, other air travel, local transportation and other business expenses in
accordance with APACHE's standard travel reimbursement policy.
<PAGE> 2
4. Payment of Taxes. By execution of this Agreement, Consultant
certifies that he is an independent contractor for federal and/or state
employment tax purposes. Consultant understands and agrees that he is
responsible for the payment of all taxes, including federal, state and local
employment taxes arising out of his activities and receipt of payment under this
Agreement. Pursuant to this Agreement, APACHE will not withhold, and is not
responsible for, federal or state employment or other taxes that may be assessed
and owed on the amounts that Consultant earns under this Agreement.
5. Independent Contractor Relationship. Consultant shall provide
professional services to APACHE as an independent contractor. He shall not be
considered an employee of APACHE during the term of this Agreement within the
meaning of any federal, state or local law, or within the meaning or application
of APACHE's employee benefit plans and related benefit policies and practices.
Consistent with his status as an independent contractor, Consultant may continue
to engage in other trade or business during the term of this Agreement.
6. No Conflict of Interest. Consultant represents that to the best of
his knowledge and belief, his performance of services under this Agreement will
not violate the terms of any non-competition or other employment agreement that
he may have executed or be subject to, and shall immediately advise APACHE in
writing should he become aware of, or should any claim be made of, such a
violation. Consultant further represents that his performance of services in
connection with Consultant's other consulting or employment relationships, if
any, shall not constitute a conflict of interest with APACHE, and that
Consultant shall advise APACHE in writing should such a conflict develop.
"Conflict of interest" shall mean the performance of services in competition
with APACHE's products and services, including its critical care and other
disease state outcomes management applications, its health care outcomes
research activities, and the consulting activities of National Health Advisors.
Additionally, Consultant agrees that he will not knowingly use or
disclose to APACHE any confidential and/or proprietary information that he may
have obtained from a prior employer concerning that employer's business or
operations in performing services for APACHE under this Agreement.
7. Ownership of Confidential and Proprietary Information. All
Confidential Information which becomes known to Consultant as a result of
performing services for APACHE shall be the sole property of APACHE, and APACHE
shall be the sole owner of all patents, copyrights and other rights in
connection therewith, including but not limited to the right to make application
for statutory protection. Consultant agrees not to use or disclose any
Confidential Information or anything directly relating to it without APACHE's
written consent, except as may be necessary in the ordinary course of performing
his consulting services for APACHE's benefit under this Agreement.
Notwithstanding these
- 2 -
<PAGE> 3
commitments, Consultant shall remain free to use (a) information in the public
domain not as a result of a breach of this Agreement and (b) his own skill,
knowledge, know-how and experience.
For purposes of this Paragraph, Confidential Information shall include,
but not be limited to, information that has been created, discovered, developed,
or otherwise become known to APACHE (including, without limitation, information
created, discovered, developed, or made known by Consultant during the period of
this Agreement) and/or in which property rights have been assigned or otherwise
conveyed to APACHE, which information has commercial value in the business in
which APACHE is or may become engaged. By way of illustration, but not
limitation, Confidential Information includes APACHE trade secrets, processes,
structures, formulas, data and know-how, improvements, inventions, product
concepts, techniques, marketing plans, strategies, forecasts, customer lists and
information about APACHE's employees and/or consultants (including without
limitation, the compensation, job responsibility and job performance of such
employees and/or consultants). Additionally, Confidential Information shall
include certain information that has been made known to APACHE from third
parties, including, but not limited to, patient identifying information,
physician identifying information, information that would link a client's name
to individual data, and any information protected by a confidentiality agreement
or terms and conditions of an agreement regarding confidentiality.
8. Inventions, Patents, Trademarks and Copyrights.
a. Consultant hereby assigns to APACHE the entire right, title
and interest in and to all Work Product produced by him in rendering services
under this Agreement. "Work Product" is defined as work product, including but
not limited to plans, programs, databases, writings, designs, models, drawings,
design inventions and any other inventions (including all proprietary rights in
any of the foregoing) made, conceived, or reduced to practice or adhered by the
Consultant, either solely or jointly with others, in the performance of this
Agreement or with the use of information, materials or facilities of APACHE
received or used by Consultant during the term of this Agreement or any
extensions or renewals of this Agreement.
b. Consultant agrees promptly to disclose to APACHE all Work
Product conceived, or reduced to practice or adhered by the Consultant as set
forth in a. above.
c. Consultant's Work Product shall be a work for hire, and APACHE
shall own the copyright thereto. The Consultant agrees to sign, execute and
acknowledge or cause to be signed, executed, and acknowledged without cost, but
at the expense of APACHE, any and all documents and to perform such acts as may
be reasonably necessary, useful or convenient for the purpose of securing to
- 3 -
<PAGE> 4
APACHE or its nominees, patent, trademark, copyright or other proprietary rights
protection throughout the world in the Work Product.
