<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarter ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-27048
____________
MECON, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2702762
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 Porter Drive, Suite 100
San Ramon, California 94583
Registrant's telephone number, including area code: (510) 838-1700
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 has been subject to such
filing requirements for the past 90 days X Yes No
---- ----
The number of shares outstanding of the registrant's Common Stock on
September 30, 1996 was
5,916,188 shares
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<PAGE>
MECON, INC.
FORM 10-QSB
SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and March 31, 1996
Consolidated Statements of Operations for the
Three and Six Month Periods Ended September 30,
1996 and 1995
Consolidated Condensed Statements of Cash Flows
for the Three and Six Month Periods
Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits 11.1 Computation of Earnings per Share
27.0 Financial Data Schedules
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MECON, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1996 SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,205 $ 11,631
Short-term investments in marketable debt securities 4,775 4,819
Accounts receivable, net of allowances of $245 and $426 at March 31, 2,769 4,534
and September 30, 1996, respectively
Unbilled accounts receivable 526 662
Related party receivable 1 12
Prepaid expenses 211 467
Other current assets 125 18
--------------- ---------------
Total current assets 23,612 22,143
Property and equipment, net 1,009 1,403
Software development costs, net 924 1,221
Other assets 36 36
--------------- ---------------
$ 25,581 $ 24,803
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 557 $ 1,136
Accrued salaries and benefits 640 596
Note payable 1,936 -
Interest payable 519 -
Deferred revenue 1,333 1,178
Income taxes payable - 132
Deferred taxes - 220
Other accrued liabilities 666 115
--------------- ---------------
Total current liabilities 5,651 3,377
Long-term obligations, less current portion 29 26
Total liabilities 5,680 3,438
Stockholders' equity:
Preferred stock, $.001 par value 5,000,000 shares authorized:
none issued and outstanding
Common stock, $.001 par value; 50,000,000 shares authorized; 5,876,947 6 6
and 5,916,188 issued and outstanding at March 31, and September 30,
1996, respectively
Additional paid in capital 24,511 24,951
Accumulated deficit (4,616) (3,557)
--------------- ---------------
Total stockholders' equity 19,901 21,400
--------------- ---------------
$ 25,581 $ 24,803
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1995 1996 1995 1996
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenue:
Subscription and license $ 2,173 $ 3,472 $ 3,542 $ 5,974
Services 840 1,138 1,731 2,111
------------------------------- ------------------------------
Net revenue 3,013 4,610 5,273 8,085
Cost of revenue 1,126 1,500 2,262 2,711
------------------------------- ------------------------------
Gross profit 1,887 3,110 3,011 5,374
Operating costs:
Research and development 509 455 925 850
Sales and marketing 853 925 1,709 1,771
General and administrative 535 793 1,078 1,404
Merger and acquisition - - - 152
------------------------------- ------------------------------
Total operating costs 1,897 2,173 3,712 4,177
------------------------------- ------------------------------
Operating income (loss) (10) 937 (701) 1,197
------------------------------- ------------------------------
Interest expense (74) - (138) -
Interest and other income, net 6 211 16 434
------------------------------- ------------------------------
Income (loss) before provision for income taxes (78) 1,148 (823) 1,631
------------------------------- ------------------------------
Provision for income taxes - 402 - 572
------------------------------- ------------------------------
Net income (loss) $ (78) $ 746 $ (823) $ 1,059
------------------------------- ------------------------------
------------------------------- ------------------------------
Accretion of redeemable preferred stock $ (55) $ - $ (110) $ -
------------------------------- ------------------------------
Net income (loss) attributable to common stockholders $ (133) $ 746 $ (933) $ 1,059
------------------------------- ------------------------------
------------------------------- ------------------------------
Net income (loss) per share $ (0.03) $ 0.12 $ (0.22) $ 0.17
------------------------------- ------------------------------
------------------------------- ------------------------------
Shares used in computing per share data 4,181 6,366 4,260 6,375
------------------------------- ------------------------------
------------------------------- ------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1995 1996 1995 1996
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 525 $ 1,275 $ (669) $ (923)
-------------------------------- ------------------------------
Cash flows from investing activities
Purchase of short term investments (1,275) - (43)
Acquisition of property and equipment (128) (308) (205) (571)
Computer software development costs (157) (178) (256) (346)
-------------------------------- ------------------------------
Net cash (used in) investing activities (285) (1,761) (461) (960)
-------------------------------- ------------------------------
Cash flows from financing activities:
Borrowings from bank - - 500 -
Repayment of bank borrowings - - - (1,936)
Proceeds from issuance of common stock, net of issuance costs - 71 - 245
