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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-20805
APACHE MEDICAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 23-2476415
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1650 Tysons Boulevard, McLean, Virginia 22102
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: (703) 847-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
Common Stock, $.01 par value per share
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____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 5, 1999 was approximately $8,258,649.
The number of outstanding shares of the registrant's Common Stock as of that
date was 7,343,176.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1999 are incorporated herein by reference
into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
APACHE Medical Systems, Inc. ("APACHE" or the "Company") provides
clinically based decision support information systems, research and consulting
services to the healthcare industry. The Company provides hospitals and
physicians with patient-specific, concurrent and predictive outcomes
information at the point of care that can be used to assist them in making
clinical and resource utilization decisions. APACHE's products and services
address the information needs of both healthcare practitioners and
administrators by enabling joint access to clinical and utilization information,
which facilitates both the containment of costs and the delivery of high-quality
care. APACHE's products and services are focused on high-risk, high-cost
patients, such as critical care, acute care, cardiovascular care and certain
chronically-ill patients, who typically account for a disproportionately large
share of healthcare expenditures.
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THE APACHE SOLUTIONS
APACHE believes that its products and services address the healthcare
industry's need for sophisticated outcomes-based clinical decision support
information. The APACHE solutions bridge the gap between the information needs
of healthcare practitioners and those of hospital administrators by enabling
joint access to clinical and cost information, which facilitates the containment
of cost, improvement in quality outcomes and the consistent delivery of high
quality care.
The Company's primary decision support system is focused on critical care
and targets hospitals and health systems with over 200 beds. For this market, in
1998 the Company introduced a new product line, the APACHE Critical Care
Series(TM) ("CCS"), and a companion set of clinical consulting services marketed
under the APACHE Best Care(TM) Services label. These replaced the Company's
previous Medical Cost Management Program ("MCMP") and related Critical Care
System offerings. The CCS is compromised of two major modules, Voyager+ and
Discover+, which are described below.
Generally, the Company's systems, which incorporate software and related
consulting services, generate information to assist providers concurrently in
making informed clinical resource utilization and patient care decisions. These
clinical decision support systems are designed to enable providers to:
-- Determine appropriate cost-effective treatment plans for individual
patients.
-- Compare actual individual patient outcomes with both predicted
patient outcomes and statistically relevant similar hospital, regional and
national norms to identify areas for improvement.
-- Analyze the performance of physicians by using clinically based,
peer-reviewed, severity-adjustment methods.
-- Analyze and measure quantifiable improvements in the clinical and
cost outcomes of specified groups of patients.
-- Plan staffing, number of beds and bed mix given the
severity-adjusted mix of patients in an intensive care unit.
APACHE's products and services are differentiated from many other
healthcare decision support systems in the following important ways:
-- Detailed Clinical Data. APACHE's products and services utilize
detailed clinical data on a variety of health parameters and outcomes data.
In addition, APACHE's products and services utilize administrative and
utilization data.
-- Patient-specific, Severity-adjusted Data. APACHE's products and
services utilize clinical, demographic and financial data for individual
patients, in addition to patient groups. APACHE's methodologies are
designed to severity-adjust these data to enable the assessment of the
overall health status of the patient. Severity adjustment is a technique
for weighting the relative factors affecting the degree of illness of a
patient. Physicians use APACHE's patient-specific clinical decision
support systems to develop individual patient care plans incorporating
APACHE's severity-adjusted outcomes predictions.
-- Concurrent, Predictive Outcomes Information. APACHE's systems
support physician decision making by providing outcomes information in
three timeframes: (i) predictions of the patient's outcomes (e.g.,
mortality, adverse occurrences and length of stay); (ii) current
information, such as the patient's daily health status; and (iii)
historical or retrospective information about the patient or groups of
similar patients. In contrast to retrospective systems, APACHE's ability to
provide concurrent information permits the generation of predictive
information during the course of a patient's care, thereby enhancing a
physician's ability to direct treatment resources as the patient's health
status changes.
-- High-risk, High-cost Patient Focus. Unlike decision support systems
that focus primarily on general hospital patients, APACHE's systems are
specifically designed to help predict outcomes for high-risk, high-cost
patients, such as critical care patients. These patients typically
represent a disproportionately large share of hospital costs.
APACHE's solutions are derived from the Company's clinical outcomes
methodologies and proprietary databases.
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Clinical Outcomes Methodologies. APACHE's methodologies include algorithms
that apply relative weightings to selected physiological variables to define a
patient's health status. APACHE's methods of measuring variations in a patient's
health status and outcomes in critical care have been utilized in connection
with more than 600 peer-reviewed articles in professional journals. APACHE has
acquired rights to and refined these methodologies, which were originally
developed by leading academic medical centers such as The George Washington
University Hospital and Dartmouth-Hitchcock Medical Center.
Proprietary Databases. The Company's databases include data on a variety of
health parameters, such as vital signs, laboratory results and measures of
physiological function, as well as outcomes data, such as adverse occurrences,
morbidity and mortality. The databases contain information from more than
700,000 patients, most of whom are high-risk, high-cost patients. The Company
created, and continues to refine, the critical care and sub-acute care
databases. APACHE acquired rights to its cardiovascular care, acute care,
HIV/AIDS, and neonatal databases. In cardiovascular and acute care, APACHE also
acquired the rights to related methodologies. APACHE's databases are
periodically updated with patient data from customers as well as special
studies, with the goal of ensuring that the databases reflect the results of
current medical practice on a national basis.
APACHE's products and services are currently focused on coverage of
patients in the critical, acute, sub-acute, and cardiovascular care categories.
The Company also currently offers products, consulting services, and health
outcomes research in HIV/AIDS and is considering adding additional categories in
the future.
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APACHE PRODUCTS AND SERVICES
The following tables summarize the major products and services offered by
the Company.
APACHE PRIMARY INFORMATION SYSTEMS PRODUCTS:
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PRODUCT PRODUCT LINE TARGET MARKET PRODUCT DESCRIPTION
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Benchmark Study Critical care; cardiovascular Acute care hospitals with One-time comparative analysis and
care ICU's; acute care report of a provider's clinical
hospitals with heart and financial performance; used to
centers identify and quantify
opportunities for cost or quality
improvement.
APACHE Critical care Acute care hospitals with Point-of-care information system,
Critical Care ICU's providing daily and prospective
Series: outcomes predictions, as well as,
Discover+ response to treatment trending and
reporting. These tools support the
case management of individuals and
patient groups.
APACHE Critical care Acute care hospitals, Multi-dimensional analytical tools
Critical Care hospital systems, with providing severity adjusted
Series: Voyager+ ICUs outcomes compared to normative
standards, integration of
financial and clinical outcomes
and standard reports.
APACHE Acute Acute care Acute care hospitals, Used for quality assurance and to
Care Voyager+ business coalitions identify priorities for clinical
process improvement and assess
results of these initiatives. Both
Critical Care and Acute Care
Voyager+ products include JCAHO
ORYX-certified outcomes measures.
HIV Manager HIV/AIDS Physicians and Physicians' Physician practice management tool
Groups including electronic medical
record and outcomes comparisons to
national and group norms.
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APACHE HEALTH OUTCOMES RESEARCH AND DISEASE MANAGEMENT PRODUCTS SERVICES:
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PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
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Clinical Trial All Product Lines Pharmaceutical, Protocol/analytic study design;
Support biotechnology, medical severity adjusted risk prediction
device/diagnostic companies; modeling in support of efficacy
contract research testing and reporting.
organizations
Product Marketing All Product Lines Pharmaceutical, Outcomes research; market analysis;
Information Tools biotechnology, medical data sets; data analysis; reporting
device/diagnostic companies; and related services.
contract research
organizations
Disease Management All Product Lines Pharmaceutical, Short and long-term cost benefit
Programs biotechnology, medical analysis; risk prediction
device/diagnostic companies; models/methodologies; best practice
contract research norms/protocols.
organizations; healthcare
providers
Custom Analysis, All Product Lines Pharmaceutical, Data management, analysis and
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Report Cards, biotechnology, medical reporting services offering
Registries device/diagnostic companies; comparisons to best demonstrated
contract research practices, regional norms, national
organizations; healthcare norms.
providers
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APACHE BEST CARE CLINICAL CONSULTING SERVICES:
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PRODUCT PRODUCT LINE TARGET MARKET SERVICE DESCRIPTION
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Clinical Process Critical Care Hospitals and IDSs Assesses the organization's performance against national norms
Improvement and best practices; determines organization readiness for
Program change, and implements one process improvement project delivered
simultaneously with a hospital's implementation of CCS products.
Annual Performance Critical Care Hospitals and IDSs Assesses the organization's performance in light of both
national norms, best practices and new medical practice and care
process developments uncovered by APACHE database analysis and
outcomes research; can be used in conjunction with client's
budgeting process to plan priorities, staffing and investment.
Bed Planning Study Critical Care Hospitals and IDSs Projects and plans for the hospital's daily demand for intensive
care and/or step-down unit beds in light of planned or potential
APACHE recommended care management changes.
Operations Hospital wide Hospitals and IDSs Rapid redesign of hospital operations and
Improvement care delivery infrastructure.
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APACHE/NATIONAL HEALTH ADVISORS STRATEGIC CONSULTING SERVICES:
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PRODUCT TARGET MARKET SERVICE DESCRIPTION
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Strategic Planning Acute Care Hospitals Three to five year strategic plans, vision
Studies Regional Delivery Systems development, product line analyses, and
implementation plans.
Integrated Delivery Acute Care Hospitals Partners'analyses and development and
Network (IDN) implementation of mergers/post-merger integration.
Development &
Implementation
Physician Acute Care Hospitals Development of Physician Hospital Organization's,
Integration Studies Networks practice acquisition, and related economic
vehicles designed to align economic incentives
between physicians and hospital/networks.
Leadership Retreats Acute Care Hospitals Annual leadership meeting of governance, medical
Networks staffs, and management which address critical
governance, management, and medical issues.
Clinical Service Acute Care Hospitals Development of discrete, branded service lines.
Line Development Networks
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CUSTOMER TRAINING AND SUPPORT
The Company provides standard and custom training programs to customers on
the use of APACHE's products. In addition to direct user training, APACHE
trains customer representatives to train their own personnel. Following initial
standard training, the Company provides customer software support, a toll-free
customer service hotline and periodic standard product upgrades. Customers pay
an annual software support service fee approximately equal to 18% of the
software license portion of the product price for ongoing software support
services.
CUSTOMERS
APACHE currently markets its products and services to three types of
customers: healthcare providers, healthcare suppliers, and
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government. The Company's healthcare customers include hospital-based integrated
delivery systems, academic and teaching hospitals and individual not-for-profit
hospitals within integrated systems. In addition, APACHE's provider customers
include Vencor, Inc., a multi-facility provider of long-term healthcare and
medical coalitions. The Company's healthcare supplier customers are
pharmaceutical manufacturers, biotechnology firms, and medical device companies.
The Company also offers health outcomes research and database services to
federal and state government agencies such as The Centers for Disease Control
("CDC"). In 1998, Vencor was the Company's largest customer, accounting for 10%
of revenues.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and the
enhancement of existing product lines are important to continue to build on its
competitive position. APACHE releases enhancements, standard upgrades, revisions
and new products on an ongoing basis.
The Company's development strategy includes products and services that: (i)
leverage APACHE's databases; (ii) increase the functionality of current
products; and (iii) expand coverage along the continuum of care to additional
disease or procedure groups. The Company's major products are based on
internally developed software and analytical studies. Late in 1998, the Company
began selling turnkey systems including computer hardware sourced from the
manufacturers. The software products are generally built on a client/server
architecture that includes UNIX or Windows NT-based servers, Windows 95/NT-based
PCs, graphical user interfaces and other software developed by third-party
vendors. The server hosts a comprehensive data repository using relational
database management system ("RDBMS") and multidimensional database ("MDDB")
technologies. The server can interface with hospital systems, such as the
laboratory, admission and bedside charting systems, and uses an open standard
Hublink interface engine to support the current versions of the industry
standard Health Level 7 information exchange protocols.
In 1998, the Company commissioned an independent third party to undertake
a feasibility study concerning development by the Company of an architecture
pursuant to which the Company could provide its clients with Internet-based
access to certain of the Company's products. The Company has decided to proceed
with the first phase of pilot system projects. The Company is still in the
initial phases of development and is not in a position to assess the timing of
release of such applications, if at all, or their costs or impact, if any, on
the Company's operations.
SALES AND MARKETING
The Company currently markets and sells its products and services through a
direct sales force. APACHE believes that the most effective use of its direct
sales force is in marketing the CCS and Best Care program to hospital systems
and individual hospitals with 200 or more licensed beds.
During 1998, the Company continued its marketing agreement with an
affiliate of Premier, Inc., which provides buying services to a group of
approximately 1,700 hospitals. Pursuant to the agreement, the Premier affiliate
has designated the Company as the exclusive supplier to the hospitals purchasing
through the Premier buying group of clinically-based outcomes data systems for
high-risk, high-cost patients, including critical care, cardiovascular care and
medical-surgical care patients, through December 31, 1999.
In the second half of 1998, the Company launched the APACHE partnership
program. This is a risk sharing system partnership, including consulting
services, which allows the client access to the APACHE Critical Care system
benefits without the need for outright purchase of the system. The Company
believes that this risk sharing approach has been initially well received by
prospective partnership clients.
APACHE's consulting services are marketed both as part of the Best Care
program and separately by the Company's consultants. The Company's Health
Outcomes Research and strategic consulting services are marketed by the
developers of those programs and other Company professionals directly to
suppliers and providers as well as through IMS America.
PROPRIETARY RIGHTS
The Company continues to make significant investments in the development
and maintenance of its risk-adjustment methodologies and its proprietary
clinical and financial databases and software. The clinical databases maintained
by the Company include a highly detailed level of clinical information that the
Company believes provides a key advantage over competing decision support
systems when combined with APACHE's value-added clinical software. APACHE has
multi-disciplinary clinical and database management personnel that audit, edit
and standardize data from customers and other sources to maintain statistically
relevant databases. The Company believes that the sophistication of its
risk-adjustment methodologies, the size and richness of its corresponding
proprietary databases and the usefulness of its software provide better outcomes
measurements and utilization control than competitive systems.
