- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-27048
____________
MECON, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2702762
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 Porter Drive, Suite 100
San Ramon, California 94583
Registrant's telephone number, including area code: (510) 838-1700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days X Yes No
--- ---
The number of shares outstanding of the registrant's Common Stock on August 8,
1997 was
6,021,632 shares
- --------------------------------------------------------------------------------
MECON, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1997 (Unaudited) and March 31, 1997
Consolidated Condensed Statements of Operations (Unaudited)
for the Three Months Ended June 30, 1997 and 1996
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Three Month period Ended June 30, 1997 and 1996
Notes to Consolidated Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits 11.1 Computation of Earnings per Share
27.0 Financial Data Schedules
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
MECON, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30, MARCH 31,
1997 1997
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents................... $ 9,557 $ 9,211
Securities available-for-sale, at market.... 3,548 4,467
Accounts receivable, net of allowances
of $484 and $555, respectively............ 2,791 2,542
Unbilled accounts receivable............... 669 886
Prepaid expenses........................... 378 362
Other current assets....................... 62 52
----------------------
Total current assets..................... 17,005 17,520
Property and equipment, net.................. 1,533 1,588
Software development costs, net.............. 1,609 1,510
Other assets................................. 14 13
----------------------
$20,161 $20,631
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 1,127 $ 978
Accrued salaries and benefits.............. 318 452
Deferred revenue........................... 1,143 1,058
Other accrued liabilities.................. 219 156
----------------------
Total current liabilities................ 2,807 2,644
Long-term obligations, less current portion.. 24 25
----------------------
Total liabilities........................ 2,831 2,669
----------------------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000
authorized; none issued and outstanding... - -
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,021,632 and 6,000,297 issued
and outstanding, respectively............. 6 6
Additional paid-in capital................. 25,083 25,033
Accumulated deficit........................ (7,759) (7,077)
----------------------
Total stockholders' equity............... 17,330 17,962
----------------------
$20,161 $20,631
See accompanying notes to consolidated financial statements.
MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1997 1996
---- ----
Revenue:
Subscription and license............................ $2,228 $ 2,502
Services............................................ 977 973
----------------------
Net revenue....................................... 3,205 3,475
Cost of revenue....................................... 1,245 1,211
----------------------
Gross profit...................................... 1,959 2,264
Operating costs:
Research and development............................ 660 395
Sales and marketing................................. 558 846
General and administrative.......................... 845 611
Reorganization and other special charges............ 749 152
----------------------
Total operating costs............................. 2,812 2,004
----------------------
Operating Income (loss)............................... (853) 260
Interest and other income, net........................ 171 223
----------------------
Income (loss) before provision for taxes.............. (682) 483
Provision for income taxes............................ 0 170
----------------------
Net Income (loss)..................................... (682) 313
----------------------
----------------------
Net income (loss) per share........................... $(0.11) $ 0.05
----------------------
----------------------
Shares used to compute net income (loss) per share.... 6,022 6,369
See accompanying notes to consolidated financial statements.
MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
1997 1996
---- ----
Net cash used in operating activities................. (308) (2,198)
Cash flows from investing activities:
Purchase of securities available-for-sale........... (2,491) -
Proceeds from sale or maturities of securities
available-for-sale................................. 3,410 1,232
Acquisition of property and equipment............... (73) (263)
Computer software development costs................. (241) (168)
----------------------
Net cash used in investing activities............. 605 801
Cash flows from financing activities:
Repayment of note receivable........................ - (1,936)
Proceeds from exercise of stock options and
employee stock purchase plan....................... 49 174
----------------------
Net cash (used in) provided by financing
activities...................................... 49 (1,762)
----------------------
Net (decrease) increase in cash and cash equivalents.. 346 (3,159)
Cash and cash equivalents at beginning of period...... 9,211 15,205
----------------------
Cash and cash equivalents at end of the period........ 9,557 12,046
----------------------
----------------------
See accompanying notes to consolidated financial statements.
MECON, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 are designed to improve the
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 financial statements
and notes thereto for the fiscal year ended March 31, 1997 contained in the
Company's Annual Report on Form 10-KSB. The results of operations for the three
months ended June 30, 1997 are not necessarily indicative of the results of
operations that may be expected for the full year.
(3) MERGER OF MANAGED CARE INFORMATION SYSTEMS, INC.
On March 29, 1996, the Company merged with Managed Care Information
Systems, Inc. ("MCIS") in a pooling of interests transaction. In connection
with the merger, the Company exchanged 338,155 shares of its common stock for
all of the outstanding shares of MCIS, assumed 33,052 common stock options,
and assumed a note payable and accrued interest to a third party in the
amount of $2.5 million which was repaid during the first quarter of fiscal
1997. In addition, the Company recorded merger related charges during the
first quarter of fiscal 1997 totaling $152,000. Accordingly, all prior
period financial information has been restated.
