Item 1 of this Annual Report on Form 10-K, and in the section entitled "Election of Directors" appearing in the Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item with respect to our audit committee and audit committee financial expert may be found in the section entitled "Audit Committee" appearing in the Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 may be found in the sections entitled "Section 16(a) Beneficial Ownership Reporting Compliance" Appearing in the Proxy Statement. Such information is incorporated herein by reference.
Our written Code of Conduct applies to all our directors and employees, including executive officers, including without limitation our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Conduct is available on our website at www.omnicell.com under the hyperlink titled "Corporate Governance." Changes to or waivers of the Code of Conduct will be disclosed on the same website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver of, any provision of the Code of Conduct by disclosing such information on the same website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to director and executive officer compensation is incorporated by reference to the section of our Proxy Statement under the section entitled "Compensation Discussion and Analysis."
The information required by this Item with respect to Compensation Committee interlocks and insider participation is incorporated herein by reference to the information from the Proxy Statement under the section entitled "Compensation Committee Interlocks and Insider Participation."
The information required by this Item with respect to our Compensation Committee's review and discussion of the Compensation Discussion and Analysis included in the Proxy Statement is incorporate herein by reference to the information from the Proxy Statement under the section entitled "Compensation Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The information required by this Item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the information from the Proxy Statement under the section entitled "Security Ownership of Certain Beneficial Owners and Management."
The information required by this Item with respect to securities authorized for issuance under our equity compensation plans is incorporated herein by reference to the information from the Proxy Statement under the section entitled "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item with respect to related party transactions is incorporated herein by reference to the information from the Proxy Statement under the section entitled "Certain Relationships and Related Transactions."
The information required by this Item with respect to director independence is incorporated herein by reference to the information from the Proxy Statement under the section entitled "Independence of the Board of Directors."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the section from the Proxy Statement under the section entitled "Principal Accountant Fees and Services."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)The following documents are included as part of this Annual Report on Form 10-K.
(1) All financial statements.
(2) Exhibits required by Item 601 of Regulation S-K.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Omnicell, Inc.
We have audited the accompanying consolidated balance sheets of Omnicell, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the index at 15(a)(1). 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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, 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.
As discussed in Notes 1, 14 and 16 to the consolidated financial statements, Omnicell, Inc. changed its method of accounting for sabbatical leave as of January 1, 2007, its method of accounting for uncertain tax positions as of January 1, 2007, and its method of accounting for stock-based compensation as of January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Omnicell, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 13, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Omnicell, Inc.
We have audited Omnicell, Inc.'s internal control over financial reporting as of December 31, 2007, 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 included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Omnicell, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2007 consolidated financial statements of Omnicell, Inc. and our report dated March 13, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 13, 2008
OMNICELL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
See Notes to Consolidated Financial Statements
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
See Notes to Consolidated Financial Statements
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
See Notes to Consolidated Financial Statements
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See Notes to Consolidated Financial Statements
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization & Summary of Significant Accounting Policies
Description of the Company. 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 major products are medication and supply dispensing systems which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States.
Principles of consolidation. The consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
We completed an acquisition that was accounted for under the purchase method of accounting. The consolidated financial statements include the results of operations from this business combination from December 11, 2007, the date of acquisition. Additional disclosure related to the acquisition is provided in Note 2, "Acquisition."
Use of estimates. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, share-based compensation, inventory valuation, valuation of goodwill and purchased intangibles, valuation of long-lived assets and accounting for income taxes.
Reclassifications. Certain reclassifications have been made to prior year reported accrued liabilities and advance payment from customer amounts in the balance sheet to conform to current year presentation.
Cash and cash equivalents. We classify investments as cash equivalents if their original or remaining maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value. Our cash and cash equivalents are maintained in demand deposit accounts with financial institutions of high credit quality and are available to be used in paying and receiving activities and are also invested in institutional money market funds, short-term bank time deposits and similar short duration instruments with fixed maturities from overnight to three months. We continuously monitor the creditworthiness of the financial institutions and institutional money market funds in which we invest our surplus funds. We have not experienced any credit losses from our cash investments.
We classify investments as short-term investments if their original or remaining maturities are greater than three months and their remaining maturities are one year or less.
Fair value of financial instruments and equity investments. The carrying values of our financial instruments, including cash and cash equivalents, accounts payable, accrued compensation and accrued liabilities approximate fair value because of their short maturities. On an annual basis we review the fair value of our cost method equity investments for impairment and we determine if there are events or changes in circumstances that may have a significant adverse effect on the fair value of the
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
investment. Should such an impairment exist, the aggregate carrying amount of our cost method investments would be adjusted.
Revenue recognition. Our products are integrated with software that is essential to the functionality of our equipment. Additionally, we provide unspecified upgrades and enhancements related to our integrated software through our maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, "Software Revenue Recognition," and all related interpretations. For arrangements with multiple elements, we allocate revenue to each element using the residual method based on vendor specific objective evidence, or VSOE, of the undelivered elements. VSOE of fair value of the undelivered elements is based on the price charged when the element is sold separately.
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. We recognize revenue for support services ratably over the related support services contract period.
We recognize revenue when the earnings process is complete, based upon our evaluation of whether the following four criteria have been met:
•Persuasive evidence of an arrangement. We use signed customer contracts and signed customer purchase orders as evidence of an arrangement for leases and sales. For service engagements, we use a signed services agreement and a statement of work to evidence an arrangement.
•Product delivery. Software and hardware delivery is deemed to occur upon successful installation and receipt of a signed and dated customer confirmation of installation letter providing evidence that we have delivered what the customer ordered. Product delivery is deemed to have occurred upon receipt of a signed and dated customer confirmation letter in instances of a customer self-installed installation.
•Fee is fixed or determinable. We assess whether a fee is fixed or determinable at the outset of the arrangement based on the payment terms associated with the transaction. We have established a history of collecting under the original contract without providing concessions on payments, products or services.
•Collection is probable. We assess the probability of collecting from each customer at the outset of the arrangement based on a number of factors, including the customer's payment history and its current creditworthiness. If, in our judgment, collection of a fee is not probable, we defer the revenue until the uncertainty is removed, which generally means revenue is recognized upon our receipt of cash payment. Our historical experience has been that collection from our customers is generally probable.
We recognize sales on shipment to distributors since we do not allow for rights of return. In general, for sales not requiring our installation or modification, we recognize sales on shipment of products to our customers. We separately sell training and professional services which are not part of multiple element arrangements and not integral to the performance of our systems. We recognize revenue on training and professional services as they are performed. VSOE of training and of professional services is based on the price paid when sold separately.