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The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes its software products under agreements that grant
customers non-exclusive licenses and contain terms and conditions restricting
the disclosure and use of APACHE's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, APACHE
attempts to protect the secrecy of its proprietary databases and other trade
secrets and proprietary information through agreements with employees and
consultants. Portions of APACHE's methodologies are, however, available in
scientific literature and bona fide researchers have been granted access to
portions of APACHE's databases for peer review and other research purposes.
The Company also seeks to protect the source code of its software and its
databases as trade secrets and under copyright law. The Company has copyright
registrations for certain of its software, user manuals and databases. The
copyright protection accorded to databases, however, is fairly limited. While
the arrangement and selection of data are protectable, the actual data are not,
and others are free to create databases that perform the same function. The
Company believes, however, that the creation of competing databases would be
very time consuming and costly.
"APACHE" is registered as a trademark and/or service mark in connection
with certain of the Company's current products and services in the United
States, Australia, the Benelux countries, Brazil, Canada, France, Germany,
Italy, Sweden and the United Kingdom. The Company believes that it has developed
substantial goodwill in connection with its mark as an indicator of quality
products and services.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and its reliable product maintenance and
support are integral to establishing and maintaining a leadership position
within the healthcare industry. In addition, although the Company believes that
its products do not infringe upon the proprietary rights of third parties, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim.
COMPETITION
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical outcomes systems are achieving documented
success in impacting cost and quality and demonstrating an attractive payback on
the decision support system investment. Other differentiating factors include
quality and depth of the underlying clinical outcomes databases, the proprietary
nature of methodologies, databases and technical resources, customer service and
support, compatibility with the customer's existing information systems,
potential for product enhancement, vendor reputation, price and the
effectiveness of marketing and sales efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as MECON, Inc., HCIA Inc., Transition Systems,
Inc. and Iameter. Other companies that provide healthcare information systems
include Cerner Corporation, McKessonHBOC, Shared Medical Systems Corporation,
IDX Systems Corporation, VitalCom Inc. and Medical Information Technology, Inc.
A number of these companies both compete for the health system's information
investment dollars and represent potentially attractive distribution channels
for the Company. The Company's products and services differ from the products
and services offered by competitors by the clinically data-based, acquity
adjusted focus on both high-risk, high-cost patients for both concurrent and
predictive outcomes information. Many of the Company's competitors and potential
competitors have greater financial, product development, technical and marketing
resources than the Company, and currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. The Company
also faces potential competition from existing and new industry associations,
such as the Project Impact initiative, sponsored by the Society for Critical
Care Medicine, who may collect data from their member physicians in order to
build registry services and comparative reports. As the market for decision
support systems develops, additional competitors may enter the market and
competition may intensify. While the Company believes that it successfully has
differentiated itself from competitors, there can be no assurance that future
competition would not have a material adverse effect on the Company.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial
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regulation under state and federal laws and regulations. To protect patient
confidentiality, data entries to APACHE's databases omit any patient
identifiers, including name, address, hospital and physician. The Company
believes that its procedures comply with the laws and regulations regarding the
collection of patient data in substantially all jurisdictions, but regulations
governing patient confidentiality rights are evolving rapidly and are often
difficult to apply. Additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. This legislation may require holders of such information to implement
security measures that may be of substantial cost to the Company. There can be
no assurance that changes to state or federal laws would not materially restrict
the ability of the Company to obtain patient information originating from
records.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's customers.
Healthcare industry participants may react to these proposals by curtailing or
deferring investments, including investments in the Company's products. The
Company cannot predict what impact, if any, such factors may have on its
business, financial condition and results of operations or on the price of the
Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the Food and Drug
Administration ("FDA") under the Federal Food, Drug and Cosmetic Act of 1938
("FDCA"), as amended. The FDCA imposes substantial regulatory controls over the
manufacturing, testing, labeling, sale, distribution, marketing and promotion of
medical devices and other related activities. These regulatory controls can
include, for example, compliance with the following: manufacturer establishment
registration and device listing; current good manufacturing practices;
completion of premarket notification or premarket approval; medical device
adverse event reporting; and general controls over misbranding and adulteration.
Violations of the FDCA can result in severe criminal and civil penalties, and
other sanctions, including, but not limited to, product seizure, recall, repair
or refund orders, withdrawal or denial of premarket notifications and approvals,
and denial or suspension of government contracts, and injunctions against
unlawful product manufacture, labeling, promotion, and distribution or other
activities.
In its 1989 Policy for the Regulation of Computer Products (the "1989
Policy Statement"), the FDA stated that it intended to exempt certain clinical
decision support software products from a number of regulatory controls. Under
the 1989 Policy Statement, the FDA stated that it intended to promulgate
regulations exempting decision support software products that are intended to
involve "competent human intervention before any impact on human health occurs
(e.g., where clinical judgment and experience can be used to check and interpret
a system's output)" from the following controls: manufacturer establishment
registration and device listing, premarket notification, and compliance with the
medical device reporting and current good manufacturing practice regulations. In
the 1989 Policy Statement, the FDA stated that until it promulgated regulations
implementing the exemptions, manufacturers of eligible decision support software
products would not be required to comply with those controls.
Since issuing the 1989 Policy Statement, the FDA has neither promulgated
the exemption regulations discussed in the 1989 Policy Statement nor actively
sought to enforce compliance with the controls discussed in such Policy
Statement. Furthermore, the FDA has referred to the 1989 Policy Statement in
official presentations regarding software regulation and in decisions and
opinions regarding the regulatory status of various products. Over the last few
years, however, the FDA has stated that it intends to revise the 1989 Policy
Statement and to base exemptions from regulatory controls, if any, upon a
product specific "risk factor" analysis. The risk factors the FDA has proposed
using include: (i) seriousness of the disease to be diagnosed or treated; (ii)
time frame for use of the information; (iii) concordance with accepted medical
practice; (iv) format of data and its presentation; (v) individualized versus
aggregate patient care recommendations; and (vi) clarity of algorithms used in
the software. Given the formative state of the FDA's evaluation and possible
revision of the 1989 Policy Statement, there can be no assurance as to the
criteria or application of such revisions, if any.
The Company's products are intended to assist healthcare providers in
analyzing economic and quality data related to patient care and expected
outcomes in order to maximize or monitor the cost-effectiveness of general
treatment plans and practice guidelines. These products are not intended to
provide specific diagnostic data or results or affect the use of specific
therapeutic interventions. As such, the Company believes that its products are
not medical devices under the FDCA and, thus, are not subject to the controls
imposed on manufacturers of medical devices. The Company further believes that
to the extent that its products are determined to be medical devices, they fall
within the exemptions for decision support systems provided by the 1989 Policy
Statement. The Company has not taken action to comply with the requirements that
would otherwise apply if the Company's products were non-exempt medical
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devices.
Since 1992, the Company's products have been widely marketed and have been
reviewed or evaluated in the medical literature. The FDA has neither requested
that the Company take any action to comply with any controls under the FDCA nor
notified the Company that it is not in compliance with any such controls. The
Company is not aware of the FDA requiring other developers of similar products
to take any action to comply with any controls under the FDCA, or of the FDA
notifying such developers that they are not in compliance with any such controls
with respect to those similar products.
Nevertheless, there can be no assurance that the FDA will not make such a
request or take other action to require the Company to comply with any or all
current or future controls applicable to medical devices. There can be no
assurance that, if such a request were made or other action were taken, the
Company could comply in a timely manner, if at all, or that any failure to
comply would not have a material adverse effect on the Company's business,
financial condition, results of operations or on the price of the Common Stock,
or that the Company would not be subjected to significant penalties or other
sanctions. There can be no assurance that the FDA will continue any or all of
the exemptions provided in the 1989 Policy Statement, or in a revised policy
statement, if any, or that the FDA will promulgate regulations formally
implementing such exemptions. There can be no assurance that the FDA will not
now or in the future make determinations that the Company's current or future
products are medical devices subject to FDA regulations and are ineligible for
the exemptions from those regulations. If the FDA made such determinations, the
Company would not be able to market its products without obtaining FDA clearance
of premarket notifications, or FDA approval of premarket approval applications
submitted by the Company. The regulatory process can be lengthy, expensive, and
uncertain; securing FDA clearances or approvals may require the submission of
extensive non-clinical and clinical safety and effectiveness data together with
other supporting information to the FDA; and there could be no assurance as to
when if ever the FDA clearances or approvals would be obtained. There can be no
assurance that the Company's current or future products will qualify for future
exemptions, if any, nor can there be any assurance that any future requirements
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
DIVESTITURES IN 1998
During 1998, the Company divested 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 collections 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 of $1.1 million resulting from the
write-off of acquired in-process research and development costs.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 82 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are satisfactory.
ITEM 2. PROPERTIES
The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 1999. The
Company is in the process of evaluating office space alternatives and plans to
execute a lease during the second quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not currently subject to, and none of its properties is
subject to, any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which required a vote of security holders during the
three months ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are the executive officers of the Company who have
been elected to their respective offices by the Board of Directors of the
Company to serve until the election and qualification of their respective
successors:
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NAMES AGE POSITION
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Peter Gladkin............ 51 President and Chief Executive Officer
Scott A. Mason........... 47 Secretary and Executive Vice President
Karen C. Miller.......... 39 Vice President, Finance and CFO
Regina M. Campbell....... 48 Vice President and General Counsel
Donald W. Seymour........ 48 Vice President of Consulting
James L. Elder, Jr....... 37 Vice President of Sales
Violet L. Shaffer........ 50 Vice President of Marketing
</TABLE>
Peter Gladkin has served as President and Chief Executive Officer since
July 1998. Prior to joining the Company, Mr. Gladkin was President and Chief
Operating Officer of Health Data Sciences Corporation ("HDS") from 1994 to 1997.
Mr. Gladkin was with Hewlett Packard Company ("HP") from 1971 to 1994 during
which time he was responsible for various sales, marketing, and business
entities throughout the U.S., Europe and worldwide. From 1987 to 1994, while at
HP, he was General Manager of the Healthcare Information Systems, a strategic
business unit of HP's Medical Products Group.
Scott A. Mason has served as Secretary and Executive Vice President of the
Company since June 1997. Dr. Mason served as Managing Partner and Founder of
National Health Advisors from 1981 through June 1997 when NHA was acquired by
the Company.
Karen C. Miller has served as Vice President of Finance and Chief Financial
Officer of the Company since October 1998. From 1997 to 1998, Ms. Miller served
as Controller of the Per-Se Technologies Division of Medaphis Corporation. Prior
to assuming this role, Ms. Miller was Chief Financial Officer, Vice President of
Finance and Controller of HDS, which she co-founded in 1983 and which was
acquired by Medaphis in 1996.
Regina M. Campbell has served as Vice President and General Counsel of the
Company since September 1998. Prior to joining the Company, Ms. Campbell was
Corporate Counsel for Medaphis Corporation from 1997 to 1998. She was director
of corporate contracting at HDS from 1995 to 1997. Ms. Campbell attended law
school from 1991 to 1995.
Donald W. Seymour has served as Vice President, Consulting of the Company
since the acquisition of NHA by the Company in June 1997. Prior to joining the
Company, Mr. Seymour served as a Partner with NHA from January 1995 through June
1997 and from 1985 to 1995 was a consultant for numerous national healthcare
consulting companies.
James L. Elder, Jr. has served as Vice President of Sales of the Company
since June 1997. Prior to joining the Company, Mr. Elder served as National
Director, Sales and Marketing for ActaMed Corporation from March 1995 through
June 1997. Prior to joining ActaMed, Mr. Elder held several sales and consulting
management positions with IBM's Health Industries Group from September 1983
through March 1995.
Violet L. Shaffer has served as Vice President of Marketing for the Company
since September 1997. Prior to joining the Company, from January 1997
through September 1997, Ms. Shaffer served as President and Chief Executive
Officer of Competitive Advantage Services, Inc. Ms. Shaffer served as Vice
President of Business Development for Nichols Research Corporation and of
HealthGate Data Corporation, an entity partially owned by Nichols, from
September 1995 through December 1996. Ms. Shaffer served as Corporate Vice
President of The MEDSTAT Group from November 1993 through August 1995.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "AMSI." The following table sets forth, for the periods indicated,
the range of high and low sale prices for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Year Ended December 31, 1998
First Quarter......................... $ 4.38 $0.94
Second Quarter........................ 3.50 1.86
Third Quarter......................... 2.75 0.88
Fourth Quarter........................ 2.13 0.38
Year Ended December 31, 1997
First Quarter......................... $10.25 $5.00
Second Quarter........................ 6.69 4.50
Third Quarter......................... 8.25 3.13
Fourth Quarter........................ 4.50 1.00
</TABLE>
As of March 5, 1999, the Company had approximately 1,332 holders of
record of its Common Stock.
The Company has never paid or declared any cash dividends and does not
anticipate paying cash dividends on its Common Stock in the forseeable future.
