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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1996.
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to .
Commission File Number: 0-28170
OACIS HEALTHCARE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0012790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 DRAKE'S LANDING RD., SUITE 100
GREENBRAE, CA 94904
(Address of principal executive offices, including zip code)
(415) 925-0121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / / No /x/
At August 8, 1996, there were 10,005,628 shares or the Registrant's Common
Stock outstanding.
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OACIS HEALTHCARE HOLDINGS CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets as of June 30, 1996 (unaudited) and
December 31, 1995 3
Statements of Operations (unaudited) for the three months
and six months ended June 30, 1996 and 1995 4
Statements of Cash Flows (unaudited) for the three months
and six months ended June 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II OTHER INFORMATION
Item 2. Change in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX TO EXHIBITS
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30,
1995 1996
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,900 $ 25,967
Accounts receivable, net 5,105 4,788
Other current assets 327 400
--------- ---------
Total current assets 9,332 31,155
--------- ---------
Property and equipment, net 2,296 2,104
Other assets, net 250 303
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$ 11,878 $ 33,562
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,725 $ 1,048
Accrued expenses 2,652 3,478
Unearned revenues 3,251 2,988
--------- ---------
Total current liabilities 7,628 7,514
--------- ---------
Long-term obligations 3,000 700
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Stockholders' equity:
Series A Preferred Stock, $0.01 par value; 3,862,000 shares authorized;
3,838,000 and 0 shares issued and outstanding 38 -
Series B Preferred Stock, $0.01 par value; 6,538,000 shares authorized;
6,229,000 and 0 shares issued and outstanding 62 -
Common Stock, $0.01 par value; 30,000,000 shares authorized;
1,732,000 and 10,006,000 shares issued and outstanding 17 100
Additional paid-in capital 18,631 47,560
Accumulated deficit (17,298) (22,137)
Deferred stock compensation (200) (175)
--------- ---------
Total stockholders' equity 1,250 25,348
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$ 11,878 $ 33,562
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
Revenues:
Software licenses $ 1,020 $ 1,485 $ 1,465 $ 2,881
Installation and support services 1,532 1,644 2,613 3,228
Third party hardware and software 695 968 1,595 1,893
---------- ---------- ---------- ----------
Total revenues 3,247 4,097 5,673 8,002
---------- ---------- ---------- ----------
Cost of revenues:
Software licenses 28 39 51 78
Installation and support services 1,452 1,369 2,613 2,689
Third party hardware and software 663 818 1,437 1,629
---------- ---------- ---------- ----------
Total cost of revenues 2,143 2,226 4,101 4,396
----------- ---------- ---------- ----------
Gross profit 1,104 1,871 1,572 3,606
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 1,151 1,478 1,907 2,836
Research and development 1,429 1,371 2,726 3,765
General and administrative 660 1,153 1,087 1,953
---------- ---------- ---------- ----------
Total operating expenses 3,240 4,002 5,720 8,554
---------- ---------- ---------- ----------
Loss from operations (2,136) (2,131) (4,148) (4,948)
Interest expense, net 24 (142) 119 (109)
Net loss $ (2,160) $ (1,989) $ (4,267) $ (4,839)
---------- ---------- ---------- ----------
Pro forma:
Net loss per common and
common equivalent shares $ (0.29) $ (0.23) $ (0.58) $ (0.59)
---------- ---------- ---------- ----------
Weighted average number of
common and common
equivalent shares 7,499,543 8,692,367 7,419,716 8,179,805
---------- ---------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Six months ended
June 30,
1995 1996
------- --------
Cash flows from operating activities: $(4,267) $(4,839)
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 746 624
Stock compensation expense -- 25
Acquired in-process research and development -- 700
Changes in assets and liabilities:
Accounts receivable (367) 317
Other current assets (27) (73)
Accounts payable (613) (677)
Accrued expenses 28 826
Unearned revenues 130 (263)
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Net cash used in operating activities (4,370) (3,360)
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Cash flows from investing activities:
Purchases of property and equipment (235) (404)
Capitalized software development costs (275) (81)
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Net cash used in investing activities (510) (485)
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Cash flows from financing activities:
Net proceeds from common stock issuance 12,694 28,905
Proceeds from option exercises -- 7
Principal payment on notes payable (1,735) (4,000)
Proceeds from note payable -- 1,000
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Net cash provided by financing activities 10,959 25,912
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Increase in cash and cash equivalents 6,079 22,067
Cash and cash equivalents, beginning of period 201 3,900
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Cash and cash equivalents, end of period $ 6,280 25,967
------- --------
Supplemental disclosure:
Cash paid for interest $ 145 139
------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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OACIS HEALTHCARE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
The financial statements included herein for Oacis Healthcare Holdings
Corp. (the "Company") have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In
management's opinion, the interim financial data presented includes all
adjustments (which include only normal and recurring adjustments) necessary for
a fair presentation. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to understand the information presented. The results of operations for
the three months and the six months ended June 30, 1996 are not necessarily
indicative of the operating results expected for the entire year. The financial
statements included herein should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1995, included in
the Company's Registration Statement on Form SB-2 (No. 333-02804-LA) filed with
the Securities and Exchange Commission.
