<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarter ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-27048
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MECON, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-2702762
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 Porter Drive, Suite 210
San Ramon, California 94583
(address of principal executive officers)
Issuer's telephone number, including area code: (925) 838-1700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days X Yes No
----- -----
The number of shares outstanding of the registrant's Common Stock on February 9,
1999 was
6,301,965 shares
Transitional Small Business Disclosure Format (check one): Yes X No
----- -----
1
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MECON, INC.
FORM 10-QSB
DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets (unaudited) as of
December 31, 1998 and March 31, 1998 3
Consolidated Condensed Statements of Income (unaudited) for the
Three and Nine Month Periods Ended December 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows (unaudited) for the
Nine Month Periods Ended December 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits 11.1 Computation of Earnings (Loss) per Share 20
27.0 Financial Data Schedules 21
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
MECON, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $12,307 $12,647
Securities available-for-sale, at market 5,736 3,844
Accounts receivable, net of allowances of $195 and $308
at December 31, 1998 and March 31, 1998, respectively 3,595 2,724
Unbilled accounts receivable 291 522
Related party receivable 30 -
Other current assets 586 358
------------------------------------------
Total current assets 22,545 20,095
Property and equipment, net 1,856 1,430
Software development costs, net 2,320 1,776
Other assets 9 9
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$26,730 $23,310
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------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,898 $ 1,113
Accrued salaries and benefits 869 848
Deferred revenue 1,946 1,741
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Total current liabilities 4,713 3,702
Long-term obligations, less current portion - 20
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Total liabilities 4,713 3,722
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Stockholders' equity:
Preferred stock, $.001 par value 5,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,280,384, and 6,201,068 issued and
outstanding at December 31, 1998 and March 31, 1998,
respectively 6 6
Additional paid in capital 25,899 25,598
Accumulated deficit (3,888) (6,016)
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Total stockholders' equity 22,017 19,588
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$26,730 $23,310
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------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements
3
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MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
--------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
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Revenue:
Subscription and license $3,439 $2,973 $ 9,782 $ 7,937
Services 1,188 924 2,734 2,981
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Net revenue 4,627 3,897 12,516 10,918
Cost of revenue 1,485 1,400 4,106 4,087
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Gross profit 3,142 2,497 8,410 6,831
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Operating costs:
Research and development 826 665 2,150 1,934
Sales and marketing 786 705 2,213 1,958
General and administrative 600 811 1,876 2,504
Reorganization charges - - - 749
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Total operating costs 2,212 2,181 6,239 7,145
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Operating income (loss) 930 316 2,171 (314)
Interest and other income, net 227 185 668 529
--------------------------------------------------
Income before provision for income taxes 1,157 501 2,839 215
Provision for income taxes 289 25 711 45
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Net income $ 868 $ 476 $ 2,128 $ 170
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--------------------------------------------------
Basic earnings per share $ 0.14 $ 0.08 $ 0.34 $ 0.03
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Weighted average common stock outstanding 6,257 6,097 6,235 6,041
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Diluted earnings per share $ 0.13 $ 0.07 $ 0.32 $ 0.03
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Weighted average common and dilutive potential
common stock outstanding 6,603 6,456 6,632 6,316
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--------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
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MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
December 31,
--------------------
1998 1997
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<S> <C> <C>
Net cash provided by operating activities $ 3,268 $ 2,124
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Cash flows (used in) provided by investing activities:
Purchase of securities available-for-sale (2,921) (5,241)
Proceeds from sales or maturities of securities
available-for-sale 1,030 6,047
Acquisition of property and equipment (979) (283)
Computer software development costs (1,039) (616)
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Net cash used in investing activities (3,909) (93)
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Cash flows from financing activities:
Proceeds from exercise of stock options and
employee stock purchase plan stock sales 301 317
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Net cash provided by financing
activities 301 317
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Net (decrease)/increase in cash and cash
equivalents (340) 2,348
Cash and cash equivalents at beginning of period 12,647 9,211
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Cash and cash equivalents at end of period $12,307 $11,559
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</TABLE>
See accompanying notes to consolidated condensed financial statements
5
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MECON, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
(1) BUSINESS OF THE COMPANY
MECON, Inc. (the Company) provides subscriptions to an information
database, licenses to software products, and consulting services to the
health care industry. These products and services improve performance and
reduce costs for health care organizations through the use of benchmark
information, processes, and tools.
