Omnicell (OMCL) 10-Q 2002 Q1 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                            to
Commission File Number 000-33043

Omnicell, Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	74-2960387 (I.R.S. Employer Identification No.)
1101 East Meadow Drive Palo Alto, California 94303 (650) 251-6100 (Address, including zip code, of registrant's principal executive offices and registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        As of March 31, 2002 there were 21,832,455 shares of the Registrant's Common Stock outstanding.

OMNICELL, INC.

FORM 10-Q

INDEX

			Page Number
PART I—FINANCIAL INFORMATION
	ITEM 1.	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001	3
		Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2002 and March 31, 2001	4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2002 and March 31, 2001	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	16
PART II—OTHER INFORMATION
	ITEM 1.	Legal Proceedings	23
	ITEM 2.	Changes in Securities and Use of Proceeds	23
	ITEM 3.	Defaults Upon Senior Securities	23
	ITEM 4.	Submission of Matters to a Vote of Security Holders	23
	ITEM 5.	Other Information	23
	ITEM 6.	Exhibits and Reports on Form 8-K	24
SIGNATURES			25
EXHIBIT INDEX			26

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PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements

OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

			March 31, 2002			December 31, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	12,966		$	16,912
	Short-term investments			8,940			6,927
	Accounts receivable, net			14,675			18,167
	Inventories, net			14,223			12,702
	Prepaid expenses and other current assets			4,841			4,803
		Total current assets		55,645			59,511
Property and equipment, net				5,348			5,384
Other assets				6,952			7,219
		Total assets	$	67,945		$	72,114
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	5,591		$	4,837
	Accrued liabilities			12,024			14,514
	Deferred service revenue			9,098			8,009
	Deferred gross profit			18,875			24,790
		Total current liabilities		45,588			52,150
Other long-term liabilities				320			363
Stockholders' equity:
	Preferred stock; $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding			—			—
	Common stock; $0.001 par value; 50,000,000 authorized; 21,832,455 shares at March 31, 2002 and 21,668,668 shares at December 31, 2001 issued and outstanding			22			22
	Additional paid in capital			119,400			118,759
	Notes receivable from stockholders			(4,554	)		(4,554	)
	Deferred stock compensation			(479	)		(664	)
	Accumulated deficit			(92,312	)		(93,962	)
	Accumulated other comprehensive loss			(40	)		—
		Total stockholders' equity		22,037			19,601
		Total liabilities and stockholders' equity	$	67,945		$	72,114

See accompanying notes.

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited

			Three Months Ended March 31,
			2002			2001
Revenues:
	Product revenues		$	21,030		$	16,726
	Service and other revenues			3,389			2,261
		Total revenues		24,419			18,987
Cost of revenues:
	Cost of product revenues			7,985			5,421
	Cost of service and other revenues			1,382			1,739
		Total cost of revenues		9,367			7,160
		Gross profit		15,052			11,827
Operating expenses:
	Research and development			2,678			2,605
	Selling, general and administrative			11,004			10,456
		Total operating expenses		13,682			13,061
Income (loss) from operations				1,370			(1,234	)
Other income				677			184
Other expense				(457	)		(770	)
		Income (loss) before provision for income taxes		1,590			(1,820	)
Provision for income taxes (expense) benefit				60			(25	)
		Net income (loss)		1,650		$	(1,845	)
Net income (loss) per common share—basic			$	0.08		$	(0.67	)
Net income (loss) per common share—diluted			$	0.07		$	(0.67	)
Weighted average common shares outstanding—basic				21,514			2,741
Weighted average common shares outstanding—diluted				22,964			2,741

See accompanying notes.

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited

				Three Months Ended
				March 31, 2002			March 31, 2001
Operating activities:
Net income (loss)				$	1,650		$	(1,845	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization				684			496
	Amortization of deferred stock compensation				185			428
	Changes in operating assets and liabilities:
		Accounts receivable, net			3,492			(4,330	)
		Inventories			(1,521	)		(2,051	)
		Prepaid expenses and other current assets			(38	)		31
		Other assets			267			(984	)
		Accounts payable			754			1,100
		Accrued liabilities			(2,490	)		3,766
		Deferred service revenue			1,089			173
		Deferred gross profit			(5,915	)		(530	)
		Other long-term liabilities			(43	)		—
			Net cash used in operating activities		(1,886	)		(3,746	)
Investing activities:
	Purchases of short-term investments				(2,053	)		(4,055	)
	Maturities of short-term investments				—			949
	Purchases of property and equipment				(648	)		(564	)
			Net cash used in investing activities		(2,701	)		(3,670	)
Financing activities:
	Proceeds from issuance of common stock				641			56
	Note payable				—			(12	)
			Net cash provided by financing activities		641			44
Net decrease in cash and cash equivalents					(3,946	)		(7,372	)
Cash and cash equivalents at beginning of period					16,912			9,681
Cash and cash equivalents at end of period				$	12,966		$	2,309
Supplemental disclosures of non-cash financing and investing activities:
	Deferred stock compensation			$	—		$	136
Supplemental cash flow information:
	Cash paid for interest			$	—		$	180

See accompanying notes.

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OMNICELL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.    Organization and Summary of Significant Accounting Policies

Description of the Company

        Omnicell, Inc. ("Omnicell" or the "Company") was incorporated in the State of California in September 1992 under the name OmniCell Technologies, Inc. In August 2001, the Company reincorporated in Delaware and changed its name to Omnicell, Inc.

        The Company provides an integrated suite of clinical infrastructure and workflow automation solutions for healthcare facilities. These solutions include automation systems, clinical reference tools, an Internet-based procurement application and decision support capabilities. The Company sells and leases its products and related services to a wide range of healthcare facilities such as hospitals, integrated delivery networks and specialty care facilities, which include nursing homes, outpatient surgery centers, catheterization labs and clinics.

        In August 2001, the Company completed its initial public offering of 6.9 million shares of common stock at the initial public offering price of $7.00 per share, raising $42.9 million net of offering expenses.

