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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
------------------------
FORM 10-KSB
<TABLE>
<S> <C>
(X) 15, ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended March 31, 1996
( ) 15, TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number 0-27048
</TABLE>
------------------------
MECON, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2702762
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification
No.)
200 PORTER DRIVE
SAN RAMON, CALIFORNIA 94583
(Address of principal executive (Zip Code)
offices)
(510) 838-1700
Issuer's telephone number, including area code
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE $.001 NASDAQ
(Title of each class) (Name of each exchange on which registered)
</TABLE>
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 ( )
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. ( )
<TABLE>
<S> <C>
State issuer's revenues for its most recent fiscal year:...................... $12,003,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within the
past 60 days (Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances
be deemed to be affiliates. This determination of executive officer or
affiliate status is not necessarily a conclusive determination for other
purposes):................................................................... $57,352,453
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 31, 1996:................................................. 5,876,947
Transitional Small Business Disclosure Format (check one): Yes ( ) No (X)
</TABLE>
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
MECON, Inc. ("MECON" or the "Company") is a leading provider of benchmarking
data information products, decision support software and value-added services to
the health care industry. The principal focus of the Company's products is to
reduce costs, and improve efficiency and effectiveness of health care delivery
systems. The Company's main product line is based upon a proprietary operations
benchmarking database containing cost and key performance information from over
550 hospitals nationwide. In addition to statistical data, the database
incorporates qualitative data derived from operational profiles provided by
hospitals that utilize the Company's database-related products. The Company's
customers use the information provided by the operations benchmarking database
to quantify, develop and implement strategies to reduce costs and to
periodically measure actual performance to maintain the cost reductions
achieved.
The need to manage costs more effectively in today's health care environment
is leading hospitals to seek information which enables them to more accurately
measure and evaluate operating and clinical efficiency. Historically, such
efforts have been hampered by a lack of adequate benchmark information to
identify cost inefficiencies, as well as a lack of sufficient decision support
tools to implement and maintain cost reductions. Accordingly, there is a need
for data and information systems which support long-term cost management
strategies through operating efficiencies, labor cost control, supply and
materials management, re-engineered care delivery processes, improved facilities
infrastructure and capital equipment utilization, and general administrative
efficiencies.
Using the MECON operations benchmarking database as its foundation, the
Company offers information products, decision support software and consulting
services that bridge the information gap faced by hospitals and other health
care providers seeking to reduce costs and improve operating efficiency. The
Company's database allows hospital executives and department managers to compare
their operational practices against those of the industry's most efficient
hospitals or members of a customer-defined peer group. This ability, when
combined with the Company's other products and services, enables hospitals to
become more cost-competitive by quantifying opportunities for immediate cost
reduction, developing and implementing short-term and long-term strategies for
achieving cost reduction opportunities, adjusting ongoing operating costs
consistent with changes in utilization, developing annual resource plans
compatible with profit requirements, and measuring actual performance on a
regular basis to maintain the gains achieved.
RECENT DEVELOPMENTS
ACQUISITION OF MCIS
On March 29, 1996, MECON acquired Managed Care Information Systems, Inc.
("MCIS") in a pooling of interests transaction, pursuant to which under the
agreement, MECON exchanged 338,155 shares of its common stock for all the
outstanding shares of MCIS, assumed 33,052 common stock options and assumed a
note payable with accrued interest to a third party in the amount of
approximately $2.5 million. MCIS has now become an operating division of MECON.
MCIS offers Action Point-SM-, a PC-based Windows-TM- product for senior
level health care executives. Action Point-SM- Executive Managed Care
Information System supports effective planning and organizational management
through immediate access to critical information on revenue/profitability, payor
mix, resource utilization, occupancy, and physician practice patterns so that
the facility can monitor data by physician, payor, and DRG.
MCIS serves a customer base of over 130 acute care institutions nationwide.
MCIS has corporate agreements with Quorum Health Care, UniHealth, Tenet Health
Care Corporation, and Adventist Health System West. In addition, MCIS has
developed strategic relationships with Johnson & Johnson Health Care Systems,
Inc., COHR, Inc., Keane, Inc., and is one of the selected vendors at the
Anderson Consulting LLP Health Strategy Center in Dallas, Texas.
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PRODUCTS
The Company's principal products and services include MECON-PEERx and other
related analytical products, the MECON-OPTIMIS performance monitoring system,
Action Point-SM- Executive Managed Care Information System and value-added
services. The foundation of the Company's product line is the MECON operations
benchmarking database.
THE MECON OPERATIONS BENCHMARKING DATABASE
The Company maintains a proprietary database containing information on labor
productivity, costs, resource utilization and practice profiles from over 450
hospitals nationwide. The database contains 257 hospital department types, such
as nursing, pharmacy, radiology, clinical laboratories and medical records.
Typically, over 17,000 elements of information are collected from each
subscribing hospital. The combination of statistical and practice profile data
in the database allows hospitals to not only measure cost reduction
opportunities, but also to identify processes that enable such reductions. The
Company believes that the MECON operations benchmarking database is the only
commercially available health care operations database that contains both
statistical and qualitative data.
Developed over the last decade, the database does not depend upon public
domain data. Instead, all of the data is provided by health care organizations
that subscribe to the Company's MECON-PEERx product described below. The
subscriber typically submits data annually at the close of its fiscal year;
however, a subscriber may choose to submit data on a more frequent basis. The
Company tests and analyzes the data submitted by subscribers to ensure
comparability with other information contained in the database.
The database runs on an Oracle RDBMS 7.1 platform. The database resides on a
Hewlett-Packard G40 server (mini-computer) that runs the HP-UX (UNIX) operating
system. The hardware and database software have been designed to support
significant growth in data processing and capacity.
MECON-PEERx
MECON-PEERx is a subscription-based information product that enables
hospitals to compare operational practices against those of the industry's most
efficient providers or the members of a customer-defined peer group. The Company
believes that the breadth and depth of the information contained in the
database, together with the Company's ability to present a wide variety of data
types in standard formats that are useful to the customer, make MECON-PEERx a
valuable resource for use in comparative performance analysis or benchmarking.
Through operations benchmarking, hospitals and other health care providers can
compare their operational practices against those of their peers. Benchmarking
allows hospitals to identify the "best practices" employed in the industry,
facilitates peer networking to learn practices that lead to lower costs, and
assists hospitals in restructuring their operations to reduce costs. The Company
has developed MECON-PEERx and its other products and services with the goal of
maximizing the value of benchmarking analysis.
Using a specially prepared report comparing subscriber cost and key
performance data against benchmark data from the Company's operations
benchmarking database, both senior executives and departmental managers can
evaluate staffing and skill mix configurations, potential opportunities for
reducing labor expenses, alternative strategies and methods of operations, and
implications of new technologies. The information and analysis provided by the
MECON-PEERx report, together with a variety of standard and optional support
services, facilitate benchmarking initiatives to improve operational practices
and efficiencies. Typical applications of the MECON-PEERx analysis include
short-term cost reduction initiatives, annual budgeting, resource planning,
long-term tracking of resource utilization, consolidation planning and
cost/benefit evaluation of new technologies or operating processes.
2
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Hospitals generally subscribe to MECON-PEERx for a renewable three-year
period. Each subscriber to MECON-PEERx receives the following:
MECON-PEERx Reports. The Company prepares a report for each subscriber
analyzing the operating cost data collected by the subscriber in light of the
peer group and best practice information contained in the MECON database. The
following table summarizes the typical types of information provided in the
report:
MECON-PEERx
<TABLE>
<CAPTION>
CATEGORIES OF OUTPUT SPECIFIC EXAMPLES
------------------------------ ------------------------------------------------------------
<S> <C> <C>
HOSPITAL LEVEL Cost Ratios Cost per Adjusted Discharge, Cost per Adjusted Patient Day
Productivity Ratios Full Time Equivalent per Occupied Beds
Financial Ratios Gross Margin, Net Margin, Balance Sheet Ratios
Characteristics & Profiles Location, Type, Services Offered
DEPARTMENT LEVEL Cost Ratios Cost per Unit of Measure, Labor Costs, Other Direct Expenses
Productivity Ratios Labor Hours per Unit of Measure, Skill Mix
Service Intensity Ratios Department Utilization per Patient Day or Discharge
Practices Organizational Characteristics, Operational Practices
</TABLE>
IMPLEMENTATION, CUSTOMER SUPPORT AND OTHER SERVICES
The Company provides implementation services at the inception of a
subscription, including management orientation in the use of benchmark data,
assistance with initial statistical data collection, development of operational
profiles and auditing of subscriber data. The Company conducts post-report
workshops with hospital management to analyze cost reduction opportunities.
First year subscription fees include charges for implementation services,
including post-report workshops. To the extent requested by customers, these
services are provided by the Company for an additional fee during subsequent
years. After a customer has subscribed to MECON-PEERx, the Company provides, for
an additional fee, quarterly status checks, advanced management development and
training, data auditing and software technical support. The Company also offers
optional services to hospitals seeking to maximize the value of the MECON-PEERx
analysis. These services range from collecting and analyzing an expanded
MECON-PEERx data set to developing the strategies and tactics necessary to
realize savings opportunities and maintain the cost reductions achieved.
OTHER INFORMATION PRODUCTS
MECON has developed additional information products based on the database
intended to provide answer-based insights to decision makers. These products
include MECON-Fast*Start, a high level analysis product offered specifically to
management consulting companies to use as a tool to support their consulting
engagements. The Company has designed it as a diagnostic tool that identifies
and quantifies cost reduction potential by major functional areas with less
detail than MECON-PEERx.
The Company's information products also include Overview Assessment and
Executive Summary. Overview Assessment uses the database in conjunction with
additional qualitative information collected through on-site work at the
hospital and provides a detailed assessment of facility- and function-specific
cost reduction strategies and tactics. Executive Summary provides a condensed
3
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analysis based on the benchmarking database that provides hospital executives
with an overall indication of opportunities for short-term and long-term cost
reduction, and the specific areas in which such opportunities are most
prominent.
MECON-OPTIMIS
As a complement to MECON-PEERx, the Company has developed MECON-OPTIMIS, an
internal performance measuring system for hospitals. MECON-OPTIMIS is a PC
software product designed to allow hospitals to measure their internal
performance by tracking their performance against specified targets. This allows
hospitals to adjust resource levels consistent with utilization changes and,
thereby, move from a fixed cost operating model to a variable cost operating
model. MECON-OPTIMIS measures labor hours and costs, non-labor expenses, skill
mix, productivity, quality and service intensity on a bi-weekly or monthly
basis. The application contains the following three modules: performance (labor
productivity and quality); budgeting; and daily staffing simulation. The
performance module retrospectively reports key performance indicators. The
budgeting module provides baseline information to plan long-term resource
requirements more accurately. The daily staffing module forecasts resource
requirements based on utilization forecasts. These modules assist institutions
in achieving labor resource utilization targets, in measuring the progress of
quality improvement initiatives, in facilitating labor budget development and in
determining department staffing needs by shift. MECON-OPTIMIS runs on an Oracle
RDBMS platform and is configured for operation on local area networks.
MECON-OPTIMIS relies on payroll, time and attendance and other financial
information systems at the host facility. The customer collects and reports data
continually, usually on a per pay period basis. Customers that purchase both
MECON-PEERx and MECON-OPTIMIS can incorporate benchmark data from MECON-PEERx
into MECON-OPTIMIS, thus increasing the value of the Company's overall product
mix.
ACTION*POINT MANAGED CARE INFORMATION SYSTEM
The Action*Point product is a managed care information system that provides
decision support to senior executives in hospitals. This product focuses on
helping health care executives access and use business information with which to
make informed decisions. The Action*Point, Windows-TM- based software is
designed to provide immediate business feedback without the need for computer
experience or knowledge of complicated query syntax. Physician, payor, product
lines and market analysis is available at both the summary and detailed
department level within a single patient encounter. An executive can navigate
complex business problems with only a point and click of the mouse which
produces sophisticated analysis and graphical presentations.