A portion of our sales is made through multi-year lease agreements. We generally sell our non-U.S. government leases to third-party leasing finance companies on a non-recourse basis and
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
recognize revenue on these leases at the net present value of the lease payment stream. We exclude from revenues any amounts paid to us related to the termination of an existing lease. Generally, we have no obligation to the leasing company once the lease is sold. Some of our lease sales, mostly those relating to U.S. government hospitals, are retained in-house as sales-type leases which we account for in accordance with Statement of Financial Accounting Standard, or SFAS No. 13, "Accounting for Leases." We recognize revenues on sales-type leases at completion of our installation obligation, if any, and at the beginning of the non-cancelable payment terms. The revenue recognized is calculated at the net present value of the future payment stream. Interest income on sales-type leases is recognized in product revenue using the interest method.
Accounts receivable, net. 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 collectability 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. Generally we sell non-U.S. government receivables to third-party leasing companies on a non-recourse basis. We reflect the financing costs on the sale of these receivables as a component of our revenue. We record our revenue at the net present value of the multi-year payment stream using the contractual interest rate charged to us by the third-party leasing company. We record the sale of our accounts receivables as "true sales" in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." During the years ended 2007, 2006 and 2005, we transferred non-recourse accounts receivable totaling $62.1 million, $46.1 million and $32.9 million, respectively, which approximated fair value, to leasing companies on a non-recourse basis. At December 31, 2007 and 2006, accounts receivable included approximately $0.6 million and $3.7 million, respectively, from leasing companies for transferred non-recourse accounts receivable. Due to the nature of the recourse clauses in certain sales arrangements, we recorded $0.7 million and $1.8 million as of December 31, 2007 and 2006, respectively, as receivables subject to a sales agreement and obligation resulting from sale of receivables.
Concentration of credit risk. No single customer accounted for more than 10% of our combined accounts receivable balance at December 31, 2007. One customer accounted for $4.3 million or 12% of our combined accounts receivable balance at December 31, 2006.
Dependence on key supplier. We have a supply agreement with a supplier for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in our hardware products. There are no minimum purchase requirements. The contractual terms regarding construction and supply of assemblies may be terminated by either the supplier or by us without cause and at any time upon giving approximately four months' notice. The contractual terms regarding inventory management of assemblies may be terminated by either the supplier or by us without cause and at any
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
time upon giving approximately six months' notice. Purchases from this supplier for the years ended December 31, 2007 and 2006, were approximately $13.5 million and $3.6 million, respectively. We expect our third-party manufacturing supplier to build a substantial portion of the sub-assemblies which we previously built at our manufacturing facility in California. We anticipate reducing our risk of dependence on a single-source supplier by establishing additional supplier manufacturing relationships and by securing single-source supplier secondary manufacturing sites.
Concentration of rising interest rate risk. Historically, our earnings have been negatively impacted by rising interest rates, because the present value of future payments sold to third party leasing partners diminishes in an environment of rising interest rates. Rising interest rates could negatively impact our revenue. We may also experience a reduction in interest income as a result of declining interest rates.
Inventory. Inventories are stated at the lower of cost (utilizing standard costs, which approximate the first-in, first-out method) or market. We routinely assess on-hand inventory for timely identification and measurement of obsolete, slow-moving or otherwise impaired 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.
Property and equipment. Property and equipment less accumulated depreciation are stated at historical cost. Depreciation and amortization of property and equipment are generally provided over their estimated useful lives, using the straight-line method, as follows:
Software development cost. We capitalize software development costs in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed," under which certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products. We establish feasibility when we complete a working model and amortize development costs over the estimated lives of the related products ranging from three to five years. For the years ended December 31, 2007, 2006 and 2005, we charged to expense $0.6 million, $0.6 million and $0.4 million, respectively, for amortization of capitalized software development costs. All development costs prior to the completion of a working model are recognized as research and development expense.
Long-lived assets including goodwill and other intangibles. We account for goodwill and other intangible assets in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. We perform our goodwill impairment tests during the fourth quarter of each year and between annual tests in certain circumstances. We did not recognize any goodwill impairment charges in 2007, 2006, or 2005. SFAS No. 142 also requires intangible assets with finite lives
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We are currently amortizing other intangible assets with finite lives over their useful lives from three to 17 years.
We review property and equipment, capitalized software, patents and certain purchased intangibles, excluding goodwill, for impairment in accordance with SFAS No. 144. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of its carrying amount to future undiscounted cash flows the assets are expected to generate. If property and equipment and certain purchased intangibles with finite lives are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. In the fourth quarter of 2007, we recorded an impairment charge of approximately $0.2 million to write-off purchased technology related to our acquisition of intellectual property from NextRx Corporation in December 2005.
Deferred revenue and deferred gross profits. Deferred revenue arises when customers are billed for products and/or services in advance of revenue recognition. Our deferred revenue consists primarily of unearned revenue on sale of equipment for which installation has not been completed, and software licenses for which revenue is recognized in installments over the duration of the license and the unearned portion of support service contracts.
Share-based compensation. In applying the provisions of SFAS No. 123(R), "Share-Based Payment" or SFAS No. 123(R), we selected a "modified prospective" transition method using the Black-Scholes-Merton option-price method for determining and recording the fair value of share-based award compensation costs. We estimate the fair value of our employee stock awards at the date of grant using certain subjective assumptions, such as expected volatility which is based on a combination of historical and market-based implied volatility, and the expected term of the awards which is based on our historical experience of employee stock option exercises including forfeitures. Our valuation assumptions used in estimating the fair value of employee share-based awards may change in future periods. We recognize the fair value of awards over the vesting period or the requisite service period. In addition, we calculate our pool of excess tax benefits available within additional paid-in capital in accordance with the provisions SFAS No. 123(R).
Income taxes. We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This statement prescribes the use of the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded against net deferred tax assets when we believe it is more likely than not that some of the deferred tax assets will not be realized. Management performs assessments regarding the realization of deferred tax assets considering all available evidence, both positive and negative. These assessments require that management make significant judgments about many factors, including the amount and likelihood of future taxable income.
In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109," or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes and interprets the provision of FASB
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
Statement No. 109. On January 1, 2007, we adopted the provisions of FIN 48 through a cumulative-effect adjustment, resulting in an adjustment of $0.1 million to the opening balance of accumulated deficit as of January 1, 2007.
Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue and the associated expense is recorded in selling, general and administrative expenses for all periods presented.
Advertising. Advertising costs are expensed as incurred and amounted to $0.3 million in 2007, $0.5 million in 2006 and $0.3 million in 2005.