Repurchase of common stock - - (34) -
Redemption of Series A preferred stock (195) - (195) -
-------------------------------- ------------------------------
Net cash provided by (used in) financing activities (195) 71 271 (1,691)
-------------------------------- ------------------------------
Net increase (decrease) in cash and cash equivalents 45 (415) (859) (3,574)
Cash and cash equivalents at beginning of period 286 12,046 1,190 15,205
-------------------------------- ------------------------------
Cash and cash equivalents at end of period $ 331 $ 11,631 $ 331 $ 11,631
-------------------------------- ------------------------------
-------------------------------- ------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
UNAUDITED
(1) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of the Company presented herein
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
notes required by generally accepted accounting principles have been
condensed or omitted. In the opinion of management, these statements include
all adjustments (all of which consist of normal recurring adjustments except
as otherwise noted herein) necessary to present fairly the Company's
financial position and results of operations for the interim periods
presented. These statements should be read in conjunction with the audited
financial statements and notes thereto for the fiscal year ended March 31,
1996 contained in the Company's Annual Report on Form 10-KSB which was filed
with the Securities and Exchange Commission on July 1, 1996. The results of
operations for the six months ended September 30, 1996 are not necessarily
indicative of the results of operations that may be expected for the year
ended March 31, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary Managed Care Information Systems, Inc. All
intercompany balances and transactions have been eliminated.
ACQUISITION COSTS
Transaction costs and other expenses related to a specific acquisition are
capitalized as incurred. Such capitalized costs are either allocated to the
acquired entity's purchase price or charged to earnings in the period the
acquisition is aborted. As of September 30, 1996, approximately $87,000 of
such costs had been deferred.
INCOME TAXES
Income tax expense for the quarter ended September 30, 1996 is based on an
estimated annual effective tax rate.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common shares and common equivalent shares, if dilutive, outstanding during
the period. Common equivalent shares include convertible preferred shares,
warrants and the exercise of stock options using the treasury stock method.
A conversion of convertible preferred shares into 479,634 common shares and a
cashless exercise of warrants into 57,013 common shares are included in the
computation for the period ended September 30, 1995. These shares have been
included in the computation for this loss period when such shares would
otherwise not be included as the impact would be antidilutive because the
preferred stock and warrants converted into common stock on the closing of
the Company's initial public stock offering. In accordance with Securities
and Exchange Commission Staff Accounting Bulletins and staff policy, net
income (loss) per share included all common and common equivalent shares
granted or issued within 12 months of the offering date as if they were
outstanding for all periods that began prior to the Company's initial public
stock offering, even if antidilutive, using the treasury stock method.
For the purposes of the net income (loss) attributable to common stockholders
per share computation, net (loss) was increased by the amount of the periodic
accretion for redeemable preferred shares.
<PAGE>
(3) MERGER OF MANAGED CARE INFORMATION SYSTEMS, INC.
On March 29, 1996, the Company merged with Managed Care Information Systems,
Inc. ("MCIS") in a pooling of interests transaction. In connection with the
merger, the Company exchanged 338,155 shares of its common stock for all of
the outstanding shares of MCIS, assumed 33,052 common stock options, and
assumed a note payable and accrued interest to a third party in the amount of
$2.5 million which was repaid during the first fiscal quarter of 1997. In
addition, the Company recorded merger related charges during the first fiscal
quarter of 1997 totaling $152,000. Accordingly, all prior period financial
information has been restated.
(4) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 Consolidated Financial
Statements to conform to the 1997 presentation. Such reclassifications had
no effect on previously reported results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The Company may from time to time make additional written and oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. Such forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below
under "certain factors bearing on future results" and elsewhere in this
report. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange
Commission.
OVERVIEW
MECON is a leading provider of operations benchmarking data, information
products, design support software and consulting services to the hospital
industry. The Company's product line is based upon a proprietary operations
benchmarking database containing cost and key performance information from
over 640 hospitals nationwide. From its incorporation until 1989, MECON's
revenue was primarily derived from consulting services for acute care
hospitals. Since 1990, the Company has transitioned into providing a variety
of products and services that employ its proprietary database comprised of
acute care hospitals' operational cost and key performance information.