VALUE-ADDED SERVICES
The Company's principal objective is to produce value to customers from its
database and software products through a series of value-added services. Such
services include custom analysis of data, training programs, benchmarking
facilitation services, and limited consulting services. The Company recently
introduced a training product known as "Benchmarking-in-action" ("BIA") that is
typically sold to current MECON-PEERx clients.
CUSTOMERS
Historically, MECON has marketed its products and services to the acute care
segment of the hospital market, primarily to individual hospitals over 100 beds.
As of March 31, 1996, the Company had over 550 customers using its products and
services. Typically, a customer purchases the three year subscription to
MECON-PEERx as a first step in its effort to control, manage and reduce costs.
The Company believes that the implementation of MECON-PEERx, and in certain
instances MECON-OPTIMIS, has frequently resulted in substantial cost benefits to
customers.
MECON's customer base is geographically diverse, including urban and rural
hospitals throughout the United States. The Company's customers include
for-profit, academic/teaching and non-profit hospitals as well as multi-hospital
systems. The Company has recently expanded its product offerings
4
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to long-term care facilities and small hospitals with fewer than 100 beds.
Revenue from certain member facilities of the University HealthSystem Consortium
Services Corporation, the Company's largest customer, accounted for 11% of net
revenue for fiscal 1996.
SALES AND MARKETING
MECON employs a 23-person direct sales and marketing organization which it
augments through the efforts of its strategic partners. MECON participates in
several national and regional trade shows including the Health Care Information
and Management Systems Society annual conference. The Company also advertises in
major trade publications and uses direct mail, primarily in regionally focused
campaigns. Additionally, national health care related journals routinely publish
case studies and data trends from the MECON database. Furthermore, MECON
sponsors client conferences providing case studies, publications, new product
introductions and a forum for client networking. The Company also generates a
substantial number of leads directly through customer referrals. During fiscal
1995 and fiscal 1996, MECON received exclusive endorsements from several
hospital associations or their subsidiary purchasing corporations.
STRATEGIC RELATIONSHIPS
The Company intends to develop strategic relationships with leading
providers of health care products and services in order to increase the
Company's presence, expand distribution channels and broaden its product line.
As part of this strategy, the Company has pursued relationships with major
health care consulting companies and entered into a strategic relationship with
Arthur Andersen LLP in April 1995. The Company is also pursuing relationships
with health care information system companies. The Company anticipates that
these relationships will allow MECON to leverage the significantly larger sales
forces of such companies while providing them with a value added product to sell
into their customer base. In September 1995, MECON signed an agreement with
HBOC, pursuant to which HBOC will integrate MECON-PEERx with its Trendstar
Decision Support System, a health care information software designed to provide
a common source of information to executives, medical staff, department managers
and others in acute care hospitals, and market the integrated solution to
current and potential Trendstar customers. The agreement is effective for a
period of three years and will automatically renew thereafter for additional one
year periods, provided that either party may terminate the agreement without
cause upon 90 days written notice. HBOC has agreed, during the term of the
agreement, not to develop or implement any operations benchmarking system
similar to MECON-PEERx. The Company has agreed not to market MECON-PEERx
independently to HBOC's Trendstar customers who were not MECON-PEERx customers
on the date of the agreement. Further, the agreement provides that the Company
is the owner of any database compiled from data received by joint customers,
including any data incorporated into the Trendstar system.
PRODUCT AND MARKET DEVELOPMENT
The Company's product development strategy is directed toward creating new
products that leverage the MECON database, increasing the functionality of its
current products and developing products for new health care market segments. As
part of this strategy, the Company is currently expanding the depth of the data
collected from subscribers. Current development efforts focus on financial
ratios, quality indicators and process data. In addition, the Company is also
developing products that will allow customers to enter and access benchmarking
data electronically. These products, which are expected to be released during
late calendar year 1996, will allow customers and MECON's internal auditing
staff to improve the speed and accuracy of data acquisition, manipulate data
efficiently and generate reports on site.
In addition, to address the growing need for benchmark information at the
integrated delivery system level, the Company is expanding its product offerings
to other health care providers such as outpatient clinics, home care providers
and surgery centers.
5
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COMPETITION
The market for health care information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors in the health care information market are the breadth and
quality of product offerings, access to proprietary data, the proprietary nature
of methodologies and technical resources, price, and the effectiveness of
marketing and sales efforts. In addition, the Company believes that the speed
with which information companies can anticipate and respond to the evolving
health care industry structure and identify information needs is an important
competitive factor. Although the Company believes that it competes favorably
with respect to each of these factors, the Company may be at a competitive
disadvantage with respect to certain competitors and potential competitors that
have greater financial, product development, technical and marketing resources
than the Company, and that have substantial installed customer bases in the
health care industry.
The Company's competitors include other providers of operations and
financial benchmarking data and products, providers of decision support software
systems and management and health care consulting firms. As the market for
health care cost management solutions develops, additional competitors,
including other major health care information companies not presently offering
cost management solutions, may enter the market and competition may intensify.
The Company also faces significant competition from internal information
services departments at large hospital alliances or for-profit hospital chains,
many of which have developed or may develop benchmarking information or other
cost control solutions.
PROPRIETARY RIGHTS
The Company depends upon a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights in its products. Subscribers to MECON-PEERx enter into
agreements restricting the disclosure and use of the comparative information
contained in the database. The Company distributes its MECON-OPTIMIS product
under software license agreements which grant customers a nonexclusive,
nontransferable license to the product and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of the product. In
addition, the Company attempts to protect its trade secrets and other
proprietary information through agreements with employees and consultants. The
Company also seeks to protect the source code of its products as a trade secret
and as an unpublished copyright work. The Company has not filed any patent
applications or copyrights covering its software or database technology. There
can be no assurance that these protections will be adequate or that the
Company's competitors will not independently develop products and services that
are substantially equivalent or superior to the Company's products and services.
The Company believes that, due to the rapid pace of innovation within the
software industry, factors such as the technological and creative skills of its
personnel and its ongoing reliable product maintenance and support are more
important in establishing and maintaining a leadership position within the
industry than are the various legal protections of its technology. In addition,
although the Company believes that its products, trademarks and other
proprietary rights 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.
EMPLOYEES
As of March 31, 1996, the Company employed a total of 101 full-time
employees, of which 51 were in customer service, 23 in marketing and sales, 11
in research and development and 16 in administration. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company occupies approximately 11,500 square feet of space at its
headquarters in San Ramon, California under a lease expiring in January 2000.
The Company also occupies approximately 3,100 square feet in Chicago, Illinois
and approximately 3,560 square feet near Washington DC for its
6
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regional client service organizations. In addition, the Company's recently
acquired subsidiary occupies 3,400 square feet in Calabasas, California. The
Company believes that its existing facilities will be adequate to meet its
currently anticipated requirements and that suitable additional or substitute
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's stockholders in the
quarter ended March 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company consummated its initial public offering of 2,000,000 common
shares on December 6, 1995 at a price of $13.00 per share. The Company's Common
Stock is quoted on the Nasdaq National Market under the symbol "MECN." The
following table sets forth the high and low prices of the Company's Common Stock
for the periods indicated as reported on the Nasdaq market.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
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<S> <C> <C> <C>
1996 Third quarter (commencing December 7, 1995)................................ $ 17.38 $ 14.25
Fourth quarter............................................................. $ 20.25 $ 14.25
</TABLE>
On March 29, 1996 the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $19.75 per share. At March 29, 1996,
there were approximately 400 record holders of the Company's Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company intends to retain all available funds and any future
earnings for use in the operation of its business.
7
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ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenue:
Subscription and license................................. $ 359 $ 1,038 $ 2,041 $ 4,821 $ 8,037
Services................................................. 2,406 2,804 2,979 4,047 3,966
--------- --------- --------- --------- ---------
Net revenue.......................................... 2,765 3,842 5,020 8,868 12,003
Cost of revenue............................................ 1,441 2,017 2,704 4,129 4,679
--------- --------- --------- --------- ---------
Gross profit............................................. 1,324 1,825 2,316 4,739 7,324
Operating costs:
Research and development................................. 208 526 870 1,647 1,855
Sales and marketing...................................... 488 438 1,236 2,588 3,349
General and administrative............................... 603 940 1,254 1,686 2,273
Merger and acquisition................................... -- -- -- -- 908
--------- --------- --------- --------- ---------
Total operating costs................................ 1,299 1,904 3,360 5,921 8,385
--------- --------- --------- --------- ---------
Operating income (loss).................................. 25 (79) (1,044) (1,182) (1,061)
Interest expense........................................... (24) (29) (25) (224) (274)
Interest and other income, net............................. 94 10 53 26 368
Loss on investment......................................... (156) (133) (180) -- --
--------- --------- --------- --------- ---------
Loss before provision for income taxes................... (61) (231) (1,196) (1,380) (967)
Provision for income tax expense........................... (45) (13) (48) -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of accounting change....... (106) (244) (1,244) (1,380) (967)
Cumulative effect for change in accounting for income
taxes..................................................... -- -- (7) -- --
--------- --------- --------- --------- ---------
Net loss................................................. $ (106) (244) (1,251) (1,380) (967)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Accretion of redeemable preferred stock.................... -- (23) (110) (173) (110)
--------- --------- --------- --------- ---------
Net Loss attributable to common stockholders............. $ (106) (267) (1,361) (1,553) (1,077)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share......................................... $ (0.02) (0.07) (0.32) (0.35) (0.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net loss per share................ 4,576 3,829 4,213 4,464 4,966
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $ 27 347 513 1,190 19,980
Total assets............................................... 1,519 1,774 1,936 4,949 25,581
Stockholders' (deficit) equity............................. 870 (310) (1,609) (3,223) 19,901
</TABLE>
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 1993 AND SECTION 21E OF THE SECURITIES ACT OF
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1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW AND
IN THE COMPANY'S PROSPECTUS DATED DECEMBER 6, 1995 AND OTHER REPORTS FILED BY
THE COMPANY.
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
550 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. For fiscal 1996, approximately
67% 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 product 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. In addition, the Company recorded nonrecurring charges totaling
$908,000 for merger and merger related costs. Accordingly, all prior period
financial information has been restated. Unless otherwise noted, management's
discussion of financial results is based on restated figures.
MCIS offers Action*Point-SM-, a PC-based Windows-TM- product for senior
level health care executives. Action*Point Executive Managed Care Information
System supports effective planning and organizational management through
immediate access to information on revenue/profitability, payor mix, resource
utilization, occupancy, and physician practice patterns enabling the facility to
monitor data by physician, payor and DRG.
At March 31, 1996, the Company's backlog, which is defined as the total
value of all contracts signed but not yet recognized as revenue, increased 82%
to $10 million compared to $5.5 million at March 31, 1995. The financial
position is further strengthened as the Company continues to de-emphasize
consulting and focus upon its products which generate recurring revenue from 3
year subscription and annual software maintenance contracts.
The Company's Subscription and license revenue consists primarily of
MECON-PEERx subscription revenue and MECON-OPTIMIS and Action*Point software
licenses. The Company recognizes subscription revenue ratably over the estimated
time to complete each respective year's implementation of the MECON-PEERx
product. The Company recognizes the associated costs of implementation as
incurred. Software license revenue primarily includes a one-time license fee.
The Company recognizes MECON-OPTIMIS license revenue upon shipment of the
software and Action*Point license revenue upon completion of the training period
and customer acceptance.
The Company's services revenue consists primarily of implementation, annual
maintenance and technical support fees for MECON-OPTIMIS and Action*Point, other
optional products and services related to MECON-PEERx, MECON-OPTIMIS, and
Action*Point, and consulting services. The Company recognizes implementation
revenue when earned and annual maintenance and technical support fees ratably
over a typical twelve month agreement term. The Company recognizes other
optional products and services when the reports have been delivered or the
services performed. The Company recognizes consulting revenue as services are
performed.
