UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

x                              ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

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

94-3166458

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

1201 Charleston Road Mountain View, California

94043

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 251-6100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

None

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 Yes 
o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 Yes 
o No x

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. Yesx  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer x      Non-accelerated file o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 30, 2005 as reported on the Nasdaq National Market, was approximately $123.7 million. Shares of common stock held by each executive officer, director and each person who is known by the registrant to own 5% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. Share ownership information of certain persons known by the registrant to own greater than 5% of the outstanding common stock for purposes of the preceding calculation is based solely on information on Schedule 13G filed with the Commission and is as of June 30, 2005.

This determination of affiliate status is not a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock was 26,554,776 as of February 28, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on April 25, 2006 are incorporated by reference into Part III of this Form 10-K.

 




OMNICELL, INC.

INDEX TO
ANNUAL REPORT ON FORM 10-K

FOR YEAR ENDED DECEMBER 31, 2005

 

 

 

Page

PART I

Item 1.

 

Business

 

 

1

 

Item 1A.

 

Risk Factors

 

 

11

 

Item 1B.

 

Unresolved Staff Comments

 

 

22

 

Item 2.

 

Properties

 

 

22

 

Item 3.

 

Legal Proceedings

 

 

22

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

22

 

PART II

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

23

 

Item 6.

 

Selected Financial Data

 

 

24

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

26

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

37

 

Item 8.

 

Financial Statements and Supplementary Data

 

 

37

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

37

 

Item 9A.

 

Controls and Procedures

 

 

37

 

Item 9B.

 

Other Information

 

 

38

 

PART III

Item 10.

 

Directors and Executive Officers of the Registrant

 

 

39

 

Item 11.

 

Executive Compensation

 

 

39

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

39

 

Item 13.

 

Certain Relationships and Related Transactions

 

 

39

 

Item 14.

 

Principal Accountant Fees and Services

 

 

39

 

PART IV

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

 

40

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

41

 

 

 

Signatures

 

 

70

 

 




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

·       the extent and timing of future revenues;

·       the size and/or growth of our market or marketshare;

·       the opportunity presented by new products or emerging markets;

·       the operating margins or earnings per share goals we may set;

·       our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and

·       our estimates regarding the sufficiency of our cash resources.

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks in this Annual Report on Form 10-K in greater detail in the section entitled “Risk Factors” under Part I, Item 1A below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report on Form 10-K. You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.




PART I

ITEM 1.                BUSINESS

General

Omnicell, Inc. (“Omnicell,” “our,” “us,” “we,” or the “Company”) was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our solutions for the healthcare industry are designed for many clinical areas of the healthcare facility—the central pharmacy, nursing units, operating room, cardiac catheterization lab and the patient’s bedside. Our solutions enable healthcare facilities to acquire, manage, dispense and administer medications and medical-surgical supplies, and are intended to enhance patient safety, reduce medication errors, improve workflow and increase operational efficiency. Our medication and supply dispensing systems facilitate the distribution of medications and medical-surgical supplies at the point of care. Our physician order management system streamlines communication between nursing and pharmacy staff. Our Web-based procurement application automates and integrates healthcare facilities’ requisition and approval processes. Each of these systems interface with healthcare facilities’ existing information systems to accurately capture and display critical patient data.

In 2002, we acquired two products, a central pharmacy storage and retrieval solution, now marketed as Omnicell PharmacyCentral, and SafetyMed, a mobile workflow and patient safety platform. In August 2003, we acquired BCX Technology, Inc., a provider of open bar code supply management systems now branded as OptiFlex open and integrated systems, to complement our cabinet-based supply solutions. In March 2004, we acquired Ariel Distributing, Inc.’s closed-loop, controlled substance inventory management software for healthcare system pharmacies, marketed by Omnicell under the product name SecureVault™. When used in combination, our products and services offer a comprehensive solution to enable healthcare facilities to enhance patient safety while improving operational efficiency. In August 2005, we opened a new research and development facility in India.

As a result of our product development efforts and acquisitions, we offer end-to-end solutions for both the medication-use process and the medical-surgical supply chain, providing additional market opportunities in areas beyond our solutions’ traditional location in the healthcare facility—the nursing unit. For the medication-use process, we provide the central pharmacy with a physician order management system, OmniLinkRx™, Omnicell PharmacyCentral, SafetyPak, an automated medication packaging system, and SecureVault, a controlled substance inventory management system. In addition, we offer SafetyMed RN, a mobile nursing workflow automation solution for use at the patient bedside. For the medical-surgical supply chain, we offer OmniBuyer®, our Web-based procurement application, for materials management decision makers.

Industry Background

The delivery of healthcare in the United States is predominantly dependent upon manual and paper-based methods, resulting in a highly fragmented, complex and inefficient system. A primary cause of this inefficiency is the relatively small investment made by healthcare facilities in information technology in the last two decades. Many existing healthcare information systems are unable to support the modernization of healthcare delivery processes and address patient safety initiatives. These factors have contributed to medical errors and unnecessary process costs across the sector.

The Institute of Medicine highlighted the prevalence of medical errors in a November 1999 report based on the results of more than 30 independent studies. The report indicated that medical errors are among the top ten causes of death in the United States and that medication errors specifically were responsible for more than an estimated 7,000 deaths in 1993. In March 2001, the Institute of Medicine issued a follow-up report that recommended increased investment in information technology as a means of reducing medical errors and improving the overall quality of patient care. In January 2003, the Institute of

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Medicine released a report urging private and public organizations to focus on quality-improvement efforts in 20 priority areas, including medication management. On February 25, 2004, the Food and Drug Administration or FDA, published a final rule that requires linear bar codes on most prescription drugs. Drug manufacturers, repackagers, relabelers, and private label distributors are subject to the rule. The FDA estimates that the bar code rule, once implemented, will result in a 50% reduction in medication errors and 500,000 fewer adverse drug events over the next 20 years, $93 billion in cost savings, and other economic benefits.

Healthcare providers and facilities are also affected by significant economic pressures. Demand for health services continues to increase, as do the shortages in the U.S. labor market for healthcare professionals, especially nurses and pharmacists. Rising costs of labor, prescription drugs and new technology all contribute to increased spending. These factors, combined with the continuing consolidation in the healthcare industry, have significantly affected patient care and have increased the need to control costs.

Our Vision and Corporate Objectives

Our vision is to be a world class provider to the healthcare industry of solutions that enhance patient safety and increase operational efficiency. Our main corporate objectives are to:

·       provide the best customer experience in healthcare;

·       provide the best and most innovative customer solutions;

·       achieve consistent financial performance; and

·       engage people to make a difference.

Our Strategies

We pursue our vision and corporate objectives by focusing on the following strategies:

·       continue to leverage and extend our solutions to address the patient safety and cost-containment pressures facing healthcare facilities;

·       continue to collaborate with leading healthcare providers in the definition, development and deployment of our products and services;

·       continue to focus on clinical preference in the development of our solutions;

·       build our operational model around working at the customers pace to ensure that our product installations enable our customers to maximize the benefit of using our products.

·       further penetrate our installed customer base;

·       develop new solutions that enhance our customers’ existing systems by preserving, leveraging and upgrading their existing information systems;

·       develop additional strategic relationships with other healthcare and non-healthcare partners to enhance our product offerings, broaden our solution portfolio and increase our sales opportunities;

·       acquire select technologies and complementary businesses to either expand or enhance our existing products and services; and

·       work closely with the large healthcare Integrated Delivery Networks, or IDNs, to promote Omnicell’s capabilities in the medication management process and supply solutions and encourage standardization across their networks.

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Omnicell Products and Services

Our primary automation solutions include medication dispensing systems, supply automation systems, a central pharmacy storage and retrieval system, a bar code medication packaging solution, a physician order management solution, a controlled substance inventory management system, a bedside automation solution and a Web-based procurement application.

Medication Dispensing Systems

Our OmniRx® medication dispensing systems consist of modular, secured and computerized cabinets and related software technology that manage and dispense medications. These systems are highly configurable and have high resolution color touch screens. Our color touch screens provide users with a Windows-based graphical interface that is suited for displaying a patient’s medical profile and Web-based clinical information. In addition, these systems have a broad range of dispensing technologies, including single-dose dispensers and drawers that support multiple levels of security by utilizing high security unit-dose modules and locking lids, medium security sensing lids and patented guiding lights. The systems are configured to support efficient workflow in all areas of the hospital including medical-surgical floors, intensive care units and emergency rooms.

Our single-dose dispensing module dispenses only the requested medication doses and is best suited for medications where regulatory guidelines mandate a highly controlled environment. Clinicians prefer this technology in high-security situations because it automates much of the logistical and documentation burden associated with dispensing controlled medications.

Supply Automation Systems

Our supply automation systems consist of modular, secure and computerized cabinets, open systems for managing medical-surgical supply inventories on open shelves and integrated systems for managing inventories of supplies stored on open shelves and/or within closed cabinets.

The cabinet-based, closed supply systems are comprised of one, two or three cells. Each cell is approximately two feet wide, six feet high and two feet deep with capacity of up to 120 stock-keeping units. Auxiliary cabinets can be added to the system to provide additional storage capacity. Various modules and drawer types are available to support a wide array of storage configurations.

The cabinet-based systems incorporate locked transparent doors that restrict access to the supplies contained inside. The user enters his or her identification number on a console and selects the appropriate patient name. Specific doors then open according to the security level of the user. Using our patented “See & Touch™” technology, the user is able to record supply utilization by pushing a dedicated reorder button on the shelf in front of the selected item.

Our OptiFlex open systems consist of the following products, which are designed to meet the specific needs of different areas of the hospital: OptiFlex MS for medical-surgical areas; OptiFlex CL for specialty areas such as the catheterization lab; and OptiFlex SS for the surgical services area. These products are easy-to-use, touch screen-based charge capture systems that are designed for clinical users who are busy caring for patients. The backbone of the OptiFlex product line is our inventory control module which is used in the materials management area. OptiFlex facilitates inventory management of medical-surgical supplies stored on open shelves and can also be used with closed cabinets. OptiFlex open systems provide a cost-effective, efficient way for hospitals to manage supplies stored on open shelves. Using a convenient flat-panel touch screen, the user touches the patient’s name or room number, then picks up the wireless bar code scanner and proceeds to the shelf location of the items to be removed. The scanner can be used to read either a bar code on the shelf location, or the product code on the item itself. OptiFlex integrated

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systems combine the ease of use of open-shelf bar code inventory management with the security of closed-cabinet inventory management.

Combination Medication Dispensing and Supply Automation Systems

Our combination systems allow healthcare organizations to store medications and medical supplies in a single system. The architecture of our combination system enables each operating department to manage its products independently of other operating departments, restricting clinician and technician access to only appropriate pharmaceuticals and medical supplies and allowing the tracking of transaction data, inventory levels, expenses and patient treatment costs through a single database. By utilizing our combination systems, healthcare facilities are able to handle medications and medical supplies with greater flexibility and efficiency.

OmniCenter®

OmniCenter is our computerized central server that processes transaction data to and from our medication and supply dispensing cabinets, recording each transaction by user, patient, item quantity, cost, date and time. OmniCenter enables the pharmacy and materials management departments to run reports automatically or on demand, indicating when to restock the systems and when to reorder medications and supplies. OmniCenter also permits the user to generate a wide range of standard and customized reports. As a diagnostic service, we are able to remotely access an installed OmniCenter server from our technical support center to monitor the status of the server and all installed medication and supply dispensing systems.

Omnicell PharmacyCentral

Omnicell PharmacyCentral is an automated pharmacy storage and retrieval system that enables hospital pharmacies to manage medication inventory in the central pharmacy, streamlining workflow for greater efficiency and improving inventory control. Omnicell PharmacyCentral combines the benefits of an automated medication carousel system with bar code technology and sophisticated distribution and workflow management software, helping pharmacists ensure that the right medications are stored in and retrieved from the right locations. With bar code label preparation and scanning, the system performs important verification checks throughout the medication management process.

