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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
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FORM 10-KSB
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended March 31, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
Commission File Number 0-27048
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MECON, INC.
(Name of small business issuer in its charter)
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 offices) (Zip Code)
(925) 838-1700
Issuer's telephone number, including area code
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
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<S> <C>
COMMON STOCK, PAR VALUE $.001 NASDAQ
SERIES A PARTICIPATING PREFERRED STOCK, PAR VALUE $.001 NASDAQ
(Title of each class) (Name of each exchange on which registered)
</TABLE>
Check whether the issuer (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 or any amendments to this Form 10-KSB. ( )
<TABLE>
<S> <C>
State issuer's revenues for its most recent fiscal year:..................... $ 15,293,000
State the aggregate market value of the voting stock held by
non-affiliates computed using the closing price on
May 29, 1998 of $9.75 (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):........................................ $ 39,516,000
The number of shares outstanding of each of the registrant's classes of
common stock, as of May 29, 1998:....................................... 6,201,068
Transitional Small Business Disclosure Format (check one): Yes ( ) No (x)
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
MECON, Inc. ("MECON" or the "Company") is a leading provider of
benchmarking solutions to the healthcare industry. The benchmarking solution
offered by MECON comprises data/information products, decision support software
and value-added services. The principal focus of the Company's products is to
reduce costs and improve efficiency and effectiveness of departmental and
clinical operations in the healthcare delivery system. The Company's main
product line is based upon a proprietary operations benchmarking database
containing cost and key performance information from 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 healthcare
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 integrated advisory services
and sufficient decision support tools to implement and maintain cost reductions.
Accordingly, there is a need for data, advisory services, and information
systems which support long-term cost management strategies through operating
efficiencies, labor cost control, supply and materials management, improved
clinical practices, re-engineered care delivery processes, improved facilities
infrastructure and capital equipment utilization, and general administrative
efficiencies.
RECENT DEVELOPMENTS
At the beginning of fiscal year 1997-98, the Company restructured its
organization to re-focus the business on its historical strengths. 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 healthcare providers
seeking to reduce costs and improve operating efficiency. The Company's
database/information products allow hospital executives, clinicians, and
department managers to compare their practices against their peers and best
demonstrated practices. This ability, when combined with the Company's
consulting 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.
PRODUCTS
The Company's principal products and services include
MECON-PEERx-TM-, MECON-PEERVIEW-TM-, MECON-OPTIMIS-TM-, MECON-Action-
Point-SM-, MECON-Advisory-SM-, MECON-PEER Practice Management Profiler-TM-,
and other related analytical products. The foundation of the Company's
product line is the MECON operations benchmarking database.
MECON-PEERx-TM- - THE OPERATIONS BENCHMARKING DATABASE
The Company maintains a proprietary database containing information on
labor productivity, costs, resource utilization and practice profiles from
several hundred hospitals nationwide. The database contains 281 hospital
department types, such as nursing, pharmacy, radiology, clinical laboratories
and medical records. Typically, between 15,000 and 36,000 elements of
information are collected from each subscribing healthcare organization. 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 healthcare
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 healthcare
organizations that subscribe to the Company's MECON-PEERx-TM- 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.
<PAGE>
MECON-PEERx-TM- 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-TM- a valuable resource for use in comparative
performance analysis or benchmarking. Through operations benchmarking,
hospitals and other healthcare 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-TM- 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, 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-TM- 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-TM- 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.
Hospitals generally subscribe to MECON-PEERx-TM- for a renewable
three-year period. Each subscriber to MECON-PEERx-TM- receives the following:
MECON-PEERx-TM- 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-TM-
<TABLE>
<CAPTION>
CATEGORIES OF OUTPUT SPECIFIC EXAMPLES
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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 and Quality Data Organizational Characteristics, Operational Practices
</TABLE>
MECON-PEERVIEW-TM- - A TOOL FOR DATA COLLECTION AND INFORMATION DELIVERY
In December 1996, MECON-PEERVIEW-TM-, a tool designed to automate
data collection and information delivery, was introduced. This product was
built using client server technology and a relational database approach. As a
complementary product to the MECON-PEERx-TM- product, MECON-PEERVIEW-TM-
enables more efficient data collection at the customer location through links
with internal information systems and MECON's national benchmark database.
Electronic delivery of reports to customers is another key feature of
MECON-PEERVIEW-TM-.
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-TM-, 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 an optional EXECUTIVE
SUMMARY - a condensed analysis based on the benchmarking
<PAGE>
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-TM- - AN INTERNAL PERFORMANCE MONITORING SYSTEM
As a complement to MECON-PEERx-TM-, the Company has developed
MECON-OPTIMIS-TM-, an internal performance measuring system for hospitals.
MECON-OPTIMIS-TM- 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-TM- 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-TM- runs on an
Oracle RDBMS platform and is configured for operation on local area networks.
MECON-OPTIMIS-TM- 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-TM- and MECON-OPTIMIS-TM- can incorporate benchmark
data from MECON-PEERx-TM- into MECON-OPTIMIS-TM-, thus increasing the value
of the Company's overall product mix.
MECON-Action-Point-SM- - CLINICAL UTILIZATION ANALYSIS SYSTEM
On March 29, 1996, MECON acquired Managed Care Information Systems,
Inc. (MCIS) in a pooling of interest transaction. MCIS's principal product,
subsequently renamed MECON-Action-Point-SM-, is a decision support product
designed for clinicians and senior level decision makers in the healthcare
delivery system. Information provided by MECON-Action-Point-SM- enables
physician managers and healthcare administrators to identify, analyze, and
improve physician practice patterns using a PC-based Windows-TM- software.
The system allows physicians to identify cost, profitability, payor mix,
resource utilization, and productivity for each physician. Tracking treatment
patterns enables physicians to review how their peers are using hospital
resources to meet the needs of their patients. By helping physicians avoid
overuse or underuse of resources, it enhances patient satisfaction and
safety. It also enables administrators to fine tune the alignment between the
mix of services offered and the needs of the population they serve, making
operations more efficient and facilitating managed care contracting.
MECON-Advisory-SM- - CONSULTING AND 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 consulting, custom analysis of data, training
programs, and benchmarking facilitation services. MECON offers a highly
structured approach to consulting services that is designed to improve
operations efficiencies and to enable sustainable cost reduction. As a
front-end to consulting services, MECON performs an overview assessment using
the database in conjunction with additional qualitative information collected
through on-site work at the healthcare organization. This provides a detailed
assessment of facility- and function-specific cost reduction strategies and
tactics. Subsequent to the overview assessment, the Company performs
extensive change action planning for clients with the objective of
implementing departmental operational change that produces immediate,
significant and sustainable cost savings. The Company also offers a training
product known as "Benchmarking-in-Action" ("BIA") that is typically sold to
current MECON-PEERx-TM- clients.
MECON-PEER Practice Management Profiler-TM- - MEDICAL GROUP OPERATIONS
BENCHMARKING DATABASE
Using the MECON-PEERx-TM- database structure and software platform,
MECON has extended its capabilities to meet the needs of the integrated
health system with the introduction of a new type of comparative information:
the MECON-PEER Practice Management Profiler-TM-. This product provides key
financial, clinical and operational performance indicators for medical
groups. Internal and external comparisons of medical group operating data
will assist these organizations in not only managing unit cost and labor
productivity, but also profitability and managed care utilization. The
company believes this is the first product of its kind in the industry which
goes beyond balance sheet and financial statement comparison and enhances
effective resource allocation decisions. The MECON-PEER Practice Management
Profiler-TM- reflects the core business for most medical group practices:
Family Practice; Internal Medicine; Primary Care; and OB/GYN.
CUSTOMERS
Historically, MECON has marketed its products and services to the
acute care segment of the hospital market, primarily to the hospital sector
of the healthcare industry. Typically, a customer purchases the three-year
subscription to MECON-PEERx-TM- as a first step in its effort to control,
manage and reduce costs. The Company believes that the implementation of all
of the above products has frequently resulted in immediate, significant and
sustainable cost benefits to customers.
MECON's customer base is geographically diverse, including urban and
rural healthcare organizations throughout the United States. The Company's
customers include for-profit, academic/teaching and non-profit hospitals as well
as multi-hospital systems. Revenue from certain member facilities of the
University HealthSystem Consortium Services Corporation, one of the Company's
largest customers, accounted for approximately 7% of net revenue for fiscal
1998. In January 1998, the Company was informed by this consortium that it has
endorsed another vendor for its benchmarking needs. As an alternative to a
consortium endorsement, the Company is seeking individual relationships with a
number of academic medical centers to supply benchmarking data. The Company will
aim to structure such individual relationships to be more profitable.
<PAGE>
SALES AND MARKETING
MECON employs a direct sales and marketing organization which it
augments through the efforts of its strategic partner, HBO & Company (HBOC).