The Company currently intends to retain its future earnings, if any, to fund
the development and finance the growth of its business. The amount and timing
of any future dividends will depend on improvements in Company operations as
well as general business conditions encountered by the Company, as well as the
financial condition, earnings and capital requirements of the Company and such
other factors as the Company's Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Systems.................................. $ 2,384 $ 935 $ 4,459 $ 2,865 $ 2,463
Support.................................. 2,117 1,961 1,486 1,352 836
Professional services.................... 5,705 5,732 5,649 5,548 5,056
---------- ---------- ---------- ---------- ----------
Total revenue....................... 10,206 8,628 11,594 9,765 8,355
Expenses:
Cost of operations....................... 4,378 5,404 4,159 3,638 4,690
Research and development................. 1,317 2,704 1,723 1,919 1,813
Selling, general and administrative...... 8,145 14,028 9,704 7,518 8,069
Restructuring Charge..................... -- 1,623 -- -- --
Write-off of acquired in-process research
and development costs.................. -- 1,612 853 -- --
Write-off of product development and
related costs.......................... -- -- 1,100 -- --
---------- ---------- ---------- ---------- ----------
Total expenses...................... 13,840 25,371 17,539 13,075 14,572
---------- ---------- ---------- ---------- ----------
Loss from operations.......................... ( 3,634) (16,743) (5,945) (3,310) (6,217)
Other income (expense):
Interest income.......................... 477 859 717 81 110
Interest expense......................... ( 38) (44) (370) (486) (73)
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C>
Other, net............................... 2 10 1 9 27
---------- ---------- ---------- ---------- ----------
Total other income (expense)........ 441 825 348 (396) 64
Net loss...................................... $ (3,193) $ (15,918) $ (5,597) $ (3,706) $ (6,153)
========== ========== ========== ========== ==========
Basic and diluted net loss per share.......... $ (0.44) $ (2.20) $ (0.87) $ (0.72) $ (6.36)
========== ========== ========== ========== ==========
Weighted average number of shares used for
calculation of net loss per share........... 7,301 7,251 6,074 4,905 1,072
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments.... $ 6,532 $ 11,317 $ 21,987 $ 4,370 $ 592
Working capital (deficiency)....... 2,119 5,134 20,332 1,958 (1,551)
Total assets....................... 12,142 14,936 29,137 9,113 5,567
Long-term obligations, less current
maturities....................... 206 79 231 1,079 566
Redeemable convertible preferred
stock............................ -- -- -- 20,732 14,515
Total stockholders' equity (deficit) 3,740 6,866 22,405 (17,794) (13,982)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Continuing with the change in business strategy developed during the third
quarter of 1997, the Company implemented several initiatives in 1998 to manage
and contain costs, conserve cash and improve the Company's focus on the
high-risk, high-cost patient market particularly in critical care medicine.
During 1998, the Company completed its restructuring of management by
recruiting a Chief Executive Officer and President who joined the Company on
July 1, 1998. In September 1998, the position of Vice President and General
Counsel was filled. In October 1998, the position of Vice President, Finance and
Chief Financial Officer was filled.
The Company intensified its focus on identified core competencies during
1998, one example of which was the decision to incorporate an industry standard
interface engine in the CCS product and to cancel internal development of a
proprietary interface engine.
The Company, as a Value Added Reseller, began selling and taking orders
for computer hardware related to the CCS in the second half of 1998. This
expansion into turnkey systems provided the Company with new sources of revenue
from hardware sales and, accordingly, new sources of contribution margin. The
sales of this computer hardware had a material affect on order rates in the
fourth quarter of 1998.
During 1998, the Company divested its CardioMac assets and discontinued its
operations in the United Kingdom. Neither transaction had a material impact on
the financial statements.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Systems....................................... 23% 11% 38%
Support....................................... 21 23 13
Professional services......................... 56 66 49
------ ------ ------
Total revenue............................ 100 100 100
Expenses:
Cost of operations............................ 43 63 36
Research and development...................... 13 31 15
Selling, general and administrative........... 80 162 84
Restructuring Charge.......................... -- 19 --
Write-off of acquired in-process research and
development costs........................... -- 19 7
Write-off of product development and related
costs....................................... -- -- 9
------ ------ ------
Total expenses........................... 136 294 151
------ ------ ------
Loss from operations............................... (36) (194) (51)
Other income (expense):
Interest income............................... 5 10 6
Interest expense.............................. -- -- (3)
Other, net.................................... -- -- --
------ ------ ------
Total other income (expense)............. 5 10 3
Net loss........................................... (31)% (184)% (48)%
------ ------ ------
</TABLE>
1998 Compared to 1997
Revenue. Revenue for 1998 increased 18% to $10.2 million from $8.6 million
in the prior year period. Systems revenue for 1998 increased 155% to $2.4
million from $935,000 in the prior year period. Increased Systems revenue was
primarily related to the delivery of the CCS in early 1998. Support revenue for
1998 increased 8% to $2.1 million from $2.0 million in the prior year period,
due to contractual price increases and an increase in the number of clients
utilizing the Company's systems. Professional services revenue for 1998 remained
constant at $5.7 million.
Cost of Operations. Cost of operations for 1998 decreased 19% to $4.4
million from $5.4 million in the prior year period. This decrease was due to
process improvements relating to systems implementations, support, and software
engineering and resulting decreases in staffing requirements, third party
licenses 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. Cost of operations for 1998 decreased to 43% of revenue from
63% in the prior year period, due to the reasons mentioned here and the increase
in revenue. Cost of operations consists primarily of personnel costs, costs of
media, production manuals, telephone support, third party equipment, licenses
sold, and other direct costs related to providing systems, support and
professional services.
Research and Development. Research and development expenses for 1998
decreased 51% to $1.3 million from $2.7 million in the prior year period, due
primarily to a decrease in staffing requirements related to the development of
new products and services that the
15
<PAGE> 16
Company has discontinued or postponed as a result of the Company's restructuring
during third quarter of 1997. During 1998, $556,000 of product development costs
were capitalized, compared to $308,000 in the prior year period. Research and
development expenses for 1998 decreased to 13% of revenue from 31% in the prior
year period, due to decreased staffing as well as increases in revenue from
1997 to 1998.
Selling, General and Administrative. Selling, general and administrative
expenses for 1998 decreased 42% to $8.1 million from $14 million in the prior
year period. This decrease was due primarily to a decrease in overhead costs
associated with the Company's restructuring during the third quarter of 1997,
the elimination of a number of outside consulting relationships and the
implementation of enhanced expense controls. Selling, general and
administrative expenses for 1998 decreased to 80% of revenue from 162% for the
prior year period, due primarily to the same factors as noted above.
Other Income (Expense). Other income decreased from $825,000 in 1997 to
$441,000 for 1998. This decrease was attributable to a decrease in interest
income related to the decrease in the amount of short-term investments.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses for tax purposes.
1997 Compared to 1996
Revenue. Revenue for 1997 decreased 26% to $8.6 million from $11.6 million
in the prior year period. Systems revenue for 1997 decreased 79% to $935,000
from $4.5 million in the prior year period. During 1997, the Company was
developing its next generation of CCS products and while it had entered into
several sales contracts with clients, these products were not yet complete and,
accordingly, systems and related product revenues were down in 1997. Support
revenue for 1997 increased 33% to $2.0 million from $1.5 million in the prior
year period, due to an increase in the number of clients utilizing the
Company's systems. Professional services revenue for 1997 remained almost
constant at $5.7 million compared with $5.6 million in 1996.
Cost of Operations. Cost of operations for 1997 increased 29% to $5.4
million from $4.2 million in the prior year period, due to expansion of the
client services department to support the anticipated growth in systems sales.
Cost of operations for 1997 increased to 63% of revenue from 36% in the prior
year period, due to the decrease in revenue. Cost of operations consists
primarily of personnel costs, costs of media, production manuals, telephone
support, third party equipment, licenses sold, and other direct costs related to
providing systems, support and professional services.
Research and Development. Research and development expenses for 1997
increased 57% to $2.7 million from $1.7 million in the prior year period, due
primarily to an increase in staffing requirements related to the enhancement of
current product lines as well as development activities for new products and
services. During 1997, $308,000 of product development costs were capitalized,
compared to $279,000 in the prior year period. Research and development expenses
for 1997 increased to 31% of revenue from 15% in the prior year period, due to
increased staffing as well as decreases in revenue during the same period.
Selling, General and Administrative. Selling, general and administrative
expenses for 1997 increased 44% to $14.0 million from $9.7 million in the prior
year period, due primarily to overhead costs associated with the increase in
staffing throughout the Company, an increase in sales and marketing related
activities, an increase in expenses associated with public reporting
requirements, expenses associated with the acquisition of NHA and severance
associated with the resignation of the Company's CEO. Selling, general and
administrative expenses for 1997 increased to 162% of revenue from 84% for the
prior year period, due primarily to the same factors as noted above.
Restructuring Charge. During the third quarter of 1997, the Company
recorded a non-recurring charge totaling $1.6 million, or 19% of revenue,
relating to the Company's decision to revise its business strategy for the
remainder of 1997 and 1998. The Company has decided to focus on products for
high-cost, high-risk patients, particularly in critical care medicine, the
Company's core strength, and to discontinue or postpone the development of
certain products, including certain cardiovascular products, resulting in the
reduction of the current workforce. The main components of the charge are as
follows: write-off of capitalized product development costs related to
discontinued products, write-off of intangible assets related to the CardioMac
acquisition in January 1997 and termination costs, including severance pay and
related benefits.
Write-off of Acquired In-Process Research and Development Costs. During
1997, the Company recorded a total non-recurring
16
<PAGE> 17
charge totaling $1.6 million, or 19% of revenue, relating to the write-off of
the acquired in-process research and development costs of $1.1 million from the
January 1997 acquired assets of CardioMac, a point-of-care data collection and
reporting tool for the catheterization laboratory and cardiovascular operating
room and $500,000 from the June 1997 acquired assets of Vermont-Oxford Network,
Inc., a neo-natal database. In 1996, the Company recorded a non-recurring charge
of $853,000, or 7% of revenue, related to the write-off of the acquired
in-process research and development costs of the HIV/AIDS database and physician
practice management software applications acquired with the December 1996 HRN
acquisition.
Other Income (Expense). Other income (expense) increased from $348,000 in
1996 to $825,000 for 1997. The increase was attributable to interest income
earned from the investment of $24.6 million of net proceeds from the initial
public offering of the Company's Common Stock in July 1996 and a decrease in
interest-bearing notes payable.
Taxes. The Company has not incurred income taxes as a result of generating
net operating losses for tax purposes.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data,
for fiscal 1998 and 1997. In the opinion of the Company's management, this
unaudited information has been prepared on the same basis as the audited
information included elsewhere in this annual report and includes all
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period:
<TABLE>
<CAPTION>
(unaudited)
FISCAL YEAR 1998 FISCAL YEAR 1997
-------------------------------------------- ----------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ 3,472 2,278 2,153 2,303 3,066 2,452 1,671 1,439
Expenses:
Cost of operations......... 909 976 1,081 1,413 1,534 1,441 1,296 1,133
Research and
development.............. 428 223 384 283 671 700 727 606
Selling, general and
administrative........... 2,285 2,020 2,308 1,530 3,151 4,507 3,275 3,095
Restructuring Charge....... -- -- -- -- -- 1,623 --
Write-off of acquired
in-process research and
development costs........ -- -- -- -- 1,112 500 -- --
Write-off of product
development and related
costs.................... -- -- -- -- -- -- -- --
-------- -------- --------- --------- -------- --------- --------- ---------
Total expenses........ 3,622 3,219 3,773 3,226 6,468 7,148 6,921 4,834
-------- -------- --------- --------- -------- --------- --------- ---------
Loss from operations........... (150) (941) (1,620) (923) (3,402) (4,696) (5,250) (3,395)
Total other income
(expense)........... 145 124 101 72 230 230 212 153
-------- -------- --------- --------- -------- --------- --------- ---------
Net loss....................... $ (5) $ (817) $ (1,519) $ (851) $ (3,172) $ (4,466) $ (5,038) $ (3,242)
======== ======== ========= ========= ======== ========= ========= =========
</TABLE>
In addition, the Company's quarterly results have been, and may continue
to be, affected by supplier and provider budgeting practices that cause many
discretionary purchase decisions to be made before certain quarter and year
ends. The timing of quarterly revenue is also affected by the ability of the
Company to perform on its contracts, which is subject to the availability of the
client personnel as well as the availability of the Company's personnel.
Although the Company has not historically experienced any material seasonality
in its operating results, the Company could experience such seasonality in the
future, which could cause fluctuations in the Company's quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through its initial
public offering of the Company's Common Stock in July 1996. At December 31,
1998, the Company had cash and cash equivalents and short-term investments of
$6,532,000 representing a decrease of $4,785,000 from the total of $11,317,000
at December 31, 1997.
During 1998, the Company used approximately $4.3 million in operating
activities. Net cash used in 1998 was composed primarily of net loss offset by
depreciation and amortization, increases in accounts receivable, decreases in
17
<PAGE> 18
accrued expenses and increases in deferred revenues.
The Company's investing activities provided cash of $3.8 million in 1998.
The primary source of cash from investing activities was from the redemption of
short-term investments.
Net cash provided by financing activities during 1998 was $263,000 related
primarily to the issuance of notes payable.
During 1998 the Company made capital expenditures totaling $235,000. As of
December 31, 1998, the Company had net working capital of $2.1 million including
cash and short-term investments in the amount of $6.5 million.
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 for the next twelve months. Through December 31, 1998, the Company
has incurred cumulative net operating losses of approximately $42.1 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.
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,
and customers. 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.
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 utilities 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. 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/NT. 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. An independent consultant has reviewed and validated that the CCS
product is Year 2000 compliant.
18
<PAGE> 19
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 April 1999 and implementation
began 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 were completed in December
1998. An action plan is being 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 to address Year 2000 issues 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
systems are not included. The Company estimates it has incurred approximately
$850,000 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's ability to perform migrations by October 1999 is dependent upon the
Company's timely receipt of migration contracts and the technical cooperation
of its customers. The favorable terms and migration services offered to
existing 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. The Company believes that 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 its 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
19
<PAGE> 20
alternative vendors for hardware and operating systems. Nonetheless, it is not
possible for the Company to fully assess the 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."
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company has implemented SFAS No. 128 for
1997. SFAS No. 128 required 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 to issue common stock
were exercised or converted into common stock. The Company has implemented SFAS
128 and it did not have a material impact on the financial statements of the
Company.
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 31, 1997.
The Company has adopted SOP 97-2 and it did not have a material impact on the
financial statements of the Company. In March 1998, AcSEC issued SOP 98-4,
which defers for one year the implementation of certain provision of SOP 97-2.