2. INITIAL PUBLIC OFFERING
On May 16, 1996, the Company completed an initial public offering in
which it sold 3,220,000 shares of Common Stock at $10.00 per share. Upon the
closing of this offering, all of the Company's Preferred Stock converted to
approximately 5,034,000 shares of Common Stock. After the offering, the
Company's authorized capital consists of 5,000,000 shares of undesignated
Preferred Stock and 30,000,000 authorized shares of Common Stock of which
9,999,400 shares are outstanding at June 30, 1996. A portion of the proceeds
from this offering were used to repay substantially all of the Company's
long-term obligations.
3. PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period. In
the period subsequent to the effective date of the Company's initial public
offering, common equivalent shares consisting of stock options and stock
warrants are antidilutive and have been excluded from the weighted average share
computation. Common equivalent shares for the period before the effective date
of the Company's initial public offering consist of convertible preferred stock
(using the if-converted method), and stock options and warrants (using the
treasury stock method), even though their effect is antidilutive, pursuant to a
Securities and Exchange Commission Staff Accounting Bulletin.
4. STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.123 "Accounting for Stock Based
Compensation" ("SFAS 123"). The Company will be required to adopt SFAS 123 in
the year ending December 31, 1996. It is the Company's intention to continue to
account for employee stock options in accordance with Accounting Principles
Bulletin No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and to
adopt the "disclosure only" alternative allowed by SFAS 123.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background
Oacis Healthcare Holdings Corp., through its wholly owned subsidiary
Oacis Healthcare Systems, Inc. (collectively the "Company"), develops, markets,
licenses, installs, and supports clinical information systems primarily for
major medical centers, hospitals, integrated health care networks and community
based health care networks. In 1986, the Company introduced StatLAN, the initial
version of the Company's clinical information system. In 1994, the Company
introduced Oacis. Oacis is comprised of the Oacis Healthcare Network, which
includes an interface engine and a clinical data repository, and Clinical Care
applications, which facilitate the input and delivery of information at the
point of care.
Substantially all of the Company's revenues are currently derived from
licenses of Oacis. Therefore, any significant reduction in licensing of Oacis,
including an inability to convert a significant number of existing StatLAN
customers to Oacis, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company intends to focus its sales and marketing efforts on Integrated Delivery
Systems ("IDSs"), which are a relatively new type of organization and which
currently account for a small portion of the overall market for clinical
information systems. There can be no assurance that IDSs will continue to form
or will invest in advanced clinical information systems of the nature offered by
the Company. The Company's future success and financial performance also will
depend in large part upon the Company's ability to provide the increasing system
functionality required by its customers through the timely development and
successful introduction of new applications and enhancements to Oacis. The
Company has historically devoted significant resources to system enhancements
and research and development and believes that significant continuing
development efforts will be required to sustain the Company's operations. There
can be no assurance that the Company will successfully develop, introduce and
market new system enhancements or applications, or that system enhancements or
new applications developed by the Company will meet the requirements of health
care providers and achieve market acceptance. Further, the Company's systems are
dependent upon a number of third-party computer hardware and software products,
and include a number of embedded software products licensed from third parties.
Failure of such third parties to maintain or enhance their products could impair
the functionality of Oacis and could require the Company to obtain alternative
products from other sources or to develop such software internally, either of
which could involve costs and delays as well as diversion of engineering
resources.
Revenue Recognition
The Company's revenues consist of license fees for the perpetual use of
its software, installation revenues associated with installing and configuring
the software to meet specific customer needs, revenues from the sale of
third-party hardware and software, and ongoing support services. The price of an
Oacis system varies depending on a number of factors, including the modules
licensed, the volume of outpatient visits and inpatient days and the number of
workstations from which the system may be accessed, and generally ranges from
more than six hundred thousand dollars to a few million dollars. The Company
resells third-party hardware and software pursuant to standard reseller
agreements.