MECON participates in several national and regional trade shows including the
Healthcare Information and Management Systems Society annual conference. The
Company uses direct mail, and regionally focused marketing campaigns.
Additionally, national healthcare 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.
STRATEGIC PARTNER
During fiscal 1998, the Company strengthened its strategic partner
relationship with HBOC by renegotiating the partnership agreement. Under the
new agreement, both the MECON sales staff and the HBOC Trendstar sales force
actively market the MECON-PEERx-TM- product to Trendstar customers. In
addition, HBOC completed the development and release of the interface between
the MECON-PEERx-TM- and Trendstar products.
PRODUCT DEVELOPMENT
The Company's product development strategy is directed toward
creating new products that leverage the MECON database, enhancing data
content in the database, and increasing the functionality of its current
products and leveraging technology to automate data collection and
information delivery. As part of this strategy, the Company is currently
expanding the depth of the data collected from subscribers. Major product
releases during fiscal 1998 include the MECON-PEERx Practice Management
Profiler-TM-, the MECON-OPTIMIS-TM- release 4.2 and MECON-Action-Point-SM-
release 5.0.
COMPETITION
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors in the healthcare 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 healthcare 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 healthcare industry.
The Company's competitors include other providers of operations and
financial benchmarking data and products, providers of decision support
software systems, large healthcare group purchasing alliances, and management
and healthcare consulting firms. As the market for healthcare cost management
solutions develops, additional competitors, including other major healthcare
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 from 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-TM- enter
into agreements restricting the disclosure and use of the comparative
information contained in the database. The Company distributes its
MECON-OPTIMIS-TM- 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.
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company employed a total of 93 full-time
employees, of which 53 were in customer service, 10 in marketing and sales,
18 in research and development and 12 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 17,500 square feet of space at its
headquarters in San Ramon, California under a lease expiring in January 2000.
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, 1998.
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>
1997 First quarter ........................................................................... $30.25 $19.62
Second quarter........................................................................... $25.00 $14.62
Third quarter............................................................................ $25.00 $6.31
Fourth quarter........................................................................... $7.12 $3.62
1998 First quarter ........................................................................... $3.69 $2.06
Second quarter........................................................................... $6.38 $3.00
Third quarter............................................................................ $8.13 $5.44
Fourth quarter........................................................................... $11.00 $6.63
</TABLE>
On March 31, 1998 the last reported sale price for the Company's Common
Stock on the NASDAQ National Market was $11.00 per share. At March 31, 1998,
there were approximately 49 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
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1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue:
Subscription and license......................................... $ 11,550 $ 9,934 $ 8,037 $ 4,821 $ 2,041
Services......................................................... 3,523 3,661 3,966 4,047 2,979
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Net revenue................................................. 15,073 13,595 12,003 8,868 5,020
Cost of revenue..................................................... 5,495 5,959 4,679 4,129 2,704
-----------------------------------------------------
Gross profit..................................................... 9,578 7,636 7,324 4,739 2,316
-----------------------------------------------------
Operating costs:
Research and development......................................... 2,603 2,336 1,855 1,647 870
Sales and marketing.............................................. 2,658 3,651 3,349 2,588 1,236
General and administrative....................................... 3,150 3,172 2,273 1,686 1,254
Reorganization and other special charges......................... 749 1,706 908 - -
-----------------------------------------------------
Total operating costs....................................... 9,160 10,865 8,385 5,921 3,360
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Operating income (loss).......................................... 418 (3,229) (1,061) (1,182) (1,044)
Interest expense.................................................... - - (274) (224) (25)
Interest and other income, net...................................... 735 808 368 26 53
Loss on investment.................................................. - - - - (180)
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Income (loss) before provision for income taxes.................. 1,153 (2,421) (967) (1,380) (1,196)
Provision for income tax expense.................................... 92 40 - - (48)
-----------------------------------------------------
Income (loss) before cumulative effect of accounting change......... 1,061 (2,461) (967) (1,380) (1,244)
Cumulative effect for change in accounting for income taxes......... - - - - (7)
-----------------------------------------------------
Net income (loss)................................................ 1,061 (2,461) (967) (1,380) (1,251)
------------------------------------------------------
Accretion of redeemable preferred stock............................. - - (110) (173) (110)
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Net income (loss) attributable to common stockholders............ $ 1,061 $(2,461) $(1,077) $(1,553) $(1,361)
-----------------------------------------------------
Basic earnings (loss) per share $ 0.17 $ (0.41) $ (0.26) $ (0.44) $ (0.40)
-----------------------------------------------------
Weighted average common stock outstanding 6,086 5,936 4,144 3,508 3,371
-----------------------------------------------------
Diluted earnings (loss) per share................................... $ 0.17 $ (0.41) $ (0.26) $ (0.44) $ (0.40)
-----------------------------------------------------
Weighted average common and dilutive potential common stock
outstanding...................................................... 6,368 5,936 4,144 3,508 3,371
----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-sale........ $16,491 $13,678 $19,980 $1,190 $ 513
Total assets.................................................... 23,310 20,631 25,581 4,949 1,936
Redeemable common and preferred stock........................... - - - 3,069 917
Long-term debt.................................................. - - - 4,949 1,936
Stockholders' (deficit) equity.................................. 19,588 17,962 19,901 (3,223) (1,609)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES ACT OF 1934. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF THE RISK FACTORS SET FORTH BELOW IN "CERTAIN FACTORS BEARING ON FUTURE
RESULTS" AND OTHER REPORTS FILED BY THE COMPANY.
OVERVIEW
MECON is a leading healthcare benchmarking solutions company. The
Company's proprietary data, family of premium quality, easy-to-use software
products and consulting services combine to produce and sustain optimum
performance in healthcare delivery systems. 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
1998, approximately 77% of the Company's revenues were derived from database
subscriptions and software licenses. Within the acute care segment of the
hospital market, MECON has marketed its products and services primarily to
individual hospitals with over 100 beds.
On March 29, 1996, the Company merged with Managed Care Information
Systems, Inc. (MCIS) in a pooling of interests transaction. In connection with
the merger, the Company exchanged 338,155 shares of its common stock for all of
the outstanding shares of MCIS, assumed 33,052 common stock options, and assumed
a note payable and accrued interest to a third party in the amount of $2.5
million. In addition, the Company recorded special charges of $908,000 for
merger-related costs. Accordingly, all prior period financial information has
been restated.
The following factors continue to contribute to the Company's
performance during fiscal year 1998. On November 25, 1996, the Company announced
plans to complete the integration of MCIS, centralize management of its product
development, sales and product support organizations, increase its investment in
the development of new products and relocate its headquarters to larger
facilities to accommodate these changes. These actions were intended to position
the Company on a strong footing for long-term growth. In connection with the
implementation of this new corporate structure, the Company recorded pretax
charges of $1.7 million in fiscal 1997 that consisted of $1.3 million of
reorganization charges and charges of $369,000 for acquisition costs and costs
for an aborted acquisition. Included in the reorganization costs were provisions
for shutting down two of the Company's satellite offices, employee severance and
related benefits, asset writedowns and a provision for doubtful accounts which
was established for uncollectible accounts receivable. This reserve was
established because the Company believed its commitment to the development of
new products would change the strategic direction of its product lines.
As a result of these integration, reorganization and product transition
efforts, revenue and expenses for the third and fourth quarters of fiscal 1997
were adversely affected. Revenue was impacted by declined productivity in the
sales force that led to contract signing delays. The effect of such delays was a
shortfall in revenue recognized in both the third and fourth quarters of fiscal
1997. This shortfall resulted in incurred operating losses, and accordingly, the
Company announced that it would take corrective measures.
On April 17, 1997, the Company announced a number of strategic and
operational changes intended to improve the Company's financial performance. As
a first step, the Company's original management team rejoined the Company and
adopted a "back-to-basics" strategy of selling the Company's current products
into its current market. Although the Company believed, and still believes, that
additional healthcare market sectors targeted by the Company's increased
investments in developing clinical outcomes and patient satisfaction products
did represent growth opportunities for the Company, the Company also believed
that continued efforts in these areas compromised both its leadership position
in benchmark-based cost management solutions and its profitability.
Tactics supporting this "back-to-basics" strategy include, but are
not limited to, selling the MECON Integrated Solution whenever possible,
cross-selling existing products to existing customers and remaining firm on
MECON-PEERx-TM-pricing related to the renewal of older, low margin
subscriptions. The MECON Integrated Solution is a packaged product offering
that includes a MECON-PEERx-TM- and MECON-PEER Practice Management
Profiler-TM-subscription, MECON-Action-Point-SM-, MECON-Advisory-SM- and
MECON-OPTIMIS-TM-. Such a packaged offering is intended to assure that the
customer achieves and sustains optimum performance by not only receiving
benchmarked-based cost management reports, but by also receiving MECON's
integrated consulting approach of implementing cost reduction opportunities
identified by MECON-PEERx-TM-, MECON-PEER Practice Management Profiler-TM-,
and MECON-Action-Point-SM- and sustaining those reductions by installing
MECON-OPTIMIS-TM-, the Company's operational cost monitoring software tool.