Operating Leases. We lease our buildings under operating leases accounted for in accordance with SFAS No. 13, "Accounting for Leases."
Sales Taxes. Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue.
Net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss)-the numerator-by the weighted average number of shares outstanding-the denominator-during the period excluding the dilutive effect of stock options and other employee stock plans. Diluted net income (loss) per share gives effect to all potentially dilutive common stock equivalents outstanding during the period. In computing diluted net income (loss) per share under the treasury stock method, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds of stock option exercises.
Foreign currency translation. The functional currency of our foreign subsidiary is the U.S. dollar. Non-functional currency monetary balances are re-measured into the functional currency of the subsidiary with any related gain or loss recorded in other income, in the accompanying Consolidated Statements of Operations.
Segment Information. We manage our business on the basis of one reportable segment. Our products and technologies share similar distribution channels and customers and are sold primarily to hospitals and healthcare facilities to improve patient safety and care and enhance operational efficiency. Our sole operating segment is medication and supply dispensing systems. Substantially all of our long-lived assets are located in the United States. For the years ended December 31, 2007, 2006 and 2005, substantially all of our total revenues and gross profits were generated by the medication and supply dispensing systems operating segment from customers in the United States.
Accounting Changes
On January 1, 2007, we adopted the provisions of Emerging Issues Task Force No. 06-2, "Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43," or EITF No. 06-2. EITF No. 06-2 requires measurement of compensation costs associated with a sabbatical or other similar benefit arrangement over the requisite service period if the obligation relates to rights that vest or accumulate. We adopted EITF No. 06-2 through a cumulative-effect adjustment, resulting in an adjustment of $0.5 million to the opening balance of accumulated deficit as of January 1, 2007. As required by EITF No. 06-2, compensation costs associated with sabbatical leave is recorded for all employees after the adoption of the provisions of EITF No. 06-2 on a straight-line
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Organization & Summary of Significant Accounting Policies (Continued)
basis over the four year accumulation period. These expenses totaled $0.6 million for the year ended December 30, 2007.
We also adopted FIN 48 as of January 1, 2007. See Note 14, "Income Taxes" for further discussion.
Newly Issued Accounting Standards Not Yet Adopted
In December 2007, FASB issued SFAS No. 141(R), "Business Combinations," or SFAS No. 141(R), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combination transactions for which the acquisition date is on or after December 15, 2008. The adoption of SFAS No. 141(R) will have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time.
In September 2006, FASB issued SFAS No. 157 "Fair Value Measurements," or SFAS No.157, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No.157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by us beginning in the first quarter of 2008. Based on a preliminary evaluation of the impact of adopting SFAS No.157, we believe that it will not have a material impact on our consolidated statements of financial position, results of operations or cash flows.
Note 2. Acquisition
In December 2007, we acquired 100% of the outstanding shares of Rioux Vision, Inc., or Rioux, a provider of system solutions to acute healthcare facilities, for an aggregate cash purchase price of $26.3 million of which $21.3 million was paid on closing and $5.0 million was held in escrow pending satisfaction of certain contingencies provided for in the stock purchase agreement between us and Rioux. Included in the purchase price were acquisition costs of $0.3 million. The acquisition of Rioux adds mobile cart technology to our line of medication-use systems.
Our preliminary allocation of the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of the acquisition. The purchase price exceeded the fair value of the net tangible liabilities of $2.2 million and intangible assets acquired by $19.9 million, which was allocated to goodwill and will be deductible for tax purposes. Also, in accordance with SFAS No. 141, "Business Combinations", we included a pre-acquisition contingency on our assessment of its fair value in our preliminary purchase price allocation. The fair value for this pre-acquisition contingency represents the amount we and Rioux agreed to adjust the purchase price as a result of our acceptance of any and all costs and risks relating to this contingency. The pre-acquisition contingency relates to an alleged patent infringement claim and is recorded as an accrued liability as of the acquisition date.
After the end of the purchase price allocation period, any adjustment to amounts recorded for the pre-acquisition contingency will be included in our results of operations in the period in which the
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Acquisition (Continued)
adjustment is determined. The purchase price allocation is preliminary and may change if information becomes available that results in a change in the acquisition cost, assets acquired or liabilities assumed at the date of purchase. The purchase price and allocation will be finalized in 2008.
The following table sets forth the components and fair values of the intangible assets associated with the Rioux acquisition (in thousands):
The fair value of intangible assets were valued using the excess earnings method under the income approach.
Proforma financial information from this acquisition has not been presented as the historical operations of Rioux were not material to our consolidated financial statements.
Note 3. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares less shares subject to repurchase plus, if dilutive, common stock equivalent shares outstanding during the period. Common stock equivalents include the effect of outstanding dilutive stock options computed using the treasury stock method. Since their impact is anti-dilutive, the total number of shares excluded from the calculations of diluted net income per share for the years ended December 31, 2007 and December 31, 2006 were 696,530 and 223,266, respectively. 3,317,472 shares were excluded from the calculations of diluted net loss per share for the year ended December 31, 2005.
The calculation of basic and diluted net income (loss) per share is as follows (in thousands, except per share amounts):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Net Investment in Sales-Type Leases
Our sales-type leases are for terms generally ranging up to five years. Sales-type lease receivables are collateralized by the underlying equipment. The components of our net investment in sales-type leases are as follows (in thousands):
The minimum lease payments for each of the five succeeding fiscal years are as follows (in thousands):
(1)a component of other current assets
(2)net of allowance for doubtful accounts of $0.4 million and $0.3 million as of December 31, 2007 and December 31, 2006, respectively.
Note 5. Inventories
Inventories consist of the following (in thousands):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Property and Equipment
Property and equipment consist of the following (in thousands):
Depreciation and amortization of property and equipment was approximately $3.0 million, $2.6 million, and $3.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Note 7. Goodwill and Other Intangible Assets
Under SFAS No. 142 "Goodwill and Other Intangible Assets," goodwill is not subject to amortization. Rather, we evaluate goodwill for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. The increase in goodwill of $19.9 million in 2007 is due to the acquisition of Rioux. No goodwill impairment was recognized in 2007.
Goodwill and other intangible assets consist of the following (in thousands):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Goodwill and Other Intangible Assets (Continued)
We capitalize third-party costs associated with internally developed patents. These costs include legal and registration fees needed to apply for and secure patents. As of December 31, 2007, we capitalized costs of $0.3 million. For patents that have not been issued and placed in use, we have not yet recorded amortization expense related to the patents. These other intangible assets will be amortized using the straight-line method over the shorter of their estimated useful lives or remaining legal life.