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Revenues from contracts where Oacis is actively involved in the
installation of the system, which are primarily in the United States and Canada,
are recognized for software license fees and installation services on a
percentage of completion basis measured by the ratio of (i) labor hours incurred
to install and configure the system to (ii) total estimated labor hours. The
Company generally bills its installation services as the services are provided.
Software license fees are generally billed in accordance with installation
milestones. Accordingly, revenues recognized in advance of achieving billing
milestones are recorded as unbilled accounts receivable and collections
resulting from billing milestones achieved in advance of recognizing revenues
are recorded as unearned revenues on the consolidated balance sheet. If the
total estimated cost of a contract is expected to exceed the contract price,
determined primarily by the installation component of the contract, the total
estimated loss is charged to expense in the period the loss is identified.
Because the Company does not recognize revenues on a contract before the
contract is signed, and because of the long sales and installation cycles
associated with Oacis, the Company is unable to accurately predict the amount of
revenues it expects to recognize from software licenses or system installations
in any particular period.
Software license revenues from contracts where Oacis is not actively
involved in the installation of the system, typically international contracts,
are recognized as contract amounts become due and payable, typically on a
milestone basis. Because Oacis is not actively involved in international
installations, milestone attainment and consequently revenue recognition on
these contracts may be delayed for reasons which include delays caused by the
customer, or Oacis' international partner, both of which are beyond the control
of Oacis.
The Company also recognizes revenues from support fees and sales of
third-party hardware and software. Support agreements generally cover a one year
period and the associated revenues are recognized ratably over the period of the
support agreement. Third-party hardware and software revenues are recognized
upon delivery of the related hardware and software. Third-party hardware and
software are generally sold pursuant to a purchase order and are not governed by
the terms of the software license and services agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues
In the three months ended June 30, 1996, total revenues increased 26% to $4.1
million from $3.2 million in the three months ended June 30, 1995. Of these
amounts, software license fee revenues increased 46% to $1.5 million and
installation and support service revenues increased 7% to $1.6 million due to an
increase in the number of installations in progress during the three months
ended June 30, 1996, a generally higher level of productivity on those
installations, and an increase in the average price of those contracts. Hardware
revenues during the three months ended June 30, 1996 increased 39% to $1.0
million due to increased system sales activity during the quarter.
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Cost of Revenues
Cost of revenues increased to $2.2 million, or 54% of total revenues,
in the three months ended June 30, 1996, compared to $2.1 million, or 66% of
total revenues, in the three months ended June 30, 1995. Cost of installation
and support services decreased 6% to $1.4 million in the three months ended June
30, 1996 from $1.5 million in the three months ended June 30, 1995 as a result
of a generally lower level of direct installation expense. Gross profit as a
percentage of total revenues increased from 34% in the three months ended June
30, 1995 to 46% in the three months ended June 30, 1996 as a result of an
increase in the billable component of installation services in the three months
ended June 30, 1996 over 1995 as well as generally higher utilization rates of
installation and support service personnel. The gross profit on third party
hardware and software increased to 15% in the three months ended June 30, 1996
from 5% in the three months ended June 30, 1995 due primarily to improved
pricing programs from third party hardware and software vendors and the mix of
third-party products sold.
Sales and Marketing
Sales and marketing expenses increased 28% to $1.5 million in the three
months ended June 30, 1996 from $1.2 million in the three months ended June 30,
1995 and increased as a percentage of total revenues to 36% in the three months
ended June 30, 1996 from 35% in the three months ended June 30, 1995. The
increase in sales and marketing expense was a result of an increase in personnel
from 26 at June 30, 1995 to 32 at June 30, 1996, and an increase in commission
expense resulting from increased sales activity.
Research and Development
Research and development expenses remained consistent at $1.4 million
in the three months ended June 30, 1996 compared to $1.4 million in the three
months ended June 30, 1995 and decreased as a percentage of total revenues to
33% in the three months ended June 30, 1996 from 44% in the three months ended
June 30, 1995 due to growth in total revenue. Although expenses remained
unchanged in comparison to the prior year period, salary and related expenses
decreased during the quarter as a result of lower comparative headcount levels
during the quarter, offset by increased usage of consulting personnel. During
the three months ended June 30, 1996, the Company capitalized $81,000 of direct
costs associated with the development of a component of Oacis after
technological feasibility had been established. The Company anticipates an
increase in the Capitalization of software development costs in future periods.