Less than 50% of MECON-OPTIMIS-TM- customers are subscribers to
MECON-PEERx-TM- because MECON-OPTIMIS-TM- predates MECON-PEERx-TM- and many
of the early MECON-OPTIMIS-TM- customers, on current maintenance agreements,
are now sales prospects for the MECON Total Solution. Additionally, less than
10% of the MECON-Action-Point-SM- customers are MECON-PEERx-TM-
<PAGE>
subscribers because the Company only recently began integrating the selling
of MECON-Action-Point-SM-, its only clinical product, with its operational
cost management products. Therefore, a cross-selling opportunity exists that
has become a tactic of the "back-to-basics" strategy.
Many of the older multi-year MECON-PEERx-TM- subscriptions were
grandfathered at substantially lower prices. The Company has adopted a firm
pricing policy to migrate expiring MECON-PEERx-TM- subscriptions to current
list prices, and accordingly, certain of these subscribers may not renew
their low margin subscriptions at higher margins due to pricing sensitivity.
Accordingly, the Company is emphasizing replacing the revenue stream up for
renewal more heavily than replacing all the expiring units. During fiscal
1998, the Company recorded $1.70 in renewal contacts for every $1.00 of
expiring contracts. However, as a result of this firm pricing tactic, the
Company believes that some of the expiring contracts may not renew. One such
contract that recently did not renew is a contract with a hospital consortium
that covers approximately 40 academic teaching hospitals. During fiscal 1998,
this contract totaled 7% of revenue. The original three-year contract, signed
in fiscal 1992, was one of the Company's first multi-year contracts, was
steeply discounted and hence contributed very low margins. The Company
believes that the termination of this contract will not adversely affect
earnings.
As a second step, the Company took action to reduce its ongoing
quarterly operating expense base. As a part of the expense reduction effort,
the Company decreased its workforce by 38 employees on April 17, 1997. This
reduction was made in an effort to reduce the Company's overall quarterly
expenses, and along with the Company's renewed focus on its core markets,
return the Company to profitability and growth. As a part of this expense
reduction effort, the Company incurred a reorganization charge of $749,000
during the first quarter of fiscal 1998. This charge was primarily comprised
of employee outplacement, severance and related benefits relocation and
additional costs associated with facility shutdowns.
The Company signed $17.1 million in total contract value during
fiscal 1998, compared to $15.2 million during fiscal 1997. This increase in
contract signings continues to build the Company's backlog which is defined
as the total value of contracts signed that have not been recognized as
revenue. Backlog is then depleted by the revenue recognized during the
period. At March 31, 1998, the Company's contract backlog stood at $12.7
million, an increase of 19% over the prior fiscal year.
Approximately 25% to 33% of the Company's quarterly revenue is
derived from backlog. The remaining 67% to 75% is generated from contracts
signed during that respective quarter. The Company has achieved sequential
revenue increases throughout fiscal 1998. These sequential revenue increases,
coupled with strong expense controls since the reductions achieved in the
April 17, 1997 reorganization, have returned the Company to profitability,
excluding the reorganization charge in the first quarter of fiscal 1998, for
the fourth consecutive quarter.
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,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue:
Subscription and license........................................... 77% 73% 67%
Services........................................................... 23% 27% 33%
------------------------
Net revenue..................................................... 100% 100% 100%
Cost of revenue....................................................... 36% 44% 39%
------------------------
Gross profit.......................................................... 64% 56% 61%
Operating costs:
Research and development........................................... 17% 17% 15%
Sales and marketing................................................ 18% 27% 28%
General and administrative......................................... 21% 23% 19%
Reorganization and other special charges........................... 5% 13% 8%
------------------------
Total operating costs........................................... 61% 80% 70%
------------------------
Operating income (loss)............................................... 3% (24)% (9)%
Interest expense...................................................... - - (2)%
Interest and other income, net........................................ 5% 6% 3%
------------------------
Income (loss) before provision for income taxes....................... 8% (18)% (8)%
Provision for income tax expense...................................... 1% - -
------------------------
Net income (loss)..................................................... 7% (18)% (8)%
-------------------------
Accretion of redeemable preferred stock............................... - - (1)%
Net income (loss) attributable to common stockholders................. 7% (18)% (9)%
-------------------------
</TABLE>
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUE
Revenue for fiscal 1998 increased 11% to $15.1 million compared to
$13.6 million for fiscal 1997. Subscription and license revenue for fiscal
1998 increased 16% to $11.6 million compared to $9.9 million for fiscal 1997
and accounted for essentially all of the increase. This increase was
primarily due to increases in renewing subscribers, an increased base of
recurring revenue from multi-year subscription contracts sold in prior years
and an increase in value added services related to MECON-PEERx-TM-. Services
revenue for fiscal 1998 decreased 4% to $3.5 million compared to $3.7 million
in fiscal 1997. Although services revenue decreased, the Company anticipates
service revenue will increase as a result of the Company's current strategy
of expanding services, such as training programs and consulting projects,
that build relationships with customers and enhance benefits that customers
derive from the Company's products.
COST OF REVENUE
Cost of revenue for fiscal 1998 decreased 8% to $5.5 million compared
to $6.0 million for fiscal 1997, primarily due to the reduction in workforce
during the April 17, 1997 reorganization, offset by an increase in amortization
of software development costs related to the Company's MECON-PEERVIEW product.
Cost of revenue for fiscal 1998 included $580,000 in amortization expense from
the capitalization of software development expenses compared to $227,000 for
fiscal 1997. Cost of revenue for fiscal 1998 decreased to 36% of total revenue
compared to 44% for fiscal 1997, primarily due to the aforementioned factors.
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1998 increased 11% to $2.6
million compared to $2.3 million for fiscal 1997, primarily due to the
development of MECON-OPTIMIS Release 4.2, MECON-Action-Point Release 5.0 and
MECON-PEERVIEW Version 5.0's functional specifications. During fiscal 1998,
approximately $832,000 was capitalized for internally developed software related
to product development and internal databases supporting company products.
Although research and development expenses remained constant at 17% of revenue
for both fiscal 1998 and 1997, the dollar amount increased due to a continued
commitment to develop the next generation of MECON-PEERVIEW, Version 5.0.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1998 decreased 27% to $2.7
million compared to $3.7 million for fiscal 1997, primarily due to the Company's
reduction in workforce during the three months ended June 30, 1997, coupled with
a significant decrease in advertising, tradeshow participation and travel. Sales
and marketing expenses for fiscal 1998 decreased to 18% of revenue compared to
27% for fiscal 1997, primarily due to the aforementioned factors.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1998 remained relatively
constant at $3.2 million. General and administrative expenses for fiscal 1998
decreased to 21% of revenue compared to 23% for fiscal 1997, primarily due to
the increase in revenue and the implementation of certain cost-cutting measures
relating to travel, telephone infrastructure and directors and officers'
insurance, as well as a decrease in bad debt expense, rent expense and
professional services expense.
REORGANIZATION AND OTHER SPECIAL CHARGES
Reorganization and other special charges for fiscal 1998 decreased 56%
to $749,000 compared to $1.7 million for fiscal 1997. The reorganization charge
for fiscal 1998 was primarily due to the Company's reorganization plan announced
in the first quarter of fiscal 1998 that consisted of employee severance costs
related to the termination of 38 employees. The reorganization charge for fiscal
1997 was primarily due to the Company's reorganization in the third quarter of
fiscal 1997 that consisted of $1.3 million related to centralizing the
management of product development, sales and product support organizations. The
remaining $369,000 related to an aborted acquisition and costs associated with
the prior year merger. Of the total $749,000 reorganization costs incurred for
fiscal 1998, $714,000 was paid during fiscal 1998 and $35,000 remained accrued
and unpaid as of March 31, 1998 and all amounts related to the 1997 charge had
been paid.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUE
Revenue for fiscal 1997 increased 13% to $13.6 compared to $12.0
million for fiscal 1996. Subscription and license revenue for
<PAGE>
fiscal 1997 increased 24% to $9.9 compared to $8.0 million for fiscal 1996
and accounted for essentially all of the revenue growth. This increase was
primarily due to increased revenue from new MECON-PEERx-TM- subscription
contracts and MECON-Action-Point-SM- license fees. Service revenue for fiscal
1997 decreased 8% to $3.7 million compared to $4.0 million for fiscal 1996.
This decrease was primarily due to a decrease in consulting revenue
reflective of the Company's continued shift in focus to product sales from
consulting services.