In 2007, we recorded an impairment charge of approximately $0.2 million to write-off purchased acquired technology related to our acquisition of intellectual property from NextRx Corporation in December 2005. As a result of the Rioux acquisition, we have prioritized our product development in areas of greater return. Investment in the NextRx technology to make it compatible with our current product direction is not likely to occur within the timeframe that the technology will remain competitive in the marketplace. It is unlikely that the technology, in its current state and at this time, will have any value to any provider of automation equipment. The impairment charge is recorded as a selling, general and administrative expense in our Consolidated Statements of Operations. We did not record any intangible impairment charges during 2006 and 2005.
Amortization expense totaled $1.0 million, $1.1 million and $1.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. Estimated future amortization expense of the intangible assets at December 31, 2007 is as follows (in thousands):
Note 8. Other Assets
Other assets consist of the following (in thousands):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Note 10. Advance Payments from Customers
As of December 31, 2007 and 2006, $0.2 million and $9.1 million, respectively, represent advance payments from customers. Payment amounts were received before completion of medication and supply dispersing system installations at customers' facilities.
Note 11. Deferred Gross Profit
Deferred gross profit consists of the following (in thousands):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Commitments and Contingencies
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2007 (in thousands):
(1)Commitments under operating leases relate primarily to leasehold property and office equipment. Rent expense was $2.4 million in 2007, $2.0 million in 2006 and $1.7 million in 2005.
(2)We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. We record a liability for firm, non-cancelable, and unconditional purchase commitments.
(3)As part of the December 2002 acquisition of substantially all of the intellectual properties of Medisafe, we agreed to pay $0.5 million in guaranteed minimum royalties due over four years in equal annual installments of $125,000 from January 2005 to January 2008. Legal Proceedings
On February 20, 2007, we were served with the third amended petition in a lawsuit entitled Alcala, et al. v. Cardinal Health, Inc., et al., case number 2006 09-4487-G, which named us as a defendant. This lawsuit was filed in the District Court of Cameron County, Texas. The lawsuit alleges claims against us for strict products liability, negligence and gross negligence arising from the use of our product by defendant Cardinal Health 109, Inc. in connection with the treatment of a patient who died after receiving treatment. The petition, which was filed by the family and estate of the deceased patient, alleges that defects in the design of our product contributed to the patient's death which was allegedly caused by the administration of the wrong medication. We deny any liability, have engaged our insurance carrier on this matter and intend to vigorously defend against these claims.
On December 19, 2007, we were served with an amended petition naming Omnicell, Inc. as an identified "Doe" defendant in a lawsuit entitled Tak Takahama; by and through her Guardian Ad Litem Donna Takahama v. Torrance Memorial Medical Center; and Does 1 through 20 Inclusive, case number YC 055726. This lawsuit was filed in the Superior Court for the State of California for the County of Los Angeles. The lawsuit alleges claims against us for negligence arising from the use of our product by Torrance Memorial Medical Center in connection with the treatment of a patient who received a different medication than what was prescribed by the patient's physician. We deny any liability, have engaged our insurance carrier on this matter and intend to vigorously defend against these claims.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Commitments and Contingencies (Continued)
On December 11, 2007, we acquired Rioux Vision, Inc., which had an existing lawsuit in progress at the time of that acquisition. Omnicell is now defending that lawsuit, as Rioux Vision is a wholly-owned subsidiary of ours. On October 26, 2006, Rioux Vision was served with a complaint in a lawsuit entitled Flo Healthcare Solutions, LLC v. Rioux Vision, Inc., Case Number 1:06-cv-02600, in the United States District Court for the Northern District of Georgia, alleging claims of patent infringement regarding certain features of the mobile carts sold by Rioux Vision. We intend to defend the case vigorously through trial, if necessary. In relation to this lawsuit and in accordance with SFAS No. 141, "Business Combinations," we included a pre-acquisition contingency based on our assessment of its fair value in our preliminary purchase price allocation. The fair value for this pre-acquisition contingency represents the amount we and Rioux agreed to adjust the purchase price as a result of our acceptance of any and all costs and risks relating to this contingency. The pre-acquisition contingency is recorded as an accrued liability as of the acquisition date. While we cannot predict the outcome of this matter, there can be no assurance should an unfavorable outcome arise, that such outcome would not have a material adverse effect on our financial position, results of operations or cash flows.
Note 13. Guarantees
As permitted under Delaware law and our by-laws and certificate of incorporation, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments they could be required to make under these indemnification agreements is unlimited; however, we have a directors' and officers' insurance policy that may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, we believe it is unlikely that we will be required to pay any material amounts pursuant to this indemnification obligation. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.
Additionally, we undertake indemnification obligations in our ordinary course of business in connection with, among other things, the licensing of our products and the provision by our technical services. Pursuant to these agreements, we may indemnify the other party for certain losses suffered or incurred by the indemnified party, generally our business affiliates or customers, in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, negligence and intentional acts in the performance of services and violations of laws. The term of these indemnification obligations is generally perpetual. In general, we attempt to limit the maximum potential amount of future payments which we may be required to make under these indemnification obligations to the purchase price paid, but in some cases the obligation may not be so limited. In addition, we may, in certain situations, warrant that, for a certain period of time from the date of delivery, our software products will be free from defects in media or workmanship. From time to time, we may also warrant that our professional services will be performed in a good and workmanlike manner. In addition, it is our standard policy to seek to disclaim most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, quality and non-infringement, as well as any liability with respect to incidental, consequential, special, exemplary, punitive or similar damages. In some states, such disclaimers may not
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Guarantees (Continued)
be enforceable. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. However, in the recent past, we have not been subject to any significant claims for such losses and have not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe it is unlikely that we will be required to pay any material amounts pursuant to this indemnification obligation.
Note 14. Income Taxes
The (benefit from) provision for income taxes consists of the following (in thousands):
A reconciliation of income taxes at the statutory federal income tax rate to income taxes included in the accompanying statements of operations is as follows (in thousands):
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Income Taxes (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):
The valuation allowance decreased by $31.0 million in 2007, $5.2 million during 2006 and $1.4 million in 2005. As of December 31, 2006, we concluded that it is more likely than not that the deferred tax assets would not be realized and therefore we provided a full valuation allowance against the deferred tax assets. In 2007, based upon the our current level of profitability as well as the level of forecasted future earnings, it became more likely than not that $24.7 million of the deferred tax assets would be realized and the valuation allowance was adjusted accordingly. In evaluating the realizability of the deferred tax assets, we considered all positive evidence against any potential negative evidence in determining that it was more likely than not these assets would be realized. We will continue to evaluate the need for a valuation allowance against our deferred tax assets on a quarterly basis. As of December 31, 2007, we have approximately $6.7 million of valuation allowance, all of which is related to unrecognized stock option deductions that will be credited directly to additional paid-in capital when realized. As a result of adopting SFAS No. 123(R), the deferred tax asset balances at December 31, 2007 and 2006 exclude $8.6 million and $4.7 million, respectively, of excess tax benefits from stock option exercises during fiscal 2007 and 2006. Equity will be increased by such excess tax benefits if and when they are ultimately realized.