General and Administrative
General and administrative expenses increased 75% to $1.2 million in
the three months ended June 30, 1996 from $.7 million in the three months ended
June 30, 1995. The increase in general and administrative expense was a result
of an increase in personnel as the Company continued to build corporate
infrastructure, an increase in corporate recruiting expenses and generally
higher levels of expenses including consulting expenses related to certain
Company-wide process improvement initiatives during the quarter.
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SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues
In the six months ended June 30, 1996, total revenues increased 41% to $8.0
million from $5.7 million in the six months ended June 30, 1995. Of these
amounts, software license fee revenues increased 97% to $2.9 million and
installation and support service revenues increased 24% to $3.2 million due to
an increase in the number of installations in progress during the six months
ended June 30, 1996, a generally higher level of productivity on those
installations, and an increase in the average price of those contracts. Hardware
revenues increased 19% to $1.9 million in the six months ended June 30, 1996 as
a result of increased system sales activity.
Cost of Revenues
Cost of revenues increased to $4.4 million, or 55% of total revenues,
in the six months ended June 30, 1996, compared to $4.1 million, or 72% of total
revenues, in the six months ended June 30, 1995. Cost of installation and
support services increased 3% to $2.7 million in the six months ended June 30,
1996 from $2.6 million in the six months ended June 30, 1995 as a result of a
general increase in the average compensation levels in those departments. Gross
profit as a percentage of total revenues increased from 28% in the six months
ended June 30, 1995 to 45% in the six months ended June 30, 1996 as a result of
an increase in the billable component of installation services in the six months
ended June 30, 1996 over 1995 as well as a shift in revenue mix to higher margin
software license fee revenue. Gross profit on third party hardware and software
increased to 14% in the six months ended June 30, 1996 from 10% in the six
months ended June 30, 1995 due primarily to improved pricing programs from third
party hardware and software vendors and the mix of third-party products sold.
Sales and Marketing
Sales and marketing expenses increased 49% to $2.8 million in the six
months ended June 30, 1996 from $1.9 million in the six months ended June 30,
1995 and increased as a percentage of total revenues to 35% in the six months
ended June 30, 1996 from 34% in the six months ended June 30, 1995. The increase
in sales and marketing expense was a result of an increase in personnel from 26
at June 30, 1995 to 32 at June 30, 1996, an increase in commission and bonus
expenses resulting from increased sales activity, and an increase in consulting
and advertising related expenses.
Research and Development
Research and development expenses increased 38% to $3.8 million in the
six months ended June 30, 1996 from $2.7 million in the six months ended June
30, 1995 and decreased as a percentage of total revenues to 47% in the six
months ended June 30, 1996 from 48% in the six months ended June 30, 1995. The
increase in research and development expense was primarily attributable to the
acquisition costs of certain technology and the costs associated with the
continuing development of that technology. During the six months ended June 30,
1996, the Company acquired through a license, technology which forms the basis
of Enterprise Member/Patient Index ("EMPI"), a component of the Oacis Healthcare
Network. Because this technology had not reached technological feasibility when
it was acquired, the $700,000 license fee was charged to expense in the first
quarter of 1996. Excluding the impact of the licensed technology, research and
development expenses increased 12% in the six months ended June 30,
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1996 over the same period in 1995 as a result of generally higher expenditures
for system development including the cost of performing the alpha testing on
certain Oacis modules, primarily in the three months ended March 31, 1996.
During the six months ended June 30, 1996, the Company capitalized $81,000 of
direct costs associated with the development of a component of Oacis after
technological feasibility had been established. The Company anticipates an
increase in the Capitalization of software development costs in future periods.
General and Administrative
General and administrative expenses increased 80% to $2.0 million in the six
months ended June 30, 1996 from $1.1 million in the six months ended June 30,
1995 and increased as a percentage of total revenues to 24% in the six months
ended June 30, 1996 from 19% in the six months ended June 30, 1995. The increase
in general and administrative expense was a result of an increase in personnel,
and increased corporate recruiting expenses as well as increased consulting
expenses related in part to certain process improvement initiatives.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company's cash and cash equivalents totaled $26.0
million as compared to cash and equivalents of $3.9 million at December 31,
1995. The Company completed an initial public offering of 3,220,000 shares of
common stock on May 16, 1996 at $10.00 per share resulting in net proceeds to
the Company of $28.9 million. Subsequent to the closing of this offering, the
Company repaid $ 4.0 million in long-term obligations.