The issuance of SOP 98-4 had no effect on the Company. In December 1998, the
AICPA issued SOP 98-9, which extends the deferral date of implementation of
certain provisions of SOP 97-2 to 2000 and amends the method of revenue
recognition in some circumstances. The Company does not anticipate the adoption
of this SOP will have a significant effect on its results of operations or
financial position.
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 1999 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 manage its Year 2000 costs and liabilities; ability to
attract and retain key employees ; success of concentrating 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; and ability to comply with and adopt
products and services to potential regulatory changes and ability to adapt to
ecomonic, political and regulatory conditions affecting the healthcare industry.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
20
<PAGE> 21
Information regarding the Company's investment securities as it relates to
market risk is not included as the possible effect of such risk is considered
to be immaterial.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
Report of Independent Public Accountants, Ernst & Young LLP........................................................... 23
Report of Independent Public Accountants, Arthur Andersen LLP......................................................... 24
Report of Independent Public Accountants, KPMG LLP.................................................................... 25
Report of Independent Public Accountants, Arthur Andersen LLP......................................................... 26
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............................ 27
Consolidated Balance Sheets for the Years Ended December 31, 1998 and 1997............................................ 28
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended
December 31, 1998, 1997 and 1996.................................................................................... 29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................ 30
Notes to Consolidated Financial Statements............................................................................ 31
Financial Statement Schedule:
Report of Independent Public Accountants, Arthur Andersen LLP, on Financial Statement Schedule...................... 44
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996................ 45
</TABLE>
All other financial statement schedules not included have been omitted
because they are not applicable or because the required information is otherwise
furnished.
22
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
APACHE Medical Systems, Inc.
We have audited the accompanying consolidated balance sheet of APACHE
Medical Systems, Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) as of December 31, 1998. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of APACHE Medical
Systems, Inc., at December 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
February 19, 1999
23
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To APACHE Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheet of APACHE
Medical Systems, Inc. (the "Company") as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of APACHE
Medical Systems, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
We previously audited and reported on the balance sheet of National Health
Advisors, Ltd. ("NHA") as of December 31, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period then ended, prior to their restatement for the 1997
pooling-of-interests with the Company. The contribution of NHA assets
represented 4% of the restated total consolidated assets as of December 31,
1996. The contribution of NHA revenues represented 24% and 28% of the restated
total consolidated revenues for 1996 and 1995, respectively. The contribution of
NHA net income represented 1% and 3% of the restated total consolidated net loss
for 1996 and 1995, respectively. Separate financial statements of the Company
included in the 1996 and 1995 restated consolidated financial statements were
audited by other auditors who have issued their report thereon dated February 7,
1997. We also audited the combination of the accompanying consolidated balance
sheet as of December 31, 1996 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period then ended, after restatement for the 1997
pooling-of-interests; and in our opinion such consolidated statements have been
properly combined on the basis described in Note 2 of the notes to the
consolidated financial statements.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
24
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
APACHE Medical Systems, Inc.:
We have audited the consolidated statements of operations, changes in
stockholders' equity, and cash flows of APACHE Medical Systems, Inc. and
subsidiary for the year ended December 31, 1996, not presented herein, before
the restatement described in Note 2 to the 1998 consolidated financial
statements of APACHE Medical Systems, Inc. In connection with our audit of the
financial statements, we also have audited the financial statement Schedule II -
Valuation and Qualifying Accounts for the year ended December 31, 1996, not
presented herein (before restatement). These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
(not presented herein) present fairly, in all material respects, the results of
operations and the cash flow of APACHE Medical Systems, Inc. for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule referred to above
(not presented herein), when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
February 7, 1997
McLean, Virginia
25
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the National Health Advisors, Ltd.:
We have audited the balance sheet of National Health Advisors, Ltd., (a
Virginia corporation) as of December 31, 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the two-year period then ended (not presented separately herein),
before the restatement described in Note 2 to the consolidated financial
statements of APACHE Medical Systems, Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company was acquired by APACHE Medical Systems,
Inc. on June 2, 1997.
In our opinion, the financial statements referred to above (not presented
separately herein), present fairly, in all material respects, the financial
position of National Health Advisors, Ltd., as of December 31, 1996, and the
results of its operations and its cash flows for each of the years in the
two-year period then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1998
26
<PAGE> 27
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Systems................................................ $ 2,384 $ 935 $ 4,459
Support................................................ 2,117 1,961 1,486
Professional services.................................. 5,705 5,732 5,649
---------- ---------- ----------
Total revenue..................................... 10,206 8,628 11,594
Expenses:
Cost of operations..................................... 4,378 5,404 4,159
Research and development............................... 1,317 2,704 1,723
Selling, general and administrative.................... 8,145 14,028 9,704
Restructuring charge................................... -- 1,623 --
Write-off of acquired in-process research and
development costs.................................... -- 1,612 853
Write-off of product development and related costs..... -- -- 1,100
---------- ---------- ----------
Total expenses.................................... 13,840 25,371 17,539
Loss from operations........................................ (3,634) (16,743) (5,945)
Other income (expense):
Interest income........................................ 477 859 717
Interest expense....................................... (38) (44) (370)
Other, net............................................. 2 10 1
---------- ---------- ----------
Total other income (expense)...................... 441 825 348
---------- ---------- ----------
Net loss.................................................... $ (3,193) $ (15,918) $ (5,597)
========== ========== ==========
Basic and diluted net loss per share........................ $ (0.44) $ (2.20) $ (0.87)
========== ========== ==========
Weighted average number of shares used for calculation of
net loss per share........................................ 7,301 7,251 6,074
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE> 28
APACHE MEDICAL SYSTEMS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
-------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 5,532 $ 5,634
Short-term investments.................................................................. 1,000 5,683
Accounts receivable, net of allowance for doubtful accounts of $514
in 1998 and $485 in 1997.............................................................. 2,972 1,235
Prepaid expenses and other.............................................................. 749 456
-------- ---------
TOTAL CURRENT ASSETS............................................................... 10,253 13,008
Furniture and equipment................................................................. 3,589 3,355
Less accumulated depreciation and amortization.......................................... (2,704) (2,095)
-------- ---------
885 1,260
Other trade receivables, net of current maturities...................................... 4 57
Capitalized software development costs, net............................................. 506 --
Intangible assets, net.................................................................. 494 611
-------- ---------
TOTAL ASSETS....................................................................... $ 12,142 $ 14,936
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 1,129 $ 553
Accrued expenses........................................................................ 3,667 5,580
-------- ---------
Current maturities of long term obligations............................................. 180 111
Deferred revenue........................................................................ 3,158 1,630
-------- ---------
TOTAL CURRENT LIABILITIES.......................................................... 8,134 7,874
Deferred rent benefit................................................................... 62 117
Maturities of long term obligations, net of current maturities.......................... 206 79
-------- ---------
TOTAL LIABILITIES.................................................................. 8,402 8,070
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized shares, 30,000,000
at December 31, 1998 and December 31, 1997: issued and
outstanding shares, 7,330,473 at December 31, 1998 and
7,267,756 at December
31, 1997.............................................................................. 73 73
Additional capital...................................................................... 45,770 45,703
Accumulated deficit..................................................................... (42,103) (38,910)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY......................................................... 3,740 6,866
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 12,142 $ 14,936
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE> 29
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
CUMULATIVE
DIVIDENDS AND
ACCRETED
ISSUE
COSTS ON
COMMON STOCK CUMULATIVE
------------------- REDEEMABLE
ADDITIONAL PREFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
------ ------ -------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 . . . . . . 1,443,027 $ 14 $ 1,366 $(1,779) $(17,395) $(17,794)
Issuance of common stock . . . . . . . . 788 -- 7 -- -- 7
Issuance of common stock through initial
public offering . . . . . . . . . . . . 2,300,000 23 27,577 -- -- 27,600
Accretion of cumulative dividends and
issue costs on redeemable preferred
stock . . . . . . . . . . . . . . . . . -- -- -- (679) -- (679)
Conversion of convertible preferred
stock . . . . . . . . . . . . . . . . . 3,294,519 33 20,017 -- -- 20,050
Conversion of convertible debt . . . . . 122,257 1 999 -- -- 1,000
Conversion of cumulative dividends on
redeemable preferred stock . . . . . . 78,331 1 939 -- -- 940
Reclass cumulative dividends on
redeemable preferred stock to APIC . . . -- -- (1,850) 1,850 -- --
Reclass accreted issue costs on
redeemable preferred stock to APIC . . . -- -- (608) 608 -- --
Reclass unaccreted issue costs on
redeemable preferred stock to APIC . . . -- -- (526) -- -- (526)
Issuance costs of initial public
offering . . . . . . . . . . . . . . . -- -- (3,034) -- -- (3,034)
Issuance of common stock options . . . . -- -- 438 -- -- 438
Net loss . . . . . . . . . . . . . . . . -- -- -- -- (5,597) (5,597)
------------ --------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 1996 . . . . . . 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 . . . . . . . . . . 62,717 -- 67 -- -- 67
Net Loss. . . . . . . . . . . . . . . . . -- -- -- -- (3,193) (3,193)
------------ --------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 1998 . . . . . . 7,330,473 $ 73 45,770 $ -- $(42,103) $ 3,740
============ ========= ======= ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE> 30
APACHE MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,193) $(15,918) $(5,597)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 611 595 569
Amortization . . . . . . . . . . . . . . . . . . . . . . . 167 563 304
Provision for doubtful accounts . . . . . . . . . . . . . . 60 611 100
Accretion of interest . . . . . . . . . . . . . . . . . . . -- -- 265
Expense for nonemployee stock options issued . . . . . . . . -- 67 69
Write-off of product development and related costs . . . . . -- 620 1,100
Write-off of acquired in-process research and
development costs . . . . . . . . . . . . . . . . . . . . -- 1,612 853
Write-off of intangible assets . . . . . . . . . . . . . . -- 436 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (1,796) 1,970 (1,699)
Other trade receivables . . . . . . . . . . . . . . . 51 236 (84)
Other current assets . . . . . . . . . . . . . . . . . (293) (103) (183)
Accounts payable and accrued expenses . . . . . . . . (1,337) 2,168 407
Deferred rent . . . . . . . . . . . . . . . . . . . . (55) (42) (28)
Deferred revenue . . . . . . . . . . . . . . . . . . . 1,528 490 (852)
------- -------- -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES . . . (4,257) (6,695) (4,776)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs . . . . . . . . . . . . . (556) (308) (279)
Purchase of furniture and equipment, net of disposals. . . . . . (235) (555) (331)
Purchase acquisitions . . . . . . . . . . . . . . . . . . . . . -- (2,915) --
Redemption (Purchase) of short-term investments . . . . . . . . 4,683 (4,624) (989)
. . . . . . . . . ------- -------- -------
NET CASH FROM (USED IN) INVESTING ACTIVITIES . . . . . . . 3,892 (8,402) (1,599)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations . . . . . . . . (16) (68) (195)
Principal payments on borrowings . . . . . . . . . . . . . . . . (179) (237) (503)
Proceeds from issuance of notes payable . . . . . . . . . . . . 391 20 75
Proceeds from issuance of preferred stock, net of issuance costs -- -- (37)
Proceeds from issuance of common stock upon exercise of options -- 30 6
Proceeds from issuance of stock under employee stock purchase plan 67 58 --
Proceeds from initial public offering of common stock . . . . . -- -- 27,600
Issuance costs on initial public offering of common stock . . . -- -- (3,034)
Payments of cumulative dividends . . . . . . . . . . . . . . . . -- -- (909)
------- -------- -------
NET CASH FROM (USED IN) FINANCING ACTIVITIES . . . . . . . 263 (197) 23,003
. . . . . . . . . ------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . (102) (15,294) 16,628
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . 5,634 20,928 4,300
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . $ 5,532 $ 5,634 $20,928
======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE> 31
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) NATURE OF THE BUSINESS
APACHE Medical Systems, Inc. (the "Company"), a Delaware corporation, was
incorporated on September 1, 1987. The Company is a leading provider of
clinically based decision support information systems and consulting services to
the healthcare industry. The Company offers healthcare providers and suppliers a
comprehensive line of outcomes-based products and services, encompassing
software, hardware, and related consulting and disease management services.
Operations of the Company are subject to certain risks and uncertainties
including, among others, uncertainties relating to product development,
significant operating losses, competition and market acceptance of its
products. The market for the Company's healthcare information systems and
services is highly competitive and characterized by continued and rapid
technological advances and substantial changes. The Company's success is
dependent upon market acceptance of its products in preference to competing
products and products that may be developed by others. The healthcare industry
is subject to changing political, economic and regulatory influences that may
affect the procurement practices and operations of the Company's customers.
There can be no assurance that the Company's products and services will achieve
a sufficient level of market acceptance to result in profitable operations.
During 1997, the Company ceased sales of its Medical Cost Management Program
software that had been sold to customers prior to 1997 as it was not Year 2000
ready. Development of the next generation of Critical Care Series (for which
the Company has taken orders in 1997) was completed in March 1998. The Company
has decided not to support the Medical Cost Management Program beyond the year
1999. The Company has offered its existing clients the option to migrate to the
next generation Critical Care Series software on favorable terms. A majority of
customers have either entered into agreements to migrate or indicated an intent
to do so. However, it is uncertain at this time whether all clients will agree
to migrate to the Critical Care Series software or whether all migrations can
be completed by the Year 2000. In the opinion of management, the development of
the Critical Care Series and the migration to the new Critical Care Series by
its existing customers will not have a material adverse impact on the Company's
financial position or results of future operations.
Through December 31, 1998, the Company has incurred cumulative net operating
losses of approximately $42.1 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 the first
quarter of year 2000. 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business combinations
On June 2, 1997, the Company acquired all the common stock of National Health
Advisors, Ltd. ("NHA") in exchange for 367,569 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 have been restated to include the results of
NHA for all periods presented.