As of December 31, 2007, we had net operating loss carry forwards for federal income tax purposes of approximately $41.1 million, which expire in the years 2020 through 2025, federal research and experimentation tax credits of approximately $1.9 million, which expire in the years 2007 through 2024, and federal alternative minimum tax credits of approximately $0.9 million which have no expiration. We also had net operating loss carry forwards for California state income tax purposes of
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Income Taxes (Continued)
approximately $2.7 million, which expire in the years 2012 through 2015, other state net operating loss carry forwards of $15.4 million and California research and experimentation credits of approximately $2.3 million, which have no expiration. We also had other state tax credits of approximately $0.2 million which began to expire in 2006.
As of December 31, 2007, $12.0 million of our net operating losses generated prior to and including December 31, 2001 are subject to an approximately $4.5 million annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Net operating losses and tax credits generated after December 31, 2001, may be subject to a substantial annual limitation due to the ownership provisions of the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
As of January 1, 2007, we adopted the provisions of FIN 48. As a result of applying the provisions of FIN 48, we recognized an increase of $0.1 million in the non-current liability for uncertain tax positions and a reduction of $0.1 million to the opening balance of accumulated deficit as of January 1, 2007.
At December 31, 2007, we had less than $0.1 million in total unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Total unrecognized tax benefits are recorded within other long-term liabilities on our consolidated balance sheet as of December 31, 2007. The total unrecognized tax benefit, if recognized, would reduce the effective income tax rate in future periods. We recognize interest and/or penalties related to uncertain tax positions in other income and expense in the Consolidated Statement of Operations. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. The amount of interest and penalties accrued at December 31, 2007 were immaterial.
As a matter of course we may be audited by various taxing authorities and those audits may result in proposed assessments where the ultimate resolution results in our owing additional taxes. We evaluate these reserves each quarter and adjusts the reserves and the related interest in light of changing facts and circumstances that affect the probability of realizing tax benefits, such as the progress of a tax audit or the expiration of a statute of limitations. We believe that our tax positions comply with applicable tax law and that we have adequately provided for any known tax contingencies, however our future results may include favorable or unfavorable adjustments to its estimated tax liabilities in the periods that assessments are resolved or when the statutes of limitations expire.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Income Taxes (Continued)
As a result of certain employment actions and capital investments undertaken by us, income earned in certain countries is subject to reduced tax rates and in some cases is wholly exempt from taxes for years through fiscal 2009. The income tax benefits attributable to the tax status of these subsidiaries are not estimated to be material.
Our tax years 1995 to 2006 remain open to audit by the Internal Revenue Service.
Note 15. Stockholders' Equity, 401(k) and Stock Option Plans
Secondary Offering
In May 2007, we issued 4,485,000 shares of our common stock in a public offering at an offering price of $21.50 per share. The net proceeds to us were $90.2 million, which is net of both underwriting discounts and offering expenses of $6.2 million.
Share Purchase Rights Plan
On February 6, 2003, our board of directors approved the adoption of a Share Purchase Rights Plan, or the Rights Plan. Terms of the Rights Plan provide for a dividend distribution of one preferred share purchase right, or a Right, for each outstanding share of our common stock, par value $0.001 per share. The dividend was payable on February 27, 2003 to the stockholders of record on that date.
The Rights are not exercisable until the distribution date, which is the earlier of the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the outstanding share of our common stock (an "Acquiring Person") or (ii) 10 business days (or such later date as may be determined by action of the board of directors prior to such time as any person or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or entity becoming an Acquiring Person. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person or a tender offer is commenced or announced to commence, each stockholder holding a Right will thereafter have the right to receive upon exercise of the Right that number of shares of Common Stock having a market value of two times the exercise price of the Right. The description and terms of the Rights are set forth in a Rights Agreement, dated as of February 6, 2003 entered into between us and EquiServe Trust Company, N.A., as rights agent. Sutter Hill Ventures and ABS Capital Partners and their respective affiliated entities will be exempt from the Rights Plan, unless they acquire beneficial ownership of 17.5% or 22.5% or more, respectively, of the Company's common stock. At no time will the Rights have any voting power. The Rights will expire on February 27, 2013, unless the Rights are earlier redeemed or exchanged by Omnicell.
401(k) Plan
We have established a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation, but not greater than 15% of their earnings, up to the maximum as required by law. Contributions by us are discretionary. No such contributions by us have been made since inception of the plan.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Stockholders' Equity, 401(k) and Stock Option Plans (Continued)
Description of Share-Based Plans
Stock Option Plans. Our 1999 Equity Incentive Plan, or the 1999 Plan, was adopted in September 1999 for the granting of incentive and nonqualified stock options, restricted stock units, or RSUs, and rights to purchase common stock and common stock units to employees, directors and consultants. RSUs give the recipients the right to receive shares of our stock upon the lapse of their related restrictions. Restrictions on RSUs lapse in various increments beginning from date of grant. Under the 1999 Plan, 4,262,745 shares of common stock were initially authorized for issuance. Further, all unissued shares under our 1992 Stock Plan and 1995 Management Stock Option Plan were added to the 4,262,745 shares reserved under the 1999 Plan. Under all of the option plans, incentive and nonqualified stock options or rights to purchase common stock may be granted to employees, directors and consultants. Incentive options, nonqualified options and stock purchase rights must be priced to be at least 100%, 85% and 85%, respectively, of the common stock's fair market value at the date of grant. Options shall become exercisable as determined by our board of directors. Options granted under the 1999 Plan generally become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our board of directors may impose different vesting terms at its discretion on any award. Options under the 1999 Plan generally expire ten years from the date of grant. Sales of stock under stock purchase rights are made pursuant to restricted stock purchase agreements.
In October 2006, the 1999 Plan was amended to permit grants of restricted stock and restricted stock units to participants under the 1999 plan. The board of directors determines the price, which is equal to the market price of the stock on the date of the grant, the award amount, the vesting provisions and the expiration period (not to exceed ten years) for each grant. We consider the dilutive impact of this program in our diluted net income (loss) per share calculation.