In April 1996, the Company entered into a master lease agreement with
Comdisco, Inc. which enables the Company to finance the purchase of new
equipment, or sell and lease back certain existing equipment, up to an aggregate
of $1.0 million. The lease term is 42 months from the date of funding, and the
annual interest rate is 8.5%. At June 30, 1996 this lease facility was
materially unused.
In April 1996, the Company borrowed $1.0 million pursuant to a Loan and
Security Agreement with Comdisco, Inc. which was secured by all property and
equipment of the Company. In June 1996, the Company repaid the outstanding
principal balance of this loan with a portion of the proceeds of the initial
public offering.
The Company's working capital and capital requirements will depend upon
numerous factors including possible customer installation delays, lengthy sales
cycles, the Company's plans for developing, acquiring or licensing new
applications and technologies, the Company's requirements to purchase additional
capital equipment and the level of resources that the Company devotes to its
sales and marketing activities. The Company believes that its existing capital
resources and available equipment lease financing arrangements will be adequate
to fund its current operations for at least the next 18 months. Thereafter, the
Company may require additional funds to support its operations and may seek to
raise such additional funds through public or private equity financing or from
other sources. There can be no assurance that additional financing will be
available at all or that, if available, such financing will be obtainable on
terms favorable to the Company.
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FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.
History of Operating Losses; Uncertain Profitability. The Company
incurred a net loss of $9.3 million for the year ended December 31, 1995 and
$4.8 million for the six months ended June 30, 1996, and, as of June 30, 1996,
had an accumulated deficit of $22.1 million. The Company has not achieved
profitability on a quarterly or annual basis and the Company anticipates that it
will incur a net loss for the current year. The Company's prior operating
history, dependence on Oacis as its principal product, long sales and
installation cycles, and dependence upon key personnel and third parties, as
well as competition, uncertainty in and consolidation of the health care
industry, and general economic and other factors make the prediction of future
operating results difficult. There can be no assurance that any of the Company's
business strategies will be successful or that the Company will be able to
achieve consistent revenue growth or achieve profitability on a quarterly or
annual basis.
Dependence on Oacis and Emerging IDS Market; Market Acceptance; System
Enhancements. Substantially all of the Company's revenues are currently derived
from licenses of Oacis. Therefore, any significant reduction in licensing of
Oacis, including an inability to convert a significant number of existing
StarLAN customers to Oacis, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company intends to focus its sales and marketing efforts on IDSs, which are
a relatively new type of organization and which currently account for a small
portion of the overall market for clinical information systems. There can be no
assurance that IDSs will continue to form or will invest in advanced clinical
information systems of the nature offered by the Company. The Company's future
success and financial performance also will depend in large part upon the
Company's ability to provide the increasing system functionality required by its
customers through the timely development and successful introduction of new
applications and enhancements to Oacis. The Company has historically devoted
significant resources to system enhancements and research and development and
believes that significant continuing development efforts will be required to
sustain the Company's operations. There can be no assurance that the Company
will successfully develop, introduce and market new system enhancements or
applications, or that system enhancements or new applications developed by the
Company will meet the requirements of health care providers and achieve market
acceptance.
Long Sales and Installation Cycles. The sales cycle for large scale
clinical information systems is lengthy. The Company's sales cycle is subject to
delays associated with the lengthy approval process that typically accompanies
significant capital expenditures, customer budgeting cycles and changes in
customer budgets, changes or the anticipation of changes in the regulatory
environment affecting healthcare organizations, changes in the customer's
strategic information system initiatives, competing information systems projects
within the customer organization, consolidation in the health care industry in
general, the highly sophisticated nature of the Company's products and
competition in the market for clinical information systems. Additionally, during
the sales process, the Company expends substantial time, effort and funds
preparing a contract proposal, demonstrating the system, arranging visits to
customer reference sites and negotiating the contract. For these and other
reasons, the Company's sales cycle is lengthy and the Company does not have the
ability to predict when or if the sales process with a prospective customer will
result in a signed contract.
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The time required to install the Company's systems can vary
significantly depending on the needs and skill sets of its customers.