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the
31
<PAGE> 32
amounts reported in the financial statements and accompanying notes. Actual
results inevitably will differ from those estimates.
Revenue Recognition
Revenues for sales of systems and products are recognized at delivery.
For systems where services are critical to the functionality of the system,
revenue is recognized using contract accounting. 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.
Cost of Operations
Cost of operations consists primarily of personnel costs, costs of media,
production manuals, telephone support, third party equipment, licenses,
software and other direct costs related to providing systems, support, and
professional services.
Furniture and Equipment
Furniture and equipment are stated at cost. Furniture and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization are calculated on the straight-line basis over
the estimated useful lives of the assets ranging from 3 to 7 years.
Amortization of equipment held under capital leases is provided on the
straight-line basis over the shorter of the estimated useful life of the assets
or the life of the lease.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. As of December 31, 1998, cash
equivalents and short-term investments consisted of money market instruments,
commercial paper and government agency securities. Cash equivalents are carried
at cost which approximates market. In accordance with the requirements of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has classified its
short-term investments as "available-for-sale". Such investments are recorded
at fair value, with unrealized gains and losses, deemed by the Company as
temporary in nature, reported as a separate component of stockholders' equity.
At December 31, 1998 and 1997, there were no unrealized gains or losses.
Software Capitalization
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and are
included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products
are available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
that current revenues bear to the total of the current and future anticipated
revenues, or (b) the straight-line method over the remaining estimated economic
life of the product, not to exceed five years. Such costs are reflected in Cost
of Operations in the Company's consolidated statement of operations.
The Company capitalized approximately $556,000, $308,000 and $279,000 in
software development costs during 1998, 1997 and 1996, respectively.
Amortization of software development costs approximated $51,000, $82,000 and
$231,000 in 1998, 1997 and 1996, respectively. During the third quarter of
1997, the Company recorded a non-recurring charge totaling approximately
$600,000 relating to the write-off of certain capitalized software products
related to discontinued products. No additional costs were capitalized during
1997, as technological feasibility had not been reached on the Company's new
Critical Care Series product.
32
<PAGE> 33
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Current Vulnerability Due to Certain Concentrations
The Company currently depends on certain suppliers for the provision of
computer hardware to its customers. The Company has not experienced and does
not expect any disruption of such services and the Company believes that
functionally equivalent computer hardware is available from other sources.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents, short term
investments, and trade receivables. Concentrations of credit risk with respect
to trade receivables result from the Company's customer base, comprising
primarily hospitals and other healthcare industry companies. Management
regularly monitors the creditworthiness of its customers and believes that it
has adequately provided for any exposure to potential credit losses.
Impairment of Long-Lived Assets
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." The Company reviews its long-lived
assets, including intangible assets and property plant and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates whether future
undiscounted net cash flows will be less than the carrying amount of the assets
and adjusts the carrying amount of its assets to fair value.
Basic and Diluted Net Loss Per Common Share
Options and warrants outstanding were not included in the computation of
diluted net loss per share as their effect would be antidilutive. Diluted net
loss per share and basic loss per share are identical for all periods
presented. In February 1998, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 98 on computations of earnings per share.
SAB No. 98 supersedes SAB No. 83, which previously required that all issuances
of Common Stock, options and warrants issued within one year of an initial
public offering be included in the calculation of earnings per share as if
outstanding for all periods presented. Under SAB No. 98, only issuances of
common stock, options and warrants issued for nominal consideration in periods
preceding an initial public offering are required to be included in the
calculation of earnings per share as if they were outstanding for all periods
presented. In the periods preceding the Company's initial public offering the
Company had no issuances of Common Stock, options or warrants for nominal
consideration. The mandatory conversion of all outstanding shares of preferred
stock, including certain accumulated dividends, and the conversion of certain
convertible debt, including the reduction of related interest, are included in
the computation of net loss per share for all periods presented preceding the
Company's initial public offering in July 1996. These shares have been included
in the computation for loss periods when such shares would otherwise not be
included as the impact would be antidilutive because the preferred stock,
accumulated dividends and convertible debt were converted into Common Stock on
the closing of the Company's initial public offering. In the computation of net
loss per share prior to the initial public offering accretion of preferred
stock to the mandatory redemption amount is not included as an increase to net
loss.
Earnings per share for all periods presented complies with SFAS No. 128.
Reclassification
Certain amounts have been reclassified from prior years to conform to the
current year presentation.
33
<PAGE> 34
(3) RESTRUCTURING CHARGE
During the third quarter of 1997, the Company recorded a restructuring charge
of $1.6 million related primarily to the Company's decision to revise its
business strategy for the remainder of 1997 and 1998. The Company has decided
to focus on products for high-cost, high-risk patients, APACHE's core strength,
and to discontinue or postpone the development of certain products (including
certain cardiovascular products), resulting in the reduction of the current
workforce. The main components of the charge are as follows: write-off of
capitalized product development costs related to discontinued products,
write-off of intangible assets related to the CardioMac acquisition in January
1997 and termination costs, including severance pay and related benefits. As of
December 31, 1998, substantially all the costs associated with the
restructuring charge had been paid.
(4) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
------ -------
<S> <C> <C>
Billed accounts . . . . . . . $3,059 $1,460
Unbilled accounts . . . . . . 427 260
------ ------
3,486 1,720
Less allowance for doubtful
accounts . . . . . . . . . . (514) (485)
------ ------
$2,972 $1,235
====== ======
</TABLE>
Unbilled accounts represent revenue that has been recognized for work
performed for which billings had not been presented to customers, as such
accounts were not billable under contract terms at the balance sheet date. It
is anticipated that substantially all of these accounts will be billed and
collected within one year of the respective balance sheet date. Included in
billed accounts receivable at December 31, 1998 is approximately $1 million
related to amounts billed in the fourth quarter of 1998 related to migration
contracts with a corresponding entry to deferred revenues. Such deferred
revenues will be recognized as the Company performs the migration services
planned for 1999.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Accrued salaries, bonuses and
benefits . . . . . . . . . . $ 554 $1,493
Discontinued product reserve 472 600
Accrued commissions . . . . . 66 349
Accrued severance costs . . . 294 600
Accrued pension costs . . . . 82 107
Other accrued license fees . 351 402
QIMC licensing and marketing
fees . . . . . . . . . . . . 88 406
Other accrued expenses . . . 1,760 1,623
------ ------
$3,667 $5,580
====== ======
</TABLE>
34
<PAGE> 35
(6) NOTES PAYABLE
Notes payable consist of promissory notes to various medical and financial
institutions.
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
(in thousands)
<S> <C> <C>
Note payable, 10% interest payable semi-annually, principal payable in
annual installments of $34,500 and $14,700 in May 1997 and 1998,
respectively.................................................................. $ 0 $ 15
Note payable, 10% interest payable semi-annually, principal payable in
annual installments of $34,500 through August 1998............................ 0 35
Note payable, prime plus 2% interest (9.75% at December 31, 1998),
payable in monthly installments of principal plus interest through
November 1999................................................................. 19 40
Note payable, 9.25% interest payable in monthly installments of
principal plus interest through June 1999, paid in full in 1998............... 0 37
Note payable, 7.58% interest payable in monthly installment of
principal and interest through March 2001..................................... 319 0
----- ----
$ 338 $127
----- ----
Less current maturities......................................................... (161) (95)
----- ----
$ 177 $ 32
===== ====
</TABLE>
Scheduled maturities of notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1999 $ 161
2000 142
2001 35
-------
$ 338
=======
</TABLE>
7) INTANGIBLE ASSETS
In December 1996, the Company completed the acquisition of the assets and
certain liabilities of Health Research Network ("HRN") for $1.57 million in
cash. The acquisition has been accounted for using the purchase method of
accounting and resulted in intangible assets totaling $728,000. These assets
are being amortized under the straight line method over 5 to 15 years.
The components of intangibles are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- -------
<S> <C> <C>
Goodwill $ 138 $ 138
Assembled Workforce 102 102
Database 488 488
----------- ---------
728 728
Accumulated Amortization (234) (117)
----------- ---------
$ 494 $ 611
=========== =========
</TABLE>
Amortization of $117,000 was charged to expense in 1998.
35
<PAGE> 36
8) LEASE COMMITMENTS
Future minimum lease payments at December 31, 1998, under non-cancelable
operating and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
-------------------------------------- --------- ------------
<S> <C> <C>
1999 . . . . . . . . . . . . . . . . $23 $444
2000 . . . . . . . . . . . . . . . . 23 -
2001 . . . . . . . . . . . . . . . . 8 -
---------- -------------
Total . . . . . . . . . . . $54 $444
=============
Less interest at 12.75% . . . . . . . (8)
----------
Present value of net minimum lease 46
payments. . . . . . . . . . . . . .
Less current maturities . . . . . . . (18)
----------
$28
==========
</TABLE>
Operating Leases
In 1994, the Company entered into a new lease agreement for its current
office space. The lease stipulates a rent abatement period of six months. Rent
expense is recorded on a straight-line basis over the term of the lease. The
difference between rent payments and rent expense resulted in a deferred rent
benefit. The current lease expires in November 1999.
Total rent expense under all operating leases was approximately $474,000,
$497,000 and $523,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Capital Leases
In 1997, the Company negotiated a new capital lease for certain office
equipment. The resulting capital lease will expire in 2001.
Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 1998 is as follows (in thousands):
<TABLE>
<S> <C>
Office equipment . . . $ 73
Less accumulated
amortization . . . . . (32)
-------
$ 41
=======
</TABLE>
36
<PAGE> 37
(9) INCOME TAXES
The Company had no provision for income taxes in 1998, 1997 or 1996 as a
result of its net losses for both financial statement and income tax purposes.
The approximate tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash adjustment . . . . . $ (115) $ (228)
Capitalized software development costs (192) (28)
-------- --------
Gross deferred tax liabilities . . . (307) (256)
Deferred tax assets:
Accrued vacation . . . . . . . . . . 46 48
Accrued bonuses . . . . . . . . . . -- 2
Accrued commissions . . . . . . . . 25 63
Allowance for doubtful accounts . . 195 191
Accrued licensing fees . . . . . . . 33 219
Deferred rent benefit . . . . . . . 24 60
Excess of tax over book revenue recognized 481 481
Accrued independent contractors fee 19 11
Tax basis of equipment in excess of book value -- 7
Intangible assets . . . . . . . . . 931 932
Other accruals . . . . . . . . . . . 781 798
Net operating loss carryforwards . . 12,077 11,400
-------- --------
Gross deferred tax assets . . . . . . . . 14,612 14,212
-------- --------
Net deferred tax assets before valuation allowance 14,305 13,956
-------- --------
Less valuation allowance . . . . . . . . (14,305) (13,956)
-------- --------
Net deferred tax assets . . . . . . . . . $ - $ -
======== ========
</TABLE>
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1998 of approximately $31,800,000, which expires
beginning in 2003. The Company's ability to use the carryforwards is subject to
limitations resulting from changes in ownership, as defined by the Internal
Revenue Code. Lack of future earnings, a change in the ownership of the
Company, or the application of the alternative minimum tax rules could
adversely affect the company's ability to utilize the net operating loss carry
forwards.
(10) STOCKHOLDERS' EQUITY
Stock Options
The Company has an Employee Stock Option Plan (the "Plan") that provides up
to 2,200,000 options to be issued to employees and Directors (prior to the
adoption of the Non-Employee Director Stock Option Plan in April 1996) of the
Company. The Plan was amended in February 1997 to increase the number of shares
reserved for issuance under the plan from 1,700,000 to 2,200,000. All options
are subject to forfeiture until vested, and unexercised options expire on the
tenth anniversary of the year granted. Vesting periods are from one to five
years. All employee stock options issued by the Company have been granted with
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant; accordingly, the Company has recorded no
compensation expense related to such grants.
In June 1996, the Company entered into a marketing agreement with an
affiliate of Premier Inc. ("Premier"), which provides buying services to a
group of approximately 1,800 hospitals. Pursuant to the agreement, the Premier
affiliate has designated the Company as the exclusive supplier to the hospitals
purchasing through the Premier buying group of clinically-based outcomes data
systems for high-risk, high-cost patients, including critical care,
cardiovascular care and medical-surgical care patients, through December 31,
1999. In return, the Company has agreed to provide certain discounts to these
hospitals and, granted to the Premier affiliate in June 1996, three options to
purchase up to a total of 366,294 shares of Common Stock. Each of the options
have a ten-year term. One of the options vested upon grant and permits the
Premier affiliate to purchase 65,488 shares of Common Stock at an exercise
price of $8.18 per share. The Company valued these options at $369,000, which
is being amortized over the life of the Premier contract. The other two options
will vest, if at all, based on the volume of products and services sold to
Premier hospitals and allow the Premier affiliate to purchase up to 300,806
shares of Common Stock at an exercise price of $13.00 per share. Performance
37
<PAGE> 38
options earned through December 31, 1998 totaled 45,695 shares. Valuation of
the related stock options was calculated utilizing the Black-Scholes option
pricing model. Expense related to the performance options are recorded when
earned. Expense for options earned was $0 and $67,000 in 1998 and 1997
respectively.
In January 1997, the Company acquired the assets of CardioMac, including a
point-of-care data collection and reporting tool for the cardiac
catheterization laboratory and cardiovascular operating room from Mercy
Hospital Medical Center, Iowa Health Centers, the Iowa Heart Institute and Mark
Tannenbaum, MD (its primary developer) for a payment of $1.35 million in cash
and options to purchase up to 150,000 shares of APACHE Common Stock at an
exercise price of $7.75 per share. The options were valued at approximately
$224,000 and vested immediately.
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 $2.00 per share. Options to purchase approximately 480,044
shares of Common Stock were repriced. The vesting schedule is 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
employees with the Company less than one year, options will vest ratably over
five years from the date of grant. The options granted to employees as
performance-based options are excluded from this action.