SafetyPak

SafetyPak is an automated bar code medication packaging system that enables hospital pharmacies to improve medication dispensing accuracy, increase pharmacy staff productivity and reduce costs. SafetyPak is a fully automated unit-dose and multi-dose oral solid medication packaging solution. By labeling medications with bar codes, SafetyPak enables bedside medication administration solutions to perform bar code checking at the patient’s bedside, helping ensure the five rights of medication administration—right patient, right drug, right dose, right route and right time. In addition, SafetyPak enables hospital pharmacies to automate the replenishment of decentralized cabinets as well as the filling of individual patient medication bins, improving the workflow of the central pharmacy.

OmniLinkRx

OmniLinkRx is a physician order management system that simplifies the communication of medication orders from nursing stations to the pharmacy. Physician orders are scanned into fax sending devices at the nursing station where the image is instantly and electronically communicated to the pharmacy. Technicians and pharmacists then enter physician orders into the pharmacy system while viewing a digital image of the actual physician order online.

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SecureVault

SecureVault allows the healthcare system pharmacies to track, monitor and control the movement of controlled substances from a central vault to one or many locations. For automated or non-automated inventories, SecureVault provides a wide range of benefits, including compliance with regulatory standards, increased efficiency for the central pharmacy, and improved administrative decision-making.

SafetyMed RN

As part of our SafetyMed mobile clinical system platform, SafetyMed RN is a comprehensive nursing workflow automation system designed to improve medication safety. In addition to performing bar code checking at the patient bedside, SafetyMed RN automates many of the steps required to safely administer medications, improving nursing efficiency. The system allows the nurse to quickly determine the scheduled medications to be administered during a particular time period, facilitating the removal of medications from the automated medication cabinet. The system performs verification checks at the patient’s bedside when medications are administered. Nurses use a wireless, handheld scanning device to scan bar code information from the patient’s wristband, from the medication packaging and from their own identification badges.

OmniBuyer

OmniBuyer is our secure, Web-based procurement application that automates and integrates a healthcare facility’s requisition and approval processes. This application incorporates buyer-specific business rules, such as spending limits, negotiated pricing, approval routing and customized access profiles. In addition, OmniBuyer is integrated with the healthcare facility’s existing information systems, further streamlining the purchasing process. OmniBuyer is based on BuySite technology from Commerce One which we have customized to meet the complex needs of the healthcare industry. OmniBuyer provides a single online point of entry to meet the procurement needs of buyers at healthcare facilities. With OmniBuyer, our customers determine the specific suppliers, including manufacturers, distributors, marketplaces and exchanges, to which their buyers will have access.

Services

We provide two types of services in support of our automation solutions: integration services and post-installation technical support. We generate revenue from service contracts for post-installation technical support, which provides our customers with phone support, on-site service, parts and access to software upgrades. On-site service is provided by our field service operations team.

Product Development

We commit significant resources to developing new products and technologies that bring value to our customers. Research and development expenses were $9.6 million, $9.1 million, and $9.0 million in the years ended December 31, 2005, 2004 and 2003, respectively, representing 7.9%, 7.3%, and 8.7% of total revenues in those years. In addition, development costs related to software implemented in our medication dispensing and supply automation systems and incurred subsequent to the establishment of technological feasibility, which were capitalized to be amortized to cost of product revenues, were $0.3 million and $1.8 million in 2005 and 2004, respectively. There were no costs capitalized in 2003.

Our architecture and product development processes allow for rapid development and testing times. The software architecture for our medication and supply cabinet dispensing systems is based on database products and development tools centered on the Microsoft Windows NT® and Windows 2000® platforms and the Microsoft Internet Information Server. We develop application software that is generally applicable to all customers, while retaining broad customization functionality. We maintain a single release

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applicable to both our medication and supply dispensing systems, with each new release containing more configurable options as new features are added, while retaining previous functionality for backward compatibility. Interfacing with our customers’ existing information systems is done according to the Health Level Seven, or HL7, standards or, for non-compliant systems, is done utilizing our custom interface software. Interface software is kept separate from the main software release. Communication between the OmniCenter server and the medication and supply dispensing systems and interface software is accomplished through an application programming interface. Each new release of server software maintains backward compatibility with this application programming interface, so that previous versions of interfaces and medication and supply dispensing systems continue to operate when the OmniCenter server software is upgraded. Our products currently do not require hardware approvals beyond standard Underwriters Laboratories or Canadian Safety Association equivalent certification in North America. For the European Community, our products are required to have Conformite European (CE) certification.

Scalability is a key benefit of our product offerings and an area of continuous focus in our research and development activities. Our medication dispensing and supply automation systems deploy current industry standard Microsoft Windows 2000 Server operating software and Pentium®-class Intel® microprocessors. Our new cabinets use the XP operating system and the motherboard uses a VIA Technologies processor. The OmniCenter server is designed to support our systems, fully deployed, at the largest healthcare facilities.

Historically, we have periodically offered major upgrades to our application software. Software upgrades are included as part of our standard service contract. The majority of our customers have a service contract with Omnicell.

The expertise of our hardware group is a significant part of our automation solutions business and constitutes one of our core competencies. While software occupies the majority of our development resources, we believe that the knowledge and expertise of our hardware group set us apart from our competitors. Since our medication dispensing and supply automation systems handle physical products, a considerable amount of skill is required to design mechanisms that will automatically dispense a variety of sizes of pharmaceuticals and medical supplies.

The Omnicell PharmacyCentral workflow automation system is a Web-based application built using the industry standard Microsoft tools. The tools used are VB.NET, ASP.NET, and Microsoft SQL Server database running on Windows 2000 and Windows 2003 Server and Microsoft Internet Server. The product can be accessed through Microsoft Windows PC or the Pocket PC portable wireless devices. This second-generation software was first installed in June 2002 and is currently installed in twenty-two hospitals. Our legacy software, which dates back to 1997, runs on the Windows NT platform and uses a Sybase database and FoxPro, remains in six hospitals. We have upgraded other legacy accounts to the new software, and expect the six remaining hospitals to upgrade to our new software over time.

Our SafetyMed RN nursing workflow automation system is built using industry-standard tools including Visual Basic, Windows 2000 and Microsoft SQL Server. The application is very modular and configurable. Mobile devices gain access to the application utilizing Citrix server and appropriate Citrix ICA clients. This technique for remote access preserves the confidentiality of patient health information by ensuring that no such information ever resides on the remote device. We intend to maintain a version of the software which is backward compatible with installed customer installations. A previous version of this application has been in use in live operation at a 650-bed hospital in Israel for four years. We have tailored the application to the U.S. market and added significant nursing workflow functionality.

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We provide OmniBuyer as a hosted application service that is accessed by our customers over the Internet. We host this product at a co-location facility in California.

The OptiFlex open systems can be offered as either a software-only solution running on a stand-alone PC or running on Omnicell cabinet hardware. The entire OptiFlex product line is built using Microsoft Visual Basic and Microsoft SQL Server 2000. The application is modular and highly configurable.

Sales and Customer Support

We market and sell our products and services to a variety of healthcare organizations, including hospitals and specialty care facilities. In the United States, we have a direct sales force of approximately 50 sales reps divided into separate medication and supply sales forces, both organized by geographic regions. In addition we have a Corporate Sales team focused on large Integrated Delivery Networks, or IDNs and a small inside sales team focused on inbound and outbound telemarketing to our installed base of customers that support our sales representatives. We sell through distributors in Europe, the Middle East, Asia and Australia and through a sales agent in Canada.

The sales cycle for our automation systems is long and can take in excess of 12 months. This is due in part to the cost of our systems and the number of people within a healthcare facility involved in the purchasing decision. To initiate the selling process, the sales representative generally targets the director of pharmacy, the director of materials management and/or other decision makers and is responsible for educating each group within the healthcare facility about the benefits of automation. To assist hospitals in the acquisition of our systems, we offer multi-year, non-cancelable payment terms that reduce cash flow requirements. Typically, we sell our customers’ multi-year payment term receivables to a third-party leasing company. We have contracts with several group purchasing organizations, or GPOs, that enable us to sell our automation systems to GPO-member healthcare facilities. These GPO contracts are typically for multiple years with options to renew or extend for up to two years but can be terminated by either party at any time. Our current GPO contracts include AmeriNet, Inc., Broadlane, Inc., Consorta, Inc., HealthTrust Purchasing Group, L.P., MAGNET Group, Novation, LLC, and Premier, Inc.

Our field service operations representatives support our sales force by providing operational and clinical expertise prior to the close of a sale and installation of our automation systems. This group assists the customer with the technical implementation of our automation systems, including configuring our systems to address the specific needs of each individual customer. After the systems are installed, on-site support is provided by our field service operations team and technical support group.

We offer technical support through our technical support center in Waukegan, Illinois, with some flow-through and specific product support provided by our outsource partner in India. The support center is staffed 24 hours a day, 365 days a year. We have found that two-thirds of all service issues can be addressed either over the phone or by our support center personnel utilizing their on-hand remote diagnostics tools. In addition, we utilize remote dial-in software that monitors customer conditions on a daily basis. In February 2005, we introduced our vSuite™ service programs which proactively monitor system status and alert service personnel to potential problems before they can lead to system failure. The vSuite programs include vDirector™, vCommander™ and vManager™. vDirector is the foundation level product for connectivity and monitoring system performance. It enables proactive remote monitoring of customer systems and tracks key performance parameters in a real-time manner. Over 200 hospitals have installed vDirector to date. vCommander™ provides a higher level of mission-critical support by monitoring Omnicell server platforms and interfaces. It ensures systems are operating within tolerance and detects various precursors to failure, such as hard disk and interface errors. vManager adds important software and platform lifecycle management functions, such as remote deployment and verification of Omnicell software upgrades, anti-virus updates, and operating system patches.

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Manufacturing

Our manufacturing strategy is to produce custom-configured systems with rapid turnaround in a high-quality and cost-effective manner. We currently conduct our manufacturing operations in an 87,000 square-foot facility in Mountain View, California, with approximately 35,000 square feet allocated to manufacturing. We operate on a continuous flow, just-in-time basis to perform final assembly, configuration and system testing of all products. Our customer service personnel work closely with the end user to determine specific customer requirements for each installation. The detailed customer requirements are transmitted electronically to our manufacturing facility and, in some instances, one of our equipment suppliers, to custom-configure each unit. Our operating software is installed as a part of the assembly process.

Our production activities consist primarily of final assembly of mechanical components and electronic sub-systems outsourced to key suppliers. While many components of our systems are standardized and available from multiple sources, certain components or subsystems are fabricated according to our specifications. We endeavor to obtain multiple sources of supplies for certain components. We believe we could obtain alternative sources of supplies within two to four months if any of our current suppliers were unable to provide us with adequate quantities of such components.

Our products are designed with a high degree of modularity that facilitates manufacturing, assembly and configuration and enables rapid deployment of new products and product enhancements. We have automated much of the software quality assurance process and have streamlined key steps in the mechanical prototyping process in order to minimize the time from design prototype to volume production.

Installations

The majority of our product revenue is derived from the sale and installation of medication dispensing and supply automation systems. These systems are shipped based on customer requested installation dates. Our field operations employees generally perform system installations. The installations are considered complete and revenue is recognizable when the database files are complete, the systems are configured and labeled, our software is installed and deemed functional, the basic interfaces are complete, the systems are in the customer-designated locations and the systems have been tested. We further require our customers to confirm that we have completed our installation obligations by providing to us a customer certification form indicating the date our installation obligations were completed.

Competition

The medication management and supply chain solutions 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 medication management and supply chain solutions market include Pyxis Corporation (a division of Cardinal Health, Inc.), McKesson Automation Inc. (a business unit of McKesson Corporation) and AmerisourceBergen Corporation (through its acquisition of MedSelect, Inc.). Pyxis Corporation, in particular, has a significantly larger installed base of customers than we do and over the last few years has developed and introduced to the market a significantly larger number of new products. With the acquisition of an automated pharmacy storage and retrieval system, the SafetyMed platform, and ScanREQ, we have gained additional competitors. They include AutoMed (an AmerisourceBergen Corporation company), the Baxter Medication Delivery business of Baxter International Inc., Care Fusion, Incorporated, Cerner Corporation, Eclipsys Corporation, IDX Systems Corporation (a division of GE Healthcare) and Siemens Medical Solutions (a division of Siemens AG).

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We believe our products and services compare favorably with those offered by our competitors, particularly in the areas of flexibility, utilization of advanced technologies, ease of use and the quality of integration with existing systems.