The Company's revenue has increased primarily due to greater market
penetration of its database and software products, the merger with MCIS, 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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
revenue for the period indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statements of Operations
Revenue:
Subscription and license.......................................................... 41% 54% 67%
Services.......................................................................... 59% 46% 33%
--- --- ---
Net revenue..................................................................... 100% 100% 100%
Cost of revenue..................................................................... 54% 47% 39%
--- --- ---
Gross margin........................................................................ 46% 53% 61%
Operating costs:
Research and development.......................................................... 17% 19% 15%
Sales and marketing............................................................... 25% 29% 28%
General and administrative........................................................ 25% 19% 19%
Merger and acquisition............................................................ -- -- 8%
--- --- ---
Total operating costs........................................................... 67% 67% 70%
--- --- ---
Operating loss...................................................................... (21)% (14)% (9)%
Interest expense.................................................................... -- 3% 2%
Interest and other income, net...................................................... 1% -- 3%
Loss on investment.................................................................. 4% -- --
--- --- ---
Loss before provision for income taxes.............................................. (24)% (17)% (8)%
Provision for income tax expense.................................................... 1% -- --
--- --- ---
Net loss............................................................................ (25)% (17)% (8)%
--- --- ---
--- --- ---
Accretion of redeemable preferred stock............................................. (2)% (2)% (1)%
--- --- ---
Net loss attributable to common stockholders........................................ (27)% (19)% (9)%
--- --- ---
--- --- ---
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUE
Revenue for fiscal 1996 increased 35% to $12.0 million compared to $8.9
million for fiscal 1995. Subscription and license revenue for fiscal 1996
increased 67% to $8.0 million compared to $4.8 million for fiscal 1995 and
accounted for essentially all of the revenue growth. This increase was primarily
due to increased revenue from new MECON-PEERx subscription contracts and
Action*Point license fees. Service revenue remained constant at $4.0 million for
both fiscal 1996 and 1995. While overall service revenue remained unchanged, it
was impacted by a 9% decrease in Optimis implementation fees as the market
waited for the Windows based version that was completed in the third fiscal
quarter of July 1996, a 14% decrease in consulting revenue reflective of the
Company's continued shift in focus to product sales from consulting services and
an offsetting increase of 23% in value-added products and services sold to the
Company's PEERx subscriber base.
COST OF REVENUE
Cost of revenue for fiscal 1996 increased 15% to $4.7 million compared to
$4.1 million for fiscal 1995, primarily due to additional staffing to support
the Company's growth. Cost of revenue for fiscal 1996 included $56,000 in
amortization expense from the capitalization of software development expenses
compared to $120,000 for fiscal 1995. Cost of revenue for fiscal 1996 decreased
to 39% of total revenue compared to 47% for fiscal 1995, primarily due to
improved utilization of customer support staff and lower travel expenses
attributable to establishing regional offices in Chicago and Washington D.C.
10
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1996 increased 19% to $1.9
million compared to $1.6 million for fiscal 1995, primarily due to the addition
of technical and programming personnel related to new product development.
During fiscal 1996 approximately $569,000 was capitalized for internally
developed software related to product development. Research and development
expenses for fiscal 1996 decreased to 15% of revenue compared to 19% for the
comparable period in the prior year, primarily due to the completion of the
Optimis windows based product development in the third quarter of fiscal 1996.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1996 increased 27% to $3.3 million
compared to $2.6 million for fiscal 1995, primarily due to sales force expansion
and investment in certain promotional activities, including trade shows,
seminars and advertising. Sales and marketing expenses for fiscal 1996 decreased
to 28% of revenue compared to 29% for fiscal 1995, primarily due to utilization
of sales and marketing capacity developed during the second half of fiscal 1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1996, excluding nonrecurring
merger costs of $908,000, increased 35% to $2.3 million compared to $1.7 million
for fiscal 1995, primarily due to increased management staffing, facilities
expenses and general expenses related to an increase in business activity.
General and administrative expenses, excluding nonrecurring merger costs, for
fiscal 1996 remained constant at 19% of revenue for both fiscal 1996 and 1995.
INTEREST AND OTHER INCOME
Interest and other income for fiscal 1996 increased to $368,000 compared to
$26,000 for fiscal 1995, primarily due to the investment of $23.1 million of net
proceeds from an initial public offering of the Company's common stock in
December, 1995.
TAXES
The Company has not incurred income taxes as a result of generating net
operating losses for tax purposes.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUE
Revenue for fiscal 1995 increased 78% to $8.9 million from $5.0 million in
fiscal 1994. Subscription and license revenue for fiscal 1995 increased 140% to
$4.8 million compared to $2.0 million for fiscal 1995 and accounted for 72% of
the revenue growth. This increase was primarily due to increased revenue from
new MECON-PEERx subscription contracts and Action*Point license fees. Service
revenue for fiscal 1995 increased 33% to $4.0 million compared to $3.0 million
for fiscal 1994 and accounted for 28% of the revenue growth. This increase was
primarily a result of an increase in Optimis implementation fees.
COST OF REVENUE
Cost of revenue for fiscal 1995 increased 52% to $4.1 million from $2.7
million for fiscal 1994, primarily due to additional staffing and recruiting
costs. Cost of revenue for each of fiscal 1995 and 1994 included $120,000 in
amortization expense from the capitalization of software development costs. Cost
of revenue for fiscal 1995 decreased to 47% of revenue from 54% for fiscal 1994,
primarily due to the continued shift toward higher margin database products and
database related product revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1995 increased 84% to $1.6
million from $870,000 for fiscal 1994, primarily due to the addition of
technical and programming personnel related to new
11
<PAGE>
product development. During fiscal 1995, approximately $388,000 was capitalized
for software product development. No research and development expenses were
capitalized in fiscal 1994. Research and development expenses for fiscal 1995
increased to 19% of revenue from 17% for fiscal 1994, primarily due to expanded
hiring of technical and programming personnel.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1995 increased 117% to $2.6 million
from $1.2 million for fiscal 1994, primarily due to sales force expansion and
increases in marketing personnel as well as trade shows and travel. Sales and
marketing expenses in fiscal 1995 increased to 29% of revenue from 25% for
fiscal 1994, due to the foregoing factors.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1995 increased 31% to $1.7
million from $1.3 million for fiscal 1994, primarily due to increased management
staffing, facilities expenses and general expenses related to an increase in
business activity. General and administrative expenses for fiscal 1995 decreased
to 19% of revenue from 25% for fiscal 1994 due to the foregoing factors.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for fiscal 1996 and fiscal 1995. In the opinion of the Company's management,
this unaudited information has been prepared on the same basis as the audited
information included elsewhere in this annual report and includes all
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period:
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1996
------------------------------------------ -------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription and license..................... $ 1,121 1,320 1,168 1,212 1,369 2,173 2,360
Services..................................... 603 1,074 1,170 1,200 891 840 984
--------- --------- --------- --------- --------- --------- ---------
Net revenue................................ 1,724 2,394 2,338 2,412 2,260 3,013 3,344
Cost of revenue.............................. 866 995 1,028 1,240 1,136 1,126 1,237
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................. 858 1,399 1,310 1,172 1,124 1,887 2,107
--------- --------- --------- --------- --------- --------- ---------
Total operating costs........................ 1,255 1,348 1,566 1,752 1,815 1,897 1,994
Operating income (loss)...................... (397) 51 (256) (580) (691) (10) 113
Net income (loss)............................ (440) 26 (292) (674) (745) (78) 78
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common
stockholders................................ $ (467) (14) (345) (727) (800) (133) 78
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
Q4
---------
<S> <C>
Revenue:
Subscription and license..................... 2,135
Services..................................... 1,251
---------
Net revenue................................ 3,386
Cost of revenue.............................. 1,180
---------
Gross profit................................. 2,206
---------
Total operating costs........................ 2,679*
Operating income (loss)...................... (473)
Net income (loss)............................ (222)
---------
Net income (loss) attributable to common
stockholders................................ (222)
---------
---------
</TABLE>
- - - --------------------------
* Includes *908,000 in expenses for the merger of MCIS.
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1996
-------------------------------------------------- ------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription and license................. 65 % 55 % 50 % 50 % 61 % 72 % 71%
Services................................. 35 % 45 % 50 % 50 % 39 % 28 % 29%
--- --- --- --- --- --- ---
Net revenue............................ 100 % 100 % 100 % 100 % 100 % 100 % 100%
Cost of revenue.......................... 50 % 42 % 44 % 51 % 50 % 37 % 37%
--- --- --- --- --- --- ---
Gross margin............................. 50 % 58 % 56 % 49 % 50 % 63 % 63%
--- --- --- --- --- --- ---
Total operating costs.................... 73 % 56 % 67 % 73 % 80 % 63 % 60%
Operating income (loss).................. (23)% 2 % (11)% (24)% (30)% -- 3%
Net income (loss)........................ (26)% 1 % (12)% (28)% (33)% (3)% 2%
--- --- --- --- --- --- ---
Net income (loss) attributable to common
stockholders............................ (27)% (1)% (15)% (30)% (35)% (4)% 2%
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
<CAPTION>
Q4
-----------
<S> <C>
Revenue:
Subscription and license................. 63 %
Services................................. 37 %
---
Net revenue............................ 100 %
Cost of revenue.......................... 35 %
---
Gross margin............................. 65 %
---
Total operating costs.................... 79 %
Operating income (loss).................. (14)%
Net income (loss)........................ (7)%
---
Net income (loss) attributable to common
stockholders............................ (7)%
---
---
</TABLE>
12
<PAGE>
The Company's quarterly revenues and operating results have varied
significantly in the past and may continue to 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.
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
disproportionate in relation to revenues. In addition, 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 by
hospitals shortly before their budgetary year end, which generally falls on June
30 or December 31. Consequently, the Company's operating results have been
seasonal.
LIQUIDITY AND CAPITAL RESOURCES
Over the last two years, the Company has financed its operations primarily
through sales of preferred and common stock. During fiscal 1996, the Company
used $945,000 in operating activities, primarily in support of additional
personnel, an increase in sales and marketing, research and development,
administrative expenses and financing receivables arising from the significant
increase in sales.
As of March 31, 1996, the Company had $3.3 million in billed and unbilled
accounts receivable, including $804,000 in accounts receivable over 90 days
compared to the March 31, 1995 balance of $2.3 million in billed and unbilled
accounts receivable, including $136,000 over 90 days. This increase in accounts
receivable, particularly the accounts receivable over 90 days, is primarily the
result of a significant increase in sales, including an increase in sales to
integrated health networks that typically pay slower than independent hospitals.
The Company recently hired collection personnel to monitor accounts receivable
on an ongoing basis.
As of March 31, 1996, the Company had net working capital of $18.0 million,
including cash, cash equivalents and short-term investments of $20.0 million.
The Company currently has no material commitments for capital expenditures.
The Company believes that with its access to financing sources, strong cash
position, and lack of debt, it will be able to adequately fund its cash
requirements for at least the next twelve months. During the next 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
CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING STATEMENTS. THE
FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING STATEMENTS.
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
13
<PAGE>
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.
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 fiscal year ended March 31, 1996, approximately 70% 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
14
<PAGE>
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.
Failure to manage growth effectively, or to develop, maintain and upgrade
management information and other systems and controls, could have a material
adverse effect on the Company.
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 U.S.
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 U.S. 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
15
<PAGE>
gross margins than sales to the 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 the requirements of
health care providers and achieve market acceptance.
