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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, 1997.
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 incorporation or (I.R.S. Employer Identification Number)
organization)
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 [X] No [ ]
At July 28, 1997, there were 10,159,192 Shares of the Registrant's Common Stock
outstanding.
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OACIS HEALTHCARE HOLDINGS CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1997 3
(unaudited) and December 31, 1996
Consolidated Statement of Operations (unaudited) for 4
three months and six months ended June 30, 1997
Consolidated Statement of Cash Flows (unaudited) 5
for the six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
INDEX TO EXHIBITS
Exhibit 11.1 Calculation of Pro Forma Net Loss Per Share 20
Exhibit 27.1 Financial Data Schedule 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,310 $ 4,307
Short-term investments 13,115 18,834
Accounts receivable, net 6,939 6,449
Other current assets 1,393 308
-------- --------
Total current assets 28,757 29,898
-------- --------
Property and equipment, net 2,899 2,143
Capitalized software, net 1,626 677
Other assets 394 4
-------- --------
$ 33,676 $ 32,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,169 $ 620
Accrued expenses 4,141 3,113
Unearned revenues 3,594 2,325
-------- --------
Total current liabilities 8,904 6,058
-------- --------
Long-term obligations 772 669
-------- --------
Stockholders' equity:
Common Stock, $0.01 par value; 30,000,000 shares authorized;
10,153,000 and 10,064,000 shares issued and outstanding 102 101
Additional paid-in capital 48,184 47,905
Accumulated deficit (24,160) (21,871)
Deferred stock compensation (126) (150)
-------- --------
Total stockholders' equity 24,000 25,985
-------- --------
$ 33,676 $ 32,712
======== ========
The accompanying notes are an integral part of these
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,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Software licenses $ 2,588 $ 1,485 $ 4,326 $ 2,881
Installation and support services 2,163 1,644 3,823 3,228
Third party hardware and software 2,110 968 3,509 1,893
------------ ------------ ------------ ------------
Total revenues 6,861 4,097 11,658 8,002
------------ ------------ ------------ ------------
Cost of revenues:
Software licenses 205 39 268 78
Installation and support services 1,581 1,369 3,046 2,689
Third party hardware and software 1,811 818 3,019 1,629
------------ ------------ ------------ ------------
Total cost of revenues 3,597 2,226 6,333 4,396
------------ ------------ ------------ ------------
Gross profit 3,264 1,871 5,325 3,606
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,561 1,478 3,270 2,836
Research and development 1,723 1,371 3,087 3,765
General and administrative 902 1,153 1,859 1,953
------------ ------------ ------------ ------------
Total operating expenses 4,186 4,002 8,216 8,554
------------ ------------ ------------ ------------
Loss from operations (922) (2,131) (2,891) (4,948)
Interest income, net 278 142 602 109
------------ ------------ ------------ ------------
Net loss $ (644) $ (1,989) $ (2,289) $ (4,839)
============ ============ ============ ============
Pro forma:
Net loss per common and common
equivalent share $ (0.06) $ (0.23) $ (0.23) $ (0.59)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares 10,111,823 8,692,367 10,091,727 8,179,805
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $ (2,289) $ (4,839)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 603 624
Stock compensation expense 24 25
Acquired in-process research and
development -- 700
Changes in assets and liabilities:
Accounts receivable, net (490) 317
Other current assets (1,085) (73)
Other assets (390) --
Accounts payable 549 (677)
Accrued expenses 945 826
Unearned revenues 1,269 (263)
-------- --------
Net cash used in operating activities (864) (3,360)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (4,689) --
Sale of short-term investments 10,408 --
Purchases of property and equipment (971) (404)
Capitalized software development costs (1,061) (81)
-------- --------
Net cash provided by (used in) investing
activities 3,687 (485)
-------- --------
Cash flows from financing activities:
Net proceeds from common stock issuance -- 28,905
Proceeds from option exercises 280 7
Principal payment on notes payable -- (4,000)
Proceeds from note payable -- 1,000
Payments on capital lease obligations (100) --
-------- --------
Net cash provided by financing activities 180 25,912
-------- --------
Increase in cash and cash equivalents 3,003 22,067
Cash and cash equivalents, beginning of period 4,307 3,900
-------- --------
Cash and cash equivalents, end of period $ 7,310 $ 25,967
======== ========
Supplemental disclosure:
Cash paid for interest $ 28 $ 139
======== ========
Capital equipment lease additions $ 286 $ --
======== ========
The accompanying notes are an integral part of these
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 in accordance with generally accepted accounting
principles. 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, 1997 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, 1996, included on Form
10-KSB filed with the Securities and Exchange Commission.