9. Termination. This Agreement may be terminated by either Party upon
fourteen (14) days written notice to the other Party. Such notice shall be
forwarded by registered mail to the following address:
<TABLE>
<S> <C>
Notice to APACHE: Mr. Thomas W. Hodson
Chairman of the Board
c/o NeuroSource, Inc.
515 N. State Street
Suite 1700
Chicago, IL 60610
Notice to Consultant: Mr. Peter Gladkin
P.O. Box 531
Cedar Glenn, CA 92321
</TABLE>
Consultant shall notify APACHE by certified mail of any change in his
address, and thereafter, APACHE shall forward any notices under this Agreement
to Consultant at such new address.
10. Assignment. This Agreement may not be transferred, subcontracted or
assigned by Consultant to any third party.
11. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
APACHE MEDICAL SYSTEMS, INC.
/s/ PETER GLADKIN By: /s/ THOMAS W. HODSON
- ----------------------------------- ---------------------------------
PETER GLADKIN
Its: CHAIRMAN OF THE BOARD
--------------------------------
Date: 5/20/98 Date: 5/20/98
------------------------------ -------------------------------
- 4 -
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into this 30th day
of May 1998, by and between Peter Gladkin (the "Executive") and APACHE MEDICAL
SYSTEMS, INC. (the "Company").
WHEREAS, the Company wishes to retain the services of the Executive; and
WHEREAS, Executive desires to be employed by the Company;
NOW, THEREFORE, in consideration of the promises and mutual agreements
made herein, and intending to be legally bound hereby, the Company and Executive
agree as follows:
1. Employment Term. Subject to Section 8, the term of this Agreement
shall be from July 1, 1998, through July 1, 2000. Should the Parties wish to
extend this Agreement beyond July 1, 2000, the Parties shall enter into a
renewal agreement delineating the terms and conditions of Executive's employment
no later than April 1, 2000.
2. Employment Duties. Executive will serve as President and Chief
Executive Officer of the Company subject to the direction and control of the
Board of Directors. Executive shall be fully responsible for all facets of the
Company's operations, with all of the Company's employees reporting to
Executive, either directly or indirectly. Executive agrees to perform and
discharge the duties assigned to him to the Board's reasonable satisfaction. In
performing such duties, Executive agrees to comply fully with all of the
Company's policies and standards and to follow the lawful instructions and
directives of the Board of Directors. Executive agrees to devote his full
professional time, skills and best efforts to the business of the Company and
will not, during the term of this Agreement, engage (whether or not during
normal business hours) in any other business or professional activity, whether
or not such activity is pursued for gain, profit or other pecuniary advantage,
without the prior written authorization of the Board of Directors, or its
designee. Subject to Section 12, Executive's retention of his current position
on the Board of Gull Laboratories, Inc. and participation on up to two
additional corporate and trade association boards shall not constitute a breach
of his commitment to devote his full time and energies to the Company, provided
that such Board memberships do not materially interfere with his performance of
responsibilities for the Company under this Agreement.
3. Board of Directors. Effective July 1, 1998, Executive will be named
as a member of the Company's Board of Directors. As a Director, Executive will
be permitted to nominate one additional member of the Board, whose nomination
will not be rejected unreasonably by the full Board. Executive will serve as a
member of
<PAGE> 2
the Nominating Committee responsible for filling vacant directors positions on
the Board during the term of this Agreement.
4. Compensation. For all services rendered by Executive under this
Agreement, the Company will pay Executive a base salary of $230,000 per annum,
in equal bi-weekly installments. Effective July 1, 1999, Executive's base salary
will increase by either five percent (5%) or at the then effective rate of the
Consumer Price Index, whichever rate is greater. Thereafter, the Compensation
Committee of the Board of Directors shall review Executive's base salary
annually during its year-end compensation review. The Company shall withhold
federal and state income and employment taxes from the salary amounts it
disburses to Executive under this Section.
5. Benefits.
(a) Executive will be entitled during the term of this Agreement
to four (4) weeks paid vacation and sick leave benefits as provided by the
Company's standard policies. Additionally, Executive shall be entitled during
the term of this Agreement to other benefits as may be provided from time to
time by the Company to its employees if and when he meets the eligibility
requirements for such benefits. The Company reserves the right to change or
discontinue any employee benefit plans or programs now being offered to its
employees and their dependents.
(b) The Company shall reimburse Executive for all reasonable
expenses incurred in connection with the performance of his duties under this
Agreement pursuant to the Company's standard business expense reimbursement
policies.
