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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarter ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-27048
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MECON, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-2702762
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 Porter Drive, Suite 210
San Ramon, California 94583
(address of principal executive officers)
Issuer's telephone number, including area code: (925) 838-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days X Yes No
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The number of shares outstanding of the registrant's Common Stock on July 31,
1998 was
6,229,112 shares
Transitional Small Business Disclosure Format (check one): Yes X No
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1
MECON, INC.
FORM 10-QSB
JUNE 30, 1998
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets (unaudited) as of
June 30, 1998 and March 31, 1998 3
Consolidated Condensed Statements of Operations (unaudited)
for the Three Month Periods Ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the Three Month Periods Ended June 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
Exhibits 11.1 Computation of Earnings (Loss) per Share
27.0 Financial Data Schedules
2
ITEM 1. FINANCIAL STATEMENTS
MECON, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
June 30, 1998 March 31, 1998
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $13,370 $12,647
Securities available-for-sale, at market 3,548 3,844
Accounts receivable, net of allowances of
$300 and $308 at June 30, 1998 and
March 31, 1998, respectively 3,193 2,724
Unbilled accounts receivable 387 522
Other current assets 458 358
------------------------------
Total current assets 20,956 20,095
Property and equipment, net 1,519 1,430
Software development costs, net 1,895 1,776
Other assets 9 9
------------------------------
$24,379 $23,310
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,380 $1,113
Accrued salaries and benefits 692 848
Deferred revenue 2,095 1,741
------------------------------
Total current liabilities 4,167 3,702
Long-term obligations, less current portion 20 20
------------------------------
Total liabilities 4,187 3,722
------------------------------
Stockholders' equity:
Preferred stock, $.001 par value 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,229,112, and 6,201,068 issued and
outstanding at June 30, 1998 and March 31, 1998,
respectively 6 6
Additional paid in capital 25,751 25,598
Accumulated deficit (5,565) (6,016)
------------------------------
Total stockholders' equity 20,192 19,588
------------------------------
$24,379 $23,310
------------------------------
------------------------------
See accompanying notes to consolidated condensed financial statements
3
MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended June 30,
---------------------------
1998 1997
---------------------------
Revenue:
Subscription and license $2,798 $2,228
Services 1,118 977
---------------------------
Net revenue 3,916 3,205
Cost of revenue 1,420 1,245
---------------------------
Gross profit 2,496 1,960
Operating costs:
Research and development 727 660
Sales and marketing 722 558
General and administrative 658 845
Reorganization charges - 749
---------------------------
Total operating costs 2,107 2,812
---------------------------
Operating income (loss) 389 (852)
Interest and other income, net 214 171
---------------------------
Income (loss) before provision for income taxes 603 (681)
Provision for income taxes 152 -
---------------------------
Net income (loss) $451 ($681)
---------------------------
---------------------------
Basic earnings (loss) per share $0.07 ($0.11)
---------------------------
---------------------------
Weighted average common stock outstanding 6,213 6,002
---------------------------
---------------------------
Diluted earnings (loss) per share $0.07 ($0.11)
---------------------------
---------------------------
Weighted average common and dilutive potential
common stock outstanding 6,668 6,002
---------------------------
---------------------------
See accompanying notes to consolidated condensed financial statements
4
MECON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended
June 30,
---------------------
1998 1997
---------------------
Net cash provided by (used in) operating activities $ 812 ($308)
---------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (14) (2,491)
Proceeds from sales or maturities of securities
available-for-sale 311 3,410
Acquisition of property and equipment (243) (73)
Computer software development costs (295) (241)
---------------------
Net cash (used in) provided by investing
activities (241) 605
---------------------
Cash flows from financing activities:
Proceeds from issuance of stock options and
employee stock purchase plan 152 49
---------------------
Net cash provided by financing activities 152 49
---------------------
Net increase in cash and cash equivalents 723 346
Cash and cash equivalents at beginning of period 12,647 9,211
---------------------
Cash and cash equivalents at end of period $13,370 $9,557
---------------------
---------------------
See accompanying notes to consolidated condensed financial statements
5
MECON, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) BUSINESS OF THE COMPANY
MECON, Inc. (the Company) provides subscriptions to an information
database, licenses to software products, and consulting services to the
health care industry. These products and services improve performance and
reduce costs for health care organizations through the use of benchmark
information, processes, and tools.