2. 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 which occurred on May 16, 1996, 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.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share." The statement redefines earnings per
share under generally accepted accounting principles. Under the new standard,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. The
Company will adopt the new standard in connection with its annual financial
statements for the year ending December 31, 1997. The pro forma effect of
adopting this statement for the three months and the six months ended June 30,
1997 and 1996, was immaterial.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements for periods ending after December 15, 1997.
Reclassification of financial statements for earlier periods for comparison
purposes is required. The Company will adopt the new standard in connection
with its annual financial statements for the year ending December 31, 1997.
The Company does not expect such adoption to have a material effect on the
consolidated financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information regarding the reporting of certain ongoing segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131
beginning in 1998 and does not expect such adoption to have a material effect
on the consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Background
The Company develops, markets, licenses, installs, and supports clinical
information systems primarily for major medical centers, hospitals and
integrated healthcare delivery systems. 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, a clinical data repository, an
Enterprise Member/Patient Index, 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. 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. The formation of IDSs and a general
consolidation in the healthcare industry, has a number of effects which include
the creation of larger healthcare networks with greater market concentration.
The Company believes that while such consolidation may result in an increase in
demand for open architecture clinical information systems such as the Company
provides, the near term effect of such consolidation reduces the resources
available for IDSs to invest in clinical information systems until such time as
the rate of consolidation slows. Accordingly, the Company believes that the
market for the Company's product may continue to develop slowly in the near
term and that sales cycles will continue to be long.
The Company's future success and financial performance depends 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
development and believes that significant continuing development efforts
together with an increased focus on integration of third party applications
will be required to sustain and enhance the Company's competitive market
position. Additionally, the Company's ability to develop, market, sell and
install its systems depends on the Company's ability to retain, recruit and
hire highly skilled personnel in a number of technical and clinical fields
particularly in the area of installation services. The market for this highly
skilled workforce is extremely competitive.
The Company's cost of revenues for installation and support services, as well
as its operating expenses, are primarily comprised of personnel and personnel
related costs. These costs are impacted by a number of factors including
increases in personnel and adjustments in compensation levels to remain
competitive in the markets in which the Company operates. The Company regularly
appraises its competitive position with regard to compensation strategies and
makes adjustments when and as required. Additionally, the Company adjusts
salary levels, generally at the beginning of its reporting year, for all
personnel based on merit and other factors including increases in the cost of
living. As a result, the year over year quarterly results before the effect of
capitalized software reflect the increased operating expenses resulting from
increased personnel and personnel related expenses.
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
and the volume of outpatient visits and inpatient days for the customer
organization, 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.
Software license fee and installation services 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 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
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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. In addition, the Company recognizes license
fee revenue from certain software components upon delivery when the Company has
no significant obligations to install or enhance its products and collection of
the license fees are probable.