(2) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of the Company presented
herein have been prepared without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information
and notes required by generally accepted accounting principles have been
condensed or omitted. In the opinion of management, these statements include
all adjustments (all of which consist of normal recurring adjustments except
as otherwise noted herein) necessary to present fairly the Company's
financial position and results of operations for the interim periods
presented. These statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
March 31, 1998 contained in the Company's Annual Report on Form 10-KSB. The
results of operations for the three and nine months ended December 31, 1998
are not necessarily indicative of the results of operations that may be
expected for future periods or the full year.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Beginning April 1, 1998, the Company has accounted for the sale of
software and related revenues in accordance with Statement of Position (SOP)
97-2, SOFTWARE REVENUE RECOGNITION. 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. Revenue
allocated to service elements generally is recognized as the services are
performed.
Revenue generated from the initial year of a MECON-PEERx-TM-
subscription and related MECON-PEERVIEW-TM- license and services contract is
recognized ratably from the date of contract signing over the estimated time
to the complete acquisition of data into the database, 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 the
complete acquisition of data into the database, which generally takes four to
five months beginning in the second or third year of the contract. Revenue
generated from the initial year of a PEER Overview Assessment contract is
recognized ratably from the date of contract signing over the estimated time
to the complete acquisition of data into the database, the overview
assessment, and the executive briefing, which is generally five to six months
in duration. 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.
6
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Revenue from MECON-OPTIMIS-TM- and MECON-Action-Point-SM- license and
implementation services are recorded as deferred revenue and recognized upon
completion of implementation. The Company offers post-contract customer
support to its MECON-OPTIMIS and MECON-Action-Point customers. Revenue from
maintenance 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-TM- revenue is recognized as the services are performed
or as the customer's specific project is completed.
The Company's adoption of SOP 97-2 did not have a material effect on the
Company's financial statements for the three and nine month periods ended
December 31, 1998. Prior to adoption of SOP 97-2, the Company accounted for
software and related revenues in accordance with SOP 91-1, SOFTWARE REVENUE
RECOGNITION.
REPORTING COMPREHENSIVE INCOME
Beginning April 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. For the
three and nine months ended December 31, 1998 and 1997, comprehensive income
was equal to the net income reported on the Consolidated Condensed Statements
of Income.
(4) REORGANIZATION CHARGES
During the first quarter of 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. At December 31, 1998, the reorganization plan is substantially
complete as there are no significant costs remaining to be incurred.
7
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(5) EARNINGS PER SHARE (EPS)
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
Three months ended December 31,
1998 1997
------------------------------------------ ------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income $868 6,257 $0.14 $476 6,097 $0.08
EFFECT OF DILUTIVE
SECURITIES
Stock options - 346 (0.01) - 359 (0.01)
------------------------------------------ ------------------------------------------
DILUTED EPS
Income
+ assumed exercises $868 6,603 $0.13 $476 6,456 $0.07
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
</TABLE>
Options to purchase 470,825 common shares at prices ranging from $8 to $24
per share and 277,164 common shares at prices ranging from $8 to $24 per
share were outstanding during the three months ended December 31, 1998 and
1997, respectively, but were not included in the computation of diluted EPS
because to do so would have been antidilutive for the periods presented.
