<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] 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: 001-12799
INFOCURE CORPORATION
(Exact name of registrant as specified in Its charter)
DELAWARE 58-2271614
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1765 THE EXCHANGE
SUITE 450
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 221-9990
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's class of capital stock as of October 31,
1998, the latest practicable date, is as follows: 6,681,576 shares of Common
Stock, $.001 par value.
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INFOCURE CORPORATION
FORM 10-QSB/A
FOR THE
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
Consolidated Balance Sheets.................................... 1
September 30, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Operations (unaudited)............... 2
Three months ended September 30, 1998 and October 31, 1997
Nine months ended September 30, 1998 and October 31, 1997
Consolidated Statements of Cash Flows (unaudited)............... 3
Nine months ended September 30, 1998 and October 31, 1997
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
PART II. OTHER INFORMATION
Item 2. Change in Securities.............................................. 12
Item 5. Other Information................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................. 12
Signatures........................................................ 13
i
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INFOCURE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash.......................................................... $ 4,002,792 $ 1,406,193
Accounts and notes receivable, net of allowances of $233,906
and $51,000.................................................. 9,786,009 5,168,850
Inventory..................................................... 554,990 437,371
Deferred tax asset............................................ 675,000 556,000
Prepaid expenses and other current assets..................... 857,067 511,110
------------ ------------
Total current assets......................................... 15,875,858 8,079,524
Property and equipment, net of depreciation of $938,459 and
$708,884..................................................... 4,230,118 1,327,796
Goodwill, net of amortization of $2,438,083 and $404,888...... 37,807,627 17,013,526
Other intangible assets, net of amortization of $147,301 and
$34,510...................................................... 1,721,233 1,027,249
Deferred tax asset............................................ 1,423,955 1,906,000
Other assets.................................................. 358,155 196,993
------------ ------------
Total assets.................................................. $ 61,416,946 $ 29,551,088
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,269,834 $ 1,693,624
Accrued expenses.............................................. 2,318,993 1,084,070
Accrued restructuring costs................................... 718,179 3,172,066
Deferred revenue and customer deposits........................ 4,657,261 3,388,284
Current portion of long-term debt............................. 2,766,096 2,001,393
------------ ------------
Total current liabilities.................................... 11,730,363 11,339,437
Long-term debt, less current portion.......................... 27,047,492 6,960,200
Other liabilities............................................. - 6,518,968
------------ ------------
Total liabilities............................................ 38,777,855 24,818,605
------------ ------------
Convertible redeemable preferred stock........................ 8,500,600 -
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 15,000,000 shares authorized;
6,722,019 and 5,760,647 issued and 6,681,576 and 5,739,574
outstanding at September 30, 1998 and December 31, 1997,
respectively................................................. 6,722 5,761
Additional paid-in capital.................................... 25,626,052 16,662,910
Accumulated deficit........................................... (11,272,678) (11,820,284)
Treasury stock, at cost....................................... (221,605) (115,904)
------------ ------------
Total stockholders' equity................................... 14,138,491 4,732,483
------------ ------------
Total liabilities and stockholders' equity.................... $ 61,416,946 $ 29,551,088
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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INFOCURE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, OCTOBER 31, SEPTEMBER 30, OCTOBER 31,
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Systems and software........................... $ 6,904,822 $ 3,078,213 $20,262,544 $4,836,049
Maintenance, support and other................. 5,586,956 2,869,340 15,035,458 4,866,720
----------- ----------- ----------- ----------
Total revenue................................ 12,491,778 5 ,947,553 35,298,002 9,702,769
----------- ----------- ----------- ----------
Operating expenses:
Hardware and other items purchased for resale.. 1,811,279 1,474,086 6,734,809 2,629,857
Selling, general and administrative........... 6,884,932 3,329,977 19,773,072 5,629,949
Depreciation and amortization................. 978,732 395,283 2,749,948 593,624
Restructuring costs........................... - - 1,874,032 -
----------- ----------- ----------- ----------
Total operating expenses..................... 9,674,943 5,199,346 31,131,861 8,853,430