On January 2, 1998, the Board of Directors authorized a repricing of stock
options to a consultant to the Company. 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 November 18, 1998,
the Board of Directors granted an aggregate of 30,000 options to three
non-employee consultants to the Company. The exercise price of these options is
equal to the fair market value of the Company's Common Stock on November 18,
1998 or $.94. These options have been accounted for in accordance with SFAS 123.
On November 18, 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 $.94 per share. Options to purchase approximately 845,566
shares of Common Stock were repriced. The vesting schedule remained the same.
The following is a summary of the Company's option transactions for the years
ending December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
WTD. AVG.
SHARES EX. PRICE
------------- ------------
<S> <C> <C>
Outstanding, December 31, 1995 869,046 $ 4.31
Granted . . . . . . 876,382 11.58
Forfeited . . . . . (112,257) 8.79
Exercised . . . . . (788) 8.18
--------- ------
Outstanding, December 31, 1996 1,632,383 $ 7.90
Granted . . . . . . 873,434 5.57
Forfeited . . . . . (685,160) 9.47
Exercised . . . . . (10,490) 2.86
--------- ------
Outstanding, December 31, 1997 1,810,167 $ 6.21
--------- ------
Granted . . . . . . 1,117,844 1.78
Forfeited . . . . . (503,333) 5.72
Exercised . . . . . - -
--------- ------
Outstanding, December 31, 1998 2,424,678 3.11
========= ======
</TABLE>
Options outstanding at December 31, 1998 have exercise prices between $0.59
and $13.00, with a weighted average exercise price of $3.11 and a weighted
average remaining contractual life of 7.4 years. At December 31, 1998,
1,046,551 options were exercisable with a weighted average exercise price of
$4.81.
At December 31, 1998, options for 305,285 shares were available for grant
under the Plan.
Non-Employee Director Stock Option Plan
In April 1996, the Company adopted its Non-Employee Director Option Plan (the
"Director Option Plan"), pursuant to which non-employee directors of the
Company will be granted an option to purchase 2,500 shares of Common Stock on
January 1, of each calendar year for each year of service. The exercise price
of such options shall be at the fair market value of the Company's Common Stock
on the date of grant. Stock options granted under the Director Option Plan may
not be transferred other than by will or by the laws of descent and
distribution. The Company has reserved 70,000 shares of Common Stock for
issuance under the Director Option
38
<PAGE> 39
Plan. The Director Option Plan may be terminated by the Board of Directors at
any time. Upon the occurrence of a Change of Control, as defined in the
Director Option Plan, all outstanding unvested options under the Director
Option Plan immediately vest. As of December 31, 1998, 40,000 shares were
granted under the Director Option Plan.
At December 31, 1998, options for 30,000 shares were available for grant
under the Director Option Plan.
Employee Stock Purchase Plan
Effective May 1, 1996, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 210,000 shares of Common Stock are available
for purchase under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 8% of an employee's base compensation, including commissions, bonuses
and overtime, at a price equal to 85% of the fair market value of the Common
Stock at the beginning of each offering period or the end of a three month
purchase period, whichever is lower. The Board of Directors has the authority
to amend or terminate the Purchase Plan provided no such action may adversely
affect the rights of any participant.
At December 31, 1998, 128,939 shares were available for purchase under the
Employee Stock Purchase Plan.
Stock Option Plans
The Company applies APB Opinion No. 25 in accounting for its Stock based
compensation plans and, accordingly, no compensation cost has been recognized
for its stock option plans and employee stock purchase plan in the financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for these plans under SFAS No. 123 "Accounting for
Stock Based Compensation," the Company's net income would have been reduced to
the pro forma amounts indicated below (in thousands):
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: January 1, 1998 through December 31, 1998 -- expected dividend
yield of 0%, risk-free interest rate of 4.5 %, expected volatility factor of
228.70 %, and an expected life of 6 years; January 1, 1997 through December 31,
1997 -- expected dividend yield of 0%, risk-free interest rate of 5.71%,
expected volatility factor of 105.35%, and an expected life of 6 years; July 1,
1996 through December 31, 1996 (post public date) -- expected dividend yield of
0%, risk-free interest rate of 6.38%, expected volatility factor of 42.50%, and
an expected life of 6 years; January 1, 1995 through June 30, 1996 (pre-public
date) -- expected dividend yield of 0%, risk-free interest rate of 6.38%,
expected volatility factor of 0%, and an expected life of 6 years.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net loss
As reported..... $ (3,193) $(15,918)
Pro forma....... (4,317) (17,075)
Net loss per share
As reported..... $ (.44) $ (2.20)
Pro forma....... (.59) (2.35)
</TABLE>
Pro forma net loss reflects only options granted in 1996 through 1998.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
of 5 years and compensation cost for options granted prior to January 1, 1995
is not considered.
Stock Warrants
The Company has 17,483 outstanding warrants issued to a stockholder in 1991
with an exercise price of $2.86 per share that expire in 2001; 349,653
outstanding warrants issued to stockholders in 1995 with an exercise price of
$1.43 per share that expire in 2000; and 110,069 outstanding warrants issued to
stockholders in 1995 with an exercise price of $8.18 per share that expire in
2000.
39
<PAGE> 40
Basic and Diluted Earnings Per Share (EPS)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income applicable to common shares:
Net loss $(3,193) $(15,918) $(5,597)
Increase in earnings resulting from conversion of convertible debt (1) - - 316
----- ------- ------
Loss applicable to common shares $(3,193) $(15,918) $(5,281)
====== ========= ========
Weighted average number of common shares outstanding 7,301 7,251 2,583
Conversion of preferred shares and convertible debt - - 3,491
------ -------- --------
Weighted average common shares 7,301 7,251 6,074
====== ======== ========
Loss per common share $(0.44) $ (2.20) $ (0.87)
====== ======== ========
</TABLE>
(1) Assumes the conversion took place January 1, 1995.
Options to purchase 2,424,678 shares of common stock were outstanding at
December 31, 1998 but were not included in the computation of diluted EPS
because the options' weighted average exercise price was greater than the
average market price of the common shares and the affect of including such
shares would be anti-dilutive to the per share amount.
The Company has 477,205 warrants outstanding at December 31, 1998 that were
not included in the computation of diluted EPS because the warrants' weighted
average exercise price was greater than the average market price of the common
shares and the affect of including such shares would be anti-dilutive to the per
share amount.
(11) WRITE-OFF OF PRODUCT DEVELOPMENT AND RELATED COSTS
During the fourth quarter of 1996, the Company recorded a non-recurring
charge totaling $1.1 million relating to the write-off of capitalized product
development costs totaling $375,000 and fees totaling $725,000 arising from an
earlier agreement with QIMC, a healthcare focused, business-led coalition
located in Cleveland. During 1994, the Company entered into an exclusive
10-year licensing agreement with QIMC for its database and methodologies. As of
December 31, 1997, the Company is committed to pay an aggregate of $406,000
through March 1999 for the license and marketing services fees associated with
the sale of the Company's product related to these methodologies. The Company
recorded this charge because the joint marketing arrangement has not met
management's expectations, resulting in limited sales of the related product
during 1996. This trend is expected to continue through 1999 and, therefore,
the projected sales for the related product and support revenue earned from
existing clients are not considered adequate to support the related expenses
associated with the QIMC agreement and the capitalized product development
costs. The remaining commitment totaling $87,500 was included in other accruals
as of December 31, 1998.
(12) ACQUISITIONS AND DIVESTITURES
In September 1998 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.
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.
In June 1997, the Company acquired National Health Advisors Ltd. ("NHA"); a
healthcare management consulting firm focused on strategy and management
support services for progressive healthcare organizations and networks. The
former shareholders of NHA received 367,569 shares of Common Stock of APACHE in
exchange for all the common stock of NHA. The acquisition was accounted for as
a pooling of interests and, as such, the accompanying consolidated financial
statements reflect the combined results of the pooled businesses for the
respective periods presented. In connection with the acquisition, the Company
recorded a one-time charge in the second quarter of 1997 for
acquisition-related costs of $732,000 included in selling, general, and
administrative expense. These costs consisted primarily of professional fees
and severance related costs.
40
<PAGE> 41
(13) COST OF OPERATIONS AND GROSS MARGIN BY PRIMARY REVENUE SOURCES
The following represents revenues and cost of operations by primary revenue
sources for the year ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Systems . . . . . . $2,384 $ 935 $4,459
Support . . . . . . 2,117 1,961 1,486
Professional services 5,705 5,732 5,649
------ ----- ------
Total revenue . 10,206 8,628 11,594
Cost of operations:
Systems . . . . . . 1,493 1,206 1,695
Support . . . . . . 686 638 615
Professional services 2,199 3,560 1,849
------ ------ ------
Total cost of
operations . 4,378 5,404 4,159
-------- ------ -----
Gross margin . . . . . . $5,828 $3,224 $7,435
====== ====== ======
</TABLE>
(14) RELATED PARTY TRANSACTION
The Company entered into a license agreement with a stockholder in February
1995. The agreement was amended in December 1996. Under the amended agreement,
the stockholder is licensed to sell a product of the Company for which the
stockholder will pay a royalty after a set number of sales. No sales of the
product have been made since 1995. The Company entered into a reseller
agreement with this stockholder in March 1998. Under the agreement, the
stockholder may resell certain products of the Company to a named hospital
system.
(15) EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing plan (the "Plan") intended to qualify
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate in the Plan after three months of service. Employees may
contribute a portion of their salary to the Plan, subject to annual limitations
imposed by the Internal Revenue Code. The Company may make matching or
discretionary contributions to the Plan at the discretion of the Board of
Directors, but has made no such contribution to date. Employer contributions
generally vest over seven years.
The Company sponsors a defined benefit pension plan (the "pension plan")
covering all former employees of National Health Advisors. The pension plan
was amended to freeze benefit accruals and the entry of new participants
effective October 31, 1997. Because the expected future service of
participants under the pension plan was eliminated during 1997, this
constitutes a curtailment under the provisions of SFAS No. 88, "Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits".
The benefits are based on final average compensation and are offset by each
employee's interest in the Company's profit sharing plan. The Company's funding
policy is to contribute annually an amount that can be deducted for federal
income tax purposes and meets minimum funding standards, using an actuarial
cost method and assumptions which are different from those used for financial
reporting.
41
<PAGE> 42
<TABLE>
<CAPTION>
Defined Benefit Pension Plan
---------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year 293,744 583,970
Service cost 149,570 139,135
Interest cost 22,031 47,494
Plan participants' contributions - -
Actuarial gain/loss (310,634) 27,918
Benefits paid - -
Amendments - 145,595
Business combinations - -
Divestitures - -
Curtailments - (650,368)
Settlements - -
- --------------------------------------------------------------------------------------- ------------
Benefit obligation at end of year (154,711) 293,744
- --------------------------------------------------------------------------------------- ------------
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning of year 186,540 122,656
Actual return on plan assets (71,161) (1,116)
Employer contribution 95,544 65,000
Plan participants' contributions - -
Benefits paid - -
Business combinations - -
Divestitures - -
Settlements - -
- ------------------------------------------------------------------------------------- ---------------
Fair value of plan assets at end of year 210,923 186,540
- ------------------------------------------------------------------------------------- ---------------
FUNDED STATUS
Unrecognized net actuarial gain/loss (225,482) -
Unrecognized prior service cost - -
Unrecognized net obligation 37,411 (107,024)
Intangible asset - -
- ------------------------------------------------------------------------------------- ---------------
Prepaid (accrued) benefit cost (188,071) (107,024)
- ------------------------------------------------------------------------------------- ---------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.50% 7.50%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost 149,570 139,135
Interest cost 22,031 47,494
Expected return on plan assets (13,991) 1,116
Asset loss deferred - -
Amortization of unrecognized transition obligation - -
Amortization of recognized gain/loss - (13,665)
Amortization of prior service cost 18,801 18,801
Settlement or curtailment recognized gain/loss - (23,468)
- ------------------------------------------------------------------------------------- ---------------
Net periodic benefit cost 176,411 169,413
- ------------------------------------------------------------------------------------- ---------------
</TABLE>
(16) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $38,000, $46,000 and $139,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
42
<PAGE> 43
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments included in current assets and current liabilities
include cash and cash equivalents, short-term investments, accounts and trade
receivables, accounts payable and accrued expenses. The carrying amounts of
these instruments approximate fair value because of the short maturity of the
instruments.
Obligations under capital leases have carrying values that approximate fair
values as the significant notes are carried net of imputed interest calculated
at approximate current market rates.
43
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO APACHE MEDICAL SYSTEMS, INC.:
We have audited in accordance with generally accepted auditing standards the
December 31, 1997 consolidated financial statements of APACHE Medical Systems,
Inc. included in this Form 10-K and have issued our report thereon dated March
27, 1998. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. The information as of and for the year ended
December 31, 1997 included in the schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
44
<PAGE> 45
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------------------------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable
1996 . . . . . . . . . . . . . $ 190,800 $100,000 $ 188,508 $ 102,292
1997 . . . . . . . . . . . . . 102,292 611,222 228,503 485,011
1998 . . . . . . . . . . . . . 485,011 60,021 30,739 514,293
</TABLE>
45
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed Form 8-K on November 4, 1998 reporting Item 4.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the Company is
incorporated herein by reference from the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management compensation is incorporated herein by
reference from the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission by April
30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission by April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission by April 30, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
1. The consolidated financial statements required by Part IV, Item 14
are included in Part II, Item 8.
2. The financial statement schedules required by Part IV, Item 14 are
included in Part II, Item 8.
(b) Reports on Form 8-K.
The Company filed Form 8-K on November 4, 1998 reporting Item 4.