        The accompanying unaudited condensed consolidated financial information has been prepared by management, in accordance with generally accepted accounting principles for interim financial information and pursuant to instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The consolidated financial statements include the Company and its wholly owned subsidiaries, Omnicell HealthCare Canada, Inc. and Omnicell Europe SARL. All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments (which would include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2002 and results of operations and cash flows for all periods presented have been made. The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.

        The condensed consolidated financial statements should be read in conjunction with the Company's December 31, 2001 audited consolidated financial statements included in the Company's Annual Report on Form-10K as filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002.

Stock Split

        All common stock share and per share amounts have been restated to reflect a 1-for-1.6 reverse stock split effected on July 31, 2001.

Use of Estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that materially affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates.

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Reclassifications

        Certain prior period amounts have been reclassified to conform to the current period presentation.

Revenue Recognition

        Revenues are derived primarily from sales of pharmacy and supply systems and subsequent service agreements. The Company markets these systems for sale or for lease. Pharmacy and supply system sales, which are accounted for in accordance with American Institute of Certified Public Accountants Statement of Position 97-2 (SOP 97-2),"Software Revenue Recognition" are recognized upon completion of the Company's installation obligation at the customer's site. Revenues from leasing arrangements are recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases," upon completion of the Company's installation obligation and commencement of the noncancelable lease term. Post-installation technical support, such as phone support, on-site service, parts and access to software upgrades, is provided by the Company under separate annual service agreements. Revenues on service agreements are recognized ratably over the related service contract period. Deferred service revenue represents amounts received under service agreements for which the services have not yet been performed and upfront fees received from certain distributors of our pharmacy and supply systems. These upfront fees are recognized ratably over the periods of the distribution agreements. For governmental customers, the Company offers free service for the first year of service. The vendor specific objective evidence of these services is deferred and recognized over the service period. Deferred gross profit represents the profit to be earned by the Company, exclusive of installation costs, on pharmacy and supply systems.

        Revenues from the Company's Internet-based procurement application, introduced in 1999, are recognized ratably over the subscription period. Internet-based procurement application revenues were not significant in the three-month periods ended March 31, 2002 and 2001, and are included in service and other revenues.

Concentration of Credit Risk

        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables and investments in a money market account. The Company's products are primarily sold to customers and to distributors. The Company performs ongoing credit evaluations of its customers and maintains reserves for credit losses. No one customer accounted for more than 10.0% of revenues in the three month periods ended March 31, 2002 and 2001.

        One leasing company accounted for 12% and 39% of accounts receivable at March 31, 2002 and 2001, respectively.

        The majority of revenues are generated from customers in North America, totaling 95% and 98% of total revenues for the three months ended March 31, 2002 and 2001, respectively.

Impairment of Long-Lived Assets

        The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable in accordance with SFAS No. 144,"Accounting for the Impairment or Disposal of Long-lived Assets." Recoverability of assets to be held and used, including assets to be disposed of other than by sale, is measured by a comparison of the carrying amount of any asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by

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the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be sold are reported at the lower of the carrying amount or fair value less costs to sell.

Software Development Costs

        Development costs related to software incorporated in the Company's pharmacy and supply systems incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. At March 31, 2002 and December 31, 2001, the balance of capitalized software development costs was approximately $1.4 million and $1.1 million, respectively. These costs are amortized over a three-year period upon commercial introduction and are reported as a component of other assets. Amortization of capitalized software development costs was approximately $0.2 million and zero in the three months ending March 31, 2002 and 2001, respectively.

Segment Information

        The Company reports segments in accordance with SFAS No. 131,"Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires the use of a management approach in identifying segments of an enterprise. Prior to 1999, the Company consisted of one operating segment: pharmacy and supply systems. A second operating segment was created in the second half of 1999 with the introduction of the Company's e-commerce business. The Company's chief operating decision maker reviews information pertaining to reportable segments to the operating income level. There are no significant intersegment sales or transfers. Assets of the operating segments are not segregated and substantially all of the Company's long-lived assets are located in the United States.

        In each of the three month periods ended March 31, 2002 and 2001, substantially all of the Company's total revenues and gross profit were generated by the pharmacy and supply systems operating segment. The Internet-based e-commerce business operating segment generated less than one percent of consolidated revenues in each of the three month periods ended March 31, 2002 and 2001. The operating losses generated by the segment were approximately $0.3 million and $1.3 million in the three months ended March 31, 2002 and 2001, respectively.

Net Income (Loss) Per Share

        Basic net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common and, if dilutive, common equivalent shares outstanding during the period. Common stock equivalents include the effect of outstanding dilutive stock options and warrants, computed using the treasury stock method. All potentially dilutive securities have been excluded from the computation of diluted net loss per share for the three months ended March 31, 2001, as their inclusion would be antidilutive. The total number of shares excluded from the calculation of net loss per common share for the three months ended March 31, 2001 was 15,645,144. For the three months ended March 31, 2002, 1,922,483 shares with an exercise price greater than $7.43, the average fair market value for the period, were excluded from the calculation of diluted net income per share.

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        The calculation of basic and diluted net loss per common share is as follows (in thousands, except per share amounts):

			Three Months Ended March 31,
			2002			2001
Historical:
	Basic:
		Net income (loss)	$	1,650		$	(1,845	)
		Weighted average shares of common stock outstanding		21,732			3,124
		Less: Weighted average common shares subject to repurchase		(218	)		(383	)
		Weighted average common shares outstanding-basic		21,514			2,741
		Net income (loss) per common share	$	0.08		$	(0.67	)
	Diluted:
		Net income (loss)	$	1,650		$	(1,845	)
		Weighted average common outstanding- basic		21,514			2,741
		Add: Dilutive effect of employee stock options and warrants		1,450			—
		Weighted average common shares outstanding-diluted		22,964			2,741
		Net income (loss) per common share	$	0.07		$	(0.67	)

Note 2.    Leasing Arrangements

        For the three months ended March 31, 2002 and 2001, net sales-type lease receivables sold under leasing agreements totaled approximately $5.7 million and $11.5 million, respectively. The Company records revenue at an amount equal to the cash to be received from the leasing company, which is equivalent to the net present value of the lease streams, utilizing the implicit interest rate under its funding agreements. The Company has no obligation under the lease once it is sold to the leasing company. Revenue is recognized when the equipment is installed. At March 31, 2002 and December 31, 2001, accounts receivable included approximately $3.4 million and $4.3 million, respectively, due from the finance companies for lease receivables sold.