POTENTIAL ACQUISITIONS
The Company may expand its product line through the acquisition of
complementary businesses, products and technologies. Acquisitions involve
numerous risks, including difficulties in the assimilation of operations and
products, the ability to manage geographically remote units, the diversion of
management's attention from other business concerns, the risks of entering
markets in which the Company has limited or no direct expertise and the
potential loss of key employees of the acquired companies. In addition,
acquisitions may involve the expenditure of significant funds. The Company's
management has no prior experience in managing acquisitions. There can be no
assurance that any acquisition will result in long-term benefits to the Company
or that management will be able to manage effectively the resulting business. In
addition, such an acquisition 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 or key employees or the inability to hire additional
personnel as needed may have a material adverse effect on the Company.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
MECON, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 1,190 15,205
Short-term investments in marketable debt securities..................................... -- 4,775
Accounts receivable, net of allowances of $48 and $245 in 1995 and 1996, respectively.... 1,867 2,769
Unbilled accounts receivable............................................................. 420 526
Related party receivable................................................................. 10 1
Prepaid expenses......................................................................... 144 211
Other current assets..................................................................... 177 125
--------- ---------
Total current assets................................................................. 3,808 23,612
Property and equipment, net................................................................ 677 1,009
Software development costs, net............................................................ 392 924
Related party note receivable.............................................................. 35 --
Other assets............................................................................... 37 36
--------- ---------
$ 4,949 25,581
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable......................................................................... $ 471 557
Accrued salaries and benefits............................................................ 495 640
Accrued interest......................................................................... 260 519
Note payable............................................................................. 1,936 1,936
Deferred revenue......................................................................... 1,597 1,333
Other accrued liabilities................................................................ 303 666
--------- ---------
Total current liabilities............................................................ 5,062 5,651
Deferred rent, less current portion........................................................ 41 29
--------- ---------
Total liabilities.................................................................... 5,103 5,680
--------- ---------
Redeemable common and preferred stock...................................................... 3,069 --
--------- ---------
Stockholders' (deficit) equity:
Preferred stock, $.001 par value; 5,000,000 authorized; none issued and outstanding...... -- --
Common stock, $.001 par value; 50,000,000 shares authorized; 3,437,848 and 5,876,947
issued and outstanding in 1995 and 1996, respectively................................... 3 6
Additional paid-in capital............................................................... 177 24,511
Stockholders' note receivable............................................................ (38) --
Accumulated deficit...................................................................... (3,365) (4,616)
--------- ---------
Total stockholders' (deficit) equity................................................. (3,223) 19,901
--------- ---------
$ 4,949 25,581
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Revenue:
Subscription and license.................................................................. $ 4,821 8,037
Services.................................................................................. 4,047 3,966
--------- ---------
Net revenue........................................................................... 8,868 12,003
Cost of revenue............................................................................. 4,129 4,679
--------- ---------
Gross profit.......................................................................... 4,739 7,324
--------- ---------
Operating costs:
Research and development.................................................................. 1,647 1,855
Sales and marketing....................................................................... 2,588 3,349
General and administrative................................................................ 1,686 2,273
Merger and acquisition.................................................................... -- 908
--------- ---------
Total operating costs................................................................. 5,921 8,385
--------- ---------
Operating loss.............................................................................. (1,182) (1,061)
Interest expense............................................................................ (224) (274)
Interest income............................................................................. 27 365
Other income (expense)...................................................................... (1) 3
--------- ---------
Loss before provision for taxes............................................................. (1,380) (967)
Provision for income taxes.................................................................. -- --
--------- ---------
Net loss.............................................................................. $ (1,380) (967)
--------- ---------
--------- ---------
Accretion of redeemable preferred stock..................................................... (173) (110)
--------- ---------
Net loss attributable to common stockholders.......................................... $ (1,553) (1,077)
--------- ---------
--------- ---------
Net loss per share.......................................................................... $ (0.35) (0.22)
--------- ---------
--------- ---------
Shares used in computing per share data..................................................... 4,464 4,966
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS' STOCKHOLDERS'
----------------- PAID-IN NOTE ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of March 31, 1994,
as previously reported....... 3,293,798 $ 3 366 (38) (693) (362)
Pooling of interests
adjustments.................. 95,751 -- 45 -- (292) (1,247)
--------- ------ ---------- ------------ ----------- -------------
Balances as of March 31,
1994......................... 3,389,549 3 411 (38) (1,985) (1,609)
Compensatory stock option
grant........................ 50,413 -- 23 -- -- 23
Issuance of common stock with
put option................... 211,416 -- (10) -- -- (10)
Issuance of redeemable
preferred stock, Series B.... -- -- 92 -- -- 92
Issuance of convertible
preferred stock, Series C.... -- -- (45) -- -- (45)
Accretion of redeemable
preferred stock.............. -- -- (173) -- -- (173)
Repurchase of common stock.... (213,530) -- (121) -- -- (121)
Net loss...................... -- -- -- -- (1,380) (1,380)
--------- ------ ---------- ------------ ----------- -------------
Balances as of March 31,
1995......................... 3,437,848 3 177 (38) (3,365) (3,223)
Compensatory stock option
grant........................ 191,993 -- 90 -- -- 90
Accretion of redeemable
preferred stock.............. -- -- (76) -- (34) (110)
Repurchase of common stock.... (296,269) -- (34) -- (250) (284)
Conversion of preferred stock
into common stock, Series
C............................ 479,634 1 999 -- -- 1,000
Exercise of common stock
warrants..................... 57,013 -- -- -- -- --
Exercise of common stock
options...................... 6,728 -- 4 -- -- 4
Repayment of shareholder
notes........................ -- -- -- 38 -- 38
Public offering proceeds, net
of expenses of $2,872........ 2,000,000 2 23,126 -- -- 23,128
Termination of redemption
obligation for common
stock........................ -- -- 225 -- -- 225
Net loss...................... -- -- -- -- (967) (967)
--------- ------ ---------- ------------ ----------- -------------
Balances as of March 31,
1996......................... 5,876,947 $ 6 24,511 -- (4,616) 19,901
--------- ------ ---------- ------------ ----------- -------------
--------- ------ ---------- ------------ ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................. $ (1,380) (967)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 328 333
Compensation expense related to issuances of common stock and stock option grants...... 23 90
Changes in operating assets and liabilities:
Accounts receivable, net............................................................. (1,225) (902)
Unbilled accounts receivable......................................................... (218) (106)
Related party note receivable........................................................ 12 44
Prepaid and other assets............................................................. (300) (14)
Accounts payable..................................................................... 281 86
Accrued salaries and benefits........................................................ 186 145
Accrued interest..................................................................... 242 259
Deferred rent........................................................................ (18) (12)
Deferred revenue..................................................................... 704 (264)
Income taxes payable................................................................. (51) --
Other accrued liabilities............................................................ 291 363
--------- ---------
Net cash used in operating activities.............................................. (1,125) (945)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments....................................................... -- (4,775)
Acquisition of property and equipment.................................................... (541) (628)
Computer software development costs...................................................... (388) (569)
--------- ---------
Net cash used in investing activities.............................................. (929) (5,972)
--------- ---------
Cash flows from financing activities:
Borrowings from bank..................................................................... 836 850
Repayment of bank borrowings............................................................. -- (850)
Proceeds from issuance of Series B redeemable preferred stock, net of issuance costs..... 956 --
Proceeds from issuance of Series C preferred stock, net of issuance costs................ 955 --
Proceeds form issuance of common stock with put option, net of issuance costs............ 215 --
Proceeds from issuance of common stock, net of issuance costs............................ -- 23,132
Repayment of shareholder note............................................................ -- 38
Repurchase of common stock............................................................... (121) (284)
Redemption of Series A preferred stock................................................... (110) (954)
Redemption of Series B preferred stock................................................... -- (1,000)
--------- ---------
Net cash provided by financing activities.......................................... 2,731 20,932
--------- ---------
Net increase in cash and cash equivalents.................................................. 677 14,015
Cash and cash equivalents at beginning of year............................................. 513 1,190
--------- ---------
Cash and cash equivalents at end of year................................................... $ 1,190 15,205
--------- ---------
--------- ---------
Supplemental information:
Cash paid for interest................................................................... $ 7 33
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
(1) BUSINESS OF THE COMPANY
MECON, Inc. (the Company) provides subscriptions to an information database,
licenses to software products, and consulting services to the health care
industry. These products and services improve the performance and reduce costs
for health care organizations through the use of benchmark information,
processes, and tools.
(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.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. Cash equivalents and
short-term investments consist principally of money market instruments which
include: corporate notes, corporate bonds, certificates of deposits, commercial
paper and government agency securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets which are generally three to five years.
SOFTWARE DEVELOPMENT COSTS
Software development costs include developed software costs incurred
subsequent to attaining technological feasibility in accordance with Statement
of Financial Accounting Standards No. 86. Software development costs are
amortized on a straight-line basis over the estimated economic life of the
product, which is generally two to three years.
The Company evaluates the recoverability of capitalized software costs on
the basis of whether such costs are fully recoverable from projected
undiscounted cash flows of individual projects.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense in the period
incurred.
REVENUE RECOGNITION
Revenue generated from the initial year of a PEERx subscription contract is
recognized ratably over the estimated time to complete the implementation of a
customer's initial year information into the database. Revenue generated from a
subsequent year subscription contract is recognized ratably over the estimated
time to complete the implementation of that year's information into the
database. Costs to deliver the PEERx products are incurred evenly throughout the
period beginning with the signing of a contract and ending with the presentation
of a post report workshop. Revenue earned and unbilled is recorded as unbilled
accounts receivable and amounts billed and unearned are recorded as deferred
revenue.
Revenue from the licensing of the Company's OPTIMIS software product is
recognized upon delivery of the software. Revenue from Optimis implementation
services, including revenue bundled with the initial license fee, is recorded as
deferred revenue and recognized as the service is performed.
21
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although the Company's Action*Point software is installed by the customer,
the Company provides customer service support during the installation as well as
technical training to customer personnel during the initial period subsequent to
installation. Revenue is recognized upon completion of the training period and
final customer acceptance, whereupon no further material obligations exist.
The Company offers post-contract customer support and implementation
services to its OPTIMIS and Action*Point customers. Revenue from maintenance and
technical support services, including revenue bundled with the initial license
fee, is recorded as deferred revenue and recognized ratably over the period the
post-contract customer support services are provided.
Consulting revenue, as well as revenue from certain other optional products
and services, is recognized as the services are performed or as the Customer's
specific project is completed.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (Statement No. 109). Under Statement No. 109
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares and common equivalent shares outstanding during the period. Common
equivalent shares include convertible preferred shares, warrants and the
exercise of stock options using the treasury stock method. The conversion of
Series C convertible preferred shares into 479,634 common shares and the
cashless exercise of warrants into 57,013 common shares are included in the
computation for all periods presented. These shares have been included in the
computations for loss periods 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 loss per share includes 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 loss per share computation, net loss has been
increased by the amount of the periodic accretion for redeemable preferred
shares (see note 11). Upon the completion of the Company's initial public stock
offering, the Series A and B preferred shares were redeemed.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
short-term investments and trade receivables. The Company has investment
policies that limit investments to short-term low risk investments. The Company
markets and sells its products to principally hospitals. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral.
22
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
by Disposed of" (Statement No. 121), was issued. This statement provides
guidelines for recognition of impairment losses related to long-term assets and
is effective for fiscal years beginning after December 15, 1995. Company
management does not believe that the adoption of this new standard will have a
material effect on the Company's financial statements.
ACCOUNTING FOR STOCK OPTIONS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement No. 123), was issued. This
statement encourages, but does not require, a fair-value-based method of
accounting for employee stock options and is effective for fiscal years
beginning after December 15, 1995. While the Company is still evaluating
Statement No. 123, it currently expects to elect to continue to measure
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and to comply with the pro forma disclosure requirements of
Statement No. 123. If the Company makes this election, Statement No. 123 will
have no impact on the Company's financial statements.
(3) MERGER OF MANAGED CARE INFORMATION SYSTEMS, INC.
On March 29, 1996, the Company completed a merger with Managed Care
Information Systems, Inc. ("MCIS"). 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. In addition,
the Company recorded nonrecurring charges totaling $908,000 for merger and
merger related costs. The merger was accounted for as a pooling of interests,
and accordingly, all prior period financial information has been restated.