(4) REORGANIZATION AND OTHER SPECIAL CHARGES
During the third quarter of fiscal 1997, the Company announced a plan to
reorganize its operations by centralizing the management of its product
development, sales and product support organizations to better achieve its
strategic growth objectives. In connection with the implementation of this new
corporate structure, the Company recorded pretax charges of $1,459,000 that
primarily included $1,337,000 of reorganization charges and a $122,000 charge
for an aborted acquisition. Included in the reorganization costs were
provisions for shutting down two of the Company's satellite offices, employee
reassignment and relocation, severance and related benefits, asset writedowns
and a provision for accounts receivable that management believed would not be
collectible. All amounts related to this charge were paid by March 31, 1997,
except that at March 31, 1997 there was $249,000 accrued for the doubtful
accounts provision. $101,000 of bad debts previously accrued for were written
off against the accrual during the first quarter and the remaining accrual
balance at June 30, 1997 was $148,000.
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. As a part of this expense reduction effort, the Company
incurred a $749,000 reorganization charge during the first quarter of fiscal
1998. This charge was primarily comprised of employee outplacement, severance
and related benefits as well as employee reassignment, relocation and
additional costs associated with facility shutdowns. The following table
sets forth a description of reorganization expense for the three months ended
June 30, 1997 and the liability at June 30, 1997:
Accrual
Total Non-cash Accrued At
Reorganization Cost Expense Expense Expense Paid 6/30/97
- ------------------- ------- ------- ------- ---- -------
Salaries and termination benefits of thirty-
eight employees $634,000 $0 $634,000 $569,000 $65,000
Relocation and facilities shutdown 38,000 0 38,000 38,000 0
Professional fees 77,000 0 77,000 72,000 5,000
Total $749,000 $0 $749,000 $679,000 $70,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULTS OF THE RISK FACTORS SET FORTH UNDER
"CERTAIN FACTORS BEARING ON FUTURE RESULTS" BELOW AND ELSEWHERE IN THIS
REPORT.
OVERVIEW
MECON is a leading healthcare benchmarking solutions company. The
Company's proprietary data, family of premium quality easy-to-use software
products and consulting services combine to produce and sustain optimum
performance in healthcare delivery systems. From its incorporation until
1989, MECON's revenue was primarily derived from consulting services for
acute care hospitals. Since 1990, the Company has transitioned into providing
a variety of products and services that employ its proprietary database
comprised of acute care hospitals' operational cost and key performance
information. For the three months ended June 30, 1997, approximately 70% of
the Company's revenues were derived from database subscriptions and software
licenses. Within the acute care segment of the hospital market, MECON has
marketed its products and services primarily to individual hospitals with
over 100 beds.
On March 29, 1996, the Company merged with Managed Care Information
Systems, Inc. ("MCIS") in a pooling of interests transaction. In connection
with the merger, the Company exchanged 338,155 shares of its common stock for
all of the outstanding shares of MCIS, assumed 33,052 common stock options,
and assumed a note payable and accrued interest to a third party in the
amount of $2.5 million. In addition, the Company recorded special charges of
$152,000 for merger-related costs in the first quarter of fiscal 1997.
Accordingly, all prior period financial information has been restated.
The following factors continued to contribute to the Company's
performance in first quarter of fiscal 1998. On November 25, 1996, the
Company announced plans to complete the integration of MCIS, centralize
management of its product development, sales and product support
organizations, increase its investment in the development of new products and
relocate its headquarters to larger facilities to accommodate these changes.
These actions were intended to position the Company on a strong footing for
long-term growth. In connection with the implementation of this new
corporate structure, the Company recorded pretax charges of $1.5 million in
the third quarter of the fiscal 1997 that consisted of $1.3 million of
reorganization charges and a $122,000 charge for an aborted acquisition.
Included in the reorganization costs were provisions for shutting down two of
the Company's satellite offices, employee reassignment and reallocations,
severance and related benefits, asset writedowns and a provision for doubtful
accounts which was established as a reserve for returns, concessions and
uncollectible accounts. This reserve was established because the Company
believes its commitment to the development of new products would change the
strategic direction of its product lines.
As a result of these integration, reorganization and product transition
efforts, revenue and expenses for the third and fourth quarter of fiscal 1997
were adversely affected. Revenue was impacted by declined productivity in
the sales force that led to contract signing delays. The effect of such
delays was a shortfall in revenue recognized in both the third and fourth
quarters of fiscal 1997. This shortfall resulted in incurred operating
losses, and accordingly, the Company announced that it would take corrective
measures.