----------- ----------- ----------- ----------
Operating income................................ 2,816,835 748,207 4,166,141 849,339
Interest and other, net......................... (716,567) (16,778) (1,700,635) (134,711)
----------- ----------- ----------- ----------
Income before income taxes...................... 2,100,268 731,429 2,465,506 714,628
Provision for income taxes...................... 871,900 329,000 1,117,900 323,000
----------- ----------- ----------- ----------
Net income...................................... 1,228,368 402,429 1,347,606 391,628
Accretive dividend.............................. - - 800,000 -
----------- ----------- ----------- ----------
Net income to common stockholders............... $ 1,228,368 $ 402,429 $ 547,606 $ 391,628
=========== =========== =========== ==========
Earnings per share:
Basic........................................... $.20 $.07 $.09 $.10
=========== =========== =========== ==========
Diluted......................................... $.15 $.07 $.07 $.09
=========== =========== =========== ==========
Weighted average shares outstanding:
Basic........................................... 6,243,356 5,683,149 6,065,034 4,076,962
=========== =========== =========== ==========
Diluted......................................... 8,364,728 5,911,095 7,903,534 4,297,257
=========== =========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
INFOCURE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 30, October 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income.................................................................. $ 1,347,606 $ 391,628
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization.............................................. 2,749,948 593,624
Deferred income tax........................................................ 1,042,900 -
Changes in current assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable.............................................. (3,401,858) (658,422)
Inventory.................................................................. 88,455 118,219
Prepaid expenses and other assets.......................................... (476,525) 82,739
Accounts payable and accrued expenses...................................... 342,130 (1,071,181)
Deferred revenue........................................................... (787,704) (583,890)
------------ -----------
Total cash provided by (used for) operating activities.................... 904,952 (1,127,283)
------------ -----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Property and equipment expenditures........................................ (2,225,667) (54,102)
Cash paid for capitalized acquisition costs and other intangible
assets..................................................................... (864,632) (865,908)
Capitalized software development costs..................................... (899,901) (124,015)
Cash paid for acquisitions................................................. (18,674,181) (6,972,410)
------------ -----------
Total cash used for investing activities.................................. (22,664,381) (8,016,435)
------------ -----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common stock..................................... 2,308,750 6,433,607
Proceeds from issuance of convertible preferred stock...................... 7,819,952 -
Net proceeds of long-term debt............................................. 14,333,027 3,587,106
Purchase of treasury stock................................................. (105,701) (174,256)
------------ -----------
Total cash provided by financing activities............................... 24,356,028 9,846,457
------------ -----------
Net increase in cash......................................................... 2,596,599 702,739
Cash and cash equivalents, beginning of period............................... 1,406,193 198,735
------------ -----------
Cash and cash equivalents, end of period..................................... $ 4,002,792 $ 901,474
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The information presented at September 30, 1998 and October 31, 1997, and for
the periods then ended is unaudited, but includes all adjustments, consisting
only of normal recurring adjustments, which the management of InfoCure
Corporation ("InfoCure," and together with InfoCure's subsidiaries, the
"Company") believes to be necessary for a fair presentation of the financial
condition, results of operations and cash flows for the periods presented.
Historical results may not be indicative of the results to be expected in the
future. Certain information in footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission"). The consolidated
financial statements, notes thereto and other information should be read in
conjunction with the historical and pro forma consolidated financial statements
and related notes thereto contained in the Company's Transition Report on Form
10-KSB filed with the Commission on April 1, 1998.
InfoCure was founded in November 1996 to develop, market and service practice
management systems for use by health care providers throughout the United
States. On July 10, 1997, InfoCure completed an initial public offering of its
common stock (the "Offering") and simultaneously acquired the following six
operating companies: International Computer Solutions, Inc. ("ICS"), Health Care
Division, Inc. ("HCD"), Millard-Wayne, Inc. ("Millard-Wayne"), KComp Management
Systems, Inc. ("KComp"), DR Software, Inc. ("DR Software") and Rovak, Inc.