Installation of an Oacis system typically requires nine to 18 months, depending
on a number of factors including the size of the customer, the system licensed,
the number of legacy systems to be interfaced, the degree of customization
requested by the customer and the customer's installation schedule. This period
may be longer if unforeseen technical, integration or other problems arise
during the installation process, if the Company has insufficient trained
installation personnel to handle several installations simultaneously or if a
customer decides to delay the installation schedule. Due to this long
installation cycle, the Company's future results of operations depend in large
part on maintaining efficient and timely installation procedures, particularly
since a typical system license and installation contract is relatively large
compared to the Company's annual revenues. In addition, payments to the Company
are dependent upon achievement of certain milestones. If installation is
delayed, then payments and revenue recognition will also be delayed. Any failure
by the Company to install its clinical information systems on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Variability in Quarterly Operating Results. The Company's
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future.
Quarterly revenues and operating results may fluctuate as a result of a variety
of factors, including the following: the Company's long sales cycle; demand for
the Company's systems, applications and services, including variability in
demand and orders for hardware; the number, timing and significance of
announcements and releases of system enhancements and new applications by the
Company and its competitors; the termination of, or a reduction in, offerings of
the Company's systems, applications and services; the loss of customers due to
consolidation in the health care industry; delays in installations requested by
customers or caused by other factors; the timing of revenue recognition; the
amount of backlog at the beginning of any particular quarter; customer budgeting
cycles and changes in customer budgets; investments by the Company in marketing,
sales, research and development, and administrative personnel necessary to
support the Company's anticipated operations; marketing and sales promotional
activities; software defects and other system quality factors; and general
economic conditions. In particular, the timing of revenue recognition can be
affected by many factors, including the timing of customer installation of the
Company's systems. As a result of the relatively large size of each customer
contract, combined with the Company's method of revenue recognition, quarterly
results are likely to be significantly affected by small changes in the number
of customer contracts in process during a particular quarter. There can be no
assurance that the Company will not experience delays in recognizing revenue in
the future, particularly considering the complexity and large scale of
installations of the Company's systems. In addition, since purchase of the
Company's systems generally involves a significant commitment of capital, any
downturn in any potential customer's business or the economy in general,
including changes in the health care market, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the Company's operating expense levels are relatively fixed and, to a
large degree, are based on anticipated revenues. If revenues are below
expectations, net income is likely to be disproportionately affected. Further,
it is likely that in some future quarter the Company's unit sales volume,
revenue, backlog or operating results will be below the expectations of public
market analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially adversely affected.
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Highly Competitive Market. Competition in the market for clinical
information systems and services is intense and is expected to increase. The
Company's competitors include other providers of health care information systems
and services, and health care consulting firms. The Company's principal
competitors include 3M Health Information Systems, Cerner Corporation, Epic
Systems Corporation, HBO & Company, and Shared Medical Systems Corporation.
Furthermore, other major health care information companies not presently
offering clinical information systems may enter the Company's markets. Increased
competition could result in price reductions, reduced gross margins, and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and results of operations. In addition, many of
the Company's competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
market recognition than the Company. Many of the Company's competitors also
currently have, or may develop or acquire, substantial installed customer bases
in the health care industry. As a result of these factors, the Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
Need to Manage Changing Operations; Dependence Upon Key Personnel. The
Company's anticipated future operations may place a strain on its management
systems and resources. The Company expects that it will be required to continue
to improve its financial and management controls, reporting systems and
procedures, and will need to expand, train and manage its work force. There can
be no assurance that the Company will be able to effectively manage these tasks,
and the failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company intends to
hire a significant number of additional installation, research and development
and sales personnel in 1996 and beyond. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain additional highly qualified employees in the future. If the
Company is unable to hire and retain such personnel, particularly those in key
positions, the Company's business, financial condition and results of operations
could be materially adversely affected. The Company's future success also
depends in significant part upon the continued service of its executive officers
and other key sales, marketing, development and installation employees. The loss
of the services of any of its executive officers or other key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. Since acquisition of the Predecessor in May 1994, the
Company has experienced turnover in certain key positions of the Company and
high turnover in general. Additions of new and departures of existing personnel
can be disruptive and could have a material adverse effect on the Company's
business, financial condition and results of operations.
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Dependence on Third Party Products. The Company's systems are dependent
upon a number of third-party computer hardware and software products. There can
be no assurance that financial or other difficulties experienced by third-party
providers will not have an adverse impact upon the technologies incorporated by
the Company's systems, or that, if such technologies become unavailable, the
Company will be able to find suitable alternatives. In particular, both the
Gateway++ and Oacis Data Repository components of Oacis incorporate a Sybase
relational database. Any significant failure by Sybase to meet the Company's
database requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. A decline in Sybase's
reputation could reduce the appeal of the Company's products to its potential
customers. Although the Company believes that it can port Oacis to other
relational database platforms, such efforts would require substantial time and
investment and would have an adverse affect on the Company's operations,
including its ability to complete other product development. In addition, Oacis
includes a number of embedded software products licensed from third parties.