Separate results of the combining entities for the periods prior to the
merger are summarized below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
1995 1995
----------- -------------
<S> <C> <C>
Total revenues:
MECON, Inc................................................................. $ 7,842 $ 7,550
MCIS....................................................................... 1,026 1,067
----------- -------------
Combined................................................................. $ 8,868 $ 8,617
----------- -------------
----------- -------------
Net income (loss):
MECON, Inc................................................................. $ (53) $ 18
MCIS....................................................................... (1,327) (763)
----------- -------------
Combined................................................................. $ (1,380) $ (745)
----------- -------------
----------- -------------
</TABLE>
23
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
In accordance with the requirements of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company has classified its investments in certain debt
securities as "available-for-sale." Such investments are recorded at fair value,
with unrealized gains and losses, deemed by the Company as temporary in nature,
reported as a separate component of stockholders' equity.
At March 31, 1996, available-for-sale securities consisted of the following
(in thousands):
<TABLE>
<CAPTION>
ADJUSTED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government securities.............................. $ 12,994 $ -- $ -- $ 12,994
Mortgage-backed securities.............................. 2,044 -- -- 2,044
Corporate debt securities............................... 4,732 -- -- 4,732
--------- ----------- ----------- ---------
$ 19,770 $ -- $ -- $ 19,770
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
At March 31, 1996, these securities were classified in the Consolidated
Balance Sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents.......................................................... $ 14,995
Short-term investments in marketable debt securities...................... 4,775
---------
$ 19,770
---------
---------
</TABLE>
The contractual maturity of all available-for-sale debt securities as of
March 31, 1996 was one year or less.
The proceeds received during 1996 from the sale and maturity of securities
held as available-for-sale were $0. During 1996, there were no gross realized
gains or losses on sales of securities held as available-for-sale.
It is assumed that the carrying amounts of all other financial instruments
approximate fair value because of their short maturity.
(5) PROPERTY AND EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS
The following is a summary of property and equipment (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Office furniture and equipment..................................................... $ 381 $ 491
Computers.......................................................................... 949 1,422
Leasehold improvements............................................................. 5 31
--------- ---------
1,335 1,944
Less accumulated depreciation...................................................... (658) (935)
--------- ---------
$ 677 $ 1,009
--------- ---------
--------- ---------
</TABLE>
24
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(5) PROPERTY AND EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS (CONTINUED)
The following is a summary of software development costs (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Purchased software................................................................. $ 28 $ 47
Internally developed software...................................................... 1,008 1,577
--------- ---------
1,036 1,624
Less accumulated amortization...................................................... (644) (700)
--------- ---------
$ 392 $ 924
--------- ---------
--------- ---------
</TABLE>
(6) FINANCINGS
BANK BORROWINGS
At March 31, 1996, the Company had a $1.5 million bank line of credit which
bears interest at the prime rate plus .75%. The line of credit, which expires on
August 6, 1996, contains restrictive covenants, which include certain levels of
working capital, tangible net worth and other certain financial ratios. The
financing is collateralized by all business assets of the Company. At March 31,
1996, there were no borrowings under this line of credit.
NOTE PAYABLE
At March 31, 1996, the Company had a $2 million line of credit with a third
party which was a result of assuming certain liabilities of MCIS during the
merger. The line of credit provided for borrowings in the form of individual
notes bearing interest rates ranging from 9.15% to 12.45%. The Company had
outstanding borrowings totaling $1,936,000 at both March 31, 1995 and 1996.
During the year ended March 31, 1995, MCIS discontinued payments on the line
of credit. As a result, MCIS was in default of the line of credit at March 31,
1995 and 1996. The agreement calls for a 2% penalty fee upon default to be
accrued monthly. The Company has accrued for all interest and penalties due
totaling $260,000 and $519,000 at March 31, 1995 and 1996, respectively.
The note payable, as well as the accrued interest and penalties, were fully
satisfied by the Company on April 1, 1996.
(7) COMMITMENTS
The Company leases office space in California, Illinois and Virginia under
operating leases with terms of 60 months. Certain office equipment is leased
under operating leases with terms of approximately 36 months.
The leases on the California and Illinois office space included free rent at
their inception as well as scheduled base rent increases over their terms. Rent
payments are being charged to expense using the straight-line method over the
terms of the leases. The Company has recorded deferred rent to reflect the
excess of rent expense over cash payments since inception of the leases.
25
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(7) COMMITMENTS (CONTINUED)
Future minimum lease commitments under operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- - - ----------------------------------------------------------------------------
<S> <C>
1997........................................................................ $ 349
1998........................................................................ 301
1999........................................................................ 161
2000........................................................................ 79
2001........................................................................ --
---------
Total..................................................................... $ 890
---------
---------
</TABLE>
Rent expense under operating leases for the years ended March 31, 1995 and
1996 was $264,000 and $363,000, respectively.
(8) RELATED PARTY TRANSACTIONS
During 1995 and 1996, the Company had several transactions with IT
Solutions, Inc. (ITS).
ITS is partially owned by certain stockholders of the Company. ITS subleases
office space from the Company and purchased office and administrative services
totaling approximately $82,000 and $27,000 during the years ended March 31, 1995
and 1996, respectively. The Company purchased contract software programming
services from ITS totaling approximately of $515,000 and $338,000 during the
years ended March 31, 1995 and 1996, respectively. As of March 31, 1995 and
1996, receivables from ITS were $15,000 and $200, respectively, and payables to
ITS were $193,000 and $0, respectively.
(9) INCOME TAXES
Income tax benefit (expense) for the years ended March 31, 1995 and 1996
consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current:
Federal................................................................................ $ 3 --
State.................................................................................. 4 --
--- ---
7 --
Deferred:
Federal................................................................................ 10 --
State.................................................................................. (17) --
--- ---
(7) --
--- ---
Total tax benefit.................................................................... $ -- $ --
--- ---
--- ---
</TABLE>
26
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(9) INCOME TAXES (CONTINUED)
Income tax expense for 1996 differed from the amounts computed by applying
the U.S. Federal income tax rate of 34% of pretax losses as a result of the
following (in thousands):
<TABLE>
<S> <C>
Computed "expected" tax benefit............................................. $ (328)
Nondeductible meals and entertainment expenses.............................. 12
Nondeductible acquisition and merger expenses............................... 281
Change in beginning of year valuation allowance............................. (114)
Expected tax benefit due to acquisition not includible for tax purposes..... 223
Change in valuation allowance due to acquisition............................ (72)
Other....................................................................... (2)
---------
$ --
---------
---------
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred income tax assets and deferred tax liabilities as of
March 31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss.................................................................. $ -- $ 88
Compensated absences................................................................ 68 84
Research credit carryforwards....................................................... 122 198
Software cost amortization.......................................................... 26 --
Capital loss carryforward........................................................... 268 259
Allowance for bad debts............................................................. -- 99
Other............................................................................... 24 --
--------- ---------
Total gross deferred tax assets................................................. 508 728
Less valuation allowance.............................................................. (466) (343)
--------- ---------
Net deferred tax assets......................................................... 42 385
Deferred tax liabilities:
Depreciation........................................................................ (21) (69)
Software costs...................................................................... -- (274)
Unbilled accounts receivable........................................................ -- (42)
--------- ---------
Total gross deferred tax liabilities............................................ (21) 385
--------- ---------
Net deferred tax asset.......................................................... $ 21 --
--------- ---------
--------- ---------
</TABLE>
The increase (decrease) in the valuation allowance of approximately $57,000
and ($123,000) for the years ended March 31, 1995 and 1996, respectively, was
primarily due to the uncertainty regarding the ultimate realization of the gross
deferred asset arising from capital losses that are only deductible for tax
purposes to the extent of future capital gains and the utilization of research
credit carryforwards.
At March 31, 1996 the Company has federal and state net operating loss
carryforwards of approximately $298,000 and $124,000, respectively. The federal
net operating losses expire in 2011 and the state operating losses expire in
2001.
27
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(9) INCOME TAXES (CONTINUED)
At March 31, 1996, the Company has research credit carryforwards for federal
and California income tax purposes of approximately $98,000 and $99,000,
respectively, which are available to offset future taxable income, if any, from
1997 through 2001.
A portion of the operating loss carryforward is attributable to the exercise
of nonqualified stock options which when realized, will result in approximately
$21,000 of deferred tax assets being credited to additional paid in capital.
(10) EMPLOYEE RETIREMENT AND SAVINGS PLAN
The Company has a qualified 401(k) savings plan. All full time employees
with one year of service may defer a portion of their salary. At the discretion
of the Board of Directors, the Company may also make a matching contribution for
all eligible employees. Contributions by the Company to the plan were
approximately $17,000 and $0 for the years ended March 31, 1995 and 1996,
respectively.
(11) REDEEMABLE COMMON AND PREFERRED STOCK
SALE OF REDEEMABLE COMMON AND PREFERRED STOCK
On September 9, 1994, the Company sold 211,416 shares of common stock, 1
million shares of Series B preferred stock, and 680,600 shares of Series C
convertible preferred stock in a private offering and received net proceeds of
$2.15 million (net of issuance costs). These stockholders had the right to put
back to the Company their shares of common stock and Series C convertible
preferred stock in the event of certain transactions. This right terminated upon
the Company's initial public offering.
Redeemable securities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------- COMMON
SERIES A SERIES B SERIES C STOCK TOTAL
----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1994............................... $ 917 $ -- $ -- $ -- $ 917
Sale of redeemable preferred stock......................... -- 864 1,000 -- 1,864
Sale of redeemable common stock............................ -- -- -- 225 225
Accretion of redeemable preferred stock.................... 115 58 -- -- 173
Redemption................................................. (110) -- -- -- (110)
----------- --------- --------- ----------- ---------
Balance as of March 31, 1995............................... 922 922 1,000 225 3,069
Accretion of redeemable preferred stock.................... 32 78 -- -- 110
Redemption................................................. (954) (1,000) -- -- (1,954)
Conversion of Series C preferred stock to common........... -- -- (1,000) -- (1,000)
Termination of redemption obligation on common stock....... -- -- -- (225) (225)
----------- --------- --------- ----------- ---------
Balance as of March 31, 1996............................... $ -- $ -- $ -- $ -- $ --
----------- --------- --------- ----------- ---------
----------- --------- --------- ----------- ---------
</TABLE>
REDEEMABLE PREFERRED STOCK
SERIES A
Under a redemption provision, the Company was required to redeem all of the
preferred stock based on a formula relating to the Company's gross revenue at
prices ranging from $5.00 per share to $6.40 per share, periodically between
1993 and 1997, at which time the balance of the shares of
28
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(11) REDEEMABLE COMMON AND PREFERRED STOCK (CONTINUED)
preferred stock, if any, would have been redeemed in full. With the proceeds
from the Company's initial public offering, the Company redeemed the remaining
outstanding shares. As of March 31, 1996 there were no shares outstanding.
SERIES B
Under a redemption provision, the Company was required to redeem all of the
Series B preferred stock at $1.00 per share periodically between 1999 and 2001
or earlier in the event of certain transactions. With the proceeds from the
Company's initial public offering the Company redeemed the remaining outstanding
shares. As of March 31, 1996 there were no shares outstanding.
SERIES C
Concurrent with the Company's initial public offering, the 680,600 shares of
Series C convertible preferred stock were automatically converted into 479,634
shares of the Company's common stock.
(12) STOCKHOLDERS' (DEFICIT) EQUITY
COMMON STOCK
In October 1995, the Board of Directors approved the reincorporation of the
Company as a Delaware corporation. The reincorporation resulted in a change in
the authorized number of preferred shares from 10,000,000 to 5,000,000 and
common shares from 30,000,000 to 50,000,000. The par value for both preferred
and common shares changed from no par value to $.001 par value. In addition, the
Company's Board of Directors authorized a 1 for 1.419 reverse split of its
common stock. All applicable share and per share amounts in the accompanying
financial statements have been retroactively adjusted to reflect this
reincorporation and reverse stock split.