("Rovak") (collectively the "Founding Companies"). American Medcare Corporation
("AMC"), a holding company and parent of ICS, HCD, and Millard-Wayne, originally
incorporated on January 11, 1983, was merged with and into InfoCure at the time
the Offering became effective and is considered a predecessor company to
InfoCure and the accounting acquirer of all the Founding Companies. All
outstanding shares of AMC were converted into approximately 3.0 million shares
of InfoCure Common Stock concurrently with the consummation of the Offering.
The aggregate consideration paid for the Founding Companies was approximately
$3.7 million in cash and 907,000 shares of Common Stock for an aggregate value
of $8.7 million, including fees and other acquisition related costs.
Subsequent to the consummation of the Offering and the acquisition of the
Founding Companies, InfoCure acquired substantially all the assets or all the
outstanding equity securities of the following companies: Professional On-Line
Computer, Inc. ("POLCI"); Commercial Computers, Inc. ("CCI"); SoftEasy Software,
Inc. ("SoftEasy"); Pace Financial Corporation ("PACE"); and the orthodontic
business unit of HALIS Services, Inc. ("OPMS"). POLCI, CCI and SoftEasy were
acquired with effect from October 1, 1997; PACE was acquired with effect from
November 1, 1997; and OPMS was acquired with effect from December 1, 1997.
Effective January 1, 1998, InfoCure also acquired Micro-Software Designs, Inc.
("Micro-Designs") and Medical Software Integrators, Inc. ("MSI"). Aggregate
consideration for all of these acquisitions was approximately $33.1 million cash
and debt, and 448,767 shares of Common Stock, for an aggregate value of $44.6
million. All acquisitions which have occurred subsequent to the consummation of
the Offering and the acquisitions of the Founding Companies are collectively
referred to herein as the "Recent Acquisitions". The acquisitions of the
Founding Companies and the Recent Acquisitions have been accounted for using the
purchase method of accounting. Effective January 15, 1998, the Company changed
its fiscal reporting period to December 31 and on April 1, 1998, the Company
filed its Transition Report on Form 10-KSB covering the eleven months ended
December 31, 1997.
The accompanying financial statements have been presented on a consolidated
basis for the nine months ended September 30, 1998 including InfoCure and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The accompanying consolidated Statements of
Operations include AMC (InfoCure's predecessor) and its subsidiaries ICS and HCD
for the period from February 1, 1997, the Founding Companies for the period from
July 11, 1997 and the Recent Acquisitions from their respective effective
acquisition dates.
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to 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 reported period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from software and hardware sales is generally recognized at delivery
if the requirements of SOP97-2 (Software Revenue Recognition) have been met. If
the requirements have not been met, the software revenue is recognized under a
percentage of completion basis. Services revenue is recognized as the work is
completed, creating deferred revenue when amounts are billed prior to the
completion of services. Revenue from support and maintenance contracts is
recognized as the services are performed ratably over the contract period, which
typically does not exceed one year. Revenue from other services is recognized
as they are provided.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturity dates of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
The Company's credit concentrations are limited due to the wide variety of
customers in the health care industry and the geographic areas into which the
Company's systems and services are sold.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from their
fair values as of September 30, 1998 and December 31, 1997.
INVENTORIES
Inventory consists primarily of peripheral computer equipment and computer
forms and supplies. Inventory is accounted for on the first-in, first-out basis
and reported at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed over the
estimated useful lives of the related assets using both straight line and
accelerated methods for financial reporting and primarily accelerated methods
for income tax purposes. Substantial betterments to property and equipment are
capitalized and repairs and maintenance are expensed as incurred.
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<PAGE>
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business acquisitions
accounted for under the purchase method. All goodwill is amortized on a
straight-line basis over an estimated useful life of 15 years. Capitalized
acquisition costs include fees and other expenses incurred in connection with
the Company's acquisition program. As acquisitions are completed, such costs
are included in the Company's total investment to be allocated appropriately.
Other intangible assets consist primarily of deferred loan costs, which are
being amortized over the life of the respective loans at rates, which
approximate the interest method.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes certain software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed. Software
development costs are expensed as incurred prior to establishing the
technological feasibility of a product. Costs incurred between the establishment
of technological feasibility and the time a product is available for general
release are capitalized. Capitalized software costs are amortized using the
straight-line method over the estimated lives of the related products (generally
48 months).