COST OF REVENUE
Cost of revenue for fiscal 1997 increased 28% to $6.0 million compared
to $4.7 million for fiscal 1996, primarily due to additional staffing to support
the Company's anticipated growth and increased amortization expense of
capitalized software development costs. Cost of revenue for fiscal 1997 included
$227,000 in amortization expense from the capitalization of software development
expenses compared to $89,000 for fiscal 1996. Cost of revenue for fiscal 1997
increased to 44% of total revenue compared to 39% for fiscal 1996, primarily due
to an increase in staffing to support the higher level of contracts signed in
fiscal 1997 compared to fiscal 1996 as well as increase amortization expense
from the capitalization of software development costs.
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1997 increased 21% to $2.3
million compared to $1.9 million for fiscal 1996, primarily due to the addition
of technical and programming personnel related to new product development.
During fiscal 1997 approximately $754,000 was capitalized for internally
developed software related to product development compared to $569,000 for
fiscal 1996. Research and development expenses for fiscal 1997 increased to 17%
of revenue compared to 15% for the comparable period in the prior year,
primarily due to a commitment to new product development in advance of related
revenues.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1997 increased 12% to $3.7
million compared to $3.3 million for fiscal 1996, primarily due to increased
commissions associated with higher levels of contract signings for fiscal 1997
compared to fiscal 1996, the hiring of a Vice President of Marketing, and
investment in certain promotional activities, including trade shows, seminars
and advertising. Sales and marketing expenses for fiscal 1997 decreased to 27%
of revenue compared to 28% for fiscal 1996, primarily due to increased
utilization of sales and marketing capacity developed in prior fiscal years.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1997 increased 39% to
$3.2 million compared to $2.3 million for fiscal 1996, primarily due to
increased management staffing, expansion of facilities, and general expenses
related to being a public company. General and administrative expenses for
fiscal 1997 increased to 23% of revenue compared to 19% of revenue for fiscal
1996, primarily due to the establishment of a larger infrastructure, including
information systems personnel, a new Chief Executive Officer and larger
facilities, to support increased revenue.
REORGANIZATION AND OTHER SPECIAL COSTS
Reorganization and other special costs for fiscal 1997 increased 88% to
$1.7 million compared to $908,000 for fiscal 1996, primarily due to the
Company's reorganization plan announced in the third quarter of fiscal 1997. The
reorganization plan called for centralizing the management of product
development, sales and product support organizations. In connection with this
reorganization, the Company recorded a special pretax charge totaling $1.7
million that primarily included a $1.3 million charge for costs associated with
the reorganization, and charges of $369,000 for an aborted acquisition and
additional acquisition costs. Included in the costs associated with the
reorganization were provisions for shutting down two of the Company's satellite
offices, employee severance and related benefits, asset writedowns and a
provision for accounts receivable that management believed would not be
collectible. This reserve was established because the Company believed its
commitment to the development of new products would change the strategic
direction of its product lines. Reorganization and other special costs of
$908,000 for fiscal 1996 primarily included costs of the MCIS merger. Included
in the merger costs were closing costs, professional fees, and other direct
costs related to the merger.
INTEREST AND OTHER INCOME, NET
Interest and other income, net for fiscal 1997 increased 120% to
$808,000 compared to $368,000 for fiscal 1996, primarily due to larger cash
balances during fiscal 1997 from the continued investment of the net proceeds
received from the initial public offering of the Company's common stock in
December, 1995.
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial
data for fiscal 1997 and fiscal 1998. 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, consisting only of normal recurring 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 1997 FISCAL YEAR 1998
---------------- ----------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription and license............................. 2,502 3,472 2,163 1,797 2,228 2,736 2,973 3,613
Services............................................. 973 1,138 889 661 977 1,080 924 542
---------------------------------------------------------------------------
Net revenue....................................... 3,475 4,610 3,052 2,458 3,205 3,816 3,897 4,155
Cost of revenue...................................... 1,211 1,500 1,483 1,765 1,245 1,442 1,400 1,408
---------------------------------------------------------------------------
Gross profit......................................... 2,264 3,110 1,569 693 1,960 2,374 2,497 2,747
---------------------------------------------------------------------------
Total operating costs................................ 2,004 2,173 3,867* 2,821 2,812** 2,152 2,181 2,015
Operating income (loss).............................. 260 937 (2,298) (2,128) (852) 222 316 732
Net income (loss) attributable to common stockholders 313 746 (1,581) (1,939) (681) 375 476 891
---------------------------------------------------------------------------
</TABLE>
- -----------
* Includes $1.5 million in reorganization and aborted acquisition costs.
** Includes $749,000 in reorganization costs.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1998
---------------- ----------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription and license.............................. 72% 75% 71% 73% 70% 72% 76% 87%
Services.............................................. 28% 25% 29% 27% 30% 28% 24% 13%
-----------------------------------------------------------------------
Net revenue........................................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenue....................................... 35% 33% 49% 72% 39% 38% 36% 34%
-----------------------------------------------------------------------
Gross margin.......................................... 65% 67% 51% 28% 61% 62% 64% 66%
-----------------------------------------------------------------------
Total operating costs................................. 57% 47% 127% 115% 88% 56% 56% 48%
Operating income (loss)............................... 8% 20% (75%) (87%) (27%) 6% 8% 18%
Net income (loss) attributable to common stockholders. 9% 16% (52%) (79%) (21%) 10% 12% 21%
-----------------------------------------------------------------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On December 7, 1995, the Company completed an initial public offering
of 2,000,000 shares of its common stock. The offering yielded $23 million in
net proceeds to the Company. At March 31, 1998, the Company's cash, cash
equivalents and securities available-for-sale increased by $2.8 million to
$16.5 million compared to $13.7 million at March 31, 1997, primarily as a
result of strong cash collections and cash management. The Company generated
$3.5 million of cash flow from operating activities for fiscal 1998 compared
to cash used of $2.8 million for fiscal 1997. This improvement was primarily
due to increased cash collections augmented by strong cash management. The
Company reduced its days of sales outstanding (DSO) in accounts receivable to
63 days at March 31, 1998 from 70 days at March 31, 1997. These improvements
resulted from increased cash collections of approximately $3.8 million in
fiscal 1998 compared to fiscal 1997.
As of March 31, 1998, the Company had net working capital of $16.4
million, including cash, cash equivalents and securities available-for-sale of
$16.5 million. Given the Company's strong cash position as of March 31, 1998,
the Company has elected to have no outstanding debt facilities. 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.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME which will be effective for financial statements for periods beginning
after December 15, 1997, and establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company will make the required reporting of
comprehensive income in its consolidated financial statements in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS
OF A BUSINESS ENTERPRISE, which will be effective for financial statements for
periods beginning after December 15, 1997, and establishes standards for
disclosures about segments of an enterprise. Earlier application is encouraged.
The Company will make the required disclosures under SFAS No. 131 in its
consolidated financial statements for the fiscal year ending March 31, 1999.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION, which supersedes SOP 91-1. The Company will be
required to adopt SOP 97-2 for software transactions entered into beginning
April 1, 1998, and retroactive application to years prior to adoption is
prohibited. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The revenue allocated to software products
generally is recognized upon delivery of the products. The revenue allocated to
postcontract customer support generally is recognized ratably over the term of
the support and revenue allocated to service elements generally is recognized as
the services are performed. Beginning in fiscal 1998, the Company will recognize
revenue in accordance with SOP 97-2. Under its current practice, the Company
does not expect a significant impact on recognition of revenue from software
transactions upon adoption of SOP 97-2.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
CERTAIN OF THE STATEMENTS ABOVE ARE 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.
PRICING
The Company announced, on April 17, 1997, that the original management
team had rejoined the Company and adopted a "back-to-basics" strategy. One
tactic supporting this "back-to-basics" strategy is to remain firm on
MECON-PEERx-TM- pricing related to renewal subscriptions. This tactic may result
in certain existing customers not renewing their older, low margin contracts at
higher total contract values due to price sensitivity. Termination of customer
relationships could result in lower subscription revenues for the Company, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
VARIABILITY OF QUARTERLY RESULTS; SEASONALITY
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter
to quarter in the future. Quarterly revenues and operating results may
fluctuate as a result of a variety of factors, including: the Company's sales
cycle and demand for its products and services; changes in distribution
channels; changes in the Company's product mix; the termination of, or a
reduction in, subscriptions to the Company's MECON-PEERx-TM- product; the
loss of customers due to consolidation in the healthcare industry; customer
delays in providing information needed by the Company to complete
implementation of, and revenue recognition from, sales of the MECON-PEERx-TM-
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.
<PAGE>
DEPENDENCE ON PRINCIPAL PRODUCT
For the fiscal year ended March 31, 1998, approximately 77% of the
Company's revenues were derived from subscriptions and licenses to its
MECON-PEERx-TM-, MECON-OPTIMIS-TM- and MECON-Action-Point-SM- products.