<TABLE>
<CAPTION>
Nine months ended December 31,
1998 1997
------------------------------------------ ------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income $2,128 6,235 $ 0.34 $170 6,041 $0.03
EFFECT OF DILUTIVE
SECURITIES
Stock options - 397 (0.02) - 275 -
------------------------------------------ ------------------------------------------
DILUTED EPS
Income
+ assumed exercises $2,128 6,632 $ 0.32 $170 6,316 $0.03
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
</TABLE>
Options to purchase 214,401 common shares at prices ranging from $8.88 to $24
per share and 411,114 common shares at prices ranging from $5 to $24 per
share were outstanding during the nine months ended December 31, 1998 and
1997, respectively, but were not included in the computation of diluted EPS
because to do so would have been antidilutive for the periods presented.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS PRESS RELEASE
ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. SUCH FACTORS INCLUDE:
(1) DEPENDENCE ON ACQUIRING DATA FROM CUSTOMER SYSTEMS WHICH MAY NOT YET BE YEAR
2000 COMPLIANT, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION, IF CUSTOMERS ARE INCAPABLE
OR UNWILLING TO SUBMIT DATA. (2) VARIABILITY IN QUARTERLY REVENUES RELATED TO
THE TIMING OF LARGE CONSULTING ENGAGEMENTS. CONSULTING CONTRACTS ARE TYPICALLY
LARGE DOLLAR CONTRACTS THAT REPRESENT A MATERIAL PERCENTAGE OF THE COMPANY'S
QUARTERLY REVENUE. DELAYS IN CONTRACT SIGNING COULD RESULT IN LOWER SERVICES
REVENUES FOR THE COMPANY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION, AND (3)
NON-RENEWAL OF OLDER, STEEPLY DISCOUNTED CONTRACTS AT HIGHER PRICES DUE TO
PRICING 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, AS
WELL AS:
- VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
- DEPENDENCE ON PRINCIPAL PRODUCTS
- INTEGRITY AND RELIABILITY OF DATABASE
- COMPETITION
- DEPENDENCE ON STRATEGIC RELATIONSHIPS
- CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY
- POTENTIAL ACQUISITIONS
- DEPENDENCE ON KEY PERSONNEL
SUCH FACTORS ALSO INCLUDE THE RISK FACTORS LISTED FROM TIME TO TIME IN THE
COMPANY'S OTHER SEC REPORTS, INCLUDING BUT NOT LIMITED TO, THE REPORT ON FORM
10-KSB FOR THE YEAR ENDED MARCH 31, 1998, AND/OR FORM 10-QSB FOR THE QUARTER
ENDED SEPTEMBER 30, 1998, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY'S
INVESTOR RELATIONS DEPARTMENT. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB.
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 focused upon building
critical mass in its PEERx database product as well as increasing the
installed base for software products, MECON-OPTIMIS and MECON Action-Point.
As a result, 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. Although
78% of the Company's revenues were derived from database subscriptions and
software sales during the nine months ended December 31, 1998, the Company
believes that an increasing proportion of its revenues will be derived from
consulting services.
The Company anticipates this change in business mix as a result of its
recently adopted customer intimacy strategy. The Company's ability to
develop and maintain long-term customer relationships is core to this
strategy. As a key imperative of this strategy, the Company must deliver
immediate, significant and sustainable value, in the form of operational cost
reductions, to its customers. Without consulting services, hospital
management teams may not have the breadth and depth to act upon the cost
reduction opportunities identified by the PEERx database. If no action is
taken, customers may not perceive value from the database, and as a result,
not renew their subscriptions.
9
<PAGE>
Tactics supporting the customer intimacy strategy include, but are not
limited to, selling the MECON-Integrated Solution-TM- whenever possible,
cross-selling existing products to existing customers and remaining firm on
MECON-PEERx pricing related to the renewal of older, low margin
subscriptions. The MECON-Integrated Solution is a packaged product offering
that includes a MECON-PEERx subscription, MECON-Advisory and MECON-OPTIMIS.
Such a packaged offering assures that the customer achieves immediate,
significant and sustainable cost savings by not only receiving
benchmark-based cost management reports that identify cost reduction
opportunities by department but by also receiving MECON's integrated
consulting approach of implementing such identified cost reduction
opportunities and installing MECON-OPTIMIS, the Company's operational cost
monitoring software tool, to assure cost reductions are sustained.
Less than 50% of MECON-OPTIMIS customers are subscribers to MECON-PEERx
because MECON-OPTIMIS predates MECON-PEERx and many of the early
MECON-OPTIMIS customers, on current maintenance agreements, are now sales
prospects for either MECON-PEERx or the MECON-Integrated Solution. Therefore,
a cross-selling opportunity exists that has become a tactic of this strategy.