6. Relocation Allowance. The Company shall provide Executive a
relocation allowance as reimbursement for his relocation expenses in the amount
of $80,000. This allowance will be disbursed to Executive as follows: (i)
$20,000 will be paid on July 1, 1998; (ii) $30,000 will be paid upon the sale of
Executive's California residence or after 60 consecutive days of listing for
sale with a recognized real estate firm, but in no event, prior to July 1, 1998;
and (iii) $30,000 will be paid upon Executive's execution of a written
commitment to purchase of residence or physical relocation of his household
goods to the Washington metropolitan area, whichever occurs first.
7. Stock Options.
(a) Stock Option Agreement. Executive will be eligible to receive
stock options in the Company in accordance with the provisions and
requirements of the Stock Option Agreement attached as Exhibit 1 to this
Agreement.
- 2 -
<PAGE> 3
(b) Bonus Target. Executive will be eligible to receive additional
stock options worth $75,000.00, to be granted at the first meeting of the
Board of Directors following issuance of year-end results for 1998. The value
of such options shall be equal to fifty (50) percent of the fair market value
of the Company's stock at year-end, as averaged over the final ten (10)
trading days in 1998, and shall be awarded at fair market value on the day of
the grant. Except as provided in this Section 7(b), the grant of such options
shall be in accordance with the provisions and requirements of the Stock Option
Agreement attached as Exhibit 1 to this Agreement.
8. Termination.
(a) For Cause. Notwithstanding any other provision of this
Agreement, the Company may terminate Executive's employment for cause at any
time without notice. For purposes of this Agreement, "cause" shall mean the
Executive's (i) commission of an action against or in derogation of the
interests of the Company which constitutes an act of fraud, dishonesty, or moral
turpitude, or which, if proven in a court of law, would constitute a violation
of a criminal code or similar law; (ii) by reason of mental or physical
incapacity or disability, becoming unable to perform the essential functions of
his position for a period of ninety (90) days; (iii) material breach of any
material duty or obligation imposed upon the Executive by the Corporation; or
(iv) divulging the Corporation's confidential information. If the Executive is
terminated pursuant to this Section 8(a), the Company's obligations under this
Agreement shall cease, and, except as required by applicable law, Executive
shall forfeit all rights to receive any other compensation or benefits under
this Agreement, except that he shall be entitled to his base salary for services
rendered through the date of termination and accrued but unpaid vacation
benefits through the effective date of termination. Additionally, Executive
shall be entitled to any vested stock options, provided that such options have
been exercised either prior to or at the time the Company notifies him of his
termination. Termination of the Executive pursuant to this Section 8(a) shall
not relieve him of his obligations under Sections 11, 12 and 13.
(b) Without Cause. Notwithstanding any other provision of this
Agreement, the Company may terminate Executive's employment and this Agreement
without cause by providing Executive sixty (60) days written notice, provided
that in the event of such termination, Executive shall be entitled to all vested
stock options, which may be exercised as defined in this Agreement, and
continuation of his salary and Company-paid health benefits for twelve (12)
months. The Company will also continue Executive's life insurance and disability
benefits during this twelve (12) month period to the extent that the terms of
its group insurance policies and/or plans extend coverage to non-employees.
Additionally, any stock option that would have vested in the nine (9) months
after the effective date of Executive's termination will be accelerated to, and
vest on, the effective
- 3 -
<PAGE> 4
termination date. Executive's vested stock options may be exercised ninety (90)
days after the effective date of his termination.
(c) Material Change in Responsibilities. Notwithstanding any other
provision of this Agreement, should the Company materially change Executive's
responsibilities, Executive may provide the Company sixty (60) days written
notice of his objection to such change. The Company shall be afforded
forty-five (45) days from receipt of such notice to respond to and cure
Executive's objection(s). Should the Company fail to restore Executive's
responsibilities in full during this forty-five (45) day period, Executive shall
be entitled to resign and such resignation for purposes of salary and benefit
continuation and vesting, shall be treated as a termination without cause as
defined in Section 8(b). For purposes of this Section, a "material change in
responsibility" shall mean a material change in his duties or authority.
9. Termination Due to Change in Control.
(a) Defined. For purposes of this Agreement, a "change in control"
is: (1) the purchase or other acquisition by any person, entity or group of
persons, within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934 or any comparable successor provisions, of beneficial
ownership (within the meaning of Rule 13D-3 promulgated under such Act) of
thirty percent (30%) or more of either the outstanding shares of common stock or
the combined voting power of the Company's then outstanding voting securities
entitled to vote generally; (2) the approval by the stockholders of the Company
of a reorganization, merger or consolidation, in each case, with respect to
which persons who were stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own more
than thirty percent (30%) of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged or
consolidated Company's then outstanding securities; (3) a liquidation or
dissolution of the Company; or (4) the sale of all or substantially all of the
Company's assets.