Intellectual Property and Proprietary Technology

Our success depends in part upon a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We pursue patent protection in the United States and foreign jurisdictions for technology that we believe to be proprietary and that offers a potential competitive advantage for our products. Our issued patents relate to our “See & Touch” methodology used in our medication dispensing and supply automation systems, the use of guiding lights in the open matrix pharmacy drawers, the use of locking and sensing lids with pharmacy drawers and the methods of restocking these drawers. These patents also apply to our unit-dose mechanism and methods, the single-dose dispensing mechanism and the methods for restocking the single-dose drawers using exchange liners. 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 are not aware that any of our products infringes the proprietary rights of any third parties.

All of our operating system software is copyrighted and subject to the protection of applicable copyright laws. We have also obtained registration of Omnicell, the Omnicell logo, OmniBuyer, OmniCenter, OmniSupplier®, OmniRx, SecureVault and Sure-Med® trademarks through the United States Patent and Trademark Office. We are in the process of registering other trademarks in the United States and internationally. We seek to protect and enforce our rights in our patents, copyrights, service marks, trademarks, trade dress and trade secrets through a combination of laws and contractual restrictions, such as confidentiality and licensing agreements.

Employees

As of December 31, 2005 we had a total of 514 employees, including 65 in manufacturing, 94 in research and development, 75 in sales, 206 in customer service/field operations, 29 in marketing and 45 in general and administration positions. We also employ independent contractors and temporary personnel to support our development, marketing, customer support, field service and administration organizations. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage.

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Executive Officers

The following table sets forth certain information as of March 1, 2006, about our executive officers:

Name

 

 

 

Age

 

Position

Randall A. Lipps

 

48

 

President, Chief Executive Officer, and Chairman of the Board of Directors

Robin G. Seim

 

46

 

Executive Vice President of Finance

James T. Judson

 

51

 

Vice President of Finance and Interim Chief Financial Officer

Gary E. Wright

 

52

 

Executive Vice President of Sales, Marketing and Business Development

J. Christopher Drew

 

40

 

Executive Vice President of Operations

John G. Choma

 

50

 

Senior Vice President of Human Resources, Employee Learning and Performance

Dan S. Johnston

 

42

 

Senior Vice President and General Counsel

Renee M. Luhr

 

45

 

Vice President of Sales

 

Randall A. Lipps was named Chief Executive Officer and President of Omnicell in October 2002. Mr. Lipps has served as Chairman of the Board and a Director of Omnicell since founding Omnicell in September 1992. From 1989 to August 1992, Mr. Lipps served as the Senior Vice President of ST Holdings, Inc., a travel and marketing company. Mr. Lipps received both a B.S. in economics and a B.B.A. from Southern Methodist University.

Robin G. Seim joined Omnicell in February 2006 as Executive Vice President, Finance. From March 2005 to December 2005, Mr. Seim served as Chief Financial Officer of Mirra, Inc., a developer of digital content protection products. From July 2001 to December 2004, Mr. Seim served as Chief Financial Officer of Candera, Inc., a maker of network-based storage controllers. From September 1999 to April 2001, Mr. Seim served as Chief Financial Officer of Villa Montage Systems, Inc., a provider of residential broadband access management systems. From February 1996 to September 1999, Mr. Seim served in a number of senior financial management positions at Bay Networks, a networking company acquired in 1998 by Northern Telecom. From February 1982 to January 1996, Mr. Seim served in a variety of financial positions with International Business Machines, Inc., a computer product and services company. Mr. Seim received a B.S. degree in accounting from California State University, Sacramento.

James T. Judson joined Omnicell in February 2005 as Vice President and Interim Chief Financial Officer. Prior to joining Omnicell, Mr. Judson had been in retirement from Sun Microsystems, Inc., a computer software and platform company, where he had served in a wide variety of financial management positions from July 1982 to January 2002, his latest position being Vice President of Finance and Planning for the worldwide operations group. Mr. Judson received a B.S. degree in industrial management from Purdue University and an M.B.A. in finance from Indiana University.

Gary E. Wright joined Omnicell in June 1994 as Vice President of Sales and Field Operations and was named Executive Vice President of Sales, Marketing and Business Development in January 2005. Mr. Wright has also served as Omnicell’s Executive Vice President of Field Operations, Vice President of Supplier Relations and International, and Vice President of Supplier Relations. Mr. Wright received a B.S. from Northern Illinois University.

J. Christopher Drew joined Omnicell in April 1994 as Manager of Product Supply and was named Executive Vice President of Operations in January 2005. Mr. Drew has also served as Omnicell’s Senior

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Vice President of Field Operations and Business Development, Vice President of Branded Solutions, and Director of Corporate Development. From August 1989 to July 1992, Mr. Drew was a Financial Analyst at Goldman, Sachs & Co. and at Brentwood Associates, a private equity firm. Mr. Drew received a B.A. in Economics from Amherst College and an M.B.A. from the Stanford Graduate School of Business.

John G. Choma joined Omnicell in July 2004 as Vice President of Performance Management and was named Senior Vice President of Human Resources, Employee Learning and Performance in January 2005. From May 2003 to July 2004, Mr. Choma owned and operated World Champion Performance, a consulting firm.  From June 2001 to May 2003, Mr. Choma served as Manager of Sales Training with Openwave Systems, Inc., a provider of open software products and services and from August 2000 to June 2001 as Manager of Sales Training and Development with Broadband Office, Inc., a broadband telecommunications company. From May 1997 to August 2000, Mr. Choma served as Manager of  Sales Training, Development and Performance Consulting of Nortel Networks, a networking company. Mr. Choma received a B.S. in education from the University of Virginia and earned a Certified Performance Technologist designation from the International Society for Performance Improvement.

Dan S. Johnston joined Omnicell in November 2003 as  Senior Vice President and General Counsel. From April 1999 to November 2003, Mr. Johnston was Vice President and General Counsel at Be, Inc., a software company. From September 1994 to March 1999, Mr. Johnson was an attorney with the law firm Cooley Godward LLP. Mr. Johnston received a B.S. in computer information systems from Humboldt State University and a J.D. from the Santa Clara University School of Law.

Renee M. Luhr joined Omnicell in February 1999 as Vice President of Marketing and Midwest Operations, and was named Vice President of Sales in March 2006. Ms. Luhr has also served as Omnicell’s Director of National Accounts and as Vice President of Corporate and Clinical Sales. From June 1982 to January 1999, Ms. Luhr served in a wide variety of finance, sales and marketing management positions for Baxter Healthcare, a medical products and services company, her last position being Vice President of Marketing and Development. Ms. Luhr received a B.A. in Economics from Northwestern University.

Web Site Address

Our Web site address is www.omnicell.com. We make available free of charge through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing, by providing a hyperlink to the EDGAR Web site directly to our reports, however, information found on, or that can be accessed through, our Web site is not incorporated by reference into this annual report. You may read and copy materials that Omnicell files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE , Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information.

ITEM 1A.        RISK FACTORS

We have identified the following additional risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer and the market price of our common stock could decline.

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Any reduction in the demand for or adoption of our medication and supply dispensing systems and related services would reduce our revenues.

Our medication and supply dispensing systems represent only one 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 medication and supply dispensing management. As a result, we must continuously educate existing and prospective customers about the advantages of our products. Our medication and supply dispensing 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 medication and supply dispensing 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 medication and supply dispensing systems and related services and reduce our revenues. We cannot assure you that we will continue to be successful in marketing our medication and supply dispensing systems or that the level of market acceptance of such systems will be sufficient to generate operating income.

If we experience delays in or loss of sales of, delays in installations of, or delays in the recognition of revenue associated with our medication and supply dispensing systems, our competitive position, results of operations and financial condition could be harmed.

The purchase of our medication and supply dispensing systems is often part of a customer’s larger initiative to re-engineer its pharmacy, distribution and materials management systems. As a result, the purchase of our medication and supply dispensing systems has recently translated into larger strategic purchases by customers that frequently require more complex and stringent contractual requirements and generally involve a significant commitment of management attention and resources by prospective customers. These larger and more complex deals often require the input and approval of many decision-makers, including pharmacy directors, materials managers, nurse managers, financial managers, information systems managers, administrators, lawyers and boards of directors. For these and other reasons, the sales cycle associated with the sale of our medication and supply dispensing 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 medication and supply dispensing systems could cause our operating results to vary significantly from quarter to quarter and could harm our business.

In addition, and in part as a result of the aforementioned complexities inherent in larger transactions, our average installation times have increased for reasons that are often outside of 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. In addition, the larger, more complex transactions often require us to include negotiated contractual terms that have the effect of delaying revenue recognition under the accounting rules that apply to us.

For all the above reasons, we believe that period-to-period comparisons of our operating results are not necessarily indicative of our future performance. Fluctuation in our quarterly operating results may cause our stock price to decline.

The medication management and supply chain solutions market is highly competitive and we may be unable to compete successfully against new entrants and established companies with greater resources.

The medication management and supply chain solutions market is intensely competitive and is characterized by evolving technologies and industry standards, frequent new product introductions and

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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 medication management and supply chain solutions market include Pyxis Corporation (a division of Cardinal Health, Inc.), McKesson Automation Inc. (a business unit of McKesson Corporation) and AmerisourceBergen Corporation (through its acquisition of MedSelect, Inc.). Pyxis Corporation, in particular, has a significantly larger installed base of customers than we do and over the last few years has developed and introduced to the market a significantly larger number of new products. With the acquisition of an automated pharmacy storage and retrieval system, the SafetyMed platform and ScanREQ, and with the entry of other companies into the automated dispensing systems market space, we have gained additional competitors. They include AutoMed (an AmerisourceBergen Corporation company), the Baxter Medication Delivery business of Baxter International Inc., Care Fusion, Incorporated, Cerner Corporation, Eclipsys Corporation, IDX Systems Corporation and Siemens Medical Solutions (a division of Siemens AG).

The competitive challenges we face in the medication management and supply chain solutions market include, but are not limited to the following:

·       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 medication and supply dispensing systems or other products and services than we do, and such advantages could be used to increase their market share;

·       other established or emerging companies may enter the medication management and supply chain solutions 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; and

·       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.

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.

Our current and potential customers may have other business relationships with our competitors and consider those relationships when deciding between our products and services and those of our competitors.

Many of our competitors are large drug and medical-surgical supply distribution companies that sell their distribution services to our current and potential customers. As a result, if a customer is a distribution customer of one of our competitors, the customer may be motivated to purchase medication and supply dispensing systems or other automation solutions from our competitor in order to maintain or enhance their business relationship with that competitor.

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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 reduce the size of our target market. In addition, the resulting organizations could have greater bargaining power, which may lead to price erosion.

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 AmeriNet, Inc.,  Consorta, Inc., HealthTrust Purchasing Group, L.P., MAGNET Group, Novation, LLC, and Premier, Inc., which 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 any of these relationships 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 they may choose to terminate our contracts before they expire.

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

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

·       the ability to successfully install our products on a timely basis and meet other contractual obligations necessary to recognize revenue;

·       the size and timing of orders for our medication and supply dispensing systems, and their installation and integration;

·       the overall demand for healthcare medication management and supply chain 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.

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Due to the foregoing factors, our quarterly revenues and operating results are difficult to predict and fluctuate, which in turn may cause the market price of our stock to decline.

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

We had net loss of $5.0 million in 2002 and net income of $7.3 million in 2003. While we were profitable with net income of $10.6 million for the year ended December 31, 2004, we had a net loss of $2.1 million for the year ended December 31, 2005. Therefore, we cannot assure you that we will be profitable in the future. Furthermore, we cannot assure you that if we again become profitable we will be able to maintain or increase profitability in the future on a quarterly or annual basis.

If the market price of our stock continues to be highly volatile, the value of an investment in our common stock may decline.

For the 12 months prior to December 31, 2005, our common stock has traded between $6.13 and $11.97 per share. The market price for shares of our common stock has been and may continue to be highly volatile. In addition, our announcements or external events may have a significant impact on the market price of our stock. These announcements or external events may include:

·       our operating results;

·       developments in our relationships with corporate customers;

·       changes in the ratings of our stock by securities analysts;

·       announcements by us or our competitors of technological innovations or new products; or

·       general economic and market conditions.

