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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 September 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 (I.R.S. Employer Identification
incorporation or organization) 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 [X] No [ ]
At October 30, 1997, there were 10,191,548 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 September 30, 1997 3
(unaudited) and December 31, 1996
Consolidated Statement of Operations (unaudited) for 4
three months and nine months ended September 30, 1997
Consolidated Statement of Cash Flows (unaudited) 5
for the nine months ended September 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 6. Exhibits and Reports on Form 8-K 17
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)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,654 $ 4,307
Short-term investments 10,111 18,834
Accounts receivable, net 6,781 6,449
Other current assets 973 308
-------- --------
Total current assets 24,519 29,898
-------- --------
Property and equipment, net 3,097 2,143
Capitalized software, net 2,031 667
Other assets 394 4
-------- --------
$ 30,041 $ 32,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 986 $ 620
Accrued expenses 2,194 3,113
Unearned revenues 3,032 2,325
-------- --------
Total current liabilities 6,212 6,058
-------- --------
Long-term obligations 555 669
-------- --------
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 share authorized;
0 shares issued and outstanding 0 0
Common Stock, $0.01 par value; 30,000,000 shares authorized;
10,191,243 and 10,064,000 shares issued and outstanding 102 101
Additional paid-in capital 48,208 47,905
Accumulated deficit (24,923) (21,871)
Deferred stock compensation (113) (150)
-------- --------
Total stockholders' equity 23,274 25,985
-------- --------
$ 30,041 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Software licenses $ 2,792 $ 2,080 $ 7,118 $ 4,961
Installation and support services 2,222 1,524 6,045 4,752
Third party hardware and software 930 3,047 4,439 4,940
------------ ------------ ------------ ------------
Total revenues 5,944 6,651 17,602 14,653
------------ ------------ ------------ ------------
Cost of revenues:
Software licenses 267 89 535 167
Installation and support services 1,885 1,486 4,931 4,175
Third party hardware and software 820 2,188 3,839 3,817
------------ ------------ ------------ ------------
Total cost of revenues 2,972 3,763 9,305 8,159
------------ ------------ ------------ ------------
Gross profit 2,972 2,888 8,297 6,494
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,498 1,344 4,768 4,180
Research and development 1,646 1,404 4,733 5,169
General and administrative 821 767 2,680 2,720
------------ ------------ ------------ ------------
Total operating expenses 3,965 3,515 12,181 12,069
------------ ------------ ------------ ------------
Loss from operations (993) (627) (3,884) (5,575)
Interest income, net 230 381 832 490
------------ ------------ ------------ ------------
Net loss $ (763) $ (246) $ (3,052) $ (5,085)
============ ============ ============ ============
Pro forma:
Net loss per common and common
equivalent share $ (0.07) $ (0.02) $ (0.30) $ (0.58)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares 10,175,426 10,008,542 10,121,499 8,789,384
============ ============ ============ ============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $ (3,052) $ (5,085)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 995 909
Stock compensation expense 37 37
Acquired in-process research and
development -- 700
Changes in assets and liabilities:
Accounts receivable, net (332) (1,240)
Other current assets (665) 45
Other assets (390) --
Accounts payable 366 (322)
Accrued expenses (1,297) 1,544
Unearned revenues 707 (947)
-------- --------
Net cash used in operating activities (3,631) (4,359)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (4,689) (20,801)
Sale of short-term investments 13,412 --
Purchases of property and equipment (1,335) (463)
Capitalized software development costs (1,556) (206)
-------- --------
Net cash provided by (used in) investing
activities 5,832 (21,470)
-------- --------
Cash flows from financing activities:
Net proceeds from common stock issuance -- 28,905
Proceeds from employee stock purchase plan 271 --
Proceeds from option exercises 33 9
Principal payment on notes payable -- (4,000)
Proceeds from note payable -- 1,000
Payments on capital lease obligations (158) (19)
-------- --------
Net cash provided by financing activities 146 25,895
-------- --------
Increase in cash and cash equivalents 2,347 66
Cash and cash equivalents, beginning of period 4,307 3,900
-------- --------
Cash and cash equivalents, end of period $ 6,654 $ 3,966
======== ========
Supplemental disclosure:
Cash paid for interest $ 40 $ 139
======== ========
Capital equipment lease additions $ 422 $ 334
======== ========
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 (SEC). 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 nine months ended September 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 SEC.
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 SEC 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 nine months ended
September 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, and 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 the
licensing and installation 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 nine 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
the Company 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 the Company 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 the Company
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 the
Company's international partner, both of which are beyond the control of the
Company.