Note 3.    Inventories

        Inventories consist of the following (in thousands):

		March 31, 2002		December 31, 2001
Raw materials		$	7,931	$	7,187
Work-in-process			834		615
Finished goods			5,458		4,900
	Total	$	14,223	$	12,702

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Note 4.    Note Payable

        The Company has established a credit facility with a bank that provides it with advances of up to 80% of eligible receivables, as defined, up to $10.0 million, and expires on June 30, 2002. Any advances under the credit facility are secured by substantially all of Company's assets. Interest under the credit facility is payable at an annual rate equal to our lender's prime rate plus 2.25%. The credit facility contains covenants that include limitations on indebtedness and liens, in addition to thresholds relating to stockholders' equity that define borrowing availability and restrictions on the payment of dividends. As of March 31, 2002, the Company had no outstanding borrowings under this credit facility, was eligible to borrow $10.0 million, and was in compliance with the covenants.

Note 5.    Deferred Gross Profit

        Deferred gross profit consists of the following (in thousands):

		March 31, 2002			December 31, 2001
Sales of pharmacy and supply systems, which have been accepted but not yet installed		$	25,291		$	32,849
Cost of sales, excluding installation costs			(6,416	)		(8,059	)
	Total	$	18,875		$	24,790

Note 6.    Deferred Stock Compensation

        Deferred stock compensation for options granted to employees has been determined as the difference between the deemed fair market value of our common stock on the date options were granted and the exercise price of those options. In connection with the grant of stock options to employees, the Company recorded deferred stock compensation of approximately zero and $136,000 in the three month periods ended March 31, 2002 and 2001, respectively. These amounts have been reflected as components of stockholders' equity and the deferred expense is being amortized to operations over the two to four year vesting periods of the options using the graded vesting method. In the three month periods ended March 31, 2002 and 2001, the Company amortized deferred stock compensation in the following amounts (in thousands):

		Three Months Ended March 31,
		2002		2001
Research and development expense			32		73
Selling, general and administrative expenses			153		355
	Total	$	185	$	428

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Note 7.    Comprehensive Income (Loss)

        The following are the components of comprehensive income (loss) (in thousands):

	Three Months Ended March 31,
	2002			2001
Net income (loss)	$	1,650		$	(1,845	)
Unrealized loss on short-term investments		(40	)		(3	)
Comprehensive income (loss)	$	1,610		$	(1,848	)

Note 8.    Contingencies

        On September 21, 2001, one of our customers, The Regents of the University of California (on behalf of the University of California San Francisco Medical Center), filed a third party complaint against the Company in an action captioned Americorp Financial, Inc. v. The Regents of the University of California, Case No. C 01-2678 MMC (N.D. Cal. 2001). This customer has suspended rent payments under its pharmacy automation leases, alleging claims for indemnification from Omnicell under its leasing documents and negligent misrepresentation in execution of the pharmacy leases. The customer's complaint demands rescission of the pharmacy leases and a declaration by the Court that the pharmacy leases are void. The Company believes that the customer's leases are valid. The Company has maintained reserves for potential losses in financed transactions, and believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial position, liquidity or results of operations.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this report contains predictions, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from any future performance suggested in this report as a result of many factors, including those referred to in "Factors That May Affect Future Operating Results" contained elsewhere in this report. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this report.

Overview

        We started our business in 1992 and began offering our supply systems for sale in 1993. In late 1996, we introduced our Omnicell pharmacy system. In January 1999, we expanded our line of pharmacy systems and customer base with the acquisition of the Sure-Med product line from Baxter Healthcare. As of March 31, 2002, a total of 22,297 pharmacy and supply automation systems had been installed or released for customer installation in 1,282 healthcare facilities.

        We sell our pharmacy and supply systems primarily in the United States. We have a direct sales force organized into six regions in the United States and Canada. We sell through distributors in Europe, the Middle East, Asia and Australia. We manufacture the majority of our systems in our production facility in Palo Alto, California, with refurbishment and spare parts activities conducted in our Waukegan, Illinois facility.

        In August 2001, we completed the initial public offering of 6.9 million shares of our common stock at the offering price of $7.00 per share, raising approximately $42.9 million, net of expenses for underwriting discounts, commissions and offering expenses. We used approximately $7.9 million of the net proceeds to repay the outstanding principal and interest on the note held by Baxter Healthcare incurred in connection with our acquisition of the Sure-Med product line in January 1999. We also used approximately $10.3 million of the net proceeds to redeem all shares of outstanding redeemable convertible preferred stock plus accrued interest thereon held by Sun Healthcare at the closing of the offering. We have used the remainder of the net proceeds for the expansion of our sales, marketing, research and development and customer support activities and for working capital and other general corporate purposes, including costs to support our leasing activities to U.S. government entities.

        We bill our customers upon delivery and acceptance of our pharmacy and supply systems and recognize revenue when the systems are installed. Deferred gross profit on our balance sheet represents primarily pharmacy and supply systems that have been shipped to, accepted, and, in most instances, paid for by our customers but not yet installed at the customer site. We record these shipments as deferred gross profit because title to the inventory has passed to the customer. During the quarter ending March 31, 2002 our product shipments decreased from the preceding quarter and as a result our deferred gross profit declined to $18.9 million at March 31, 2002 compared to $24.8 million at December 31, 2001. The reduction in shipments in the quarter ending March 31, 2002 compared to the preceding quarter is partly attributable to a delay in product orders caused by a faulty component from one of our vendors. We have identified the faulty component and are working with our vendor to replace the components for our customers. Other contributing factors to the decline in shipments were several contracts that did not close at the end of the quarter, the decline in shipments to military customers and fewer lease rollovers than planned. We are optimistic that shipments will return to historical levels in the quarter ended June 30, 2002 due to new product releases, increased sales from strategic partner relationships and higher lease rollovers.