ASSET IMPAIRMENT
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of,
effective for years beginning after December 15, 1995, requires that long lived
assets and certain intangibles to be held and used by the Company be reviewed
for impairment. The Company periodically assesses whether there has been a
permanent impairment of its long-lived assets, in accordance with SFAS No. 121.
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates.
RESTRUCTURING COSTS
The Company records the cost of consolidating existing Company facilities into
acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees, in accordance with Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring).
EARNINGS PER SHARE
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
which is effective for fiscal years ending after December 15, 1997. Basic
earnings per share for the nine months ended September 30, 1998 is calculated
based upon the weighted average number of common shares outstanding during the
period. Diluted earnings per share includes the dilutive effect of common stock
equivalents.
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RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, Reporting Comprehensive Income, effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purposes financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company has addressed
the requirements of SFAS No. 130 and no material impact on the financial
statements is expected.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance of and
allocation of resources to operating segments. The adoption of SFAS No.131 has
no material impact on the financial statements.
SOP 97-2, Software Revenue Recognition, effective for fiscal years beginning
after December 15, 1997, provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and
establishes certain criteria for revenue recognition. The adoption of SOP 97-2
has no material impact on the financial statements.
NOTE 3. BUSINESS ACQUISITIONS
The following unaudited pro forma information presents the revenue, net income
and earnings per share of the Company as if the acquisitions of the Founding
Companies and the Recent Acquisitions had occurred as of February 1, 1997. The
pro forma information is not necessarily indicative of actual results if such
acquisitions occurred as of February 1, 1997, nor is it indicative of results of
operations, which may be realized in future periods. The pro forma amounts give
effect to appropriate adjustments for the fair value of the net assets acquired,
operating expenses not assumed as part of the acquisitions, amortization of
goodwill, interest expense, and income taxes.
PRO FORMA PRO FORMA
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, 1997 OCTOBER 31, 1997
------------------ -----------------
Revenue..................... $11,063,000 $33,189,000
Net income.................. $ 579,000 $ 1,736,000
Earnings per share-basic.... $ .09 $ .28
Earnings per share-diluted.. $ .07 $ .23
NOTE 4. COMMON STOCK ISSUED FOR EARNOUT COMMITMENT
Effective December 1, 1997, the Company adopted a plan to restructure its
operations by re-evaluating and consolidating existing facilities and acquired
operations (the "Restructuring Plan"). As a result, during the year ended
December 31, 1997, the Company recognized $11.1 million of charges related to
the impairment of goodwill, capitalized software, and contingent consideration
associated with prior acquisitions, referred to as "earnout commitments." A
portion of these earnout commitments were payable in the form of common stock.
As of September 30, 1998, $2,273,852 of such earnout commitments were settled by
issuance of approximately 384,487 shares of common stock.
NOTE 5. COMMON STOCK AND EARNINGS PER SHARE
Common stock issued and outstanding reflects shares issued in the Company's
initial public offering completed effective July 10, 1997, and shares issued to
effect the acquisitions of the Founding Businesses and the Recent Acquisitions.
The financial statements for the nine months ended September 30, 1998 reflect
approximately $6,414,000 in Common Stock
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issued in connection with the acquisitions of Micro-Designs, MSI, and earnout
commitments associated with prior acquisitions. The weighted average number of
shares outstanding used in computing basic EPS for the nine months ended
September 30, 1998 was 6,065,034. The weighted average number of shares
outstanding used in computing diluted EPS for the nine months ended September
30, 1998 was 7,903,534 including common stock equivalents of 986,648 shares
assuming exercise of the Company's options and warrants and the effect of
1,000,070 shares issuable assuming the conversion of the Company's convertible
preferred stock into common stock.
NOTE 6. ACCRETIVE DIVIDEND
In February 1998, the Company completed the sale of approximately 850,000
shares of Convertible Redeemable Preferred Stock in a private placement for
approximately $8.5 million which netted the Company approximately $7.8 million.
In connection therewith, the Company also granted the placement agent a ten-year
warrant to acquire 100,000 shares of the Company's Common Stock.
Shares of the Convertible Redeemable Preferred Stock are immediately
convertible into common stock at an equivalent conversion price of $8.50, which
was the market value of the common stock at the date of the private placement.