On April 17, 1997, the Company announced a number of strategic and
operational changes intended to improve the Company's financial performance.
As a first step, the Company renewed its strategic emphasis on its historical
strengths in benchmarking-based cost management solutions and refocused its
activities on the core markets served by the Company's PEERVIEW, OPTIMIS,
Action-Point and consulting services. Although the Company believed that
additional healthcare market sectors targeted by the Company's increased
investments in developing clinical, outcomes and patient satisfaction
products did represent growth opportunities for the Company in the future,
the Company believed that continued efforts in these areas compromised both
its leadership position in benchmark-based cost management solutions and its
profitability.
Accordingly, the Company took action to reduce its ongoing quarterly
operating expense base. As a part of the expense reduction effort, the
Company decreased its workforce by 38 employees on April 17, 1997. This
reduction was made in an effort to reduce the Company's overall quarterly
expenses, and along with the Company's renewed focus on the core markets,
return the Company to profitability and growth. As a part of this expense
reduction effort, the Company incurred a reorganization charge of $749,000
during the first quarter of fiscal 1998. This charge was primarily comprised
of employee outplacement, severance and related benefits as well as employee
reassignment, relocation and additional costs associated with facility
shutdowns.
The Company's revenue has decreased primarily due to reduced productivity
in the sales force as a result of the reorganization in the third quarter of
fiscal 1997. The Company's revenue is primarily derived from direct sales to
end users.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128), which requires the presentation of basic earnings per share
(EPS) and, for companies with complex capital structures, diluted EPS. SFAS
No. 128 is effective for annual and interim periods ending after December 15,
1997; earlier application is not permitted. The Company expects that
adoption of this statement will not have a material impact on earnings per
share as presented in the accompanying consolidated financial statements, as
the company incurred losses for all periods presented.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenue for the period indicated:
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---- ----
Revenue:
Subscription and license......................... 70% 72%
Services......................................... 30% 28%
---------------------------
Net revenue.................................... 100% 100%
Cost of revenue.................................... 39% 35%
---------------------------
Gross Profit....................................... 61% 65%
Operating costs:
Research and development......................... 21% 11%
Sales and marketing.............................. 17% 24%
General and administrative....................... 26% 18%
Reorganization and other special charges......... 23% 4%
---------------------------
Total operating costs.......................... 88% 58%
---------------------------
Operating income (loss)............................ (27)% 7%
Interest and other income, net..................... 5% 6%
---------------------------
Income (loss) before provision for income taxes.... (22)% 13%
Provision for income taxes......................... - 5%
---------------------------
Net Income (loss).................................. (22)% 8%
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
REVENUE
Revenue for the three months ended June 30, 1997 decreased 9% to $3.2
million compared to $3.5 million for the comparable period in the prior year.
Subscription and license revenue for the three months ended June 30, 1997
decreased 12% to $2.2 million compared to $2.5 million for the comparable
period in the prior year and accounted for essentially all of the revenue
decrease. This decrease was primarily due to decreased revenue from new
MECON-Action*Point license fees. Service revenue for the three months ended
June 30, 1997 remained essentially unchanged but increased to 30% of total
revenue compared to 28% for the comparable period in the prior year. The
company anticipates services revenue continuing to increase as a percent of
total revenues. This anticipated increase is primarily due to the Company's
current strategy of expanding support services, such as training programs and
consulting projects, that build relationships with customers and enhances
benefits they derive from the Company's products.
COST OF REVENUE
Cost of revenue for the three months ended June 30, 1997 remained
constant at $1.2 million primarily due the reduction in staffing to
historical levels as a result of the Company's reduction in workforce during
the three months ended June 30, 1997. Cost of revenue for the three months
ended June 30, 1997 included $142,000 in amortization expense from the
capitalization of software development costs compared to $24,000 for the
comparable period in the prior year. Cost of revenue for the three months
ended June 30, 1997 increased to 39% of total revenue compared to 35% for the
comparable period in the prior year, primarily due to higher fixed costs
associated with the amortization of software development costs compared to
the comparable period in the prior year.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30,
1997 increased 67% to $660,000 compared to $240,000 for the comparable period
in the prior year, primarily due to the addition of technical and programming
personnel related to new product development. During the three months ended
June 30, 1997 approximately $240,000 was capitalized for internally developed
software related to product development compared to $168,000 for the
comparable period in the prior year. Research and development expenses for
the three months ended June 30, 1997 increased to 21% of revenue compared to
11% for the comparable period in the prior year, primarily due to an
increased commitment to new product development in advance of related
revenues.