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Results of Operations

        The following table sets forth for the periods indicated certain statement of operations data of the Company expressed as a percentage of total revenues:

			Three Months Ended March 31,
			2002		2001
Revenues:
	Product revenues		86.1	%	88.1	%
	Service and other revenues		13.9		11.9
		Total revenues	100.0		100.0
Cost of revenues:
	Cost of product revenues		32.7		28.5
	Cost of service and other revenues		5.7		9.2
		Total cost of revenues	38.4		37.7
		Gross profit	61.6		62.3
Operating expenses:
	Research and development		11.0		13.7
	Selling, general, and administrative		45.0		55.1
		Total operating expenses	56.0		68.8
Income (loss) from operations			5.6		(6.5	)
Other income			2.8		1.0
Other expense			(1.9	)	(4.1	)
Income (loss) before income taxes			6.5		(9.6	)
Provision (benefit) for income taxes			(0.3	)	0.1
		Net income (loss)	6.8	%	(9.7	)%

Revenues

        Total revenues.    Total revenues increased 28.6% to $24.4 million for the three months ended March 31, 2002 from $19.0 million for the same period in 2001.

        Product revenues increased 25.7% to $21.0 million for the three months ended March 31, 2002 from $16.7 million for the same period in 2001. The increase in product revenues for the three months ended March 31, 2002 was due primarily to increases in the number of installed pharmacy and supply systems in the first three months of 2002 compared to the same period in the prior year.

        Service and other revenues include revenues from service and maintenance contracts, rentals of automation systems, amortization of upfront fees received from distributors and monthly subscription fees from hospital customers connected to our internet-based procurement application. Service and other revenues increased 49.9% to $3.4 million for the three months ended March 31, 2002 from $2.3 million for the same period in 2001. The increase in service and other revenues for the period ending March 31, 2002 was primarily due to the increase in our installed base of automation systems combined with an increase in the number of rentals. We anticipate that service and other revenues will continue to grow in absolute dollars due to continued growth in our installed base of automation systems.

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Cost of Revenues

        Total Cost of Revenues.    Total cost of revenues increased 30.8% to $9.4 million for the three months ended March 31, 2002 from $7.2 million in the same prior year period. For the three months ended March 31, 2002, cost of revenues was 38.4% of total revenues as compared to 37.7% in the same prior year period.

        Cost of Product Revenues.    Cost of product revenues consists primarily of direct materials, labor and overhead required to manufacture pharmacy and supply systems and also includes costs required to install our systems at the customer location. Cost of product revenues increased 47.3% to $8.0 million for the three months ended March 31, 2002 from $5.4 million in the same prior year period. Gross profit on product sales was $13.0 million, or 62.0% of product revenues, for the three months ended March 31, 2002 as compared to $11.3 million, or 67.6% of product revenues, for the three months ended March 31, 2001. The decrease in the gross profit percentage on product revenues for the three months ended March 31, 2002 from the same period in 2001 was due to a higher percentage of lower margin pharmacy products in 2002 compared to 2001 and an increase in manufacturing costs partially offset by lower product installation costs as certain customers accepted responsibility for their own installations.

        Cost of Service and Other Revenues.    Costs of service and other revenues include spare parts required to maintain and support installed systems and service and maintenance expense, including outsourced contract services. Cost of service and other revenues decreased 20.5% to $1.4 million for the three months ended March 31, 2002 from $1.7 million for the same period in the prior year. For the three months ended March 31, 2002, gross margin on service revenues was $2.0 million, or 59.2% of service revenues, as compared to $0.5 million, or 23.1% of service revenues, for the same period in 2001. The decline in the cost of service and other revenues for the three months ended March 31, 2002 on an absolute dollar basis was attributable to the integration of a large volume of refurbished product, for which our costs are minimal to service our customers, recovered from returned or upgraded product. Additionally, the costs we incurred to provide direct service to customers in several major cities in the United States was more than offset by decreased costs from our third party service supplier.

Operating Expenses

        Research and Development.    Research and development expenses increased 2.8% to $2.7 million for the three months ended March 31, 2002 from $2.6 million for the same period in 2001. The increase is due to higher salary expense as a result of staffing increases and consulting, partially offset by higher software capitalization as new products prepare for release. In the three months ended March 31, 2002, $0.5 million of software development costs were capitalized as compared to $0.2 million for the same period in the prior year. Research and development expenses decreased as a percentage of total revenues to 11.0% from 13.7% for the three months ended March 31, 2002 and 2001, respectively, due primarily to the increase in total revenues during the periods. We anticipate that research and development expenses will increase modestly in absolute dollars for the remainder of 2002.

        Selling, General and Administrative.    Selling, general and administrative costs increased 5.2% to $11.0 million for the three months ended March 31, 2002 from $10.5 million for the same period in the prior year. Selling, general and administrative expenses increased on an absolute dollar basis primarily as the result of increased spending in sales, increased salaries related to staffing increases and higher commissions to third party group purchasing organizations, partially offset by decreased deferred stock compensation expense. We anticipate that selling, general and administrative expenses will remain relatively level with the corresponding periods in the prior year for the remainder of 2002.

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Other Income

        Other income increased to $677,000 for the three months ended March 31, 2002 from $184,000 for the three months ended March 31, 2001 due primarily to the recovery of $482,000 from an investment written off in a prior year. The remaining balance for the three months ended March 31, 2002 and the entire amount for the comparable period in the prior year, represent interest income on invested cash and short-term investment balances.

Other Expense

        Other expense decreased to $457,000 for the three months ended March 31, 2002 from $770,000 for the three months ended March 31, 2001 due to a decline in interest expense as a result of the repayment of outstanding debt. In addition, the Company wrote off an investment in equity securities of a privately held company of $403,000 that was deemed impaired during the quarter.