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 SEPTEMBER 30, 1997 AND 1996
Revenues
In the three months ended September 30, 1997, total revenues decreased 11% to
$5.9 million from $6.7 million in the three months ended September 30, 1996. Of
these amounts, software license fee revenues increased 34% to $2.8 million,
installation and support services revenues increased 46% to $2.2 million and
third-party hardware revenue decreased 69% to $0.9 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 as well as
a license extension to an existing client where the Company had no significant
obligation to install or enhance the Product. International revenues
represented approximately 18% of total revenue for the current quarter and 7%
for the same period in the prior year. The Company expects international
revenues will remain a significant component of total revenues for the remainder
of 1997. 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 more installations in process. Support revenues contributed
modestly to the increase. The decrease in third-party hardware and software
revenues over the prior year third quarter was attributable to the mix and
quantity of third party products sold in the quarter.
Cost of Revenues
Cost of revenues were $3.0 million, or 50% of total revenues, in the three
months ended September 30, 1997, compared to $3.8 million, or 57% of total
revenues, in the three months ended September 30, 1996. Cost of installation
and support services increased 27% to $1.9 million in the three months ended
September 30, 1997 from $1.5 million in the three months ended September 30,
1996 as a result of an increase in the average number of installation personnel
and the average cost of such personnel in addition to an increase in the use of
third party consultants to supplement the installation organization. Gross
profit as a percentage of total revenues increased to 50% in the three months
ended September 30, 1997 from 43% in the three months ended September 30, 1996.
Gross profit on software license fees decreased to 90% from 96% 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 decrease slightly
in future periods due to increases in amortization of software development
costs and may fluctuate on a quarter to quarter basis due to distribution fees
which are tied to the timing of recognition of license fees from international
customers. Gross profit on installation and support services increased to 15%
for the third quarter 1997 from 2% in the prior year period due to an increase
in margin contribution from the support organization as well as improved
utilization rates in the installation organization partially offset by higher
hourly costs and a higher component of low margin and nonbillable activities
primarily related to the beta installations in process during the quarter.
Gross
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profit on third-party hardware and software decreased to 12% in the three
months ended September 30, 1997 from 28% in the three months ended September
30, 1996. The decrease in third-party hardware and software margins is
primarily attributable to the mix of products sold and pricing programs
available. The Company anticipates that third-party hardware and software
gross margins in the three months ended September 30, 1997 are indicative of
future third-party product margins, although quarterly third-party product
gross margins are expected to continue to fluctuate due to changes in
third-party product mix and pricing programs.
Sales and Marketing
Sales and marketing expenses increased 11% to $1.5 million in the three
months ended September 30, 1997 from $1.3 million in the three months ended
September 30, 1996 and increased as a percentage of total revenues to 25% in
the three months ended September 30, 1997 from 20% in the three months ended
September 30, 1996. The increase in sales and marketing expenses was primarily
attributable to higher headcount in both the sales and marketing functions in
addition to higher commission expense resulting from the realization of certain
project installation milestones. Additionally, during the quarter marketing
expenses were lower due to recognition of reimbursements received under certain
third-party reseller agreements. Quarterly sales and marketing expenses may
fluctuate as a result of the timing of commission expense associated with new
contract signings and project milestones.
Research and Development
Research and development expenses, before software capitalization, increased
40% to $2.1 million in the three months ended September 30, 1997 from $1.5
million in the three months ended September 30, 1996 and increased as a
percentage of revenue to 36% for the three months ended September 30, 1997 from
23% in the three months ended September 30, 1996. The increase in expenses was
primarily attributable to increased headcount in order to meet the Company's
development plan which encompasses new products and enhancements to existing
products. Capitalized software was $495,000, or approximately 23% of research
and development costs, for the three months ended September 30, 1997 as compared
to $125,000, or approximately 8%, for the three months ended September 30, 1996.
The higher software capitalization is due to an increase in the number of
products in the latter stages of development.
General and Administrative
General and administrative expenses increased 7% to $821,000 in the three
months ended September 30, 1997 from $767,000 in the three months ended
September 30, 1996, and increased to 14% as a percentage of revenue for the
three months ended September 30, 1997 compared to 12% for the same period in
the prior year. The increase in general and administrative expenses was due to
increased headcount in addition to higher "Public Company" related expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
In the nine months ended September 30, 1997, total revenues increased 20% to
$17.6 million from $14.7 million in the nine months ended September 30, 1996.
Of these amounts, software license fee revenues increased 43% to $7.1 million,
installation and support services revenue increased 27% to $6.0 million and
third-party hardware revenue decreased 10% to $4.4 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 15% of total revenue for the period. This compares
with approximately 4% in the same period for the prior year. The Company
expects international revenues will remain a significant component of total
revenues. The increase in installation and support services revenues from the
same period in 1996 was primarily due to a higher number of billable hours
resulting from more installations in process as well as increased maintenance
revenues resulting from new sites having completed installation and initiated
maintenance. The decrease in third-party hardware and software revenues over
the prior year was principally due to the mix and quantity of third-party
products sold during the third quarter.