Software license revenues from contracts where Oacis is not actively involved
in the installation of the system, typically contracts outside of North
America, are recognized as contract amounts become due and payable, typically
on a milestone basis. In addition, revenue recognition on a contract milestone
basis can have the effect of increasing quarterly revenue and earnings
variability due to the size and timing of such milestones. Because Oacis is
not actively involved in these 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, 1997 AND 1996
Revenues
In the three months ended June 30, 1997, total revenues increased 67% to $6.9
million from $4.1 million in the three months ended June 30, 1996. Of these
amounts, software license fee revenues increased 74% to $2.6 million,
installation and support services revenues increased 32% to $2.2 million and
third-party hardware and software revenue increased 118% to $2.1 million. A
significant portion of the increase in software license fee revenue was due to
the timing of recognition of software license fees from international contracts
which represented approximately 20% of total revenue for the quarter. There was
no software license fee revenue from international contracts in the same period
of the prior year. Revenue on international contracts is recognized when
amounts become due and payable and are difficult to predict as the Company is
not actively involved in the installation. However, the Company expects
international revenues will remain above historical levels for the remainder of
the year. The increase in installation and support services revenues from the
same quarter in 1996 was primarily due to a higher number of billable hours
resulting from new projects starting up and, to a lesser degree, from an
increase in maintenance revenues. The increase in third-party hardware and
software revenues over the prior year second quarter resulted from the number
of transactions and an increase in the average transaction value of third-party
product sales.
Cost of Revenues
Cost of revenues were $3.6 million, or 52% of total revenues, in the three
months ended June 30, 1997, compared to $2.2 million, or 54% of total revenues,
in the three months ended June 30, 1996. Cost of installation and support
services increased 15% to $1.6 million in the three months ended June 30, 1997
from $1.4 million in the three months ended June 30, 1996 as a result of an
increase in the average number of installation personnel. Gross profit as a
percentage of total revenues increased to 48% in the three months ended June
30, 1997 from 46% in the three months ended June 30, 1996. Gross profit on
software license fees decreased to 92% in the second quarter of 1997 from 97%
in the prior year period due primarily to increases in international
distributor fees and, to a smaller degree, increased amortization of software
development costs. The Company anticipates that gross margins on software
license fees will continue to be below historical levels in future periods due
to increases in amortization of software development costs and may fluctuate on
a quarter to quarter basis due to timing of recognition of license fees and
related distribution fees for international contracts. Gross profit on
installation and support services increased to 27% for the second quarter 1997
from 17% in the prior year period due to improved margins in the support
organization combined with average lower costs per hour for installation
personnel and higher average billing rates. Gross profit on third-party
hardware and software decreased to 14% in the three months ended June 30, 1997
from 15% in the three months ended June 30, 1996.
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Sales and Marketing
Sales and marketing expenses increased 6% to $1.6 million in the three months
ended June 30, 1997 from $1.5 million in the three months ended June 30, 1996
and decreased as a percentage of total revenues to 23% in the three months
ended June 30, 1997 from 36% in the three months ended June 30, 1996. The
increase in sales and marketing expenses was primarily attributable to
increased headcount in both the sales and marketing functions offset by lower
consulting expenses. The Company expects sales and marketing expenses to
increase during the remainder of the year as it continues to build
infrastructure both in its sales and product management-marketing functions.
Additionally, quarterly sales and marketing expenses may fluctuate as a result
of the timing of commission expenses associated with new contract signings and
project milestones.
Research and Development
Research and development expenses, before software capitalization, increased
52% to $2.2 million in the three months ended June 30, 1997 from $1.5 million
in the three months ended June 30, 1996, but decreased as a percentage of
revenue to 32% for the three months ended June 30, 1997 from 35% in the three
months ended June 30, 1996. The increase in expenses was primarily attributable
to increased headcount and consulting costs related to the execution of its
product plan which includes new products and enhancements to existing products.
Capitalized software development costs were $487,000, or approximately 22% of
research and development costs, for the three months ended June 30, 1997 as
compared to $81,000, or approximately 6%, for the three months ended June 30,
1996. The higher software capitalization rate is due to an increase in the
number of products in later stages of development as well as increases in total
development costs.