(b) In the event that a change in control results in either an
involuntary termination of Executive through elimination of his position or
transfer of Executive to a location outside of a 50-mile radius of his permanent
residence, Executive shall be entitled to all options which have vested or are
otherwise due to vest pursuant to Section 10 of the Executive's Incentive Stock
Option Agreement with the Company, and continuation of his salary and
Company-provided health, disability and life insurance benefits for twelve (12)
months as provided in Section 8(b).
(c) In the event of Executive's termination pursuant to Section
9(b), Executive may, at his sole option, elect to receive payment of his twelve
(12) months salary in the form of a lump sum distribution, less applicable
withholdings, which
- 4 -
<PAGE> 5
shall be payable within twenty (20) days of the effective date of his
termination. Executive's election to such a lump sum distribution shall not
diminish Executive's obligations under Sections 11, 12 and 13.
(d) A "change in control" will not effect or diminish Executive's
rights and obligations under any provision of this Agreement, including,
without limitation, Sections 11, 12 and 13.
10. Election of Board Chair. In the event that the Board of Directors
elects a new Chairperson, other than Executive or Thomas Hodson, during the term
of this Agreement, Executive shall notify the Board in writing of any objections
he may have to the newly elected Chair within sixty (60) days of his or her
election. The Board shall thereafter be afforded forty-five (45) days to resolve
and redress Executive's concerns. Should the Board fail to redress Executive's
objections to his satisfaction, Executive may resign his employment and receive
the salary and continuation of his benefits as provided in Section 8(b).
11. Confidentiality. In the course of performing his duties under this
Agreement, Executive will have access to "Confidential Information." Executive
agrees and acknowledges that this Confidential Information constitutes a
valuable and unique asset of the Company and that its protection is of critical
importance to the Company. To ensure that such Confidential Information is not
disclosed or divulged to third persons, Executive agrees as follows:
(a) that Confidential Information is owned by the Company and
is to be held by Executive in trust and solely for the benefit of the Company;
(b) that he shall not disclose or otherwise make available such
Information to any person or entity without the prior written authorization of
the Board of Directors of the Company, except as necessary for the performance
of Executive's services under this Agreement;
(c) that he shall not in any way utilize such Confidential
Information for the gain or advantage or Executive or others or to the detriment
of the Company; and
(d) that upon termination of this Agreement, he shall promptly
return any and all such Confidential Information to the Company and shall
continue to abide by the confidentiality provisions of this Section.
For purposes of this Agreement, "Confidential Information" shall
include, but not be limited to, information that has been created, discovered,
developed, or otherwise become known to APACHE (including, without limitation,
information created, discovered, developed, or made known by Consultant during
the period of this Agreement) and/or in which property rights have been assigned
or otherwise
- 5 -
<PAGE> 6
conveyed to APACHE, which information has commercial value in the business in
which APACHE is or may become engaged. By way of illustration, but not
limitation, Confidential Information includes trade secrets, processes,
structures, formulas, data and know-how, improvements, inventions, product
concepts, techniques, marketing plans, strategies, forecasts, customer lists and
information about APACHE's employees and/or consultants (including without
limitation, the compensation, job responsibility and job performance of such
employees and/or consultants). Additionally, Confidential Information shall
include certain information that has been made known to APACHE from third
parties, including, but not limited to, patient identifying information,
physician identifying information, information that would link a client's name
to individual data, and any information protected by a confidentiality agreement
or terms and conditions of an agreement regarding confidentiality.
12. Non-Competition. Executive agrees and acknowledges that the Company
has a legitimate and necessary interest in protecting its goodwill, customer and
client relationships, and Confidential Information. Consistent with that
interest, Executive agrees that during the term of this Agreement and for a
period of eighteen (18) months following his receipt of notice of termination
under Section 8, that he will not, directly or indirectly, own, manage, control,
participate in, consult with, render services to or otherwise engage in any
Competitive Business, or solicit or assist any other person to engage in any
Competitive Business.
(a) For purposes of this Agreement, "Competitive Business" is
defined as (1) all entities and/or individuals with whom the Company has a
contract to provide support and services; (2) entities and/or individuals that
the Company has identified on its key prospect list at the time Executive
receives notice of his termination; and/or (3) any other business engaged in
developing, selling, licensing or otherwise merchandising computer programs,
databases and related manuals, service and/or know-how for the purpose(s) of:
(i) managing the quality and utilization of patient care or related services
using outcomes management applications; or (ii) assessing and/or predicting
mortality and other treatment outcomes of hospital patients or outpatients; or
(iii) otherwise recording patient health factors in connection with predicting
their treatment, managing clinical productivity or containing costs through the
use of outcomes management applications. Ownership of not more than three
percent (3%) or the outstanding securities of any class of any corporation that
are listed on a national securities exchange or traded in the over-the-counter
market shall not constitute ownership of a Competitive Business within the
meaning of this provision. If the Company expands, diminishes and/or changes the
scope of its business during the term of this Agreement, the definition of
Competitive Business hereunder will be considered automatically revised to
incorporate any such expansion, diminution and/or change.