In December 1995, the Company sold in an initial public offering 2,000,000
shares of its common stock which generated net proceeds of approximately $23
million. A portion of the proceeds were used to redeem the outstanding Series A
and Series B preferred stock.
1995 STOCK PLAN
The Company's 1995 Stock Plan (the "1995 Plan") was adopted in October 1995
and became effective in December 1995. The 1995 Plan provides for the grant to
employees of the Company (including officers and employee directors) of
incentive stock options and for the grant of nonstatutory stock options and
stock purchase rights ("Rights") to employees and consultants of the Company. A
total of 650,000 shares of Common Stock has been reserved for future issuance
under the 1995 Plan. The exercise price of all nonstatutory stock options
granted under the 1995 Plan shall be determined by the Administrator. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of fair market value on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the 1995 Plan may not exceed ten
years.
In conjunction with the MCIS merger, the Company assumed the MCIS stock
option plan. Information with respect to this plan has been included in the
stock option table below. MCIS's stock option plan was terminated upon
consummation of the merger.
29
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(12) STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
The activity under the 1995 Stock Plan was as follows:
<TABLE>
<CAPTION>
INCENTIVE
SHARES STOCK
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ------------ ---------------
<S> <C> <C> <C>
Shares reserved at December 12, 1995 (inception of plan).... 650,000 -- $ --
Options granted............................................. (295,902) 295,902 1.24-17.25
Options canceled............................................ -- -- --
---------- ------------ ---------------
Balance at March 31, 1996................................... 354,098 295,902 $ 1.24-17.25
---------- ------------ ---------------
---------- ------------ ---------------
</TABLE>
1995 DIRECTOR OPTION PLAN
The Company's 1995 Director Option Plan (the "Director Plan") was adopted in
October 1995 and became effective in December 1995. A total of 50,000 shares of
Common Stock has been reserved for issuance under the Director Plan. The
Director Plan provides for the grant of nonstatutory stock options to certain
non-employee directors of the Company ("Outside Directors") pursuant to an
automatic, nondiscretionary grant mechanism. The Director Plan provides that
each Outside Director shall be granted a nonstatutory stock option to purchase
10,000 shares of Common Stock upon the date which such person first becomes an
Outside Director or, if later, on the effective date of the Director Plan (the
"First Option"). Thereafter, each Outside Director shall be automatically
granted an option to purchase 2,500 shares of Common Stock on November 11 of
each year (a "Subsequent Option"), if on such date, such Outside Director shall
have served on the Company's Board of Directors for at least six (6) months. The
Director Plan provides that each option shall become exercisable in monthly
installments over a period of three years from the date of grant. The exercise
price per share of all options granted under the Director Plan shall be equal to
the fair market value of a share of the Company's Common Stock on the date of
grant. Options granted to Outside Directors under the Director Plan have a ten
year term, but will expire unless exercised within three months following the
termination of an Outside Director's status as a director. If not terminated
earlier, the Director Plan will have a term of ten years. Through March 31,
1996, the Company had not granted any options under the Director Plan.
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in October 1995 and became effective in December 1995. A total of
150,000 shares of Common Stock has been reserved for issuance under the Purchase
Plan.
The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 7 1/2% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair market value of the Common Stock at the beginning of each
offering period or the end of a six month purchase period, whichever is lower.
Unless terminated sooner, the Purchase Plan will terminate ten years after its
effective date. The Board of Directors has authority to amend or terminate the
Purchase Plan provided no such action may adversely affect the rights of any
participant. There were no purchases of shares by employees during the year
ended March 31, 1996 under the Purchase Plan.
1994 INCENTIVE STOCK OPTION PLAN
The Company's 1994 Incentive Stock Option Plan (the "1994 Plan") provides
for the grant of incentive stock options to employees of the Company. The Board
of Directors has determined that no further options will be granted under the
1994 Plan. Outstanding options granted under the 1994 Plan generally become
exercisable at a rate of 1/5 of the shares subject to the option at a specified
30
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
(12) STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
date after the date of grant and an additional 1/5 of the shares at the end of
each subsequent anniversary of the initial vesting date, subject to continued
service as an employee, consultant or director. The term of each outstanding
stock option is seven years. The exercise price of all options granted under the
1994 Plan was at least equal to the fair market value of the Common Stock of the
Company on the date of grant. Payment of the exercise price may be made in cash,
promissory notes or other shares of the Company's Common Stock.
The activity under the option plan was as follows:
<TABLE>
<CAPTION>
INCENTIVE
SHARES STOCK EXERCISE
AVAILABLE OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
---------- ------------ -----------
<S> <C> <C> <C>
Shares reserved at July 25, 1994 (inception of plan)............ 422,833 -- $ --
Options granted................................................. (250,176) 250,176 .57
Options canceled................................................ 17,618 (17,618) .57
---------- ------------ -----------
Balance at March 31, 1995....................................... 190,275 232,558 .57
Options granted................................................. (212,615) 212,615 .68-8.00
Options canceled................................................ 35,689 (35,689) .68
Options exercised............................................... -- (6,728) .68
---------- ------------ -----------
Balance at March 31, 1996....................................... 13,349 402,756 $ .57-8.00
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
WARRANTS
In September 1994, the Company issued warrants to purchase up to $350,000 of
the Company's common stock. The warrant exercise prices ranged from $2.99 to
$5.27 per share based on the future financial performance of the Company subject
to certain anti-dilution adjustments upon conversion of Series C preferred stock
into common stock. In conjunction with the Company's initial public offering,
holders of the warrants completed a cashless exercise of the warrants into
57,013 shares of common stock.
(13) MAJOR CUSTOMERS
As of March 31, 1995, the Company had three significant contracts; one which
covered approximately 50 academic hospitals; the second covered a health system
with 13 hospitals; and the third was a consulting engagement. The contract which
covered 50 academic hospitals represented 12% of 1995 revenues.
As of March 31, 1996, the Company had a significant contract which covered
approximately 50 academic hospitals. This contract, totaling 11% of 1996
revenues, was renewed in January 1995 for services to be rendered through March
1998.
(14) CONTINGENCIES
In the ordinary course of business, certain claims, suits and complaints may
be filed or are pending against the Company. In the opinion of management, all
matters are adequately covered by insurance, or if not covered, are in the
opinion of management and counsel not probable or would not be material to the
financial position or results of operations of the Company.
(15) SUBSEQUENT EVENTS
On April 4, 1996, the Company approved a loan of $40,000 to one of its
officers. The loan is due in equal monthly installments over 5 years, commencing
August 1, 1996. The loan is collateralized by the pledge of vested stock
options, is due in full upon termination of the officer's employment, permits
prepayment in part or in full without notice or penalty and bears interest at a
fixed rate of 9.25 % per annum. It is the company's policy to record interest
income on this note as earned.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MECON, Inc.:
We have audited the accompanying consolidated balance sheets of MECON, Inc.
and subsidiary as of March 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' (deficit) equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MECON, Inc.
and subsidiary as of March 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
May 13, 1996
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in nor were there any disagreements with the Company's
accountants on accounting or financial disclosure matters during the two years
ended March 31, 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and directors of the Company and their ages as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- - - ---------------------------------- --- ----------------------------------------------
<S> <C> <C>
Vasu R. Devan 49 Chairman of the Board of Directors, President
and Chief Executive Officer
Raju Rajagopal 49 Senior Vice President, Western Region and
Director
David J. Allinson 34 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Jeffrey J. Parkinson 46 Senior Vice President, Eastern Region
Rodney Klein 48 Senior Vice President, Central Region
William H. Kimball (1)(2) 51 Director
Walter G. Kortschak (1)(2) 36 Director
David L. Lowe 36 Director
Robert L. Montgomery (1)(2) 59 Director
</TABLE>
- - - ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
VASU R. DEVAN. Mr. Devan co-founded the Company in 1983 and has served as
President and Chief Executive Officer since the Company's inception. From 1979
to 1983, Mr. Devan was the principal at Vasu R. Devan & Associates, a health
care management consulting firm. Previously he held management positions at
Technicon Medical Information Systems Corporation and Medicus Systems
Corporation, each a health care information systems company, and at Booz Allen
and Hamilton, a management consulting company. Mr. Devan received a Master of
Science in industrial engineering from Wayne State University.
RAJU RAJAGOPAL. Mr. Rajagopal co-founded the Company in 1983 and has served
as Senior Vice President, Western Region since November 1994. Mr. Rajagopal also
served as the Company's Senior Vice President, Sales and Marketing from April
1993 to November 1994, as Senior Vice President, Marketing and Operations from
April 1991 to April 1993, and as Senior Vice President, Development and Customer
Support from 1983 to April 1991. Previously, Mr. Rajagopal worked in designing
and implementing operational improvement programs for Bechtel Corporation, an
international construction company. Mr. Rajagopal received a Master of Science
in chemical engineering from Wayne State University.
DAVID J. ALLINSON. Mr. Allinson joined the Company as Vice President,
Finance and Administration and Chief Financial Officer in November 1994. From
May 1990 to November 1994, Mr. Allinson held various management positions, most
recently Director of Finance, for Meris Laboratories, Inc.,
33
<PAGE>
an independent clinical laboratory. Previously, Mr. Allinson held a number of
positions with the public accounting firm of Price Waterhouse. Mr. Allinson
received a Bachelor of Science in accounting from San Jose State University and
is a Certified Public Accountant.
JEFFREY J. PARKINSON. Mr. Parkinson became the Company's Senior Vice
President, Eastern Region in November 1994. From August 1989 to November 1994,
Mr. Parkinson served the Company as Senior Vice President, Advisory Services.
From January to July 1989, Mr. Parkinson was a manager with Coopers & Lybrand's
Health Care Consulting Services. Between 1981 and 1988, Mr. Parkinson was Vice
President of Consulting Services for Voluntary Hospitals of America. Mr.
Parkinson received a Master of Science in industrial engineering from the
University of Minnesota and a Master of Business Administration from the
University of South Florida.
RODNEY KLEIN. Mr. Klein became the Company's Senior Vice President, Central
Region in July 1995. From May 1994 to July 1995, Mr. Klein served the Company as
Vice President, Central Region. From January 1987 to May 1994, Mr. Klein was
Vice President of Finance of the University Hospital Consortium. From 1978 to
1987, Mr. Klein was Vice President of Finance for The Jewish Hospital of St.
Louis. Mr. Klein received a Master of Business Administration -- Accounting from
the University of Michigan.
WILLIAM H. KIMBALL. Mr. Kimball was elected a director of the Company in
April 1993. Mr. Kimball has been in private legal practice for over twenty years
and has represented physicians, hospitals, independent physicians associations
and companies doing business in the health care field. Mr. Kimball works
regularly with medical groups on strategic planning and managed care issues. Mr.
Kimball received a Doctor of Jurisprudence from the University of California,
Berkeley.
WALTER G. KORTSCHAK. Mr. Kortschak has been a director of the Company since
September 1994. Mr. Kortschak is a General Partner of Summit Partners, where he
has been employed since June 1989. Summit Partners and its affiliates manage a
number of venture capital funds, including Summit Ventures III, L.P. and Summit
Investors II, L.P., which are principal stockholders of the Company. Mr.
Kortschak is also a director of McAfee Associates, Inc. and Diamond Multimedia
Systems, Inc. and serves as a director of several privately-held companies. Mr.
Kortschak received a Master of Science in engineering from the California
Institute of Technology and a Master of Business Administration from the
University of California, Los Angeles.
DAVID L. LOWE. Mr. Lowe became a director of the Company in April 1996.
Since November 1994, Mr. Lowe has served as Chief Executive Officer of ADAC
Laboratories, where he has been employed since 1988. At ADAC laboratories Mr.