The Company has recognized $800,000 as an accretive dividend attributable to the
immediate conversion feature of this convertible issue including placement fees
and the estimated value of warrants granted to the placement agent.
NOTE 7. SUBSEQUENT EVENTS
On October 23, 1998, InfoCure Corporation ("InfoCure" or the "Company")
acquired substantially all of the assets, subject to the assumption of
approximately $4.6 million of liabilities, of the Healthcare Systems Division
("HSD") (the "HSD Acquisition") of The Reynolds and Reynolds Company ("Reynolds
and Reynolds"). HSD is currently headquartered in Dayton, Ohio, and provides
healthcare practice management systems principally to the radiology,
anesthesiology and enterprise-wide medical practice and MSO markets. The
aggregate consideration consisted of approximately $37.4 million in cash, a
$10.0 million subordinated, convertible note payable to the seller over five
years and a $2.0 million subordinated promissory note payable to the seller
within 120 days of closing, for a total purchase price of approximately $49.4
million. The purchase price is subject to adjustment based on the final adjusted
net asset value of HSD on the close date and other asset valuation adjustments.
In addition to the purchase price, InfoCure paid closing costs of approximately
$1.5 million. The convertible note is convertible at InfoCure's option at any
time through September 30, 1999, into shares of InfoCure common stock. The
conversion price is based on the market price of the common stock at the time of
conversion. The cash portion of the purchase price was funded by a term loan
from InfoCure's senior lender. The Company expects to record a one-time pretax
charge of approximately $9.0 million in the quarter ended December 31, 1998
representing the acquisition of in-process research and development of software.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain information included in this report constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including without limitation the following statements: (i) the Company's belief
that its operating cash flow, combined with availability of funds under its line
of credit facility and from private placements with institutional investors will
be sufficient to fund the Company's working capital requirements through at
least the next twelve months; and (ii) the Company's intention to seek
additional sources of financing to fund future acquisitions, if any. The
Company notes that a variety of risk factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements.
Reference is made in particular to the discussion set forth below in this report
and set forth in the Company's Transition Report on Form 10-KSB for the period
ended December 31, 1997 which was filed with the Commission on April 1, 1998.
CHANGE IN FISCAL YEAR. The Company historically has reported its financial
statements on a fiscal year ending January 31. In January 1998, the Company
determined to change its fiscal year end from January 31 to December 31, giving
retroactive effect to the change such that the Company's fiscal year beginning
February 1, 1997 ended on December 31, 1997. As a result, the Company's third
quarter in 1998 covers the three months ended September 30, 1998, as compared to
the Company's third quarter in 1997, which covers the three months ended October
31, 1997.
HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS
TOTAL REVENUE. Total revenue for the three months ended September 30, 1998 was
$12.5 million, compared to total revenue of $5.9 million for the three months
ended October 31, 1997. Total revenue for the nine months ended September 30,
1998 was $35.3 million, compared to total revenue of $9.7 million for the nine
months ended October 31, 1997. These increases in total revenue primarily
reflect the completion of the acquisition of the Founding Companies effective
July 10, 1997, and the Recent Acquisitions as of their respective effective
dates. Revenue for periods prior to July 10, 1997 include only revenue of the
Company's predecessor, AMC, and its consolidated subsidiaries. Systems and
software revenue was $6.9 million for the three months ended September 30, 1998,
or 55% of total revenue, while maintenance, support, and other revenue was $5.6
million, or 45% of total revenue for the same period. Systems and software
revenue was $20.3 million for the nine months ended September 30, 1998, or 57%
of total revenue, while maintenance, support, and other revenue was $15.0
million, or 43% of total revenue for the same period. The Company recognized
strong demand during the quarter across several products, especially its
enterprise-wide Ideal general medical software product.