Many of the older multi-year MECON-PEERx subscriptions were
grandfathered at substantially lower prices. The Company has adopted a firm
pricing policy to migrate expiring MECON-PEERx 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 the nine
months ended December 31, 1998, the Company renewed essentially all expiring
contracts at 130% of the related customers' expiring contract values.
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 $1.1 million or 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. We
have traditionally recognized approximately 55% of the hospital consortium
revenue has historically been recognized in the September quarter and the
remaining 45% in the December quarter. Including the revenue impact of this
contract's non-renewal on the December 1998 quarter, revenue for the three
months ended December 31, 1998 increased 19% to $4.6 million compared to $3.9
million for the comparable period in the prior year. Revenue for the nine
months ended December 31, 1998 increased 15% to $12.5 million compared to
$10.9 million for the comparable period in the prior year. The Company
believes that the termination of this contract will not adversely effect
future earnings.
The total value of contracts signed in the three months ended December
31, 1998 increased 33% to a record $6.5 million compared to $4.9 million
signed in the comparable period in the prior fiscal year and $5.1 million in
the second quarter of 1999. This marks the Company's second consecutive
quarter of record contract signings. Of the $6.5 million, consulting
contract value signed represented approximately $1.9 million, up 123% from
the September 30, 1998 quarter and 148% from the comparable quarter in the
prior fiscal year. The sequential and year-over-year growth in consulting
contract value signed continues to assist the Company in executing on its
customer intimacy strategy, build its revenue backlog and improve its
visibility to consulting revenue in the immediate future. Of the $6.5
million, the database and software contract value signed represented
approximately $4.6 million, up 8% from the September 30, 1998 quarter and 11%
from the comparable quarter in the prior fiscal year. Contributing to the
growth rate of the database and software contract value signed was one
particular database customer in the December 31, 1998 quarter that signed a
one-year PEERx contract with options to renew the contract in years two and
three versus the Company's standard three-year contract. If the customer had
signed a three-year contract, the sequential and year-over-year growth rate
would have amounted to 39% and 43%, respectfully. This one-year contract was
with Catholic Healthcare West (CHW), which expanded its use of MECON's
operations
10
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benchmarking information services from the twenty CHW facilities, with
three-year contract terms, currently served in the Southern California market
to all 47 CHW facilities throughout the western United States.
As a result of continued increases in the total value of contracts
signed, the Company has achieved record revenue. These increases in total
contract value continue 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. Since
the total value of contracts signed in the third quarter of fiscal 1999 was
$6.5 million compared to $4.6 million in revenue recognized, backlog
increased by approximately $1.9 million in the third quarter of fiscal 1999.
Currently, approximately 50% to 75% of the Company's quarterly revenue is
derived from backlog. The remaining 25% to 50% is generated from contracts
signed during that respective quarter. The increase in the recurring base of
revenue, strong renewals and consulting contracts coupled with strong expense
controls have continued to drive improvement in the Company's gross and
operating margins.
In January 1999, the Company announced the release of its new database
product, MECON-PEERnext. MECON-PEERnext enables customers with an
industry-standard browser to access the MECON-PEERx database. The interactive
capability of MECON-PEERnext provides customers the ability to create and
analyze their individualized benchmarking reports with a faster turnaround.
MECON-PEERnext eliminates the need for customers to install customized
software on their computers to obtain benchmarking reports. Additionally,
customers can analyze performance metrics from their organization relative to
a peer group or over time in either graphical or tabular format. The Company
believes the release of MECON-PEERnext leverages the value of the existing
database to its customers, strengthens the Company's competitive position and
creates cost efficiencies in its internal operations by greatly reducing
printing and supply costs related to delivering benchmarking reports through a
browser. Existing customers will be migrated to MECON-PEERnext during the
next eighteen months.