Lowe also served as President and Chief Operating Officer from February 1992 to
November 1994, as General Manager of the Nuclear Medicine Division from 1990 to
February 1992 and as a General Manager of the Radiology Information Systems
division from 1988 to 1990. Mr. Lowe is also a director of Vivra, Inc. Mr. Lowe
received a Bachelors degree in Economics from the University of California,
Davis and Masters of Business Administration from Stanford University's Graduate
School of Business.
ROBERT L. MONTGOMERY. Mr. Montgomery became a director of the Company in
April 1993. From January 1989 to the present, Mr. Montgomery has served as
President and Chief Executive Officer of Alta Bates Health System, a non-profit
health care holding company. Mr. Montgomery is also a director of Health Systems
International and Health Risk Management. Mr. Montgomery received a Master of
Public Health, Health Administration from the University of California,
Berkeley.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board and are elected annually. Except for Mr. Rajagopal, who
is the brother-in-law of Mr. Devan, there are no family relationships between
the directors or executive officers of the Company.
34
<PAGE>
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees and
administers the Company's 1994 Incentive Stock Option Plan, 1995 Stock Plan and
1995 Employee Stock Purchase Plan. The Audit Committee aids management in the
establishment and supervision of the Company's financial controls, evaluates the
scope of the annual audit, reviews audit results, consults with management and
the Company's independent auditors prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into aspects
of the Company's financial affairs.
DIRECTOR COMPENSATION
All non-employee directors receive $500 cash remuneration for attendance at
each meeting of the Board of Directors and for each Board Committee meeting held
on a different day and are reimbursed for all reasonable expenses incurred by
them in attending Board and Committee meetings. Non-employee directors
participate in the Company's 1995 Director Option Plan (the "Director Plan").
Under the Director Plan, each non-employee director who joins the Board in the
future will automatically be granted a nonstatutory option to purchase 10,000
shares of Common Stock on the date upon which such person first becomes a
director. In addition, each non-employee director, including current
non-employee directors, automatically receives a nonstatutory option to purchase
2,500 shares of Common Stock on November 11 of each year, provided the director
has been a member of the Board for at least six months. The exercise price of
each option granted under the Director Plan is equal to the fair market value of
the Common Stock on the date of grant. The share grants vest monthly over a
period of three years from the date of grant, provided the optionee remains a
director of the Company. Options granted under the Director Plan have a term of
ten (10) years unless terminated sooner, whether upon termination of the
optionee's status as a director or otherwise pursuant to the Director Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company reincorporated into Delaware in part to take advantage of
certain provisions in the Delaware General Corporation Law (the "Delaware Code")
relating to limitations on liability of corporate officers and directors. The
Company believes that the reincorporation into Delaware, the provisions of its
Certificate of Incorporation and Bylaws and the separate indemnification
agreements outlined below are necessary to attract and retain qualified persons
as directors and officers.
The Company's Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the Delaware Code. Under current Delaware
law, a director's liability to a company or its stockholders may not be limited
with respect to (i) any breach of his duty of loyalty to the company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments or
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware Code or (iv) transactions from which the director derived an
improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under the Delaware Code. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions, regardless of whether the
Bylaws would permit indemnification. The Bylaws authorize the use of
indemnification agreements and the Company has entered into such agreements with
each of its directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any overtly threatened
litigation or proceeding that might result in a claim for indemnification.
35
<PAGE>
SECTION 16(A) REPORTING DELINQUENCIES
Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by the Company, or written
representations from certain reporting persons, the Company believes that during
fiscal 1996 all Section 16 filing requirements were met, except that David Lowe
failed to file one Form 3 and Gary Lakin filed one late Form 3.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended March 31, 1996 and 1995 concerning the compensation for services
rendered in all capacities to the Company earned by (i) the individual who
served as Chief Executive Officer and (ii) each of the Company's four other most
highly compensated executive officers with annual compensation in excess of
$100,000 for such fiscal year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS
------------------------------------------------------ LONG-TERM
OTHER ANNUAL COMPENSATION ALL OTHER
FISCAL BONUS COMPENSATION ------------- COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY ($) ($) ($)(1) OPTIONS (#) ($)(2)(3)
- - - --------------------------------- --------- ----------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vasu R. Devan ................... 1996 $ 169,167 -- -- -- $ 2,880
Chairman of the Board, Chief 1995 $ 150,000 $ 6,750 -- -- $ 3,980
Executive Officer and President
Raju Rajagopal .................. 1996 $ 136,979 $ 2,500 -- 10,000 $ 1,740
Senior Vice President, Western 1995 $ 125,000 $ 31,060 -- -- --
Region
Rodney Klein .................... 1996 $ 135,250 $ 2,700 -- 15,000 $ 1,745
Senior Vice President, Central 1995 $ 119,163 $ 10,000 -- 105,708 --
Region
Jeffrey J. Parkinson ............ 1996 $ 127,667 $ 2,100 -- 15,000 $ 2,098
Senior Vice President, Eastern 1995 $ 120,000 $ 30,913 -- 70,472 $ 1,765
Region
Robert Quist (4) ................ 1996 $ 113,333 -- -- -- --
Vice President, MCIS Division 1995 $ 12,500 -- -- -- --
</TABLE>
- - - ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for such year.
(2) All other compensation includes the contributions allocated under the
Company's 401(k) plan on behalf of Messrs. Devan, Rajagopal, Parkinson and
Klein in the amounts of $1,180, $0, $1,532 and $0 for fiscal year 1995, and
$1,875, $1,740, $1,875 and $1,745 for fiscal year 1996, respectively.
(3) All other compensation includes premiums paid by the Company on life
insurance policies for the benefit of Messrs. Devan and Parkinson in the
amounts of $2,792 and $233 for fiscal year 1995 and $1,005 and $233 for
fiscal year 1996, respectively.
(4) Mr. Quist's employment with the Company commenced in February 1995.
36
<PAGE>
OPTION GRANTS
The following table sets forth information concerning stock options granted
to the Named Executive Officers during the fiscal year ended March 31, 1996
pursuant to the Company's Stock Option Plan:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($/SH)(1) DATE
- - - ---------------------------------------------------------- -------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Raju Rajagopal............................................ 10,000 2.11% $ 13.00 12/6/01
Rodney Klein.............................................. 15,000 3.17% $ 13.00 12/6/01
Jeffrey J. Parkinson...................................... 15,000 3.17% $ 13.00 12/6/01
Robert Quist.............................................. 16,950 3.58% $ 1.24 5/14/05
</TABLE>
- - - ------------------------
(1) All options were granted at an exercise price equal to market value as
determined by the Board of Directors of the Company on the date of grant.
The Board of Directors determined the market value of the Common Stock based
on various factors, including the illiquid nature of an investment in the
Common Stock, the Company's historical financial performance, the
preferences (including liquidation) of the outstanding Series A Preferred
Stock, the Company's future prospects and the prices paid for securities of
the Company in arm's-length transactions between third parties.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to stock
options held by each of the Company's Named Executive Officers. There were no
option exercises during the fiscal year ended March 31, 1996 by any of the Named
Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END (#): FISCAL YEAR-END ($)(1):
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Raju Rajagopal............................................ 2,000 8,000 13,500 54,000
Rodney Klein.............................................. 24,142 95,566 425,746 1,702,984
Jeffrey J. Parkinson...................................... 17,094 68,378 290,581 1,162,322
Robert Quist.............................................. 16,950 -- 313,745 --
</TABLE>
- - - ------------------------
(1) These values have been calculated on the basis of $19.75 per share, less the
applicable option exercise price.
EMPLOYMENT AGREEMENTS
In September 1994, the Company entered into employment agreements with Vasu
R. Devan and Raju Rajagopal, respectively, providing for severance payments at
their respective salary rates per month (less applicable withholding) for the
initial twelve months following termination in the event that they are
terminated other than for cause, death or disability or voluntary termination.
Following the end of such initial severance period, Messrs. Devan or Rajagopal
would be entitled, for an additional twelve month period, to receive the lesser
of their then current salaries or $8,333.33 per
37
<PAGE>
month (less applicable withholding); provided, however, that such severance
payments shall be decreased by any earnings during such period resulting from
their services as an employee or consultant to any third party. The employment
agreements will terminate by their terms in September 1997.
COMPENSATION PLANS
1995 STOCK PLAN
The Company's 1995 Stock Plan (the "1995 Plan") was adopted in October 1995
and became effective in December 1995. The 1995 Plan provides for the grant to
employees of the Company (including officers and employee directors) of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for the grant of nonstatutory
stock options and stock purchase rights ("Rights") to employees and consultants
of the Company. The 1995 Plan is administered by the Board of Directors or a
Committee of the Board of Directors (the "Administrator"), which selects the
optionees, determines the number of shares to be subject to each option or Right
and determines the exercise price of each option or Right. A total of 650,000
shares of Common Stock has been reserved for future issuance under the 1995
Plan. The exercise price of all incentive stock options granted under the 1995
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of all nonstatutory stock options granted
under the 1995 Plan shall be determined by the Administrator. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of stock of the Company, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the maximum term of the option must not exceed five years. The term of
all other options granted under the 1995 Plan may not exceed ten years.
In the event of the merger or sale of substantially all of the assets of the
Company, all outstanding options shall be assumed or substituted by the
successor corporation, or if they are not assumed or substituted, they shall
become fully vested and exercisable. Unless terminated sooner, the 1995 Plan
will terminate ten years from its effective date. The Board has authority to
amend or terminate the 1995 Plan, provided no such action would impair the
rights of the holder of any outstanding options without the written consent of
such holder.
1995 DIRECTOR OPTION PLAN
The Company's 1995 Director Option Plan (the "Director Plan") was adopted in
October 1995 and became effective in December 1995. A total of 50,000 shares of
Common Stock has been reserved for issuance under the Director Plan. The
Director Plan provides for the grant of nonstatutory stock options to certain
non-employee directors of the Company ("Outside Directors") pursuant to an
automatic, nondiscretionary grant mechanism. The Director Plan provides that
each Outside Director shall be granted a nonstatutory stock option to purchase
10,000 shares of Common Stock on the date upon which such person first becomes
an Outside Director or, if later, on the effective date of the Director Plan
(the "First Option"). Thereafter, each Outside Director shall be automatically
granted an option to purchase 2,500 shares of Common Stock on November 11 of
each year (a "Subsequent Option"), if on such date, such Outside Director shall
have served on the Company's Board of Directors for at least six (6) months. The
Director Plan provides that each option shall become exercisable in monthly
installments over a period of three years from the date of grant. The exercise
price per share of all options granted under the Director Plan shall be equal to
the fair market value of a share of the Company's Common Stock on the date of
grant. Options granted to Outside Directors under the Director Plan have a ten
year term, but will expire unless exercised within three months following the
termination of an Outside Director's status as a director. In the event of the
merger or sale of substantially all of the assets of the Company, all
outstanding options shall be assumed or substituted by the successor
corporation, or if they are not assumed or substituted, they shall become fully
vested and exercisable. If not terminated earlier, the Director Plan will have a
term of ten years.
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
permits eligible employees to purchase Common Stock. A total of 150,000 shares
of Common Stock has been reserved
38
<PAGE>
for issuance under the Purchase Plan. The Purchase Plan qualifies under Section
423 of the Code. The Purchase Plan provides for offerings that each have a six
month duration commencing on the first trading day on or after June 1 and
December 1 of each year. Employees are eligible to participate if they are
regularly employed by the Company for at least twenty hours per week and more
than five months in any calendar year. Employees are permitted to purchase
Common Stock through payroll deductions, which may not exceed 7 1/2% of an
employee's base compensation, including commissions, bonuses and overtime, at a
price equal to 85% of the fair market value of the Common Stock at the beginning
of each offering period or the end of a six month purchase period, whichever is
lower. In the event of certain changes in control of the Company, the Purchase
Plan provides that each option under the plan be assumed or an equivalent option
substituted by the successor or purchaser corporation, unless the Board of
Directors decides to shorten the offering period by setting a new exercise date
or cancel each outstanding right to purchase and refund all sums collected from
participants in the offering period then in progress. Unless terminated sooner,
the Purchase Plan will terminate ten years after its effective date. The Board
of Directors has authority to amend or terminate the Purchase Plan provided no
such action may adversely affect the rights of any participant.