Failure of such third parties to maintain or enhance their products could impair
the functionality of Oacis and could require the Company to obtain alternative
products from other sources or to develop such software internally, either of
which could involve costs and delays as well as diversion of engineering
resources. In addition, modifications or enhancements by these third-party
vendors often require that the Company modify its own software products to
operate with these enhancements or modifications. There can be no assurance that
the Company will be able to modify its own software to accommodate third-party
changes or that the effort to make such changes will not adversely affect the
Company's other development projects.
Risk of System Defects; Failure to Meet Performance Criteria. Systems
as complex as those offered by the Company frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive testing, the Company has in the past
released systems that contain defects, has discovered software errors in certain
of its enhancements and applications after their introduction and, as a result,
has experienced delays in recognizing revenues and incurred higher than expected
operating expenses during certain periods in order to correct these errors. The
Company's systems are intended for use in a clinical health care setting, to
collect and display clinical information used in the diagnosis and treatment of
patients. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to system defects than the market for
software products generally. In addition, customer contracts typically provide
that the Oacis system is warranted to meet certain performance criteria
concerning response time and system availability. The Company also will
generally recommend hardware configurations that it believes will be adequate to
achieve user acceptable response time performance and system availability.
Failure of a customer's system to meet these performance criteria could
constitute a material breach under such contracts, and could delay revenue
recognition and require that the Company incur additional expense in order to
make the system meet these performance criteria or to purchase additional
hardware where the recommended hardware configurations have been determined to
be inadequate. Although to date the Company has not experienced material adverse
effects resulting from any software errors or performance failures, there can be
no assurance that, despite testing by the Company and by current and potential
customers, errors or performance failures will not occur in new enhancements or
applications after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation, or increased service and warranty costs, any
of which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
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16
Consolidation and Uncertainty in the Health Care Industry. Many health
care providers are consolidating to create larger health care networks with
greater market concentration. Such consolidation could erode the Company's
existing customer base and reduce the size of the Company's target market. In
addition, the resulting enterprises could have greater bargaining power, which
could lead to price erosion of the Company's systems and services. The reduction
in the size of the Company's target market or the failure of the Company to
maintain adequate price levels could have a material adverse effect on the
Company's business, financial condition and results of operations. The health
care industry also is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operation of health
care industry participants. During the past several years, the United States
health care industry has been subject to an increase in governmental regulation
and reform proposals. These reforms may increase governmental involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for the Company's customers. Health care industry participants may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's systems
and services. The failure of the Company to maintain adequate price levels or
sales as a result of legislative or market-driven reforms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Limited Proprietary Rights; Risk of Infringement. The Company relies on
a combination of trade secrets, copyright and trademark laws, nondisclosure and
other contractual provisions to protect its proprietary rights. The Company has
not filed any patent applications covering its technology or registered any of
its copyrights with state or federal agencies. There can be no assurance that
measures taken by the Company to protect its intellectual property will be
adequate or that the Company's competitors will not independently develop
systems and services that are substantially equivalent or superior to those of
the Company. Substantial litigation regarding intellectual property rights
exists in the software industry, and the Company expects that software products
may be increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
systems overlap. Although the Company believes that its systems and applications
do not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that a license or similar agreement will be available
on reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any such claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Liability. The Company's clinical information systems provide
clinical information used by clinicians in the diagnosis and treatment of
patients. Any failure by the Company's systems to provide accurate, reliable and
timely information, or to adequately protect the confidentiality of the
information, could result in claims against the Company. The Company maintains
insurance to protect against claims associated with the use of its systems, but
there can be no assurance that its insurance coverage would adequately cover any
claims asserted against the Company. A successful claim brought against the
Company in excess of its insurance coverage could have a material adverse effect
on the Company's business, financial condition and results of operations. Even
unsuccessful claims could result in the Company's expenditure of funds in
litigation and diversion of management time and resources. There can be no
assurance that the Company will not be subject to product liability claims that
will result in liability in excess of its insurance coverage, that the Company's
insurance will cover such claims or that appropriate insurance will continue to
be available to the Company in the future at commercially reasonable rates.