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-TM- 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 healthcare 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 healthcare
consulting firms. Furthermore, other major healthcare 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
healthcare industry. The Company also faces significant competition from
internal management information services departments of large hospital
alliances or for-profit hospital chains, many of which have developed or may
develop benchmarking information and other cost control solutions. In
addition, increased competitive pressures, among other factors, could lead to
lower prices for the Company's products and services, thereby materially
adversely affecting the Company's operating results. Accordingly, there can
be no assurance that the Company will be able to compete successfully in the
future.
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of 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. Failure
to manage growth effectively, or to develop, maintain or upgrade management
information and other systems and controls, could have a material adverse effect
on the Company.
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 one such strategic relationship with
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 this
relationship 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 HEALTHCARE INDUSTRY
Many healthcare providers are consolidating to create larger healthcare
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.
<PAGE>
The healthcare industry is subject to changing political, economic
and regulatory influences that may effect the procurement practices and
operation of healthcare industry participants. During the past several years,
the US healthcare industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. Several lawmakers have announced that they intend to propose
programs to reform the US healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment for the
Company's customers. Healthcare 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 healthcare providers, including small and rural hospitals,
long-term care facilities, large group medical practices, rehabilitation
hospitals and surgical centers. In order to develop the subscriber base
necessary for the accumulation of meaningful operations benchmarking data for
such new markets, the Company may be required to offer significant price
discounts to prospective customers in such markets. In addition, because such
providers typically have smaller budgets than the Company's existing
customers, entry into new markets may require the Company to offer lower
priced versions of its products. Sales of such new products may result in
lower gross margins than sales to the 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 enhancement and development efforts will be required to
sustain the Company's growth. There can be no assurance that the Company will
successfully develop, introduce and market new products or product enhancements,
or that products or product enhancements developed by the company will meet
requirements of healthcare 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. 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.
<PAGE>
YEAR 2000
The Company is reviewing its internal computer systems and product
offerings to ensure these systems and offerings are adequately able to address
the issues expected to arise in connection with the Year 2000. These issues
include the possibility that software which does not have the capacity to
recognize four digits in a date field may no longer function properly when use
of that date becomes necessary.
The Company is currently evaluating the status of its products which
are not at present Year 2000 compliant and expects to implement programming
changes necessary to address Year 2000 issues. The Company is also evaluating
its internal systems and expects to implement the systems and programming
changes necessary to address Year 2000 issues on an enterprise-wide basis. The
Company is currently reviewing the cost of such actions. A significant
proportion of these costs are not expected to be incremental costs to the
Company, but will represent redeployment of existing Company resources. The
Company expects such modifications to its products and internal systems will be
made on a timely basis, and presently believes that, with modifications to
existing software or converting to new software, the Year 2000 issue will not
pose significant operational problems for the Company's computer systems;
however, there can be no assurance there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on future
results of operations.
The Company has not fully determined the extent to which it may be
impacted by third parties' systems, which may not be Year 2000-compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company deals on financial transactions worldwide. While the Company
has begun efforts to seek reassurance from its suppliers and service providers,
there can be no assurance that the systems of other companies that the Company
deals with or on which the Company's systems rely will be timely converted, or
that any such failure to convert by another company could not have an adverse
effect on the Company.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
MECON, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $12,647 9,211
Securities available-for-sale, at market......................................... 3,844 4,467
Accounts receivable, net of allowances of $308 and $555, respectively............ 2,724 2,542
Unbilled accounts receivable..................................................... 522 886
Prepaid expenses................................................................. 277 362
Other current assets............................................................. 81 52
----------------------------
Total current assets........................................................ 20,095 17,520
Property and equipment, net......................................................... 1,430 1,588
Software development costs, net..................................................... 1,776 1,510
Other assets........................................................................ 9 13
----------------------------
$23,310 20,631
----------------------------
----------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable................................................................. $317 601
Accrued salaries and benefits.................................................... 848 452
Deferred revenue................................................................. 1,741 1,058
Other accrued liabilities........................................................ 796 533
----------------------------
Total current liabilities................................................... 3,702 2,644
Long-term obligations, less current portion......................................... 20 25
----------------------------
Total liabilities........................................................... 3,722 2,669
----------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 authorized; none issued and
outstanding................................................................. - -
Common stock, $.001 par value; 50,000,000 shares authorized; 6,201,068 and
6,000,297 issued and outstanding in 1998 and 1997, respectively............... 6 6
Additional paid-in capital....................................................... 25,598 25,033
Accumulated deficit.............................................................. (6,016) (7,077)
----------------------------
Total stockholders' equity.................................................. 19,588 17,962
----------------------------
$23,310 20,631
----------------------------
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Subscription and license.......................................................... $11,550 9,934 8,037
Services......................................................................... 3,523 3,661 3,966
----------------------------------------
Net revenue................................................................. 15,073 13,595 12,003
Cost of revenue..................................................................... 5,495 5,959 4,679
----------------------------------------
Gross profit................................................................ 9,578 7,636 7,324
----------------------------------------
Operating costs:
Research and development......................................................... 2,603 2,336 1,855
Sales and marketing.............................................................. 2,658 3,651 3,349
General and administrative....................................................... 3,150 3,172 2,273
Reorganization and other special charges......................................... 749 1,706 908
----------------------------------------
Total operating costs....................................................... 9,160 10,865 8,385
----------------------------------------
Operating income (loss)............................................................. 418 (3,229) (1,061)
Interest expense.................................................................... - - (274)
Interest and other income, net...................................................... 735 808 368
----------------------------------------
Income (loss) before provision for taxes............................................ 1,153 (2,421) (967)
Provision for income taxes.......................................................... 92 40 -
----------------------------------------
Net income (loss)........................................................... 1,061 (2,461) (967)
Accretion of redeemable preferred stock............................................. - - (110)
----------------------------------------
Net income (loss) attributable to common stockholders....................... $1,061 (2,461) (1,077)
----------------------------------------
----------------------------------------
Basic earnings (loss) per share $0.17 (0.41) (0.26)
----------------------------------------
----------------------------------------
Weighted average common stock outstanding 6,086 5,936 4,144
----------------------------------------
----------------------------------------
Diluted earnings (loss) per share $0.17 (0.41) (0.26)
----------------------------------------
----------------------------------------
Weighted average common and dilutive potential common stock outstanding 6,368 5,936 4,144
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' TOTAL
-------------------- PAID-IN NOTE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
------ ------ ------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of common stock options.. 102,968 - 398 - - 398
Employee stock purchase plan
purchases...................... 20,382 - 144 - - 144
Other............................. - - (20) - - (20)
Net loss.......................... - - - - (2,461) (2,461)
---------------------------------------------------------------------------------------------
Balances as of March 31, 1997..... 6,000,297 6 25,033 - (7,077) 17,962
Exercise of common stock options.. 162,487 - 462 - - 462
Employee stock purchase plan
purchases...................... 38,284 - 103 - - 103
Net income........................ - - - - 1,061 1,061
---------------------------------------------------------------------------------------------
Balances as of March 31, 1998..... 6,201,068 $6 25,598 - (6,016) 19,588
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $1,061 (2,461) (967)
Adjustments to reconcile income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 1,183 622 333
Loss on write off of fixed assets ................................................ - 328 -
Bad debt and sales discount provisions.............................................. 370 472 223
Compensation expense related to issuances of common stock and stock option grants... - - 90
Changes in operating assets and liabilities:
Accounts receivable............................................................... (552) (245) (1,125)
Unbilled accounts receivable...................................................... 364 (360) (106)
Prepaid expenses and other current and noncurrent assets.......................... 60 (54) 30
Accounts payable.................................................................. (284) 421 86
Deferred revenue.................................................................. 683 (275) (264)
Accrued liabilities and other liabilities......................................... 654 (1,217) 755
------------------------------------
Net cash provided by (used in) operating activities............................ 3,539 (2,769) (945)
------------------------------------
Cash flows from investing activities:
Purchase of securities available-for-sale.............................................. (6,826) (8,117) (4,775)
Proceeds from sale or maturities of securities available-for-sale........... 7,449 8,425 -
Acquisition of property and equipment.................................................. (387) (1,301) (628)
Computer software development costs.................................................... (904) (814) (569)
-------------------------------------
Net cash used in investing activities.......................................... (668) (1,807) (5,972)
------------------------------------
Cash flows from financing activities:
Bank borrowings........................................................................ - - 850
Repayment of bank borrowings........................................................... - (1,940) (850)
Proceeds from issuance of common stock, net of issuance costs..................... - - 23,132
Proceeds from exercise of stock options and employee stock purchases.............. 565 542 -
Repayment of stockholder note.......................................................... - - 38
Repurchase of common stock............................................................. - - (284)
Redemption of preferred stock.......................................................... - - (1,954)
Other.................................................................................. - (20) -
------------------------------------
Net cash provided by (used in) financing activities............................ 565 (1,418) 20,932
------------------------------------
Net increase (decrease) in cash and cash equivalents...................................... 3,436 (5,994) 14,015
Cash and cash equivalents at beginning of year............................................ 9,211 15,205 1,190
------------------------------------
Cash and cash equivalents at end of year.................................................. $12,647 9,211 15,205
------------------------------------
------------------------------------
Supplemental information:
Cash paid for interest................................................................. $- - 33
------------------------------------
------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
(1) BUSINESS OF THE COMPANY
MECON, Inc. (MECON or the Company) is a leading provider of
benchmarking solutions to the healthcare industry. The benchmarking solution
offered by MECON comprises data/information products, decision support software
and value-added services. The principal focus of the Company's products is to
reduce costs and improve efficiency and effectiveness of healthcare delivery
systems. The Company's main product line is based upon a proprietary operations
benchmarking database containing cost and key performance information from
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.