1994 INCENTIVE STOCK OPTION PLAN
The Company's 1994 Incentive Stock Option Plan (the "1994 Plan") provides
for the grant of incentive stock options to employees of the Company. As of
September 30, 1995, an aggregate of approximately 422,833 shares of Common Stock
had been reserved for issuance under the 1994 Plan and options to purchase an
aggregate of 416,996 shares of Common Stock were outstanding under the 1994
Plan. The Board of Directors has determined that no further options will be
granted under the 1994 Plan. Outstanding options granted under the 1994 Plan
generally become exercisable at a rate of 1/5 of the shares subject to the
option at a specified date after the date of grant and an additional 1/5 of the
shares at the end of subsequent anniversary of the initial vesting date, subject
to continued service as an employee, consultant or director. The term of each
outstanding stock option is seven years. The exercise price of all options
granted under the 1994 Plan was at least equal to the fair market value of the
Common Stock of the Company on the date of grant. Payment of the exercise price
may be made in cash, promissory notes or other shares of the Company's Common
Stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following are the only persons known by the Company to own beneficially,
as of March 31, 1996, 5 percent or more of the outstanding shares of its Common
Stock.
On March 31, 1996 there were 5,876,947 shares of the Company's common stock
outstanding.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- - - ------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Vasu R. Devan ................................................................. 1,196,380 20.36%
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Raju Rajagopal (1) ............................................................ 540,408 9.19%
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Artisan Partners Ltd. Prt. .................................................... 367,400 6.25%
</TABLE>
- - - ------------------------
(1) Includes 2,000 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 31, 1996, by each director and nominee to the Board of
Directors, the Chief Executive Officer
39
<PAGE>
and the four other most highly compensated executive officers and, as a group,
by such persons and other executive officers of the Company. All shares are
subject to the named person's sole voting and investment power.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
- - - ------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Vasu R. Devan ................................................................. 1,196,380 20.36%
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Raju Rajagopal (1) ............................................................ 540,408 9.19%
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Jeffrey J. Parkinson (2) ...................................................... 165,388 2.86%
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Robert Quist (3) .............................................................. 16,950 *
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Rodney Klein (4) .............................................................. 24,142 *
c/o 200 Porter Drive, Suite 100
San Ramon, California 94583
Robert L. Montgomery (5) ...................................................... 110,944 1.89%
William H. Kimball ............................................................ 92,736 1.58%
All directors and executive officers as a group (8 persons) (6) ............... 2,647,315 44.59%
</TABLE>
- - - ------------------------
* Less than 1%
(1) Includes 2,000 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996.
(2) Includes 17,094 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996.
(3) Includes 16,950 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996.
(4) Includes 24,142 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996.
(5) Includes shares beneficially owned or held of record by Robert and Joan S.
Montgomery as trustees of the Montgomery Family Trust.
(6) Includes 60,186 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1996
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal years ended March 31, 1995 and 1996, the Company engaged
in numerous transactions with IT Solutions, Inc., a California corporation
("ITS"), of which Vasu R. Devan, Raju Rajagopal and Jeffrey J. Parkinson own
39%, 14% and 5%, respectively, of the outstanding capital stock. ITS subleases
office space and purchases certain office and administrative services from the
Company, the cost of which totaled approximately $82,000 and $27,000 for the
fiscal years ended March 31, 1995 and 1996, respectively. In addition, pursuant
to an Independent Contractor Services Agreement dated September 12, 1994 between
the Company and ITS, the Company purchased
40
<PAGE>
software programming contract services in the aggregate amount of $515,000 and
$338,000 for the years ended March 31, 1995 and 1996, respectively. The Company
believes that each of the above transactions with ITS was entered into on terms
no less favorable to the Company than the Company could have obtained from
unrelated third parties.
In September 1994, pursuant to the terms of a Stock and Warrant Purchase
Agreement, the Company issued to Summit Ventures III, L.P. and Summit Investors
II, L.P. an aggregate of 1,000,000 shares of Series B Preferred Stock, an
aggregate of 680,600 shares of Series C Preferred Stock, an aggregate of 211,416
shares of Common Stock and warrants to purchase an aggregate of 83,937 shares of
Common Stock, for an aggregate purchase price of $2,224,124. Mr. Walter G.
Kortschak, a director of the Company, is a general partner of Summit Partners,
L.P., an entity associated with the above-referenced funds.
In May 1995, pursuant to the terms of an Equity Purchase Agreement (the
"Equity Agreement") among the Company, ICI Partnership, a California partnership
("ICI"), and a former officer of the Company, the Company repurchased an
aggregate of 292,459 shares of Common Stock from such former officer for an
aggregate purchase price of $253,000. In connection with such repurchase and
pursuant to the Equity Agreement, the officer also sold to ICI his ownership
interest in ICI. The general partners of ICI include Messrs. Devan, Rajagopal
and Parkinson, all executive officers of the Company. ICI was organized for the
purpose of acquiring, owning, voting and holding for investment or sale the
stock of Imaging Constructs, Incorporated, a Nebraska corporation.
41
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- - - ------------ -------------------------------------------------------------------------------------------------
<S> <C>
2.1(1) Agreement and Plan of Reorganization dated as of March 26, 1996 by and among Registrant, Managed
Care Information Systems, Inc. ("MCIS"), MECON Acquisition Corp. and certain shareholders of
MCIS
3.1(2) Certificate of Incorporation of Registrant
3.2(2) Form of Restated Certificate of Incorporation of Registrant
3.3(2) Bylaws of Registrant
4.1(2) Specimen Common Stock Certificate of Registrant
4.2(2) Warrants, dated September 9, 1994, issued by Registrant to Summit Ventures III, L.P. and Summit
Investors II, L.P.
10.1(2) Property Lease covering Registrant's facilities in San Ramon, California
10.2(2) Stock and Warrant Purchase Agreement dated September 9, 1994 among Registrant and certain
investors
10.3*(2) 1994 Incentive Stock Option Plan of Registrant
10.4*(2) 1995 Stock Plan and Form of Stock Option Agreement
10.5*(2) 1995 Director Option Plan and Form of Director Option Agreement
10.6*(2) 1995 Employee Stock Purchase Plan and Form of Subscription Agreement
10.7(2) Investor Rights Agreement dated as of September 9, 1994 among the Registrant and certain
stockholders of the Registrant
10.8**(2) Business Partner Marketing Agreement dated September 27, 1995, between the Registrant and HBO &
Company
10.9**(2) Letter Agreement dated April 8, 1995 between the Registrant and Arthur Andersen LLC
10.10(2) Business Loan Agreement and Commercial Security Agreement dated August 7, 1995, between the
Registrant and Silicon Valley Bank
10.11(2) Form of Indemnification Agreement
10.12*(2) Employment Agreement between the Registrant and Raju Rajagopal dated September 9, 1994
10.13*(2) Employment Agreement between the Registrant and Vasu R. Devan dated September 9, 1994
10.14(2) Independent Contractor Services Agreement between the Registrant and IT Solutions, Inc.
10.15(2) Equity Purchase Agreement among Registrant, ICI Partnership and Thomas Alexander dated May 17,
1995
10.16(2) Series A Preferred Stock and Common Stock Exchange and Repurchase Agreement between Registrant
and Lutheran Health Services dated January 11, 1993, as amended
10.17**(2) Agreement to provide MECON-PEERx Operations Benchmarking Database Services to University Hospital
Consortium Service Corporation members revised February 24, 1995
10.18(2) Form of MECON-PEERx subscription agreement
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- - - ------------ -------------------------------------------------------------------------------------------------
<S> <C>
10.19(2) Form of MECON-OPTIMIS software agreement
11.1 Computation of per share earnings
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney
27.1 Financial Data Schedules
</TABLE>
- - - ------------------------
(*) Management contract or compensation plan or arrangement required to be filed
as an exhibit to this report on Form 10-KSB
(**)Confidential treatment requested.
(1) Incorporated by reference from the Registrant's Form 8-K filed on April 12,
1996.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (file No. 33-98206-LA), as amended, filed on December 6, 1996.
(B) REPORTS ON FORM 8-K
On April 12, 1996, the Company filed a report on Form 8-K dated March 29,
1996 which announced the acquisition of Managed Care Information Systems, Inc.
by the Company. The Company filed financial statements for this Form 8-K on June
12, 1996.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: June 28, 1996
MECON, Inc.
By: /s/ VASU R. DEVAN
-----------------------------------
Mr. Vasu R. Devan
CHAIRMAN OF THE BOARD OF DIRECTORS
AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints David J. Allinson as his attorney-in-fact,
each with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Report on Form 10-KSB, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- - - ------------------------------------------------ -------------------------------------------- -----------------
/s/ VASU R. DEVAN Chairman of the Board, President and Chief
-------------------------------------- Executive Officer (Principal Executive June 28, 1996
(Vasu R. Devan) Officer)
/s/ DAVID J. ALLINSON Vice President, Finance and Administration
-------------------------------------- and Chief Financial Officer (Principal June 28, 1996
(David J. Allinson) Financial and Accounting Officer)
/S/ RAJU RAJAGOPAL
-------------------------------------- Senior Vice President, Western Region and June 28, 1996
(Raju Rajagopal) Director
/S/ WILLIAM H. KIMBALL
-------------------------------------- Director June 28, 1996
(William H. Kimball)
/S/ WALTER G. KORTSCHAK
-------------------------------------- Director June 28, 1996
(Walter G. Kortschak)
ROBERT MONTGOMERY
-------------------------------------- Director June 28, 1996
(Robert Montgomery)
DAVID LOWE
-------------------------------------- Director June 28, 1996
(David Lowe)
</TABLE>
44
<PAGE>
EXHIBIT 11.1
MECON, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Weighted average shares of common stock..................................................... 3,508 4,010
Cashless exercise of warrants............................................................... 57 57
Conversion of Series C preferred stock...................................................... 480 480
Options subject to Staff Accounting Bulletin No. 83......................................... 419 419
--------- ---------
Shares used in per share calculation........................................................ 4,464 4,966
--------- ---------
--------- ---------
Net loss attributable to common stockholders................................................ $ (1,553) $ (1,077)
--------- ---------
--------- ---------
Net loss per share.......................................................................... $ (0.35) $ (0.22)
--------- ---------
--------- ---------
</TABLE>
45
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
MECON, Inc.
We consent to incorporation by reference in the registration statement (No.
333-7324) on Form S-8 of MECON, Inc. of our report dated May 13, 1996, relating
to the consolidated balance sheets of MECON, Inc. and subsidiary as of March 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for the years then ended, which
report appears in the March 31, 1996 annual report on Form 10-KSB of MECON, Inc.
KPMG Peat Marwick LLP
San Francisco, California
June 28, 1996
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MECON,
INC. BALANCE SHEET AS OF MARCH 31, 1996 AND THE STATEMENT OF OPERATIONS FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 15,205
<SECURITIES> 4,775
<RECEIVABLES> 3,540
<ALLOWANCES> (245)
<INVENTORY> 0
<CURRENT-ASSETS> 23,612
<PP&E> 1,944
<DEPRECIATION> (935)
<TOTAL-ASSETS> 25,581
<CURRENT-LIABILITIES> (5,651)
<BONDS> 0
0
0
<COMMON> (6)
<OTHER-SE> (19,895)
<TOTAL-LIABILITY-AND-EQUITY> (19,901)
<SALES> 0
<TOTAL-REVENUES> (12,003)
<CGS> 4,679
<TOTAL-COSTS> 8,385
<OTHER-EXPENSES> 368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> (967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (967)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> 0
</TABLE>