SALES AND MARKETING
Sales and marketing expenses for the three months ended June 30, 1997
decreased 34% to $558,000 compared to $846,000 for the comparable period in
the prior year. This decrease was primarily due to the reduction in staffing
in marketing as a result of the Company's reduction in workforce and the
significant decrease in advertising, tradeshow participation and travel.
Sales and marketing expenses for the three months ended June 30, 1997
decreased to 17% of revenue compared to 24% for the comparable period in the
prior year, primarily due to personnel reductions in the marketing department
and reduced marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30,
1997 increased 38% to $845,000 compared to $611,000 for the comparable period
in the prior year, primarily due to increased management staffing,
depreciation and general expenses related to being a public company. General
and administrative expenses for the three months ended June 30, 1997
increased to 26% of revenue compared to 18% of revenue for the comparable
period in the prior year, primarily due to the aforementioned factors.
REORGANIZATION AND OTHER SPECIAL CHARGES
Reorganization and other special charges for the three months ended June
30, 1997 increased to $749,000 compared to $152,000 for the comparable period in
the prior year, primarily due to the Company's reorganization plan to reduce its
workforce by 38 employees announced during the three months ended June 30, 1997.
This is compared to merger costs associated with the integration of the
Company's wholly-owned subsidiary, MCIS, during the comparable period in the
prior year. The reorganization charge incurred during the three months ended
June 30, 1997 was primarily comprised of employee outplacement, severance and
related benefits as well as employee reassignment, relocation and additional
costs associated with facility shutdowns. Of the total $749,000 reorganization
costs incurred, $679,000 was paid during the first quarter and $70,000 was
accrued at June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three years, the Company financed its operations primarily
through sales of preferred and common stock. On December 7, 1995, the Company
completed an initial public offering of 2,000,000 shares of its common stock.
The offering yielded $23 million in net proceeds to the Company. At June 30,
1997, the Company's cash, cash equivalents and securities available-for-sale
decreased by $600,000 to $13.1 million compared to $13.7 million at March 31,
1997 primarily as a result of the cash payments made related to the
reorganization charge incurred in connection with the Company's corporate
reorganization. The Company used approximately $308,000 in operating
activities for the three months ended June 30, 1997 compared to $2.2 million
in the comparable period in the prior year. This improvement was primarily
due to increased cash collections. The Company reduced its days of sales
outstanding (DSO) in accounts receivable to 75 days at June 30, 1997 from 94
days at June 30, 1996. This improvement increased cash collections by
approximately $1.5 million during the three months ended June 30, 1997
compared to the same period in the prior year.
As of June 30, 1997, the Company had net working capital of $14.2
million, including cash, cash equivalents and securities available-for-sale
of $13.1 million. Given the Company's strong cash position as of June 30,
1997, the Company had no outstanding debt facilities. The Company currently
has no material commitments for capital expenditures.
The Company believes that with its access to financing sources, strong
cash position, and lack of debt, it will be able to adequately fund its cash
requirements for at least the next twelve months.
The Company has a history of operating losses and uncertain
profitability. The Company has incurred net losses in fiscal 1995, 1996, 1997
and the first quarter of fiscal 1998. In view of the Company's prior
operating history, there can be no assurance that the Company will be able to
achieve profitability on a quarterly or annual basis, or that it will be able
to sustain or increase its revenue growth in future periods. The Company
urges review of all risk factors that could cause actual results to differ
materially from those projected in any forward-looking statements made by the
Company. Readers should carefully review such risk factors set forth in the
Company's filings with the Securities and Exchange Commission.
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
On July 9, 1997, the Company filed a definitive proxy statement
pursuant to section 14(a) of the Securities Exchange Act of 1934 to:
1. Elect five directors to serve for the ensuing year and until their
successors are duly elected and qualified.
2. Ratify the appointment of KPMG Peat Marwick, LLP as independent
accountants for the Company for the 1998 fiscal year
3. Increase the number of shares available under the 1995 Directors
Stock Option Plan to 100,000 from 50,000.
4. Transact such other business as may properly come before the
meeting or any adjournment thereof.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 Computation of Earnings per Share
Exhibit 27.0 Financial Data Schedules
(b) Reports on Form 8-K
The Company did file the following reports on Form 8-K during the three months
ended June 30, 1997:
On April 14, 1997, the Company filed a report on Form 8-A12G dated April
14, 1997 which announced the registration of certain classes of securities
pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934.
On May 9, 1997, the Company filed a report on Form 8-K dated April 17, 1997
which announced certain management changes and a renewed focus on the Company's
historical strengths.
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: 8/14/97 /s/ Vasu Devan
---------- --------------
Vasu Devan
President and Chief Executive Officer
Date: 8/14/97 /s/ David J. Allinson
---------- ---------------------
David J. Allinson
Chief Financial Officer