HARDWARE AND OTHER ITEMS PURCHASED FOR RESALE. For the three months ended
September 30, 1998, hardware and other items purchased for resale was $1.8
million, or 15% of total revenue, compared to $1.5 million, or 25% of total
revenue, for the three months ended October 31, 1997. For the nine months ended
September 30, 1998, hardware and other items purchased for resale was $6.7
million, or 19% of total revenue, compared to $2.6 million, or 27% of total
revenue, for the nine months ended October 31, 1997. For the three months ended
September 30, 1998, gross margin, which represents total revenue less hardware
and other items purchased for resale, was 85% of the total revenue compared to
75% of total revenue, for the three months ended October 31, 1997. For the nine
months ended September 30, 1998, gross margin was 81% of total revenue compared
to 73% of total revenue for the nine months ended October 31, 1997. The increase
in the gross margin as a percentage of total revenue reflects primarily changes
in gross margin associated with the different businesses included in these
acquisitions, and a shift in the revenue mix away from lower margin hardware
sales to higher margin software sales and the increased percentage of high
margin maintenance revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense includes sales and marketing expense, client service expense, product
development expense and administrative expense covering principally personnel,
rent, telephone and travel. Selling, general and administrative expense
increased to $6.9 million, or 55% of total revenue for the three months ended
September 30, 1998, compared to $3.3 million, or 56% of total revenue for the
three months ended October 31, 1997. Selling, general and administrative expense
increased to $19.8 million, or 56% of total revenue for the nine months ended
September 30, 1998, compared to $5.6 million, or 58% of total revenue, for the
nine months ended October 31, 1997. The decrease in selling, general and
administrative expenses as a percent of revenue reflects the leveraging of fixed
costs as the Company continues to grow.
-9-
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$979,000, or 8% of total revenue, for the three months ended September 30, 1998,
compared to $395,000, or 7% of total revenue, for the three months ended October
31, 1997. Depreciation and amortization expense was $2.7 million, or 8% of total
revenue, for the nine months ended September 30, 1998, compared to $594,000, or
6% of total revenue, for the nine months ended October 31, 1997. Increased
depreciation and amortization expense primarily represents the significant
increase in goodwill due to the acquisition of the Founding Companies and Recent
Acquisitions.
RESTRUCTURING COSTS. In the nine months ended September 30, 1998, the Company
incurred a cost of $1.9 million associated with the Restructuring Plan.
INTEREST AND OTHER, NET. Interest and other, net, increased to $717,000, or 6%
of total revenue, for the three months ended September 30, 1998, compared to
$17,000, or 0.3% of total revenue, for the three months ended October 31, 1997.
Interest and other, net, increased to $1.7 million, or 5% of total revenue, for
the nine months ended September 30, 1998, compared to $135,000, or 1% of total
revenue, for the nine months ended October 31, 1997. The increase relates
primarily to increases in interest expense related to indebtedness incurred to
complete the Company's Recent Acquisitions.
PROVISION FOR INCOME TAXES. The provision for income taxes was $872,000 for
the three months ended September 30, 1998, compared to $329,000 for the three
months ended October 31, 1997. The provision for income taxes was $1.1 million
for the nine months ended September 30, 1998 compared to $323,000 for the nine
months ended October 31, 1997. The effective income tax rate of 45% for the nine
months ended September 31, 1998, is higher than statutory rates due to permanent
differences resulting from the amortization of nondeductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had total cash and cash equivalents of $4.0
million and working capital of $4.1 million. The Company's current ratio
increased to 1.35:1 at September 30, 1998, from 0.71:1 at December 31, 1997.
During the nine months ended September 30, 1998, the Company generated $905,000
of cash from operating activities. During this period, cash used in investing
activities was $22.7 million, representing primarily cash used for acquisitions
of $18.7 million and property and equipment costs of $2.2 million. Of the cash
invested in acquisitions, $12.8 million and $5.3 million were used to acquire
MDI and MSI, respectively. The MDI acquisition provided the Company with its
Windows-based client/server practice management software serving oral and
maxillofacial surgery practices. This software is being further developed by
the Company as a core product serving these and other specialties. The MSI
acquisition provided the Company with a leading position among office-based
anesthesiology practices and InfoMine, a decision support tool designed to help
physicians utilize information collected by the Company's core products. A
substantial portion of the property and equipment costs represented the
Company's investment in its telecommunications infrastructure.