During the first six months of fiscal 1997, approximately 74% of the
Company's revenues were derived from database subscriptions and software
licenses. Within the acute care segment of the hospital market, MECON has
marketed its products and services primarily to individual hospitals with
over 100 beds.
On March 29, 1996, the Company merged with Managed Care Information
Systems, Inc. ("MCIS") in a pooling of interests transaction. In connection
with the merger, the Company exchanged 338,155 shares of its common stock for
all of the outstanding shares of MCIS, assumed 33,052 common stock options,
and assumed a note payable and accrued interest to a third party in the
amount of $2.5 million which was repaid during the first fiscal quarter of
1997. In addition, the Company recorded merger related charges during the
first fiscal quarter of 1997 totaling $152,000. Accordingly, all prior
period financial information has been restated. Unless otherwise noted,
management's discussion of financial results is based on restated figures.
The Company's revenue has increased primarily due to greater market
penetration of its database and software products, product enhancements,
price increases, and increased support and data analysis fees related to the
Company's expanded software customer base. The Company's revenue is
primarily derived from direct sales to end users.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
revenue for the period indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------------
1995 1996 1995 1996
---------------------------------------
<S> <C> <C> <C> <C>
Subscription and license revenue 72% 75% 67% 74%
Services revenue 28% 25% 33% 26%
---------------------------------------
Net revenue 100% 100% 100% 100%
Gross margin 63% 67% 57% 66%
Research and development 17% 10% 18% 10%
Sales and marketing 28% 20% 32% 22%
General and administrative 18% 17% 20% 17%
Merger and acquisition 0% 0% 0% 2%
---------------------------------------
Operating income (loss) 0% 20% (13%) 15%
Interest expense (2%) 0% (3%) 0%
Interest income 0% 5% 0% 5%
---------------------------------------
Income (loss) before provision for taxes (2%) 25% (16%) 20%
---------------------------------------
Provision for income tax (expense) benefit 0% (9%) 0% (7%)
---------------------------------------
Net income (loss) (2%) 16% (16%) 13%
---------------------------------------
Accretion of redeemable preferred stock (2%) 0% (2%) 0%
---------------------------------------
Net income (loss) attributable to common stockholders (4%) 16% (18%) 13%
---------------------------------------
</TABLE>
REVENUE. Revenue for the three months ended September 30, 1996
increased 53% to $4.6 million compared to $3.0 million for the comparable
period in the prior year. Subscription and license revenue for the three
months ended September 30, 1996 increased 59% to $3.5 million compared to
$2.2 million for the comparable period in the prior year and accounted for
81% of the revenue growth. These increases were primarily due to an increase
of new MECON-PEERx subscriptions, Optimis and Action*Point licenses and
implementation services. Services revenue for the three months ended
September 30, 1996 increased 31% to $1.1 million compared to $840,000 for the
comparable period in the prior year. This increase was primarily due to an
increase in software implementation services offset by a planned decrease in
consulting revenue as a result of the Company's continued shift in focus to
product sales from consulting services. Revenue for the six months ended
September 30, 1996 increased 53% to $8.1 million compared to $5.3 million for
the comparable period in the prior year. Subscription and license revenue for
the six months ended September 30, 1996 increased 71% to $6.0 million
compared to $3.5 million for the comparable period in the prior year and
accounted for 89% of the revenue growth. These increases were primarily due
to an increase of new MECON-PEERx subscriptions, optional MECON-PEERx reports
and MECON-PEERx analyses sold back to the subscriber base and Optimis and
Action*Point licenses. Services revenue for the six months ended September
30, 1996 increased 23% to $2.1 million compared to $1.7 million for the
comparable period in the prior year. This increase was primarily due to an
increase in optional MECON-PEERx reports, MECON-PEERx analyses sold back
to the subscriber base and Software implementation services offset by a
planned decrease in consulting revenue as a result of the Company's continued
shift in focus to product sales from consulting services.