Furthermore, the stock market as a whole from time to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging companies. These broad market fluctuations may cause the market price of our common stock to decline irrespective of our performance. In addition, sales of substantial amounts of our common stock in the public market could lower the market price of our common stock.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to and reporting on these assessments. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. For example, in 2004, we determined that we had a material weakness related to controls over the review of signed contracts prior to revenue recognition. Prior to year end 2004, we had interpreted our  internal revenue recognition policy to require an enforceable contract as evidenced by a signature from our customer. During our year-end process we concluded that our internal revenue recognition policy should have been interpreted to require both the customer’s signature and our own signature prior to recognizing revenue. This material weakness in our interpretation of our internal revenue recognition policy arose from the lack of sufficient understanding of our internal policy. As a result of this material weakness, our management concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2004. If we cannot in the future favorably assess, or our

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independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment of, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

We have outstanding options that have the potential to dilute shareholder value and cause our stock value to decline.

We frequently grant stock options to our employees and other individuals. At December 31, 2005, we had options outstanding for 6,579,137 shares of our common stock at option exercise prices ranging from $1.80 to $20.00 per share. If some or all of such shares are sold into the public market over a short time period, the value of our stock may decline, as the market may not be able to absorb those shares at the prevailing market prices. Such sales may also make it more difficult for us to sell equity securities in the future on terms that we deem acceptable.

Decreased effectiveness of equity compensation could negatively impact our ability to attract and retain employees, and a modification to our equity compensation strategy or recent changes in accounting for equity compensation could adversely affect our earnings.

Accounting principles generally accepted in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the implementation of a new accounting principle.

We currently account for stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, we record compensation expense related to stock options if the current market price of the underlying stock exceeds the exercise price of the stock option on the date of grant. In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” The revision, “SFAS 123R—Share-Based Payment,” is effective for reporting periods beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission adopted a rule amendment that delayed the compliance dates for SFAS 123R such that we are now allowed to adopt the new standard no later than January 1, 2006. SFAS 123R supersedes APB Opinion 25, and will require companies to recognize compensation, using the fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. We adopted SFAS 123R on January 1, 2006.

The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, valuation of employee stock options under SFAS 123R is similar to SFAS 123, with minor exceptions. The impact on the results of operations and earnings per share had the Company adopted SFAS 123, is described more fully in Note 1, “Organization and Summary of Significant Accounting Policies.” The Company expects that the adoption of SFAS 123R’s fair value method will have a significant impact on the Company’s results of operations, although it is not expected to have an impact on our overall financial position. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are currently evaluating the impact of this statement on our consolidated financial statements.

We have historically used stock options and other forms of equity compensation as key components of our employee compensation program in order to align employees’ interests with the interests of our

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stockholders, encourage employee retention, and provide competitive compensation packages. The changing regulatory landscape could make it more difficult and less favorable for us to grant stock options to employees in the future. In light of these changes, we anticipate that we may modify our equity compensation strategy to emphasize equity incentives other than stock options, including increased use of certain performance-related features. If employees believe that the incentives that they would receive under any such modified strategy are less attractive, we may find it difficult to attract, retain and motivate employees. To the extent that new regulations make it more difficult or expensive to grant equity instruments to employees, we may incur increased compensation costs, further change our equity compensation strategy or find it increasingly difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business, financial condition or results of operations.

We may not be able to successfully integrate acquired businesses or technologies into our existing business, which could negatively impact our operating results.

As a part of our business strategy, during the past few years we acquired an automated pharmacy storage and retrieval system, the SafetyMed platform, and SecureVault and we may seek to acquire other businesses, technologies or products in the future. While we expect to analyze carefully all potential transactions before committing to them, we cannot assure you that any transaction that is completed will result in long-term benefits to us or our stockholders, or that our management will be able to integrate or manage the acquired business effectively. Acquisitions entail numerous risks, including difficulties associated with the integration of operations, technologies, products and personnel that, if realized, could harm our operating results. Risks related to potential acquisitions include, but are not limited to:

·       uncertain availability of suitable businesses, products or technologies for acquisition on terms acceptable to us;

·       difficulties in combining previously separate businesses into a single unit;

·       substantial diversion of management’s attention from day-to-day business when evaluating and negotiating such transactions and then integrating an acquired business;

·       discovery, after completion of the acquisition, of liabilities assumed from the acquired business or of assets acquired that are not realizable;

·       failure to achieve anticipated benefits such as cost savings and revenue enhancements;

·       difficulties related to assimilating the products of an acquired business; and

·       failure to understand and compete effectively in markets in which we have limited previous experience.

If our U.S. government customers do not receive their annual funding, our ability to recognize revenues on future sales to U.S. government customers, to sell our U.S. government receivables to third-party leasing companies or to collect payments on unsold receivables from U.S. government customers could be impaired.

U.S. government customers sign five-year non-cancelable payment terms but are subject to one-year government budget funding cycles. In our judgment and based on our history with these accounts, we believe these receivables are collectible. However, in the future, the failure of any of our U.S. government customers to receive their annual funding could impair our ability to sell to these customers or to sell our U.S. government receivables to third-party leasing companies. In addition, the ability to collect payments on unsold receivables could be impaired and may result in a write down of our unsold receivables to U.S. government customers. As of December 31, 2005, the balance of our unsold leases to U.S. government customers was $3.6 million.

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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. 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 can be 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.

We depend on a limited number of suppliers for our medication and supply dispensing 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 medication and supply dispensing systems is to work closely with several key sub-assembly manufacturers and equipment providers 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.

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.

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

We believe that our success depends in part on our ability to obtain patent protection for technology 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 medication and supply dispensing 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 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.

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Intellectual property 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. In the future, third parties may claim that we have infringed upon their intellectual property rights with respect to current or future products. We expect that developers of medication and supply dispensing 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 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.

Product liability claims against us could harm our competitive position, results of operations and financial condition.

Our products provide medication management and supply chain solutions for the healthcare industry. 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 are 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 medication management and supply chain solutions 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 medication management and supply chain solutions 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 more 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.

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We may need additional financing in the future to meet our capital needs and such financing may not be available on favorable terms and may be dilutive to existing stockholders.

We intend to continue to expend substantial funds for research and development activities, product development, expansion of sales and marketing activities and the potential acquisition and integration of complementary products and businesses. As a consequence, in the future we may need to seek additional financing to meet our working capital needs and to finance capital expenditures, as well as to fund operations or potential acquisitions. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products, respond to competitive pressures or take advantage of acquisition opportunities, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations. We have an effective “shelf” registration statement which enables us to offer and sell, from time to time, up to a total dollar amount of $100 million of our debt and equity securities in one or more offerings, which could cause our stockholders to experience dilution of their ownership interest and may cause our stock price to decline.

If our new product solutions do not achieve market acceptance, our sales and operating results will be affected.

We market new products, historically added through acquisitions, which we believe are competitive in their respective markets and will meet the demands of our customers. Our ongoing business goals are dependent in part on customer acceptance of these new products. We cannot assure you that we will be successful in marketing these products, that these products will compete effectively with similar products sold by our competitors or that the level of market acceptance of such products will be sufficient to generate expected revenues and synergies with our other products.

In addition, deployment of these new products typically require interoperability with other Omnicell products as well as with healthcare facilities’ existing information management systems. If these products fail to satisfy these demanding technological objectives, our customers will be dissatisfied and we may be unable to generate future sales. Failure to establish a significant base of customer references will significantly reduce our ability to sell these products to additional customers.

We are dependent on technologies provided by third party vendors.

Some of our products incorporate technologies owned by third parties that are licensed to us for use, modification and/or distribution, including but not limited to certain Commerce One procurement software products for use in our Web-based procurement product, OmniBuyer. If we lose access to, or the ongoing rights to modify and distribute, these technologies with our products we will either have to devote resources to independently develop, maintain and support the technologies ourselves or transition to another vendor. Any independent development, maintenance or support of these technologies by us or the transition to alternative technologies could be costly, time consuming and could delay our product releases and upgrade schedules. These factors could negatively and materially affect our ability to market, sell or distribute our products and in turn our business and prospects.

Our international operations may subject us to additional risks that can adversely affect our operating results.

We currently have operations outside of the United States, consisting of primarily software development and customer support, and in the future we may expand our international operations, particularly in India. Our international operations introduce a variety of risks, including:

·       the difficulty of managing an organization operating in various countries;

·       growing political sentiment against international outsourcing of support services and development;

·       reduced protection for intellectual property rights in some countries

20




·       changes in regulatory requirements;

·       the requirement to comply with a variety of international laws and regulations, including local labor ordinances and changes in tariff rates;

·       fluctuations in currency exchange rates and difficulties in transferring funds from certain countries; and

·       political unrest, terrorism and the potential for other hostilities in areas in which we have facilities.

Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.

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

While the manufacture and sale of our current products are not regulated by the United States Food and Drug Administration, or FDA, these products, or our future products, if any, may be regulated in the future. A requirement for FDA approval could reduce 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 medication and supply dispensing 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, or JCAHO, in order to be eligible for Medicaid and Medicare funds. JCAHO does not approve or accredit medication and supply dispensing systems; however, disapproval of our customers’ medication and supply dispensing 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, or HIPAA. This legislation required the Secretary of Health and Human Services, or 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 August 2002, HHS published final modifications to its privacy regulations that took effect on April 14, 2003. These regulations restrict the use and disclosure of personally identifiable health information by our customers who are ‘‘covered entities’’ under HIPAA. Because Omnicell may be considered a ‘‘business associate’’ under HIPAA, many of our customers have required that we enter into written agreements governing the way we handle any patient information we may encounter in providing our products and services. In February 2003, HHS issued final security rules requiring covered entities to implement appropriate technical and physical safeguards of electronically transmitted personal health information by April 2005. We cannot predict the potential impact of these rules, rules that have not yet been proposed or any other rules that might be finally adopted on our customers or on Omnicell. 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 reduce the demand for our products or force us to redesign our products in order to meet regulatory requirements.

We adopted a stockholder rights plan that may discourage, delay or prevent a merger or acquisition that is beneficial to our stockholders.

In February 2003, our Board of Directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a change in control of our company that is beneficial to our

21




stockholders. Pursuant to the terms of the plan, when a person or group, except under certain circumstances, acquires 15% or more of our outstanding common stock (other than two current stockholders and their affiliated entities, which will not trigger the rights plan unless they acquire beneficial ownership of 17.5% and 22.5% or more, respectively, of our outstanding common stock) or ten business days after commencement or announcement of a tender or exchange offer for 15% or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 15% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquiror’s rights would not become exercisable for our shares of common stock at a discount, the potential acquiror would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, a change in control of our company that our stockholders may consider in their best interests may not occur.

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 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.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.                PROPERTIES

We lease approximately 156,000 square feet of office, development and manufacturing space in Mountain View, California, Waukegan, Illinois, Lebanon, Tennessee, Houston, Texas, and India. In June 2003, we entered into an agreement to lease 87,000 square feet of office, development and manufacturing space in Mountain View, California. The sixty-five month lease, with an option to renew for an additional five years, commenced upon occupancy in January 2004. In addition, we maintain an administrative, marketing, development, technical support and training facility located in approximately 38,000 square feet of office space in Waukegan, Illinois under a lease expiring in June 2006, with an option to renew for an additional five years, and 2,400 and 5,800 square feet of administrative, sales and product development space in Lebanon, Tennessee and Houston, Texas under leases expiring in October 2006 and June 2009, respectively. Commencing in August, 2005 we leased 22,000 square feet of office space in Bangalore, India, primarily for use as an R&D facility. The lease is for an initial period of five years, with an option to renew for two successive five-year periods.

ITEM 3.                LEGAL PROCEEDINGS

We are not currently involved in any material legal proceedings.

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

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2005.

22




PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Our Common Stock

Our common stock trades on the Nasdaq National Market under the trading symbol “OMCL.” The following table sets forth the high and low closing sale prices for our common stock for each quarterly period within the two most recent fiscal years. The reported last sale price of the Company’s common stock on the Nasdaq National Market on March 10, 2006 was $10.97.