During the nine months ended September 30, 1998, the Company generated cash
from financing activities of $24.4 million, including $14.3 million net proceeds
from the Company's commercial credit facility (the "Line of Credit") and $7.8
million net proceeds from the issuance of convertible preferred stock. These
net proceeds were principally used to fund the Company's acquisition of PACE,
MDI and MSI. The PACE acquisition provided the company with its Ideal core
software product for enterprise-wide general medical practices and MSO's.
The Line of Credit was established in November 1997, with an original
aggregate availability of $10.0 million to be used primarily for acquisition
purposes and working capital. The available credit under this facility was
increased to $30.0 million in February 1998 and to $70.0 million on September
28, 1998. The Line of Credit has a five-year term, bears interest at an annual
rate of prime plus 1.25% to 2.00%, depending on the Company achieving certain
debt service ratios, and is secured by substantially all of the Company's
assets. As of September 30, 1998, the interest rate was 9.5% and the
outstanding and otherwise committed balance under the facility was $27.8
million.
On February 9, 1998, the Company completed the private placement of 850,060
shares of convertible redeemable preferred stock resulting in gross proceeds to
the Company of $8.5 million and net proceeds of approximately $7.8 million after
offering expenses. The Company granted to the placement agent a warrant to
acquire 100,000 shares of the Company's common stock at an exercise price of
$9.00 per share.
-10-
<PAGE>
On September 28, 1998, the Company completed the sale of 203,338 shares of
Common Stock for $2.5 million in a private placement to an institutional
investor (the "Institutional Placement"). The investor committed to invest $7.5
million of additional funds, which must be invested from time to time at the
request of the Company, at its sole discretion, and subject to certain price and
trading volume limitations, upon the exercise of put options during the 18
months ending February 28, 2000.
In connection with the HSD Acquisition, the Company delivered to Reynolds and
Reynolds a $10.0 million five-year, convertible promissory note, bearing
interest per annum at rates commencing at 8.0% and increasing each year to a
maximum of 14.0%. The note is convertible at the option of the Company during
the first year of the term into shares of common stock at a price based on the
market value of the common stock at the conversion date. In addition, the
Company delivered to Reynolds and Reynolds a $2.0 million subordinated
promissory note payable within 120 days of the closing of the HSD Acquisition.
The Company believes that its existing cash and anticipated future operating
cash flow, combined with availability of funds under the Line of Credit and
Institutional Placement, will be sufficient to fund the Company's working
capital requirements through at least the next twelve months. The Company's
ability to consummate future acquisitions will be determined by the Company's
ability to attain additional sources of capital. Consequently, the Company may
seek additional sources of financing, including borrowings and the sale of
equity and/or debt securities. The sale of equity securities, including
securities convertible into equity securities, may result in further dilution to
existing stockholders. No assurance can be given that additional sources of
capital will be available on terms acceptable to the Company or at all.
YEAR 2000 COMPLIANCE
Many existing installed computer systems and software products are designed
to accept and process year codes of only two digits in their date fields. These
systems and products are not "Year 2000 compliant" because they may not operate
properly when requested to distinguish twenty-first century dates from twentieth
century dates. Computer systems and software products that are not Year 2000
compliant must therefore be upgraded or replaced. Significant uncertainty
exists concerning both the capacity of companies and other entities to effect
all of the upgrades or replacements required to achieve Year 2000 compliance and
the potential consequences that may result from the failure to do so.
The Company's Year 2000 compliance plan consists of an on-going program
covering software products acquired or developed by the Company prior to the HSD
Acquisition ("Current Products"), a recently commenced program covering the
products acquired in the HSD Acquisition ("HSD Products") and a program covering
internal and third-party systems. While the Company does not anticipate that the
failure of any of its Current Products, HSD Products or internal and third-party
systems to be Year 2000 compliant would result in a material adverse effect on
the Company's business, financial condition and results of operations, no
assurance can be given that any such failure would not have such an effect. In
the future, the Company may acquire additional products that may not be Year
2000 complaint. No assurance can be given that the Company will not incur
significant unknown costs relating to Year 2000 compliance in connection with
any such acquisitions.