In January 1999, the Company notified HBOC of its intent to terminate its
strategic relationship with HBOC by March 1999. At the same time, the Company
expressed its willingness, and intent, to renegotiate the partnership
agreement with more balanced economic terms. However, if the Company can not
renegotiate mutually acceptable terms, MECON is prepared for the relationship
to terminate. During last fiscal year and through the nine months ended
December 31, 1998, HBOC sales accounted for less than 3% of revenue. The
Company believes that the termination of this relationship will not adversely
affect future earnings.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenue:
Subscription and software...................... 74% 76% 78% 73%
Consulting services............................ 26% 24% 22% 27%
---------------------------------------------------
Net revenue................................. 100% 100% 100% 100%
Cost of revenue ................................... 32% 36% 33% 37%
---------------------------------------------------
Gross profit ...................................... 68% 64% 67% 63%
Operating costs:
Research and development....................... 18% 17% 17% 18%
Sales and marketing............................ 17% 18% 18% 18%
General and administrative..................... 13% 21% 15% 23%
Reorganization charges......................... - - - 7%
---------------------------------------------------
Total operating costs.................... 48% 56% 50% 66%
---------------------------------------------------
Operating income (loss) ........................... 20% 8% 17% (3%)
Interest and other income, net .................... 5% 5% 5% 5%
---------------------------------------------------
Income (loss) before provision for income taxes ... 25% 13% 22% 2%
Provision for income taxes ........................ 6% 1% 6% -
---------------------------------------------------
Net income (loss) ................................. 19% 12% 16% 2%
---------------------------------------------------
---------------------------------------------------
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1997
REVENUE
Revenue for the three months ended December 31, 1998 increased 19% to
$4.6 million compared to $3.9 million for the comparable period in the prior
fiscal year. Subscription and software revenue increased 16% to $3.4 million
compared to $3.0 million for the comparable period in the prior fiscal year
and accounted for 64% of the increase. Consulting services revenue increased
29% to $1.2 million compared to $924,000 for the comparable period in the
prior fiscal year and accounted for the remainder of the increase.
The increase in subscription and software revenue was primarily attributable
to an increasing number of renewing subscribers at higher unit prices and an
increasing number of new subscribers. Revenue related to renewals accounted
for approximately 60% of the increase. The expanding base of recurring
revenue from multi-year subscription contracts sold in prior years and new
PEERx contracts signed during the three months ended December 31, 1998
equally contributed to the remainder of the increase.
The increase in consulting services revenue was primarily attributable to an
increase in consulting engagements sold over the last six months. During the
quarters ended September 30, 1998 and December 31, 1998 approximately $2.7
million of consulting contracts were sold compared to $1.7 million in the
comparable quarter ended December 31, 1997. The Company anticipates
consulting services to increase as a percent of revenue given the Company's
customer intimacy strategy. This strategy includes expanding
12
<PAGE>
customer support services, such as training programs and consulting projects,
that build relationships with customers and enhance benefits customers derive
from the Company's database. Although the Company anticipates a greater
percent of its future revenue to be derived from consulting services,
consulting service contracts are significantly larger dollar contracts than
MECON-PEERx, MECON-OPTIMIS and MECON-Action-Point contracts. Therefore, the
timing of contract signings and delivery of related services may impact the
timing of revenue recognition, and as a result, consulting service revenue
may significantly vary from quarter to quarter.