(c) Exhibits
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ---------------------------------------------------------------------------
<S> <C>
2.1 Asset Purchase Agreement by and among the Company and Dun & Bradstreet HealthCare
Information, Inc. and Cognizant Corporation dated as of December 30, 1996 *
2.2 Asset Purchase Agreement by and among the Company and 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 dated as of January 7, 1997 *
2.3 Agreement and Plan of Merger among the Company, NHA Acquisition Corporation,
National Health Advisors, Ltd., Scott A. Mason and Donald W. Seymour dated as of
June 2, 1997 *****
3.1 Amended and Restated Certificate of Incorporation *****
3.2 By-Laws **
4.1 Specimen Common Stock Certificate **
4.2 Rights Agreement between the Company and First Chicago Trust Company of New York,
dated as of May 6, 1997 ***
10.1 APACHE Medical Systems, Inc. Employee Stock Option Plan + *****
10.2 APACHE Medical Systems, Inc. Non-Employee Director Option Plan + *****
10.3 Sublease Agreement between the Company and First Union National Bank of Virginia,
dated March 17, 1994 **
10.4 Registration Agreement between the Company and Certain Stockholders, dated December
28, 1995 **
10.5 Form of Warrant Agreement relating to warrants issued in 1995 **
10.6 Warrant Agreement between the Company and Venture Fund of Washington, dated May 13,
1991 **
10.7 Licensing Agreement between the Company and Cerner Corporation, dated February 2,
1995 **
10.8 Nonqualified Stock Option Agreement between the Company and The Cleveland Clinic
Foundation, dated August 19, 1994 **
10.9 Agreement between the Company and The George Washington University, dated August 19,
1994 **
10.10 Letter Agreement between the Company and the Northern New England Cardiovascular
Disease Study Group, dated March 13, 1995 **
10.11 Licensing Agreement between the Company and Quality Information Management
Corporation, dated March 24, 1994 **
10.12 Marketing Agreement between the Company and American Healthcare Systems Purchasing
Partners, L.P., dated as of June 3, 1996 **
10.13 Registration Agreement between the Company and each of 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 dated January 7, 1997 *
10.14 Nonqualified Stock Option Agreements between the Company and each of Iowa Health
Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy Hospital Medical Center and
Mark A. Tannenbaum, M.D., dated January 7, 1997 ****
10.15 Security Agreement dated February 11, 1997 made by the Company for the use and
benefit of Crestar Bank and corresponding Commercial Note *****
10.16 License Agreement between the Company and Vermont Oxford Network, Inc., Related
Services Agreement between the Company and Vermont Oxford Network, Inc. and
Consulting Agreement between the Company and Clinimetrics, Inc. each effective as
of June 24, 1997 ++ *****
10.17 Employment Agreement by and between the Company and Gerald E. Bisbee, Jr., Ph.D.,
dated May 5, 1997 + *****
10.18 Employment Agreement by and between the Company and Scott A. Mason, dated June 2,
1997 + *****
10.19 Nonqualified Stock Option Agreement between the Company and William A. Knaus, M.D.
dated May 29, 1997 + *****
10.20 APACHE Medical Systems, Inc. Employee Stock Option Plan, Amended and Restated
February 23, 1998, including forms of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement + ******
10.21 Form of 1998 Employment Agreement + ******
10.22 Form of Nonqualified Director Stock Option Agreement + ******
10.23 Employment Agreement by and between Peter Gladkin and the Company, dated May 30, 1998 +*******
10.24 Employment Agreement by and between Gina Campbell and the Company, dated August 24, 1998 + ********
10.25 Employment Agreement by and between Karen Miller and the Company, dated September 30, 1998 +********
23.1 Consent of Ernst & Young LLP ********
23.2 Consent of Arthur Andersen LLP ********
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C>
23.3 Consent of KPMG LLP ********
27.1 Financial Data Schedule ********
- ----------
+ Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K
++ Confidential treatment was requested for a portion of this Exhibit
* Incorporated herein by reference to the Company's Report on Form 8-K
filed on January 14, 1997 (File No. 0-20805)
** Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04106)
*** Incorporated herein by reference to the Company's Current Report on
Form 8-K filed on June 4, 1997 (File No. 0-20805)
**** Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 0-20805)
***** Incorporated herein by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-20805)
****** Incorporated herein by reference to the Company's Report on Form 10-K
for the year ended December 31. 1997 (File No. 0-20805)
******* Incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 0-20805)
******** Filed herewith
</TABLE>
48
<PAGE> 49
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, ON MARCH 30, 1998.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ PETER GLADKIN
---------------------------
Peter Gladkin
President and Chief Executive Officer
By: /s/ KAREN C. MILLER
----------------------------
Karen C. Miller
Vice President, Finance and Chief Financial
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 30, 1998 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED.
<TABLE>
<S> <C>
/s/ EDWARD J. CONNORS /s/ LAWRENCE S. LEWIN
--------------------- ---------------------
Edward J. Connors Lawrence S. Lewin
Director Director
/s/ THOMAS W. HODSON /s/ RICHARD E. DESSIMOZ
-------------------- -----------------------
Thomas W. Hodson Richard E. Dessimoz
Director Director
/s/ WILLIAM A. KNAUS, M.D. /s/ GERALD E. BISBEE, JR., PH.D.
-------------------------- --------------------------------
William A. Knaus, M.D. Gerald E. Bisbee, Jr., Ph.D.
Director Director
</TABLE>
49
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into this 24th day
of August 1998, by and between Regina Campbell (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 7, the term of this
Agreement shall be from September 14, 1998 through September 14, 2000. Should
the Parties wish to extend this Agreement beyond September 14, 2000, the
Parties shall enter into a renewal agreement delineating the terms and
conditions of Executive's employment no later than July 14, 2000.
2. Employment Duties. Executive will serve as Vice President and
General Counsel of the Company subject to the direction of the Chief Executive
Officer and the Board of Directors. Executive shall be fully responsible for
all facets of the Company's legal function, including the supervision and
management of outside counsel. Executive agrees to perform and discharge the
duties assigned to her to the Company'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 Chief Executive Officer and Board of Directors. Executive agrees to devote
her 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 Chief Executive
Officer or the Board of Directors.
3. Compensation.
(a). Base Annual Salary. For all services rendered by
Executive under this Agreement, the Company will pay Executive a base salary of
$150,000 per annum, in equal bi-weekly installments, which shall be subject to
review annually by the Compensation Committee of the Board of Directors. The
Company shall withhold federal and state income and employment taxes from the
salary amounts it disburses to Executive under this Section.
<PAGE> 2
(b). Performance Bonus. Executive may be eligible to
receive an annual performance bonus based on the Company's achievement of
revenue and operating profit targets.
4. Benefits.
(a). Executive will be entitled during the term of this
Agreement to three (3) 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 she 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 her duties
under this Agreement pursuant to the Company's standard business expense
reimbursement policies.
(c). The Company shall reimburse Executive up to $1,000
annually for the cost of Executive's California state bar dues and Executive's
attendance at a continuing legal education program(s) for up to three business
days each year. Additionally, the Company will reimburse Executive for the
reasonable travel expenses that she incurs as a result of her participation in
such programs.
5. Signing/Relocation Bonus. The Company shall provide Executive
a signing/relocation bonus in the amount of $20,000. This sum will be
disbursed to Executive as follows: (i) $5,000 will be paid thirty (30) days
after the date this Agreement is fully executed by the Parties; (ii) $5,000
will be paid sixty (60) days after Executive commences employment with the
Company; (iii) $5,000 will be paid ninety (90) days after Executive commences
employment with the Company; and (iv) $5,000 will be paid upon Executive's
execution of a written commitment to purchase, or rent for a minimum of twelve
(12) months, a residence in the Washington Metropolitan area.
6. Stock Options. Upon Executive's execution of this Agreement,
Executive will be eligible to receive 50,000 incentive stock options in the
Company (the "Incentive Stock Options") in accordance with the provisions and
requirements of the Incentive Stock Option Agreement attached as Exhibit 1 to
this Agreement.
7. Termination.
(a). For Cause. Notwithstanding any other provision of
this Agreement, the Company may terminate Executive's employment for cause at
- 2 -
<PAGE> 3
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 her position for a period of ninety (90) days; (iii) material
breach of any material duty or obligation imposed upon the Executive by the
Company; or (iv) divulging the Company's confidential information. If the
Executive is terminated pursuant to this Section 7(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 she shall be
entitled to her 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 shares
resulting from the exercise of vested Incentive Stock Options, provided that
such options have been exercised either prior to or at the time the Company
notifies her of her termination. Termination of the Executive pursuant to this
Section 7(a) shall not relieve her of her obligations under Sections 10, 11 and
12.
(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 thirty (30) days written notice,
provided that in the event of such termination, Executive shall be entitled to
all vested Incentive Stock Options, which may be exercised as defined in this
Agreement, and continuation of her salary and Company-paid health benefits for
six (6) months after the effective date of her termination. The Company will
also continue Executive's life insurance and disability benefits during this
six (6) month period to the extent that the terms of its group insurance
policies and/or plans extend coverage to non-employees. Additionally, any
Incentive Stock Options that would have vested in the three months after the
effective date of Executive's termination will be accelerated to, and vest on,
the effective termination date. Executive's vested Incentive Stock Options may
be exercised three (3) months after the effective date of her 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 thirty (30)
days written notice of her objection to such change. The Company shall be
afforded sixty (60) 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 sixty (60) 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 7(b). For purposes of this Section, a "material change in
- 3 -
<PAGE> 4
responsibility" shall mean a material change in her duties or authority.
8. 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 her
position or transfer of Executive to a location outside of a 50-mile radius of
the Company's office at 1650 Tysons Boulevard in McLean, Virginia, Executive
shall be entitled to all Incentive Stock 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 her salary and
Company-provided health, disability and life insurance benefits for six (6)
months as provided in Section 7(b).
(c). In the event of Executive's termination pursuant to
Section 8(b), Executive may, at her sole option, elect to receive payment of
her six (6) months salary in the form of a lump sum distribution, less
applicable withholdings, which shall be payable within twenty (20) days of the
effective date of her termination. Executive's election to such a lump sum
distribution shall not diminish Executive's obligations under Sections 10, 11
and 12.
(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 10, 11 and 12.
9. Selection of Chief Executive Officer. In the event that the
Board of Directors selects a new Chief Executive Officer, other than Executive
or Peter Gladkin, during the term of this Agreement, Executive shall notify the
Board in writing of any objections she may have to the newly elected Chief
Executive Officer within sixty (60) days of his or her selection. The Board
shall thereafter
- 4 -
<PAGE> 5
be afforded forty-five (45) days to resolve and redress Executive's concerns.
Should the Board fail to redress Executive's objections to her satisfaction,
Executive may resign her employment and receive the salary and continuation of
her benefits as provided in Section 7(b).
10. Confidentiality. In the course of performing her 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 she 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 she shall not in any way utilize such
Confidential Information for the gain or advantage of Executive or others or to
the detriment of the Company; and
(d). that upon termination of this Agreement, she 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 Executive 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 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.
- 5 -
<PAGE> 6
11. 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 twelve (12) months following her receipt of notice of
termination under Section 7, that she 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 her 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.
12. Non-Solicitation.
(a). Executive agrees that during the term of this
Agreement and for a twelve (12) month period following her receipt of notice of
her termination under Section 7, she will not, directly or indirectly, without
the prior written consent of the Company, solicit or attempt to solicit
Competitive 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 a twelve (12) month period following her receipt of notice of
her termination under Section 7, she will not, directly or indirectly, without
the prior written
- 6 -
<PAGE> 7
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.
13. Remedies. Executive agrees and acknowledges that the
violation of any of the covenants or agreements contained in Sections 10, 11
and 12 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.
14. 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:
If to the Company: Mr. Peter Gladkin
Chief Executive Officer
APACHE Medical Systems, Inc.
1650 Tysons Boulevard
McLean, VA 22102-3915
Notice to Executive: Ms. Regina Campbell
-------------------
-------------------
Executive shall notify the Company by certified mail of any change in
her address, and thereafter, the Company shall forward any notices under this
Agreement to Executive at such new address.
15. 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.
16. Assignment. This Agreement is one for personal services and
may not be assigned by Executive to a third party.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia.
18. 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
- 7 -
<PAGE> 8
shall not be exclusive and shall be in addition to all other rights and
remedies available at law or in equity.
<TABLE>
<S> <C>
- ----------------------------------- ------------------------------------
REGINA CAMPBELL APACHE MEDICAL SYSTEMS, INC.
By:
--------------------------------
- ----------------------------------- ------------------------------------
Date Date
1528987
</TABLE>
- 8 -
<PAGE> 9
Exhibit 1
APACHE MEDICAL SYSTEMS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement (this "Agreement"), dated as of
September 14, 1998, (the "Grant Date"), is by and between APACHE Medical
Systems, Inc., a Delaware corporation (the "Corporation"), and Regina Campbell
(the "Optionee"), a key employee of 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 50,000 shares
of the Corporation's common stock, par value $0.01 per share (the "Shares"), at
an exercise price of $1.2190 per Share.
2. Vesting and Expiration. The option rights of the Optionee
will be exercisable until September 14, 2008, provided that they have vested
and, except as otherwise expressly provided in this Agreement, the Optionee is
employed by the Corporation. The Option shall vest as provided on Exhibit A
hereto.
3. Exercise Following Termination of Employment. If the Optionee
ceases to be 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 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 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 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 an employee of the
Corporation. If the Optionee dies during such three-month period 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
<PAGE> 10
last for a continuous period of not less than 12 months.
4. Acceleration Following Termination Other Than for Cause. In
the event Optionee's 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 three (3) months after the effective date of
Optionee's termination will be accelerated to, and vest on, the effective date
of Optionee's termination. Any Shares as to which the Option has not vested on
the effective date of termination will be cancelled.
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 (as defined in Section 9 hereof and 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 Section 9 hereof) 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.
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,
2
<PAGE> 11
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. 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 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.
3
<PAGE> 12
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:
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.
(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.
4
<PAGE> 13
(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.
5
<PAGE> 14
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.