(2) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of the Company presented
herein have been prepared without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information
and notes required by generally accepted accounting principles have been
condensed or omitted. In the opinion of management, these statements include
all adjustments (all of which consist of normal recurring adjustments except
as otherwise noted herein) necessary to present fairly the Company's
financial position and results of operations for the interim periods
presented. These statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
March 31, 1998 contained in the Company's Annual Report on Form 10-KSB. The
results of operations for the three months ended June 30, 1998 are not
necessarily indicative of the results of operations that may be expected for
future periods or the full year.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Beginning April 1, 1998, the Company has accounted for software and
related revenues in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. The revenue
allocated to software products generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support generally is
recognized ratably over the term of the support and revenue allocated to
service elements generally is recognized as the services are performed.
Revenue generated from the initial year of a MECON-PEERx-TM-
subscription and related MECON-PEERVIEW-TM- license and services contract is
recognized ratably from the date of contract signing over the estimated time
to deliver a customer's MECON-PEERx report, which is generally four to five
months in duration. Revenue generated from a subsequent year subscription
contract is recognized ratably over the estimated time to deliver a
customer's subsequent year report, which generally takes four to five months
beginning in the second or third year of the contract. Costs to deliver the
MECON-PEERx products are estimated to be incurred evenly throughout the
period beginning with the signing of a contract and ending with the delivery
of a report. Revenue earned and unbilled is recorded as unbilled accounts
receivable and amounts billed and unearned are recorded as deferred revenue.
Revenue from MECON-OPTIMIS-TM- and MECON-Action-Point-SM- license and
implementation services are recorded as deferred revenue and recognized upon
completion of services. The Company offers post-contract customer support to
its MECON-OPTIMIS and MECON-Action-Point customers. Revenue from maintenance
and technical support services, including amounts bundled with the initial
license fee, is
6
recorded as deferred revenue and recognized ratably over the period the
post-contract customer support services are provided.
MECON-Advisory-SM- revenue is recognized as the services are performed or
as the customer's specific project is completed.
The Company's adoption of SOP 97-2 did not have a material effect on the
Company's financial statements for the three-month period ended June 30,
1998. Prior to adoption of SOP 97-2, the Company accounted for software and
related revenues in accordance with SOP 91-1, SOFTWARE REVENUE RECOGNITION.
REPORTING COMPREHENSIVE INCOME
Beginning April 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. For the
three months ended June 30, 1998 and 1997, comprehensive income (loss) was
equal to the net income (loss) reported on the consolidated condensed
statements of operations.
(4) REORGANIZATION AND OTHER SPECIAL CHARGES
During the first quarter of fiscal 1998, the Company took action to
reduce its ongoing quarterly operating expense base. As a part of the expense
reduction effort, the Company decreased its workforce by 38 employees on
April 17, 1997 and incurred a $749,000 reorganization charge during the first
quarter of fiscal 1998. This charge was primarily comprised of employee
severance and related benefits and additional costs associated with facility
shutdowns. At June 30, 1998, the reorganization plan is substantially
complete as there are no significant costs remaining to be incurred.
(5) EARNINGS (LOSS) PER SHARE (EPS)
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
Three months ended June 30,
1998 1997
----------------------------------------------- ---------------------------------------------
Income Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------- ---------------------------------------------
BASIC EPS
Income (loss) $451 6,213 $0.07 ($681) 6,002 ($0.11)
EFFECT OF DILUTIVE SECURITIES
Stock options - 455 - - - -
----------------------------------------------- ---------------------------------------------
DILUTED EPS
Income (loss) + assumed
exercises $451 6,668 $0.07 ($681) 6,002 ($0.11)
----------------------------------------------- ---------------------------------------------
----------------------------------------------- ---------------------------------------------
Options to purchase 171,735 common shares at prices ranging from $11 to $24
per share and 699,540 common shares at prices ranging from and $1 to $24 per
share were outstanding during the three months ended June 30, 1998 and 1997,
respectively, but were not included in the computation of diluted EPS because
to do so would have been antidilutive for the periods presented.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS REPORT ON
FORM 10-QSB ARE FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED. SUCH FACTORS INCLUDE:
(1) VARIABILITY IN QUARTERLY REVENUES RELATED TO THE TIMING OF LARGE
CONSULTING ENGAGEMENTS. CONSULTING CONTRACTS ARE TYPICALLY LARGE DOLLAR
CONTRACTS THAT REPRESENT A MATERIAL PERCENTAGE OF THE COMPANY'S QUARTERLY
REVENUE. DELAYS IN CONTRACT SIGNING COULD RESULT IN LOWER SERVICES REVENUES
FOR THE COMPANY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION, AND (2) NON-RENEWAL OF
OLDER, STEEPLY DISCOUNTED CONTRACTS AT HIGHER PRICES DUE TO PRICING
SENSITIVITY. TERMINATION OF CUSTOMER RELATIONSHIPS COULD RESULT IN LOWER
SUBSCRIPTION REVENUES FOR THE COMPANY, WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION,
AS WELL AS:
- VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
- DEPENDENCE ON PRINCIPAL PRODUCTS
- INTEGRITY AND RELIABILITY OF DATABASE
- COMPETITION
- DEPENDENCE ON STRATEGIC RELATIONSHIPS
- CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY
- POTENTIAL ACQUISITIONS
- DEPENDENCE ON KEY PERSONNEL
SUCH FACTORS ALSO INCLUDE THE RISK FACTORS LISTED FROM TIME TO TIME IN THE
COMPANY'S OTHER SEC REPORTS, INCLUDING BUT NOT LIMITED TO, THE REPORT ON FORM
10-KSB FOR THE YEAR ENDED MARCH 31, 1998, AND/OR FORM 10-QSB FOR THE QUARTER
ENDED DECEMBER 31, 1997, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY'S
INVESTOR RELATIONS DEPARTMENT. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB.