- 6 -
<PAGE> 7
13. Non-Solicitation.
(a) Executive agrees that during the term of this Agreement and
for an eighteen (18) month period following his receipt of notice of his
termination under Section 8, he will not, directly or indirectly, without the
prior written consent of the Company, solicit or attempt to solicit business
from any individual or entity that was a customer of the Company at any time
during the six (6) month period immediately prior to Executive's termination of
employment with the Company.
(b) Executive agrees that during the term of this Agreement and
for an eighteen (18) month period following his receipt of notice of his
termination under Section 8, he will not, directly or indirectly, without the
prior written consent of the Company, solicit or induce any employee of the
Company to leave the employ of the Company or hire for any purpose any employee
of the Company.
14. Remedies. Executive agrees and acknowledges that the violation of
any of the covenants or agreements contained in Sections 11, 12 and 13 would
cause irreparable injury to the Company, that the remedy at law for such
violation or threatened violation would be inadequate, and that the Company will
be entitled, in addition to any other remedy, to temporary injunctive or other
equitable relief without the necessity of proving actual damages or posting a
bond.
15. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the respective
parties as follows:
<TABLE>
<S> <C>
If to the Company: Counsel
Chairman of the Board
c/o NeuroSource, Inc.
515 N. State Street, Suite 1700
Chicago, IL 60610
Notice to Executive: Mr. Peter Gladkin
P.O. Box 531
Cedar Glenn, CA 92321
</TABLE>
Executive shall notify the Company by certified mail of any change in
his address, and thereafter, the Company shall forward any notices under this
Agreement to Executive at such new address.
16. Entire Agreement. This Agreement embodies the entire agreement of
the Parties relating to Executive's employment and supersedes all prior
agreements, oral or written. No amendment or modification of this Agreement
shall be valid or enforceable unless made in writing and signed by the Parties.
- 7 -
<PAGE> 8
17. Assignment. This Agreement is one for personal services and may not
be assigned by Executive to a third party.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
19. Severability. Should one or more of the provisions of this Agreement
be held invalid or unenforceable by a court of competent jurisdiction, such
provisions or portions thereof shall be ineffective only to the extent of such
invalidity or unenforceability, and the remaining provisions of this Agreement
or portions thereof shall nevertheless be valid, enforceable and remain in full
force and effect. The Company's rights under this Agreement shall not be
exclusive and shall be in addition to all other rights and remedies available at
law or in equity.
APACHE MEDICAL SYSTEMS, INC.
/s/ PETER GLADKIN By: /s/ THOMAS W. HODSON
- ----------------------------------- ---------------------------------
PETER GLADKIN
Its: CHAIRMAN OF THE BOARD
--------------------------------
Date: 5/30/98 Date: 6/3/98
------------------------------ -------------------------------
- 8 -
<PAGE> 1
Exhibit 1
APACHE MEDICAL SYSTEMS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement (this "Agreement"), dated as of
April 17, 1998 (the "Grant Date"), is by and between APACHE Medical Systems,
Inc., a Delaware corporation (the "Corporation"), and Peter Gladkin (the
"Optionee"), a consultant to the Corporation.
1. Grant of Option. Subject to the provisions of the APACHE Medical
Systems, Inc. Employee Stock Option Plan (the "Plan") and this Agreement, the
Corporation hereby grants to the Optionee the right and option (the "Option") to
purchase from the Corporation an aggregate of 500,000 shares of the
Corporation's common stock, par value $0.01 per share (the "Shares"), at an
exercise price of $2.506 per Share, provided that on or before July 1, 1998 the
Optionee executes a written agreement to serve as President and Chief Executive
Officer of the Corporation.
2. Vesting and Expiration. The option rights of the Optionee will be
exercisable until July 1, 2008, provided that they have vested and, except as
otherwise expressly provided in this Agreement, the Optionee is employed by or
is a consultant to the Corporation. The Option shall vest as provided on Exhibit
A hereto.
3. Exercise Following Termination of Employment. If the Optionee ceases
to be a consultant to or an employee of the Corporation, the outstanding portion
of the Option shall be exercisable only in accordance with the following
provisions:
(a) If the Optionee's consultancy or employment with the
Corporation is terminated for "cause" (as defined below), the outstanding
portion of the Option, whether or not vested, shall terminate at the time notice
of termination is effective. As used herein, "cause" means the Optionee's (i)
commission of an action against or in derogation of the interests of the
Corporation which constitutes an act of fraud, dishonesty or moral turpitude or
which, if proven in a court of law, would constitute a violation of a criminal
code or similar law; (ii) material breach of any material duty or obligation
imposed upon the Optionee by the Corporation; or (iii) divulging the
Corporation's confidential information.