COST OF REVENUE. Cost of revenue for the three months ended September
30, 1996 increased 36% to $1.5 million compared to $1.1 million for the
comparable period in the prior year, primarily due to additional staffing to
support the Company's growth. Cost of revenue for the three months ended
September 30, 1996 included $23,751 in amortization expense from the
capitalization of software development expenses compared to $38,500 for the
comparable period in the prior year. The decrease in amortization expense
was primarily due to certain software development costs capitalized prior to
fiscal year 1996 being fully amortized compared
<PAGE>
to the amortization of software development costs capitalized related to
MECON Optimis for Windows which was released in the third fiscal quarter of
1996. Cost of revenue for the three months ended September 30, 1996
decreased to 33% of total revenue compared to 37% for the comparable period
in the prior year, primarily due to improved utilization of customer support
staff and lower travel expenses attributable to establishing regional offices
in Chicago and Washington D.C. Cost of revenue for the six months ended
September 30, 1996 increased 17% to $2.7 million compared to $2.3 million for
the comparable period in the prior year, primarily due to additional staffing
to support the Company's growth. Cost of revenue for the six months ended
September 30, 1996 included $47,502 in amortization expense from the
capitalization of software development expenses compared to $72,000 for the
comparable period in the prior year. The decrease in amortization expense was
primarily due to certain software development costs capitalized prior to
fiscal year 1996 being fully amortized compared to the amortization of
software development costs capitalized related to MECON Optimis for Windows
which was released in the third fiscal quarter of 1996. Cost of revenue for
the six months ended September 30, 1996 decreased to 34% of total revenue
compared to 43% for the comparable period in the prior year, primarily due to
improved utilization of customer support staff and lower travel expenses
attributable to establishing regional offices in Chicago and Washington D.C.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended September 30, 1996 decreased 11% to $455,000 compared to
$509,000 for the comparable period in the prior year, primarily due to a
shift from utilizing independent contract staff to full-time employees at
lower rates. During the three months ended September 30, 1996, $178,000 was
capitalized for internally developed software related to product development
compared to $157,000 for the comparable period in the prior year. Research
and development expenses for the three months ended September 30, 1996
decreased to 10% of total revenue compared to 17% for the comparable period
in the prior year primarily due to the completion of the MECON-Optimis
Windows-based product. Research and development expenses for the six months
ended September 30, 1996 decreased 8% to $850,000 compared to $925,000 for
the comparable period in the prior year, primarily due to a shift from
utilizing independent contract staff to full-time employees at lower rates.
During the six months ended September 30, 1996, $346,000 was capitalized for
internally developed software related to product development compared to
$256,000 for the comparable period in the prior year. Research and
development expenses for the six months ended September 30, 1996 decreased to
11% of total revenue compared to 18% for the comparable period in the prior
year primarily due to utilization of programming capacity developed in
research and development.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended September 30, 1996 increased 8% to $925,000 compared to $853,000 for
the comparable period in the prior year, primarily due to the Company hiring
a Vice President of Marketing in the fourth fiscal quarter of 1996 and
increased commissions as a result of increased revenue. Sales and marketing
expenses for the three months ended September 30, 1996 decreased to 20% of
revenue compared to 28% for the comparable period in the prior year,
primarily due to utilization of the capacity developed in sales and
marketing. Sales and marketing expenses for the six months ended September
30, 1996 increased 6% to $1.8 million compared to $1.7 million for the
comparable period in the prior year, primarily due to the Company hiring a
Vice President of Marketing in the fourth fiscal quarter of 1996 and
increased commissions as a result of increased revenue. Sales and marketing
expenses for the six months ended September 30, 1996 decreased to 22% of
revenue compared to 32% for the comparable period in the prior year,
primarily due to utilization of the capacity developed in sales and marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1996 increased 48% to $793,000 compared to
$535,000 for the comparable period in the prior year, primarily due to
increased staffing, failed acquisition costs of approximately $100,000, and
general expenses related to an increase in business activity and
infrastructure expenses related to a public company's operations. General
and administrative expenses for the three months ended September 30, 1996
decreased to 17% of revenue compared to 18% for the comparable period in the
prior year, primarily due to utilization of the capacity developed in
administration. General and administrative expenses for the six months ended
September 30, 1996 increased 27% to $1.4 million compared to $1.1 million for
the comparable period in the prior year, primarily due to increased staffing,
failed acquisition costs of approximately $100,000, and general
<PAGE>
expenses related to an increase in business activity and infrastructure
expenses related to a public company's operations. General and
administrative expenses for the six months ended September 30, 1996 decreased
to 17% of revenue compared to 20% for the comparable period in the prior
year, primarily due to utilization of the capacity developed in
administration.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $5.2 million in billed and
unbilled accounts receivable, including $922,000 in accounts receivable over
90 days compared to $3.3 million in billed and unbilled accounts receivable
at March 31, 1996, including $804,000 in accounts receivable over 90 days.