OVERVIEW
MECON is a leading healthcare benchmarking solutions company. The
Company's proprietary data, family of premium quality, easy-to-use software
products and consulting services combine to produce and sustain optimum
performance in healthcare delivery systems. From its incorporation until
1989, MECON's revenue was primarily derived from consulting services for
acute care hospitals. Since 1990, the Company has 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, 1998, approximately 71% of
the Company's revenues were derived from database subscriptions and software
sales. Within the acute care segment of the hospital market, MECON has
marketed its products and services primarily to individual hospitals with
over 100 beds.
The following factors continue to contribute to the Company's
performance during the first quarter of fiscal 1999. On November 25, 1996,
the Company announced plans to complete the integration of Managed Care
Information Systems, Inc. ("MCIS"), a pooling of interests transaction in
fiscal 1996, centralize management of its product development, sales and
product support organizations, accelerate its investment in the development
of new clinical operations and quality measurement 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.
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
8
sales force that led to contract signing delays. The effect of such delays
was a shortfall in revenue recognized in both the third and fourth quarters
of fiscal 1997. This shortfall resulted in incurred operating losses, and
accordingly, the Company announced that it would take corrective measures.
On April 17, 1997, the Company announced a number of strategic and
operational changes intended to improve the Company's financial performance.
As a first step, the Company's original management team rejoined the Company
and adopted a "back-to-basics" strategy of selling the Company's current
products into its current market. Although the Company believed, and still
believes, that additional healthcare market sectors targeted by the Company's
accelerated investments in developing clinical operations and quality
measurement products did represent growth opportunities for the Company, the
Company also believed that continued efforts in these areas compromised both
its leadership position in benchmark-based cost management solutions and its
profitability.
Tactics supporting this "back-to-basics" strategy include, but are not
limited to, selling the MECON-Integrated Solution-TM- whenever possible,
cross-selling existing products to existing customers and remaining firm on
MECON-PEERx-TM- pricing related to the renewal of older, low margin
subscriptions. The MECON-Integrated solution is a packaged product
offering that includes a MECON-PEERx subscription, MECON-Advisory-TM- and
MECON-OPTIMIS-TM-. Such a packaged offering assures that the customer achieves
immediate, significant and sustainable cost savings by not only receiving
benchmarked-based cost management reports that identify cost reduction
opportunities by department but by also receiving MECON's integrated
consulting approach of implementing such identified cost reduction
opportunities and installing MECON-OPTIMIS, the Company's operational
cost monitoring software tool, to assure cost reductions are sustained.
Less than 50% of MECON-OPTIMIS customers are subscribers to MECON-PEERx
because MECON-OPTIMIS predates MECON-PEERx and many of the early
MECON-OPTIMIS customers, on current maintenance agreements, are now sales
prospects for either MECON-PEERx or the MECON-Integrated Solution.
Additionally, less than 10% of the MECON-ActionPoint customers are
MECON-PEERx subscribers because the Company only recently began integrating
the selling of MECON-ActionPoint, its only clinical product, with its
operational cost management products. Therefore, a cross-selling opportunity
exists that has become a tactic of the "back-to-basics" strategy.