COST OF REVENUE
Cost of revenue for the three months ended December 31, 1998 increased
6% to $1.5 million compared to $1.4 million for the comparable period in the
prior fiscal year. The increase in cost of revenue was primarily attributable
to increased personnel and related costs as well as increased amortization of
software development costs partially offset by decreased printing costs
related to the non-renewal of the hospital consortium contract. The hospital
consortium contract required significant paper deliverables to all 40
academic facilities related to the benchmarking reports. The employee count
increased to 55 during the three months ended December 31, 1998 from 49
during the comparable period in the prior fiscal year. Amortization of
software development costs increased to $172,000 for the three months ended
December 31, 1998 from $147,000 for the comparable period in the prior fiscal
year. Cost of revenue for the three months ended December 31, 1998 decreased
to 32% of revenue compared to 36% for the comparable period in the prior
fiscal year. The decrease in cost of revenue as a percent of revenue is
primarily a result of increased pricing on both new and renewing MECON-PEERx
contracts and higher daily billing rates achieved for the Company's fixed-fee
consulting engagements. The Company anticipates cost of revenue to increase
in absolute dollars due to planned increases in employees and increases in
amortization of software development costs. The Company anticipates cost of
revenue as a percent of revenue to remain relatively constant as the
efficiencies gained in technology and pricing are offset by a shift in
revenue mix to consulting.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended December
31, 1998 increased 24% to $826,000 compared to $665,000 for the comparable
period in the prior fiscal year. This increase was primarily due to an
increase in personnel working on MECON-PEERnext version 2.0 functional
specifications, which is planned for release in the second or third quarter
of fiscal 2000. During the three months ended December 31, 1998,
approximately $339,000 was capitalized for internally developed software
related to product development compared to $199,000 for the comparable period
in the prior year. The increase in software development costs capitalized
primarily relates to the beta testing and programming efforts related to
MECON-PEERnext version 1.0 released in January, 1999. Research and
development expenses for the three months ended December 31, 1998 increased
to 18% of revenue compared to 17% for the comparable period in the prior
fiscal year. This increase as a percent of revenue was primarily due to
planned product development efforts related to the functional specifications
of MECON-PEERnext version 2.0. The Company anticipates research and
development spending to increase in absolute dollars but decrease as a
percent of revenue as the company moves from the initial product development
efforts for MECON-PEERnext version 2.0 to programming, testing and release
management.
SALES AND MARKETING
Sales and marketing expenses for the three months ended December 31,
1998 increased 11% to $786,000 compared to $705,000 for the comparable period
in the prior fiscal year. This increase was primarily due to an increase in
salaries, commissions, and travel. The employee count remained constant at 12
during the three months ended December 31, 1998 compared to the same period
in the prior fiscal year. Sales and marketing expenses for the three months
ended December 31, 1998 decreased to 17% of revenue during the three months
ended December 31, 1998 compared to 18% during the comparable period in the
13
<PAGE>
prior fiscal year. The Company anticipates sales and marketing expenses to
increase in absolute dollars and as a percent of revenue due to increased
commissions related to an increasing customer base and more robust marketing
efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended December
31, 1998 decreased 26% to $600,000 compared to $811,000 for the comparable
period in the prior fiscal year. This decrease was primarily due to
reductions in the provision for bad debts, professional fees, and expenses
related to office infrastructure. The reduction in the provision for bad
debts accounted for 76% of the decrease and is the result of a reduction in
write-offs, improved cash collections and the reduction in the amount of
receivables older than 90 days. Additionally, the Company continues to
implement cost cutting policies and programs to create efficiencies in office
infrastructure expenses. General and administrative expenses for the three
months ended December 31, 1998 decreased to 13% of revenue compared to 21% of
revenue for the comparable period in the prior fiscal year. This decrease was
primarily due to the aforementioned cost reduction initiatives. The Company
anticipates general and administrative expenses to increase in absolute
dollars but remain relatively constant as a percent of revenue as a result of
increased depreciation, employee training and personnel.
PROVISION FOR INCOME TAXES
The increase in the income tax provision for the three months ended
December 31, 1998 of $264,000 was primarily attributable to the Company
achieving increased profitability offset by the use of its net operating loss
carryforwards and other tax credits. The remaining net operating loss
carryforwards and tax credits taken in conjunction with the Company's
anticipated profit is expected to result in an effective tax rate of 25% for
fiscal 1999. Therefore, the Company provided taxes at such a rate in the
first three quarters of fiscal 1999. In the prior fiscal year, the Company
had a larger net operating loss carryforward and tax credits to offset
current income taxes.
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1997
REVENUE
Revenue for the nine months ended December 31, 1998 increased 15% to
$12.5 million compared to $10.9 million for the comparable period in the
prior fiscal year. Subscription and software revenue increased 23% to $9.8
million compared to $7.9 million for the comparable period in the prior year
and accounted for all of the revenue increase. This increase was primarily
due to an increased base of recurring revenue from multi-year subscription
contracts and an increase in software sales.
Consulting services revenue for the nine months ended December 31, 1998
decreased 8% to $2.7 million compared to $3.0 million for the comparable
period in the prior year. The decrease was primarily due to the timing of
contract signings and delivery of related services that impact the timing of
revenue recognition. The Company anticipates service revenue to increase as a
percent of total revenues. This anticipated increase is primarily due to the
Company's strategy of expanding customer support services, such as training
programs and consulting projects, that build relationships with customers and
enhance benefits customers derive from the Company's database products.