Fiscal Year Ended December 31, 2005

 

 

 

High

 

Low

 

Fourth Quarter

 

$

12.29

 

$

9.09

 

Third Quarter

 

$

10.56

 

$

8.00

 

Second Quarter

 

$

8.80

 

$

6.13

 

First Quarter

 

$

10.77

 

$

6.50

 

 

Fiscal Year Ended December 31, 2004

 

 

 

High

 

Low

 

Fourth Quarter

 

$

14.19

 

$

8.95

 

Third Quarter

 

$

14.60

 

$

11.93

 

Second Quarter

 

$

20.46

 

$

11.91

 

First Quarter

 

$

22.64

 

$

16.35

 

 

The approximate number of holders of record of the shares of our common stock was 245 as of February 28, 2006. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of holders of record. The Company estimates that it has approximately 5,900 beneficial owners of its common stock.

We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future as we currently intend to retain any earnings for use in our business. Any future determination to pay dividends will be at the discretion of our Board of Directors.

Securities Authorized for Issuance Under Equity Compensation Plans

Information required for this item is contained in Part III of this Annual Report on Form 10-K under item 12 entitled “Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.”

23




ITEM 6.                SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited financial statements, notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended December 31, 2003, 2004 and 2005, and the balance sheet data at December 31, 2004 and 2005, are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended December 31, 2001 and 2002, and the consolidated balance sheet data at December 31, 2001, 2002 and 2003 are derived from our audited financial statements that are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in the future.(1)

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(in thousands, except per share amounts)

 

Condensed Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

95,292

 

$

100,856

 

$

82,206

 

$

72,834

 

$

75,501

 

Service and other revenues

 

26,226

 

23,083

 

19,921

 

14,856

 

11,400

 

Total revenues

 

121,518

 

123,939

 

102,127

 

87,690

 

86,901

 

Cost of product revenues

 

44,714

 

43,032

 

34,458

 

30,308

 

26,745

 

Cost of service and other revenues

 

9,794

 

9,001

 

8,003

 

6,110

 

6,022

 

Total cost of revenues

 

54,508

 

52,033

 

42,461

 

36,418

 

32,767

 

Gross profit

 

67,010

 

71,906

 

59,666

 

51,272

 

54,134

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

9,611

 

9,105

 

8,950

 

9,970

 

11,031

 

Selling, general and administrative(2)

 

59,698

 

52,083

 

42,779

 

44,767

 

43,683

 

Restructuring and facility charges(3)

 

406

 

171

 

953

 

1,723

 

(150

)

Purchased in-process research and development

 

 

 

 

715

 

 

Total operating expenses

 

69,715

 

61,359

 

52,682

 

57,175

 

54,564

 

Income (loss) from operations

 

(2,705

)

10,547

 

6,984

 

(5,903

)

(430

)

Other income (expense), net

 

651

 

379

 

565

 

875

 

(577

)

Income (loss) before income taxes

 

(2,054

)

10,926

 

7,549

 

(5,028

)

(1,007

)

Provision for income taxes

 

20

 

324

 

242

 

10

 

160

 

Net income (loss)

 

$

(2,074

)

$

10,602

 

$

7,307

 

$

(5,038

)

$

(1,167

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

$

0.43

 

$

0.32

 

$

(0.23

)

$

(0.11

)

Diluted

 

$

(0.08

)

$

0.38

 

$

0.29

 

$

(0.23

)

$

(0.11

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

25,906

 

24,849

 

22,746

 

21,725

 

10,312

 

Diluted

 

25,906

 

27,720

 

25,321

 

21,725

 

10,312

 


(1)          The amounts shown include the results of the BCX Technology, Inc. acquisition from August 16, 2003, and the results of the APRS, Inc. acquisition from August 30, 2002.

(2)          Includes charges for stock-based compensation as follows:

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

Research and development

 

 

$

0

 

 

 

$

2

 

 

$

25

 

$

86

 

$

213

 

Selling, general and administrative

 

 

$

0

 

 

 

$

68

 

 

$

217

 

$

419

 

$

1,034

 

 

24




(3)          We recorded restructuring charges of $1.7 million in the fourth quarter of fiscal 2002 and $0.6 million in the second quarter of fiscal 2003 in connection with plans to reduce costs and improve operational efficiencies. We recorded facility charges of $0.4 million in the fourth quarter of fiscal 2003 in connection with the move of our corporate headquarters to Mountain View, California. We recorded severance charges of $0.2 million in the second quarter of fiscal 2004. We recorded restructuring costs of $0.4 million in the first quarter of fiscal 2005.

 

 

December 31,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(in thousands, except other data)

 

Condensed Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

29,536

 

$

30,599

 

$

33,524

 

$

21,485

 

$

23,839

 

Total assets

 

100,428

 

99,491

 

84,467

 

70,925

 

72,114

 

Deferred gross profit(1)

 

7,981

 

7,846

 

10,125

 

18,008

 

24,790

 

Deferred service revenue

 

16,393

 

13,922

 

12,650

 

11,598

 

8,009

 

Long-term obligations, net of current portion

 

1,542

 

3,741

 

5,568

 

4,446

 

363

 

Total stockholders’ equity

 

$

55,238

 

$

53,697

 

$

34,758

 

$

16,306

 

$

19,601

 


(1)          Deferred gross profit represents primarily gross profit on sales of medication and supply dispensing systems, excluding installation cost, that have been shipped to, accepted, invoiced, and, in most instances, paid for by our customers but not yet installed at the customer site. The revenues and cost of revenues for such items are recorded upon completion of installation.

25




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

Omnicell, Inc. was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our healthcare automation solutions enable healthcare facilities to acquire, manage, dispense and administer medications and medical-surgical supplies, and are intended to enhance patient safety, reduce medication errors, improve workflow and increase operational efficiency. Our medication dispensing and supply automation systems facilitate the distribution of medications and medical-surgical supplies at the point of care. Our physician order management system streamlines communication between nursing and pharmacy staff. Our Web-based procurement application automates and integrates healthcare facilities’ requisition and approval processes. These systems interface with healthcare facilities’ existing information systems to accurately capture and display critical patient data. When used in combination, our products and services offer a comprehensive solution to enable healthcare facilities to enhance patient safety while improving operational efficiency.

We sell our medication dispensing and supply automation systems primarily in the United States. We have a direct sales force organized into six geographic regions in the United States. We sell through distributors in Asia, Australia, Europe, the Middle East, and South America and through a sales agent in Canada. We manufacture the majority of our systems in our production facility in Mountain View, California, with refurbishment and spare parts activities conducted in our Waukegan, Illinois facility. In August of 2005, we opened a facility in Bangalore, India and established a wholly owned subsidiary, Omnicell Corporation (India) Private Limited. The function of this entity has initially been focused on software product development but may expand into other operations over time. The subsidiary was staffed by a workforce of approximately 40 engineers and support staff at end of 2005, approximately 30 of whom transferred to Omnicell from the third party contractor that had been supplying these development resources in the past. We believe that our new operation gives us access to an excellent talent base and in conjunction with our domestic team, will enable us to scale our research and development and service investments most efficiently for the foreseeable future.

We recognize revenue when our medication dispensing and supply automation systems are installed. Installation generally takes place three to six months after our systems are ordered. The installation process at our customers’ sites includes internal procedures associated with large capital expenditures and the time associated with adopting new technologies. Given the length of time necessary for our customers to plan for and complete their acceptance of the installation of Omnicell systems, our focus is on shipping products based on the installation dates requested by our customers and working at the customers pace. This has resulted in us growing product backlog which has the benefit of enabling us to operate more efficiently and predictably.

In 2005, we focused on running our business more efficiently, cost effectively, and with greater emphasis on market share expansion. We believe that a key to realizing these efficiencies is to improve the linearity of our business within each quarter. Focusing our operational model on working at the customers’ pace has allowed our backlog to grow, enabling us to maintain a more predictable level of production and more predictable installation schedules for ourselves and our customers. We believe this helps us reduce

26




our costs, which enables us to compete more aggressively in the marketplace and deliver better stockholder value.

Product Backlog

Product backlog is the dollar amount of medication dispensing and supply automation systems that has shipped to customers but is not yet installed at the customer site plus the dollar amount of such systems that has not shipped but for which we have purchase orders. To facilitate excellent customer service through the timely delivery of our products and services, we anticipate our product backlog will build over time as our business grows. Our backlog was $69.6 million, $46.9 million and $38.1 million as of December 31, 2005, 2004 and 2003, respectively.

Critical Accounting Policies

General

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. We have policies that we consider key accounting policies, such as revenue recognition, which are critical to our business operations and the understanding of our results of operations. In addition, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our most critical accounting estimates include the valuation of accounts receivable, accounting for sales of accounts receivable, valuation of inventory, purchased residual interests which are included within other assets, assessment of impairment of goodwill and accrued Sure-Med upgrade costs.

Revenue Recognition

Our revenue recognition policy significantly impacts our results of operations because it determines the timing of when revenue is recognized. It also impacts the timing of certain expenses, such as commissions, as they are determined by the timing of the recognition of corresponding revenues. We follow specific and detailed policies on recognizing revenue. Revenue results are difficult to predict and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Revenues are derived primarily from sales of medication dispensing and supply automation systems and subsequent service agreements. The Company markets these systems for sale with 30-day or multi-year payment terms. Medication dispensing and supply automation system sales, which are accounted for in accordance with American Institute of Certified Public Accountant’s Statement of Position 97-2, “Software Revenue Recognition,” as amended, are recognized when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered and installations are complete; Omnicell’s price to the customer is fixed or determinable; and collectibility is reasonably assured. The majority of our product revenue is derived from the sale and installation of medication dispensing and automation systems. We ship our systems based on customer requested installation dates. Our field operations employees generally perform system installations. The installations are considered complete and revenue is recognizable when the database files are complete, the systems are configured and labeled, our software is installed and deemed functional, the basic interfaces are complete, the systems are in the customer-designated locations and the systems have been tested. We further require our customers to confirm that we have completed our installation obligations by providing to us a customer certification form indicating the date our installation obligations, if any, were completed. Delays at a customer site due to construction or other causes could result in our inability to install, and therefore recognize revenue. We also sell our medication

27




dispensing and supply automation systems through distributors in Europe, the Middle East, Asia and Australia and through a sales agent in Canada. We recognize revenue upon shipment of our systems to distributors when the distributors have specific purchase orders from identified end-users.

Revenues from multi-year payment arrangements are recognized upon completion of our installation obligation, if any, and at the beginning of the non-cancelable payment term. Most of our multi-year payment receivables are sold to third-party leasing finance companies. We record revenue at the net present value of the payment stream utilizing an implicit interest rate comparable to those charged by a third-party leasing company. We exclude from revenues any amount paid to us for a new sale that relates to the termination of an existing payment stream. Generally, we have no obligation to the leasing company once the receivable is sold. In 2005, 2004 and 2003, sales of medication dispensing and supply automation systems sold under multi-year payment agreements totaled approximately $38.5 million, $34.8 million and $27.9 million, respectively. In 2005, 2004 and 2003, customer lease receivables sold to third-party leasing companies totaled approximately $36.9 million, $32.7 million and $26.8 million, respectively. At December 31, 2005 and 2004, accounts receivable included approximately $1.6 million and $2.6 million, respectively, due from finance companies for lease receivables sold. U.S. government customers sign five-year non-cancelable payment terms but are subject to one-year government budget funding cycles. In our judgment and based on our history with these accounts, we believe these receivables are collectible. However, in the future, if any of our U.S. government customers do not receive their annual funding, the ability to collect payments on unsold leases could be impaired and may result in a write down of our unsold leases to U.S. government customers. Further, it could impair our ability to make additional sales to U.S. government customers and impair our ability to sell these receivables to third-party leasing companies. As of December 31, 2005, the balance of our unsold leases to U.S. government customers was $3.6 million.

Post-installation technical support, such as phone support, on-site service, parts and access to software upgrades, when and if available, is provided by us under separate support services terms. When support services are sold under multiple element arrangements, we allocate revenue to support services based on its fair value. We recognize revenue for support services ratably over the related support services contract period. In addition, we enter into professional services and training arrangements. We recognize revenue for these arrangements upon performance of such services. Deferred service revenue represents amounts received under service agreements for which the services have not yet been performed.