Many of the older multi-year MECON-PEERx subscriptions were
grandfathered at substantially lower prices. The Company has adopted a firm
pricing policy to migrate expiring MECON-PEERx subscriptions to current list
prices, and accordingly, certain of these subscribers may not renew their low
margin subscriptions at higher margins due to pricing sensitivity.
Accordingly, the Company is emphasizing replacing the revenue stream up for
renewal more heavily than replacing all the expiring units. During the three
months ended June 30, 1998, except for the hospital consortium renewal
discussed below, the Company renewed essentially all expiring contracts at
137% of the related customers' expiring contract values. However, as a result
of this firm pricing tactic, the Company believes that some of the expiring
contracts may not renew. One such contract that recently did not renew is a
contract with a hospital consortium that covers approximately 40 academic
teaching hospitals. During fiscal 1998, this contract totaled 7% of revenue.
The original three-year contract, signed in fiscal 1992, was one of the
Company's first multi-year contracts, was steeply discounted and hence
contributed very low margins. The majority of this revenue has historically
been recognized in the second quarter of the fiscal year. As a result of the
hospital consortium's non-renewal, the Company believes that in the second
quarter of fiscal 1999 there may be nominal revenue growth compared to the
comparable period in the prior fiscal year. The Company believes that the
termination of this contract will not adversely effect future earnings.
As a second step of the "back-to-basics" strategy, 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
9
overall quarterly expenses, and along with the Company's renewed focus on its
core markets, return the Company to profitability and growth. As a part of
this expense reduction effort, the Company incurred a reorganization charge
of $749,000 during the first quarter of fiscal 1998. This charge was
primarily comprised of employee severance and related benefits and additional
costs associated with facility shutdowns.
The total value of contracts signed in the three months ended June 30,
1998 increased 34% to $4.4 million compared to $3.3 million signed in the
comparable period in the prior fiscal year and the Company's revenue
increased by 22% to $3.9 million for the three months ended June 30, 1998
compared to $3.2 million in the comparable period in the prior fiscal year.
This disparity between the growth in total contract value signed and revenue
recognized relates to a shift in contract mix in the first quarter of fiscal
1999. A greater number, and total value, of contracts signed in the first
quarter of fiscal 1999 were MECON-PEERx subscriptions, which tend to be
multi-year contracts, compared to MECON-OPTIMIS, MECON-ActionPoint and
MECON-Advisory, which tend to be only one-year contracts. Therefore, a
greater proportion of total contract value signed in the first quarter of
fiscal 1999 is recognized in future periods. Furthermore, given the shift in
contract mix where a greater number, and total value, of contracts signed in
the first quarter of fiscal 1999 were MECON-PEERx subscriptions, the Company
believes that services revenue for the second quarter of fiscal 1999 may
decrease sequentially from the first quarter of fiscal 1999 and the
comparable period in the prior fiscal year.
As a result of continued year-over-year increases in the total value of
contracts signed since the adoption of the "back-to-basics" strategy, the
Company has achieved year-over-year revenue growth. These increases in total
contract value continue to build the Company's backlog, which is defined as
the total value of contracts signed that have not been recognized as revenue.
Backlog is then depleted by the revenue recognized during the period. Since
the total value of contracts signed in the first quarter of fiscal 1999 was
$4.4 million compared to $3.9 million in revenue recognized, backlog
increased by approximately $500,000 in the first quarter of fiscal 1999.
An increasing base of recurring revenue is primarily driving
year-over-year revenue growth. Currently, approximately 50% to 75% of the
Company's quarterly revenue is derived from backlog. The remaining 25% to 50%
is generated from contracts signed during that respective quarter. The
increase in the recurring base of revenue coupled with strong expense
controls have returned the Company to profitability, excluding the
reorganization charge in the first quarter of fiscal 1998, for the fifth
consecutive quarter.