(b) If the Optionee's consultancy or employment with the
Corporation is terminated for any reason other than for cause (as defined
above), death or disability (as defined below), the outstanding portion of the
Option (to the extent vested prior to such termination) shall remain exercisable
until the first to occur of (i) the expiration date referred to in Section 2,
and (ii) the expiration of three months from the effective date of termination,
provided that if the Optionee ceases to be a consultant or employed by the
Corporation by reason of death or disability, the period referred to in this
clause (ii) shall be one year following the date the Optionee ceases to be a
consultant or an employee of the Corporation. If the Optionee dies during such
three-month period
<PAGE> 2
referred to in clause (ii), his or her estate may exercise the Option (to the
extent such Option was vested and exercisable prior to death), but not later
than the earlier of one year after the date of death or the expiration of the
term of the Option. As used herein, "disability" means the inability of the
Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or has lasted or can be expected to last for a continuous period
of not less than 12 months.
4. Acceleration Following Termination Other Than for Cause. In the event
Optionee's consultancy or employment is terminated other than for cause, any
Shares as to which the Option has not vested on the effective date of
termination that would have vested during the nine (9) months after the
effective date of Optionee's termination will be accelerated to, and vest on,
the effective date of Optionee's termination date.
5. Limitation on Exercisability. Notwithstanding any other provision
hereof (including, without limitation, Sections 4, 9 and 10, the Shares that may
be purchased for the first time during any calendar year pursuant to the Option,
together with any other options issued to the Optionee by the Corporation
intended to be incentive stock options (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended from time to time, or subsequent
comparable statute (the "Code")), shall not have a fair market value (determined
as of the respective Grant Dates of such options) in excess of $100,000.
6. Exercise. The Option may be exercised by delivering to the
Corporation at its principal offices a written notice, signed by a person
entitled to exercise the Option, of the election to exercise the Option and
stating the number of Shares to be purchased. Such notice shall be accompanied
by the payment of the full exercise price of the Shares to be purchased. Upon
payment in accordance with the Plan and within the time period specified by the
Corporation of the amount, if any, required to be withheld for Federal, state
and local tax purposes on account of the exercise of the Option, the Option
shall be deemed exercised as of the date the Corporation received such notice.
The Corporation may withhold, or allow the Optionee to remit to the Corporation,
any Federal, state or local taxes required by law to be withheld with respect to
any event giving rise to income tax liability with respect to the Option. In
order to satisfy all or any portion of such income tax liability, the Optionee
may elect to surrender Shares previously acquired by the Optionee or to have the
Corporation withhold Shares that would otherwise have been issued to the
Optionee pursuant to the exercise of the Option, the number of such withheld or
surrendered Shares to be sufficient to satisfy all or a portion of the income
tax liability that arises upon the event giving rise to income tax liability
with respect to the Option. Payment of the full exercise price shall be in the
form of cash, shares of capital stock of the Corporation having a fair market
value (as defined in the Plan) on the date of exercise equal to the full
exercise price, or by any combination of cash and shares of such capital stock.
Upon the proper exercise of the Option, subject to the other provisions of this
Agreement, the Corporation shall issue in the name of the person exercising the
Option, and deliver to such person, a certificate or certificates for the Shares
purchased.
<PAGE> 3
7. Nontransferability of Option. The Option shall not be transferable by
the Optionee except by will or the laws of descent and distribution. Without
limiting the generality of the foregoing, the Option shall not be sold,
transferred except as aforesaid, assigned, pledged or otherwise encumbered or
disposed of, shall not be assignable by operation of law, and shall not be
subject to execution, attachment or similar process. Any attempted sale,
transfer, pledge, assignment or other encumbrance or disposition of the Option
contrary to the provisions hereof, or the levy of any execution, attachment or
similar process upon the Option, shall be null and void and without effect.
During the lifetime of the Optionee, the Option may be exercised only by the
Optionee or the Optionee's agent, attorney-in-fact or guardian. Following the
death of the Optionee, the Option may be exercised by the Optionee's beneficiary
or estate to the extent permitted by Section 3.
8. Notice of Transfer of Shares. The Optionee may not transfer or
otherwise dispose of any Shares purchased upon the exercise of the Option before
the expiration of (a) two years from the Grant Date or (b) one year after the
exercise of the Option with respect to such Shares, whichever occurs later,
without first giving written notice to the Secretary of the Corporation.