Current Products. The Company has concluded that a majority of its current
products are Year 2000 compliant. For those of its Current Products that are not
Year 2000 compliant, the Company has implemented a program for developing and
installing Year 2000 compliance solutions, including the development and
installation of one or more software patches. Customers must be on current
maintenance contracts with the Company to qualify for patches or other
solutions. The Company believes that it will complete its Year 2000 Compliance
Program for its Current Products by July 1999, but no assurance can be given
that it will do so. Potential hindrances include but are not limited to delays
or failures in the development or implementation of solutions, an inability to
hire technical resources necessary to complete all tasks, failure by customers
to install patches in a proper or timely manner and an inability to locate
customers not currently under a maintenance contract. The Company estimates
that the cost to complete its Year 2000 Compliance Program for its Current
Products will be less than $200,000. This estimate is based on assumptions that
the Company believes to be reasonable at this time, but no assurance can be
given that these assumptions will remain true.
HSD Products. Reynolds and Reynolds has represented to the Company that it
has performed a Year 2000 assessment of the seven HSD Products and has reported
the results of this assessment to the Company. Based on these representations,
the Company believes that Year 2000 solutions have been tested and developed for
three of the seven HSD Products, that development of solutions for two of the
HSD Products is currently in progress with estimated completion by December 1998
and that two of the seven HSD Products are more than five years old and
therefore should be retired. The Company estimates that the cost to complete its
Year 2000 Compliance Program for the HSD Products will be less than $300,000.
This estimate is based on assumptions that the Company believes to be reasonable
at this time, but no assurance can be given that these assumptions will remain
true.
Internal and Third-Party Systems. The Company has assessed its internal
software and hardware systems and believes that it is not exposed to potential
business disruptions due to the failure of such systems to be Year 2000
compliant. In addition, the Company has contacted parties with which it
conducts a material amount of business to assess the status of their Year 2000
compliance programs. The Company intends to complete its determination of Year
2000 compliance by these third parties by March 1999, and to develop strategies
to assure that no material business disruptions result from third-party Year
2000 noncompliance. These strategies may include demanding assurance that
current business partners achieve timely Year 2000 compliance or, in the absence
of such assurance, contracting with alternate third parties or developing a
workaround. In addition, because the Company's products are often interfaced
with a customer's existing third-party applications, the Company's products may
experience difficulties resulting from the non-compliance of such existing
applications. Although the Company does not anticipate costs associated with
internal and third-party systems Year 2000 compliance to be material, no
assurance can be given that the Company will not incur significant costs to
complete the compliance program for these systems.
Potential for Year 2000 Litigation. Multiple lawsuits relating to Year
2000 issues have been filed against one of the Company's competitors. The
plaintiffs in these lawsuits are seeking compensatory damages and equitable and
injunctive relief. The Company has taken measures to avoid the type of lawsuit
brought against this competitor. However, as the Company develops and
implements its Year 2000 compliance plan, no assurance can be given that a Year
2000-related claim will not be brought against the Company in the future, that
the assertion of such claims will not result in litigation or that the Company
would prevail in such litigation. Litigation, regardless of its outcome, could
result in substantial cost to the Company, divert management's attention from
the Company's operations and impact customer purchasing decisions. Any such
litigation could, therefore, have a material adverse effect on the Company's
business, financial condition and results of operations.
-11-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGE IN SECURITIES.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
The Company continues to consider acquisitions and is in various stages
of discussions with potential acquisition candidates in the health care
practice management systems industry.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27. Financial Data Schedule (solely for use by the Commission)
(b) Reports on Form 8-K
Not Applicable.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFOCURE CORPORATION
Date: January 25, 1999 /s/ Frederick L. Fine
---------------- ----------------------
Frederick L. Fine
President; Chief Executive Officer
(Principal Executive Officer); Director
Date: January 25, 1999 /s/ Lance B. Cornell
---------------- --------------------
Lance B. Cornell
Senior Vice President-Finance;
Chief Financial Officer
(Principal Financial Officer)
Date: January 25, 1999 /s/ Gary W. Plumer
---------------- ------------------
Gary W. Plumer
Vice President-Finance;
Assistant Secretary;
Assistant Treasurer
(Principal Accounting Officer)
-13-
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