10
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenue for the periods indicated:
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------------------
Statements of Operations
Revenue:
Subscription and license............................ 71% 70%
Services............................................ 29% 30%
-------------------
Net revenue..................................... 100% 100%
Cost of revenue..................................... 36% 39%
-------------------
Gross profit............................................ 64% 61%
Operating costs:
Research and development............................ 19% 21%
Sales and marketing................................. 18% 17%
General and administrative.......................... 17% 26%
Reorganization charges.............................. 0% 23%
-------------------
Total operating costs........................... 54% 88%
-------------------
Operating income (loss)................................. 10% (27%)
Interest and other income, net.......................... 5% 5%
-------------------
Income (loss) before provision for income taxes......... 15% (21%)
Provision for income taxes.............................. 4% -
-------------------
Net income (loss)....................................... 12% (21%)
-------------------
-------------------
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
REVENUE
Revenue for the three months ended June 30, 1998 increased 22% to $3.9
million compared to $3.2 million for the comparable period in the prior
fiscal year. Subscription and license revenue for the three months ended June
30, 1998 increased 26% to $2.8 million compared to $2.2 million for the
comparable period in the prior fiscal year and accounted for 80% of the
revenue increase. This increase was primarily attributable to an increased
base of recurring revenue from multi-year subscription contracts sold in
prior periods. The increase in recurring revenue is attributable to the
company's strategy of requiring its customers to sign three year contracts
for its MECON-PEERx product.
The 14% increase in services revenue to $1.1 million from $977,000 was
primarily due to the Company's current strategy of expanding customer support
services, such as training programs and consulting projects, that build
relationships with customers and enhance benefits customers derive from the
Company's products. Although the Company anticipates a greater percentage of
its future revenue to be derived from consulting services, consulting service
contracts are significantly larger dollar contracts than MECON-PEERx,
MECON-OPTIMIS and MECON-ActionPoint contracts. Therefore, the timing of
contract signings and delivery of related services may impact the timing of
revenue recognition, and as a result, consulting service revenue may
significantly vary from quarter to quarter. Given the shift in contract mix
where a greater number, and total value, of contracts signed in the first
quarter of fiscal 1999 were MECON-PEERx subscriptions, the Company believes
that services revenue for the second quarter of fiscal 1999 may decrease
sequentially from the first quarter of fiscal 1999 and the comparable period
in the prior fiscal year.
11
COST OF REVENUE
Cost of revenue for the three months ended June 30, 1998 increased 14%
to $1.4 million compared to $1.2 million for the comparable period in the
prior fiscal year. The increase in cost of revenue was primarily attributable
to an increase in MECON-PEERx, MECON-OPTIMIS and MECON-Action Point product
delivery personnel. The employee count increased to 56 during the three
months ended June 30, 1998 from 46 in the comparable period in the prior
fiscal year. Cost of revenue for the three months ended June 30, 1998
decreased to 36% of revenue compared to 39% for the comparable period in the
prior fiscal year. While the dollars spent as a percentage of revenue
decreased, the absolute dollars spent increased as the Company staffed for an
increased base of customers. The decrease in percentage of revenue was
primarily due to an increased revenue base related to recurring revenue from
multi-year subscription contracts sold in prior years. The Company continues
to leverage efficiencies in delivery related to such customers. The Company
anticipates cost of revenue to increase in absolute dollars due to the
increase in amortization of software development costs as the next generation
of its products are released, as well as the anticipated hiring of product
delivery personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30,
1998 increased 10% to $727,000 compared to $660,000 for the comparable period
in the prior fiscal year. This increase was primarily due to an increase in
technical and programming personnel. During the three months ended June 30,
1998, approximately $295,000 was capitalized for internally developed
software related to product development compared to $240,000 for the
comparable period in the prior year. Research and development expenses for
the three months ended June 30, 1998 decreased to 19% of revenue compared to
21% for the comparable period in the prior fiscal year. This decrease as a
percentage of revenue was primarily due to a planned product development
effort with respect to anticipated revenue levels. While the dollars spent as
a percentage of revenue decreased, the absolute dollars spent increased as
the Company continues to develop the next generation of MECON-PEERVIEW,
Version 5.0, through late fiscal 1999, and accordingly, the Company
anticipates research and development spending to increase nominally in
absolute dollars.
SALES AND MARKETING
Sales and marketing expenses for the three months ended June 30, 1998
increased 29% to $722,000 compared to $558,000 for the comparable period in
the prior fiscal year. This increase was primarily due to an increase in
employees, marketing activities, travel and office infrastructure. The
employee count increased to 11 during the three months ended June 30, 1998
from eight in the comparable period in the prior fiscal year. Sales and
marketing expenses for the three months ended June 30, 1998 increased to 18%
of revenue compared to 17% for the comparable period in the prior fiscal
year. This increase in percentage of revenue was primarily due to an increase
in marketing activities to generate a market awareness of the Company's
capabilities in consulting services. The Company anticipates sales and
marketing expenses to increase in absolute dollars due to increased
commissions related to an increasing customer base and marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30,
1998 decreased 22% to $658,000 compared to $845,000 for the comparable period
in the prior fiscal year. This decrease was primarily due to reductions in
rent, legal and professional fees, and expenses related to office
infrastructure. The reduction in rent and professional fees individually
accounted for the largest portion of the decrease. General and
administrative expenses for the three months ended June 30, 1998 decreased to
17% of revenue compared to 26% of revenue for the comparable period in the
prior fiscal year. This decrease was primarily due to the aforementioned cost
reduction initiatives. The Company anticipates general and administrative
expenses to increase nominally in absolute dollars due to depreciation and
amortization and a new corporate wide training program.