Accounts Receivable

We actively manage our accounts receivable to minimize credit risk. We typically sell to customers for which there is a history of successful collection. New customers are subject to a credit review process, which evaluates the customers’ financial position and ability to pay. We continually monitor and evaluate the collectibility of our trade receivables based on a combination of factors. We record specific allowances for doubtful accounts when we become aware of a specific customer’s inability to meet its financial obligation to us such as in the case of bankruptcy filings or deterioration of financial position. Estimates are used in determining our allowances for all other customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. While we believe that our allowance for doubtful accounts receivable is adequate and that the judgment applied is appropriate, such amounts estimated could differ materially from what will actually be uncollectible in the future.

Sales of Accounts Receivable

We offer our customers multi-year, non-cancelable payment terms. We typically sell our customers’ multi-year payment agreements to a third-party leasing company. In these sales, we generally transfer customer accounts receivable to the leasing company on a non-recourse basis at our book value so no gain is recorded on the transfer. In these non-recourse transfers, we remove the sold receivable from our assets as we have assessed that the sales should be accounted for as “true sales” in accordance with Statement of

28




Financial Accounting Standard, or SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” If we have overestimated the amount of the receivable sales that should be recorded in this way, our assets and liabilities would need to be increased. During the fiscal years ended December 31, 2005, 2004 and 2003, we transferred accounts receivable totaling $32.9 million, $26.6 million and $22.5 million, respectively, which approximated fair value, to leasing companies on a non-recourse basis. Due to the nature of the recourse clauses in certain of our sales arrangements, we have recorded $4.0 million of our total sold receivable portfolio of $244.9 million as of December 2005 and $6.1 million of our total sold receivable portfolio of $174.9 million as of December 31, 2004 as receivables subject to a sales agreement and obligation resulting from sale of receivables due to recourse clauses in those certain sale arrangements.

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based on assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than we projected, additional inventory write-downs may be required.

Other Assets

Purchased Residual Interests

The value of purchased residual interests included in other assets at December 31, 2005 and 2004 was $0.3 million and $0.9 million, respectively. Although we had no contractual obligation to do so, in July 2002 we executed an agreement to purchase from Americorp Financial, Inc., or AFI, all residual interests in our equipment covered by multi-year payment agreements financed by AFI. The total purchase price was $3.1 million. The purchase price was assigned to the acquired payment residual interests based on the original implied payment residual value, equipment type and our assessment of the customers’ likelihood of renewal at the end of the payment term. As equipment is renewed or upgraded, we charge the assigned value to cost of product revenues. When equipment is not renewed or upgraded at the end of the contract or when we believe a renewal is unlikely, the assigned value is written off. The payment streams associated with the purchased residual interests expire at various dates within four years from the date of the purchase agreement. Purchased residual interests are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable from future undiscounted cash flows. If actual demand, market condition or timing of new products introductions differ from those projected by management, the value of purchased residual interests could become significantly impaired.

Impairment of Goodwill and Purchased Intangible Assets

At December 31, 2005 we had goodwill and purchased intangible assets with indefinite lives of $3.4 million. In accordance with the SFAS No. 142, “Goodwill and Other Intangible Assets,” we measure such assets for impairment on an annual basis during the fourth quarter and between annual tests in certain circumstances. No impairment of goodwill or purchased intangibles with indefinite lives was recognized for the years ended December 31, 2005, 2004 or 2003.

At December 31, 2005 we had purchased intangible assets with finite lives of $2.3 million. Purchased intangible assets with finite lives include software and customer relationships acquired in a business combination. Purchased intangible assets with finite lives are amortized on a straight-line basis over their useful lives of five or six years. Additionally, these intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. No impairment of these intangible assets was recognized for the years ended December 31, 2005, 2004 or 2003.

29




Accrued Liabilities

Accrued liabilities are based on our judgment of estimated future costs for goods or services already received or obligations incurred. Actual costs may differ from those estimates. Our estimates for accrued customer upgrade costs of $0.1 million and $0.2 million as of December 31, 2005 and 2004, respectively, required a significant amount of judgment related to forecasted costs of materials, labor, travel and other costs required to fulfill upgrade obligations to certain Sure-Med customers. Our estimates can and have changed based on actual costs incurred in completing these obligations.

Results of Operations

The following table sets forth certain items included in our results of operations for the years ended December 31, 2005, 2004 and 2003, expressed as a percentage of our total revenues for these periods:

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

Statement of Operations:

 

 

 

 

 

 

 

Product revenues

 

78.4

%

81.4

%

80.5

%

Service and other revenues

 

21.6

 

18.6

 

19.5

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Cost of product revenues

 

36.8

 

34.7

 

33.8

 

Cost of service and other revenues

 

8.1

 

7.3

 

7.8

 

Total cost of revenues

 

44.9

 

42.0

 

41.6

 

Gross profit

 

55.1

 

58.0

 

58.4

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

7.9

 

7.3

 

8.7

 

Selling, general and administrative

 

49.1

 

42.0

 

41.9

 

Restructuring and facility charges

 

0.3

 

0.1

 

1.0

 

Total operating expenses

 

57.3

 

49.4

 

51.6

 

Income (loss) from operations

 

(2.2

)

8.6

 

6.8

 

Other income (expense), net

 

0.5

 

0.3

 

0.6

 

Income (loss) before provision for income taxes

 

(1.7

)

8.9

 

7.4

 

Provision for income taxes

 

0.0

 

0.3

 

0.2

 

Net income (loss)

 

(1.7

)%

8.6

%

7.2

%

 

Product Revenues, Cost of Product Revenues and Gross Profit

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(in thousands)

 

Product revenues

 

$

95,292

 

$

100,856

 

$

82,206

 

Cost of product revenues

 

44,714

 

43,032

 

34,458

 

Gross profit

 

$

50,578

 

$

57,824

 

$

47,748

 

 

Product revenues decreased by $5.6 million, or 5.5% in 2005 compared to 2004. During the third quarter of 2004, the company implemented a major realignment of our direct sales force dividing them into a product focused sales organization, with sales representatives selling either medication or supply products. This was done to bring more focus to our supply products offerings. This in turn created disruptions in the sales process and led to delays in customers placing orders during the fourth quarter of 2004 and the first quarter of 2005. This was a major contributor to lower product revenues in the first half of 2005. In addition, at the end of the first quarter of 2005, the company made a decision to change its business model to slow the pace of installations to improve the customer experience in working with

30




Omnicell. This led to a significant growth in product order backlog as customer demand rebounded during the second quarter of 2005 and throughout the remainder of 2005. Working with a sizable backlog has enabled the company to distribute the installation of our products more evenly across the quarter and run the company much more efficiently creating a win/win situation for our customers and Omnicell.

Product revenues increased by $18.6 million, or 22.7%, in 2004 compared to 2003. The increase was due primarily to an increase in the number of medication, dispensing and supply automation system installations, an increase in revenue associated with our provision of software programs that interface our systems with our customers’ systems, and an increase in revenue from multi-year payment arrangements resulting in an increase in the size of the average customer purchase transaction. In addition, part of this increase can be attributed to our emphasis on closing larger and more complex transactions with larger healthcare facilities and to the strength of our expanding market position. We also experienced strong contributions from our new product lines.

Cost of product revenues increased by $1.7 million or 3.9% in 2005 as compared to 2004. The increase was partially due to a higher mix of other equipment manufacturer, or OEM, product whose costs are relatively higher as a percent of revenue than product we manufacture ourselves. For example, hardware for our Central Pharmacy products which we OEM carries higher relative costs than our core cabinet products and we sold higher numbers of these Central Pharmacy products in 2005 compared to 2004. This increase was partially offset by lower costs associated with our China sourcing strategy.

Gross profit on product sales was $50.6 million or 53.1% of product revenues in 2005 compared to $57.8 million and 57.3% of product revenues in 2004. A major contributor to the year over year decline in the margin percent was the one time charge of $1.1 million taken in first quarter of 2005 to write off excess inventory associated with the end of our SureMed product line. From an ongoing operations standpoint, we experienced a 16.0% decline in lease renewal revenues year over year, which yield higher margins than the sale of new equipment. Additionally, we achieved 76.0% growth in our emerging products business compared to 2004. The hardware component of several of our emerging products are supplied through third party OEM agreements and therefore carry a higher product cost and lower gross margin than our internally designed and manufactured systems. To the extent that we are successful at broadening our product base through these products, it puts downward pressure on our gross margins . Lastly, we earned lower margins on several major competitive product wins which were installed in the first half of 2005. These new account sales are often won with targeted negotiations on pricing and deliverables which yield lower initial profits in the near term but higher profits from follow-on orders and account penetration after the initial installation

Cost of product revenues increased by $8.6 million, or 24.9%, in 2004 compared to 2003. Gross profit on product sales was $57.8 million, or 57.3% of product revenues in 2004 as compared to $47.7 million, or 58.0% of product revenues in 2003. The decrease in gross profit as a percentage of product revenues in 2004 as compared to 2003 was attributable to the increase in headcount and temporary labor, in part required by the installation of units near the end of the quarter that had only been ordered earlier in the same quarter, an increase in charges related to the renewal of existing multi-year payment term agreements related to purchased residuals, price compression due, in part, to large, competitive deals, an increased mix of lower margin product installations, and to increased inventory charges related to the build up and reduction of our inventory. We expect the cost of product revenues to increase consistently with our product revenue growth.

31




Service and Other Revenues, Cost of Service and Other Revenues and Gross Profit

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(in thousands)

 

Service and other revenues

 

$

26,226

 

$

23,083

 

$

19,921

 

Cost of service and other revenues

 

9,794

 

9,001

 

8,003

 

Gross profit

 

$

16,432

 

$

14,082

 

$

11,918

 

 

Service and other revenues include revenues from service and maintenance contracts, rentals of automation systems and monthly subscription fees from hospitals, whose information systems are connected to our Web-based procurement application. Service and other revenues increased by $3.1 million, or 13.6%, in 2005 compared to 2004, and increased by $3.2 million, or 15.9%, in 2004 compared to 2003. The increases in 2005 and 2004 from the prior years were primarily due to the increase in our installed base of automation systems combined with an increase in the number of multi-year payment term sales with service contracts.

Cost of service and other revenues increased by $0.8 million, or 8.8%, in 2005 compared to 2004, and increased by $1.0 million, or 12.5%, in 2004 compared to 2003. The increase in cost of service and other revenues in 2005 as compared to 2004 is due to costs associated with the growth of certain of our emerging product lines for installation and support services and for increased material costs used in supporting the installed base. Gross profit on service and other revenues was $16.4 million, or 62.7% of service and other revenues in 2005, compared to $14.1 million, or 61.0% of service and other revenues in 2004. The increase in gross profit margin on service and other revenues in 2005 as compared to 2004 reflects a reduction in cost from the transition from an outsourced service model to an internal service organization which was completed in 2004. We believe that cost of service and other revenues will continue to fluctuate based on our ability to improve cost efficiencies from our internal service organization.

Gross profit on service and other revenues was $14.1 million, or 61.0% of service and other revenues in 2004, compared to $11.9 million, or 59.8% of service and other revenues in 2003. The increase in gross profit margin on service and other revenues in 2004 as compared to 2003 was predominantly a result of increased revenues from the roll out of multi-tiered pricing packages for premium services. The increase also reflects a reduction in cost from the transition from an outsourced service model to an internal service organization, partially offset by increased costs due to the change to the service call center model which provides extended hours of coverage to customers. We believe that cost of service and other revenues will continue to fluctuate based on our ability to improve cost efficiencies from our internal service organization. We believe that cost of service and other revenues will continue to fluctuate based on our ability to improve cost efficiencies from our internal service organization.

Operating Expenses

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(in thousands)

 

Research and development

 

$

9,611

 

$

9,105

 

$

8,950

 

Selling, general and administrative

 

59,698

 

52,083

 

42,779

 

Restructuring, facility and severance charges

 

406

 

171

 

953

 

Total operating expenses

 

$

69,715

 

$

61,359

 

$

52,682

 

 

Research and Development.   Research and development expenses increased by $0.5 million, or 5.6%, in 2005 compared to 2004 and which increased by $0.2 million, or 1.7% in 2004 compared to 2003.

32




Research and development expenses represented 7.9%, 7.3% and 8.7% of total revenues in 2005, 2004 and 2003, respectively.