(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.
(MCIS). All intercompany balances and transactions have been eliminated in
consolidation.
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
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
The Company capitalizes internally generated software development costs
for external use in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED. Capitalization of software development costs begins upon the
establishment of technological feasibility for the product. The Company
amortizes such capitalized amounts upon commencement of product introduction at
the greater of the straight-line basis using estimated economic lives of two to
three years or the ratio of actual revenues achieved to total anticipated
revenues over the lives of the products. The realizability of unamortized
capitalized costs is periodically reviewed relative to the estimated future
revenues of the related products. Under SFAS No. 86, the Company capitalized
$740,000, $754,000 and $569,000 of software development costs for the years
ended March 31, 1998, 1997 and 1996, respectively.
The Company capitalizes software development costs for internal use in
accordance with Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Capitalization of
software development costs begins in the application development stage of the
product. The Company amortizes such capitalized amounts using the straight-line
basis over estimated economic lives of up to three years. Under SOP 98-1, the
Company capitalized $92,000 of software development costs related to internal
databases supporting company products for the year ended March 31, 1998 and no
such costs for prior periods.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense in the
period incurred.
ADVERTISING COSTS
All costs associated with advertising and promoting products are
expensed in the period incurred.
<PAGE>
REVENUE RECOGNITION
The Company accounts for software and related revenues in accordance
with SOP 91-1, SOFTWARE REVENUE RECOGNITION.
Revenue generated from the initial year of a MECON-PEERx subscription
contract is recognized ratably from the date of contract signing over the
estimated time to deliver a customer's MECON-PEERx report, which is generally
four to five months in duration. Revenue generated from a subsequent year
subscription contract is recognized ratably over the estimated time to deliver a
customer's subsequent year report, which generally takes four to five months
beginning in the second or third year of the contract. Costs to deliver the
MECON-PEERx products are estimated to be incurred evenly throughout the period
beginning with the signing of a contract and ending with the delivery of a
report. 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 MECON-OPTIMIS software
product is recognized upon delivery of the software to the customer. Revenue
from MECON-OPTIMIS implementation services, including amounts bundled with the
initial license fee, is recorded as deferred revenue and recognized upon
completion of services, generally over four to five months.
Although the Company's MECON-Action-Point-SM- 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 MECON-OPTIMIS and MECON-Action-Point-SM- customers. Revenue from
maintenance and technical support services, including amounts 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.
MECON-Advisory-SM- revenue is recognized as the services are
performed or as the customer's specific project is completed.
In October 1997, SOP 97-2, SOFTWARE REVENUE RECOGNITION, was issued
which supersedes SOP 91-1. The Company will be required to adopt SOP 97-2 for
software transactions entered into beginning April 1, 1998. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The revenue allocated to software products generally is recognized upon delivery
of the products. The revenue allocated to postcontract customer support
generally is recognized ratably over the term of the support and revenue
allocated to service elements generally is recognized as the services are
performed. Beginning in fiscal 1999, the Company will recognize revenue in
accordance with SOP 97-2. Under its current practice, the Company does not
expect a significant impact on recognition of revenue from software transactions
upon adoption of SOP 97-2.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under SFAS 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.
EARNINGS (LOSS) PER SHARE
In December 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE,
which requires the presentation of basic earnings per share (EPS) and, for
companies with complex capital structures, diluted EPS. Basic earnings (loss)
per share is calculated using the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is calculated
using the weighted average number of common and dilutive potential common stock
outstanding during the period. Dilutive potential common stock represents
outstanding options which are calculated using the treasury stock method.
Earnings (loss) per share amounts have been restated for all periods presented
to conform to the requirements of SFAS No. 128.
For the purposes of the 1996 net loss per share computations, net loss
has been increased by the amount of the periodic accretion for redeemable
preferred shares. Upon the completion of the Company's initial 1995 public stock
offering, the Series A and B preferred shares were redeemed.
<PAGE>
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
securities available-for-sale and trade receivables. The Company has investment
policies that limit investments to short-term low risk investments. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts to cover potential credit losses.
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 recorded amounts of assets and liabilities at the
date of the consolidated financial statements and of revenues and expenses
during the reporting period, as well as the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. A change in
the facts and circumstances surrounding these estimates could result in a change
to the estimates and impact future operating results.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Pursuant to SFAS No. 121, the
Company assesses the recoverability of the carrying amount of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may be impaired. If the estimated future undiscounted
operating cash flows over the remaining useful life of the long-lived asset is
less than the carrying amount of the asset, a charge to income would be
recognized for the excess of the carrying amount of the asset over its fair
value.
STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, effective April 1, 1995. This statement establishes financial
accounting and reporting standards for stock-based compensation, including
employee stock purchase plans and stock option plans. As allowed by SFAS No.
123, the Company continues to measure compensation expense for awards granted to
employees under the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation. Such
reclassifications had no effect on previously reported results of operations.
(3) REORGANIZATION AND OTHER SPECIAL CHARGES
During fiscal 1998, the Company took action to reduce its ongoing
quarterly operating expense base. As a part of the expense reduction effort, the
Company decreased its workforce by 38 employees on April 17, 1997 and incurred a
$749,000 reorganization charge during the first quarter of fiscal 1998. This
charge was primarily comprised of employee severance and related benefits and
additional costs associated with facility shutdowns. The following table sets
forth a description of the reorganization charge for the year ended March 31,
1998:
<TABLE>
<CAPTION>
ACCRUAL
-------
TOTAL USED OR AT
----- ------ ------
REORGANIZATION COST EXPENSE PAID 3/31/98
------------------- ------- ---- -------
<S> <C> <C> <C>
Salaries and termination benefits of 38 employees..... $634,000 599,000 35,000
Facilities shutdown................................... 38,000 38,000 -
Professional fees..................................... 77,000 77,000 -
----------------- ---------------- ---------------
$749,000 714,000 35,000
----------------- ---------------- ---------------
----------------- ---------------- ---------------
</TABLE>
During fiscal 1997, the Company implemented a plan to reorganize its
operations by centralizing the management of its product development, sales and
product support organizations to better achieve its strategic growth objectives.
In connection with the implementation of this new corporate structure, the
Company recorded a pretax charge of $1,337,000 for costs associated with
employee severance and related benefits; asset writedowns; expansion of the
corporate headquarters; and a provision for accounts receivable that management
believed would not be collectible. This reserve was established because the
Company believed its commitment to the development of new products would change
the strategic direction of its product lines. The following table sets forth a
description of the type and amount of reorganization costs recognized as expense
for the year ended March 31, 1997:
<PAGE>
<TABLE>
<CAPTION>
USED ACCRUAL
---- -------
TOTAL OR AT
----- -- --
REORGANIZATION COST EXPENSE PAID 3/31/97
------------------- ------- ---- -------
<S> <C> <C> <C>
Salaries and termination benefits..................... $529,000 529,000 -
Facilities shutdown................................... 285,000 285,000 -
Professional fees..................................... 5,000 5,000 -
Asset writedowns...................................... 218,000 218,000 -
Provision for doubtful accounts....................... 300,000 51,325 248,675
----------------- ---------------- -----------------
$1,337,000 1,088,325 248,675
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
During fiscal 1998, the Company utilized for bad debt write-offs
the remaining balance of $248,675 that was identified at the time of the
restructuring and there were no remaining amounts at March 31, 1998.
Other special charges of $369,000 were incurred during fiscal 1997
related to additional acquisition costs from the prior year merger and
costs associated with aborted acquisitions.
On March 29, 1996, the Company merged with Managed Care
Information Systems, Inc. (MCIS) in a pooling of interests transaction.