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Cost of Revenues
Cost of revenues were $9.3 million, or 53% of total revenues, in the nine
months ended September 30, 1997, compared to $8.2 million, or 56% of total
revenues, in the nine months ended September 30, 1996. Cost of installation and
support services increased 18% to $4.9 million in the nine months ended
September 30, 1997 from $4.2 million in the nine months ended September 30,
1996 as a result of an increase in the average number of installation personnel
in addition to an increase in the use of third party consultants to supplement
the installation organization. Gross profit as a percentage of total revenues
increased to 47% in the nine months ended September 30, 1997 from 44% in the
nine months ended September 30, 1996. Gross profit on software license fees
decreased to 92% 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 decrease slightly in future periods due to
increases in amortization of software development costs and may fluctuate on a
quarter to quarter basis due to distribution fees which are tied to the timing
of recognition of license fees from international customers. Gross profit on
installation and support services increased to 18% for the nine months ended
September 30, 1997 from 12% in the prior year period due to improved margins in
the support organization where expenses have remained flat but maintenance
revenue has grown as new sites have completed installations and initiated
maintenance. Improved utilization rates, in the installation organization
partially offset by a higher component of lower margin and non billable
activities primarily related to beta installations in process, have also
contributed to the increase. Gross profit on third-party hardware and software
was 14% in the nine months ended September 30, 1997 as compared to 23% for the
same period for 1996. The decrease in third-party hardware and software margins
is primarily attributable to the mix of products sold and pricing programs
available.
Sales and Marketing
Sales and marketing expenses increased 14% to $4.8 million in the nine months
ended September 30, 1997 from $4.2 million in the nine months ended September
30, 1996 but decreased as a percentage of total revenues to 27% in the nine
months ended September 30, 1997 from 29% in the nine months ended September 30,
1996. The increase in sales and marketing expenses was primarily attributable
to increased headcount in both the sales and marketing functions in addition to
higher commission expense offset by lower consulting expenses. Additionally,
during the quarter marketing expenses were lower due to recognition of
reimbursements received under certain third-party reseller agreements.
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
17% to $6.3 million in the nine months ended September 30, 1997 from $5.4
million in the nine months ended September 30, 1996 but decreased as a
percentage of revenue to 36% for the nine months ended September 30, 1997 from
37% in the nine months ended September 30, 1996. The increase in expenses was
primarily attributable to increased headcount and consulting costs in order to
meet the Company's development plan which encompasses 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 September 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 $1.6 million, or approximately 25% of
research and development costs for the nine months ended September 30, 1997 as
compared to $206,000, or approximately 4%, for the nine months ended September
30, 1996. The higher software capitalization is due to an increase in the number
of products in the latter stages of development.
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General and Administrative
General and administrative expenses decreased 1% to $2.7 million in the nine
months ended September 30, 1997 from $2.7 million in the nine months ended
September 30, 1996, and declined to 15% as a percentage of revenue for the nine
months ended September 30, 1997 compared to 19% for the same period in the
prior year. The decrease in general and administrative expenses was a result of
certain non recurring expenses in the nine months ended September 30, 1996
offset by increased headcount and "Public Company" related expenses in the nine
months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company's cash and cash equivalents and short-term
investments totaled $16.8 million as compared to cash and equivalents of $23.1
million at December 31, 1996.
In 1998 the Company will be relocating its corporate headquarters in
conjunction with the expiration of its existing leases. The Company expects
that capital expenditures related to this relocation and build out of its new
headquarters will total approximately $3 million including costs for leasehold
improvements and furnishing systems. The Company is evaluating lease and other
financing sources for a portion of the capital required for this project.
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.
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 nine months ended
September 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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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
$3.1 million for the nine months ended September 30, 1997, and as of September
30, 1997 had an accumulated deficit of $24.9 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, 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, 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
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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 nine 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 salescycle; 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
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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
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
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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 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.
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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 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
11.1 Calculation of Pro Forma Net Loss Per Share filed herewith.
21.1(3) Subsidiaries of the Registrant.
27.1 Financial Data Schedules filed herewith.
(1) Incorporated by reference from Exhibit 3.2 previously filed with the
Company's Registration Statement on Form SB-2 (No. 33-02804-LA)
(2) Incorporated by reference from Exhibit 3.3 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(3) Incorporated by reference from the same numbered exhibit previously filed
with the Company's Registration Statement on Form SB-2 (No. 333- 02804-LA)
(4) Incorporated by reference from the same numbered exhibit previously filed
with the Company's 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 three months
ended September 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 November 12, 1997 /s/ Stephen F. Ghiglieri
---------------------------------------
Stephen F. Ghiglieri Vice President,
Finance and Administration, Chief
Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
Date November 12, 1997 /s/ Jim McCord
---------------------------------------
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