Provisions for Income Taxes

        A provision for state income taxes of $25,000 was offset by an $85,000 Alternative Minimum Tax credit.

Liquidity and Capital Resources

        As of March 31, 2002, our principal sources of liquidity included approximately $21.9 million in cash, cash equivalents and short-term investments and $10.0 million available under our revolving credit facility. Our funds are currently invested in U.S. Treasury and government agency obligations, investment grade commercial paper and short-term interest-bearing securities.

        We have established a credit facility with a bank that provides us with advances of up to 80% of eligible receivables, as defined, up to $10.0 million, and expires on June 30, 2002. Any advances under the credit facility would be secured by substantially all of our assets. Interest under the credit facility is payable at an annual rate equal to our lender's prime rate plus 2.25%. Our credit facility contains covenants that include limitations on indebtedness and liens, in addition to thresholds relating to net capital deficiencies that define borrowing availability and restrictions on the payment of dividends. As of March 31, 2002, we had no outstanding obligations under this credit facility and were eligible to borrow $10.0 million.

        We used cash of $1.9 million in operating activities in the first three months of 2002 compared to $3.7 million used in operating activities in the first three months of 2001. Net income of $1.7 million for the first three months ended March 31, 2002 included non-cash charges for depreciation and amortization of $0.9 million. The net loss of $1.9 million for the three months ended March 31, 2001 included non-cash charges for depreciation and amortization of $0.9 million. Accounts receivable decreased $3.5 million as shipments to customers declined. Inventories increased $1.5 million to support future business. Accrued liabilities decreased $2.5 million as payments were made for previously accrued lease buyout agreements and upgrade costs. Deferred service revenue increased $1.1 million as more customers entered into extended service contracts. The $5.9 million decline in deferred gross profit reflects the decline in shipments to customers and the fact that installations exceeded shipments in the three months ended March 31, 2002.

        Cash of $2.7 million was used in investing activities in the three months ending March 31, 2002 compared to cash of $3.7 million used in investing activities in the three months ending March 31, 2001. Net purchases of short-term investments were $2.1 million in the three months ending March 31, 2002 compared to net purchases of $3.1 million in the three months ending March 31, 2001. Our expenditures for property and equipment were $0.6 million in the three months ending March 31, 2002 and 2001.

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        Financing activities in the three months ended March 31, 2002 consisted primarily of raising funds through issuances of our equity securities as a result of the exercise of employee stock options and stock issuances under the employee stock purchase plan.

        We have not paid any significant amount of income taxes to date.

        We believe our current cash balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for the foreseeable future. However, if demand for our products and services does not continue as currently anticipated, we may be required to raise additional capital through the public equity market, private financings, collaborative arrangements and debt. In addition, in certain circumstances we may decide that it is in our best interests to raise additional capital to take advantage of opportunities in the marketplace. If additional capital is raised through the issuance of equity or securities convertible into equity, our stockholders may experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of the common stock. Additional financing may not be available to us on favorable terms, if at all. If we are unable to obtain financing, or to obtain it on acceptable terms, we may be unable to execute our business plan.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        There were no significant changes in the quantitative and qualitative disclosures in market risk from the Company's Form-10K as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2001.

Factors That May Affect Future Operating Results

Any reduction in the growth and acceptance of our pharmacy and supply systems and related services would harm our business.

        Our pharmacy and supply systems represent a relatively new approach to managing the distribution of pharmaceuticals and supplies at healthcare facilities. Many healthcare facilities still use traditional approaches that do not include automated methods of pharmacy and supply management. As a result, we must continuously educate existing and prospective customers about the advantages of our products. Our pharmacy and supply systems typically represent a sizeable initial capital expenditure for healthcare organizations. Changes in the budgets of these organizations and the timing of spending under these budgets can have a significant effect on the demand for our pharmacy and supply systems and related services. In addition, these budgets are often characterized by limited resources and conflicting spending priorities among different departments. Any decrease in expenditures by these healthcare facilities, particularly our significant customers, could decrease demand for our pharmacy and supply systems and related services and harm our business. We cannot assure you that we will continue to be successful in marketing our pharmacy and supply systems or that the level of market acceptance of such systems will be sufficient to generate operating income.

        Since the September 11, 2001 terrorist attacks on the United States, we have received no new orders for our pharmacy or supply systems from U.S. military hospital customers. Prior to September 11, 2001, such hospitals accounted for approximately 3.6% of the shipments for the first nine months of 2001 and 4% of the shipments in 2000. Because of restricted access to U.S. military bases, planned installations of systems already sold and shipped to U.S. military hospitals have been postponed for an indefinite period of time, delaying our recognition of revenue for such systems. We do not know how long these delays in the sales and installation cycle for these customers will last, and we do not know whether or to what extent we will be able to sell and install additional systems to these customers in the future.

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The healthcare industry faces financial constraints and consolidation that could adversely affect the demand for our products and services.

        The healthcare industry has faced, and will likely continue to face, significant financial constraints. For example, the shift to managed care in the 1990s put pressure on healthcare organizations to reduce costs, and the Balanced Budget Act of 1997 significantly reduced Medicare reimbursement to healthcare organizations. Our automation solutions often involve a significant financial commitment by our customers, and, as a result, our ability to grow our business is largely dependent on our customers' information technology budgets. To the extent healthcare information technology spending declines or increases more slowly than we anticipate, demand for our products and services would be adversely affected.

        Many healthcare providers have consolidated to create larger healthcare delivery organizations with greater market power. If this consolidation continues, it could erode our customer base and could reduce the size of our target market. In addition, the resulting organizations could have greater bargaining power, which may lead to price erosion.

The clinical infrastructure and workflow automation market is highly competitive and we may be unable to compete successfully against new entrants and established companies with greater resources.