12
REORGANIZATION CHARGES
No reorganization charges were incurred during the three months ended
June 30, 1998 compared to $749,000 for the comparable period in the prior
fiscal year. The decrease was primarily due to the series of management
changes and corrective measures taken in the first quarter of fiscal 1998 as
previously discussed compared to no such actions in the first quarter of
fiscal 1999.
PROVISION FOR INCOME TAXES
The increase in income taxes for the three months ended June 30, 1998 of
$152,000 was primarily attributable to the Company achieving increasing
profitability over the past five quarters, and therefore utilizing its net
operating loss carryforwards and other tax credits. The remaining net
operating loss carryforwards and tax credits taken in conjunction with the
Company's anticipated profit is expected to result in an effective tax rate
of 25% for fiscal 1999. Therefore, the Company provided taxes at such a rate
in the first quarter of fiscal 1999. In the prior fiscal year, the Company
had a larger net operating loss carryforward and tax credits and no history
of profitability to provide a basis for an income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's cash, cash equivalents and securities
available-for-sale increased by $427,000 to $16.9 million compared to $16.5
million at March 31, 1998 primarily as a result of strong cash collections
and cash management. The Company generated $812,000 of cash flow from
operating activities for the three months ended June 30, 1998 compared to
cash used of $308,000 in the comparable period in the prior year. This
improvement was primarily due to increased cash collections augmented by
strong cash management. The Company's days of sales outstanding (DSO)
remained relatively constant at 68 days at June 30, 1998 compared to 63 days
at March 31, 1998.
As of June 30, 1998, the Company had net working capital of $16.8
million, including cash, cash equivalents and securities available-for-sale
of $16.9 million. Given the Company's strong cash position as of June 30,
1998, the Company has elected to have no outstanding debt facilities. The
Company currently has no material commitments for capital expenditures.
The Company believes that with its access to financing sources, strong
cash position, and lack of debt, it will be able to adequately fund its cash
requirements for the next twelve months and the foreseeable future.
YEAR 2000
The Company is reviewing its internal computer systems and product
offerings to ensure these systems and offerings are adequately able to
address the issues expected to arise in connection with the Year 2000. These
issues include the possibility that software which does not have the capacity
to recognize four digits in a date field may no longer function properly when
use of that date becomes necessary.
The Company is currently evaluating the status of its products, some of
which are not at present Year 2000 compliant, and expects to implement
programming changes necessary to address Year 2000 issues. The Company is
also evaluating its internal systems and expects to implement the systems and
programming changes necessary to address Year 2000 issues on an
enterprise-wide basis. The Company is currently reviewing the cost of such
actions. A significant proportion of these costs are not expected to be
incremental costs to the Company, but will represent redeployment of existing
Company resources. The Company expects such modifications to its products and
internal systems will be made on a timely basis, and presently believes that,
with modifications to existing software or converting to new software, the
Year 2000 issue will not pose significant operational problems for the
Company's computer systems; however, there can be no assurance there will not
be a delay in, or increased costs associated with, the
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implementation of such changes, and the Company's inability to implement such
changes could have a material adverse effect on future results of operations.
The Company has not fully determined the extent to which it may be
impacted by third parties' systems, which may not be Year 2000-compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company deals on financial transactions worldwide. While the Company
has begun efforts to seek reassurance from its suppliers and service
providers, there can be no assurance that the systems of other companies that
the Company deals with or on which the Company's systems rely will be timely
converted, or that any such failure to convert by another company could not
have a material adverse effect on the Company.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the
Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. The Company anticipates that the
adoption of SFAS No. 133 will not have an impact in the Company's financial
statement.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits 11.1 Computation of Earnings (Loss) per Share
Exhibits 27.0 Financial Data Schedules
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1998.
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: 8/13/98 /s/ Vasu Devan
--------------
Vasu R. Devan
President and Chief Executive Officer
Date: 8/13/98 /s/ David J. Allinson
---------------------
David J. Allinson
Chief Financial Officer
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