General and Administrative
General and administrative expenses decreased 22% to $0.9 million in the
three months ended June 30, 1997 from $1.2 million in the three months ended
June 30, 1996, and declined to 13% as a percentage of revenue for the three
months ended June 30, 1997 compared to 28% for the same period in the prior
year. The decrease in general and administrative expenses was a result of
certain non recurring expenses incurred in the three months ended June 30,
1996.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues
In the six months ended June 30, 1997, total revenues increased 46% to $11.7
million from $8.0 million in the six months ended June 30, 1996. Of these
amounts, software license fee revenues increased 50% to $4.3 million,
installation and support services revenues increased 18% to $3.8 million and
third-party hardware revenue increased 85% to $3.5 million. A significant
portion of the increase in software license fee revenue was due to the timing of
recognition of software license fees from international contracts which
represented approximately 14% of total revenue for the year to date period. This
compares with approximately 1% in the same period for the prior year. Revenue on
international contracts is recognized when amounts become due and payable and
are difficult to predict as the Company is not actively involved in the
installation. However, the Company expects international revenues will remain
above historical levels for the remainder of the year. The increase in
installation and support services revenues over the same period in 1996 was
primarily due to a higher number of billable hours, principally in the second
quarter of 1997, resulting from new project starts and from increased
maintenance revenues during the six months ended June 30, 1997. The increase in
third-party hardware and software revenues over the same period in the prior
year resulted from the number of transactions and an increase in the average
transaction value of third-party product sales.
Cost of Revenues
Cost of revenues were $6.3 million, or 54% of total revenues, in the six
months ended June 30, 1997, compared to $4.4 million, or 55% of total revenues
in the six months ended June 30, 1996. Cost of installation and support
services increased 13% to $3.0 million in the six months ended June 30, 1997
from $2.7 million in the six months ended June 30, 1996 as a result of an
increase in the average number of installation personnel and an increase in the
average cost of such personnel during the six months ended June 30, 1997.
Gross profit as a percentage of total revenues increased to 46% in the six
months ended June 30, 1997 from 45% in the six months ended June 30, 1996.
Gross profit on software license fees decreased to 94% from 97% due primarily
to increases in international distributor fees and, to a smaller degree,
increased amortization of software development costs. The Company anticipates
that gross margins on software license fees will continue to be at lower than
historical levels in future periods due to
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increases in amortization of software development costs and may fluctuate on a
quarter to quarter basis due to the timing of recognition of license fees and
related distribution fees from international contracts. Gross profit on
installation and support services increased to 20% for the six months ended
June 30, 1997 from 17% in the prior year period principally due to improved
margins in the support organization where expenses have remained relatively
flat but maintenance revenue has grown as new sites have completed
installations and initiated maintenance. Gross profit on third-party hardware
and software was 14% in the six months ended June 30, 1997, unchanged from the
same period for 1996.
Sales and Marketing
Sales and marketing expenses increased 15% to $3.3 million in the six months
ended June 30, 1997 from $2.8 million in the six months ended June 30, 1996 but
decreased as a percentage of total revenues to 28% in the six months ended June
30, 1997 from 36% in the six months ended June 30, 1996. The increase in sales
and marketing expenses was primarily attributable to increased headcount in
both the sales and marketing functions and increased commission expenses offset
by lower consulting expenses. The Company expects sales and marketing expenses
to increase during the remainder of the year as it continues to build
infrastructure both in its sales and product management-marketing functions.
Additionally, quarterly sales and marketing expense may fluctuate as a result
of the timing of commission expenses associated with new contract signings and
project milestones.
Research and Development
Research and development expenses, before software capitalization, increased
8% to $4.2 million in the six months ended June 30, 1997 from $3.8 million in
the six months ended June 30, 1996, but decreased as a percentage of revenue to
36% for the six months ended June 30, 1997 from 48% in the six months ended
June 30, 1996. The increase in expenses was primarily attributable to higher
headcount and consulting costs related to the execution of its product plan
which includes new products and enhancements to existing products. The year
over year increase was net of $700,000 of acquisition costs for certain
technology in the June 30, 1996 period. This technology, which forms the basis
of the Oacis Enterprise Member/Patient Index ("EMPI"), a component of the Oacis
Healthcare network, and the costs associated with the continuing development of
that technology were charged to expense in the first quarter 1996 because the
licensed technology had not reached technological feasibility and had no
alternative future use when it was acquired. Capitalized software was $1.1
million, or approximately 26% of research and development costs for the six
months ended June 30, 1997 as compared to $81,000, or approximately 2%, for the
six months ended June 30, 1996. The higher software capitalization is due to a
number of products in later stages of development as well as increases to total
development costs.