        The clinical infrastructure and workflow automation market is intensely competitive and is characterized by evolving technologies and industry standards, frequent new product introductions and dynamic customer requirements. We expect continued and increased competition from current and future competitors, many of whom have significantly greater financial, technical, marketing and other resources than we do. Our current direct competitors in the clinical infrastructure and workflow automation market include Pyxis Corporation (a division of Cardinal Health) and Automated Healthcare (a division of McKessonHBOC). Pyxis Corporation, in particular, has a significantly larger installed base of customers than we do and over the last couple of years has developed and introduced to the market a significantly larger number of new products.

        The competitive challenges we face in the clinical infrastructure and workflow automation market include, but are not limited to:

•

Our competitors may develop, license or incorporate new or emerging technologies or devote greater resources to the development, promotion and sale of their products and services.



•

Certain competitors have greater name recognition and a more extensive installed base of pharmacy and supply systems or other products and services, and such advantages could be used to increase their market share.



•

Other established or emerging companies may enter the clinical infrastructure and workflow automation market.



•

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, including larger, more established healthcare supply companies, thereby increasing their ability to develop and offer products and services to address the needs of our prospective customers.



•

Our competitors may secure products and services from suppliers on more favorable terms or secure exclusive arrangements with suppliers or buyers that may impede the sales of our products and services.

        Competitive pressures could result in price reductions of our products and services, fewer customer orders and reduced gross margins, any of which could harm our business.

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We have a history of operating losses and we cannot assure you that we will achieve profitability.

        For 1996 and 1997, we incurred net losses of approximately $10.5 million and $10.2 million, respectively. We had net income of approximately $0.6 million in 1998 and had net losses of $26.3 million and $20.8 million in 1999 and 2000, respectively. While we were profitable in both the third and fourth quarters of 2001 and the first quarter of 2002, we had a net loss of $1.2 million for 2001, and as of March 31, 2002, we had an accumulated deficit of approximately $92 million. There can be no assurance that we will be able to sustain or increase profitability in the future on a quarterly or annual basis.

Our quarterly operating results may fluctuate significantly and may cause our stock price to decline.

        Our quarterly operating results may vary significantly in the future depending on many factors that may include, but are not limited to, the following:

•

the size and timing of orders for our pharmacy and supply systems, and their installation and integration;



•

the overall demand for healthcare clinical infrastructure and workflow automation solutions;



•

changes in pricing policies by us or our competitors;



•

the number, timing and significance of product enhancements and new product announcements by us or our competitors;



•

the relative proportions of revenues we derive from products and services;



•

our customers' budget cycles;



•

changes in our operating expenses;



•

the performance of our products;



•

changes in our business strategy; and



•

economic and political conditions, including fluctuations in interest rates and tax increases.

        Due to the foregoing factors, our quarterly revenues and operating results are difficult to predict.

        The purchase of our pharmacy and supply systems is often part of a customer's larger initiative to re-engineer their pharmacy, distribution and materials management systems. As a result, the purchase of our pharmacy and supply systems generally involves a significant commitment of management attention and resources by prospective customers and often requires the input and approval of many decision-makers, including pharmacy directors, materials managers, nurse managers, financial managers, information systems managers, administrators and boards of directors. For these and other reasons, the sales cycle associated with the sale or lease of our pharmacy and supply systems is often lengthy and subject to a number of delays over which we have little or no control. We cannot assure you that we will not experience delays in the future. A delay in, or loss of, sales of our pharmacy and supply systems could cause our operating results to vary significantly from quarter to quarter and could harm our business. In addition, many of our hospital customers are often slow to install our systems after they are purchased for reasons that are outside our control. Since we recognize revenue only upon installation of our systems at a customer's site, any delay in installation by our customers could also cause a reduction in our revenue for a given quarter. For all the above reasons, we believe that period-to-period comparisons of our operating results are not necessarily indicative of our future performance. Although we have experienced revenue growth over the last several quarters, this growth should not be considered indicative of future revenue growth, if any, or of future operating results. Fluctuation in our quarterly operating results may cause our stock price to decline.

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If we are unable to recruit and retain skilled and motivated personnel, our competitive position, results of operations and financial condition could be harmed.

        Our success is highly dependent upon the continuing contributions of our key management, sales, technical and engineering staff. We believe that our future success will depend upon our ability to attract, train and retain highly skilled and motivated personnel. In particular, we will need to hire a number of information technology, research and development, programming and engineering personnel to assist in the continued development of our business. As our products are installed in increasingly complex environments, greater technical expertise will be required. As our installed base of customers increases, we will also face additional demands on our customer service and support personnel, requiring additional resources to meet these demands. We may experience difficulty in recruiting qualified personnel. Competition for qualified technical, engineering, managerial, sales, marketing, financial reporting and other personnel is intense and we cannot assure you that we will be successful in attracting and retaining qualified personnel. Competitors have in the past attempted, and may in the future attempt, to recruit our employees. Failure to attract and retain key personnel could harm our competitive position, results of operations and financial condition.

If we are unable to maintain our relationships with group purchasing organizations or other similar organizations, we may have difficulty selling our products and services.

        We have agreements with various group purchasing organizations, such as Premier, Inc., Novation, LLC, Consorta, Inc. and Catholic Resources Partners, that enable us to sell more readily our products and services to customers represented by these organizations. Our relationships with these organizations are terminable at the convenience of either party. The loss of our relationship with Premier, for example, could impact the breadth of our customer base and could impair our ability to increase our revenues. We cannot guarantee that these organizations will renew our contracts on similar terms, if at all, and we cannot guarantee that they will not terminate our contracts before they expire.

We depend on a limited number of suppliers for our pharmacy and supply systems and our business may suffer if we are unable to obtain an adequate supply of components and equipment on a timely basis.

        Our production strategy for our pharmacy and supply systems is to work closely with several key sub-assembly manufacturers and utilize lower cost manufacturers whenever possible. Although many of the components of our systems are standardized and available from multiple sources, certain components or subsystems are fabricated according to our specifications. At any given point in time, we may only use a single source of supply for certain components. Our failure to obtain alternative vendors, if required, for any of the numerous components used to manufacture our products would limit our ability to manufacture our products and could harm our business. In addition, any failure of a maintenance contractor to perform adequately could harm our business.