This increase in accounts receivable, particularly the accounts receivable
over 90 days, was primarily due to sales to integrated health networks that
typically pay slower than independent hospitals. In the first fiscal quarter
of 1997, the company hired additional collection personnel to focus on
accounts older than 90 days. As a result, the average days in accounts
receivable decreased 14% to 81 days as of September 30, 1996 from 94 days as
of June 30, 1996.
As of September 30, 1996, the Company had net working capital of $18.8
million including cash, cash equivalents and short-term investments of $16.5
million. The Company currently has no material commitments for capital
expenditures.
The Company believes that the cash and short-term investments of $16.5
million, together with anticipated cash flows from operations, will be
adequate to fund its cash requirements for at least the next twelve months.
During the fiscal year, the Company intends to complete the development and
release of its PEERVIEW product and intends to hire customer service
personnel as the installed customer base increases.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
VARIABILITY OF QUARTERLY RESULTS; SEASONALITY
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 Company's sales
cycle and demand for its products and services; changes in distribution
channels; changes in the Company's product mix; the termination of, or a
reduction in, subscriptions to the Company's MECON-PEERx product; the loss of
customers due to consolidation in the health care industry; customer delays
in providing information needed by the Company to complete implementation of,
and revenue recognition from, sales of the MECON-PEERx product; changes in
customer budgets; investments by the Company in marketing, sales, research
and development and administrative personnel necessary to support the
Company's growth; the timing of new product introductions and enhancements by
the Company and its competitors; marketing and sales promotional activities
and trade shows; the unpredictability of revenues from consulting services;
and general economic conditions. Accordingly, the Company's operating
results for any particular quarterly period may not be indicative of results
for future periods. Moreover, the Company's operating expense levels are
relatively fixed and, to a large degree, are based on anticipated revenue
levels. Consequently, if anticipated revenues in any given quarter do not
occur as expected, expense levels could be disproportionately high and may
result in losses.
<PAGE>
The Company's quarterly results have been, and may continue to be,
affected by hospital budgeting practices that cause many discretionary
purchase decisions to be made shortly before the budgetary year end, which
generally occurs on June 30 or December 31. Consequently, the Company's
operating results have been somewhat seasonal.
DEPENDENCE ON PRINCIPAL PRODUCT
For the six months ended September 30, 1996, approximately 74% of the
Company's revenues were derived from subscriptions to its MECON-PEERx product
and related services. Accordingly, any significant reduction in
subscriptions to such product would have a material adverse effect on the
Company's business and operating results. Although subscriptions to the
MECON-PEERx database generally have three-year terms, there can be no
assurance that customers will not cancel their subscriptions prior to the end
of the subscription period. In addition, although the Company has
experienced a high customer renewal rate, there can be no assurance that the
Company's customers will renew their subscriptions or that any renewal terms
will be as favorable to the Company as existing terms.
INTEGRITY AND RELIABILITY OF DATABASE
The Company's success depends significantly on the integrity of its
database. Although the Company tests data for completeness and
consistency, it does not conduct independent audits of the information
provided by its customers. Moreover, while the Company believes that the
benchmarking information contained in its database is representative of the
operational aspects of various types of hospitals, there can be no assurance
that such information is appropriate for comparative analysis in all cases or
that the database accurately reflects general or specific trends in the
hospital market. If the information contained in the database were found, or
were perceived, to be inaccurate, or if such information were generally
perceived to be unreliable, the Company's business and operating results
could be materially and adversely affected.
COMPETITION
The market for health care information systems and services is intensely
competitive and rapidly changing. The Company's competitors include other
providers of operations and financial benchmarking data and services,
providers of decision support software systems and management and health care
consulting firms. Furthermore, other major health care information companies
not presently offering cost management solutions may enter the markets in
which the Company competes. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development and marketing resources than the Company, and currently have, or
may develop or acquire, substantial installed customer bases in the health
care industry. The Company also faces significant competition from internal
management information services departments of large hospital alliances or
for-profit hospital chains, many of which have developed or may develop
benchmarking information and other cost control solutions. In addition,
increased competitive pressures, among other factors, could lead to lower
prices for the Company's products and services, thereby materially adversely
affecting the Company's operating results. Accordingly, there can be no
assurance that the Company will be able to compete successfully in the future.