COST OF REVENUE
Cost of revenue for the nine months ended December 31, 1998 remained
relatively constant in dollars at $4.1 million compared to the same period in
the prior fiscal year. The employee count increased to
14
<PAGE>
55 during the nine months ended December 31, 1998 from 48 during the
comparable period in the prior fiscal year. Amortization of software
development costs increased to $516,000 for the nine months ended December
31, 1998 from $446,000 during the comparable period in the prior fiscal year.
These increases were offset by a decrease in the number of highly
compensated independent contractors utilized to deliver consulting services,
stronger telecommunications management and decreased printing costs related
to the non-renewal of the hospital consortium contract. The hospital
consortium contract required significant paper deliverables to all 40
academic facilities related to the benchmarking reports. Cost of revenue for
the nine months ended December 31, 1998 decreased to 33% of total revenue
compared to 37% for the comparable period in the prior year, primarily due to
a shift in revenue mix from consulting to higher margin product. The Company
anticipates cost of revenue to increase in absolute dollars but remain
relatively constant as a percent of revenue due to the increase in
amortization of software development costs offset by an anticipated shift in
revenue towards consulting services revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine months ended December 31,
1998 increased 11% to $2.2 million compared to $1.9 million for the
comparable period in the prior fiscal year. This increase was primarily due
to an increase in personnel related to the development of MECON-PEERnext
versions 1.0 and 2.0. Version 1.0 was released in January 1999 and version
2.0 is anticipated to be released in the second or third quarter of fiscal
2000. During the nine months ended December 31, 1998, $1.0 million was
capitalized for internally developed software related to product development
compared to $616,000 for the comparable period in the prior fiscal year. The
increase in software development costs capitalized primarily relates to the
programming, testing and release management efforts related to MECON-PEERnext
version 1.0, which was released in January, 1999. Research and development
expenses for the nine months ended December 31, 1998 decreased to 17% of
revenue compared to 18% for the comparable period in the prior fiscal year.
The Company anticipates research and development spending to increase in
absolute dollars but decrease as a percent of revenue as the company moves
from the initial product development efforts for MECON-PEERnext version 2.0
to programming, testing and release management.
SALES AND MARKETING
Sales and marketing expenses for the nine months ended December 31, 1998
increased 13% to $2.2 million compared to $2.0 million for the comparable
period in the prior fiscal year, primarily due to an increase in commissions
and travel costs. Sales and marketing expenses for the nine months ended
December 31, 1998 remained constant at 18%. The Company anticipates sales and
marketing expenses to increase in absolute dollars and as a percent of
revenue due to increased commissions related to an increasing customer base
and more robust marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the nine months ended December
31, 1998 decreased 25% to $1.9 million compared to $2.5 million for the
comparable period in the prior year, primarily due to reductions in the
provision for bad debts, professional fees and expenses related to office
infrastructure. The reduction in the bad debts provision accounted for 33% of
the decrease and is the result of a reduction in write-offs, improved cash
collections and a reduction in the amount of receivables older than 90 days.
The remainder of the decrease was a result of the Company's cost cutting
policies and programs to create efficiencies in office infrastructure
expenses. General and administrative expenses for the nine months ended
December 31, 1998 decreased to 15% of revenue compared to 23% for the
comparable period in the prior year, primarily due to the forementioned
factors. The Company anticipates general and administrative expenses to
increase in absolute dollars but remain relatively constant as a percent of
revenue as a result of expected increases in depreciation, employee training
and personnel.
15
<PAGE>
REORGANIZATION CHARGES
No reorganization charges were incurred during the nine months ended
December 31, 1998 compared to $749,000 for the comparable period in the prior
fiscal year. The decrease was primarily due to the series of management
changes and corrective measures taken in the first quarter of fiscal 1998 as
previously discussed compared to no such actions in the first nine months of
fiscal 1999.