We depend on services from third parties to support our products, and if we are unable to continue these relationships and maintain their services, our competitive position, results of operations and financial condition could be harmed.

        Our ability to develop, manufacture and support our existing products and any future products depends upon our ability to enter into and maintain contractual arrangements with others. We currently depend upon services from a number of third-party vendors, including Dade Behring, Inc., to support our products. We cannot be sure that we will be able to maintain our existing or future service arrangements, or that we will be able to enter into future arrangements with third parties on terms acceptable to us, or at all. If we fail to maintain our existing service arrangements or to establish new arrangements when and as necessary, our competitive position, results of operations and financial condition could be harmed.

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If we are unable to successfully integrate our automation solutions with the existing information systems of our customers, they may choose not to use our products and services.

        For healthcare facilities to fully benefit from our automation solutions, our systems must integrate with their existing information systems. This may require substantial cooperation, investment and coordination on the part of our customers. There is little uniformity in the systems currently used by our customers, which complicates the integration process. If these systems are not successfully integrated, our customers could choose not to use or to reduce their use of our automation solutions, which would harm our business.

Any deterioration in our relationship with Commerce One would adversely affect our Internet-based procurement capabilities.

        We have entered into an agreement with Commerce One, Inc., a provider of business-to-business technology solutions that link buyers and suppliers of goods and services to trading communities using the Internet. Our agreement with Commerce One enables us to implement a customized version of Commerce One's BuySite software at customer sites. We cannot be sure that Commerce One will not license its BuySite technology to our competitors. We cannot guarantee that Commerce One will be able to develop and introduce enhancements to its products that keep pace with emerging technological developments and emerging industry standards. In addition, we cannot guarantee that the Commerce One network will not experience performance problems or delays. The failure by Commerce One in any of these areas could harm our Internet-based procurement capabilities.

Our failure to protect our intellectual property rights could adversely affect our ability to compete.

        We believe that our success will depend in part on our ability to obtain patent protection for products and processes and our ability to preserve our trademarks, copyrights and trade secrets. We have pursued patent protection in the United States and foreign jurisdictions for technology that we believe to be proprietary and for technology that offers us a potential competitive advantage for our products, and we intend to continue to pursue such protection in the future. Our issued patents relate to various features of our pharmacy and supply systems. There can be no assurance that we will file any patent applications in the future, that any of our patent applications will result in issued patents or that, if issued, such patents will provide significant protection for our technology and processes. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to our technology or that others will not design around the patents we own. All of our operating system software is copyrighted and subject to the protection of applicable copyright laws. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.

Intellectual property or product liability claims against us could harm our competitive position, results of operations and financial condition.

        We are aware of one third-party patent issued several years ago that may relate to certain of our products. Although we have received no notice alleging infringement from this third party to date, there can be no assurance that such third party will not assert an infringement claim against us in the future. Other than this patent, we do not believe that any of our products infringe upon the proprietary rights of any third parties. We cannot assure you, however, that third parties will not claim that we have infringed upon their intellectual property rights with respect to current or future products. We expect that developers of pharmacy and supply systems will be increasingly subject to infringement claims as the number of products and competitors in our industry grows and the functionality of products in different industry segments overlaps. We do not possess special insurance that covers intellectual property infringement claims; however, such claims may be covered under our traditional insurance policies. These policies contain terms, conditions and exclusions that make recovery for

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intellectual infringement claims difficult to guarantee. Any infringement claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, which could harm our competitive position, results of operations and financial condition.

        We provide products that build clinical infrastructure and automate workflow. Despite the presence of healthcare professionals as intermediaries between our products and patients, if our products fail to provide accurate and timely information or operate as designed, customers, patients or their family members could assert claims against us for product liability. Also, in the event that any of our products is defective, we may be required to recall or redesign those products. Litigation with respect to liability claims, regardless of its outcome, could result in substantial cost to us, divert management's attention from operations and decrease market acceptance of our products. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of product liability claims. We possess a variety of insurance policies that include coverage for general commercial liability and technology errors and omissions liability. However, these policies may not be adequate against product liability claims. A successful claim brought against us, or any claim or product recall that results in negative publicity about us, could harm our competitive position, results of operations and financial condition.

Changing customer requirements could decrease the demand for our products and services.

        The clinical infrastructure and workflow automation market is intensely competitive and is characterized by evolving technologies and industry standards, frequent new product introductions and dynamic customer requirements that may render existing products obsolete or less competitive. As a result, our position in the clinical infrastructure and workflow automation market could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend in part upon our ability to enhance our existing products and services and to develop and introduce new products and services to meet changing customer requirements. The process of developing products and services such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future as new technologies are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, demand for our products could decrease.

We may be required to seek additional financing to meet our future capital needs, which we may not be able to secure on favorable terms, or at all.

        We plan to continue to expend substantial funds for research and development activities, product development, integration efforts and expansion of accounts receivable and sales and marketing activities. We may be required to expend greater than anticipated funds if unforeseen difficulties arise in the course of completing the development and marketing of our products or services or in other aspects of our business. Our future liquidity and capital requirements will depend upon numerous factors, including:

•

the development of new products and services on a timely basis;



•

the receipt and timing of orders for our pharmacy and supply systems;



•

the cost of developing increased manufacturing and sales capacity; and



•

the timely collection of accounts receivable.

        As a result of the foregoing factors, it is possible that we will be required to raise additional funds through public or private financings, collaborative relationships or other arrangements. We cannot assure you that this additional funding, if needed, will be available on terms attractive to us, if at all.

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Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants that could affect our ability to pay dividends or raise additional capital. Our failure to raise capital when needed could harm our competitive position, results of operations and financial condition.

Government regulation of the healthcare industry could adversely affect demand for our products.