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth and
expansion which has placed a significant strain on its personnel and
resources. The Company's growth has resulted in an increase in the level of
responsibility for the Company's key personnel, several of whom were only
recently hired, including the Company's Chief Financial Officer, who joined
the company in November 1994, and the Company's President and Chief Operating
Officer, who joined the Company in September, 1996. Failure to manage growth
effectively, or to develop, maintain or upgrade management information and
other systems and controls, could have a material adverse effect on the
Company. In addition, through the merger of MCIS in March 1996, the Company
increased the scope of its product lines and operations. This expansion in
scope has resulted in an increased need for infrastructure and systems.
Furthermore, this requirement is relatively more substantial due to the
limited systems investment made by the Company prior to fiscal 1997. This
requirement includes, without limitation, securing adequate financial
resources to
<PAGE>
successfully integrate and manage MCIS, retention of key employees,
integration of management information, control and telecommunications
systems, consolidation of geographically dispersed facilities, and
integration of various functions and groups of employees, each of which could
pose significant challenges. Moreover, MCIS historically has not been
profitable, and the Company must make significant and rapid improvements at
MCIS for the merged operation to achieve profit margins comparable to the
Company's historical results. The Company's future operating results will
depend in large measure on its success in implementing operating and
financial procedures and controls, improving communication and coordination
among different operating functions, integrating certain functions such as
sales and implementation, strengthening management information and
telecommunications systems, and continuing to hire additional qualified
personnel in all areas. There can be no assurance that the Company will be
able to manage these activities and implement these additional systems and
controls successfully, and any failure to do so could have a material adverse
effect upon the Company's operating results.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
A key element of the Company's business strategy is to develop
relationships with leading industry organizations in order to increase the
Company's market presence, expand distribution channels and broaden the
Company's product line. The Company has recently entered into strategic
relationships with Arthur Andersen LLP and HBOC. The Company believes that
its success in penetrating new markets for its products and services depends
in large part on its ability to maintain these relationships and cultivate
additional relationships. There can be no assurance that the Company's
existing or future strategic partners will not develop and market products in
competition with the Company or otherwise discontinue their relationships
with the Company, or that the Company will be able to successfully develop
additional strategic relationships.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY
Many health care providers are consolidating to create larger health
care delivery enterprises with greater regional market power. Such
consolidation could erode the Company's existing customer base and reduce the
size of the Company's target market. In addition, the resulting enterprises
could have greater bargaining power, which may lead to price erosion of the
Company's products and services. The reduction in the size of the Company's
target market or the failure of the Company to maintain adequate price levels
could have a material adverse effect on the Company.
The health care industry is subject to changing political, economic and
regulatory influences that may effect the procurement practices and operation
of health care industry participants. During the past several years, the US
health care industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. Several lawmakers have announced that they intend to propose
programs to reform the US health care system. These programs may contain
proposals to 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 products and
services. The Company cannot predict what impact, if any, such factors might
have on its business, financial condition and results of operations.
UNCERTAINTY OF ENTRANCE INTO NEW MARKETS
A substantial majority of the Company's revenues to date have been
derived from sales to large hospitals in urban areas. The Company's future
success depends in part upon the Company's ability to market its products and
services to other health care providers, including small and rural hospitals,
long-term care facilities, large group medical practices, rehabilitation
hospitals and surgical centers. In order to develop the subscriber base
necessary for the accumulation of meaningful operations benchmarking data for
such new markets, the Company may be required to offer significant price
discounts to prospective customers in such markets. In addition, because
such providers typically have smaller budgets than the Company's existing
customers, entry into new markets may require the Company to offer lower
priced versions of its products. Sales of such new products may result in
lower gross margins than sales to the
<PAGE>
Company's existing customer base. Moreover, the entry into such new markets
may require the Company to increase substantially its product development,
marketing and other expenses. There can be no assurance that the Company
will be successful in entering new markets.
NEW PRODUCT DEVELOPMENT
The Company's future success and financial performance will depend in
large part on the Company's ability to continue to meet the increasingly
sophisticated needs of its customers through the timely development and
successful introduction of new and enhanced versions of its database and
other complementary products and services. Product development has been
focused on enhancing existing products or introducing new products and has
inherent risks, and there can be no assurance that the Company will be
successful in its product development efforts or that the market will
continue to accept the Company's existing or new products and services. The
Company believes that significant continuing product development efforts will
be required to sustain the Company's growth. There can be no assurance that
the Company will successfully develop, introduce and market new products or
product enhancements, or that products or product enhancements developed by
the company will meet requirements of health care providers and achieve
market acceptance.