9. Adjustments Upon Reorganization or Changes in Capitalization. In the
event of a stock split, stock dividend, recapitalization, reclassification or
combination of shares, merger, sale of assets or similar event, the Compensation
Committee of the Board of Directors shall adjust equitably (a) the number and
class of Shares or other securities that are reserved for issuance under the
Option, (b) the number and class of Shares or other securities that are subject
to the Option, and (c) the appropriate Fair Market Value and other price
determinations applicable to the Option. The Compensation Committee of the Board
of Directors shall make all determinations under this Section 9, and all such
determinations shall be conclusive and binding. As used herein, "Fair Market
Value" means the amount determined by the Compensation Committee of the Board of
Directors from time to time, using such good faith valuation methods as it deems
appropriate, except that as long as the Shares are traded on NASDAQ or a
recognized stock exchange, it shall mean the average of the highest and lowest
quoted selling prices for the Shares on the relevant date, or, if there were no
sales on such date, the weighted average of the means between the highest and
the lowest quoted selling prices on the nearest day before and the nearest day
after the relevant date, as prescribed by Treasury Regulation Section
20.2031-2(b)(2), as reported in The Wall Street Journal or a similar publication
selected by the Compensation Committee of the Board of Directors.
10. Acceleration of Exercisability. Except as stated in Exhibit A hereto
with respect to Tranches (D) and (E) and notwithstanding the provisions of
Section 2, the Option shall immediately vest, and until the expiration date
specified in Section 2 shall remain, exercisable as to all of the Shares
forthwith upon the occurrence of any Change in Control of the Corporation. As
used herein, "Change in Control" means the purchase or other acquisition by any
person, entity or group of persons, within the meaning of Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") or any
comparable successor provisions, of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either
<PAGE> 4
the outstanding Shares or the combined voting power of the Corporation's then
outstanding voting securities entitled to vote generally; the approval by the
stockholders of the Corporation of a reorganization, merger, or consolidation,
in each case, with respect to which persons who were stockholders of the
Corporation immediately prior to such reorganization, merger or consolidation do
not, immediately thereafter, own more than 30% of the combined voting power
entitled to vote generally in the election of directors of the reorganized,
merged or consolidated Corporation's then outstanding securities; a liquidation
or dissolution of the Corporation; or of the sale of all or substantially all of
the Corporation's assets.
11. Miscellaneous.
(a) Notices. Any notice hereunder shall be in writing, and
delivered or sent by first-class U.S. mail, postage prepaid, addressed to:
(i) if to the Corporation, at:
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102, and
(ii) if to Optionee, at:
Post Office Box 531
Cedar Glenn, CA 92321
subject to the right of either party, by written notice hereunder, to designate
at any time hereafter some other address.
(b) Compliance with Law and Regulations. The Option and the
obligation of the Corporation to sell and deliver Shares hereunder shall be
subject to all applicable Federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may be required.
Notwithstanding any other provision of this Agreement, the Option may not be
exercised if its exercise, or the receipt of Shares pursuant thereto, would be
contrary to applicable law.
(c) No Rights as Stockholder. The Optionee shall have no rights
as a stockholder with respect to any Shares subject to the Option prior to the
date of issuance to the Optionee of a certificate or certificates for such
Shares.
(d) No Employment Rights. Nothing in the Plan, this Agreement or
the grant of an Option shall confer upon the Optionee any rights to continued
employment with the Corporation or shall interfere with the right of the
Corporation to terminate the Optionee's employment with the Corporation.
<PAGE> 5
(e) Section 83(b) Election. If the Optionee elects, in accordance
with Section 83(b) of the Code, to recognize ordinary income in the year in
which the Option is granted, the Optionee shall furnish to the Corporation a
copy of a completed and signed election form and shall pay (or make arrangements
satisfactory to the Corporation to pay) to the Corporation, within sixty (60)
days after the Grant Date, any Federal, state and local taxes required to be
withheld with respect to the Option.
(f) Withholding. The Corporation shall, to the extent permitted
by law, have the right to deduct from any payment of any kind otherwise due to
the Optionee any Federal, state and local taxes required by law to be withheld
or collected with respect to the Option.
(g) Reservation of Shares; Certain Costs. The Corporation shall
keep available sufficient authorized but unissued Shares needed to satisfy the
requirements of this Agreement. The Corporation shall pay any original issue tax
that may be due upon the issuance of Shares pursuant to the Option and all other
costs incurred by the Corporation in issuing such Shares.
(h) Employment by Affiliates. For the purpose of this Agreement,
employment by a parent or subsidiary of, or a successor to, the Corporation
shall be considered employment by the Corporation. "Parent" and "subsidiary" as
used herein shall have the meaning of "parent" and "subsidiary corporation,"
respectively, as defined in Section 424 of the Code.
(i) Plan Governs. The Optionee hereby acknowledges receipt of a
copy of the Plan and agrees to be bound by its terms, all of which are
incorporated herein by reference. The Plan shall govern in the event of any
conflict between this Agreement and the Plan.