Grants of restricted stock to non-employee directors are granted on the date of Omnicell's annual meeting of stockholders and vest in full on the date of Omnicell's next annual meeting of stockholders. The fair value of the stock on the date of issuance is amortized to expense from the date of grant to the date of vesting. The fair value of restricted stock under the 1999 Plan is the product of the number of shares granted at the grant date market price of our common stock
RSUs granted to employees generally vest over a period of four years and are expensed ratably on a straight-line basis over the vesting period. The fair value of restricted stock units under the 1999 Plan is the product of the number of shares granted at the grant date market price of our common stock.
On January 1 of each year, the number of shares reserved for issuance under the 1999 Plan increases automatically by the lesser of (i) 5.5% of the total number of shares of our common stock outstanding, (ii) 3,000,000 shares, or (iii) such other lesser amount as may be determined by our board of directors. As of December 31, 2007, there were a total of 1,378,381 shares reserved for future issuance under the 1999 Plan.
In April 2003, our board of directors adopted the 2003 Equity Incentive Plan, or the 2003 Plan. A total of 500,000 shares of common stock have been reserved for issuance under the 2003 Plan. As of December 31, 2007, 359,160 shares were subject to outstanding options under the 2003 Plan. As of December 31, 2007, there were a total of 123,683 shares reserved for future issuance under the 2003 Plan. The 2003 Plan provides for the issuance of non-qualified options, stock bonuses and rights to
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Stockholders' Equity, 401(k) and Stock Option Plans (Continued)
acquire restricted stock to our employees, directors and consultants. Options granted under the 2003 Plan shall have an exercise price not less than 70% of the fair market value of the stock on the date of grant and are generally intended to become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter, however our board of directors may impose different vesting at its discretion on any award. Options granted under the 2003 Plan will expire ten years from the date of grant.
In February 2004, our board of directors adopted the 2004 Equity Incentive Plan, or the 2004 Plan and, together with the 1999 Plan and the 2003 Plan, the Plans. A total of 200,000 shares of common stock have been reserved for issuance under the 2004 Plan. No options are currently issued or outstanding under the 2004 Plan. The 2004 Plan provides for the issuance of non-qualified options to new employees as an inducement material to the individual's entering into employment with us. Options granted under the 2004 Plan have an exercise price not less than the fair market value of the stock on the date of grant and generally become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our board of directors may impose different vesting terms at its discretion on any award. Options under the 2004 Plan generally expire ten years from the date of grant.
The board of directors shall administer the Plans unless and until the board of directors delegates administration to a committee. The Board has delegated administration of the Plans to the Compensation Committee of the Board and the Plans are generally administered by such committee. The board of directors may suspend or terminate the Plans at any time. The board of directors may also amend any of the Plans at any time or from time to time. However, no amendment will be effective unless approved by our stockholders after its adoption by the board of directors to the extent stockholder approval is necessary to satisfy the requirements of The NASDAQ Stock Market listing requirements.
If we sell, lease or dispose of all or substantially all assets or we are acquired pursuant to a merger or consolidation, then the surviving entity may assume or substitute all outstanding awards under the Plans. If the surviving entity does not assume or substitute these awards, then generally the vesting and exercisability of the stock awards will accelerate.
At December 31, 2007, the total number of shares available for future issuance under all Plans was as follows (in thousands):
1997 Employee Stock Purchase Plan. We have an Employee Stock Purchase Plan, or ESPP, under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings, up to a maximum of $25,000 of fair value per year. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period. As of December 31, 2007, 1,876,968 shares had been issued under the ESPP. On January 1 of
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Stockholders' Equity, 401(k) and Stock Option Plans (Continued)
each year, through and including 2007, the number of shares reserved for issuance under the ESPP increases automatically by the lesser of (i) 1.5% of the total number of shares of our common stock outstanding, (ii) 750,000 shares, or (iii) such other lesser amount as may be determined by our board of directors. As of December 31, 2007, there were a total of 832,161 shares reserved for future issuance under the ESPP.
Note 16. Share-Based Compensation
In December 2004, FASB issued SFAS No.123(R), which requires the measurement and recognition of compensation expense based on estimated fair value for all share-based payment awards including stock options, employee stock purchases under employee stock purchase plans, non-vested share awards (restricted stock) and stock appreciation rights. SFAS No. 123(R) supersedes our previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," APB No. 25. In March 2005, the SEC issued SAB No. 107, which provides the Staff's views regarding implementation issues related to SFAS No. 123(R).
We adopted the provisions of SFAS No. 123(R) using the modified prospective transition method beginning on January 1, 2006. In accordance with that transition method, we have not restated prior periods for the effect of compensation expense calculated under SFAS No. 123(R). We have selected the Black-Scholes-Merton option-pricing model as the most appropriate method for determining the estimated fair value of all our awards. As required by SFAS No. 123(R), compensation expense is recorded for all share-based equity awards issued, granted or modified after the adoption of the provisions of SFAS No. 123(R) and also includes compensation expense on awards granted prior to but not vested as of the effective date.
On November 10, 2005, the FASB issued FASB Staff Position No. SFAS No. 123(R)-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." We adopted the alternative method provided in the FASB Staff Position for calculating the effects of share-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital related to the tax effects of employee share-based compensation, or APIC pool, which is available to absorb tax deficiencies recognized subsequent to adoption of SFAS No. 123(R).
Impact of SFAS No. 123(R)
We adopted SFAS No. 123(R) using the modified prospective transition method beginning January 1, 2006. In 2006 we recorded share-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair value method required for pro forma disclosure under SFAS No. 123 were in effect for expense recognition purposes adjusted for estimated forfeitures. We have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123(R) using straight-line amortization method. As SFAS No. 123(R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation in 2006 and 2007 has been reduced for estimated forfeitures. Amounts previously reported prior to the adoption of SFAS No. 123(R) have not been restated.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
Total share-based compensation resulting from stock option grants, restricted stock awards, restricted stock units and shares purchased under our ESPP were included in our consolidated statements of operations as follows (in thousands, except per share data):
Share-based compensation capitalized in inventory during 2007 and 2006 was $0.1 million and $0.2 million, respectively. The income tax benefit realized from share-based compensation during 2007 and 2006 was $4.9 million and $0.5 million, respectively.
Prior to the adoption of SFAS No.123(R), we provided the disclosures required under SFAS No. 123, "Accounting for Stock-based Compensation," or SFAS No. 123, which permitted the use of either a fair value based method or the intrinsic value method defined in APB No. 25 to account for share based compensation arrangements. As permitted by SFAS No. 123, we elected to determine the value of share based compensation arrangements under the intrinsic value based method of APB No. 25; accordingly, we only recognized compensation expense when options were granted with an exercise price below fair value of the underlying stock at the date of grant. Any resulting compensation expense was recognized ratably over the vesting period.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
The following table sets forth pro forma information as if compensation expense had been determined using the fair value method under SFAS No. 123 (in thousands, except per share data):
(1)Stock-based compensation expense is calculated based on the pro forma application of SFAS No. 123.