General and Administrative
General and administrative expenses decreased 5% to $1.9 million in the six
months ended June 30, 1997 from $2.0 million in the six months ended June 30,
1996, and declined as a percentage of revenue to 16% for the six months ended
June 30, 1997 compared to 24% for the same period in the prior year. The
decrease in general and administrative expenses was a result of non-recurring
expenses in the six months ended June 30, 1996 offset by increased headcount
costs and "Public Company" related expenses in the six months ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company's cash and cash equivalents and short-term
investments totaled $20.4 million as compared to cash and equivalents of $23.1
million at December 31, 1996.
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 leasehold improvements in part related to its
planned relocation in 1998, and the level of resources that the Company devotes
to its sales and marketing activities. The Company believes that its existing
capital resources 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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NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." The statement redefines earnings per share under
generally accepted accounting principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully diluted
earnings per share is replaced by diluted earnings per share. The Company will
adopt the new standard in connection with its annual financial statements for
the year ending December 31, 1997. The pro forma effect of adopting this
statement for the three months and six months ended June 30, 1997 and 1996, was
immaterial.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements for periods ending after December 15, 1997.
Reclassification of financial statements for earlier periods for comparison
purposes is required. The Company will adopt the new standard in connection
with its annual financial statements for the year ending December 31, 1997.
The Company does not expect such adoption to have a material effect on the
consolidated financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments
of An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information regarding the reporting of certain ongoing segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131
beginning in 1998 and does not expect such adoption to have a material effect
on the consolidated financial statements.
FACTORS AFFECTING OPERATING RESULTS
This report on Form 10-Q 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 has
incurred a net loss of $4.6 million for the year ended December 31, 1996 and
$2.3 million for the six months ended June 30, 1997, and as of June 30, 1997
had an accumulated deficit of $24.2 million. The Company has not achieved
consistent profitability on a quarterly basis and has not achieved annual
profitability. The Company's prior operating history, consolidation and
uncertainty in the healthcare industry, dependence on the emerging market for
IDSs, dependence on Oacis as its principal product, long sales and installation
cycles, increasing dependence on international sales and dependence upon key
personnel and third parties, competition, 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 consistent profitability on a quarterly or annual basis.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY, DEPENDENCE ON
EMERGING MARKET FOR IDSs. Many health care providers are consolidating to
create larger health care networks and IDSs with greater market concentration.
The Company focuses its sales and marketing efforts primarily on IDSs, which
are a relatively new type of organization and currently account for a small
portion of the overall market for clinical information systems. The Company
believes that consolidation and formation of IDSs will continue and may
ultimately result in an increase in demand for open architecture clinical
information systems such as the Company provides, and accordingly focuses its
sales and marketing efforts on this market. However, the near term effect of
such consolidation includes reducing the resources available for IDSs to invest
in clinical information systems until such time as the rate of consolidation
slows. Accordingly, the Company believes that the market for the Company's
products may continue to develop slowly in the near term and that sales cycles
will continue to be long. In addition, continued consolidation could erode the
Company's existing customer base and reduce the size of the Company's target
market. Additionally, 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 resulting from
industry consolidation or delays in purchasing clinical information systems due
to industry consolidation 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,
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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.
DEPENDENCE ON OACIS; 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 would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success and financial performance
depends in large part upon the Company's ability to provide the increasing
system functionality required by its customers through the timely development
or integration of new applications and enhancements and the successful
introduction of such 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 and enhance the Company's competitive market
position. . There can be no assurance that the Company will successfully
develop or integrate, introduce, market and sell new system enhancements or
applications, or that system enhancements or new applications developed or
integrated 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.
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, if the Company is
unable to contract with third parties to provide supplemental installation
resources, 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
the achievement of which is generally dependent upon the customer and other
third-parties. 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.