POTENTIAL ACQUISITIONS
For the three months ended September 30, 1996, the Company incurred
failed acquisition costs of $100,000. The Company may continue to attempt
to expand its product line through the acquisition of complementary
businesses, products and technologies. Any such transactions would be
accompanied by the risks commonly encountered in such transactions. In
particular, business combinations include such risks as the difficulty of
assimilating the operations and personnel of the combined companies, the
ability to manage geographically remote units, the diversion of management's
attention from other business concerns, the potential disruption of the
Company's ongoing business, the risks of entering markets in which the
Company has limited or no direct experience, the inability to retain key
technical and managerial personnel, the inability of management to maximize
the financial and strategic position of the Company through the successful
integration of acquired businesses, additional expenses associated with
amortization of acquired intangible assets and maintenance of uniform
standards, controls, procedures and policies, and the impairment of
relationships with employees and customers as a result of any integration of
new personnel. In addition, acquisitions may involve the expenditure of
significant funds. The Company's management has limited prior experience in
managing acquisitions. There can be no assurance that the Company would be
successful in overcoming these risks or other problems encountered in
connection with such business combinations or that such transactions will not
materially adversely affect the Company's business, financial condition or
results of operations. In addition, such business combinations may involve
the issuance of additional equity securities, which may be dilutive to
stockholders.
DEPENDENCE ON KEY PERSONNEL
The success of the Company and of its business strategy is dependent in
large part on its key management and operating personnel, including its Chief
Executive Officer and President, Vasu R. Devan. The Company believes that
its future success will also depend upon its ability to attract and retain
highly-skilled technical, managerial and marketing personnel. Such
individuals are in high demand and often attract competing offers. In
particular, the Company's success will depend on its ability to retain the
services of its executive officers. The Company will also have an ongoing
need to expand its management personnel and support staff. The loss of the
services of one or more members of management of key employees or the
inability to hire additional personnel as needed may have a material adverse
effect on the Company.
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were approved at the Company's Annual Meeting of
Stockholders held on September 17, 1996:
(a) The following directors were elected:
Directors Votes For Votes Withheld
--------- --------- --------------
Vasu R. Devan 5,674,928 100
Raju Rajagopal 5,674,928 100
William H. Kimball 5,674,928 100
Walter G. Kortschak 5,674,928 100
David L. Lowe 5,674,928 100
Robert L. Montgomery 5,674,928 100
(b) The Stockholders approved the following proposals:
<TABLE>
<CAPTION>
Number of Common Shares Voted
Proposal For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1) Amendment to the 1995
Stock Plan to increase the
number of shares of Common
Stock reserved for issuance
thereunder by 550,000 shares 4,816,640 658,401 800 0
2) Ratification of appointment
of KPMG Peat Marwick LLP
as independent accountants 5,647,928 0 100 0
</TABLE>
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 11.1 Computation of Earnings per Share
Exhibits 27.0 Financial Data Schedules
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1996.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MECON INC.
(Registrant)
Date: 11/13/96 /s/ Vasu Devan
------------ ---------------------------
Vasu R. Devan
President and Chief Executive Officer
Date: 11/13/96 /s/ David J. Allinson
------------ ---------------------------
David J. Allinson
Chief Financial Officer
<PAGE>
EXHIBIT 11.1
MECON INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares of common stock 3,329 5,916 3,408 5,906
Cashless exercise of warrants 57 0 57 0
Conversion of Series C preferred stock 480 0 480 0
Dilutive effect of options outstanding 0 450 0 469
Options subject to Staff Accounting Bulletin No. 83 315 0 315 0
- ------------------------------------------------------------------------------------------------------------
Shares used in per share calculation 4,181 6,366 4,260 6,375
- ------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stockholders $ (133) $ 746 $ (933) $1,059
Earnings per share $(0.03) $ 0.12 $(0.22) $ 0.17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,631
<SECURITIES> 4,819
<RECEIVABLES> 4,960
<ALLOWANCES> 426
<INVENTORY> 0
<CURRENT-ASSETS> 22,143
<PP&E> 1,403
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,803
<CURRENT-LIABILITIES> 3,377
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,803
<SALES> 0
<TOTAL-REVENUES> 8,085
<CGS> 2,711
<TOTAL-COSTS> 6,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,631
<INCOME-TAX> 572
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,059
<EPS-PRIMARY> 0
<EPS-DILUTED> $0.17
</TABLE>