        While the manufacture and sale of our current products are not regulated by the United States Food and Drug Administration (FDA), we cannot assure you that these products, or our future products, if any, will not be regulated in the future. A requirement for FDA approval could have a material adverse effect on the demand for our products. Pharmacies are regulated by individual state boards of pharmacy that issue rules for pharmacy licensure in their respective jurisdictions. State boards of pharmacy do not license or approve our pharmacy and supply systems; however, pharmacies using our equipment are subject to state board approval. The failure of such pharmacies to meet differing requirements from a significant number of state boards of pharmacy could decrease demand for our products and harm our competitive position, results of operations and financial condition. Similarly, hospitals must be accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) in order to be eligible for Medicaid and Medicare funds. JCAHO does not approve or accredit pharmacy and supply systems; however, disapproval of our customers' pharmacy and supply management methods and their failure to meet JCAHO requirements could decrease demand for our products and harm our competitive position, results of operations and financial condition.

        While we have implemented a Privacy and Use of Information Policy and strictly adhere to established privacy principles, use of customer information guidelines and federal and state statutes and regulations regarding privacy and confidentiality, we cannot assure you that we will be in compliance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This legislation requires the Secretary of Health and Human Services (HHS), to adopt national standards for some types of electronic health information transactions and the data elements used in those transactions, to adopt standards to ensure the integrity and confidentiality of health information and to establish a schedule for implementing national health data privacy legislation or regulations. In December 2000, HHS published its final health data privacy regulations which will take effect in December 2002. These regulations restrict the use and disclosure of personally identifiable health information without the prior informed consent of the patient. HHS has also issued final rules with respect to transaction and code standards which require the use of specific electronic formats for most transactions containing patient information. HHS has not yet issued final rules on other topics under HIPAA, although it has issued proposed rules on some other topics. The final rules, if and when issued, may differ from the proposed rules. We cannot predict the potential impact of rules that have not yet been proposed or any other rules that might be finally adopted instead of the proposed rules. In addition, other federal and/or state privacy legislation may be enacted at any time. These laws and regulations could restrict the ability of our customers to obtain, use or disseminate patient information. This could adversely affect demand for our products or force us to redesign our products in order to meet regulatory requirements.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other natural disaster or any other catastrophic event could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

        Our facilities are located near known earthquake fault zones and are vulnerable to significant damage from earthquakes. We are also vulnerable to damage from other types of disasters, including tornadoes, fires, floods, power loss, communications failures and similar events including the effects of war or acts of terrorism. If any disaster were to occur, our ability to operate our business at our facilities could be seriously or completely impaired or destroyed. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        On September 21, 2001, one of our customers, The Regents of the University of California (on behalf of the University of California San Francisco Medical Center), filed a third party complaint against the Company in an action captioned Americorp Financial, Inc. v. The Regents of the University of California, Case No. C 01-2678 MMC (N.D. Cal. 2001). This customer has suspended rent payments under its pharmacy automation leases, alleging claims for indemnification from Omnicell under its leasing documents and negligent misrepresentation in execution of the pharmacy leases. The customer's complaint demands rescission of the pharmacy leases and a declaration by the Court that the pharmacy leases are void. The Company believes that the customer's leases are valid. The Company has maintained reserves for potential credit losses in financed transactions, and believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial position, liquidity or results of operations.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

        In August 2001, we completed the initial public offering of 6.9 million shares of our common stock at the initial public offering price of $7.00 per share, raising $42.9 million, net of expenses of the underwriting discounts, commissions and offering expenses.

        We used approximately $10.3 million of the net proceeds to redeem 720,800 shares of redeemable convertible preferred stock plus accrued interest thereon held by Sun Healthcare at the closing of the offering. In 2001, we also used approximately $7.9 million of the net proceeds to repay the outstanding principal and interest on the note held by Baxter Healthcare incurred in connection with our acquisition of the Sure-Med product line in January 1999. Through March 31, 2002, we spent the remaining net proceeds of $24.7 million on sales, marketing, research and development and customer support activities and for working capital and other general corporate purposes, including costs to support our leasing activities to U.S. government entities.

ITEM 3.    DEFAULT UPON SENIOR SECURITIES

        None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

ITEM 5.    OTHER INFORMATION

        None.

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ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits.

INDEX TO EXHIBITS

Exhibit No.		Exhibit Description
3.1	(1)	Amended and Restated Certificate of Incorporation of Omnicell.
3.2	(2)	Bylaws of Omnicell.
4.1		Reference is made to Exhibits 3.1 and 3.2
4.2	(3)	Form of Common Stock Certificate

(1)

Previously filed as the like-numbered Exhibit to our report on Form 10-Q for the quarter ended June 30, 2001, as filed with the Securities Exchange Commission on September 20, 2001.

(2)

Previously filed as Exhibit 3.6 to our Registration Statement on Form S-1, Registration No. 333-57024.

(3)

Previously filed as Exhibit 4.1 to our Registration Statement on Form S-1, Registration No. 333-57024.

        (b)    Reports on Form 8-K.    The Company did not file a Current Report on Form 8-K with the Securities and Exchange Commission during the quarter ended March 31, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.

	OMNICELL, INC. (Registrant)
Date: May 13, 2002	/s/  ROBERT. Y. NEWELL, IV      Robert. Y. Newell, IV Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number		Description
3.1	(1)	Amended and Restated Certificate of Incorporation of Omnicell.
3.2	(2)	Bylaws of Omnicell.
4.1		Reference is made to Exhibits 3.1 and 3.2
4.2	(3)	Form of Common Stock Certificate

(1)

Previously filed as the like-numbered Exhibit to our report on Form 10-Q for the quarter ended June 30, 2001, as filed with the Securities Exchange Commission on September 20, 2001.

(2)

Previously filed as Exhibit 3.6 to our Registration Statement on Form S-1, Registration No. 333-57024.

(3)

Previously filed as Exhibit 4.1 to our Registration Statement on Form S-1, Registration No. 333-57024.

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QuickLinks

OMNICELL, INC. FORM 10-Q INDEX

ITEM 1. Condensed Consolidated Financial Statements

OMNICELL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
OMNICELL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Unaudited
OMNICELL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Unaudited
OMNICELL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULT UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO EXHIBITS
SIGNATURES
EXHIBIT INDEX