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Government Regulation. The United States Food and Drug Administration
(the "FDA") is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Computer products are
subject to regulation when they are used or are intended to be used in the
diagnosis of disease or other conditions, or in the cure, mitigation, treatment
or prevention of disease, or are intended to affect the structure or function of
the body. The FDA could determine in the future that predictive applications of
the Company's systems and applications make them clinical decision tools subject
to FDA regulation. Medical devices are subject to regulation by the FDA, which
requires, among other things, premarket notifications or approvals and
compliance with labeling, registration and listing requirements, good
manufacturing practices and records and reporting requirements. Compliance with
these regulations could be burdensome, time consuming and expensive. The Company
also could become subject to future legislation and regulations concerning the
manufacture and marketing of medical devices and health care software systems.
These could increase the cost and time necessary to market new products and
could affect the Company in other respects not presently foreseeable. The
Company cannot predict the effect of possible future legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in the Company's databases is
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and use of confidential patient medical
record information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other health care
provider with access to the Company's information system, regulations governing
patient confidentiality rights are evolving rapidly. Additional legislation
governing the dissemination of medical record information has been proposed at
both the state and federal level. This legislation may require holders of such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
will not materially restrict the ability of health care providers to submit
information from patient records to the Company's systems.
Risks Associated With Potential Acquisitions. The Company may in the
future pursue acquisitions of complementary products, technologies or
businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's results of operations. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, products and personnel of the acquired company, the diversion
of management's attention from other business concerns, risks of entering
markets in which the Company has no direct prior experience, and the potential
loss of key employees of the acquired company. There can be no assurance that
the Company will ever successfully complete an acquisition.
International Sales. The Company has licensed clinical information
systems to customers located outside of the United States and expects to
continue marketing its systems to foreign customers In 1994 and 1995, revenues
from international customers were immaterial. However, in July, the Company
announced a contract with the South Australian Health Commission through its
Australian distributor, McDonnell Information Systems Pty. Limited The Company's
operating results may be subject to the risks inherent in international
transactions, including difficulties in staffing and managing foreign sales
operations, changes in regulatory requirements, exchange rates, tariffs or other
barriers, and other factors.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Upon the closing of the Company's initial public offering in May 1996, all
outstanding shares of Preferred Stock were automatically converted into
5,034,000 shares of Common Stock. Following such closing , the Company filed a
restated Certificate of Incorporation with the Delaware Secretary of State which
eliminated the previously authorized Preferred Stock, authorized 5,000,000
shares of undesignated Preferred Stock and increased the authorized Common Stock
to 30,000,000 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
3.1+ Certificate of Incorporation of Registrant, as currently in
effect.
3.2+ Restated Certificate of Incorporation of Registrant, to be filed
upon closing of this offering.
3.3+ Bylaws of Registrant.
4.1+ Form of Common Stock certificate.
10.1+ 1996 Stock Plan and form of agreement thereunder.
10.2+ 1996 Director Option Plan and form of option agreement thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4+ Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.
10.5+ Restated Stockholders Agreement dated as of April 8, 1996 between
the Registrant and certain stockholders.
10.6+ Lease dated August 30, 1990 for facilities located at 100 Drake's
Landing Road, Greenbrae, California, together with related
expansion and extension agreements and work agreements.
10.7+ Lease dated July 10, 1992 for facilities located in Atlanta,
Georgia, together with an addendum thereto dated March 29, 1993.
10.8+ Employment Agreement dated May 17, 1995 between Jim McCord and
Oacis Healthcare Systems, Inc., a wholly-owned subsidiary of the
Registrant ("Subsidiary").
10.9+ Master Lease Agreement and Equipment Schedule VL-1, each dated as
of March 1, 1996, between Comdisco, Inc. and Subsidiary.
10.11+ Standard form of Software License Agreement for the Oacis System.
11.1 Calculation of Pro Forma and Supplemental Net Loss Per Share.
21.1+ Subsidiaries of the Registrant.
+ Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form SB-2 (No. 333-02804-2)
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
OACIS HEALTHCARE HOLDINGS CORP.
(Registrant)
Date August 14, 1996 /s/ Stephen F. Ghiglieri
------------------------- ---------------------------------
Stephen F. Ghiglieri
Vice President, Finance and Administration
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date August 14, 1996 /s/ Jim McCord
------------------------- ---------------------------------
Jim McCord
Chairman and Chief Executive Officer
(Principal Executive Officer)
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE
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11.1 Computation of Pro Forma Net
Loss Per Share 21