(j) Choice of Law. This Agreement shall be construed in
accordance with and be governed by the laws of the State of Delaware.
(k) Counterparts. This Agreement may be executed in two
counterparts each of which shall constitute one and the same instrument.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
APACHE MEDICAL SYSTEMS, INC.
/s/ THOMAS W. HODSON
-------------------------------
By: Thomas W. Hodson
Title: Chairman and Acting Chief Executive
Officer
/s/ PETER GLADKIN
-------------------------------
Peter Gladkin, Optionee
<PAGE> 7
EXHIBIT A
Vesting
The Option shall vest subject to the Corporation's performance and with
the passage of time as follows:
1. Immediate and Annual Vesting. The Option shall vest depending on time
and satisfaction of Earnings* targets as follows:
<TABLE>
<CAPTION>
Tranche Number of Shares Vesting Date
------- ---------------- ------------
<S> <C> <C> <C>
Immediate 40,000 upon start date (July 1, 1998)
(A) 80,000 1st Anniversary (July 1, 1999)
(B) 80,000 2nd Anniversary (July 1, 2000)
(C)** 100,000 3rd Anniversary (July 1, 2001)
(D)** 100,000 4th Anniversary (July 1, 2002)
(E)** 100,000 5th Anniversary (July 1, 2003)
</TABLE>
"Earnings" in all cases is defined as earnings before interest and taxes as
reported by the Corporation plus any agreed upon nonrecurring charges or
writedowns as long as these relate to pre-July 1, 1998 assets or activities.
**In order for the Option to vest as to these Shares, the Corporation must
report positive Earnings* for any consecutive four-quarter period (the "Earnings
Requirement"). If the Corporation does not meet such Earnings Requirement, then
the vesting of that Tranche shall be delayed until the Earnings Requirement is
met or the Vesting Date occurs.
2. Accelerated Vesting. At the discretion of the Board of Directors,
vesting may be accelerated if both Earnings* and stock price performance targets
are satisfied, but not necessarily simultaneously, as follows:
<TABLE>
<CAPTION>
Tranche Earnings Target AND Stock Price Target
- ------- --------------- ------------------
<S> <C> <C>
(A) any two consecutive quarters Closing price of $6 or
in which the Corporation higher for 20 consecutive
reports positive Earnings trading days
(B) any four consecutive Closing price of $9 or
quarters in which the higher for 30 consecutive
Corporation reports positive trading days
Earnings
(C) Earnings* greater than $1.0 Closing price of $12 or
million for any four higher for 60 consecutive
consecutive quarters of trading days
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
Earnings as reported in the
Company's Form 10-K and
Forms 10-Q filed with the
Securities and Exchange
Commission
(D)*** Earnings* greater than $3.0 Closing price of $15 or
million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in the
Company's Form 10-K and
Forms 10-Q filed with the
Securities and Exchange
Commission
(E)*** Earnings* greater than $4.0 Closing price of $18 or
million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in the
Company's Form 10-K and
Forms 10-Q filed with the
Securities and Exchange
Commission
</TABLE>
***Notwithstanding Section 10 of the Agreement, unless the Board of Directors
decides otherwise, Tranches (D) and (E) will not vest in case of Change in
Control prior to July 1, 2000, unless the consideration to the Corporation's
stockholders exceeds $15 per Share. All per Share price data referred to in
Section 2 of this Exhibit A shall be adjusted in accordance with Section 9 of
the Agreement.
<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 June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income applicable to common shares:
Net loss $(989) $(4,466) $(994) $(7,638)
------------ ------------ ------------ ------------
Loss applicable to common shares $(989) $(4,466) $(994) $(7,638)
============ ============ ============ ============
Weighted average number of common shares outstanding 7,289 7,245 7,289 7,242
Weighted average common shares 7,289 7,245 7,289 7,242
============ ============ ============ ============
Loss per common share $(0.14) $(0.62) $(0.14) $(1.05)
============ ============ ============ ============
</TABLE>
<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 JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,068
<SECURITIES> 2,194
<RECEIVABLES> 3,618
<ALLOWANCES> (513)
<INVENTORY> 0
<CURRENT-ASSETS> 11,793
<PP&E> 3,518
<DEPRECIATION> 2,401
<TOTAL-ASSETS> 13,493
<CURRENT-LIABILITIES> 7,450
<BONDS> 93
0
0
<COMMON> 73
<OTHER-SE> 5,831
<TOTAL-LIABILITY-AND-EQUITY> 13,493
<SALES> 5,749
<TOTAL-REVENUES> 5,749
<CGS> 1,897
<TOTAL-COSTS> 1,897
<OTHER-EXPENSES> 5,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> (994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (994)
<EPS-PRIMARY> ($0.14)
<EPS-DILUTED> ($0.14)
</TABLE>