-------------------------------------
By: Peter Gladkin
Title: President and Chief Executive Officer
-------------------------------------
Regina Campbell, Optionee
6
<PAGE> 15
EXHIBIT A
Vesting
The Option shall vest with the passage of time and subject to the
Corporation's performance as follows:
1. Six-Month and Annual Vesting. The Option shall vest during the
period of the Optionee's employment with the Corporation commencing six months
after the date Optionee begins employment with the Corporation (the "Start
Date") as follows:
<TABLE>
<CAPTION>
Tranche Number of Shares Vesting Date
------- ---------------- ------------
<S> <C> <C>
Six-Month 10,000 Six Months After Start Date (Mar. 14, 1999)
(A) 10,000 1st Anniversary After Start Date (Sept. 14, 1999)
(B) 10,000 2nd Anniversary After Start Date (Sept. 14, 2000)
(C) 10,000 3rd Anniversary After Start Date (Sept. 14, 2001)
(D) 10,000 4th Anniversary After Start Date (Sept. 14, 2002)
</TABLE>
2. Accelerated Vesting. At the discretion of the Board of
Directors, vesting of the Tranches referred to below may be accelerated if both
Earnings (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-________, 1998 assets or activities) 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 Closing price of $6 or
quarters in which the higher for 20 consecutive
Corporation reports trading days
positive Earnings
(B) Any four consecutive Closing price of $9 or
quarters in which the higher for 30 consecutive
Corporation reports trading days
positive Earnings
(C) Earnings greater than Closing price of $12 or
$1.0 million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in
the Corporation's Form 10-K
and Forms 10-Q filed with
the Securities and
Exchange Commission
(D) Earnings greater than Closing price of $15 or
$3.0 million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in
the Corporation's Form 10-K
and Forms 10-Q filed with
the Securities and
Exchange Commission
</TABLE>
7
<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into this 30th day of
September 1998, by and between Karen Miller (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 7, the term of this Agreement shall
be from October 1, 1998 through October 1, 2000. Should the Parties wish to
extend this Agreement beyond October 1, 2000, the Parties shall enter into a
renewal agreement delineating the terms and conditions of Executive's employment
no later than July 1, 2000.
2. Employment Duties. Executive will serve as Vice President and Chief
Financial Officer of the Company subject to the direction of the Chief Executive
Officer and the Board of Directors. Executive shall be fully responsible for all
facets of the Company's financial functions, including investor relations and
the supervision and management of the department. Executive agrees to perform
and discharge the duties assigned to her to the Company'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 Chief Executive Officer and Board of
Directors. Executive agrees to devote her 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 (excluding a limited number of
memberships in approved trade or professional associations and organizations),
whether or not such activity is pursued for gain, profit or other pecuniary
advantage, without the prior written authorization of the Chief Executive
Officer or the Board of Directors.
3. Compensation.
(a). Base Annual Salary. For all services rendered by Executive under
this Agreement, the Company will pay Executive a base salary of $128,000 per
annum, in equal semi-monthly installments, which shall be subject to review
annually by the Compensation Committee of the Board of Directors. The Company
shall withhold federal and state income and
<PAGE> 2
employment taxes from the salary amounts it disburses to Executive under this
Section.
(b). Performance Bonus. Executive may be eligible to receive an annual
performance bonus of up to 35% based on the Company's achievement of revenue and
operating profit targets.
4. Benefits.
(a). Executive will be entitled during the term of this Agreement to
three (3) 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 she 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 her duties under this Agreement
pursuant to the Company's standard business expense reimbursement policies.
5. Signing/Relocation Bonus. The Company shall provide Executive a
signing/relocation bonus in the amount of $20,000. This sum will be disbursed to
Executive as follows: (i) $5,000 will be paid thirty (30) days after Executive
commences employment with the Company; and, (ii) $5,000 will be paid monthly
thereafter for a period of three (3) months. In the event the Executive decides
to voluntarily terminate employment prior to completion of one (1) year
employment with the Company all signing bonuses and relocation funds are at the
Company's sole option, recoverable unless such termination was due to
catastrophic illness and/or disability.
6. Stock Options. Upon Executive's execution of this Agreement, Executive
will, as soon as practically possible, receive 50,000 incentive stock options in
the Company (the "Incentive Stock Options") in accordance with the provisions
and requirements of the Incentive Stock Option Agreement attached as Exhibit 1
to this Agreement.
7. 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
- 2 -
<PAGE> 3
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
her position for a period of ninety (90) days; (iii) material breach of any
lawful material duty or obligation imposed upon the Executive by the Company; or
(iv) divulging the Company's confidential information. If the Executive is
terminated pursuant to this Section 7(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 she shall be entitled to her 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 shares resulting from the exercise of vested
Incentive Stock Options, provided that such options have been exercised either
prior to or at the time the Company notifies her of her termination. Termination
of the Executive pursuant to this Section 7(a) shall not relieve her of her
obligations under Sections 10, 11 and 12.
(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
Incentive Stock Options, which may be exercised as defined in this Agreement,
and continuation of her salary and Company-paid health benefits for six (6)
months after the effective date of her termination. The Company will also
continue Executive's life insurance and disability benefits during this six (6)
month period to the extent that the terms of its group insurance policies and/or
plans extend coverage to non-employees. Additionally, any Incentive Stock
Options that would have vested in the three months after the effective date of
Executive's termination will be accelerated to, and vest on, the effective
termination date. Executive's vested Incentive Stock Options may be exercised
three (3) months after the effective date of her 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 thirty (30) days written
notice of her objection to such change. The Company shall be afforded sixty (60)
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 sixty (60) 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
7(b). For purposes of this Section, a "material change in responsibility" shall
mean a material change in her duties or authority.
- 3 -
<PAGE> 4
8. 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 her position or
transfer of Executive to a location outside of a 50-mile radius of the Company's
office at 1650 Tysons Boulevard in McLean, Virginia, Executive shall be entitled
to all Incentive Stock 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 her salary and Company-provided health,
disability and life insurance benefits for six (6) months as provided in Section
7(b).
(c). In the event of Executive's termination pursuant to Section 8(b),
Executive may, at her sole option, elect to receive payment of her six (6)
months salary in the form of a lump sum distribution, less applicable
withholdings, which shall be payable within twenty (20) days of the effective
date of her termination. Executive's election to such a lump sum distribution
shall not diminish Executive's obligations under Sections 10, 11 and 12.
(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 10, 11 and 12.
9. Selection of Chief Executive Officer. In the event that the Board of
Directors selects a new Chief Executive Officer, other than Executive or Peter
Gladkin, during the term of this Agreement, Executive shall notify the Board in
writing of any objections she may have to the newly elected Chief Executive
Officer within sixty (60) days of his or her selection. The Board shall
thereafter be afforded forty-five (45) days to resolve and redress Executive's
concerns.
- 4 -
<PAGE> 5
Should the Board fail to redress Executive's objections to her satisfaction,
Executive may resign her employment and receive the salary and continuation of
her benefits as provided in Section 7(b).
10. Confidentiality. In the course of performing her 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 she 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 she shall not in any way utilize such Confidential
Information for the gain or advantage of Executive or others or to the detriment
of the Company; and
(d). that upon termination of this Agreement, she 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 Executive 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 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.
- 5 -
<PAGE> 6
11. 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 twelve (12) months following her receipt of notice of termination
under Section 7, that she 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
her 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 severity adjusted outcomes for the
purpose of predicting their treatment, managing clinical productivity or
containing costs through the use of these 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.
12. Non-Solicitation.
(a). Executive agrees that during the term of this Agreement and for a
twelve (12) month period following her receipt of notice of her termination
under Section 7, she will not, directly or indirectly, without the prior written
consent of the Company, solicit or attempt to solicit Competitive 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 a
twelve (12) month period following her receipt of notice of her termination
under Section 7, she will not, directly or indirectly, without the prior written
consent of the Company, solicit or induce any employee of the Company to
- 6 -
<PAGE> 7
leave the employ of the Company or hire for any purpose any employee of the
Company.
13. Remedies. Executive agrees and acknowledges that the violation of any
of the covenants or agreements contained in Sections 10, 11 and 12 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.
14. 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:
If to the Company: Mr. Peter Gladkin
Chief Executive Officer
APACHE Medical Systems, Inc.
1650 Tysons Boulevard
McLean, VA 22102-3915
Notice to Executive: Karen Miller
-----------------------
-----------------------
Executive shall notify the Company by certified mail of any change in her
address, and thereafter, the Company shall forward any notices under this
Agreement to Executive at such new address.
15. 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.
16. Assignment. This Agreement is one for personal services and may not be
assigned by Executive to a third party.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
18. 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
- 7 -
<PAGE> 8
available at law or in equity.
- ------------------------------ ------------------------------
Karen Miller APACHE MEDICAL SYSTEMS, INC.
By:
---------------------------
- ------------------------------ ------------------------------
Date Date
-8-
<PAGE> 9
Exhibit 1
APACHE MEDICAL SYSTEMS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement (this "Agreement"), dated as of
October 1, 1998 (the "Grant Date"), is by and between APACHE Medical Systems,
Inc., a Delaware corporation (the "Corporation"), and Karen Miller (the
"Optionee"), a key employee of 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 50,000 shares of the Corporation's
common stock, par value $0.01 per share (the "Shares"), at an exercise price of
$1.9380 per Share.
2. Vesting and Expiration. The option rights of the Optionee will be
exercisable until October 1, 2008, provided that they have vested and, except as
otherwise expressly provided in this Agreement, the Optionee is employed by the
Corporation. The Option shall vest as provided on Exhibit A hereto.
3. Exercise Following Termination of Employment. If the Optionee ceases to
be 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 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 lawful material duty or obligation imposed upon the Optionee by
the Corporation; or (iii) divulging the Corporation's confidential information.
(b) If the Optionee's 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 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 an employee of the Corporation. If
the Optionee dies during such three-month period 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.
<PAGE> 10
4. Acceleration Following Termination Other Than for Cause. In the event
Optionee's 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 three (3) months after the effective date of Optionee's
termination will be accelerated to, and vest on, the effective date of
Optionee's termination. Any Shares as to which the Option has not vested on the
effective date of termination will be cancelled.
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 (as defined
in Section 9 hereof and 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 Section 9 hereof) 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.
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
2
<PAGE> 11
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. 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 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.
3
<PAGE> 12
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:
--------------------------------
--------------------------------
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.
(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.
4
<PAGE> 13
(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.
5
<PAGE> 14
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.
-------------------------------------
By: Peter Gladkin
Title: President and Chief Executive Officer
-------------------------------------
Karen Miller, Optionee
6
<PAGE> 15
EXHIBIT A
Vesting
The Option shall vest with the passage of time and subject to the
Corporation's performance as follows:
1. Six-Month and Annual Vesting. The Option shall vest during the period of
the Optionee's employment with the Corporation commencing six months after the
date Optionee begins employment with the Corporation (the "Start Date") as
follows:
<TABLE>
<CAPTION>
Tranche Number of Shares Vesting Date
------- ---------------- ------------
<S> <C> <C>
Six-Month 10,000 Six Months After Start Date (Apr. 1, 1999)
(A) 10,000 1st Anniversary After Start Date (Oct. 1, 1999)
(B) 10,000 2nd Anniversary After Start Date (Oct. 1, 2000)
(C) 10,000 3rd Anniversary After Start Date (Oct. 1, 2001)
(D) 10,000 4th Anniversary After Start Date (Oct. 1, 2002)
</TABLE>
2. Accelerated Vesting. At the discretion of the Board of Directors,
vesting of the Tranches referred to below may be accelerated if both Earnings
(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-1997, 1998 assets or activities) 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 Closing price of $6 or
quarters in which the higher for 20 consecutive
Corporation reports trading days
positive Earnings
(B) Any four consecutive Closing price of $9 or
quarters in which the higher for 30 consecutive
Corporation reports trading days
positive Earnings
(C) Earnings greater than Closing price of $12 or
$1.0 million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in
the Corporation's Form 10-K
and Forms 10-Q filed with
the Securities and
Exchange Commission
(D) Earnings greater than Closing price of $15 or
$3.0 million for any four higher for 60 consecutive
consecutive quarters of trading days
Earnings as reported in
the Corporation's Form 10-K
and Forms 10-Q filed with
the Securities and
Exchange Commission
</TABLE>
7
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated February 19,
1999, with respect to the consolidated financial statements of APACHE Medical
Systems, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998, in the following Registration Statements:
<TABLE>
<S> <C>
(1) Registration Statement Number 333-23731 on Form S-8, dated March 21, 1997;
(2) Registration Statement Number 333-23749 on Form S-8, dated March 21, 1997;
(3) Registration Statement Number 333-36423 on Form S-8, dated September 26, 1997;
(4) Registration Statement Number 333-36425 on Form S-8, dated September 26, 1997;
</TABLE>
/s/ Ernst & Young LLP
Vienna, Virginia
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements, File Nos. 333-23731, 333-23749, 333-36425, and
333-36423.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
<PAGE> 1
Exhibit No. 23.3 Consent of KPMG LLP
The Board of Directors
APACHE Medical Systems, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-23731, 333-23749, 333-36423, and 333-36425) on Form S-8 of APACHE Medical
Systems, Inc. of our report dated February 7, 1997, relating to the
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows of APACHE Medical Systems, Inc. and subsidiary, and
the related schedule for the year ended December 31, 1996, before the
restatement described in Note 2 to the consolidated financial statements, which
report appears in the December 31, 1998, annual report on Form 10-K of APACHE
Medical Systems, Inc.
KPMG LLP
March 30, 1999
McLean, VA
<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 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,532
<SECURITIES> 1,000
<RECEIVABLES> 3,490
<ALLOWANCES> 514
<INVENTORY> 0
<CURRENT-ASSETS> 10,253
<PP&E> 3,589
<DEPRECIATION> (2,704)
<TOTAL-ASSETS> 12,142
<CURRENT-LIABILITIES> 8,134
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 3,667
<TOTAL-LIABILITY-AND-EQUITY> 12,142
<SALES> 10,206
<TOTAL-REVENUES> 10,206
<CGS> 0
<TOTAL-COSTS> 4,378
<OTHER-EXPENSES> 9,462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (3,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,193)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