The 2005 increase in research and development expense was due primarily to a lower amount of capitalized software as compared to 2004. In 2005, we capitalized $0.3 million, and in 2004, we capitalized $1.8 million of development costs related to software implemented in our medication dispensing and supply automation systems and incurred subsequent to the establishment of technological feasibility. There were no such costs capitalized in 2003. We determine technology feasibility to occur when products enter beta testing at customer sites and continues until official release of the product to the general public. During 2005, the amount of time and resources dedicated to supporting beta testing was significantly reduced as we made progress in our development processes.

Each year, we attempt to provide upgraded functionality in all of our product offerings. Since 2003, we have increased spending on software development, cost reduction initiatives for which we will receive future benefits such as product documentation and integration of acquired technology, and engineering endeavors to improve on product quality and reliability. In August 2005, we opened an office and wholly-owned subsidiary in Bangalore, India when we acquired the workforce of a third party technology partner focused initially on software development and quality assurance. We anticipate that we will continue to commit significant resources to research and development in future periods to enhance and extend our product and new feature offerings and will benefit from the lower cost structure and access to technological talent through our India operations.

Selling, General and Administrative.   Selling, general and administrative expenses increased by $7.6 million, or 14.6%, in 2005 compared to 2004 and increased by $9.3 million, or 21.7%, in 2004 compared to 2003. Selling, general and administrative expenses represented 49.1%, 42.0% and 41.9% of total revenues in 2005, 2004 and 2003, respectively.

Approximately $2.0 million of the increase reflects costs associated with an increase in sales headcount starting in mid 2004. In addition, during the first quarter of 2005, we incurred $1.5 million in costs associated with our previously announced reduction in force, $0.4 million of which is included in restructuring and other charges as discussed below. An additional $1.2 million in the year over year increase reflects increases in accounting, legal and regulatory compliance fees and $0.6 million was due to the write-off of costs associated with abandoned acquisitions. The remainder of the year over year increase was due to normal inflation and other miscellaneous increases.

In 2004, selling, general and administrative expenses increased by $9.3 million, or 21.7% compared to 2003. This increase reflects higher headcount in 2004 to support targeted increases in revenues and bookings and our continued growth, as well as costs related to regulatory compliance requirements. We increased headcount in our selling, general and administrative areas by approximately 19.0% from December 31, 2003 to December 31, 2004, with most of the growth concentrated in sales and customer service functions.

Restructuring and Facility Charges.   Restructuring and facility charges were $0.4 million in 2005, $0.2 million in 2004 and $1.0 million in 2003. In the first quarter of 2005, we initiated a restructuring to reduce costs, improve operational efficiencies and realign Omnicell to a new strategic direction. As part of this restructuring, we reduced our headcount by approximately 6.0% or 28 employees, including 4 in research and development and 24 in selling, general and administrative positions. We incurred $0.4 million in restructuring and other charges during the first quarter of 2005, all of which was paid out by the end of such quarter. In 2004 and 2003, we restructured our organization to reduce costs and improve operational efficiencies. As part of this restructuring, we reduced headcount by 3 in 2004 and 14 in 2003 respectively.

Income taxes

We use the liability method for income taxes, whereby deferred tax assets and liabilities are determined based on differences between the bases of assets and liabilities for financial reporting and income tax purposes. Taxes are measured using enacted tax rates and laws that are expected to be in effect

33




when the differences are expected to reverse. We make estimates and judgments in determining income tax expense.

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(in thousands)

 

Provision for income taxes

 

 

$

20

 

 

$

324

 

$

242

 

 

Due to net operating loss carry forwards available to us, we recorded minimal total federal and state income tax expense in 2005, 2004 and 2003.

As of December 31, 2005, we had approximately $43.1 million of deferred tax assets. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized. Realization of the Company’s deferred tax assets is dependent upon future earnings, if any. Due to our recent operating history, we concluded that it is more likely than not that the deferred tax assets will not be realized. Accordingly, we have provided a full valuation allowance against the deferred tax assets. In the event that these attributes are recognized in the future, income tax expense will be reduced by $33.6 million and $9.5 million will be credited to additional paid-in capital for the benefit associated with stock option deductions.

Segment Information

We report segments in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” SFAS 131 requires the use of a management approach in identifying segments of an enterprise. Prior to 1999, the Company consisted of one operating segment: medication and supply dispensing systems. A second operating segment was created in the second half of 1999 with the introduction of our e-commerce business. Our chief operating decision-maker reviews information pertaining to reportable segments to the operating income level. There are no significant inter-segment sales or transfers. Assets and capital expenditures of the operating segments are not segregated and substantially all of our long-lived assets are located in the United States. For the years ended December 31, 2005, 2004 and 2003, substantially all of our total revenues and gross profit were generated by the medication and supply dispensing systems operating segment.

Liquidity and Capital Resources

Our principal sources of liquidity, which include cash, cash equivalents and short-term investments, totaled approximately $29.5 million as of December 31, 2005. This represented a decrease of $1.1 million compared to $30.6 million as of December 31, 2004. The majority of our funds are currently invested in U.S. commercial and government debt securities.

Net cash used in operating activities was $2.3 million during 2005 compared to $4.3 million used in 2004. We had a net loss of $2.1 million in 2005 compared to net income of $10.6 million in 2004. Apart from the reduction in net income in 2005, the increase in cash flow from operating activities of $2.0 million in 2005 compared to 2004 resulted from cash positive movements in inventories, other assets, deferred gross profit, deferred service revenue and prepaid expenses, offset by an increase in accounts payable. In particular, gross inventories increased significantly less in 2005 than in 2004, resulting in the generation of cash of $4.4 million. This smaller increase was due primarily to a reduction in same quarter sales and installations and more predictability of demand from the higher backlog. Other assets declined $5.2 million less in 2005 than in 2004 due primarily to the expiration of in-house leases, although $4.8 million of such decline represents a reclass from the long term portion of such leases to a short term portion, having an equal and opposite effect on prepaid assets. Prepaid assets increased by $2.6 million during 2005 but $1.2 more cash was generated compared to 2004 due to a reduction in prepaid commissions. A total of $2.4 million lower cash usage in 2005 compared to 2004 was a result of the reduced emphasis on same quarter sales and shipments, which caused a smaller reduction in deferred product revenue and cost. Deferred

34




service revenue increased by $1.2 million in 2005 compared to 2004, due to an increase in service contracts, particularly relating to emerging businesses such as Omnicell PharmacyCentral and related products.

We generated net cash from investing activities of $8.7 million during 2005, compared to $8.4 million net cash used during 2004. We reduced our purchases of short term investments by $18.6 million in 2005 compared to 2004, but at the same time the maturity of such instruments declined by $5.3 million. Additionally, we paid $0.3 million relating to achievement of performance milestone in 2004 for BCX Technology, Inc. Capital expenditures were $2.1 million in 2005 compared to $3.8 million in 2004, representing mainly information system related purchases for our headquarters facility in Mountain View, California.

We generated $3.6 million and $7.7 million in net cash from financing activities during 2005 and 2004, respectively. The main source of cash during 2005 and 2004 was $3.6 million and $8.0 million respectively in net proceeds from common stock issuances upon exercise of employee stock options and common stock issuances under our employee stock purchase plan.

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 at least through 2006. 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 or 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 our 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.

Off-Balance Sheet Arrangements

As of December 31, 2005, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) of the Securities Exchange Act of 1934, as amended, and the instructions thereto.

Contractual Obligations

As part of the acquisition of BCX Technology, Inc. we paid $1.0 million in January 2004, comprised of an additional $0.5 million as part of the purchase price and $0.5 million relating to the achievement of performance milestones in 2003. Additionally, the acquisition agreement required us to pay up to an additional $1.0 million by January, 2006, if certain performance milestones are achieved in the years 2004 and 2005. The first of these milestones of $0.5 million was achieved and paid in January 2004. The second of these milestones of $0.3 million was paid in January 2005. The third milestone was achieved and the final payment of $0.7 million was paid in January 2006.

As part of the December 2002 acquisition of substantially all of the intellectual property of Medisafe, a provider of point-of care patient safety solutions, we paid $125,000 in January 2005 relating to an obligation to pay $0.5 million in guaranteed minimum royalties due over four years in equal annual installments of $125,000 beginning in 2005.

35




We have net operating lease commitments of $6.8 million payable when due through 2010 as follows (in thousands):

For the years ended December 31,

 

 

 

 

 

2006

 

$

1,953

 

2007

 

1,786

 

2008

 

1,885

 

2009

 

997

 

2010

 

187

 

Thereafter

 

 

Total minimum lease payments

 

$

6,808

 

 

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment (“SFAS No. 123R”), which replaced SFAS No. 123 and superseded APB No. 25. SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB No. 25, but will be required to account for such transactions using a fair value method and recognize the expense in the consolidated statement of operations. SFAS No. 123R is effective for Omnicell beginning in the first quarter of 2006. In March 2005, the SEC issued SAB No. 107 regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies. We have evaluated the requirements of SFAS No. 123R and SAB No. 107 and expect that the adoption of SFAS No. 123R and SAB No. 107 in the first quarter of 2006 will have a material impact on the our consolidated results of operations and net earnings per share. We are evaluating which method of valuation we will use in determining the fair value of share-based payments to employees. We expect to apply the modified prospective method, which requires that compensation expense be recorded for all unvested stock options beginning the first quarter of 2006.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We have evaluated the effect that the adoption of SFAS 151 will have on our consolidated results and do not expect it to have a material impact.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”) which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by Omnicell in the first quarter of fiscal 2006. We are evaluating the effect that the adoption of SFAS 154 will have on our consolidated results of operations and financial condition but do not expect it to have a material impact.

36




ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discusses our exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices. We reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio which is comprised solely of highly rated, short-term investments. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading purposes. We are not exposed to currency exchange fluctuations when we sell our products internationally as we manage the sensitivity of our international sales by denominating all transactions in U.S. dollars.

Our exposure to market rate risk for changes in interest rates relate primarily to our investment portfolio. We do not hold derivative financial instruments in our investment portfolio. We place our investments with high quality institutions and limit the amount of credit exposure to any one issuer. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default, market and reinvestment risk. We classify our short-term investments as “fixed-rate” if the rate of return on such instruments remains fixed over their term. These “fixed-rate” investments include fixed-rate U.S. government securities and corporate obligations with contractual maturity dates of less than one year. The table below presents the amounts and related weighted average interest rates of our short-term investments at December 31, 2005 and 2004 (dollars in thousands, except percentage rates). Short term investments were $0 as of December 31 2005 due to the maturation of all previous cash investments in December 2005 and no new investments were made prior to the end of the year.

 

 

December 31,

 

 

 

2005

 

2004

 

Average fixed interest rate

 

0.40

%

2.10

%

Amortized cost

 

$

0

 

$

11,150

 

Fair value

 

$

0

 

$

11,117

 

 

ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements together with the related notes and the reports of our independent registered public accounting firm appear on pages 40 through  68 of this annual report on Form 10-K, and are incorporated herein by reference.

ITEM 9.                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.        CONTROLS AND PROCEDURES

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent our financial position and results of operations.

The Audit Committee of our Board of Directors, which is composed solely of independent directors, meets regularly with the independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accounting firm. The independent registered public accounting firm has free access to the Audit Committee.

37




Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of December 31, 2005, our chief executive officer and interim chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective to ensure, at the reasonable assurance level, that the information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for such reports.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d to 15(f). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met.

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 using the criteria for effective internal control over financial reporting as described in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this evaluation, we concluded that, as of December 31, 2005, our internal control over financial reporting was effective. Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on management’s assessment of our internal control over financial reporting, as stated in their report which is included elsewhere herein.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.       OTHER INFORMATION

None.

38




PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors, Executive Officers, Promoters and Control Persons

The information required by this Item with respect to our Directors may be found in the section entitled “Proposal 1—Election of Directors” appearing in our definitive Proxy Statement pursuant to Securities Act of 1934 to be delivered to stockholders in connection with the solicitation of proxies for our Annual Meeting of Stockholders to be held on April 26, 2006 (the “Proxy Statement”). Such information is incorporated herein by reference.

Information required by this Item with respect to our executive officers may be found in Part I of this Annual Report on Form 10-K in the section entitled “Executive Officers of the Registrant.”

Section 16(a) Beneficial Ownership Regarding Compliance

The information required by this Item is set forth in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Code of Ethics

We have adopted the Omnicell Code of Conduct, a code of ethics with which every person who works for us is expected to comply. Our Code of Conduct is available in the Corporate Governance section of the Investor Relations section of our Web site at www.omnicell.com. If we make any substantive amendments to our Code of Conduct or grant any waiver from a provision of the Code of Conduct to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our Web site.