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, revenues from international
customers accounted for approximately 4% of the total revenues in 1996 and in
the first six months of 1997 international revenues accounted for approximately
14% of total revenues. The Company expects that international revenues may
continue to be a significant component of total revenues in future quarters.
Accordingly, the Company's operating results may increasingly 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
including dependence on third-party distributors and installers of the
Company's products. Additionally, due to the revenue recognition model used
for international sales (sales outside of North America) this increasing
reliance on international sales may result in higher quarter to quarter
variability of software revenues.
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
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cycle; demand for the Company's systems, applications and services, including
variability in demand, orders for and shipment of hardware; increasing
dependence on international revenues, 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.
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, HealthVISION, Inc. 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 1997 and beyond. Competition for such
personnel is intense, particularly in the area of installation services, 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.
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
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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.
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
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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.
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.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Stockholders was held on June 11, 1997. Matters voted on
at that meeting were: (i) the election of eight directors (ii) the
confirmation of the appointment of Price Waterhouse LLP as independent auditors
for the fiscal year ending December 31, 1997 and (iii) the amendment of the
1996 Employee Stock Purchase Plan to increase the number of shares available
for issuance from 250,00 shares to 600,000 shares. Tabulation for each
proposal and individual director were as follows:
Proposal I. Election of Directors
Director For Withheld
-------- --- --------
Jim McCord 7,615,761 15,100
Alan W. Crites 7,615,961 14,900
David Dominik 7,615,961 14,900
Fred Goad 7,615,961 14,900
John Kingery 7,615,927 14,934
Bernard Puckett 7,615,961 14,900
Dennis G. Sisco 7,121,161 509,700
William H. Younger, Jr. 7,615,961 14,900
Proposal II. Confirmation of Appointment of Price Waterhouse, LLP
For Against Abstain
--- ------- -------
7,624,264 3,900 2,697
Proposal III. Amendment of 1996 Employee Stock Purchase Plan
For Against Abstain
--- ------- -------
7,137,138 463,645 13,678
yITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(1) Certificate of Incorporation of Registrant
3.2(2) Bylaws of Registrant.
4.1(3) Form of Common Stock certificate.
10.1(3) 1996 Stock Plan and form of agreement thereunder.
10.2(3) 1996 Director Option Plan and form of option agreement thereunder.
10.3(3) 1996 Employee Stock Purchase Plan and form of subscription agreement thereunder.
10.4(3) Form of Indemnification Agreement entered into between Registrant and its directors and executive officers.
10.5(3) Restated Stockholders Agreement dated as of April 8, 1996 between the Registrant and certain stockholders.
10.6(3) 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(3) Lease dated July 10, 1992 for facilities located in Atlanta, Georgia, together with an addendum thereto dated
March 29, 1993.
10.8(3) Employment Agreement dated May 17, 1995 between Jim McCord and Oacis Healthcare Systems, Inc., a wholly-owned
subsidiary of the Registrant ("Subsidiary").
10.9(3) Master Lease Agreement and Equipment Schedule VL-1, each dated as of March 1, 1996, between Comdisco, Inc. and
Subsidiary.
10.11(3) Standard form of Software License Agreement for the Oacis System.
10.12(4) Leases dated March 19, 1997 for Facilities Located at 1101 5th Avenue, San Rafael, Marin County, California
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11.1 Calculation of Pro Forma Net Loss Per Share.
21.1(3) Subsidiaries of the Registrant.
27.1 Financial Data Schedules.
(1) Incorporated by reference to Exhibit 3.2 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(2) Incorporated by reference to Exhibit 3.3 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(3) Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form SB-2 (No. 333- 02804-LA)
(4) Incorporated by reference to the same numbered exhibit previously filed
with the Company Form 10-KSB for the year ended December 31, 1996
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the six months
ended June 30, 1997.
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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 11, 1997 s/ Stephen F. Ghiglieri
-------------------------------------
Stephen F. Ghiglieri Vice President,
Finance and Administration, Chief
Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
Date August 11, 1997 s/ Jim McCord
-------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE
11.1 Computation of Pro Forma Net Loss Per Share 20
27.1 Financial Data Schedule 21
19