PROVISION FOR INCOME TAXES
The increase in the income tax provision for the nine months ended
December 31, 1998 of $666,000 was primarily attributable to the Company
achieving increased profitability offset by the use of its net operating loss
carryforwards and other tax credits. The remaining net operating loss
carryforwards and tax credits taken in conjunction with the Company's
anticipated profit is expected to result in an effective tax rate of 25% for
fiscal 1999. Therefore, the Company provided taxes at such a rate in the
first, second and third quarters of fiscal 1999. In the prior fiscal year,
the Company had a larger net operating loss carryforward and tax credits to
offset current income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash, cash equivalents and
securities available-for-sale increased by $1.5 million to $18.0 million
compared to $16.5 million at March 31, 1998 primarily as a result of strong
cash collections and cash management. The Company generated $3.3 million of
cash flow from operating activities for the nine months ended December 31,
1998 compared to $2.1 million in the comparable period in the prior year.
This improvement was primarily due to increased net income and cash
collections augmented by strong cash management. The Company's days of sales
outstanding (DSO) remained relatively constant at 68 days at December 31,
1998 compared to 63 days at March 31, 1998.
As of December 31, 1998, the Company had net working capital of $17.8
million, including cash, cash equivalents and securities available-for-sale
of $18.0 million. Given the Company's strong cash position as of December 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 the next twelve months and the foreseeable future.
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, one of
which is not at present Year 2000 compliant and expects to implement
programming changes necessary to address Year 2000 issues. The Company has no
contingency plans should the product programming changes become infeasible or
incapable of operating in the Year 2000. This product's historical
contribution to revenue is immaterial. The Company is also evaluating its
internal systems and expects to complete this evaluation by the end of this
fiscal year. The Company expects to complete implementation of the systems
and programming changes necessary to address Year 2000 issues on an
enterprise-wide basis by June 1999. 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
16
<PAGE>
expects 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 a material 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 customers'
benchmarking information gathering systems and other third parties with whom
the Company deals on financial transactions. While the Company expects to
complete its efforts to seek assurance from its suppliers, service providers
and customers by the end of this fiscal year, 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 a material adverse effect on the
Company. If it is determined that a material number of customers cannot
collect their data because of Year 2000 issues, the Company will staff
accordingly to collect the data manually.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the
Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. The Company anticipates that the
adoption of SFAS No. 133 will not have an impact on the Company's
consolidated financial statements.
17
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits 11.1 Computation of Earnings per Share
Exhibits 27.0 Financial Data Schedules
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MECON INC.
(Registrant)
Date: 2/16/99 /s/ Vasu Devan
-----------------------------
Vasu R. Devan
President and Chief Executive Officer
Date: 2/16/99 /s/ David J. Allinson
-----------------------------
David J. Allinson
Chief Financial Officer
19
<PAGE>
EXHIBIT 11.1
MECON, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average common stock outstanding 6,257 6,097 6,235 6,041
----------------------------------------------------
Net income $ 868 $ 476 $2,128 $170
----------------------------------------------------
Basic earnings per share $ 0.14 $ 0.08 $0.34 $ 0.03
----------------------------------------------------
----------------------------------------------------
DILUTED EARNINGS PER SHARE
Weighted average common stock outstanding 6,257 6,097 6,235 6,041
Dilutive effect of options outstanding 346 359 397 275
----------------------------------------------------
Weighted average common and dilutive
potential common stock outstanding 6,603 6,456 6,632 6,316
----------------------------------------------------
Net income $ 868 $ 476 $2,128 $ 170
----------------------------------------------------
Diluted earnings per share $ 0.13 $ 0.07 $ 0.32 $ 0.03
----------------------------------------------------
----------------------------------------------------
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,307
<SECURITIES> 5,736
<RECEIVABLES> 3,790
<ALLOWANCES> 195
<INVENTORY> 0
<CURRENT-ASSETS> 22,545
<PP&E> 1,856
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,730
<CURRENT-LIABILITIES> 4,713
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,730
<SALES> 0
<TOTAL-REVENUES> 12,516
<CGS> 4,106
<TOTAL-COSTS> 10,345
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,839
<INCOME-TAX> 711
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,128
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
</TABLE>