In connection with the merger, the Company exchanged 338,155 shares of
its common stock for all of the outstanding shares of MCIS, assumed 33,052
common stock options, and assumed a note payable and accrued interest to
a third party in the amount of $2.5 million which was repaid during the first
fiscal quarter of 1997. Accordingly, all prior year financial information
has been restated. In addition, the Company recorded charges totaling
$908,000 for merger-related costs for the year ended March 31, 1996.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS 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 based on quoted market prices, with
unrealized gains and losses, deemed by the Company as temporary in nature,
reported as a separate component of stockholders' equity. At March 31, 1998
and 1997, cost of available-for-sale securities approximated fair value of
such securities.
At March 31, 1998 and 1997, available-for-sale securities consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Government securities....................................................... $522 778
Corporate debt securities................................................... 13,484 11,143
Foreign debt securities..................................................... - 532
-----------------------
$14,006 12,453
-----------------------
-----------------------
</TABLE>
At March 31, 1998 and 1997, these securities were classified in the
Consolidated Balance Sheet as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash equivalents............................................................ $10,162 7,986
Securities available-for-sale........................................ 3,844 4,467
-----------------------
$14,006 12,453
-----------------------
-----------------------
</TABLE>
The contractual maturity of all available-for-sale securities as of
March 31, 1998 was one year or less.
During fiscal 1998, 1997 and 1996, there were no gross
realized gains or losses on sales of securities held as
available-for-sale.
The carrying amounts of all other financial instruments approximate
fair value because of their short maturity.
<PAGE>
(5) PROPERTY AND EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS
The following is a summary of property and equipment at March 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Office furniture and equipment........................................................ $523 458
Computers............................................................................. 2,132 1,994
Leasehold improvements................................................................ 191 7
----------------------
2,846 2,459
Less accumulated depreciation......................................................... (1,416) (871)
----------------------
$1,430 1,588
----------------------
----------------------
</TABLE>
Depreciation expense was $545,000, $395,000 and $244,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.
The following is a summary of software development costs at March 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Purchased software................................................................... $230 158
Internally developed software........................................................ 3,163 2,331
----------------------
3,393 2,489
Less accumulated amortization........................................................ (1,617) (979)
----------------------
$1,776 1,510
----------------------
----------------------
</TABLE>
Amortization expense was $638,000, $227,000 and $89,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases with terms of 60
months. Certain office equipment is leased under operating leases with terms of
approximately 36 months.
Future minimum lease commitments under operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- ---------------------
<S> <C>
1999.......................................................................... $216,980
2000.......................................................................... 164,273
2001.......................................................................... 1,761
2002 and thereafter........................................................... -
------------------
Total...................................................................... $383,014
------------------
------------------
</TABLE>
Rent expense under operating leases for the years ended March
31, 1998, 1997 and 1996 was $401,000, $520,000 and $363,000,
respectively.
(7) RELATED PARTY TRANSACTIONS
IT Solutions, Inc. (ITS) is partially owned by certain stockholders
of the Company. Prior to April 1, 1996, ITS subleased office space from the
Company and purchased office and administrative services from the Company
totaling approximately $27,000, which is included as a reduction of general
and administrative expenses, during the year ended March 31, 1996. The
Company purchased contract software programming services from ITS totaling
approximately $3,000, $500,000 and $338,000, capitalized as software
development costs or expensed as research and development costs, during the
years ended March 31, 1998, 1997 and 1996, respectively. As of March 31, 1998
and 1997, receivables from ITS were insignificant and there were no payables
to ITS.
<PAGE>
(8) INCOME TAXES
Income tax expense for the years ended March 31, 1998, 1997 and 1996
consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Current:
<S> <C> <C> <C>
Federal............................................................................ $31 3 -
State.............................................................................. 61 16 -
-------------------------
92 19 -
Deferred:
Federal............................................................................ - 16 -
State.............................................................................. - 5 -
-----------------------------
- 21 -
-----------------------------
Total tax expense............................................................... $92 40 -
-----------------------------
-----------------------------
</TABLE>
Income tax expense for the years ended March 31, 1998, 1997 and 1996
differed from the amounts computed by applying the U.S. Federal income tax rate
of 34% of pretax income (losses) as a result of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit..................................................... $392 (823) (328)
Nondeductible expenses and merger costs............................................. 26 87 293
Research credits.................................................................... - (196) -
State taxes......................................................................... 40 15 -
Utilization of net operating loss and research credit carryforwards................. (464) - -
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)
Losses and credits for which no benefit was taken................................... - 953 -
Other............................................................................... 98 4 (2)
---------------------------
$92 40 -
---------------------------
---------------------------
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of deferred income tax assets and liabilities as of March 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss................................................................. $790 1,434
Compensated absences............................................................... 153 105
Research credit carryforwards...................................................... 438 401
Research expenses capitalized for state tax purposes............................... 143 -
Capital loss carryforward.......................................................... 259 259
Allowance for bad debts............................................................ 122 220
Depreciation....................................................................... 70 48
MCIS tax accounting method change.................................................. 173 305
Other.............................................................................. 46 16
-----------------------
Total gross deferred tax assets............................................... 2,194 2,788
Less valuation allowance.............................................................. (1,778) (2,076)
-----------------------
Net deferred tax assets....................................................... 416 712
Deferred tax liabilities:
Software costs..................................................................... (416) (712)
-----------------------
Total gross deferred tax liabilities.......................................... (416) (712)
-----------------------
Net deferred tax asset........................................................ $- -
-----------------------
-----------------------
</TABLE>
<PAGE>
The (decrease) increase in the valuation allowance of approximately
$(298,000), $1,733,000 and ($123,000) for the years ended March 31, 1998, 1997
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 net operating losses and research credit carryforwards.
At March 31, 1998, the Company had federal net operating loss
carryforwards of approximately $2,322,000, which expire from 2011 through 2013.
At March 31, 1998, the Company had research credit carryforwards for
federal and California income tax purposes of approximately $314,000 and
$187,000, respectively, which are available to offset future tax liabilities, if
any, from 1999 through 2013 for federal and for an unlimited period of time for
California.
A portion of the net operating loss carryforward is attributable to the
exercise of nonqualified and disqualified stock options which when realized,
will result in approximately $715,000 of deferred tax assets being credited to
additional paid-in capital.
(9) 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 $49,000, $26,000 and zero for the years ended March 31,
1998, 1997 and 1996, respectively.
(10) PREFERRED SHARE PURCHASE RIGHTS PLAN
Pursuant to the Preferred Shares Rights Agreement (the Rights
Agreement) dated April 9, 1997, the Company's Board of Directors declared a
dividend of one right (the Rights) on each outstanding share of the Company's
common stock payable to stockholders of record as of March 14, 1997 and payable
in the same ratio as each future common share is issued. The exercise price of
the Right shall be $55 per right, and the redemption price shall be $0.01 per
right. The Rights are exercisable upon certain events as defined in the Rights
Agreement and expire on the earlier of (i) February 26, 2007 or (ii) exchange or
redemption of the Rights.
Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per common share. In the event of
liquidation, the holders of the Series A Preferred will be entitled to a minimum
preferential liquidation payment equal to 1,000 times the aggregate amount to be
distributed per share to holders of common shares plus an amount equal to any
accrued and unpaid dividends on the Series A Preferred. Each share of Series A
Preferred will have 1,000 votes, and will vote together with the common shares.
In the event of any merger, consolidation or other transaction in which the
common shares are changed or exchanged, each share of Series A Preferred will be
entitled to receive 1,000 times the amount received per common share. These
rights are protected by certain anti-dilution provisions.
(11) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations under SFAS No. 128 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders............................... $1,061 (2,461) (1,077)
------------------------------------
------------------------------------
Denominator for basic earnings (loss) per share -- weighted average common shares 6,086 5,936 4,144
Dilutive stock options.............................................................. 282 - -
------------------------------------
Denominator for diluted earnings (loss) per share................................... 6,368 5,936 4,144
------------------------------------
------------------------------------
Basic earnings (loss) per share..................................................... $0.17 (0.41) (0.26)
------------------------------------
------------------------------------
Diluted earnings (loss) per share................................................... $0.17 (0.41) (0.26)
------------------------------------
------------------------------------
</TABLE>
<PAGE>
Options to purchase 421,638 shares of the Company's common stock at
March 31, 1998 were not included in the computation of diluted earnings per
share because their exercise prices were greater than the average market price
of the Company's common stock of $5.75 per share. All options to purchase shares
of the Company's common stock at March 31, 1997 and 1996, respectively, were not
included in the computation of diluted loss per share as their effect would have
been antidilutive. (Note 12).
(12) STOCK-BASED COMPENSATION PLANS
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 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.