(2)Net loss and net loss per share represents pro forma information based on SFAS No. 123.
Valuation Assumptions
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of shares issued under the employee stock purchase plans is estimated on the date of issuance using the Black-Scholes-Merton model. The weighted average assumptions used for options granted and ESPP in 2007, 2006 and 2005 were as follows:
(1)The risk-free interest rate for both stock options and the ESPP in 2007 is based on the zero-coupon U.S. Treasury rate curve in effect at the time of the option grant or at the beginning of the ESPP offering period. The risk-free interest rate for stock options and
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
the ESPP in 2006 and 2005, is based on the Treasury bill rate in effect at the time of the option grant or at the beginning of the ESPP offering period.
(2)In 2007, our computation of expected volatility for both stock options and the ESPP reflects a combination of historical and market-based implied volatility consistent with SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting Bulletin 107. In 2007, we determined that the combination of historical and market-based implied volatility provides a more accurate reflection of our market conditions and is more representative of future stock price trends than employing solely historical volatility. For stock options granted and ESPP offerings in 2006, we calculated volatility based solely on historical volatility. For stock options granted prior to January 1, 2006 and valued in accordance with SFAS No. 123, the expected volatility used to estimate the fair value of the options was based solely on the historical volatility on our stock and we recognized option forfeitures as they occurred as allowed by SFAS No. 123.
(3)Represents the period of time that options granted are expected to be outstanding, which is derived from historical data on employee exercise and post-vesting employment termination behavior.
Share-Based Payment Award Activity
A summary of option activity under the Plans for the years ended December 31, 2007, 2006 and 2005 is presented below:
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
Outstanding options at December 31, 2007 had a weighted-average remaining contractual life of 6.6 years and an aggregate intrinsic value of $65.4 million. Vested and expected to vest options had a weighted-average remaining contractual life of 6.4 years and an aggregate intrinsic value of $59.4 million. Exercisable options at December 31, 2007 had an aggregate intrinsic value of $47.2 million and a weighted-average remaining contractual life of 5.6 years.
The outstanding exercisable options for equity share-based payment awards at December 31, 2007 were as follows:
As of December 31, 2007, $10.7 million of total unrecognized compensation costs related to unvested options is expected to be recognized over a weighted average period of 2.4 years. The weighted average fair value of options granted was $12.07 and $6.49 during 2007 and 2006, respectively. The intrinsic value of options exercised during 2007 and 2006 was $19.9 million and $13.7 million, respectively. The total fair value of shares vested during 2007 and 2006 was $8.2 million and $7.7 million, respectively.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
Restricted Stock and Restricted Stock Units
A summary of activity of restricted stock granted under the 1999 Plan as of December 31, 2007 is presented below:
The fair value of restricted stock under the 1999 Plan is the product of the number of shares granted and the closing market price of our common stock on the grant date. The total fair value of restricted stock grants vested in 2007 is $0.4 million. Our unrecognized compensation cost related to nonvested restricted stock is approximately $0.1 million and is expected to be recognized over a weighted average period of 0.3 years.
A summary of activity of restricted stock units granted under the 1999 Plan as of December 31, 2007 is presented below:
The fair value of RSUs under the 1999 plan is the product of the number of shares granted and the closing market price of our common stock on the grant date. The total fair value of RSUs vested in 2007 is $4.8 million. Expected future compensation expense relating to RSUs outstanding on December 31, 2007 is $4.4 million over a weighted-average period of 3.5 years.
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Share-Based Compensation (Continued)
Employee Stock Purchase Plan
As of December 31, 2007, our unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $0.9 million and is expected to be recognized over a weighted average period of 0.6 years.
Note 17. Subsequent Event
On February 20, 2008, our board of directors authorized a stock repurchase plan providing for the repurchase of up to $40.0 million of our common stock over the next 12 months. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time on the open market, in privately negotiated transactions or pursuant to a Rule 10b5-1 plan. The stock repurchase program does not obligate us to repurchase any specific number of shares, and we may terminate or suspend the repurchase program at any time. On March 12, 2008, we announced the completion of the repurchase plan. A total of 2,133,898 shares at an average cost of $18.75 per share were repurchased through a combination of open market purchases and pursuant to a 10b5-1 trading plan. Purchases were financed from our existing cash and cash equivalents.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(1)for doubtful accounts and sales returns.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Randall A. Lipps and Robin G. Seim, each of them acting individually, as his or her attorney-in-fact, each with the full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RANDALL A. LIPPS Randall A. Lipps
Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)
March 14, 2008
/s/ ROBIN G. SEIM Robin G. Seim
Vice President of Finance, Chief Financial Officer
(Principal Accounting and Financial Officer)
March 14, 2008
/s/ MARY E. FOLEY Mary E. Foley
Director
March 14, 2008
/s/ JAMES T. JUDSON James T. Judson
Director
March 14, 2008
S-1
/s/ WILLIAM H. YOUNGER, JR. William H. Younger, Jr.
Director
March 14, 2008
/s/ RANDY D. LINDHOLM Randy D. Lindholm
Director
March 14, 2008
/s/ GARY S. PETERSMEYER Gary S. Petersmeyer
Director
March 14, 2008
/s/ DONALD C. WEGMILLER Donald C. Wegmiller
Director
March 14, 2008
/s/ SARA J. WHITE Sara J. White
Director
March 14, 2008
/s/ JOSEPH E. WHITTERS Joseph E. Whitters
Director
March 14, 2008
S-2
INDEX TO EXHIBITS
Exhibit No.
Description
2.1(1)
Stock Purchase Agreement, dated November 29, 2007, by and among Omnicell, Inc., Rioux Vision, Inc. and Shawn Rioux.
3.1(2)
Amended and Restated Certificate of Incorporation of Omnicell, Inc.
3.2(3)
Certificate of Designation of Series A Junior Participating Preferred Stock.
3.3(4)
Bylaws of Omnicell, Inc., as amended.
4.1(2)
Form of Common Stock Certificate.
4.2(5)
Rights Agreement, dated February 6, 2003, between Omnicell and EquiServe Trust Company, N.A.
10.1(2)
Real Property Lease, effective July 1, 1999, between Omnicell and Amli Commercial Properties Limited Partnership.
10.2(2)
Master Assignment Agreement and Master Sales Agreement, dated September 29, 1994, between Americorp Financial, Inc. and Omnicell, as amended.