ITEM 11.         EXECUTIVE COMPENSATION

The information required by this Item is set forth in the Proxy Statement under the headings “Executive Compensation” and “Employment, Severance and Change of Control Agreements” and is incorporated herein by reference.

We have recently entered into Change of Control Agreements with each of our executive and certain of our other senior level officers which provide that, in the event of (i) a change of control of Omnicell, and (ii) termination without cause or constructive termination of such officer’s employment with Omnicell or its successor within 12 months of such change of control, such officer shall be entitled to receive (a) severance pay equivalent to 12 months’ salary at such officer’s base rate of pay in effect immediately prior to such termination and (b) full acceleration of any outstanding unvested stock options granted to such officer, provided, in each case, that such officer executes Omnicell’s standard waiver and release agreement. The form of Change of Control Agreement is filed as Exhibit 10.26 hereto.

ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is set forth in the Proxy Statement under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated herein by reference.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item set forth in the Proxy Statement under the headings “Compensation Committee Interlocks and Insider Participation” and “Certain Transactions” and is incorporated herein by reference.

ITEM 14.         PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is set forth in the Proxy Statement under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

39




PART IV

ITEM 15.         EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

 

Page

(a)(1)

 

Financial Statements

 

 

 

 

Index to Financial Statements:

 

 

 

 

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm

 

 

41

 

 

 

Consolidated Balance Sheets as of December 31, 2005 and 2004

 

 

43

 

 

 

Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003

 

 

44

 

 

 

Consolidated Statements Stockholders’ Equity (Net Capital Deficiency) for the years ended December 31, 2005, 2004 and 2003

 

 

45

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

 

 

46

 

 

 

Notes to Consolidated Financial Statements

 

 

47

 

 

 

Consolidated Supplementary Financial Data

 

 

68

 

(a)(2)

 

Financial Statement Schedule

 

 

 

 

 

 

See Schedule II on page 69 for valuation and qualifying accounts.

 

 

 

 

 

 

All other schedules have been omitted because they are either inapplicable or the required information has been provided in the consolidated financial statements.

 

 

 

 

(a)(3)

 

Exhibits

 

 

 

 

 

 

The exhibits in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

 

 

 

 

 

40




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS

The Board of Directors and Stockholders of
Omnicell, Inc.

We have audited the accompanying consolidated balance sheets of Omnicell, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the index at 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Omnicell, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Omnicell, Inc.’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Palo Alto, California

 

March 13, 2006

 

 

41




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of
Omnicell, Inc.

We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting,” that Omnicell, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Omnicell, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Omnicell, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, Omnicell, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Omnicell, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Omnicell, Inc. and our report dated March 13, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Palo Alto, California

 

March 13, 2006

 

 

42




OMNICELL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

 

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

29,536

 

$

19,482

 

Short-term investments

 

 

11,117

 

Accounts receivable, net of allowance for doubtful accounts of $689 and $478 at December 31, 2005 and 2004, respectively

 

29,456

 

21,967

 

Inventories

 

13,763

 

14,592

 

Receivables subject to a sales agreement

 

2,551

 

2,878

 

Prepaid expenses and other current assets

 

10,286

 

7,730

 

Total current assets

 

85,592

 

77,766

 

Property and equipment, net

 

4,727

 

5,660

 

Long-term lease receivables subject to a sales agreement

 

1,292

 

3,224

 

Purchased intangibles

 

2,504

 

3,679

 

Goodwill

 

3,127

 

2,127

 

Other assets

 

3,186

 

7,035

 

Total assets

 

$

100,428

 

$

99,491

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

4,059

 

$

4,489

 

Accrued liabilities

 

12,664

 

12,918

 

Deferred service revenue

 

6,526

 

5,506

 

Deferred gross profit

 

7,981

 

7,846

 

Obligation resulting from sale of receivables

 

2,551

 

2,878

 

Total current liabilities

 

33,781

 

33,637

 

Long-term obligation resulting from sale of receivables

 

1,292

 

3,224

 

Long-term deferred service revenue

 

9,867

 

8,416

 

Other long-term liabilities

 

250

 

517

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value:

 

 

 

 

 

Authorized: 50,000,000 shares; issued and outstanding: 26,270,861 shares at December 31, 2005 and 25,333,873 shares at December 31, 2004

 

26

 

26

 

Additional paid-in capital

 

138,365

 

134,795

 

Accumulated deficit

 

(83,165

)

(81,091

)

Accumulated other comprehensive income / (loss)

 

12

 

(33

)

Total stockholders’ equity

 

55,238

 

53,697

 

Total liabilities and stockholders’ equity

 

$

100,428

 

$

99,491

 

 

See Notes to Consolidated Financial Statements.

43




OMNICELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

Product revenues

 

$

95,292

 

$

100,856

 

$

82,206

 

Service and other revenues

 

26,226

 

23,083

 

19,921

 

Total revenues

 

121,518

 

123,939

 

102,127

 

Cost of revenues:

 

 

 

 

 

 

 

Cost of product revenues

 

44,714

 

43,032

 

34,458

 

Cost of service and other revenues

 

9,794

 

9,001

 

8,003

 

Total cost of revenues

 

54,508

 

52,033

 

42,461

 

Gross profit

 

67,010

 

71,906

 

59,666

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

9,611

 

9,105

 

8,950

 

Selling, general and administrative

 

59,698

 

52,083

 

42,779

 

Restructuring, facility and severance charges

 

406

 

171

 

953

 

Total operating expenses

 

69,715

 

61,359

 

52,682

 

Income (loss) from operations

 

(2,705

)

10,547

 

6,984

 

Interest income

 

607

 

363

 

449

 

Interest expense

 

(8

)

(9

)

(58

)

Other income and expense

 

52

 

25

 

174

 

Income (loss) before provision for income taxes

 

(2,054

)

10,926

 

7,549

 

Provision for income taxes

 

20

 

324

 

242

 

Net income (loss)

 

$

(2,074

)

$

10,602

 

$

7,307

 

Net income (loss) per share—basic

 

$

(0.08

)

$

0.43

 

$

0.32

 

Net income (loss) per share—diluted

 

$

(0.08

)

$

0.38

 

$

0.29

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

25,906

 

24,849

 

22,746

 

Diluted

 

25,906

 

27,720

 

25,321

 

 

See Notes to Consolidated Financial Statements.

44




OMNICELL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(NET CAPITAL DEFICIENCY)
(in thousands, except share amounts)

 

 

Common

 

Notes

 

 

 

 

 

Accumulated

 

Total
Stockholders’

 

 

 

Shares

 

Stock
Amount

 

Additional
Paid In
Capital

 

Receivable
From
Stockholders

 

Deferred
Stock
Compensation

 

Accumulated
Deficit

 

Other
Comprehensive
Income (Loss)

 

Equity (Net
Capital
Deficiency)

 

Balance at December 31, 2002

 

22,118,017

 

 

$

22

 

 

 

$

119,955

 

 

 

$

(4,512

)

 

 

$

(159

)

 

 

$

(99,000

)

 

 

 

 

 

$

16,306

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,307

 

 

 

 

 

 

7,307

 

 

Change in unrealized loss on short-term investments 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(8

)

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,299

 

 

Exercise of stock option

 

1,431,672

 

 

2

 

 

 

6,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,156

 

 

Issuance of stock under employee stock purchase plan

 

166,164

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

425

 

 

Warrants exercised

 

91,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

Stock compensation charge

 

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94

 

 

Repayment of stockholders’ note receivable

 

(26,761

)

 

 

 

 

(182

)

 

 

4,512

 

 

 

 

 

 

 

 

 

 

 

 

4,330

 

 

Amortization of deferred stock compensation

 

 

 

 

 

 

 

 

 

 

 

 

148

 

 

 

 

 

 

 

 

 

148

 

 

Balance at December 31, 2003

 

23,781,042

 

 

24

 

 

 

126,446

 

 

 

 

 

 

(11

)

 

 

(91,693

)

 

 

(8

)

 

 

34,758

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,602

 

 

 

 

 

 

10,602

 

 

Change in unrealized loss on short-term investments 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

(25

)

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,577

 

 

Exercise of stock option

 

1,259,647

 

 

2

 

 

 

6,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,794

 

 

Issuance of stock under employee stock purchase plan

 

293,184

 

 

 

 

 

1,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,174

 

 

Stock compensation charge

 

 

 

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59

 

 

Amortization of deferred stock compensation

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

 

Income tax benefits realized from employee stock option exercises

 

 

 

 

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

324

 

 

Balance at December 31, 2004

 

25,333,873

 

 

26

 

 

 

134,795

 

 

 

 

 

 

 

 

 

(81,091

)

 

 

(33

)

 

 

53,697

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,074

)

 

 

 

 

 

(2,074

)

 

Change in unrealized loss on short-term investments 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

13

 

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

32

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,029

)

 

Exercise of stock option

 

641,135

 

 

 

 

 

2,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,285

 

 

Issuance of stock under employee stock purchase plan

 

295,853

 

 

 

 

 

1,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,282

 

 

Income tax benefits realized from employee stock option exercises

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

Balance at December 31, 2005

 

26,270,861

 

 

$

26

 

 

 

$

138,365

 

 

 

$

 

 

 

$

 

 

 

$

(83,165

)

 

 

$

12

 

 

 

$

55,238

 

 

 

See Notes to Consolidated Financial Statements

45

 




OMNICELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

Year Ended December 31,

 

 

 

2005

 

2004

 

2003

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,074

)

$

10,602

 

$

7,307

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,199

 

4,085

 

3,504

 

Loss on sale of property and equipment

 

3

 

62

 

 

Stock compensation

 

 

70

 

242

 

Provision for excess and obsolete inventories

 

2,590

 

740

 

535

 

Income tax benefits from employee stock option exercises

 

3

 

324

 

 

Changes in assets and liabilities, net of effects of investment and acquisitions:

 

 

 

 

 

 

 

Accounts receivable, net

 

(7,489

)

(7,438

)

(3,885

)

Inventories

 

(1,761

)

(6,171

)

3,423

 

Receivables subject to a sales agreement

 

327

 

(141

)

(1,037

)

Prepaid expenses and other current assets

 

(2,556

)

(3,764

)

(2,092

)

Long-term receivables subject to a sales agreement

 

1,932

 

1,761

 

(1,302

)

Other assets

 

3,849

 

(1,384

)

2,998

 

Accounts payable

 

(430

)

1,568

 

(3,054

)

Accrued liabilities

 

(931

)

(1,864

)

5,409

 

Deferred service revenue

 

2,471

 

1,272

 

1,052

 

Deferred gross profit

 

135

 

(2,279

)

(7,883

)

Obligation resulting from sale of receivables

 

(327

)

141

 

1,037

 

Long-term obligation resulting from sale of receivables

 

(1,932

)

(1,761

)

1,302

 

Other long-term liabilities

 

(267

)

(125

)

125

 

Net cash provided by (used in) operating activities

 

(2,258

)

(4,302

)

7,681

 

Investing activities

 

 

 

 

 

 

 

Investment in privately held company

 

 

(126

)

 

Acquisition of intangible assets and intellectual property

 

(323

)

(1,378

)

 

Acquisitions of privately held companies, net of cash acquired

 

 

(1,000

)

(2,689

)

Purchases of short-term investments

 

(1,564

)

(20,148

)

(19,890

)

Maturities of short-term investments

 

12,728

 

18,031

 

10,942

 

Purchases of property and equipment

 

(2,098

)

(3,781

)

(2,659

)

Proceeds from the sale of property and equipment

 

4

 

23

 

 

Net cash provided by (used in) investing activities

 

8,747

 

(8,379

)

(14,296

)

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee stock purchase plan and option exercises

 

3,565

 

7,969

 

6,399

 

Receipts from stockholders’ notes receivable

 

 

 

4,512

 

Payment of notes payable

 

 

(305

)

(1,197

)

Net cash provided by financing activities

 

3,565

 

7,664

 

9,714

 

Net increase (decrease) in cash and cash equivalents

 

10,054

 

(5,017

)

3,099

 

Cash and cash equivalents at beginning of year