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
of incentive stock options to employees, officers, consultants and directors and
for the grant of nonstatutory stock options and stock purchase rights (Rights)
to employees and consultants of the Company. A total of 1,200,000 shares of
common stock has been reserved for future issuance under the 1995 Plan. The
exercise price of options granted under the 1995 Plan is generally at least
equal to the fair market value of the common stock of the Company on the date of
grant. However, 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. Generally, options vest 20% on the date of grant, and 20%
each year thereafter for four years. As of March 31, 1998, there were 387,621
shares available for future grant under the 1995 Plan.
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.
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. Initially, a
total of 50,000 shares of common stock was reserved for issuance under the
Director Plan. As of July 1997, the Director Plan was amended to increase the
number of shares of the Company's common stock reserved for issuance under the
Director Plan to 100,000 shares. The Director Plan, as amended in January 1997,
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 new
Outside Director shall be granted a nonstatutory stock option to purchase 15,000
shares of common stock (10,000 shares prior to the January 1997 amendment) upon
the date which such person first becomes an Outside Director. Thereafter, each
Outside Director shall be automatically granted an option to purchase 5,000
shares of common stock on January 16 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
initial grant to new Directors will be exercisable three years from the date of
grant and the subsequent options will vest immediately. 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. As of March 31, 1998,
there were 19,028 shares available for future grant under the Director Plan.
In addition, the Director Plan was amended in January 1997 to include an
annual retainer of $10,000 for Outside Directors, a per meeting fee of $1,000
for Board meetings, and $750 for separately held committee meetings.
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.
<PAGE>
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. The Company sold 38,284 and 20,382 shares to employees under the
Purchase Plan for the years ended March 31, 1998 and 1997, respectively. No
shares were sold under the Purchase Plan in prior years. As of March 31, 1998,
there were 91,334 shares available for future grant under the Purchase Plan.
OPTION PLAN ACTIVITY
The following table summarizes option activity for the three years
ended March 31, 1998, in the format consistent with SFAS No. 123:
<TABLE>
<CAPTION>
INCENTIVE STOCK WEIGHTED
--------------- --------
OPTIONS AVERAGE
------- --------
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance at March 31, 1995........................................... 232,558 $0.57
Options granted..................................................... 479,742 10.56
Options canceled.................................................... (7,500) 8.00
Options exercised................................................... (6,728) 0.59
---------------------------------------
Balance at March 31, 1996........................................... 698,072 7.36
Options granted..................................................... 1,032,385 10.82
Options canceled.................................................... (541,450) 14.52
Options exercised................................................... (102,968) 3.86
---------------------------------------
Balance at March 31, 1997........................................... 1,086,039 7.39
Options granted..................................................... 564,888 4.07
Options canceled.................................................... (546,581) 6.26
Options exercised................................................... (162,487) 2.84
---------------------------------------
Balance at March 31, 1998........................................... 941,859 $6.83
---------------------------------------
---------------------------------------
</TABLE>
The weighted average fair value of options granted was $3.11,
$7.98 and $6.04 per share for the years ended March 31, 1998, 1997 and 1996,
respectively.
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
---------
AVERAGE WEIGHTED- WEIGHTED-
------- --------- ---------
RANGE OF REMAINING AVERAGE AVERAGE
-------- --------- ------- -------
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
-------- ------ ----------- -------- ------ --------
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.57 - 2.37 231,803 6.3 $1.49 105,336 $1.16
2.38 - 3.25 185,565 9.2 3.00 66,166 3.10
4.81 - 6.88 202,018 8.3 6.10 48,965 5.98
7.25 - 8.88 148,024 6.8 7.86 63,288 7.91
13.00 52,742 4.4 13.00 37,272 13.00
15.00 - 16.26 16,735 4.1 15.60 13,085 15.77
17.88 - 21.25 50,972 8.3 17.88 20,972 17.88
21.63 - 23.78 54,000 7.8 23.62 24,000 23.42
- ---------------------- ---------------- ---------------- -------------------- ----------------- -------------------
$0.57 - 23.78 941,859 7.4 $6.83 379,084 $7.26
- ---------------------- ---------------- ---------------- -------------------- ----------------- -------------------
- ---------------------- ---------------- ---------------- -------------------- ----------------- -------------------
</TABLE>
<PAGE>
PRO FORMA INFORMATION
The Company continues to apply APB No. 25 in accounting for its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of operations for
its fixed stock option plans and its stock purchase plan. Had compensation cost
for the Company's stock-based compensation plans been determined in accordance
with the fair value method prescribed in SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders
(IN THOUSANDS)....................................... As reported $1,061 (2,461) (1,077)
Pro forma (1,701) (4,082) (1,253)
Basic and diluted earnings (loss) per share.......... As reported 0.17 (0.41) (0.26)
Pro forma (0.28) (0.69) (0.30)
</TABLE>
The above pro forma amounts include compensation expense for
options and purchase rights granted since April 1, 1995, and may not be
representative of that to be expected in future years.
The fair value of each option granted under the option plans and
purchase rights granted under the Purchase Plan are estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
STOCK OPTION PLANS EMPLOYEE STOCK PURCHASE PLAN
------------------ ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected volatility............ 98% 95% 95% 98% 95% 95%
Expected life.................. 6.38 years 4.5 years 4.5 years 6 months 6 months 6 months
Risk-free interest rate........ 6.21% 6.32% 5.84% 5.45% 5.05% 5.18%
</TABLE>
A dividend yield of zero was used for each year. The
weighted-average fair value of purchase rights granted under the Purchase
Plan in fiscal 1998, 1997 and 1996 was $1.79, $2.57 and $8.44 per share,
respectively.
OPTION REPRICING
On January 16, 1997, the Company offered certain key employees holding
options with exercise prices in excess of $12.00 per share the opportunity to
exchange such options for options with an exercise price of $5.625 per share,
the fair market value of the Company's stock on that date, provided that such
options be subject to a revised four-year vesting schedule beginning on the new
grant date. Options to purchase 412,176 shares were so exchanged and are
included in fiscal 1997 options granted and canceled.
(13) MAJOR CUSTOMERS
For the year ended March 31, 1998, one significant customer
accounted for 20% of the Company's fiscal 1998 revenues. At March 31, 1998,
receivables from two different customers constituted 24% of total accounts
receivable. At March 31, 1998, unbilled receivables from two other customers
constituted 23% of total unbilled accounts receivables.
For the years ended March 31, 1997 and 1996, the Company
had a different significant customer which covered approximately 50
academic hospitals. This contract, totaling 11% of 1997 and 1996 revenues
and 15% of total unbilled receivables at March 31, 1997, was renewed in
January 1995 for services to be rendered through March 1998. As of March
31, 1998, this contract had not been renewed.
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the years in the three-year period ended March 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Francisco, California
May 1, 1998
<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, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.
ITEM 10. EXECUTIVE COMPENSATION
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy
Statement for its 1998 annual meeting of stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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-TM- Operations Benchmarking Database Services to University Hospital Consortium
Service Corporation members revised February 24, 1995
10.18(2) Form of MECON-PEERx-TM-subscription agreement
10.19(2) Form of MECON-OPTIMIS-TM-software agreement
11.1(4) Computation of per share earnings
23.1(3) Consent of KPMG Peat Marwick LLP
24.1(3) Power of Attorney
27.1(3) 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.
(3) Previously filed.
(4) Incorporated by reference from the Registrant's Form 10-K, Footnote
11 of Notes to Consolidated Financial Statements filed on June 26,
1998.
(b) REPORTS ON FORM 8-K
On April 14, 1997, the Company filed a report on form 8-A12G dated
April 14, 1997 which announced the registration of certain classes of securities
pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934.
On May 9, 1997, the Company filed a report on form 8-K dated April 17,
1997 which announced certain management changes and a renewed focus on the
Company's historical strengths.
<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 26, 1998
MECON, Inc.
By: /s/ DAVID J. ALLINSON
Mr. David J. Allinson
VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ VASU R. DEVAN Chairman of the Board, President and Chief Executive Officer June 26, 1998
----------------- (Principal Executive Officer)
(Vasu R. Devan)
/s/ DAVID J. ALLINSON Vice President, Finance and Administration and Chief Financial June 26, 1998
--------------------- Officer (Principal Financial and Accounting Officer)
(David J. Allinson)
/s/ RAJU RAJAGOPAL Senior Vice President, Chief Operations Officer June 26, 1998
------------------
(Raju Rajagopal)
/s/ RICH MCCANN Director June 26, 1998
------------------
(Rich McCann)
/s/ M. GREG ALLIO Director June 26, 1998
------------------
(M. Greg Allio)
/s/ KATHY BRITTAIN WHITE Director June 26, 1998
------------------------
(Kathy Brittain White)
</TABLE>
<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
1, 1998, relating to the consolidated balance sheets of MECON, Inc. and
subsidiary as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended March 31, 1998, which report appears
in the March 31, 1998 annual report on Form 10-KSB of MECON, Inc.
KPMG Peat Marwick LLP
San Francisco, California
June 26, 1998