10.3(2)
Group Purchasing Agreement, effective June 1, 1997, between Premier Purchasing Partners, L.P., and Omnicell.
10.4(2)
Letter Agreement, dated June 27, 1997, between the University Health System Consortium Services Corporation and Omnicell.
10.5(2)
Federal Supply Schedule Contract No. V797P3406k, effective August 7, 1997, between the Department of Veterans Affairs and Omnicell.
10.6(2)
Asset Purchase Agreement, dated December 18, 1998, between Omnicell and Baxter Healthcare Corporation, as amended.
10.7(2)
Form of Director and Officer Indemnity Agreement.
*10.8(2)
1992 Equity Incentive Plan, as amended.
*10.9(2)
1995 Management Stock Option Plan.
*10.10(2)
1997 Employee Stock Purchase Plan, as amended.
*10.11(6)
1999 Equity Incentive Plan, as amended.
*10.11A
Form of Stock Unit Grant Notice and Form of Stock Unit Award Agreement for 1999 Equity Incentive Plan, as amended.
*10.11B
Form of Restricted Stock Award Grant Notice and Form of Restricted Stock Award Agreement for 1999 Equity Incentive Plan, as amended.
10.12(2)
Collaborative Solutions Provider Agreement, dated July 10, 2001, between Omnicell and Bergen Brunswig Drug Company.
10.13(7)
Real Property Lease, dated June 30, 2003, between Shoreline Park, LLC and Omnicell, Inc.
*10.14(6)
2003 Equity Incentive Plan.
*10.15(8)
Employment Agreement, dated October 31, 2003, between Omnicell and Dan S. Johnston.
E-1
10.16(8)
Master Services Agreement, dated September 5, 2003, between Omnicell and Aditi Technologies Pvt. Ltd.
*10.17(6)
2004 Equity Incentive Plan.
10.18(9)
Master Lease/Loan Purchase Program Agreement, dated as of February 28, 2005, between Omnicell and De Lage Landen Financial Services, Inc. as amended March 11, 2006.
*10.19(10)
Omnicell Quarterly Executive Bonus Plan.
*10.20(11)
Employment Agreement, dated November 28, 2005, between Omnicell and Robin G. Seim.
*10.21(12)
Executive Officer Compensation.
*10.22(13)
Form of Change of Control Agreement.
*10.23(14)
Employment Agreement, dated March 6, 2006, between Omnicell and Renee M. Luhr.
10.24(15)
Master Lease/Loan Purchase Program Agreement, dated as of April 3, 2006, between Omnicell and General Electric Capital Corporation.
*10.25(16)
Compensation Arrangement for Non-Employee Directors.
*10.27(17)
Amended and Restated Severance Benefit Plan.
10.28(4)
Real Property Lease, effective June 29, 2007, between Omnicell, Inc. and Britannia Hacienda VIII LLC.
*10.29(17)
Separation Agreement and General Release, by and between Omnicell, Inc. and Brian R. Rodli, dated May 4, 2007.
*10.30(12)
2007 Omnicell Quarterly Executive Bonus Plan.
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Powers of Attorney. Reference is made to the signature page to this report.
31.1
Certification of Chief Executive Officer required by Rule 13a-15 or Rule 15d-15(e) (e).
31.2
Certification of Chief Financial Officer required by Rule 13a-15 or Rule 15d-15(e) (e).
32.1**
Certifications required by Rule 13a-14 (b) or Rule 15d-14 (b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
(1)Previously filed as an exhibit to our Current Report on Form 8-K, filed on December 5, 2007 and incorporated herein by reference.
(2)Previously filed as an exhibit to our Registration Statement on Form S-1, as amended, filed on March 14, 2001 and incorporated herein by reference.
(3)Previously filed as an exhibit to our Annual Report on Form 10-K, filed on March 28, 2003 and incorporated herein by reference.
(4)Previously filed as an exhibit to our Quarterly Report on Form 10-Q, filed on August 9, 2007 and incorporated by reference herein.
(5)Previously filed as an exhibit to our Current Report on Form 8-K, filed on February 14, 2003 and incorporated by reference herein. E-2
(6)Previously filed as an exhibit to our Annual Report on Form 10-K, filed on March 23, 2007 and incorporated herein by reference.
(7)Previously filed as an exhibit to our Quarterly Report on Form 10-Q, filed on August 7, 2003 and incorporated herein by reference.
(8)Previously filed as an exhibit to our Annual Report on Form10-K, filed on March 8, 2004 and incorporated herein by reference.
(9)Previously filed as an exhibit to our Current Report on Form 8-K, filed on March 15, 2005 as amended by our Current Report on Form 8-K/A, filed on May 17, 2006, incorporated herein by reference.
(10)Previously filed as an exhibit to our Current Report on Form 8-K, filed on December 13, 2005 and incorporated herein by reference.
(11)Previously filed as an exhibit to our Current Report on Form 8-K, filed on January 24, 2006 and incorporated herein by reference.
(12)Previously filed as an exhibit to our Current Report on Form 8-K, filed on April 10, 2007 and incorporated herein by reference.
(13)Previously filed as an exhibit to our Annual Report on Form 10-K, filed March 16, 2006 and incorporated herein by reference.
(14)Previously filed as an exhibit to our Current Report on Form 8-K, filed on March 15, 2006 and incorporated herein by reference.
(15)Previously filed as an exhibit to our Current Report on Form 8-K, filed on May 9, 2006 and incorporated herein by reference.
(16)Reference is made to Item 1.01 of our Current Report on Form 8-K, filed on October 30, 2006 and incorporated herein by reference.
(17)Previously filed as an exhibit to our Current Report on From 8-K, filed on May 4, 2007 and incorporated herein by reference.
*Management contract or compensatory plan or arrangement.
**This certification attached hereto as Exhibit 32.1 accompanying this Annual Report on Form 10-K is not deemed filed with the Securities and Exchange Commission and is not incorporated by reference into any filing of Omnicell, Inc. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended (whether made before or after the date of this Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing.
Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. E-3
DOCUMENTS INCORPORATED BY REFERENCE
PART I
ITEM 1. BUSINESS
ITEM 1A.
ITEM 1A. RISK FACTORS
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 2. PROPERTIES
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
OMNICELL, INC. SELECTED FINANCIAL DATA
OMNICELL, INC. SUPPLEMENTARY FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B.
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OMNICELL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value and share amounts)
OMNICELL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
OMNICELL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts)
OMNICELL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
SIGNATURES
POWER OF ATTORNEY
INDEX TO EXHIBITS